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Reference Case No. 14 of 1966, decided on 1st May 1968.
S. 23 - Profit rate - No Comparable business in Province - Finding that profit rate as disclosed by assessee was "too low" - Held, without basis in circumstances of case.
Pioneer Sports Ltd., Sialkot v. Commissioner of Income-tax, Punjab and another (1934) 2 I T R 305 ref.
S. 23 read with S. 13, proviso-Mere failure of assessee to furnish stock register showing purchase and consumption of raw material-No ground to reject account of assessee.
Pioneer Sports Ltd. Sialkot v. Commissioner of Income-tax, Punjab and another (1934) 2 I T R 305 ; Bombay Cycle Stores Co. Ltd. v. Commissioner of Income-tax, Madhya Pradesh and Bhandara, Nagpur (1958) 33 I T R 13 and S. Beeriah Reddiar v. Commissioner of Income-tax, Travancore-Cochin, Bangalore (1960) 38 I T R 152 ref.
Kale Khan Muhammad Hanif v. Commissioner of Income-tax, Madhya Pradesh and Bhopal (1963) 50 I T R 1 ; A. Govindarajulu Mudaliar v. Commissioner of Income-tax, Hyderabad (1958) 34 I T R 807 (S C) and Lakhmiehand Baijnath v. Commissioner of Income-tax, West Bengal (1959) 35 I T R 416 held not relevant.
Akbar Hayat Mirza and M. Hossain for Applicant.
Afzalul Hoque for Respondent.
Dates of hearing : 1st, 2nd, 5th and 6th February and 1st May 1968.
.-This is a reference under section 66(1) of the Income-tax Act (hereinafter called "the Act") and it arises in the following circumstances : Ata Hussain Khan Ltd., a private limited Company, is the assessee and the relevant assess ment years are 1956-57, 1957-58 and 1958-59, respectively. For these three years the assessee showed turnover of Rs. 75,290, Rs. 3,48,753 and Rs. 3,72,846 respectively. The gross profits for these three years as shown by the assessee amounted to Rs. 59,640, Rs. 1,17,158, Rs. 1,30.263 respectively. The rates of gross profits were at 34 %, 33.6 % and 35%, respectively for the three yeas.
The assessee, it is stated, derives income, from dealing in goods like paper board, glass and also from running photo offset and printing press which included printing on containers, label printing, calendar printing on paper and also on tins. The Income-tax Officer in considering the return filed by the asses see for the year 1956-57 observed :
"In arriving at the G. P. of Rs. 44,511 the assessee deducted Rs. 15,129 as depreciation. If this is added to G. P. shown correct G. P. will come to Rs. 59,640. This is about 34%. G. P. shown 'is too low in assessee's line of business. The assessee fails to furnish quantitative reconciliation of raw materials purchased and consumed in manufacturing different types of containers, etc., and finished products manufactures and sold."
It is stated that the assessee failed to produce what is called stock book showing day to day consumption of raw materials for manufacturing goods in respect of all the three years. It created doubt in the mind of the income-tax Officer as to the reliability of the different amounts of loan taken from the mother of Ata Hussain Khan who is Managing Director of this company.
On a consideration of the facts and circumstances of the case, the Income-tax Officer assessed the gross profits of the assessee at 43.6 %, 44.7 % and 44% for the years 1956-57, 1957-58 and 1958-59, respectively. The Appellate Assistant Commissioner, it is stated, virtually accepted the findings of the Income-tax Officer and refused to interfere with the addition of amounts to gross profits as made by him. On further appeal to the Tribunal, it observed :
"However we do not subscribe to the view that these so-called loans represented sales kept out of the books. We do not propose to express any opinion as to the real nature of the so-called loans at this stage.
The Income-tax Officer's basis of action was unverifiability of the accounts coupled with lowness of profit. He found that the loans were not properly explained. So he treated these as suppressed sales of the company."
The Tribunal also found that there is no comparable case. After having found that, the Tribunal recorded its ultimate deci sion in the following terms:
"'The assessee showed profit rate of 40% in 1955-56 Income-tax year. This rate is reasonable we direct that this rate should be applied on the disclosed sales of the three years."
