Surajmal Champalal v. Commissioner Of Income-Tax, Bihar And Orissa

1. The Income-tax Appellate Tribunal, Patna, has forwarded a statement of the case, as directed by this court, under section 66(2) of the Income-tax Act, relating to the assessment year 1949-50. The assessee had filed a return of his income as a Hindu undivided family, showing an income of Rs. 1,901. While examining the accounts of the assessee, the Income-tax Officer found the introduction of two items of capital, Rs. 51,000 on the 12th of October, 1948, when the assessee's business and cash book commenced, and Rs. 20,000 on a subsequent date. The assessee was asked to explain these items and he said that Rs. 51,000 was a gift from his father and Rs. 20,000 was a deposit by the wife of Jhumarmal, a separated brother of the assessee. The Income-tax Officer was not satisfied with this explanation. He further found that there were despatches of jute consignments on five days in February, 1948, and also in July and August of that year, but these despatches were not shown in the assessee's accounts. The assessee was also asked to explain about that but the Income-tax Officer did not feel satisfied with whatever explanation was offered in that respect. In the result, the assessing officer held:

“From the omission of the transaction in the accounts the presumption would be strengthened that the assessee kept away the profits of his business (and?) introduced capital here. Taking all these facts into consideration, I would add back a sum of Rs. 51,000 to the profits.”

2. Against that, an appeal was taken before the Appellate Assistant Commissioner, who upheld the assessment. When the matter came before the Appellate Tribunal, the only ground pressed before them was with regard to the explanation about Rs. 51,000. In their order dated the 4th December, 1953 (annexure “C-l”), the Tribunal held that the assessee should be given an opportunity to produce further evidence in support of his explanation in regard to Rs. 51,000 introduced in the cash book on the date of commencement of the business and, in that view, they remanded the case to the Appellate Assistant Commissioner with a direction that the assessee should be given a further opportunity to establish the alleged gift of that amount by his father. They further said that, if ultimately the Appellate Assistant Commissioner would come to the conclusion that the alleged gift was true, he would still consider whether the other defects which existed in the accounts did not warrant an addition to the assessee's own profits. The Appellate Assistant Commissioner after remand and after considering further evidence that was adduced by the assessee in support of this explanation, justified the addition of Rs. 51,000 to the assessee's profits as done by the Income-tax Officer. Again, an appeal was brought before the Appellate Tribunal against that judgment. This time, the Appellate Tribunal held, in disagreement with the Appellate Assistant Commissioner, that the source of the cash (of Rs. 51,000) was satisfactorily explained by the assessee. Yet the Tribunal did not interfere with the addition of Rs. 51,000 as made originally by the Income-tax Officer. In their order, they observed that the story put forward by the appellant that it did not carry on business before the 12th of October, 1948, was false. In July, 1948, the department had found two despatches of jute made by the assessee, one of 35 bales and the other of 40 bales, and the assessee himself admitted before the Tribunal that there were two other despatches in that month, one of 94 bales on the 13th of July, 1948, and the other of 37 bales on the 14th of July, 1948. From these facts it appeared evident to the Tribunal that:

“……the department has not been able to detect all the transactions which were suppressed by the assessee during the entire period from the commencement of the accounting year up to October 12, 1948……; there were many more transactions during the period up to October 12, 1948. There was also another cash credit of Rs. 20,000 in the account of the wife of the elder brother, Surajmal. Considering both these cash credits and the suppressed dealings, the Income-tax Officer had added only Rs. 51,000.”

3. On this, a reference was asked for but without success. Ultimately, the assessee came to this court and obtained a rule calling upon the Appellate Tribunal to forward a statement of the case. The question framed for our consideration is:

“Whether, on the facts and circumstances of the case, the addition of Rs. 51,000 as estimated profits from suppressed transactions is justifiable in law?”

4. The finding of the Appellate Tribunal that the assessee's business, on which tax was to be levied, did not commence from the 12th October, 1948, as was shown by the books of account of the assessee, is final. The other finding that there were several transactions during the period up to the 12th of October, 1948, which did not find a place in the assessee's account books or in the return filed by him, cannot be challenged. The finding that there were four despatches in the month of July, 1948, but they also did not find a place in the assessee's accounts is also there. In view of these findings, whether the question, as it has been framed, can be answered in the affirmative or in the negative is to be considered.

5. The addition of Rs. 51,000 made by the Income-tax Officer was on account of the rejection of the assessee's account books. The justification for such a rejection cannot now be challenged, in view of the findings recorded by the Appellate Tribunal to the effect that the account books did not represent the entire period of the assessee's business, which had commenced much prior to the 12th October, 1948, the day on which the cash book began; and that several transactions done by the assessee were not incorporated in the account books and further that the explanation in regard to the introduction of Rs. 20,000 as a deposit from the wife of the elder brother of the assessee was not satisfactory.

6. Learned counsel appearing for the assessee, however, contended that the figure of estimate of Rs. 51,000, which the Income-tax Officer added to the assessee's profits, was not based upon any material or evidence. Not only there should be materials to justify the rejection of the account books of the assessee but there must be materials or evidence on which the figure of estimate has to be based and that should be disclosed by the assessing officer. This submission was based mostly on the observations made by their Lordships of the Supreme Court in the case of Raghubar Mandal Harihar Mandal v. State of Bihar [1957] 8 S.T.C 770, 776, 777, 778 S.C.. There, the assessee's account books were rejected for the reasons stated by the assessing officer and the quarterly gross turnover was estimated. Their Lordships of the Supreme Court observed:

“It is clear to us that what the Sales Tax Officer and the Commissioner did was to hold, for certain reasons, that the returns made by the assessee and the books of account filed by it were incorrect and undependable. It is not necessary to repeat those reasons, because we must accept the finding of fact arrived at by the assessing authorities that the returns and the books of account, were not dependable…… Having rejected the returns and the books of account, the assessing authorities proceeded to estimate the gross turnover. In so estimating the gross turnover, they did not refer to any materials at all. On the contrary, they indulged in a pure guess and adopted a figure without reference to any evidence or any material at all………… 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 (Bihar Sales-tax Act).”

