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Case Referred No. 30 of 1957, decided on 24th February, 1959.

S. 13‑Rejection of accounts -Estimate of profits by adopting flat rate on turnover‑Further addition for unexplained cash credits‑Whether permissible.

Where the income‑tax authorities reject the books of account of the assessee and compute the gross profits of his business by applying a flat rate on' the total turnover, they cannot rely on the books for the purpose of adding cash credits, which were part of the scheme of balancing accounts, to the profits so ascertained.

A. Kuppuswami for Assessee.

C. Kondaiah for Commissioner.

.‑In compliance with our directions dated March 26, 1955, under section 66 (2) of the Indian Income‑tax Act, the Income‑tax Appellate Tribunal, Hyderabad, has stated a case on the following question;

"Whether on the material placed before it the Tribunal is justified in sustaining the addition of Rs. 1,37,189."

The assessee is a firm carrying on business in ground‑nut kernel and manufacture and sale of ground‑nut oil and cake at Guntur. The reference pertains to the assessment for the year 1947. The previous year was the calendar year 1946. In the year of account, the books disclosed a turnover of Rs. 18'18 lakhs and a gross profit of Rs. 92,726 which worked out to 5'1%. The net income disclosed by the assessee was Rs. 25,454. This figure, however, was not accepted by the Income‑tax Officer who added four sums on account of tile value of the yield of oil and cake from unaccounted for kernel Rs. 34,795, the value of deficit yield of oil and cake from kernel disclosed in he book,. Rs. 46,001, unaccounted for profit on sale of permits restricted to the unproved cash credits Rs. 56,345, and interest of Rs. 48 in respect of one of the impugned cash credits, making a total of Rs. 1,37,18'9. An appeal against these additions was rejected. The Tribunal to‑whom the assessee appealed, while maintaining the additions, criticised the basis and expressed the view that it is the proviso to section 13 of the Act which ought to be applied in the circumstances of the case, namely, that when the book version of profits could not be accepted, the addition should be, what it called, unitary. It rejected the books in the following words;

" .We have absolutely no doubt in our mind that these were all un‑accounted for profits brought into account and tried to be screened off by rubbing away the original entries in the books of account. This would show that the account version of profit could not be accepted."

After stating that the assessee during the year obtained a good number of permits for export of oil to Bengal, Bihar and Uttar Pradesh where the price of oil was very much higher than in Madras, the Tribunal further observed;

"We are convinced that the book version of profits could not be accepted and the income had to be estimated. The gross profit as mentioned above was only 5'1 per cent. and with the additions made it would be 9 5 per cent. which is lower than 10 or 11 per cent. disclosed by other merchants, in this line. We would accordingly confirm the additions. We might state at the end that although we discussed the above points in detail, in our opinion it was not necessary to consider minutely every one of the defects and every one of the additions in the view we have taken. They were discussed to exemplify the incorrect nature of the book version."

The Tribunal was careful in its concluding sentences to emphasise that it is basing its computation on the estimate of 9'5%, and not upon any, of the items which were taken into account by the income‑tax authorities. The scrutiny by the Tribunal of the items of addition made by the income‑tax authorities was merely for the purposes of showing that the accounts could not be relied upon. It considered the weighment book and held that it was difficult and perhaps impossible to say whether the assessee accounted for all the yield of kernel in the books, because the entire quantity of ground nut received by him had not been recorded correctly, and therefore concluded that in their view it was a case where the proviso to section 13 comes into play and that the additions made under the separate heads should be unitary. It is clear from this order that since the departmental officers made additions on this ground and since the learned advocate addressed arguments, they expressed an opinion on the merits as presented to them. But the conclusions on these items did not weigh with the Tribunal, because, as we have already stated, it was careful enough to exclude from the computation, any consideration of the items.

The contention of the learned advocate Shri Kuppuswamy is that the Tribunal having adopted as the basis of assessment a gross profit of 9'5% instead of 5.1%. had computed the figure of Its. 1,37,189 wrongly. This contention, in our view, is valid. The Tribunal has made an arithmetical error in the computation, because the additions on account of the value of the yield of oil and cake from the unacounted for kernel of Rs. 34,795 and on account of the yield of oil and take from kernel disclosed in the books of Rs. 46,001 would come to Rs. 80,796 and enhance the profit to Rs. 1,72,522 which on a total turnover of Rs. 18,18,308 works out to about 9'5%. The Appellate Assistant Commissioner has also computed these figures as showing a yield of 9'5%, gross profit, which is the gross profit in three other similar cases in Guntur. Having thus computed the gross profit at 9 5% the Appellate Assistant Commissioner further added a sum of Rs. 56,345 on account of unaccounted for profit on sale of permits restricted to the unproved cash credits. This addition is obviously wrong when a flat rate of 9‑5% on the total turnover is being adopted in computing the gross profits. The assessee had recourse to the several entries of cash credits only for the purposes of balancing the accounts with a view to reducing the rate of gross profits. If once the income‑tax authorities have rejected the books, they cannot have it both ways, namely, adopting a flat rate to compute gross profit as well as rely on the books for the purposes of adding unexplained cash credits which were part of the scheme of balancing the accounts. The Tribunal, quite properly, rejected this basis and having done so, merely confirmed the additions of the income‑tax authorities, probably under the impression that the two items of yield of oil and cake from unaccounted kernel and the value of deficit yield of oil and cake from kernel disclosed in the books would amount to Rs. 1,37,189. We cannot, having regard to the categorical observations of the Tribunal that the addition should be unitary where the proviso to section 13 of the Act is applied by making an estimate, assume that the Tribunal intended to negative the statement by also adding cash credits in computing the gross profits. In the circumstances we have no hesitation in holding that the addition on the flat rate of 9‑5% adopted by the Tribunal in estimating the gross profit is proper and that the amount of Rs. 1,37,189, was wrongly computed.

Our answer to the reference is in the negative. The assessee will receive costs from the Department. Advocate's fee Rs. 250.

M. N. Question answered in the negative.

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