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Ms. Gemini Leather Stores v. The Commissioner Of Income Tax,
Factual and Procedural Background
The Income-tax Appellate Tribunal, Delhi Bench "B" referred two questions to the Court under section 66(2) of the Indian Income-tax Act, 1922, concerning the estimation of total turnover and the fixing of the rate of profit for miscellaneous goods for the assessment year 1956-57. The assessee is a partnership firm engaged in the manufacture of leather boards, with sales recorded both at a factory and a newly opened shop. The Income-tax Officer, acting on information alleging suppression of sales, estimated the turnover significantly higher than the assessee's books indicated and applied profit rates accordingly. This estimate was reduced in appeals before the Appellate Assistant Commissioner and further reduced by the Appellate Tribunal, which also adjusted the profit rates applied to various sales categories. The main dispute involved whether there was sufficient material to justify the turnover estimate of Rs. 7,00,000 and the application of a 17.5% profit rate for miscellaneous goods.
Legal Issues Presented
- Whether there was any material before the Tribunal for estimating the total turnover at Rs. 7,00,000?
- Whether there was any material before the Tribunal for fixing the rate of profit for miscellaneous goods at 17.5%?
Arguments of the Parties
Revenue's Arguments
- The Income-tax Officer relied on information from Ballomal alleging suppression of sales by the assessee.
- The Officer rejected the assessee’s books due to lack of vouchers for purchases exceeding Rs. 1,70,000, unaccounted deliveries of leather splits, unrecorded bank drafts, and undisclosed business carried on under different names.
- The Officer estimated turnover at Rs. 15 lacs and applied profit rates of 26% on leather boards and 25% on other sales.
Assessee's Arguments
- The assessee contended that the business activities of Ballomal and Agra Rubber Shoes Agency were independent and not part of the assessee's business.
- They provided explanations and evidence, including letters from third parties and proof of separate godown rentals, to establish Ballomal’s independent business.
- The assessee relied on a precedent where a 15% profit rate was applied to similar goods and disclosed a 20% profit rate on a smaller turnover.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Case of Basant Singh, Agra | Use of a 15% profit rate on turnover for miscellaneous goods | The Tribunal considered this precedent while reducing the profit rate from 20% to 17.5% for miscellaneous goods, finding it appropriate given the volume of sales and nature of goods. |
Court's Reasoning and Analysis
The Court examined the material before the Tribunal regarding the turnover estimate and the profit rate applied. It noted that the Income-tax Officer’s rejection of the assessee’s books was based on several deficiencies, such as unverifiable purchases, unaccounted deliveries, and unrecorded transactions under different business names. However, the Tribunal, as a fact-finding authority, accepted the assessee’s explanation that Ballomal’s business was independent, supported by documentary evidence and third-party letters. The Tribunal’s reduction of the turnover estimate from Rs. 10 lacs to Rs. 7 lacs was based on the absence of proof that the assessee sold goods to local dealers and the establishment that Ballomal’s activities were separate. Regarding the profit rate, the Tribunal’s decision to reduce it to 17.5% was supported by comparison with the Basant Singh precedent and the assessee’s disclosed profit rate on a smaller scale, constituting sufficient material for the adjustment. The Court found both questions referred to be answered in the affirmative, thereby upholding the Tribunal’s findings.
Holding and Implications
The Court held that there was sufficient material before the Tribunal both for estimating the total turnover at Rs. 7,00,000 and for fixing the profit rate for miscellaneous goods at 17.5%.
The decision affirms the Tribunal’s fact-based assessment and its discretion in accepting explanations and evidence presented by the assessee. The ruling directly affects the parties by validating the reduced turnover and profit rate estimates, but does not establish any new legal precedent beyond confirming the Tribunal’s findings in this case.
- In compliance with an order of this Court under section 66(2) of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal, Delhi Bench "B" has referred the following two questions for our opinion :-
(i) Whether there was any material before the Tribunal for estimating the total turnover at Rs. 7,00,000/- ?
(ii) Whether there was any material before the Tribunal for fixing the rate of profit for miscellaneous goods at 17.5% ?"
2. The assessee is a partnership firm consisting of four partners viz. Om Prakash son of Shri Hakim Rai, Mulkraj son of Shri Shanker Das, Bishamber Nath son of Shri Sanji Ram, and Lakhani Hashmat son of Shri Shaukiram. This partnership was formed by an oral agreement on 20th July 1953, and, thereafter, a deed was executed on 30-9-53. The assessment year involved in the present reference is 1956-57, the previous year being the financial year ended on 31st March, 1956. The assessee firm in the accounting year carried on the business of manufacture of leather boards. The raw material i.e. leather spilt for manufacturing the leather boards was imported from foreign countries. Formerly, the assessee had only one place of business i.e. the factory, but on 22-9-1955, a shop was opened and separate books of account for the shop in respect of the sale of leather splits etc. was opened. In the accounting year, according to the books of the assessee, there were sales of Rs. 3,76,911/- in the factory and Rs. 18,832/- at the newly opened shop, which comprised of cuttings, waste leather and leather splits. So far as the sale of leather boards was concerned, according to the assessee, the same was made exclusively to Bata Shoe Company Ltd. Calcutta.
3. One Ballomal give information to the Income-tax Officer that the assessee firm had suppressed its sales, and acting on this information, the Income-tax Officer examined a number of persons including Ballomal, in respect of suppressed transaction, and estimated the sales of the assessee at Rs. 15 lacs. An amount of Rs. 6 lacs was allocated to the sales of leather board and Rs. 9 lacs to other sales. Rejecting the account book version of the assessee, he applied a rate of 26% on the sale of leather boards and 25% on the other sales.
