Case: Malik and Sons (H.) Vs. Commissioner of Income Tax

Cornelius, J.1. This is an appeal under section 66A of the Income tax Act, 1922, read with section 21 of the Excess Profits Tax Act, 1940, and comes before this Court on a certificate granted by the High Court at Lahore on the basis that " the value of the subject-matter is about Rs. 38, 000 and a substantial question of law is involved. "2. Briefly stated the facts are that for the year 1941-42, the assessee namely, M/s. H. Malik & Sons, was assessed to pay income-tax and excess profits tax on a net total income of Rs. 1, 13, 556, by order of the Income-tax Officer, Lahore, dated the 15th December, 1941. This sum included Rs. 1, 07, 176 being the estimated profits from a military contract to supply camp-kettles. In 1944, a letter was issued from the Central Board of Revenue at Delhi to all Income-tax authorities, in regard to statements of income derived by persons who had executed war contracts for the supply of quantities of camp-kettles to military authorities. It seems from the letter that such contracts had been placed at a large number of centres in India, as it then was. The prices at which the contracts were placed varied from centre to centre, being dependant apparently upon competitive tendering. The Central Board of Revenue appears from the letter to have been impressed by the great difference in the rates at which tenders had been placed at the various centres, and having collated figures from places as far apart as Bombay, Calcutta, Jullundur, Lahore and Rawalpindi, stated their opinion that " contractors who secured orders at rates in excess of Rs. 4-14-0 per kettle body made extra profits in amost all cases. " It should be mentioned that the rates were not fixed for complete kettles, but separately for kettle bodies and kettle covers respectively. The expression " extra profits " in the context of income-tax assessment would require to be understood as profits in excess of those usually shown by assessees and accepted as fair by Income-tax authorities. The letter contains suggestions that certain materials necessary for the manufacture were capable of being sold in the black market at much higher prices than the contractors were required to pay to the Government by which they were supplied to the contractors, but that suggestion has no importance for the decision of this appeal. Another suggestion, however, is of importance, namely, that under existing orders, the quantity of raw material which was being supplied by Government to the contractors was in excess of the quantity required on a strict computation, not by 5 per cent. only as was intended by the Supply Department originally, but by nearly 38 per cent. Thus, there was a margin out of which a surplus might be expected to develop, for which the contractors were not required to account to the Govern ment and which was readily convertible into money in the market.On receipt of this letter, action was taken by local Income-tax Officers, and the assessee in the present case received notice under an order worded as follows :" Issue notice under section 34 for 1941-42 and 1942-43 assess ments. Income from contract business appears to have been under-assessed. "3. Further proceedings followed and in the present case orders were made on the 11th February, 1946, in regard to income-tax as well as excess profits tax. The order relating to income-tax shows that the assessee in the reply to the notice under section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act stated that no income had escaped assessment, and the legal objection has also been raised that the Income-tax Officer was not acting on " definite information " as required by the statute. The Income-tax Officer found that the assessee had under-assessed the profits and proceeded to estimate the deficit upon a comparison of tender prices by different contractors and on different dates. Although the minimum rate sanctioned for the assessee was Rs. 5-13-0 per kettle body and Rs. 2-12-0 per kettle cover, the Income tax Officer assumed that the figures which would have been proper, in the sense of allowing a reasonable margin of profit, were Rs. 4-8-0 per kettle body and 1-4-0 per kettle cover respectively and he proceeded to apply these figures in relation to the quantities supplied by the assessee and came to the conclusion that the income which had been concealed previously amounted to not less than Rs. 1, 09, 261. The justification given by the Income-tax Officer for thus re-calculating the profits is contained in the following words :" It was discovered much later than the date of assessment that the assessee had earned huge profits on the contract of the supply of camp-kettles because they got very favourable rates. The profits were, therefore, found to have been under-assessed. "Having determined the extra profit at Rs. 1, 09, 261, the Income-tax Officer proceeded to observe that this extra amount was in excess of the total profits shown at the original assessment and made the further observation that it was " on these facts evident that there was definite information to find that the income has escaped assessment and had been under-assessed " and further that this was " not a matter of mere opinion. " Further to support the additional