Civil Appeals No 218 of 1955 and 219 to 223 of  1955
Appeal by special leave from the judgment and Order dated September 14 1951 of the Income tax Appellate Tribunal Madras in ITA No 3158 of 1949 50
and Appeals by special leave from the judgment and order dated September 30 1953 of the Income tax Appellate Tribunal Madras in ITA Nos
7840 of 1952 53 and EPTA Nos 300 301 and 302 of 1952 53
section Chowdhuri N A Palkhivala and Naunit Lal for the appellant
887 H N Sanyal Additional Solicitor General of India R Ganapathi lyer and D Gupta for the respondent
1960 February 3
The Judgment of the Court was delivered by KAPUR J
In these six appeals the common question raised is whether the proviso to section 13 of the Income tax Act is applicable to the facts and circumstances of these cases
They are therefore disposed of by one judgment
Civil Appeal No 218 of 1955 arises out of the assessment for the year 1943 1944
Civil Appeals Nos 219 to 223 relate to the assessment years 1944 1945 1946 1947 and for the chargeable accounting periods from January 1943 to February 1944 and from February 1945 to February 1946
The appellant in each of the appeals is the assessee and the respondent is the Commissioner of Income tax and Excess Profits Tax Madras
The appellant is a resident and ordinarily resident  in India and carried on extensive trade in Colombo in grains folder gram and other food stuffs for cattle and poultry
For the assessment year 1943 1944 the appellant showed a turnover of Rs 1774825 and a gross profit of Rs 63217 which is about 35 per cent
For the two previous assessment years the appellant s gross profits were 9 per cent and 8 per cent respectively
The Income tax Officer by his order dated March 20 1948 rejected the accounts and estimated the gross profit by adding back Rs 238831 to the returned income
Thus he raised the turnover to Rs 2000000 and the gross income to Rs 300000 giving a profit of 15 per cent on the estimated turnover
On appeal to the Appellate Assistant Commissioner the order of the Income tax Officer was confirmed
The Income tax Appellate Tribunal on appeal by its order dated September 14 1951 after pointing out various defects rejected the account books but accepted the appellant s turnover and computed the profits at 15 per cent on grains imported from India and 121 per cent on grains purchased in Ceylon
It held that correct profit for the year under assessment could not be deduced from the books produced by the appellant
The Excess Profits tax 113 888 for the chargeable accounting period from February 10 1942 to January 16 1943 was decided on the basis of the Income tax assessment for the year 1943 44
On November 21 1951 the appellant applied to the of Tribunal for stating a case under section 661 on the following four questions 1 Whether under the circumstances of the case the Tribunal was justified in holding that Section 13 of the Indian Income tax Act applies to the case
2 Whether the reasons set out by the Appellate Tribunal in paragraph 2 of its judgment are sufficient to invoke Section 13 of the Act
3 Whether the Tribunal having disagreed with the department on the basis of the assessment had jurisdiction to apply Section 13 and make an assessment on an alleged estimate
4 Whether the Tribunal was justified in making an assessment on the basis of Section 13 without giving an adequate opportunity to the assessee to meet the materials upon which eventually the assessment was rested
But the Tribunal by its order dated February 12 1950 held that no question of law arose and therefore declined to state a case and thus rejected the application
The appellant then applied to the High Court of Madras under section 662 of the Act on the same four questions of law
This application was dismissed by the High Court on February 26 1953
Against this order of the appellant applied for special leave to appeal and by leave of this Court amended the petition so as to make it an appeal against the order of the High Court as well as the order of the Tribunal dated September 14 1951
In the other appeals also the course of proceedings before the Income tax Officer the Appellate Assistant Commissioner and the Income tax Appellate Tribunal was the same
For the assessment years 1944 1945 and 1946 47 the appellant disclosed a turnover of Rs 1035748 and Rs 598728 respectively and the gross profits rates were 107 per cent and 87 per cent respectively
As the books of accounts in regard to these years also were rejected the Income tax Appellate Tribunal applied section 13 and estimated the gross 889 profit rates at 12 12 per cent and 10 per cent for the respective years
The appellant applied to the Tribunal under section 661 of the Act for stating a case to the High Court for its decision on the following two points 1 Whether on the facts and in the circumstances of the case the Department was right in acting under the proviso to section 13 of the Act in th absence of a finding that income profits and gains cannot properly be deduced from the books produced or that no method of accounting has been regularly employed
2 Whether on the facts and in the circumstances of the case the Department had sufficient materials before it to justify the rates of 12 12 per cent and 10 per cent gross profits on the total turnover on the ground that the rates worked out by the figures submitted by the assessee work out at a lesser figure
