Bookmark
PDF
Share
CaseIQ

G.M. Chenna Basappa v. Commissioner Of Income-Tax

Andhra Pradesh High Court

Mar 27, 1958

Judgment

Subsequent
References

CaseIQ

Important Paras

Please sign up to view Important Paras.

Smart Summary (Beta)

Structured Summary of the Opinion (P. Chandra Reddy, O.C.J.)

Factual and Procedural Background

The assessee was a dealer engaged in the manufacture and sale of groundnut kernel and cake at Adoni. The return disclosed a gross profit of Rs. 5,118 on a turnover of Rs. 3,67,000. Purchases of groundnut and kernel were shown (amounts given in the opinion), but some transactions lacked vouchers and some records (notably, records showing kernel obtained by decorticating groundnuts) were absent.

On examination the Income-tax Officer (ITO) considered the books unreliable in part, estimated the assessee's gross profit at 10% (producing an addition of Rs. 31,551 as originally stated by the ITO) and also made additions of alleged secret profits by including unexplained cash credits (various credits mentioned in the names of individuals amounting in total to sums described in the opinion, e.g., Rs. 48,000 on 21 occasions to one Mallikarjunappa, Rs. 9,000 to Eriah and Rs. 16,000 to Sajjanara Guru Basappa).

On appeal the Appellate Assistant Commissioner (AAC) revised the yield/production estimates (adopting specific percentage yields: 76, 42 and 50 per cent for kernel, oil and cake respectively) which reduced the addition for gross-profit deficiency to Rs. 14,222 (substituting this for the ITO's figure of Rs. 51,551 as given in the opinion). As regards the unexplained cash credits, the AAC upheld additions to the extent of Rs. 37,400 (the opinion records this figure). The assessee's further appeal to the Income-tax Appellate Tribunal (Tribunal) was unsuccessful.

At the instance of the assessee this Court directed the Tribunal to refer the following question for opinion (as stated in the opinion): “Whether on the facts, and in the circumstance of the case, the Appellate Tribunal is justified in sustaining both the additions of Rs. 14,222/- ??? deficit yield and Rs. 35,400/- as cash credits an whether they do not amount to double taxation?” (The reference framed the issue in terms of whether sustaining both additions amounted to double taxation.)

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in sustaining both the addition of Rs. 14,222 (deficit yield / adjusted estimate of undisclosed business profit) and the addition of (as framed in the reference) Rs. 35,400 as unexplained cash credits — i.e., whether sustaining both additions amounted to double taxation.
Whether, as an interlocutory/procedural matter under Section 66(1) of the Indian Income-tax Act, a question of law arises out of the Tribunal's order when the specific legal point now pressed was not raised before the Tribunal.

Arguments of the Parties

Assessee's Arguments (as presented by Mr. Rama Rao)

The ITO, after rejecting parts of the books, had estimated the profits of the business for the assessment year; having once estimated the business profits, it was impermissible to add the unexplained cash credits in addition to that estimate, because that would amount to double counting of the same profits.
This contention was founded on the authority of Ramcharitar Ram v. Commissioner of Income-tax (Patna) (1953-23 ITR 301 : AIR 1954 Pat 143).
Before the Tribunal the assessee's representative (as recorded) also argued that certain intangible additions had been made in prior years, and therefore the present addition should be deleted (i.e., reliance on prior-year adjustments as a ground to reduce the present addition).