7. Provisions under that section of the Sales Tax Act were the same as sub-section (3) of section 23 of the Income-tax Act under which the present assessment was made. Their Lordships also referred to this similarity in the two provisions because they also considered some decisions on the Income-tax Act and particularly the dictum laid down by Lord Russell of Killowen in the case of Income-tax Commissioner v. Badridas Ramrai Shop, Akola. Referring to the observations of Lord Russell which were quoted in the judgment, their Lordships of the Supreme Court observed that they did not find anything in those observations which ran counter to what the Supreme Court had said in the case of Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R 775; [1955] 1 S.C.R 941. and continued.

“No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words of Lord Russell of Killowen again, ‘he must make what he honestly believes to be a fair estimate of the proper figure of assessment’ and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate. In the case under our consideration, the assessing officer did not do so, and that is where the grievance of the assessee arises.”

8. It is thus clear that what their Lordships of the Supreme Court laid down after considering their previous decisions and also the dictum laid down by Lord Russell of Killowen was that not only there should be materials and reasons for rejecting the accounts of an assessee but also there must be materials on which will be based the figure of estimate which the assessing officer will adopt either by way of addition to the profit shown by the assessee or in determining the total turnover, in a case of sales tax assessment. There may be some difficulty in practice about that but all the same that is what has been clearly laid down in the case decided by the Supreme Court.

9. In the present case, the Income-tax Officer had given reasons why he rejected the books of account of the assessee and that was upheld by the Appellate Tribunal. To that extent there is no difficulty. Learned counsel appearing for the assessee, however, attempted to challenge those reasons but we think that that is no longer permissible in view of the categorical findings in that respect arrived at by the Appellate Tribunal which must be taken as final and binding.

10. The other part of the argument of the learned counsel was that even if it is taken that the accounts were rightly rejected, yet the figure of estimate (Rs. 51,000) was not based upon any material or evidence and, therefore, that cannot be sustained. This part of the argument cannot be supported by the circumstances of the present case. While stating the reasons for the rejection of accounts, materials were disclosed in the assessment order that two amounts of capital introduced in the business were not explained satisfactorily by the assessee. That came to Rs. 71,000. In addition to that there were transactions which did not find a place in the accounts. What was their extent we do not get from the assessment order. But from what has been stated in the Appellate Tribunal's order, we find that about 206 bales, which had been despatched in the month of July, had not found a place in the assessee's accounts. Thus, it cannot be said that there were not some materials or evidence before the assessing officer as well as before the Appellate Tribunal in arriving at the figure of estimate. In that view, what their Lordships of the Supreme Court laid down in the case of Raghubar Mandal Harihar Mandal v. State of Bihar, as already referred to, cannot be said to have been violated in any way. Learned counsel's further contention was that, when the Appellate Tribunal held in disagreement with the assessing officer that the explanation offered by the assessee in respect of Rs. 51,000 was satisfactory, that was necessarily to be omitted from the volume of materials and/or evidence on which the estimate of Rs. 51,000 for addition to profit was made. This is correct. A part of the materials which were depended upon for arriving at the figure of estimate at the original stage, by the orders of the Tribunal, had to be omitted. That became irrelevant so far as the figure of estimate was to be arrived at. The original estimate of Rs. 51,000 must be now taken to have been based upon some irrelevant material. If an estimate is based partly upon irrelevant material and partly upon relevant material it is difficult to sustain such an estimate because it cannot be said as to what extent and which part of the figure of estimate was dependent upon the irrelevant portion of the material. When the Tribunal found that a major part, if we can say so, of the material on which the Income-tax Officer had based his figure of estimate was not justified for being taken into consideration, because the explanation offered by the assessee was satisfactory in that respect, the proper course, in our view, was to ask the assessing officer to reconsider the matter on the basis of other materials which were available to be taken into account in arriving at the figure of estimate. Instead of that, the Tribunal retained the original estimate figure though a large slice of the materials depended upon for that purpose was not acted upon by them. Learned counsel appearing for the revenue urged that though the explanation of the assessee in regard to Rs. 51,000 was accepted by the Tribunal and was, therefore, omitted as a relevant material for the purpose of estimating the figure for addition to the assessee's profits, yet, the Tribunal, in addition to what the Income-tax Officer had found, discovered two other items of dealings in the month of July, 1948, as admitted by the assessee before them, not to have been include ed in the assessee's account books and on that basis held that there were several such transactions which the assessee had not brought into his books. In other words, the argument of learned counsel comes to this. The Tribunal replaced Rs. 51,000 by their new discovery of two transactions and their suspicion of many other transactions suppressed by the assessee. This, in our view, is not a dependable argument nor the Tribunal have equated what they found, if they really found any new admission by the assessee, with what was to be omitted from the consideration of materials for the purpose of arriving at the figure of estimate.

11. For the reasons given above, we are inclined to answer the question that on the facts and circumstances of the case the addition of Rs. 51,000 as estimated profit from the suppressed transactions was not justifiable in law. The reference is accordingly disposed of but there will be no order for costs.