The Tribunal dismissed the application on January 15 1954
The appellant did not apply to the High Court under section 662 of the Income Tax Act but obtained special leave from this Court against the order of the Tribunal by which it applied the proviso to section 13 of the Income Tax Act
All the six appeals were heard together and a common question arises whether the Income tax Appellate Tribunal was justified in applying the proviso to section 13 of the Income Tax Act
It was contended by the appellant in Civil Appeals Nos 218 219 and 221 of 1955 that the Income tax Appellate Tribunal was not justified in applying the proviso to section 13 and assuming that the proviso did apply then the percentage worked out was unjustified and had been arrived at by relying upon material which the appellant had no opportunity to meet and therefore the case fell within the rule in Dhakeshwari Cotton Mills Ltd vs The Commissioner of Income tax West Bengal 1 where a similar violation of the fundamental rule of natural justicese the information upon which the Tribunal relied was not disclosed to the assessee and no opportunity was given to him 11955 I SCR 941 890 to rebut such material was held to be a ground for interference with the order of the Tribunal
It was rightly argued that the power to compute profits under the proviso to section 13 arises only where no method of accounting has been regularly employed by the assessee and where the method employed is such that the income profits and gain cannot properly be deduced therefrom
It means that the method adopted by the assessee must prima facie prevail where it is regularly employed though the Incometax Officer can resort to the proviso if the method is such that true profits cannot be correctly determined therefrom
In other words even if the assessee has regularly employed a method of accounting it can be discarded under the proviso if the method does not show correct profits of the year
The Appellate Tribunal by its order dated September 14 1951 held that correct profits could not be deduced from the books produced by the assessee and therefore the proviso to section 13 of the Income Tax Act applied
The reasons it gave were 1 that vouchers for several purchases made in Colombo had not been produced and for purchases of over Rs 300000 no vouchers were forthcoming and without the vouchers the entries in the account books could not be verified  2 there was no quantitative tally for the grains and for other materials purchased by the appellant which were ground into powder turned into fodder packed in different sizes and then sold
It was not possible according to the Tribunal to accept the books of account where the turnover was as large as about seventeen lacs of rupees without a quantitative tally 3 a fairly big sum of money was alleged to have been paid towards purchasing of license  for export from India and Rs 19000 worth of purchases were made in Tuticorin when only a small sum of money in cash was shown in the assessee s accounts 4 several outsiders  cheques had been entered in the accounts of the assessee without any proof as to why those cheques were paid to the assessee and 5 a fairly big sum of money had been invested in India in the purchase of property without 891 money being received from Colombo
On these facts the Tribunal said In view of these defects we are clearly of opinion that the correct profit could not be deduced from the books produced by the assessee and accordingly hold that proviso to Section 13 of the Act applies in this case
The question therefore is regarding the estimate  After giving this finding the Tribunal accepted the turnover as shown in the appellant s books
In making the computation of profits the Tribunal took into consideration the following matters that the export of food grains from India was prohibited except under a license that there was an acute shortage of cattle fodder in Ceylon and the appellant had to resort to dubious means in order to obtain grains that during a substantial portion of the year of accounting there was no price control in Colombo that as the appellant was a manufacturer of forage by mixing several kinds of grains and powdering them and sold them in packets of various weights the appellant must have made higher profits than persons who deal in grain only
Keeping all this in view the Tribunal was of the opinion that the rate of 15 per cent adopted in regard to imported grains was not too high but in the case of local purchases it was and therefore reduced the rate of profit in the latter case to 121 per cent
It was on this material that the Tribunal adopted the figure of profit as estimated by the Income tax Officer and in order to support this opinion further the Tribunal remarked that in certain cases which had come to its notice the rate of profits went up to 20 per cent  On the basis of this remark it was argued that the principle of natural justice had been violated in that the Tribunal had taken into consideration the rate of profit in other cases without giving an opportunity to the appellant to explain those cases and relied upon Dhakeshwari Cotton Mills Ltd vs The Commissioner of Income tax West Bengal 1 where a violation of the fundamental rule of justice ie where the information was not disclosed to the assessee and no opportunity was given to rebut that material was 1 1955 I SCR 941 892 held to be a ground for interference with the order of the Tribunal
