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Bombay Cycle Stores Co. Ltd. v. Commissioner Of Income-Tax, Madhya Pradesh And Bhandara, Nagpur
Summary of the Opinion of Tendolkar, J.
Factual and Procedural Background
The Nagpur High Court received a reference from the Tribunal consisting of two questions of law. The questions concerned (1) whether the Tribunal was entitled to compute gross income from sales of bicycles and motor-cycles under the proviso to section 13 of the Indian Income-tax Act even though the gross profits ascertained from the assessee's accounts were alleged to be correct, and (2) whether Income-tax authorities were right in adding Rs. 12,174 (paid as sales tax) to the assessee's income although that amount had not been realised from customers.
The assessee was a private limited company dealing in motor-cycles, cycles and accessories for the assessment year 1950–51. The accounting year ended on 31 December 1949. The Income-tax Officer concluded that profits could not properly be deduced from the accounts and, invoking the proviso to section 13, estimated sales at Rs. 10,00,000 with a flat profit rate of 20%. On appeal, the Appellate Assistant Commissioner reduced the sales estimate to Rs. 9,00,000 and the gross profit rate to 17½%. The Tribunal accepted the Appellate Assistant Commissioner’s sales estimate of Rs. 9,00,000 but reduced the rate of gross profits to 12%, noting it had taken into account a claim of Rs. 9,200; the overall effect of the Tribunal’s order was a reduction of Rs. 49,500 in the estimated profits.
The second question concerned the inclusion of Rs. 12,174 (sales tax) in the assessee's total income. The Tribunal, by a later order, stated that this amount had been taken into account when they calculated the reduction of Rs. 49,500.
Legal Issues Presented
- "Was the Tribunal entitled to compute the gross income from the sales of bicycles and motor-cycles under the proviso to section 13 of the Indian Income-tax Act, even though the gross profits ascertained by reference to the accounts of the assessee were found to be correct?"
- "Were the Income-tax authorities right in adding Rs. 12,174 paid in respect of sales tax to the income of the assessee even though it had not realised it from its customers?"
Arguments of the Parties
Appellant's Arguments (as presented by Mr. Palkhivala for the assessee)
- The proviso to section 13 was wrongly applied in this case; the Income-tax Officer should not have invoked it.
- Even if the proviso was properly invoked, the Income-tax Officer was obliged to make his estimate as near as possible to actual profits; therefore, where profits in respect of bicycles and motor-cycles could be correctly ascertained from the books (even if accessories could not), those ascertained profits should have been accepted rather than estimating on the whole turnover.
- The absence of a stock register, by itself, should not automatically justify invoking the proviso; reliance was placed on Pandit Bros. v. Commissioner of Income-tax for the proposition that the absence of a stock register cautions the officer but does not, by itself, make invocation of the proviso mandatory.
- Regarding the Rs. 12,174 sales-tax item: because the Tribunal's order did not explicitly mention this amount, counsel contended the Tribunal may have lost sight of it and that the Tribunal's later statement that the amount had been taken into account should be disregarded.
Taxing Authorities' Position (Income-tax Officer / Appellate Assistant Commissioner / Tribunal)
- The Income-tax Officer examined the materials, noted the absence of a stock register and other deficiencies, and concluded that the profits and gains could not properly be deduced from the accounts; he therefore invoked the proviso to section 13 and made an estimate (sales Rs. 10,00,000 at 20% profit).
- The Appellate Assistant Commissioner reduced the estimate to sales Rs. 9,00,000 and a gross profit rate of 17½%.
- The Tribunal maintained the sales estimate of Rs. 9,00,000 but reduced the gross profit rate to 12%, indicating it had taken into account the assessee's claim of Rs. 9,200 and, by subsequent order, stated that the Rs. 12,174 sales-tax amount had been considered when granting the reduction of Rs. 49,500.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Pandit Bros. v. Commissioner of Income-tax [1954] 26 I.T.R. 159 | Observed that absence of a stock register "only cautions" the Income-tax Officer against the falsity of returns and that absence of a stock register alone does not necessarily justify invoking the proviso to section 13. | The court distinguished the present case from Pandit Bros.: it noted that in Pandit Bros. the Income-tax Officer had not concluded that the proviso applied, whereas in the present case the Income-tax Officer had considered detailed material (including the absence of a stock register among other factors) and reached the opinion that profits could not be properly deduced. The court therefore held that Pandit Bros. did not prevent the Income-tax Officer from invoking the proviso here. |
Court's Reasoning and Analysis
The court proceeded in two main parts corresponding to the questions referred.
