1971 (3) TMI 11 - HC - Income Tax

Best judgment assessment made by rejecting regularly maintained accounts - Whether Tribunal was right in rejecting the trading results of the applicant without it being established that there was any suppressed turnover - Whether the Tribunal was right in holding that the mahimai collections which were utilised for the purpose of charity represented the trading profit of the applicant

Issues Involved:
1. Rejection of trading results without establishing suppressed turnover.
2. Classification of mahimai collections as trading profit.

Detailed Analysis:

Issue 1: Rejection of Trading Results Without Establishing Suppressed Turnover

The first issue concerns whether the Tribunal was justified in rejecting the trading results of the applicant without establishing any suppressed turnover. The assessee, a dealer in rice, maintained regular books of account and a stock book based on the number of bags. The Income-tax Officer (ITO) found the gross profit rate of 0.4% to be very low compared to other similar dealers. The ITO also noted that the stock book should have been maintained in terms of weight for proper verification and that the addresses of parties in the sale bills were insufficient for cross-verification. The ITO rejected the accounts, estimating the turnover and gross profit, leading to an addition to the income returned by the assessee.

The assessee's appeal to the Appellate Assistant Commissioner and subsequently to the Income-tax Appellate Tribunal was unsuccessful. The Tribunal concurred with the ITO's findings.

The court analyzed Section 145 of the Income-tax Act, 1961, which corresponds to Section 13 of the Indian Income-tax Act, 1922. Section 145(1) mandates that income should be computed according to the method of accounting regularly employed by the assessee, provided the accounts are correct and complete. If the accounts are correct but the method does not allow proper deduction of income, the ITO can determine the income on another basis. Section 145(2) applies when accounts are neither correct nor complete, allowing the ITO to make a best judgment assessment.

The court found that the grounds for rejecting the accounts-low profit rate, non-maintenance of a stock book in terms of weight, and insufficient customer addresses-were not valid. The court cited several precedents, including R. M. P. Perianna Pillai & Co. v. Commissioner of Income-tax, which held that low gross profits alone are not enough to reject the accounts. The court also referenced S. N. Namasivayam Chettiar v. Commissioner of Income-tax, emphasizing that the absence of a stock register is not a sufficient ground for best judgment assessment unless corroborated by other facts.

The court concluded that the assessee's accounts were maintained according to a regular method, were correct and complete, and the income could be properly computed from them. The Tribunal's grounds for rejecting the accounts were neither valid nor relevant. Therefore, the first question was answered in the negative and in favor of the assessee.

Issue 2: Classification of Mahimai Collections as Trading Profit

The second issue was whether the mahimai collections, which were utilized for charity, represented the trading profit of the applicant. The assessee had collected amounts from purchasers credited to a "mahimai account" and later transferred to "God's account." The assessee claimed these amounts were not includible in his total income as they were set apart for charitable purposes. The claim was rejected on the grounds that the amount had not been applied for charitable purposes.

The Appellate Tribunal found that the mahimai collections were actually for incidental expenses in trade and there was no legal obligation to spend any part for charity. Consequently, the second question was answered in the affirmative and against the assessee.

Conclusion

The court concluded that the Tribunal's rejection of the trading results was not justified as the grounds were neither valid nor relevant. However, the classification of mahimai collections as trading profit was upheld. The first question was answered in favor of the assessee, and the second question was answered against the assessee. There was no order as to costs, and a copy of the judgment was to be forwarded to the Income-tax Appellate Tribunal as required by Section 260(1) of the Income-tax Act, 1961.

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