The assessee having been dissatisfied with this order, request ed the Tribunal to make a reference to this Court under section 66(1) of the Act and the Tribunal accordingly referred the following question on 27-8-1962 :
"Whether on the findings of fact made by the Tribunal it was justified to take recourse to section 13 of the Act and raise the rate of gross profit to 40% for the assessment years 1956-57, 1957-58 and 1958-59 "
This reference was heard by a Division Bench of this Court consisting of K. M. Hasan and Talukdar, JJ, and the learn ed Judges found that the Tribunal's finding relating to the loan was somewhat contradictory and referred back the matter to the Tribunal and required it under section 66(4) of the Act to state further facts. In compliance with the said direction, the Tribunal has stated further facts in the present reference. In' doing so the Tribunal observed as follows :-
"After receipt of the records Tribunal fixed a date for fur ther hearing. When. the case was taken up both the parties declined to adduce any further evidence. Both sides further agreed that the matter of cash credit in the name of Sugra Begum was not treated at any stage of the case as defects in the accounts which either singly or considered along with other factors could be a reason for rejection of accounts and taking recourse to section 13 of the Act. We have noticed their statements in our order sheet."
The Tribunal proceeded further to say:
"The two remarks of the Tribunal which had created some difficulties in the Court were not in fact contradictory in the nature. After considering the stand of the Income-tax Officer and the explanation offered by the assessee on the question of cash credit the Tribunal rejected both versions as none could establish their respective cases. The Tribunal refused to express any opinion about the real nature of the "So-called loans" evidently because it could have and as a matter of fact decided the case on other materials on record."
It is true we are concerned with what the Tribunal did in disposing of the appeal of the assessee by its order dated 1-8-61, and not with the interpretation it gives now to its order. The Tribunal is no doubt the author of its order but on that ground it cannot add or vary it subsequently. We are, however, in agreement with the Tribunal in its explanation given on 24-12-65, that its decision was not based on so-called loans about which at expressed no opinion and that it decided the case on other materials. That position is clear from the passages from its order noted earlier in this judgment. The Tribunal, however, in stating further facts suggested that the following question would be more appropriate than the one referred earlier :-
"Whether in the facts and circumstances of the case the Tribunal was justified in upholding the rejection of accounts and taking recourse to enhancement of profit disclosed by the asses see."
It seems to us that both the questions are substantially the same and it is not necessary to reframe the question as suggested now. We would, therefore, proceed to consider the question referred to this Court on 27-8-62.
Mr. A. H. Mirza, learned counsel for the assessee, submits that this question should be answered in the negative. His conten tion is that the return submitted by the assessee has not been relied on mainly on the grounds that the profit shown therein is too low and that the assessee failed to furnish the stock register and that the loan from the mother of the Managing Director as alleged has not been satisfactorily proved.
On the first ground, learned counsel's contention is that there is no basis for reaching the conclusion that the profit was too low for there was no other business of this nature in the province and as found by the Tribunal itself there was no com parable case. That being so, there was no basis for the finding to the effect that the profit was too low.
Mr. Afzalul Haque, learned Advocate for the Revenue, sub mits that the profit as determined by the Tribunal is favourable to the assessee and cannot be considered to be unreasonable. But that is not the question. The contention of learned counsel is that the finding that the profit as shown by the assessee is to low is without a basis. This contention of the learned counsel for the assessee, therefore, appears to us to be of substance.
Next contention of the learned counsel for the assessee is that mere failure to furnish stock register is no ground to reject the account of the assessee. This contention of learned counsel is also of substance.
In the case of the Pioneer Sports Ltd., Sialkot v. Commissioner of Income-tax, Punjab and another ((1934) 2 I T R 305) a Division Bench of the Lahore High Court, consisting of Addison and Sale, JJ. Observed:
"It has been alleged before us, and has not been denied, that the method of accounting disclosed by the petition in connec tion with the assessment under review is the same method which has been accepted by the Income-tax authorities both before and after the year in question. The exception taken in this particular instance by the Income-tax Officer to the method of accounting was based on the absence of a stock register. Counsel for the petitioner has assured us, and it has, not been denied on behalf of the Income-tax authorities that the company has never had a stock register. In this parti cular case the suspicions of the Income-tax Officer were aroused by the reduced rates of profit shown by the company and the income-tax Officer rejected the profits shown by the company in the accounts produced on the ground that a trading account based on an inventory not supported by stock book can only be accepted if it discloses a reasonable rate of profits. In other words, the Income-tax Officer did not attack the method of accounting adopted by the assessee but he refused to accept the profits disclosed only because he considered the rate of profits shown to be unreasonably low.
It appears to us that the Income-tax Officer went beyond his function in this case in endeavouring to lay down certain principles of business."
The learned Judges then proceeded to observe:
"The mere fact that they may choose to charge a low rate of profit, is no reason for the Income-tax Officer to reject the total profits as stated by the Company in their return. Nor is the absence of a stock register, when admittedly the company have never used a stock register, any reason for justifying the assumption of the Income-tax Officer that the profits cannot properly be deduced from the returns submitted, when these is no other reason except the fact of reduced profits to justify this assumption."
