2005 (12) TMI 60 - HC - Income Tax

(1) Whether the Tribunal having accepted the correctness of the account books of the appellant-assessee erred in invoking sub-section (2) of section 145 can put its own assessment regarding gross profits on the sale of gold and silver? (2) Whether the Tribunal erred in law in adding the agricultural income of minor son to the income of the appellant-assessee even when section 10 of the Income-tax Act expressly excluded such an income? - In view of the said clear provisions in section 4 of the Act, Chapter II and section 2 of the Finance (No. 2) Act, 1996, we have no doubt in our mind that the agricultural income of the minor child of an assessee, has to be taken into consideration for the purpose of determining the rate of tax that is applicable to his income. We, accordingly, answer the second question in the negative and hold that the Tribunal did not err in law in coming to the finding that the agricultural income of the minor son of the appellant had to be included in the income of the appellant for the purpose of determining the rate of income-tax applicable to the income of the appellant. In the result, the appeal is partly allowed and the matter is remanded to the Income-tax Appellate Tribunal to decide the issue on the first question of law

Summary

Issues Involved:
1. Whether the Tribunal erred in invoking section 145(2) of the Income-tax Act despite accepting the correctness of the appellant's account books.
2. Whether the Tribunal erred in law by including the agricultural income of the appellant's minor son for determining the rate of income-tax applicable to the appellant's income.

Detailed Analysis:

Issue 1: Applicability of Section 145(2) of the Income-tax Act

The appellant, engaged in the business of silver and gold ornaments, filed a return declaring an income of Rs. 3,94,558 for the assessment year 1996-97. A survey under section 133A revealed discrepancies, leading the Assessing Officer (AO) to reject the appellant's books under section 145(2) due to inconsistencies in the valuation of closing stock. The AO determined the appellant's income independently, including the agricultural income of the appellant's minor son for tax rate purposes.

The appellant contested this assessment before the Commissioner of Income-tax (Appeals) [CIT(A)], arguing the maintenance of proper books. The CIT(A) upheld the AO's rejection of the books but reduced the gross profit rates applied by the AO, partially deleting the additions. The appellant further appealed to the Income-tax Appellate Tribunal (ITAT), which set aside the CIT(A)'s order, directing the AO to accept the declared sales and apply specific gross profit rates for gold and silver ornaments.

The High Court noted that the Tribunal did not provide a clear finding on whether the appellant's accounts were correct and complete or whether the income could be properly deduced from them. The Court emphasized that section 145 applies when accounts are either not correct/complete or the accounting method does not allow proper income deduction. The Tribunal's decision lacked a clear determination on these aspects, necessitating a remand for a fresh decision by the Tribunal.

Issue 2: Inclusion of Agricultural Income of Minor Son

The appellant argued that section 10 of the Income-tax Act excludes agricultural income from the total income for tax purposes, and thus, the agricultural income of his minor son should not be included under section 64(1A). The Department countered that the inclusion was only for determining the tax rate, not for levying tax on the agricultural income itself.

Section 64(1A) mandates the inclusion of a minor child's income in the total income of the individual. The High Court clarified that while agricultural income is excluded from total income for tax purposes under section 10, it still qualifies as "income." Section 4 of the Act and the Finance Act provisions stipulate that agricultural income must be considered for determining the applicable tax rate. Consequently, the Court held that the Tribunal did not err in including the minor son's agricultural income for rate determination.

Conclusion:

The appeal was partly allowed. The High Court remanded the matter to the ITAT for a fresh decision on whether the appellant's accounts were correct and complete and whether the income could be properly deduced from them. The inclusion of the minor son's agricultural income for tax rate purposes was upheld. The parties were directed to appear before the ITAT on January 9, 2006, for further proceedings.