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TMI Blog1968 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assessee-firm to prove that the yield of rice shown by it was correct. The explanation of the assessee-firm was that most of the paddy had been purchased in the months of October, November and December (55,665 maunds) and the paddy purchased during these three months was highly moist and, therefore, the yield was low. The other reason given by the assessee-firm was that the paddy purchased by it was of inferior quality as compared with the quality purchased by the other dealers in the market and in proof of this assertion, baki of Dalals Association, New Mandi, Karnal, was produced. The assessee-firm also produced a certificate from the District Food and Supplies Controller, Karnal, certifying that the assessee-firm purchased 36,880 bags (71,822 maunds and 26 seers) of paddy for the period 1st April, 1957, to 31st March, 1958, and total rice produced from the paddy came to 44,997 maunds, 26 seers and 13 chattacks which gave an average of 25 seers and chattack per maund of paddy. These facts had been verified by the I. F. S., Karnal, from the rokar and the rice stock register maintained by the assessee-firm and that paddy stocks had been mostly purchased by the assessee-firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Officer are as under : (1) The assessee-firm had purchased both inferior and superior quality of paddy, which fact has been admitted by the Income-tax Officer himself, and, therefore, it was not reasonable to expect the same yield in the case of the assessee-firm as in other cases where the quality of paddy purchased was wholly superior and of better quality ; (2) The purchase of paddy in the beginning of the season is a normal feature in such cases and the extent of the purchases made in the beginning of the season is a relevant factor to consider the yield and its probable dryage ; (3) The Income-tax Officer has not taken into account the fact that there was yield of rice polish, the sale proceeds of which were Rs. 8,972 as shown in the account books of the assessee-firm ; and (4) The assessee-firm had pointed out that out of the total yield, the yield of Basmati was 12,748 maunds and the remaining yield, i.e., 32,250 mounds, was of coarse rice. Admittedly, the yield of Basmati is comparatively less. The assessee-firm, not being satisfied with the order passed by the Appellate Assistant Commissioner, filed an appeal before the Income-tax Appellate Tribunal which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Appellate Tribunal to draw up the statement of the case and refer it to this court for decision. In compliance with that order, the Appellate Tribunal has drawn up an agreed statement of the case and has referred the two questions of law set out above for decision by this court. From the order of the Income-tax Appellate Tribunal, it is apparent that the proviso to section 13 of the Act was held applicable on the ground that there was no check on the dryage claimed by the assessee-firm which fact had been admitted by it before the Appellate Tribunal. From this, the Appellate Tribunal observed that there were no means to verify whether all the purchases made were accounted for by paddy sent for milling. The register produced before the Appellate Tribunal showed the amount of rice obtained from the paddy but the amount of paddy entered in the register remained unverified in relation to the purchases debited in the account books. It may be remembered that neither the Income-tax Officer nor the Appellate Assistant Commissioner doubted that the assessee-firm had purchased and husked 71,822 maunds of paddy. Therefore, there was no question of the quantity of the paddy remaining un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s upon which such a finding could be given, but they were circumstances which might provoke an enquiry. The Income-tax Officer must discover evidence or material aliunde before he could give such a finding. In increasing the taxable income, the Income-tax Officer did not adopt any method or basis and he was not acting according to the provisions of the statute. It was also observed that in all cases which fell under section 13 of the Indian Income-tax Act, 1922, there must be material before the Income-tax Officer to lead him to the conclusion that the method employed was defective or that the case required reconsideration and a new computation must be made. The second case relied upon by the learned counsel for the assessee-firm is C. Arumugaswami Nadar v. Commissioner of Income-tax. In that case, in reassessment proceedings of the assessee, who carried on the business of match manufacturing, for the calendar years 1946 and 1948, the Income-tax Officer brought to assessment the sums of Rs. 12,000 and Rs. 15,000 respectively, as income escaping assessment on the ground that the consumption of chlorate for the manufacture of matches was excessive. When the matter was before it, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how that, in so far as the consumption of chlorate was concerned, it was really accounted for by the match production ; and (v) that it could not be said that the accounts maintained by the assessee were incapable of reflecting his true income and there was no scope for invoking the proviso to section 13 of the Income-tax Act. " The next case referred to by the learned counsel for the assessee-firm is Harakchand Radhakisan v. Commissioner of Income-tax. The assessee-firm, in that case, carried on business in oil and oil-cake. For the assessment year in question, it submitted a return showing the quantity of seeds crushed and quantity of oil and oil-cake obtained. The Income-tax Officer did not reject the account books of the assessee but on the basis of previous year's assessment presumed that the rate of yield must be much higher, and estimated that the yield of oil and oil-cake must be 32 per cent. and 66 per cent. respectively and refraction 2 per cent. and added Rs. 27,445 and Rs. 4,740 for shortage of oil and oil-cake. It was held that, in the absence of any material to show that the quality of the seeds in the previous year was the same, the percentage of estimated yield