S. N. Namasivayam Chettiar Vs. The
Commissioner of Income-Tax, Madras [1960] INSC 16 (3 February 1960)
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION: 1960 AIR 729 1960 SCR (2) 885
CITATOR INFO :
RF 1991 SC1338 (14)
ACT:
Income Tax-Assessment-Rejection of accounts
and estimate of Profits-Computation of Profits supported by cases of other
assessees Stock register--Effect of Non-production-Indian Income-tax Act, 1922
(XI Of 1922) S. 13 Proviso.
HEADNOTE:
The appellant, a resident and ordinarily
resident in India, carried on trade in Colombo in grains and foodstuffs for
cattle. For the relevant assessment years the Income-tax Officer rejected the
accounts produced by the appellant on the grounds inter alia that there was
absence of vouchers and that the stock account and the manufacturing account
had not been kept or produced; and he then made an estimate of the profits. The
Appellate Tribunal also agreed with the Income-tax Officer and held that the
correct profits could not be deduced from the books produced by the assessee
and that therefore the proviso to s. 13 of the (1)(1959) II L.L.J. 38.
886 Indian income-tax Act, 1922 applied.
Having taken into consideration all the relevant factors it computted the
profits at 15 on grains imported from India and 12 1/2 % on grains purchased in
Ceylon, and, in support of its computation, it pointed out that in certain
cases which had come to its notice the rates of profits went Up to 20%.
The appellant challenged the validity of the
assessment on the ground that the principle of natural justice had been
violated in that the Tribunal had taken into consideration the rate of profit
in other cases without giving an opportunity to the appellant to explain those
cases, and relied upon Dhakeshwari Cotton Mills Ltd.v. The Commissioner of incomes-tax,
West Bengal. [1I955] i S.C.R. 941- He also urged that the non-production of
stock account was not such a defect as to entitle the Taxing Authorities to
reject the books and apply the proviso to s. 13 of the Act.
Held:(1) that the percentage of profits made
by traders in other cases was not the basis made by the Tribunal for arriving
at any conclusion as to the percentage at which income should be computed in
the present case, but was merely an ancillary support to that conclusion and
that Dhakeshwari Cotton Mills Ltd. v. The Commissioner of Income- tax, West Bengal, was not applicable to the case.
(2)that the keeping of a stock register is of
great importance because that is a means of verifying the assessee's accounts
by having aquantitative tally; that if, after taking into account all the
materials including the want of a stock register, it is found that from the
method of accounting correct profits of the business are not deducible, the
operation of the proviso to s. 13 of the Act would be attracted.
Ghansyam Das Permanand v. Commissioner of
Income-tax C.P. & Beray (1952) 21 I.T.R. 79, Bombay Cycle Stores Company
Ltd.
v. Commissioner of Income-tax. (1958) 33
I.T.R. 13 and Commissioner of Income-tax v. McMillan and Co. [1958] S.C.R. 689,
relied on.
CIVIL APPELLATE JURISDICTION: Civil Appeals
No. 218 of 1955 and 219 to 223 of' 1955.
Appeal by special leave from the judgment and
Order dated September 14, 1951, of the Income-tax Appellate Tribunal, Madras, in I.T.A. No. 3158 of 1949-50.
and Appeals by special leave from the
judgment and order dated September, 30, 1953, of the Income-tax Appellate
Tribunal, Madras, in I.T.A. Nos. 7840 of 1952-53 and E.P.T.A. Nos.
300, 301 and 302 of 1952-53.
S. Chowdhuri, N. A. Palkhivala and Naunit
Lal, for the appellant.
887 H. N. Sanyal, Additional
Solicitor-General of India, R. Ganapathi lyer and D. Gupta for the respondent.
1960 February 3. The Judgment of the Court
was delivered by KAPUR J. -In these six appeals the common question raised is
whether the proviso to s. 13 of the Income-tax Act is applicable to the facts
and circumstances of these cases.
