G. MEHROTRA C.J. - Income-tax Reference No. 1/63 arises out of a reference made by the Income-tax Appellate Tribunal, Calcutta Bench, Calcutta. The following question of law has been referred to this court for opinion :
'Whether, on the facts and in the circumstances of the case, that part of the condition mentioned in clause (i) of sub-section (2) of section 15C of the Indian Income-tax Act, namely, not formed by transfer to a new business of building, machinery or plant used in a business which was being carried on or before the 1st day of April, 1948, had been satisfied by the assessee so as to entitle it to the relief envisaged in that section for the assessment years 1953-54, 1954-55 and 1955-56 ?'
As the Tribunal has refused to refer certain further questions which, according to the assessee, arose out of the order of the Tribunal, on an application made before this court the Tribunal was asked to state a case. The Tribunal has thus stated the case and referred the following two questions of law for opinion to this court :
'(1) Whether, on the facts and circumstances of the case, the proviso to section 13 of the Income-tax Act is attracted and
(2) Whether there was any material on the record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee ?'
This is the subject-matter of Income-tax Reference No. 8/64. Both these references have been argued together and we propose to give our opinion to the three questions by one consolidated order.
The assessee is a limited company engaged in the manufacture and sale of bolted tanks, welded tanks, pulleys, steel plates, etc. It also carried on business as the dealer in miscellaneous hardware articles. The business of the company was started on 15th April, 1951, and the first assessment year was 1952-53. The assessment years in question are 1953-54, 1954-55 and 1955-56. Some old machinery were purchased during the accounting period for the year 1952-53. During the accounting year for 1953-54 assessment also, old machinery of considerable worth were purchased for the manufacture of bolted tanks. It is set out in the statement of the case that it is common ground that the undertaking started its manufacturing operartions by purchasing old machinery and also during the accounting period for 1953-54 old machinery for the manufacture of bolted tanks were purchased from Messrs. Agarwal & Co. of Tinsukia. The old machinery which were purchased from M/s. Agarwal & Co. of Tinsukia were used in that business before the 1st April, 1948.
The relevant provision of the Indian Income-tax Act, 1922, (hereinafter called 'the Act') is section 15C which reads as follows :
'15C. (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking, computed in accordance with such rule as may be made in this behalf by the Central Board of Revenue.
(2) This section applies to any industrial undertaking which -
(i) is not formed by the splitting up, or the reconstruction of business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948;......'
Only the relevant portion of the section has been quoted above. The new industry will thus be entitled to the benefit of section 15C(1), unless it is an undertaking not formed by the splitting up, or the reconstruction, of business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948.
The contention of the assessee which has been repelled by the Tribunal was that, unless the undertaking at its initial stage was formed by the transfer of old building, machinery or plant or was formed by the splitting up or reconstruction of already existing business, the undertaking will be entitled to the benefit of the section. The Tribunal has held that as from the facts of the case it was evident that the manufacturing unit out of which the profit was earned by the assessee came into existence after purchase of the machinery and the plant used in a business which was being carried on before the 1st day of April, 1948, the section 15C will not be applicable to this undertaking.
'Industrial undertaking' has not been defined anywhere in the Income-tax Act. Section 15C(1) will apply to all undertaking unless it is an undertaking formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948. It is not the case where the assessee-industry was formed by the splitting up or the reconstruction of business already in existence. The Tribunal has held that this section will not apply to the assessee as it has been formed by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948. The contention of the assessee is that at the initial stage the industry itself should have been formed by the transfer to a new business of building, machinery or plant used in the business. The Tribunal held that there is no dispute that the undertaking started its manufacturing operation by purchasing old machineries. There is also no dispute that during the accounting period for 1953-54, old machineries for the manufacture of bolted tanks were purchased from M/s. Agarwal & Co. of Tinsukia and that these machineries were used in that business before April 1, 1948. On this finding it cannot be said that it is an industrial undertaking which has not been formed by transfer of machinery used in a business which was being carried on before the 1st day of April, 1948. It is not a case where the industrial undertaking, that is, its manufacturing process, was carried on with the help of any new plant, though some parts of it may have been old. In our opinion, the first question referred to us should be answered in the negative.
The two questions referred to us for opinion which form the subject-matter of the Income-tax Reference No. 8/64 have already been set out earlier. Section 13 of the Act runs as follows :
'Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee :
Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine'.