in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-firm. It was a serious matter for the assessee-firm if the purchases of paddy or the production of rice and sale thereof were not accepted by the Food and Civil Supplies Department as it involved criminal prosecution and the cancellation of the licence. The Income-tax Officer in such a case should have been slow to disbelieve the accounts maintained by the assessee-firm unless very strong evidence was available to him to prove that the accounts maintained were false and did not exhibit the correct position. He only doubted the correctness of the accounts on the ground that the yield of rice from paddy was rather on the low side as compared with some other dealer and, in the absence of day to day dryage register, the correct quantity of paddy milled could not be verified but he nowhere recorded his finding that, in the absence of day to day dryage register, the income, profits and gains could not properly be deduced from the method of accounting which had been regularly employed by the assessee-firm. In my opinion, the Income-tax authorities, in this case, were not justified in applying the proviso to section 13 of the Act. The learned counsel for the Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the income-tax authorities that, in the circumstances, the absence of the stock register materially affected the determination of the correct income, profits and gains of the business. In the instant case, the yield shown by the assessee in the assessment year under dispute was slightly higher than the yield shown in the previous years and the method of accounting was the same which had not been objected to in the previous years nor was the assessee-firm required to maintain a day to day dryage register. Merely because the yield of rice in the case of the assessee-firm was lower than the yield of some other dealer was not sufficient ground to apply the proviso to section 13 of the Act in this case. This case is, therefore, covered by the exception made in the Supreme Court judgment. The next Supreme Court case relied upon by the learned counsel for the Commissioner of Income-tax is S. N. Namasivayam Chettiar v. Commissioner of Income-tax, in which it had been held by the Appellate Tribunal that the correct profits of the assessees could not be deduced from the books produced by him for the following reasons : (1) Vouchers for several purchases made in Colombo had not been pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since it worked out at 6 or 7 per cent. in their case. He accordingly estimated the turnover at Rs. 12 lakhs and the rate of gross profit on the turnover at 6.5 per cent. It was held on these facts that the Income-tax Officer could exercise the power to estimate the turnover of the firm, and, as the firm furnished no explanation at all as to why profit at the normal rate was not earned, it was open to the Income-tax Officer to estimate the gross profit at a rate at which profit was earned in similar business by other merchants. It was also laid down that the power to estimate the turnover where the accounts were unreliable must be exercised not arbitrarily but judicially in the light of relevant materials and once the books of account of the assessee were rejected and the rate of gross profit earned by him was found unreliable, it was open to the Income-tax Officer to estimate the gross profit at a rate at which profit was earned in similar business by other merchants. The facts of that case as stated are entirely different from the facts of the instant case. The learned counsel for the Commissioner of Income-tax has also relied upon a Division Bench judgment of this court in Punj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the dryage claimed by the assessee, we would uphold the estimate as made by the Appellate Assistant Commissioner. " It is quite apparent that even the Appellate Tribunal sustained the addition made by the Appellate Assistant Commissioner on their experience of similar cases and not on any material on the record. The difference between the yield estimated by the Appellate Assistant Commissioner and the Appellate Tribunal and the yield returned by the assessee-firm is so small that it cannot be concluded therefrom that the correct profits could not be deduced from the method of accounting applied by the assessee-firm. It is quite apparent from the above discussion that my answer to the first question is in the negative from which it follows that the answer to the second question must also be in the negative. But assuming that my answer to the first question is not correct, I am still of the opinion that the answer to the second question must be in the negative. The reason is that, under the proviso to section 13 of the Act, once the Income-tax Officer comes to the conclusion that the income, profits and gains cannot properly be deduced from the method of accounting employed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate a gross turnover of Rs. 4,00,000. I allow a deduction at 2% on the turnover and assess him on Rs. 3,92,000 to pay sales tax of Rs. 6,125.' For the quarter ending on 30th September, 1946, the Sales Tax Officer said : 'I reject his irregular account and estimate a gross turnover of Rs. 3,00,000 for the quarter and assess him on Rs. 2,94,000 to pay tax of Rs. 4,593-12-0.' These and similar orders do not show that the assessment was made with reference to any evidence or material ; on the contrary, they show that having rejected the books of account, the assessing authorities indulged in pure guess and made an assessment without reference to any evidence or any material at all. This the assessing authorities were not entitled to do under clause (b) of sub-section (2) of section 10 of the Act. " I find considerable force in this argument of the learned counsel for the assessee-firm. In reply, the learned counsel for the Commissioner of Income-tax has referred to the Privy Council judgment in Commissioner of Income-tax v. Laxminarain Badridas to the effect that under section 23(4) of the Income-tax Act, the officer is to make an assessment to the best of his judgment against a per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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