1963 (4) TMI 80 - HC - Income Tax

Summary

Issues Involved:

1. Whether the applicant paid a higher price for styron for extra-commercial reasons.
2. The applicability of the proviso to section 13 of the Indian Income-tax Act, 1922.
3. The determination of the reasonableness of expenditure by tax authorities.

Issue-wise Detailed Analysis:

1. Whether the applicant paid a higher price for styron for extra-commercial reasons:

The applicant, a registered firm manufacturing plastic goods, showed a loss of Rs. 1,08,075 in the manufacturing account for the year ending December 31, 1952. The Income-tax Officer found that the firm purchased 71,488 lbs. of styron, with 3,280 lbs. bought from I.C.I. at Rs. 2-11-0 per lb. and the remaining 68,208 lbs. from Hindusthan Plastic Co. at Rs. 4-7-9 per lb. The constitution of Hindusthan Plastic Co. was the same as that of the applicant firm. The Income-tax Officer concluded that the purchase price was inflated by Rs. 1,18,000 and estimated the sales at Rs. 3,00,000 with a gross profit of Rs. 54,000, invoking the proviso to section 13 of the Indian Income-tax Act, 1922.

The Appellate Assistant Commissioner and the Appellate Tribunal upheld this view, noting that the appellant paid a higher price to Hindusthan Plastic Co. for reasons other than business, establishing the inflation of the purchase price.

2. The applicability of the proviso to section 13 of the Indian Income-tax Act, 1922:

The proviso to section 13 was invoked by the Income-tax Officer to estimate the sales and gross profit of the applicant. The Tribunal justified the use of this proviso, stating that the applicant paid a higher price to Hindusthan Plastic Co. for extra-commercial reasons, resulting in inflated purchase prices and deflated profits.

3. The determination of the reasonableness of expenditure by tax authorities:

The applicant argued that the tax authorities should not substitute their own standard of reasonable expenditure for that of the assessee, referencing cases such as Craddock vs Zevo Finance Co Ltd. (1946) and Newtone Studios Ltd. vs Commissioner of Income-tax (1955). The court acknowledged that while it is generally not open to tax authorities to determine the reasonableness of expenditure, this principle is subject to limitations. These include cases where the transaction is not genuine, is colourable, illusory, or fraudulent, or where considerations other than business purposes are involved.

The court referred to Supreme Court judgments in Commissioner of Income-tax vs Chandulal Keshavlal & Co (1960) and Commissioner of Income-tax vs Royal Calcutta Turf Club (1961), which established that expenditure must be justified on grounds of commercial expediency and should be wholly and exclusively for business purposes. The court concluded that in the present case, the applicant failed to show that styron was unavailable at a lower price, and the transaction appeared to deflate the profits of the assessee, justifying the Tribunal's conclusion.

Conclusion:

The court upheld the Tribunal's decision, affirming that the applicant paid a higher price for styron for extra-commercial reasons. The answer to the question raised was in the affirmative, and the applicant was ordered to pay the costs of the reference to the respondent.