The contention of the assessee is that the Income-tax Officer was not right in holding that the method of accounting employed by the assessee was such that the income, profits and gains could not be properly deduced from it. It is further urged that even assuming that from the method of accounting employed by the assessee, the income, profits and gains could not be properly deduced and thus the proviso was attracted, the computation made by the Income-tax Officer was not on any basis and was done arbitrarily. The Tribunal held as follows :
'It, however, appears that, although there are separate trading accounts for the several items of goods dealt with and manufactured by the assessee, all the purchases relating to the various accounts were debited by the assessee to one consolidated account. Shri Rampuria admits that the allocation of these purchases to the various trading accounts was not on any scientific basis but that the apportionment was made purely on an ad hoc basis. It further appears that although the assessee was manufacturing various items such as bolted tanks, welded tanks, pulleys, steel plates, etc., there was no daily consumption register or any production register which could afford a check as to the actual production in the assessees factory from day-to-day. Further, the stock account also cannot be reconciled because the assessee only makes an inventory of the stock at the end of the year of all the goods together. There is no separate stock reconciliation account'.
From these observations it is clear that it could not be said that there were no reasonable grounds for the Income-tax Officer to form an opinion that from the method of accounting of the assessee his profits could not be ascertained.
The law, so far as section 13 of the Act is concerned, is summed up in the case of Commissioner of Income-tax v. A. Krishnaswmi Mudaliar, as follows :
'......the expression in the opinion of the Income-tax Officer in the proviso to section 13 of the Indian Income-tax Act, 1922, does not confer a mere discretionary power; in the context, it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced therefrom ...... If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits'.
In the above case, the assessee-firm paid an amount of Rs. 1,00,000 for acquiring a cinema film, a wasting asset, which was to be exploited for four years for the benefit of the partnership. The price paid for acquiring the assets was debited as an outgoing. At the and of the year there was a total collection of Rs. 1,46,849 by the exploitation of the asset. The expenses for carrying on the business amounted to Rs. 18,206. The result according to the firm which maintained its accounts on cash basis, was a net profit of Rs. 28,647. This was arrived at by posting the outgoing for acquiring its stock-in-trade as a proper debit, and ignoring the value of that asset at the end of the year altogether. In these circumstances it was held that the Income-tax Officer is right in holding that the account kept was not such that permitted that the true income profits could be deduced. The question thus, of the stock of daily production would be a relevant factor to arrive at the true statement of the profits and when no such proper account was maintained which showed as to how much material purchased was utilised for production daily and there being no proper stock register, it cannot be said that the proviso was not attracted in the case and that the opinion was arbitrarily formed. Thus, in our opinion, the question No. 1 in Reference No. 8/64 is answered in the affirmative.
Question No. 2 in Income-tax Reference No. 8/64, in my opinion, is to be answered in the negative. Section 13, proviso, empowers the Income-tax Officer to choose his own basis for computing the profit in case he finds that real profits cannot be determined by the method of accounting employed by the assessee. This, however, does not give power to the Income-tax Officer to arbitrarily add to the profits disclosed by the assessee in his return supported by the account books. The power given to the Income-tax Officer under section 13 proviso, cannot be equated with the power given to him to make best judgment assessment under section 23(4) of the Act.
It will be convenient to refer to the case of Seth Nathuram Munnalal v. Commissioner of Income-tax. In this case the second question referred to was as follows :
'If the answer to this question is in the affirmative, is there any material on record to warrant the estimate of the profits at the several rates adopted in this case ?'
Dealing with this question it was observed that the statement of the case is not satisfactory. this was evidently due to the view of the Appellate Tribunal that the assessment was a leap in the dark. It was held that as the trading profits could not be properly doduced from the account books for want of opening and closing stocks, the proviso to section 13 was attracted; but that did not entitle the Income-tax Officer to reject the books, as unreliable. If the assessee fails to satisfy the Income-tax Officer as to the correctness of the percentage of profits returned by him, it was open to the officer to take a higher percentage consistent with the state of trade in the locality or with any special circumstances of the assessee which warrant a higher rate of profits.