In our opinion no such case arises in the present appeal
No information as in Dhakeshwari s Case was supplied to the Tribunal by any one and taken into consideration by it and therefore it was not necessary to give any such opportunity as the appellant contends for
In the present case the Tribunal has held that from the method of accounting adopted by the appellant correct profits could not be deduced because of the various reasons which have been set out above and the reference to profits made in other cases was only by way of supporting that conclusion
It was not the basis on which the conclusion was formed nor the basis on which the percentage was arrived at
As a matter of fact the Income tax Officer who also rejected the accounts of the appellant had also given similar reasons
He had held that there was absence of vouchers that the stock account and the manufacturing account had not been kept or produced that the cheques of other parties had been credited in the accounts of the appellant which had not been explained and that there was purchase of goods and property by the appellant without there being sufficient cash in hand
The Income tax Officer also said that in other cases where grains were purchased in India and sold in Colombo the rates of profit were higher ranging between 20 per cent and 39 per cent
He then worked out profits in respect of various grains in the case of the appellant and found that the average rate of gross profit worked out to 158 per cent and in his opinion the gross profit in fodder should have been higher
He further took into consideration the fact that Colombo was bombed in April 1942 resulting in panic in that town and therefore during a portion of the accounting year the appellant might not have made the same margin of profit
He estimated the sales at twenty lacs and the gross profit at three lacs thus arriving at a figure of 15 per cent on the turnover
It appears to us that neither the Income tax Officer nor the Appellate Tribunal relied upon the profits made by traders in other cases as a basis for arriving at any conclusion 893 as to the percentage at which the income should be computed and that they used that material for a different purpose
It is extremely doubtful if the order of the Income tax Officer or the Tribunal would have been different if no reference had been made to the rate of profits in other cases
In other words the profits in other cases were not the reason for holding that 15 per cent
profit was a proper rate but merely an ancillary support to that conclusion
It may be mentioned that throughout in his grounds of appeal the appellant has emphasised the inapplicability of section 13 of the Income Tax Act and the proviso thereto but not to this particular violation of principles of natural justice whichwas emphasised and particularised before us
In his appeal to the appellate Assistant Commissioner no objection was taken to the reference by the Income tax Officer to the rate of profits made by other dealers in grains
In the grounds of appeal
to the Tribunal also there was no such objection
In the application under section 661 there was no specific ground taken and in the application under section 662 the matter does not seem to have been raised
The order of the High Court dated February 26 1953 does not show that any such question was raised before it all it shows is that the appellant s books of account were found to be defective and afforded no data for arriving at correct profits of the business
The order also refers to the non production of invoices the unexplained steep fall in profits made during the year when compared with the previous years
The High Court could not find any legal flaw in the order of the Appellate Tribunal to justify an order for directing the case to be stated
In the grounds of special leave to this Court no pointed reference was made to the material which is now alleged to have been used by the Tribunal without giving an opportunity to the appellant to explain that material
An amended petition by leave of this Court was filed on April 28 1954 and there also no such pointed reference was made to the material to which objection is now being taken before us
Dhakeshwari s Case 1 cannot in our opinion apply to the facts of this case 1 1955 I SCR 941 894 It was then urged that the four reasons given which we have set out above could not make section 13 applicable
for the rejection of accounts several reasons were given by the Appellate Tribunal one of these reasons was the non production
of stock registers and manufacturing accounts
This reason was given by the Income tax Officer and adopted by the Appellate Tribunal
It was submitted that the non production of stock account was not such a defect as to entitle the Taxing Authorities to reject the books and apply the proviso to section 13
Reliance was placed on the judgment of the Punjab High Court in Pandit Brothers vs The Commissioner of Income tax Delhi 1
The facts in that case were very different
The Income tax Officer there added a certain sum to the assessee s profits on the ground that the expense ratio was too high and the profits disclosed were too low and there was no stock register