They are therefore disposed of by one
judgment. Civil Appeal No. 218 of 1955 arises out of the assessment for the
year 1943-1944. Civil Appeals Nos. 219 to 223 relate to the assessment years
1944-1945, 1946-1947 and for the chargeable accounting periods from January
1943 to February 1944, and from February 1945 to February 1946. The appellant
in each of the appeals is the assessee and the respondent is the Commissioner
of Income-tax and Excess Profits Tax, Madras.
The appellant is a 'resident and ordinarily
resident' in India and carried on extensive trade in Colombo in grains, folder,
gram and other food-stuffs for cattle and poultry.
For the assessment year 1943-1944 the
appellant showed a turnover of Rs. 17,74,825 and a gross profit of Rs. 63,217
which is about 3.5 per cent. For the two previous assessment years the
appellant's gross profits were 9 per cent and 8 per cent respectively. The
Income-tax Officer, by his order dated March 20, 1948, rejected the accounts
and estimated the gross profit by adding back Rs. 2,38,831 to the returned
income. Thus he raised the turnover to Rs. 20,00,000 and the gross income to
Rs. 3,00,000 giving a profit of 15 per cent on the estimated turnover. On
appeal to the Appellate Assistant Commissioner, the order of the Income-tax
Officer was confirmed. The Income-tax Appellate Tribunal on appeal by its order
dated September 14, 1951, after pointing out various defects, rejected the
account books but accepted the appellant's turnover and computed the profits at
15 per cent on grains imported from India and 121 per cent on grains purchased
in Ceylon. It held that correct profit for the year under assessment could not
be deduced from the books produced by the appellant. The Excess Profits tax 113
888 for the chargeable accounting period from February 10, 1942 to January 16,
1943, was decided on the basis of the Income- tax assessment for the year
1943-44. On November 21, 1951, the appellant applied to the of Tribunal for
stating a case under s. 66(1) on the following four questions:
(1) Whether under the circumstances of the
case the Tribunal was justified in holding that Section 13 of the Indian
Income-tax Act applies to the case.
(2) Whether the reasons set out by the
Appellate Tribunal in paragraph 2 of its judgment are sufficient to invoke
Section 13 of the Act.
(3) Whether the Tribunal, having disagreed
with the department on the basis of the assessment, had jurisdiction to apply
Section 13 and make an assessment on an alleged estimate.
(4) Whether the Tribunal was justified in
making an assessment on the basis of Section 13 without giving an adequate
opportunity to the assessee to meet the materials upon which eventually the
assessment was rested.
But the Tribunal, by its order dated February
12, 1950, held that no question of law arose and therefore declined to state a
case and thus rejected the application. The appellant then applied to the High
Court of Madras under s.
66(2) of the Act on the same four questions
of law. This application was dismissed by the High Court on February 26, 1953.
Against this order of the appellant applied for special leave to appeal and, by
leave of this Court, amended the petition so as to make it an appeal against
the order of the High Court as well as the order of the Tribunal dated
September 14, 1951.
In the other appeals also the course of
proceedings before the Income-tax Officer, the Appellate Assistant Commissioner
and the Income-tax Appellate Tribunal was the same. For the assessment years
1944-1945 and 1946-47 the appellant disclosed a turnover of Rs. 10,35,748 and
Rs. 5,98,728 respectively and the gross profits rates were 10.7 per cent and
8.7 per cent respectively. As the books of accounts in regard to these years
also were rejected, the Income-tax Appellate Tribunal applied s. 13 and
estimated the gross 889 profit rates at 12 1/2 per cent and 10 per cent for the
respective years. The appellant applied to the Tribunal under s. 66(1) of the
Act for stating a case to the High Court for its decision on the following two
points:
(1) Whether on the facts and in the
circumstances of the case, the Department was right in acting under the proviso
to section 13 of the Act in the absence of a finding that income, profits and
gains cannot properly be deduced from the books produced or that no method of
accounting has been regularly employed.
(2) Whether on the facts and in the
circumstances of the case, the Department had sufficient materials before it to
justify the rates of 12 1/2 per cent and 10 per cent gross profits on the total
turnover on the ground that the rates worked out by the figures submitted by
the assessee work out at a lesser figure.