The Income-tax Officer after applying the proviso, took the percentage of gross profit on a comparison of similar profit disclosed by the applicant-assessee itself in earlier years. On appeal relating to the assessment year 1953-54 the Appellate Assistant Commissioner of Income-tax took the gross margin of profit as disclosed for the assessment year 1952-53 as the basis and on that basis for the year 1953-54 the gross profit margin amounted to 46%. For the subsequent two years the Appellate Assistant Commissioner allowed ad hoc relief of Rs. 24,000 for the assessment year 1954-55 and Rs. 18,000 for the year 1955-56. The Tribunal on second appeal found that in the first two assessment years, that is to say, 1953-54 and 1954-55, the trading conditions were better and also the profit margin earned by the assessee must have been at the same rate as in the immediately preceding year, i.e., 1952-53, the overall gross profit of the latter year being about 44.5%. On consideration of this rate they felt that the overall result of gross profits worked out to be 46.8% and 48%, respectively, for the first two years under the appeal as compared to 44.5% of 1952-53. On these considerations the Tribunal restricted the additions for the first year to Rs. 3,000 and for the second year to Rs. 10,000. For 1955-56 the Tribunal on the basis of the trading conditions which were adverse in the relevant accounting period and as a lesser percentage of gross profit was applied by the Appellate Assistant Commissioner, did not allow further modification or reduction. For 1953-54 and 1954-55 the Tribunal made an ad hoc addition of Rs. 3,000 and Rs. 10,000, respectively, and with regard to 1955-56 it retained the ad hoc addition made by the Appellate Assistant Commissioner of Rs. 18,000. There is no material to justify the addition made by the income-tax authorities to the gross profit shown by the assessee in his account books. The additions were made on ad hoc basis and not on the evidence such as the trading conditions in similar trade or on the reconstruction of the account books of the assessee on the basis selected by the Income-tax Officer which was different from the one adopted by the assessee.
Reference may also be made to the case of Pandit Bros. v. Commissioner of Income-tax. The reference should thus be answered according.
NAYUDU J. - The facts of the case have been set out in the judgment of the Chief Justice and, therefore, need not be repeated. I am in agreement with the answers proposed by the Chief Justice to question No. 1 in Ref. No. 1/63 and question No. 1 in Ref. No. 8/64. I regret I am unable to agree with the conclusion reached in regard to and the answer proposed to question No. 2 in Ref. No. 8/64. I am clearly of opinion that the answer to this question should be in the affirmative and not in the negative.
The two questions referred to the High Court for opinion are as follows :
'(1) Whether, on the facts and circumstances of the case, the proviso to section 13 of the Income-tax Act is attracted and
(2) Whether there was any material on the record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee ?'
As already pointed out, I am in agreement with the Chief Justice that the answer to question No. 1 above should be in the affirmative. In other words, we have agreed that the decision of the income-tax authorities that the proviso to section 13 of the Indian Income-tax Act, 1922 (Act No. XI of 1922), hereinafter referred to as the Act, is attracted in this case. It is necessary to indicate the basis of our opinion on this question. We are satisfied that maintaining the record of the stock of daily production would be a relevant factor to arrive at the true statement of the profits of the business of the assessee, but that no such record is maintained or available. Further, that although there are separate trading accounts for several items of goods dealt in and manufactured by the assessee, all the purchases relating to the various accounts were debited to one consolidated account, there being no allocation of those purchases to the various accounts on any scientific basis, but, apparently, on an ad hoc basis. Thus, from the accounts produced by the assessee, it is not possible to determine how much of the material purchased daily has been utilised for purposes of production. Besides, no proper stock register has been maintained. This being the case, it is clear that the method of accounting employed by the assessee is such that the income, profits and gains cannot properly be deduced therefrom. Consequently, the proviso to section 13 of the Act is clearly attracted in this case and the Income-tax Office was entitled to determine the basis and the manner by which the computation of the income assessable to tax shall be made.