Revenue's Position / Lower Authorities' Findings

The ITO concluded that the assessee must have made a gross profit of 10% on turnover and therefore made an addition on that head.
Separately, the ITO did not accept explanations for various cash credits, viewing them as profits from undisclosed sources (i.e., profit-earning activities outside the books). On that basis the ITO added amounts as unexplained cash credits.
The AAC accepted the ITO's concerns in part, reducing the estimate-based addition to Rs. 14,222 but upholding a substantial portion of the cash-credit additions (Rs. 37,400 as recorded in the opinion). The Tribunal, when dismissing the appeal, treated the two heads as separate and distinct.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ramcharitar Ram v. Commissioner of Income-tax, B. & O., 1953-23 ITR 301 : AIR 1954 Pat 143	Held that the ITO could not add both (a) an estimated profit for the business (where books not accepted) and (b) further cash credits as separate undisclosed profits of the same business, unless there was material to show a different and independent business apart from the one reflected in the books.	The Court distinguished this case from the instant facts: in the present case the ITO's additions were not both said to be profits of the same business as reflected in the accounts. Therefore Ramcharitar Ram was not of assistance to the assessee here.
D.C. Auddy & Bros. v. Commissioner of Income-tax, West Bengal, 1955-28 ITR 713 : AIR 1956 Cal 295	Distinguished between (i) undisclosed income from a known source (i.e., same business) and (ii) income from an undisclosed source; held that where additions are referable to distinct sources the ITO could add both estimated undisclosed book profits and unexplained cash credits as profits from undisclosed sources.	The Court considered this decision to be more directly in point and observed that it furnished an answer to the assessee's contention: it supports the view that two additions may be sustained when they relate to distinct heads/sources.
Srinivas v. Commissioner of Income-tax, 1948-16 ITR 254 : AIR 1949 Pat 211	Addressed a contention similar to the assessee's — the Patna High Court rejected the contention that both additions could not be made.	The Court cited Srinivas as being to the same effect as D.C. Auddy, supporting rejection of the assessee's double-counting contention.
Abboy Chetty v. Commissioner of Income-tax, Madras, 1947-15 ITR 442 : AIR 1948 Mad 181	Authority for the proposition that a question of law is said to arise out of an order of the Appellate Tribunal only if the point of law was raised before the Tribunal; otherwise it does not "arise out of" the Tribunal's order for purposes of Section 66(1).	The Court relied on this authority to hold that where the specific legal question was not raised before the Tribunal, it could not be said to arise out of the Tribunal's order under Section 66(1); thus a fresh challenge on that ground before this Court was impermissible.
Commissioner of Income-tax v. Modern Theatres Ltd., Salem, 1951-2 Mad LJ 625 : AIR 1952 Mad 255	Also cited for the same procedural principle about the necessity of raising the point before the Tribunal for it to constitute a question of law arising out of the Tribunal's order.	The Court cited this authority alongside Abboy Chetty to reinforce the procedural requirement and applied it to conclude that the point now pressed had not been raised earlier and therefore did not arise out of the Tribunal's order for reference purposes.

Court's Reasoning and Analysis

The Court proceeded in two strands of analysis: (A) the substantive question whether both additions could lawfully be made, and (B) the procedural question whether the legal point now urged before the Court had been raised before the Tribunal so as to constitute a question of law under Section 66(1).

(A) Substantive analysis:

The Court first examined the assessee's principal substantive contention (as advanced by Mr. Rama Rao) that once the ITO estimated the profits of the business (after rejecting parts of the books), he could not thereafter add the unexplained cash credits in addition to that estimate because that would amount to double taxation of the same profits.
The Court distinguished the Patna decision in Ramcharitar Ram on its facts: in that case the ITO had added both an estimated profit and further cash credits as profits of the same business; the Patna High Court held such double addition impermissible unless there was material to show a distinct, independent business apart from the one for which books were appraised.
The Court found the instant facts different. Here the ITO's first addition related to an estimated undisclosed profit attributable to the business activities shown (an undisclosed profit from a known source), whereas the unexplained cash credits were treated as profits from an altogether undisclosed source (a separate profit-earning activity not reflected in the books). The Court held that the ITO could legitimately make additions under two distinct heads if they were traceable to distinct sources.
The Court relied on the Calcutta High Court decision in D.C. Auddy & Bros., which allowed the ITO to add both an estimated concealed profit of the business and unexplained cash credits treated as profits from undisclosed sources where they were not additions to the same single source of income. The Court observed that D.C. Auddy supported its conclusion and that Srinivas (Patna) was also in point in rejecting a similar contention advanced by an assessee.
The Court summarized the correct legal position (as stated in the opinion): if the two additions are referable to two distinct heads — (i) undisclosed profits from the known (booked) business and (ii) profits from an undisclosed source — they are legally sustainable; the position would differ if the cash credits were part of the undisclosed profits of the same business, in which case double counting would not be permissible.

