1954 (10) TMI 12 - SC - Income Tax

Whether the estimate of profit made by the Income-tax Officer was excessive or whether it was justified on the material on the record? Held that - Both the Income-tax Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It is thus a fit case for the exercise of our power under Article 136. In the result we allow this appeal, set aside the order of the Tribunal and remand the case to it with directions that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the Income-tax Officer if it is intended to make the estimate on the foot of those enquiries.

Summary

Issues Involved:
1. Violation of principles of natural justice by the Income-tax Officer and Tribunal.
2. Reliance on material not disclosed to the assessee.
3. Arbitrary estimation of gross profit without proper evidence.
4. Refusal to consider evidence submitted by the assessee.
5. Jurisdiction of the Supreme Court under Article 136 of the Constitution.

Issue-wise Detailed Analysis:

1. Violation of principles of natural justice by the Income-tax Officer and Tribunal:
The appellant contended that the assessment order made under Section 23(3) of the Income-tax Act violated the principles of natural justice as it was not based on any material whatsoever, and the evidence tendered by the appellant had been improperly rejected. The Tribunal failed to disclose to the assessee the material that the departmental representative had provided regarding the gross profit rates of other cotton mills and did not give the assessee an opportunity to rebut or explain the same. The Supreme Court agreed that the Tribunal violated fundamental rules of justice by not disclosing the information supplied by the departmental representative, not giving the company an opportunity to rebut the material, and refusing to take all the material the assessee wanted to produce in support of its case. The result was that the assessee had not had a fair hearing.

2. Reliance on material not disclosed to the assessee:
The Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills without showing that statement to the assessee and without giving him an opportunity to show that the statement had no relevancy to the case of the mill in question. The Supreme Court found it surprising that the Tribunal did not disclose the information given by the representative of the department to the appellant and refused to look at the trunk load of books and papers produced by the appellant's counsel. The Court emphasized that the Tribunal should have disclosed the material on which it was going to base its estimate and afforded the assessee a full opportunity to meet the substance of any private inquiries made by the Income-tax Officer.

3. Arbitrary estimation of gross profit without proper evidence:
The Income-tax Officer estimated the gross profit on sales at 40% by a pure guess, while the Tribunal reduced it to 35% by applying another rule of thumb. The Supreme Court noted that it was not clear from either of these judgments on what material these estimates were based. The Court held that the Income-tax Officer and the Tribunal acted on pure guess and suspicion without any material support. The Court reiterated that in making the assessment under sub-section (3) of Section 23 of the Act, the Income-tax Officer is not entitled to make a pure guess and must act on some material, however inadequate, but not capriciously or arbitrarily.

4. Refusal to consider evidence submitted by the assessee:
The Tribunal refused to take into account the trunk load of books and papers that the assessee wanted to produce in support of its case. The Supreme Court criticized this refusal, stating that no harm would have been done if, after notice to the department, the trunk had been opened and some time devoted to see what it contained. The Court emphasized that it was meet and proper, particularly when dealing with a matter of significant magnitude, not to employ unnecessary haste and show impatience.

5. Jurisdiction of the Supreme Court under Article 136 of the Constitution:
The learned Solicitor-General argued that the Supreme Court should not grant special leave against an order of an Income-tax Tribunal when remedies provided by the Income-tax Act itself were available for correcting errors of the Tribunal. The Supreme Court, however, held that it is not possible to define with precision the limitations on the exercise of the discretionary jurisdiction vested in the Court by Article 136. The Court emphasized that the power under Article 136 is an exceptional and overriding power to be exercised sparingly and with caution, but it must be used to advance the cause of justice and prevent injustice. The Court concluded that when a person has been dealt with arbitrarily or has not been given a fair deal by a Court or tribunal, no technical hurdles can stand in the way of the exercise of this power.

Conclusion:
The Supreme Court allowed the appeal, set aside the order of the Tribunal, and remanded the case to it with directions to give the assessee full opportunity to place any relevant material before the Tribunal and to disclose the material on which the Tribunal is going to base its estimate. The Tribunal was also directed to afford the assessee full opportunity to meet the substance of any private inquiries made by the Income-tax Officer. The Tribunal may remit the case to the Income-tax Officer for making a fresh assessment after taking further evidence from the assessee or the department. The costs of the proceedings will abide by the result.