Issue of perversity of findings could by itself come within the ambit of a substantial question of law

In a recent ruling, in the matter of Chevoit Company Ltd. Vs. CIT (ITA No. 137 of 2001) (Calcutta HC – Special Jurisdiction {Income-tax}) the Calcutta High Court (HC) held that assessment by lower authorities without reference to the evidence produced by the assessee must be held to be perverse, and that the perversity of the finding itself becomes a substantial question of law.

Facts :- The assessee is engaged in the business of manufacturing and has a factory in Noida. During the course of assessment proceedings, the Assessing Officer disallowed a part of welfare, power and fuel and laminating expenses on the basis of an estimate.  Following an appeal by the assessee, the Commissioner of Income-tax (Appeals) (CIT(A), after finding the approach of the Assessing Officer to be erroneous,  allowed the entire claim of the assessee without verifying the documents.  Aggrieved with the CIT(A)’s order, the Revenue approached the Income-tax Appellate Tribunal (Tribunal). The Tribunal, on the basis of guesswork, modified the order passed by the CIT(A) by partly upholding the dis allowances made by the Assessing Officer in his original order without reference to the documents produced by the assessee and without assigning any reason.  The assessee challenged the order of the Tribunal before the Calcutta High Court .

Issue

The Division Bench of Calcutta High Court , at the time of the admission of the appeal, formulated the following substantial questions of law:

1. Whether the Tribunal was justified in law in sustaining the disallowances in part and whether its purported findings were:

– based on any material; and/or

– have been arrived at by ignoring the relevant materials; and/or

– have been arrived at by taking into consideration irrelevant or extraneous materials; and/or

– are otherwise arbitrary, unreasonable and perverse.

2. Whether the expenses are dis allowable in the absence of any finding that the expenditure was not incurred for the purposes of the business and having regard to the settled legal position that the Assessing Officer cannot substitute his own views in place of those of the businessman who is the best judge of commercial expediency.

Revenue’s contentions :- The Revenue disallowed part of the welfare expenses, power and fuel expenses and laminating expenses, contending that the sales during the year had gone down but there was no corresponding decrease in the expenses.

Assessee’s contentions  :- The assessee argued that Due to a lockout and labour agitation in the factory, production was lower, resulting in a fall in sales, Expenditure on medical costs and welfare for labourers remained unrelenting, The documents produced in support of all three expenses were neither considered by lower authorities nor there was a finding that those documents were manufactured and The order of the Tribunal was the result of mere guesswork.

High Court ruling :- From the Assessing Officer’s order, it appeared that the Assessing Officer neither considered the documents nor found that the documents were manufactured or irrelevant. The partial disallowance of expenses by the Assessing Officer was on the basis of mere guesswork;  The CIT(A), after finding that the approach of the Assessing Officer was erroneous, allowed all the expenses without verifying the documents; The Tribunal took a middle course by modifying both the orders without reference to any documents; The assessment by lower authorities was on the basis of guesswork and without reference to documents. Accordingly, the assessment must be held to be perverse; Even though the appeal before the Calcutta High Court is permissible only on a substantial question of law, if a finding of fact is perverse and is based on no evidence, the appeal can be set aside by the Calcutta High Court. The perversity of the findings becomes a substantial question of law (relying on the Supreme Court decision in the Kulwant Kaur case).  The orders of the lower authorities were set aside by remanding the matter back to the Tribunal for the purpose of reassessing the amount, after taking into consideration all the evidences. The Tribunal would be free to give the Assessing Officer an opportunity to produce evidence of rebuttal.

Conclusion :- In Kulwant Kaur’s case, it was held by the Supreme Court that in appeal before the Calcutta High Court  a finding of fact, even if erroneous, will generally not be disturbed. However, where it is found that the finding stands vitiated on an inaccurate test and on the basis of assumptions and conjectures and, as a result, there is an element of perversity involved therein, the Calcutta High Court will be within its jurisdiction to deal with the same. This was in regard to section 103 of the Code of Civil Procedure. The Chevoit Company’s decision relies on the decision of the Supreme Court in Kulwant Kaur’s case, and reaffirms the position that an issue of perversity of findings could by itself come within the ambit of a substantial question of law.