assessment, the Income-tax Officer mentioned (a) submission of fictitious particulars regarding the execution of the contract through sub-contractors and (b) that on the expenditure side, the account furnished originally by the assessee was " almost entirely unreliable being unvouched ". On the latter ground, the Income-tax Officer thought he was justified " in view of the information in my possession " in cutting down the expenditure shown by " an amount which may yield results consistent with the above fact. "4. The matter was taken by the assessee before the Appellate Assis tant Commissioner who upheld the fresh assessment but on different grounds. It is not necessary to mention these grounds in detail, since on appeal to the Income-tax Appellate Tribunal, the Appellate Assis tant Commissioners order was set aside and the case was remanded to him for fresh determination. It is necessary to state, however, two matters mentioned in the Appellate Assistant Commissioners order, The first is that the Appellate Assistant Commissioner did not, like the Income-tax Officer, ignore the information sent in the Central Board of Revenues letter that a margin of nearly 38% had been provided for by Government in supplying quantities of raw materials for the execution of the contract, as against an assumed figure of only 5%. The second matter worthy of mention is that the Appellate Assistant Commissioner expressed his agreement with the appellant that the basis of assessment adopted by the Income-tax Officer was open to serious objections.5. Against the order of remand made by the Income-tax Appellate Tribunal the assessee moved the Tribunal to state a case for the con sideration of the High Court, and such an order was made on the 21st February, 1950, referring two questions to the High Court, which are indeed the same question stated firstly in relation to the proceedings under the Income-tax Act, and then repeated in relation to the proceedings for recovery of excess profits tax. The question was whether within the meaning of the relevant statutes, there was definite information in the possession of the Income-tax Officer leading to the discovery of under-assessment of the assessees income.6. The Division Bench of the High Court answered both questions in the affirmative. They came to the conclusion that the letter from the Central Board of Revenue contained in itself definite information which had led to the discovery by the Income-tax Officer that in rela tion to the income derived from the kettle contracts, M/s. H. Malik & Sons had been under-assessed. The first such piece of information was contained in the figures provided of rates tendered and accepted for similar kettles at a number of centres other than Lahore. The learned Judges also thought that the possibility of the difference of prices being due to change of specifications was ruled out as a result of the information conveyed in the Central Board of Revenue letter. Finally, the High Court relied upon the information that the margin left to cover wastage in relation to raw materials provided by Government was not 5% but nearly 38%. In the view of the learned Judges, this circumstance was sufficient material upon which the Income-tax Officer could entertain a reasonable belief that additional income had been made by converting the surplus of raw materials so supplied into money. The learned Judges were careful to say that they were not concerned with the question as to the percentage of the material which the assessee might reasonably be thought to have saved. They considered that the only question they were required to determine was whether the Income-tax Officer had material for reasonable belief.7. As has been seen already, the High Court certified the case for purposes of an appeal under section 66A of the Income-tax Act, 1922, on the ground that it involved " a substantial question of law. " On hearing Mr. Bashir for the appellant, we are clearly of the opinion that no such question arises in the case at all. The determination of income for purposes of incidence of taxation thereon must, in relation to a contract such as that here under examination, rest upon an estimate of the margin of profit which, in all the circumstances affecting or arising out of the execution of the contract, could be reasonably believed to have been derived by the contractor. In making the original assessment of 1941, the Income-tax Officer did not have available any comparitive figures of tender rates fixed for other centres where similar articles were being produced under similar conditions. These figures were, however, available to the proper officials of the Central Board of Revenue in Delhi, and their collection and collation must be regarded as an act giving shape and definition to the information collected from different sources, in the sense necessary for determining the probable margin of profit enjoyed by a particular contractor in relation to the rate which had been allowed to him. There can be no question but that the com munication of these facts, duly tabulated and followed up by an opinion as to the limit of rate beyond which the margin of profit would be abnormal, constituted definite information not previously available to the Income-tax Officer, on the basis of