(B) Procedural analysis:

The Court noted a significant procedural objection: the specific contention now pressed before this Court (that both additions could not lawfully be made together) had not been raised before either the ITO or the AAC. Before the Tribunal the assessee's representative had relied on a different point (that intangible additions had been made in prior years and therefore the present addition should be deleted).
The Tribunal had considered the matter, observed that income of each year must be determined from materials available for that year, and found the present additions related to the year under consideration; the Tribunal dismissed the appeal treating the additions as representing distinct sources.
The Court explained the statute-based procedural requirement (Section 66(1) of the Indian Income-tax Act): a question of law is said to arise out of an order of the Tribunal only if that point of law was raised before the Tribunal. If the point was not raised, it cannot be said to arise out of the Tribunal's order for the purposes of a reference.
The Court cited authorities (Abboy Chetty and Modern Theatres) to support that proposition and applied it here to conclude that the question now contended did not arise out of the Tribunal's order because it had not been raised there in the form now advanced.

Holding and Implications

QUESTION ANSWERED IN THE AFFIRMATIVE AND AGAINST THE ASSESSEE.

Direct consequences imposed by the Court (as recorded in the opinion):

The reference was answered against the assessee.
The assessee was ordered to pay the costs of the Department, fixed at Rs. 100.

Implications: The Court held that where additions are referable to distinct heads — one being undisclosed profit attributable to the known business and the other being profits from an undisclosed source — it is permissible to make both additions; by contrast, where both additions relate to the same business-source they cannot be cumulatively added. The opinion does not purport to lay down a novel rule beyond applying and distinguishing existing authorities; the decision's practical effect is the dismissal of the assessee's contention and the upholding of the two-fold treatment on the particular facts of this case.

Reference answered. Costs fixed at Rs. 100 (as recorded in paragraph 20–21 of the judgment).

Show all summary ...

P. Chandra Reddy, O.C.J:— At the instance of the assessee, this court directed the Income-tax Appellate Tribunal to refer the following question for its opinion.

“Whether on the facts, and in the circumstance of the case, the Appellate Tribunal is justified in sustaining both the additions of Rs. 14,222/- ??? deficit yield and Rs. 35,400/- as cash credits an whether they do not amount to double taxation?

2. The facts relevant to this question may be shortly stated:

The return submitted by the assessee, who ??? a dealer in the manufacture and sale of ground nut-kernel and cake at Adoni disclosed a gross ??? of Rs. 5,118/- on a turnover of Rs. 3,67,000/- the purchases of ground-nut alone amounting to Rs. 2,41,213/- and the purchase of kernels ??? of the value of Rs. 1,07,448/-. There were ??? vouchers to support these transactions. The assesee decorticate ground-nuts and obtained kerne. The resultant kernel together with the kernel ??? was crushed by means of expellers ??? ground-nut oil and cake which were sold, ??? books were maintained to show the daily ??? of kernel pressed and the quantity of oil and ??? obtained.