First, the court examined the premise underlying question No. 1 — that the Income-tax authorities had found the gross profits ascertained from the assessee's accounts to be correct. The court found no support for this assumption on the record. The bench had asked counsel to identify any finding in the orders of the Income-tax Officer, the Appellate Assistant Commissioner, or the Tribunal that the accounts correctly showed gross profits; counsel could not point to such a finding. The Income-tax Officer had in fact required quantitative analysis and observed that the assessee could supply quantities only for cycles and motor-cycles but not accessories, and the Income-tax Officer expressly refused to accept the trading accounts and estimated turnover at Rs. 10,00,000. Consequently, the court concluded the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal did not accept the accounts as correctly showing gross profits.
The court then addressed the two branches of the assessee's argument. On the first branch (that the proviso was wrongly applied), the court interpreted the proviso to section 13 as conferring a discretionary power on the Income-tax Officer to compute income "on such basis and in such manner as he may determine" where, in his opinion, income cannot properly be deduced from the accounts. The court held that the opinion required is that of the Income-tax Officer, and if there was material on which he reasonably could form that opinion, the exercise of the power to invoke the proviso could not be interfered with. Applying this to the facts, the court found that the Income-tax Officer had considered detailed material (including absence of a stock register and statements supplied by the assessee) and legitimately concluded that correct profits could not be deduced; therefore the invocation of the proviso was justified.
On the second branch (that the Income-tax Officer should have accepted proved margins for certain sales and estimated only the remainder), the court observed that even if margins had been proved for some sales, section 13 when invoked calls for an estimate of the total turnover. The Tribunal had noted that accepting proved margins for some sales would have obliged it to allow a higher average gross profit on the balance. The court held that where the proviso is invoked, the presence of proved margins for some items does not make it incumbent on the Income-tax Officer to accept those figures in isolation while estimating the rest; an overall estimate for the whole turnover is permissible and appropriate.
Concerning the second referred question about the Rs. 12,174 sales-tax item, the court set out the procedural history: the point had not been raised in the appeal before the Tribunal but was the subject of a later written application; the Tribunal apparently allowed the question to be raised but the original Tribunal order contained no reference to the amount. After a rectification application, the Tribunal issued an order stating that the Rs. 12,174 had been taken into account when granting the reduction of Rs. 49,500. The court rejected the assessee's submission that the Tribunal's later statement should be disregarded and accepted the Tribunal’s factual statement that the item had been before their minds and had been taken into account in arriving at the percentage of gross profits applied to the Rs. 9,00,000 turnover. As a result, the court held that question No. 2 did not survive for independent disposal.
Holding and Implications
Holding: The reference is answered against the assessee; the assessee fails on this reference and shall pay the costs of the Income-tax Commissioner.
Implications:
- Direct effect on the parties: The court upheld the Tribunal's treatment (including the Tribunal's statement that it had taken the Rs. 12,174 sales-tax item into account) and dismissed the assessee's contentions on the reference; the assessee must pay the costs of the Income-tax Commissioner.
- On legal principle: The court affirmed that the proviso to section 13 is available to the Income-tax Officer where, based on material before him, he forms the opinion that income cannot properly be deduced from the accounts; absence of a stock register is a relevant circumstance but not, by itself, determinative. The court also confirmed that once the proviso is invoked an overall estimate on total turnover is permissible even where margins for some sales have been proved.
- The opinion does not state that it establishes any novel or wider precedent beyond its application to the facts presented; it rests its conclusions on the recorded findings and the proper exercise of the Officer's discretion under section 13.
Reference answered accordingly.
Tendolkar, J.:— As directed by the Nagpur High Court, two questions of law have been referred to its by the Tribunal, and they are:
“(1) Was the Tribunal entitled to compute the gross income from the sales of bicycles and motor-cycles under the proviso to section 13 of the Indian Income-tax Act, even though the gross profits ascertained by reference to the accounts of the assessee were found to be correct ?