which it became known to him for the first time, and therefore was discovered by him, that certain profits had accrued to the contractor which had not been taken into account at the first assessment.8. Again, the original assessment had been based upon the belief that the supply of raw materials to the contractors in such cases was on the basis of allowing 5% in excess of the necessary quantity. The Central Board of Revenues letter refers expressly to a test carried out at Lahore and reported in January, 1942, to the Central authorities in Delhi which showed that the quantities of raw materials that were being provided to contractors were nearly 38% in excess of the extra requirements as strictly computed. This was clearly not a matter within the knowledge of the Income-tax Officer who made the first assessment in 1941. It constituted definite information of a character directly relevant to the determination of the possible margin of profit. This fact was discovered by the Income-tax Officer in consequence of the letter from the Central Board of Revenue, dated the 10th March, 1944. In our view the learned Judges of the High Court were entirely right in saying that any one of the several items mentioned in the letter from the Central Board of Revenue was " sufficient for taking action under section 34. "9. We consider that the two items which we have discussed above were clearly within the meaning of the expression " definite informa tion " and that they enabled the Income-tax Officer to " discover " that there had been under-assessment. Accordingly, section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act were clearly attracted. We do not see in the circumstances of the present case that any substantial question of law arose regarding the applica bility of these two sections to the case of the present assessee.

Decision reasoning: 0[ds]7. As has been seen already, the High Court certified the case for purposes of an appeal under section 66A of the Income-tax Act, 1922, on the ground that it involved " a substantial question of law. " On hearing Mr. Bashir for the appellant, we are clearly of the opinion that no such question arises in the case at all. The determination of income for purposes of incidence of taxation thereon must, in relation to a contract such as that here under examination, rest upon an estimate of the margin of profit which, in all the circumstances affecting or arising out of the execution of the contract, could be reasonably believed to have been derived by the contractor. In making the original assessment of 1941, the Income-tax Officer did not have available any comparitive figures of tender rates fixed for other centres where similar articles were being produced under similar conditions. These figures were, however, available to the proper officials of the Central Board of Revenue in Delhi, and their collection and collation must be regarded as an act giving shape and definition to the information collected from different sources, in the sense necessary for determining the probable margin of  profit enjoyed by a particular contractor in relation to the rate which had been allowed to him. There can be no question but that the com munication of these facts, duly tabulated and followed up by an opinion as to the limit of rate beyond which the margin of profit would be abnormal, constituted definite information not previously available to the Income-tax Officer, on the basis of which it became known to him for the first time, and therefore was discovered by him, that certain profits had accrued to the contractor which had not been taken into account at the first assessment.8. Again, the original assessment had been based upon the belief that the supply of raw materials to the contractors in such cases was on the basis of allowing 5% in excess of the necessary quantity. The Central Board of Revenues letter refers expressly to a test carried out at Lahore and reported in January, 1942, to the Central authorities in Delhi which showed that the quantities of raw materials that were being provided to contractors were nearly 38% in excess of the extra requirements as strictly computed. This was clearly not a matter within the knowledge of the Income-tax Officer who made the first assessment in 1941. It constituted definite information of a character directly relevant to the determination of the possible margin of profit. This fact was discovered by the Income-tax Officer in consequence of the letter from the Central Board of Revenue, dated the 10th March, 1944. In our view the learned Judges of the High Court were entirely right in saying that any one of the several items mentioned in the letter from the Central Board of Revenue was " sufficient for taking action under section 34. "9. We consider that the two items which we have discussed above were clearly within the meaning of the expression " definite informa tion " and that they enabled the Income-tax Officer to " discover " that there had been under-assessment. Accordingly, section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act were clearly attracted. We do not see in the circumstances of the present case that any substantial question of law arose regarding the applica bility of these two sections to the case of the present assessee.