Having thus agreed that the Income-tax Officer was correct in forming the opinion, that the accounts produced and the method employed in maintaining them are such that the income, profits and gains cannot properly be deduced therefrom, the only question that remains to be considered is whether there was any material on the record for the Income-tax Officers computation of the income, profits and gains, which leads us to the consideration of the second question referred to us for our opinion in the Income-tax Reference No. 8 of 1964, which has already been quoted. Once we are satisfied that there is some or any material on record for the basis adopted by the Income-tax Officer or the Tribunal, the answer to the question must be in the affirmative and it would not be open to us to consider whether this material was sufficient for and justified the fixation of the assessable this made by the Income-tax Officer. That this is the correct position of law has been laid down by a Division Bench decision of this court, to which I was a party, in Civil Rule No. 1(M) of 1966, wherein the following observations were made and may be quoted with advantage :
'It is not for this court to enter into the merits and sit in judgment over the correctness of the decision made, so long as there is some material before the Tribunal as well as the Income-tax Officer, from which the disputed assessment could be said to have been made.'
In the Privy Council decision in Feroz Shah v. Income tax Commissioner, their Lordships of the Privy Council took a similar view, when they observed that the only judicial determination that was open to them to make, was 'whether there was any evidence before these officers, upon which they might so find ?' and the test their Lordships set themselves is contained in the following sentence in the judgment :
'In these circumstances it is in their Lordships judgment, impossible to say that there was no evidence before the Income-tax Officer....'
Hence, all that we have to consider is whether there was any material at all on record, which would form the basis of the Income-tax Officers assessment.
On this question, I am clearly of opinion that there was some material before the Income tax Officer for the computation of the income made by him. In this case, the Income-tax Officer took the percentage of gross profits on a comparison of similar profits shown as realised by the assessee itself in an earlier year, that is, the year immediately preceding the assessment year 1953-54, and adopted that figure. It is common knowledge that when the accounts produced for the assessment year in question are of no help in determining the profits for the year in question, reference to the profits in the year immediately preceding would afford some material to base a decision as regards the computation of the income for the assessment year. In the instant case, both the Tribunal and the Appellate Assistant Commissioner of Income tax had also taken into consideration the favourable trading conditions during the years 1953-54 and 1954-55 and also the generally unfavourable trading conditions that obtained during the assessment year 1955-56. These are relevant factors to be taken into consideration in arriving at the probable profits and gains during the assessment year in question, a conclusion supported by the Privy Council decision in Feroz Shah v. Income tax Commissioner.
In the decision of the Judicial Committee in Commissioner of Income-tax v. Laxminarayan Badridas, their Lordships observed at page 180 as follows :
'He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessees circumstances and his own knowledge of previous returns by and assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate.....'
In Seth Nathuram Munnalal v. Commissioner of Income tax, the learned judges of the Nagpur High Court constituting the Bench, held on the facts that there was material on record to warrant an estimate of the profits and in that context held that it was open to the Income tax Officer to take a higher percentage consistent with the state of trade in the locality or with any special circumstances of the assessee which warrant a higher rate of profits.
It is thus clear that there were materials before the Income-tax Officer as well as the Appellate Assistant Commissioner of Income tax, on which the computation was based. The Tribunal considered that the application of gross profits at the rate of 46.8% and 48% respectively, for the two years 1953-54 and 1954-55 as determined by the Income tax Officer and the Appellate Assistant Commissioner, were slightly on the high side, and accordingly reduced the percentage to a figure which would support the addition of Rs. 3,000 for the assessment year 1953-54 and Rs. 10,000 for 1954-55, these figures of Rs. 3,000 and Rs. 10,000 being less than the figures of gross profits that would have to be added, had the percentages determined by the Income tax Officer and the Appellate Assistant Commissioner been retained. Hence, the mere fact that the Tribunal reduced the figure, which undoubtedly is to the advantage of the assessee, this cannot at all be called into question, when there was material before the Income tax Officer to support the computation made by him. It would be extraordinary and, to my mind, inconsistent, to say that there was no material to support a lesser computation of the income. Hence, it cannot be said that there was no material for the final figures as determined by the Income tax Appellate Tribunal of the years 1953-54 and 1954-55. As per the year 1955-56, the Tribunal did not interfere with the figure as determined by the Income tax Officer and the Appellate Assistant Commissioner of Income-tax.
This being the case, I experience no doubt or difficulty in coming to the conclusion that there was material on record for the basis adopted for computing the income of the assessee, for all the three years of assessment, namely, 1953-54, 1954-55 and 1955-56 by the Income tax Officer and the Tribunal.
I would, accordingly, answer this question in the affirmative.
BY THE COURT
As there is difference of opinion with regard to Question No. 2 in Reference No. 8 of 1964, the following question is referred to the third judge for opinion :
'Whether there was any material on the record for the basis adopted by the Income tax Officer or the Tribunal for computing the income of the assessee ?'
