Additional Commissioner Of Income-Tax, Delhi-Ii v. Jay Engineering Works Ltd.

V.S Deshpande, J.:— These are two applications under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), praying that the Income-tax Appellate Tribunal be asked to state the case and to refer to this court the following question of law:

“Whether, on the facts and in the circumstances of the case, the Tribunal in the absence of any evidence was legally correct in holding that the amounts of Rs. 3,26,200 and of Rs. 83,523 were deductible from determination of profits for the assessment years 1962–63 and 1963–64 respectively?”

2. The applicant-assessees carry on business of manufacturing of fans, etc., on a large scale. The relevant account books for the accounting years 1961–62 and 1962–63 was destroyed in fire in November, 1962. In the returns filed by the assessees along with the statements of profit and loss accounts and balance-sheets a deduction of Rs. 3,36,200 from the determination of profits for the assessment year 1962–63 and a deduction of Rs. 83,523 from the determination of the profits for the assessment year 1963–64 were claimed by the assessees.

3. The deductions were disallowed by the Income-tax Officer, but were allowed by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal. The applications made by the assessees for reference of the above question of law to this court were also dismissed by the Tribunal. Hence the present applications.

4. In finding out whether the Tribunal should be asked to refer to this court the above question of law, two points require consideration, viz.:

(1) When can it be said that a finding by an income-tax authority is not supported by any evidence? and

(2) Whether in the present case the orders allowing the deductions claimed by the assessees could be said to be unsupported by any evidence? Point No. 1

5. The Income-tax Officer and certain other authority functioning under the Income-tax Act have a dual character. They are both agencies of investigation made into the incomes of assessees and they are also quasijudicial authorities assessing the liabilities of the assessees to payment of income-tax. Under section 142(2) of the Act the Income-tax Officer may make such enquiry as he considers necessary for the purpose of obtaining full information in respect of the income or loss of an assessee. Under section 143(3) of the Act, the Income-tax Officer does not only hear such evidence as the assessee may produce or as he may require to be produced, but also takes into consideration “all relevant material which he has gathered” for the purpose of making an assessment. While the word “evidence” may recall the oral and documentary evidence as may be admissible under the indian evidence act, the use of the word “material” shows that the Income-tax Officer not being a court can rely upon material which may not be strictly evidence admissible under the indian evidence act for the purpose of making an order of assessment. Courts often take judicial notice of certain facts which need not be proved, while administrative and quasi-judicial authorities can take “official notice” of wider varieties of facts which need not be proved before them. Thus, not only in respect of the relevancy but also in respect of proof the material which can be taken into consideration by the Income-tax Officer and other authorities under the Act is far wider than the evidence which is strictly relevant and admissible under the Evidence Act.

6. Under section 34 of the Indian Evidence Act account books maintained in the regular course of business are evidence after the relevant entries are proved by oral evidence or are admitted. The Income-tax, Officers, however, have to deal with such numerous cases of assessment that they can accept as correct books of account maintained in regular course of business without such a formal proof.

7. In the present case, the relevant books of account in which detailed information as to the expenses which were claimed as deductions for the assessment years 1962–63 and 1963–64 are destroyed by fire in November, 1962. Under the indian evidence act secondary evidence of the contents of these account books would have to be adduced if they were to be used to prove any fact. The external auditors of the assessee-companies had, however, made their annual reports under section 227(2) of the Companies Act, 1956, to the members of the company on the accounts examined by them and on the balance-sheets and profit and loss accounts for these two years. These reports do not doubt the correctness of the expenses, deductions of which were claimed by the assessees. Under section 227(3)(b) and (c) the auditor's report had to state whether in their opinion proper books of account as required by law have been kept by the company and whether the company's balance-sheets and profit and loss accounts were in agreement with the books of account and returns. Under section 209 of the Companies Act, the assessee-company was required to maintain proper books of account with reference to the receipts and expenditure taking place in the business of the assessees. The account books maintained by them must be such as to give a true and fair view of the state of affairs of the companies.

8. The question arises, therefore, whether the reports of the auditors could be said to be “material” on which reliance could be placed by the income-tax authorities. Unlike the proof required of such reports as also of the account books under the indian evidence act, it is quite competent for the income-tax authorities not only to accept the auditors' report, but also to draw the proper inference from the same. The income-tax authorities could, therefore, come to the conclusion that since the auditors were required by the statute to find out if the deductions claimed by the assessees in their balance-sheets and profit and loss accounts were supported by the relevant entries in their account books, the auditors must have done so and must have found that the account books supported the claims for deductions, when the deductions were disallowed, by the Income-tax Officer on the ground that detailed information regarding them was not available, justice was not done to the assessees. It was not possible for the assessees to produce the original account books, which were destroyed in fire. There was, however, other material mainly consisting of the auditors' reports from which it could be inferred that the deductions were properly supported by the relevant entries in the account books. In a sense it may be a question of law as to what the meaning of “material” is and whether the auditors' reports were material. But the question of law is well settled and is not capable of being disputed and does not, therefore, call for reference.

Point No. 2

9. The Tribunal has stated that, though, ordinarily, the adjustments relating to expenses should have been made by the assessees in the accounts of the year to which the adjustments relate and not in a subsequent year, it is often inevitable that such adjustments relating to earlier years have to be made in subsequent years. This is specially so, when the business, as of the assessees, is of giant proportions and the branches are farflung he Tribunal has also very properly relied upon the auditors' reports to draw the proper inference from the same. Since the evidence in income-tax proceedings need not consist necessarily of evidence admissible under the Evidence Act but may consist of other material which has a probative value, the Tribunal was justified in taking such material into account. It cannot, therefore, be said that the decision of the Tribunal was not based on any evidence. On the contrary, it was based on evidence meaning thereby that it was based on relevant material which can be considered in the income-tax proceedings.

10. The applications are, therefore, dismissed. There will be no order as to costs.