(2) Were the Income-tax authorities fight in adding Rs. 12,174 paid in respect of sales tax to the income of the assessee even though it had not realised it from its customers ?”
2. Now, the assessee is a private limited company which dealt in motor-cycles, cycles and accessories in the assessment year 1950–51.
3. The accounting year was the year ending 31st December, 1949. The Income-tax Officer found that the profits and gains could not properly be deduced from the accounts kept by the assessee, applied the proviso to section 13 and estimated the sales at Rs. 10 lakhs and a flat rate of 20 per cent. as profits. The Appellate Assistant Commissioner on appeal reduced the estimate of sales to Rs. 9 lakhs and applied a flat rate of 171/2 per cent. The Tribunal maintained the estimate of sales made by the Appellate Assistant Commissioner, but further reduced the rate of gross profits to 12 per cent. and stated in their order that in reducing this rate they had duly taken into account the claim of the assessee in respect of a sum of Rs. 9,200. The effect of the Tribunal's order was that the assessee got a reduction of Rs. 49,500 in the estimated profits. Now, question No. (1) as framed appears to proceed on the footing that the Income-tax authorities had found that the gross profits ascertained by reference to the accounts of the assessee were correct. We find no justification for such an assumption on the record. We asked Mr. Palkhivala, who appears for the assessee, to point out from the order of the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal where they had so found and he was unable to draw our attention to any such finding. He pointed out from the order of the Income-tax Officer that the assessee was called upon to furnish quantitative analysis of the goods sold, but was able to sort out the quantities of sales of cycles and motor-cycles only and expressed his inability to furnish such details in respect of accessories. He relied upon this for the inference that the Income-tax Officer found that the gross profits in respect of sales of cycles and motor-cycles only could be correctly ascertained from the accounts. It appears to us to be impossible to read this passage in the order of the Income-tax Officer as a finding that the gross profits could be correctly ascertained from the accounts as kept. The Income-tax Officer dealt with and considered in great detail all material that was placed before him by the assessee; he noticed and commented upon the important fact that no stock register was kept; and considering all these facts, he stated:
“I am not prepared to accept the result of the trading accounts, as well as the sale position at Bombay branch, and would estimate them at Rs. 10,00,000.”
4. It is clear, therefore, that the Income-tax Officer did not accept the gross profits ascertained by reference to the accounts to be correct, nor did the Appellate Assistant Commissioner or the Tribunal accept such accounts. The basis for the first question, therefore, appears to be lacking. However, Mr. Palkhivala has attempted to argue under this question two distinct propositions. The first branch of his argument is that the proviso to section 13 was wrongly applied in this case; and the second branch was that even assuming that the proviso was correctly applied, in making the estimate the Income-tax Officer was bound to make as near an estimate as he could to the actual profits, and if in respect of bicycles and motor-cycles the correct profit could be ascertained from the books, notwithstanding the fact that it could not be so ascertained in respect of accessories, the Income-tax Officer should have accepted the profits so ascertained as his own estimate. Now, dealing with the first part of the argument, the proviso to section 13 confers a power upon the Income-tax Officer to make a computation on such basis and in such manner as he may determine if, in his opinion, the income, profits and gains cannot properly be deduced therefrom. The opinion is to be that of the Income-tax Officer, and if there was any material on which he could possibly have come to that opinion, nobody can interfere with the exercise of that power by the Income-tax Officer of invoking the proviso to section 13.
5. Mr. Palkhivala has drawn our attention to a decision in Pandit Bros. v. Commissioner of Income-tax [1954] 26 I.T.R 159. where the Punjab High Court, in dealing with a case where there was absence of a stock register, as in this case, has observed at page 166:
“Again, the fact that there is no stock register only cautions him (the Income-tax Officer) against the falsity of the returns made by the assessee……”
6. and Mr. Palkhivala urges that the absence of the stock register would not, therefore, by itself warrant the opinion of the Income-tax Officer that the true profits could not be deduced from the accounts kept. Now, in the first instance, in the case relied upon by Mr. Palkhivala, it must be noticed that the Income-tax Officer had not found that the case fell within the proviso to section 13. In other words, he had not come to the conclusion that the income, profits and gains could not be properly deduced from the accounts that were kept. That, in itself, was sufficient to make the application of the proviso unwarranted. Moreover, the observation relied upon states only a proposition which appears to us to be quite obvious. Whether the absence of a stock register is or is not material must depend upon the other circumstances of the case and the other material which is available to the Income-tax Officer, and if the accounts, notwithstanding the absence of the stock register, enable the Income-tax Officer to deduce properly the income, profits and gains of the business, the mere absence of the register will not be a sufficient ground for invoking the proviso to section 13. But obviously, in this case, it is clear from a mere perusal of the order of the Income-tax Officer that he did not rely only on the absence of a stock register, but considered in detail every single material that was produced including statements prepared by the assessee, and came to the conclusion that from all this material he could not deduce correctly the profits of the business. In our opinion, therefore, the Income-tax Officer was fully justified in forming the opinion that he did and applying the proviso to section 13.