4. In appeal before the Appellate Assistant Commissioner, the turnover estimated by the Income-tax Officer at Rs. 15 lacs was reduced to Rs. 10 lacs, but the sale of leather boards estimated by the Income-tax Officer was maintained. He reduced the sale of other articles from 9 lacs to 4 lacs. The rate of profit on the aforesaid sales applied by the Income tax Officer was upheld.
5. On appeal, the Appellate Tribunal reduced the estimate made by the Appellate Assistant Commissioner from ten lacs to seven lacs, and allocated four lacs towards the sales of leather boards and three lacs towards other sales. As respect of rate, the Tribunal applied a net rate of 25% on the sale of leather boards add 17.5% in respect of other sales.
6. Considering the nature of the two questions referred to above, it is now necessary to see as to whether there was any material inter alia for estimating the total turnover, and applying the rate of 17.5% in respect of the sale of commodities other than the leather boards. The Income tax Officer, while rejecting the account books of the assessee, had given inter alia the following reasons :-
i) Purchases to the extent of over Rs. 1,70,000/- were not support by vouchers and were not verifiable.
ii) The assessee took delivery of consignments of leather splits from Madras weighing 6218 maunds valued at over Rs. 3,20,000/- at Jajau Railway station, 18-miles from Agra Cantt. in various names, which were not accounted for in books.
iii) The assessee purchased bank drafts of about Rs. 2,46,000/- in various names and sent them to Madras for financing the purchases which were not accounted for in the assessees books.
iv) The assessees had been purchasing leather splits from open market even though the leather splits were intended to be used by the persons in whose favour import licences were issued.
v) The assessee firm had been carrying on business in the name of Ballomal & Co. and Agra Rubber Shoes Agency which transactions had not been recorded in the assessees books.
The Income Tax Officer and the Appellate Assistant Commissioner had inter alia while coming to the conclusion that the business carried on by Ballomal was that of the assessee, relied upon a letter sent by Bata Shoe Company Ltd., to the assessee, by which an order had been placed with the assessee for leather boards, according to the sample given by Ballomal on 21-7-1953. The Appellate Tribunal accepted the explanation of the assessee that Ballomal had gone to Calcutta in connection with his own business on the 21st July, 1953 a day after the formation of firm, and shown specimen to Bata Shoe Company on behalf of the firm. The Tribunal disbelieved the statement of Ballomal recorded by the Income Tax Officer, which went against the assessee. The Tribunal is a fact finding authority and was entitled to accept the explanation of the assessee. Further, it has held that the statement of Ballomal did not establish that the business owned by him were that of the assessee. It has also referred to letter dated 12-7-1957 from Iraw Brand Footwear Company and the letter dated 12-7-1957 from Simogo Shoe Factory as also a letter from Kamal Babu, Director Incharge, S.G.R. Industries Calcutta all addressed to Ballomal & Co. which indicated that Bollomal was carrying on his independent business. Reliance seems to have also been placed on one Shri Khan Chand, a partner of India Barrat Shoe Company who stated that Ballomal was carrying on independent business. Apart from these facts, it also took note of the fact that Ballomals godown was at a distance of 3 or 4 houses away from the godown of the assessee and Shri Khan Chand used to take delivery of leather splits from the godown of Ballomal. It held that it had been proved by the assessee that Ballomal had taken a godown from the Assistant Custodian, Evacuee Property, being House No. 1485 at Hing-Ki-Mandi and Ballomal was paying rent for it. As regards a cheque on Radha Swami Satsang Bank for Rs. 530/-, the explanation of the assessee that the cheque had been given to Ballomal for encashment by Lakhani Hashmat one of the partners of the assessee firm, and Ballomal signed it in order that payment be expedited also seems to be sufficient material on the record for the finding of the Tribunal that the business of Ballomal & Co. and Agra Rubber Shoe Agency was not that of the assessee. While reducing the estimate from Rs. ten lacs to seven lacs, the Tribunal held that the Income Tax Officer had not been able to prove, as found by him in his assessment order, that the assessee had sold the manufactured goods and leather splits to thousands of local dealers. Inasmuch as the Tribunal found that the business of Ballomal & Co., and Agra Rubber shoes Agency was not that of the assessee, and further it was established that the assessee had sold manufactured goods and leather splits to any of the local dealers, it cannot be said that there was no material for reducing the estimated income from Rs. ten lacs to seven lacs.
7. As regards the applicability of the rate of 17.5% the assessee had relied upon the case of one Basant Singh, Agra where a rate of 15% had been adopted by the Tribunal. The assessee, while making a disclosure of his suppressed income, had shown a rate of 20% on a disclosed turnover of Rs. 47,766/-. The Tribunal reduced the rate of 17.5% on account of the fact that the estimate of three lacs made by it in respect of goods other than the leather boards, included sales of leather splits etc. The reduction of the rate was considered appropriate on account of the fact that in the case of Basant Singh Agra, the rate applied was 15% and further that the rate of 20% disclosed by the assessee was on a smaller volume of sale. We are of the view that this constituted sufficient material for reduction on the rate by the Tribunal.
8. We accordingly answer both the questions in the affirmative. There shall be no order as to costs. Counsels fee is assessed at Rs. 200/-.
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