The finding in that case was that the assessee maintained regular accounts of his purchases and sales and there was no finding by the Income tax Officer that in his opinion the income could not properly be deduced therefrom
Khosla J as he then was there said  There is no finding that there was material before the Income tax Officer to lead him to the conclusion that a proper statement of income profits and gains could not be deduced from the material placed before him
All he said was that the profits appeared to be somewhat low and there was no stock register 
The want of a stock register was in that particular case not a very serious defect because the account books had been found and accepted as correct and disclosed a true state of affairs
It cannot therefore be said that that case laid down as a proposition of law that the want of a stock register by which a proper check could be made was not such a serious defect as to make the proviso to section 13 inapplicable
The importance of such register was pointed out by the Nagpur High Court in Ghanshyam Das Permanand vs Commissioner of Income tax CP  Berar 2
In cases such as the instant case the keeping of a 1 1954 2  81 895 stock register is of great importance because that is a means of verifying the assessee s accounts by having a quantitative tally 
If after taking into account all the materials including the want of a stock register it is found that from the method of accounting correct profits of the business are not deducible the operation of proviso to section 13 of the Income tax Act would be attracted Bombay Cycle Stores Company Ltd vs Commissioner of Income tax 1
It may also be added as was held by this Court in Commissioner of Incometax vs
Mac Millan  Co 2 that the Income tax Officer even if he accepts the assessee s method of accounting is not bound by the figure of profits shown in the accounts
It is for the Income tax Authorities to consider the material which is placed before them and if after taking into account in any case the absence of a stock register coupled with other materials they are of the opinion that correct profits and gains cannot be deduced then they would be justified in applying the proviso to section 13
In our opinion therefore when the Tribunal applied the proviso to section 13 because of the various blemishes which were pointed out by the Income tax Officer and accepted by the Appellate Tribunal it cannot be said that there was any error in the order of the Appellate Tribunal justifying the interference of this Court under article 136
In regard to the Appeal No 220 of 1955 for the assessment year 1946 1947 the objection raised was that the Tribunal had committed the same error in that it took into consideration the earlier decision of the Tribunal in an identical situation  ie in the case of the same assessee in regard to previous years
As we have held that there was no error in the order of the Tribunal in regard to the previous years it cannot be said that this observation of the Tribunal was in any manner erroneous
This appeal should therefore be dismissed
The other appeals which arise Under the Excess Profits Tax Act for the various chargeable accounting periods depend upon the result of the Income tax 1  2   197
114 896 assessment appeals and as we have dismissed those appeals these appeals also must be dismissed
In the result all the six appeals are dismissed with costs
As the appeals were consolidated there will be of One set of costs
Appeals dismissed


Summary:
The Industrial Tribunal in the process of ascertaining the available surplus disallowed a claim of the appellant employer for interest on a certain sum of money standing in the depreciation fund and alleged to have been used as working capital
If this claim was allowed and the amount claimed deducted as a prior charge the employees would not be entitled to any bonus as there would be no surplus
The Industrial Tribunal was of opinion that even if the depreciation reserve was utilised as working capital no return thereon was allowable in deciding what amount was to be deducted as prior charge
On appeal the appellant contended inter alia that the balance sheet of the employer company placed before the Industrial Tribunal itself showed that
the entire sum of depreciation fund was used as working capital
Held that any portion of the reserve fund actually utilised as working capital in the year under consideration should be treated as entitled to a reasonable rate of return and the amount thus ascertained deducted as a prior charge in ascertaining the available surplus
The balance sheet did not by itself prove the fact of utilisation of any reserve as working capital and the law required that such an important fact as the utilisation of the reserve as working capital had to be proved by the employer by evidence on affidavit or otherwise after giving opportunity to the workmen to contest the correctness of such evidence by cross examination
Management of Trichinopoly Mills Ltd vs National Cotton Textile Mills Workers Union CA NO
309 Of 1957 and Khandesh Spg
 Weaving Mills Co Ltd vs The Rashtriya Girni Kamgar Sangh jalgaon CA No 257 Of 1958 followed
Indian Hume Pipe Co Ltd vs Their Workmen
1959 11 LLJ 357 explained