7. Turning to the latter part of the argument, although, as we have pointed out earlier, there is nothing on the record to show that the gross profits ascertained by reference to the accounts of the assessee were found to be correct, in paragraph 9 of the statement of the case the Tribunal states as follows:
“It appears that an effort was made by the assessee to claim, in respect of sales where the assessee has proved the margin of profit, that the account should be accepted,”
8. Mr. Palkhivala wishes to rely upon this as a finding of fact that the margin of profit was accepted in respect of sales of bicycles and motor-cycles only and not accepted in respect of accessories. That, in our opinion, is not the correct reading of the case. The statement only says that in respect of some sales the margin of profit was proved and the Tribunal proceeds to point out that since they had to make an estimate on the total turnover, if they had accepted the profit which was proved in respect of some sales, they would have had to allow a considerably higher average gross profit in respect of the balance. Therefore, although it may be that the margin of profits on some sales was proved, when we are dealing with a turnover of Rs. 9 lakhs the mere fact that such a margin has been proved does not make it incumbent that the estimate should be made in respect of the rest of the business only and not in respect of specific items of sale where the margin has been proved; and indeed, if any other course was adopted and the actual figures proved in respect some sales were accepted, as regards the balance of the sales a higher or lower rate may well be estimated having regard to the margin of profit shown or proved in the actual sales. In our opinion, therefore, where section 13 was invoked from the mere fact that some sales had been proved in which the margin of profit was also proved, it was not incumbent on the Income-tax Officer to grant in respect of these sales the actual profit and estimate it in respect of the others.
9. Our answer to question No. 1, which, as we have pointed out, appears to have been based on an incorrect assumption, will, therefore, be as indicated in our judgment, because answering the question as it stands would be answering it on an incorrect assumption.
10. The second question raised relates to an amount of sales tax of Rs. 12,174 which was added to the total income of the assessee by the taxing authorities. It appears that in the appeal before the Tribunal the point had not been taken that this amount should be excluded from the total income of the assessee; but by a subsequent written application dated the 20th of October the assessee sought leave to raise this question and apparently the Tribunal allowed them to do so. There is no reference to this amount in the order of the Tribunal; and when the order came to the notice of the assessee, they presented a rectification application on the 12th of January, 1953, pointing out that there was no reference to the question of exclusion of this amount. On that the Tribunal made an order on the 10th of February, 1954, in which they state that this amount was taken into account when the Tribunal gave reduction of Rs. 49,500 to the assessees. Mr. Palkhivala has attempted to persuade us to hold that since the order of the Tribunal does not mention this amount, this statement should be disregarded and in fact the amount was lost sight of by the Tribunal when they passed their order. We cannot countenance any such suggestion. We accept the statement of fact from the Tribunal that this item was present to their minds and was taken into account by them in arriving at the percentage of gross profits to be allowed on the entire turnover of Rs. 9 lakhs. If we accept that fact, it may still be open to Mr. Palkhivala to contend that the Tribunal should be asked separately to determine the question of Rs. 12,174; but the consequence of it would necessarily be, in view of the statement of the Tribunal, that they would like to reconsider their estimate of the percentage of gross profits. Mr. Palkhivala does not desire, therefore, that such a course should be adopted. As we accept the statement of the Tribunal, this question of exclusion of Rs. 12,174 from the total income has already been taken into account by the Tribunal and question No. 2, therefore, does not survive for disposal. The result, therefore, is that the assessees fail on this reference and shall pay the costs of the Income-tax Commissioner.
11. Reference answered accordingly.
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