The observations quoted above would support both the conten tions of Mr. Mirza, counsel for the assessee.
In the case of Bombay Cycle Stores Co. Ltd. v. Commis sioner of Income-tax, Madhya Pradesh and Bhandara Nagpur ((1958) 33 I T R 13) it was held if the accounts, notwithstanding the absence of the stock register, enabled the Income-tax Officers to deduce properly the Income, profits and gains of the business, the mere absence of the register would not be a sufficient ground for invoking the aid of the proviso to section 13.
In this case, we have already noticed that the returns submit ted have been found to be unverifiable on the ground of absence of stock register and lowness of the profit. The Tribunal, in the case before us observed in stating the case under section 66(1) "The Income-tax Officer found that there is no stock book show ing day to day consumption of raw materials for manufactured goods." It would be found that the case referred to above supports the contention that the absence of the stock book would not be a sufficient ground for finding the returns to be unverifia ble. It is true, the Tribunal also stated that there is no quantita tive reconciliation of raw materials purchased and consumed in different jobs. In dealing with this question the Tribunal in its order dated 1-8-61, observed:
"The assessee did not produce before us any order book but the gist of the argument of the pleader was that the manufactur ed goods were supplied to certain well-known parties and industrial concerns of the city on orders received and that the manufactured goods otherwise have no general sale value. We have looked into some of the bills and notice that quite a large volume of goods had been supplied to match manufacturers."
The Tribunal further observed:
"Though the Income-tax Officer considers the accounts to be invariable his action shows that the accounts provide a foundation for his determination of the profits of the business."
These observations indicate that it would not be accurate to say that the accounts have been found to be wholly unverifiable.
In the case of S. Beeriah Reddiar v. Commissioner of Income-tax, Travancore-Cochin Bangalore ((1960) 38 I T R 152), it was held that low profits and absence of a variety-wise or regular stock register was not a sufficient ground for rejecting the accounts of the D assessee under the proviso to section 13 of the Income-fax Act. This case also supports the contention of Mr. Mirza that there was no valid reason for not accepting the accounts submitted by the assessee on this ground.
On a closer scrutiny of the order of the Income-tax Appellate Tribunal in disposing of the appeal on 1-8-61, it is seen that the Tribunal itself does not express any opinion clearly on the ques tion of unverifiability of the accounts or lowness of the profits.
The Tribunal itself noticed "The assessee enjoys a sort of monopoly, there being no rival." It would therefore appear that there is nothing for comparison of the profits of the assessee. We do not, therefore, find any basis for holding that the profits shown by the assessee were indeed too low. The Tribunal ultimately concluded that 40% was the rate of profits for all the three years only on the ground that the assessee had shown that profit rate for the year 1955-56. If reliance is placed on the return of the assessee for one year, it is not understood why the return submitted for other years should be rejected unless some new reason can be assigned. We do not find any sound basis whatsoever for fixing 40% as the rate of profit for the there years in question there was no justification for reaching the said conclusion.
Learned Advocate for the Revenue places his reliance on the case of Kale Khan Mohammad Hanif v. Commissioner of Income-tax, Madhya Pradesh and Bhopal ((1963) 50 I T R 1). In that case the Supreme Court of India held that the onus of proving the source of a sum of money found to have been received by the assessee is on him. This case; in our opinion, is irrelevant for the purposes of the instant case for we have already noticed that the Tribunal has not founded its conclusion on the failure to prove the alleged loan.
Learned Advocate for the Revenue places reliance on the case of A. Govindarajulu Mudaliar v. Commissioner of Income-tax, Hyderabad ((1958) 34 I T R 807 (S C)). In that case also it was held that where an assessee failed to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the Income-tax Officer was entitled to draw an inference that the receipts were all of assessable nature. This case is also not applicable at all to the facts of the case before us.
Next case relied on by learned Advocate for Revenue is Lakhmichand Baijnath v. Commissioner of Income-tax West Bengal ((1959) 35 I T R 416). In that case also it was held that where wan amount is credited in business books, it is not an unreason able inference to draw that it was a receipt from business. This case was cited by Mr. Afzalul Huq to show that the alleged loan, as a matter of fact, was income of the assessee but we have in our judgment repeatedly made it clear that the case proceeded on grounds other than obtaining loan in this case. Therefore, this case also has no application to the facts of the case before us. We are of opinion that rejection of accounts as done under section 13 was not justified.
For the reasons stated above, we answer the question referred to us on 27-8-1962 in the negative. We leave the parties to bear their own costs.
I agree.
S. Q. Reference answered in the negative.
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