Judgment:
1. All the three appeals by the assessee are directed against the three separate orders of the learned CIT(A), all dt. 26th February, 1990, for asst. yrs. 1984-85, 1985-86 and 1986-87. As the issue involved in all the appeals is the same, they are being disposed of by this common order for the sake of convenience. The only grievance of the assessee in all the appeals is that the learned first appellate authority erred in holding Kankaria Finance Corporation and Punglia Brothers as benami concerns of the assessee-company.
2. The assessee is a Limited Company engaged in the manufacture of woollen yarn and guar-gum-powder. Quite some time before the years under consideration the assessee-company had been incurring losses. Its production had almost ceased and hence it started doing job work for many concerns including Kankaria Finance Company and Punglia Brothers.
Since some of the partners of these two firms were either directors or relatives of the directors of the assessee-company and/or substantial shareholders in the assessee-company, the AO treated these two firms as benami of the assessee. The AO further computed the alleged diversion of profits to these two firms at Rs. 35,98,256 for asst. yr. 1984-85, Rs. 30,38,115 for asst. yr. 1985-86 and Rs. 22,85,490 for asst. yr.
1986-87 and added the same to the total income of the assessee in the three respective assessment years.
3. In the first appeal, the CIT(A) upheld the AO's action of treating the two firms as benami concerns of the assessee. However, in his opinion the profits allegedly diverted were not computed on a proper footing and hence had remanded the matter back to the AO with certain directions to recompute the profits. Thus, the issue before us is a limited one, to decide as to whether the two firms were rightly treated as benami concerns of the assessee-company or not.
4. Shri N. M. Ranka, the learned counsel for the assessee, contended that the assessee-company was running into heavy losses and merely to keep it going, job work was undertaken. It did job work for about forty parties, out of which only two firms, viz. Kankaria Finance Corporation and Punglia Brothers were picked up, merely on account of some proximity between the partners of the two firms and the assessee-company and/or its directors. But these relationships did not per se make it benami of the assessee-company. Further, out of about Rs. 43 lakhs received during the year on account of job work, only around Rs. 6 lakhs were from these two firms. Moreover, Kankaria Finance Corporation was in existence since several years being assessed independently as Calcutta. Punglia Bros. also, it was submitted was assessed separately at Jodhpur. The most important aspect, it was submitted, was that since the assessee-company was running into heavy losses, there was no motive to reduce the tax liability by the alleged diversion of profits. The burden was on the Department to prove that apparent is not real, and that it had failed to prove so. For his submissions, the learned counsel relied on the decisions CIT vs. Daulat Ram Rawatmull (1973) 87 ITR 349 (SC); Madura Knitting Co. vs. CIT & CEPT (1956) 30 ITR 764 (Mad) and CIT vs. Gokaldas Hukam Chand (1943) 11 ITR 462 (Bom).
5. Shri S. S. Rana, the learned Departmental Representative, submitted that only two firms were picked up out of about forty firms because only these two were found to be benami of the assessee-company. Despite adverse financial circumstances faced by the assessee-company, infrastructure to carry out its own production did exist and the actual working also showed that its day-to-day work had increased. As regards the motive, the learned Departmental Representative submitted, it is not known what could be the motive, but that does not mean that the two firms could not be the benami of the assessee-company. Further, it was submitted that the job charges payable by these firms to the assessee were in fact directly paid to the creditors of the assessee and this clearly showed that they were benami concerns. As regards the case laws cited by the learned counsel, Shri Rana submitted that they were distinguishable on facts and hence did not apply to the assessee's case.
6. Shri Ranka in his reply submitted that adjustment of job charges to pay off the creditors of the assessee could not be the reason to hold the firms as benami.
7. We have duly considered the rival submissions and the material on record. The Hon'ble Supreme Court, in the case of Jaydayal Poddar vs.
Mst. Bibi Hezra, AIR "Though the question, whether a particular sale is benami or not, is largely one of fact, and for determining this question, no absolute formulae or acid test, uniformly applicable in all situations, can be laid down, yet in weighing the probabilities and for gathering the relevant indicia, the Courts are usually guided by these circumstances : (1) the source from which the purchase money came; (2) the nature and possession of the property, after the purchase; (3) motive, if any, for giving the transaction a benami colour; (4) the position of the parties and the relationship, if any, between the claimant and the alleged benamidar; (5) the custody of the title deeds after the sale; and (6) the conduct of the parties concerned in dealing with the property after the sale." 7.1 The Supreme Court also observed in the above case that the above indicia are not exhaustive and their efficacy varies according to the facts of each case. Nevertheless, the first index, viz. the source whence the purchase money came, is by far the most important test for determining whether the sale standing in the name of one person, is in reality for the benefit of another. Similar are the observations of the Supreme Court in case of Vidyadhar Krishnarao Mungi & Ors. vs. Usman Gani Saheb Konkani & Ors. AIR 1974 SC 658. It was observed that in a case where it is asserted that an assignment in the name of the person is in reality for the benefit of another, the real test is the source whence the consideration came. But when it is not possible to obtain evidence which conclusively establishes or rebuts the allegation, the case must be dealt with on reasonable probabilities and legal inferences arising from proved or admitted facts.
8. The case before us does not pertain to a sale. Nonetheless, the principles enunciated above can be conveniently applied to the facts of the case. The most relevant for our purposes would be : (1) the source of funds; (2) the motive, and (3) the conduct of the parties. Amongst these, the most important factor, as held by the Supreme Court, is the sources of funds. The Revenue has utterly failed in this test. It has not been able to show that the venturing into a new line of business by the two firms was made possible by the assessee-company by providing funds to them.
9. Secondly, as regards the motive, the learned Departmental Representative submitted that the Department it not aware of the motive of the assessee in carrying out business through benami firms. Thus the motive, if any, is neither ascertainable from the material on record, nor have we been enlightened about it by the Department.
10. And finally, the conduct of the parties does not lead us anywhere to conclude that the two firms were in fact doing woollen business for the benefit of the assessee-company. The benefit, if at all, was that since the assessee-company was running into heavy losses, economically it had become an unviable unit, and hence to enable it to meet its financial commitments, it shifted to job work business in which it was aided by about forty different firms including the two firms. If the partners of the two firms were interested in the assessee-company either as shareholders or directors, that fact alone could not make them benami of the assessee-company, particularly in the light of the fact that similar job work was done on similar terms on behalf of other parties also.
11. Thus, in view of the above discussion we hold that Kankaria Finance Corporation and Punglia Bros. are not the benami concerns of the assessee-company.