The Tribunal dismissed the application on
January 15, 1954.
The appellant did not apply to the High Court
under s. 66(2) of the Income Tax Act but obtained special leave from this Court
against the order of the Tribunal by which it applied the proviso to s. 13 of the
Income Tax Act. All the six appeals were heard together and a common question
arises whether the Income tax Appellate Tribunal was justified in applying the
proviso to s. 13 of the Income Tax Act.
It was contended by the appellant in Civil
Appeals Nos. 218, 219 and 221 of 1955 that the Income-tax Appellate Tribunal
was not justified in applying the proviso to s. 13 and assuming that the
proviso did apply then the percentage worked out was unjustified and had been
arrived at by relying upon material which the appellant had no opportunity to
meet and therefore the case fell within the rule in Dhakeshwari Cotton Mills
Ltd. v. The Commissioner of Income- tax, West Bengal (1) where a similar
violation of the fundamental rule of natural justices.e., the information upon
which the Tribunal relied was not disclosed to the assessee and no opportunity
was given to him (1)[1955] I S.C.R. 941.
890 to rebut such material-was held to be a
ground for interference with the order of the Tribunal.
It was rightly argued that the power to
compute -profits under the proviso to s. 13 arises only where no method of
accounting has been regularly employed by the assessee and where the method
employed is such that the income, profits and gain cannot properly be deduced
therefrom. It means that the method adopted by the assessee must prima facie
prevail where it is regularly employed, though the Incometax Officer can resort
to the proviso if the method is such that true profits cannot be correctly
determined therefrom. In other words, even if the assessee has regularly
employed a method of accounting it can be discarded under the proviso if the
method does not show correct profits of the year.
The Appellate Tribunal, by its order dated
September 14, 1951, held that correct profits could not be deduced from the
books produced by the assessee and therefore the proviso to s. 13 of the Income
Tax Act applied. The reasons it gave were (1) that vouchers for several
purchases made in Colombo had not been produced and for purchases of over Rs.
3,00,000 no vouchers were forthcoming and without the vouchers the entries in
the account books could -not be verified ; (2) there was no quantitative tally
for the grains and for other materials purchased by the appellant, which were
ground into powder, turned into fodder, packed in different sizes and then
sold. It was not possible, according to the Tribunal, to accept the books of
account, where the turnover was as large as about seventeen lacs of rupees,
without a quantitative tally; (3) a fairly big sum of money was alleged to have
been paid towards purchasing of license,-, for export from India; and Rs.
19,000 worth of purchases were made in Tuticorin when only a small sum of money
in cash was shown in the assessee's accounts; (4) several outsiders' cheques
had been entered in the accounts of the assessee without any proof as to why
those cheques were paid to the assessee; and (5) a fairly big sum of money had
been invested in India in the purchase of property without 891 money being
received from Colombo. On these facts the Tribunal said:
In view of these defects, we are clearly of
opinion that the correct profit could not be deduced from the books produced by
the assessee, and accordingly hold that proviso to Section 13 of the Act
applies in this case. The question, therefore, is regarding the estimate.'
