1966 (5) TMI 6 - HC - Income Tax

Whether there was any material on the record for the basis adopted by the ITO or the Tribunal for computing the income of the assessee

Issues Involved:
1. Applicability of Section 15C of the Indian Income-tax Act, 1922.
2. Applicability of the proviso to Section 13 of the Indian Income-tax Act, 1922.
3. Validity of the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee.

Issue-wise Detailed Analysis:

1. Applicability of Section 15C of the Indian Income-tax Act, 1922:

The primary issue was whether the assessee's industrial undertaking was entitled to the relief under Section 15C for the assessment years 1953-54, 1954-55, and 1955-56. Section 15C(1) provides tax relief for profits derived from new industrial undertakings, provided certain conditions are met, including that the undertaking is not formed by the transfer of old machinery or plant used in a business before April 1, 1948.

The Tribunal found that the assessee's undertaking started its manufacturing operations by purchasing old machinery from M/s. Agarwal & Co. of Tinsukia, which was used before April 1, 1948. Therefore, the Tribunal concluded that the undertaking did not satisfy the conditions of Section 15C, as it was formed by the transfer of old machinery. The court upheld this view, stating that the undertaking was not entitled to the benefit of Section 15C(1) because it was formed by the transfer of machinery used in a business carried on before April 1, 1948.

2. Applicability of the proviso to Section 13 of the Indian Income-tax Act, 1922:

The second issue was whether the proviso to Section 13 was applicable in this case. Section 13 mandates that income, profits, and gains be computed according to the method of accounting regularly employed by the assessee. The proviso allows the Income-tax Officer to determine the computation basis if the method employed does not properly deduce the income.

The Tribunal observed that the assessee's accounting method was not scientific, as purchases were debited to one consolidated account and allocated on an ad hoc basis. There was no daily consumption register or production register, and the stock account could not be reconciled. Given these deficiencies, the court held that the Income-tax Officer was justified in applying the proviso to Section 13, as the assessee's method did not allow for proper deduction of income. Therefore, the question was answered in the affirmative.

3. Validity of the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee:

The third issue was whether there was any material on record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee. The Tribunal had made ad hoc additions to the assessee's declared profits based on previous years' profits and trading conditions.

The Chief Justice and Nayudu J. differed in their opinions. The Chief Justice held that the additions were arbitrary and not based on any material evidence, thus answering the question in the negative. Nayudu J. believed that there was some material, such as previous years' profits and trading conditions, to justify the additions, thus answering the question in the affirmative.

The third judge, S. K. Dutta J., resolved the difference by holding that there was no material on record to justify the basis adopted by the Income-tax Officer or the Tribunal. He noted that the profit of a previous year is irrelevant for computing the profit of a subsequent year without comparable market conditions. The varying additions made by different authorities indicated that the computation was arbitrary and based on guesswork.

Conclusion:

1. Section 15C Applicability: The court held that the assessee was not entitled to the benefits under Section 15C as the undertaking was formed by the transfer of old machinery used before April 1, 1948.
2. Proviso to Section 13: The court affirmed that the proviso to Section 13 was applicable due to the inadequacies in the assessee's accounting method.
3. Basis for Income Computation: The court concluded that there was no material on record to justify the basis adopted by the Income-tax Officer or the Tribunal for computing the income, thus answering the question in the negative.

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