3. Similarly, there was no record showing the kernel obtained by decorticating the ground ???. In these circumstances and having regard to the ??? that dealers similarly situated made gross profits if about 12 per cent., the Income-tax Officer ??? the gross profits of the assessee at 10 per cent which resulted in the addition of Rs. 31,551/-. besides this, he added Rs. 73,000/- secret profits ??? into the books in the guise of ??? anamath cash credits in the name of ??? relatives and friends, when in the course if examination of accounts he found that there were credits to the tune of Rs. 48,000/- on 21 ??? occasions in the name of Mallikarjunappa whose full identity was not disclosed and another ??? of Rs. 9,000/- as a credit in favour of one ??? Eriah whose existence was not proved by he assessee and a third item of Rs. 16,000/- in the lame of one Sajjanara Guru Basappa, which ??? borrowing also was not satisfactorily explained. On appeal, the Appellate Assistant Commissioner thought that the fair estimate to be adopted was at the rate of 76, 42 and 50 per cent for yielding kernel, oil and cake respectively which would make only an addition of Rs. 14,222/- to the ??? disclosed by the assessee. Thus, in that behalf lie estimate made by the Income-tax Officer was ??? by substituting Rs. 14,222/- for Rupees 51,551/-. As regards the other head, the Appellate Assistant Commissioner upheld the addition inly to the extent of Rs. 37,400/-. In his opinion, he entries which make up that amount were not satisfactorily explained by the assessees. The assessee carried a further appeal to the Tribunal but unsuccessfully.

4. If it is urged by Mr. Rama Rao in support of this Reference that the Income-tax Officer having made an estimate of the profits of he business for the assessment year upon an examination of the account-books which, as modified by the Appellate Assistant Commissioner, resulted in an addition of Rs. 14,222/- it was not open to him to make an addition of another sum in the name of undisclosed profits; in other words, it was open to the Income-tax authorities of accept either the sum of Rs. 14,222/- or Rupees 57,400/- as the estimated profits of the assessee for the year and not to take into account both the mounts together.

5. It is maintained by him that having rejected he books of account in some respects and made an estimate of the profits he could not add up the:ash credits to that estimate. This argument is founded on Ramcharitar Ram v. Commissioner of Income-tax, B. and O. 1953-23 ITR 301 : (AIR 1954 Pat 143). We do not think that this ruling is of much assistance to the assessee. In that case, the Income-tax Officer made an estimate of the profits if the business for the assessment year, not having accepted as genuine his books of account. Having lone it, he found that some cash credits entered in he books of account were the separate profits of he business. He added this to the income disclosed ??? the assessee.

6. He further added another amount as the undisclosed profits of that very business. In that ???, the High Court pointed out that the Income-tax Officer could not add both the sums as the Edition was made under the head “business” and ??? could be justified only if there was material) show that the assessee carried on a different and dependent business apart from the business to which its books related and on which it was being ssessed.

7. The facts of this case do not bear any ??? to the instant case. The Income-tax Officer here has not added the two items under the ??? of profits made out of the same business as ??? in the accounts. The Officer thought that he assessee must have made a gross profit of 10 per cent on the turnover as disclosed in his account-books.

8. With regard to the other head, he was not prepared to accept the explanation regarding the sources from which the credits were derived and was inclined to view them as profits from undisclosed source. According to him this might have had reference to the business which the assessee carried on outside the books of account. In our opinion, it is certainly open to the income-tax Officer to make these two additions which fell under two distinct heads.

9. The correct legal position seems to be that if the two additions are traceable to two distinct heads, namely, one attributable to the business activities of the assessee and is thus an undisclosed profit from the known source and the other to profits from an undisclosed source i.e, some profit earning activity of the assessee which is altogether unknown, they are legally sustainable. The position will be different if the cash credits also were treated as part of the undisclosed profits of the same business. It will not be permissible for him to estimate the gross profits from the business and again to add to it the cash credits shown in the books in some disguise, as a part of the income of the same business.

10. The case which is more in point is D.C Auddy and Bros. v. Commissioner of Income-tax, West Bengal, 1955-28 ITR 713 : (AIR 1956 Cal 295) which was cited by the counsel for the assessee. This decision does not render him any assistanoe; on the other hand, it furnishes an answer to the point raised by him. What happened there was this. The books of the assessee disclosed only a gross profit of 4 per cent.