After giving this finding the Tribunal accepted the turnover as shown in the
appellant's books. In making the computation of profits the Tribunal took into
consideration the following matters: that the export of food grains from India
was prohibited except under a license, that there was an acute shortage of
cattle fodder in Ceylon and the appellant had to resort to dubious means in
order to obtain grains, that during a substantial portion of the year of
accounting there was no price control in Colombo, that as the appellant was a
manufacturer of forage by mixing several kinds of grains and powdering them and
sold them in packets of various weights, the appellant must have made higher
profits than persons who deal in grain only. Keeping all this in view the
Tribunal was of the opinion that the rate of 15 per cent adopted in regard to
imported grains was not too high but in the case of local purchases it was, and
therefore reduced the rate of profit in the latter case to 121 per cent. It was
on this material that the Tribunal adopted the figure of profit as estimated by
the Income-tax Officer, and in order to support this opinion further, the
Tribunal remarked that in certain cases which had come to its notice the rate
of profits 'went up to 20 per cent.' On the basis of this remark it was argued
that the principle of natural justice had been violated in that the Tribunal
had taken into consideration the rate of profit in other cases without giving
an opportunity to the appellant to explain those cases and relied upon
Dhakeshwari Cotton Mills Ltd. v. The Commissioner of Income-tax, West Bengal
(1) where a violation of the fundamental rule of justice, i.e., where the
information was not disclosed to the assessee and no opportunity was given to
rebut that material, was (1) [1955] I. S.C.R. 941 892 held to be a ground for
interference with the order of the Tribunal. In our opinion, no such case
arises in the present appeal. No information, as in Dhakeshwari's Case was
supplied to the Tribunal by any one and taken into consideration by it, and
therefore it was not necessary to give any such opportunity as the appellant
contends for. In the present case the Tribunal has held that from the method of
accounting adopted by the appellant correct profits could not be deduced
because of the various reasons which have been set out above and the reference
to profits made in other cases was only by way of supporting that conclusion.
It was not the basis on which the conclusion
was formed nor the basis on which the percentage was arrived at.
As a matter of fact, the Income-tax Officer
who also rejected the accounts of the appellant had also given similar reasons.
He had held that there was absence of vouchers, that the stock account and the
manufacturing account had not been kept or produced, that the cheques of other
parties had been credited in the accounts of the appellant which had not been
explained and that there was purchase of goods and property by the appellant without
there being sufficient cash in hand. The Income-tax Officer also said that in
other cases where grains were purchased in India and sold in Colombo the rates
of profit were higher, ranging between 20 per cent and 39 per cent. He then
worked out profits in respect of various grains in the case of the appellant
and found that the average rate of gross profit worked out to 15.8 per cent.,
and in his opinion the gross profit in fodder should have been higher. He
further took into consideration the fact that Colombo was bombed in April 1942,
resulting in panic in that town and therefore during a portion of the
accounting year the appellant might not have made the same margin of profit. He
estimated the sales at twenty lacs and the gross profit at three lacs, thus
arriving at a figure of 15 per cent on the turnover. It appears to us that
neither the Income-tax Officer nor the Appellate Tribunal relied upon the
profits made by traders in other cases as a basis for arriving at any
conclusion 893 as to the percentage at which the income should be computed and
that they used that material for a different purpose.
It is extremely doubtful if the order of the
Income-tax Officer or the Tribunal would have been different if no reference
had been made to the rate of profits in other cases. In other words, the
profits in other cases were not the reason for holding that 15 per cent. profit
was a proper rate but merely an ancillary support to that conclusion.
It may be mentioned that throughout in his
grounds of appeal the appellant has emphasised the inapplicability of s. 13 of
the Income Tax Act and the proviso thereto, but not to this particular
violation of principles of natural justice which was emphasised and
particularised before us. In his appeal to the appellate Assistant Commissioner
no objection was taken to the reference by the Income-tax Officer to the rate
of profits made by other dealers in grains. In the grounds of appeal. to the
Tribunal also there was no such objection. In the application under s. 66(1) there
was no specific ground taken and in the application under s. 66(2) the matter
does not seem to have been raised. The order of the High Court, dated February
26, 1953, does not show that any such question was raised before it; all it
shows is that the appellant's books of account were found to be defective and
afforded no data for arriving at correct profits of the business. The order
also refers to the non-production of invoices, the unexplained steep fall in
profits made during the year when compared with the previous years. The High
Court could not find any legal flaw in the order of the Appellate Tribunal to
justify an order for directing the case to be stated. In the grounds of special
leave to this Court no pointed reference was made to the material which is now
alleged to have been used by the Tribunal without giving an opportunity to the
appellant to explain that material.
An amended petition by leave of this Court
was filed on April 28, 1954, and there also no such pointed reference was made
to the material to which objection is now being taken before us. Dhakeshwari's
Case (1) cannot, in our opinion, apply to the facts of this case, (1) [1955] I.