The records of the case will be placed before the third judge.
S. K. DUTTA J. (2-2-1967). - The following question has been referred to me on a difference of opinion between the Chief Justice and Nayudu J., viz. :
'Whether there was any material on the record for the basis adopted by the Income tax Officer or the Tribunal for computing the income of the assessee ?'
The facts briefly are as follows : The assessee is a limited company engaged in the manufacture of bolted-tanks, welded-tanks, pulleys, steel plates, etc. It submitted returns before the Income tax Officer for assessment years 1953-54, 1954-55 and 1955-56. In the return for 1953-54 the assessee showed its profit as Rs. 7,565. The Income-tax Officer added a sum of Rs. 28,618 to it. The Appellate Assistant Commissioner reduced the addition to Rs. 7,500. The Tribunal further reduced it to Rs. 3,000. In the return for 1954-55 the assessee showed its profit as Rs. 8,099. The Income-tax Officer added a sum of Rs. 55,920 to it. The Appellate Assistant Commissioner reduced the addition to Rs. 24,000 and the Tribunal reduced it further to Rs. 10,000. In the return for 1955-56, the assessee showed its profit as Rs. 15,695. The Income tax Officer added a sum of Rs. 36,959 to it. The Appellate Assistant Commissioner reduced the addition to Rs. 18,000 which was confirmed by the Tribunal.
It is not disputed that the proviso to section 13 of the Indian Income-tax Act, 1922, is applicable to the present case. This section reads as follows :
'13. Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee :
Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income tax Officer may determine.'
It must, however, be noted that although the proviso gives discretion to the Income tax Officer to make the computation 'upon such basis and in such manner as the Income tax |Officer may determine', this desecration cannot be exercised arbitrarily. The question to determine in every such case will be whether there is any material for the basis adopted by the Income tax Officer or the Tribunal, as the case may be, for computing the income of the assessee. The material which is irrelevant or which amounts to mere guess work or conjecture is no material. The law in this connection has been laid down by the Supreme Court in several cases and the following observation made by it, in the case Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax is apposite :
'The limits of our jurisdiction to interfere with the finding of fact reached by the courts or tribunals of facts have been laid down by us in various decisions of this court. In Dhirajlal Girdharilal v. Commissioner of Income tax we observed that when a court of fact arrives at its decision by considering material which is irrelevant to the enquiry, or acts on material, partly relevant and partly irrelevant, where it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its decision, a question of law arises : Whether the finding of the court of fact is not vitiated by reason of its having relied upon conjectures, surmises and suspicions not supported by any evidence on record or partly upon evidence and partly upon inadmissible material. We also observed in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal that an assessment so made without disclosing to the assessee the information supplied by the departmental representative and without giving any opportunity to the assessee to rebut the information so supplied and declining to take into consideration all materials which the assessee wanted to produce in support of the case constituted a violation of the fundamental rules of justice and called for interference on our part.'
In the case before us the profit disclosed by the assessee and accepted by the department in the return for the assessment year 1952-53 was made the basis of the computation of profit for the subsequent three years. But the profit of a previous year is quite irrelevant for the purpose of computing the profit of a subsequent year in the absence of materials which may enable the assessing authority to compare the market conditions of the two years. There is no such material and it is not understood on what material the Tribunal said that for 1953-54 and 1954-55 'the trading conditions' were better. Nor is there any material to show that there were 'adverse trading conditions' for the assessment year 1955-56. Moreover, the computation of various additions was merely a guess work. This can be seen not only from the fact that there was no material to arrive at the particular figures but also from the fact that the additions made by the Income tax Officer, the Appellate Assistant Commissioner and the Tribunal, respectively, varied widely.
In the above circumstances, I hold there was no material on the record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee. The question is answered accordingly.
BY THE COURT
I.T. Refs. 1/63 and 8/64.
I.T. Ref. 8/64
The question No. 1 referred to us for opinion is answered in the affirmative.
In view of the judgment of the third judge the question No. 2 is answered in the following words : 'There was no material on the record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee.'
The answer, therefore, is in the negative.
I.T. Ref. 1/63.
The question is answered in the affirmative. In the entire circumstances, we wish to make no order as to costs.