11. The Income-tax Officer considered this percentage of profits as too low and thought that considerable volume of sale had been suppressed. In that view, he estimated the gross profits at 15 per cent and added a sum of Rs. 5,000/- to assessable income as representing concealed profits of the business. Besides this, he added a further sum of Rs. 32,563 which was made up of certain cash credits which were entered in the suspense account of the assessee. The explanation as put in by the partners of the assessee with regard to the source of the deposits was not accepted by the Department and the Officer concerned came to the conclusion that they were profits made by the firm from undisclosed sources.

12. One of the questions posed before the Bench of the Calcutta High Court was whether the Income-tax Officer could add the amount of unexplained cash credits as profits from undisclosed sources when he had already estimated the whole of the undisclosed profits of the business carried on by the assessee. The learned Judges answered it in the affirmative, distinguishing 1953-23 ITR 301 : (AIR 1954 Pat 143) cited on behalf of the assessee since the Income-tax Officer had not, after making an estimate of the profits of the business and making an addition to the undisclosed book profits, added a further sum as undisclosed profits of the same business' as in the Patna Case.

13. They then pointed out the distinction between an undisclosed income from known source and income from an undisclosed source. We do not see how this ruling can be pressed into service by the assessee. A contention similar to the one advanced by the assessee here was rejected by the learned Judges. To the same effect is the judgment of the Patna High Court in Srinivas v. Commissioner of Income-tax, 1948-16 ITR 254 : (AIR 1949 Pat 211). Therefore, even on this ground, the Reference has to be rejected.

14. That apart, there is a very substantial reason for rejecting this Reference. The objection as presented before us was not raised either before the Income-tax Officer or the Appellate Assistant Commissioner. Both the Officers determined the question bearing on the genuineness of these entries. The stand taken before the Tribunal was that certain intangible additions were made in prior years and therefore the present one should be deleted.

15. This contention was disposed of by the Tribunal by observing that the income of each year should be determined from the materials available for that year, and that the additions made in prior years related to the income of those years and the additions under consideration bore on the income of the year under consideration and that, therefore, there was absolutely no force in the representative's argument.

16. The statement in paragraph 8 of the statement of the case that

“the asses see's argument that both the credits as well as deficit yield could not be added was not accepted by the Tribanal for the reason that both were separate and distinct”

has to be understood in the context of the observations made by the Tribunal in its order dismissing the appeal. It would not be possible to construe this as meaning that the case of the appellant was presented in the form in which it is done before us and it was negatived, having regard to the fact that it is stated in the statement that

“the particulars regarding this are found in the orders of the Income-tax Officer and the Appellate Assistant Commissioner, copies of which are annexures A and B and form part of the case.”

17. If, however, that is susceptible of the interpretation sought to be put upon it, it is not of much help to the assessee because it means that the matter had received the attention of the Tribunal and they found as a fact that they represent two distinct sources. Be that as it may, there is no scope for construing it in the maimer the counsel for the assessee invites us to do. If that were soy no question of law arises to be answered by us.

18. A question of law can be said to arise out of an order of the Appellate Tribunal within the meaning of Section 66(1) of the Indian Income-tax Act.

19. In other words, the order of the Tribunal should disclose that point of law was raised before the Tribunal. If such a question is not raised before the Tribunal, it cannot be said to arise out of its order even if it could be sustained on the facts in the statement of the case by the Tribunal. There is ample authority for this proposition. See Abboy Chetty v. Commissioner of Income-tax, Madras, 1947-15 ITR 442 : (AIR 1948 Mad 181) and Commissioner of Income-tax v. Modern Theatres Ltd., Salem 1951-2 Mad LJ 625 : (AIR 1952 Mad 255).

20. In the above circumstances, the question is answered in the affirmative and against the assessee. The assessee will pay the costs of the Department which we fix at Rs. 100/-.

M.K.S

21. Reference answered.