S.C.R 941 894 It was then urged that the four reasons given, which we have set
out above, could not make s. 13 applicable. for the rejection of accounts
several reasons were given by the Appellate Tribunal; one of these reasons was
the non- production. of stock registers and manufacturing accounts.
This reason was given by the Income-tax
Officer and adopted by the Appellate Tribunal. It was submitted that the
non-production of stock account was not such a defect as to entitle the Taxing
Authorities to reject the books and apply the proviso to s. 13. Reliance was
placed on the judgment of the Punjab High Court in Pandit Brothers v. The
Commissioner of Income-tax, Delhi (1). The facts in that case were very
different. The Income-tax Officer there added a certain sum to the assessee's
profits on the ground that the expense ratio was too high and the profits disclosed
were too low and there was no stock register. The finding in that case was that
the assessee maintained regular accounts of his purchases and sales and there
was no finding by the Income-tax Officer that in his opinion the income could
not properly be deduced therefrom. Khosla, J.
(as he then was) there said:
` There is no finding that there was material
before the Income-tax Officer to lead him to the conclusion that a proper
statement of income, profits and gains could not be deduced from the material
placed before him. All he said was that the profits appeared to be somewhat low
and there was no stock register.'.
The want of a stock register was, in that
particular case, not a very serious defect because the account books had been
found and accepted as correct and disclosed a true state of affairs. It cannot
therefore be said that that case laid down as a proposition of law that the
want of a stock register by which a proper check could be made was not such a
serious defect as to make the proviso to s. 13 inapplicable.
The importance of such register was pointed
out by the Nagpur High Court in Ghanshyam Das Permanand v. Commissioner of
Income-tax, C.P. & Berar (2). In cases such as the instant case, the
keeping of a (1) [1954) 26 I.T.R. 159.
(2) [1952] 21 I.T.R. 79, 81.
895 stock register is of great importance
because that is a means of verifying the assessee's accounts by having a
quantitative tally'. If, after taking into account all the materials including
the want of a stock register, it is found that from the method of accounting
correct profits of the business are not deducible, the operation of proviso to
s. 13 of the Income-tax Act would be attracted, Bombay Cycle Stores Company
Ltd. v. Commissioner of Income-tax (1). It may also be added, as was held by
this Court in Commissioner of Incometax v.Mac Millan & Co. (2), that the
Income-tax Officer, even if he accepts the assessee's method of accounting, is
not bound by the figure of profits shown in the accounts. It is for the Income-tax
Authorities to consider the material which is placed before them and, if, after
taking into account in any case the absence of a stock register coupled with
other materials they are of the opinion that correct profits and gains cannot
be deduced, then they would be justified in applying the proviso to s.
13. In our opinion therefore when the
Tribunal applied the proviso to s. 13 because of the various blemishes which
were pointed out by the Income-tax Officer and accepted by the Appellate
Tribunal, it cannot be said that there was any error in the order of the
Appellate Tribunal justifying the interference of this Court under Art. 136.
In regard to the Appeal No. 220 of 1955 for
the assessment year 1946-1947 the objection raised was that the Tribunal had
committed the same error in that it took into consideration the earlier
decision of the Tribunal 'in an identical situation' i.e., in the case of the
same assessee in regard to previous years. As we have held that there was no
error in the order of the Tribunal in regard to the previous years, it cannot
be said that this observation of the Tribunal was in any manner erroneous. This
appeal should therefore be dismissed.
The other appeals which arise Under the
Excess Profits Tax Act for the various chargeable accounting periods depend
upon the result of the Income-tax (1) [ 1958] 33 I.T.R. 13. (2) [1958] 33
I.T.R. 182, 197.
114 896 assessment appeals and, as we have
dismissed those appeals, these appeals also must be dismissed.
In the result all the six appeals are
dismissed with costs. As the appeals were consolidated there will be of One set
of costs.
Appeals dismissed.
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