Case: Dhakeswari Cotton Mills Limited Vs. Commissioner of Income Tax, West Bengal

1. The appellant is a public limited joint stock company incorporated under the Indian Companies Act, 1915, with its registered office at Calcutta. It carries on the business of manufacture and sale of cotton yarn and. On the 28th of July, 1944, thex Officer issued a notice to it under section 22(2) of the Indianx Act calling upon it to file the return of its income for the assessment year5 (account year being. Before the expiry of the due date for filing the return the account books of the appellant company together with the documents relevant to the accounts, were taken into custody by thel Officer, Narayanganj and it is alleged that these remained in the custody of the court of thel Magistrate till January, 1950, when they were handed back to the appellant2. In this situation the assessee pleaded for extension of time to furnish the return. This request was refused, and a show cause notice was issued under section 28(3) of the Act calling upon the appellant company why penalty should not be imposed upon it for its failure to file the return. An officer of the company appeared before thex Officer and explained the cause for this default. In order to, ascertain whether the explanation furnished by the assessee was genuine, thex Officer made inquiries from the court concerned about this matter. He also made a request to the court to allow him, access to the books of account. The court, however, neither acceded to the demand that books of account be made available to the assesse nor did it permit thex Officer to have access to them. Thex Officer having thus satisfied himself about , the genuineness of the assessees explanation, condoned the default in filing the return and dropped the proceedings taken against the company under section 28(3) of the Act3. It seems that no further action in the matter was taken by the department till the year 1947. During that year the company requested the department toreador the proceedings. The proceedings having been revived the appellant company furnished the return of its income for the assessment year5 on the 16th March, 1948. This return, however, was not a complete document as without the assistance of the books the profits could not be computed according to the , provisions of law. On receipt of the return thex Officer issued a notice under section 23(2) of the Act calling upon the company to supply further information on a number of points and to prepare certain statements indicated in the notice. This requisition had to be complied with by the 19th March, 19484. On that date the Chief Accounts Officer of the company appeared before thex Officer and asked for further time till the middle of the following week for furnishing the requisite particulars. This request was, however, refusedand assessment was completed on the 20th March, 1948. The excess profits assessment was also made final on the 23rd March, 19485. It may be mentioned that in the return the company had disclosed a gross :profit of 28 per cent, . on sales amounting to Rs. 1, 78, 96, 122. The total amount of sales in the year 1942 was of the amount of Rs. 1, 15, 69, 582, disclosing a gross profit of 41 percent. The establishment expenses, however, during that yearwere in the sum of Rs. 15, 94, 101, while during the accounting year relevant to the year under assessment these had gone up to Rs. 34, 74, 735 on account of labour troubles. A number of other causes were mentioned by the assessee for the low rate of profit during the relevant period; but thex Officer took no notice of them. On appeal this order was upheld by the Appellate Assistant Commissioner. The assessee then appealed to the Tribunal against these decisions. What happened before the Tribunal may well be stated in terms of the Tribunals order itself6. On the 3rd December Mr. Banerjee the appellants counsel saw the Account. ant Member in his chamber and wanted to produce written arguments and a trunk full of books and papers in support of his case. Mr. Banerjee was told that the arguments in the case had finished on the 25th and he was allowed time only to supply to the court the gross profit rates shown or assessed in the cases of other similar cotton mills. He was told that it was pot fair to the other side to take notice of any 945 additional evid ence or record at that stage and his trunk of books and papers was returned to him7. During the discussion of Mr. Banerjee with the Accountant Member Mr. Banerjee produced a report showing that the gross profit rates of some mills in Bengal on the average amounted to 23 per cent. In the statement showing 23 per cent. gross profit rates there was another item called Pool profit which was bigger than the gross profits rate. Mr. Banerjee was asked to explain what this word Pool profit meant but he had no information on this point............ For want of this information we are afraid it is not possible for us to attach a great deal of importance to the gross profit percentage of 23 per cent. mentioned in the books produced by Mr. Banerjee8. Mr. Banerjee during this discussion further produced a book showing the wastage expected. In that book certain quality of cotton had been mentioned and it was said that wastage of 34 per cent. was normal. In the case of the assessee he has shown a wastage of 9 per cent. in 1942, 26 per cent. in 1943 and 19 per cent. in 1944. The figure of 34 per cent. shown in that book would therefore seem to refer to a particular quality of cotton very much inferior to the cotton generally used by the appellant. The departments main case on the question of wastage is based on the appellants own books according to which his wastage in the year under review amounted to three times the wastage in the year previous. In the light of all this information it appears to us that thex Officer was justified in making a substantial addition to the gross profit shown by the appellant9. Coming to the question of what the amount of addition should be the departmental representative has on our request filed a number of cases of other cotton mills which show a gross profit rates varying between 49 per cent. and 22 per cent. and in one case even 13 per cent. has been shownIn the face of all the above facts it appears to us that thex Officer was justified in coming to the conclusion that all sales had not been brought into the books. We have, however, considered all facts relevant to this case and are of the opinion that the addition to the sales should be reduced from Rs. 36 lakhs made by the10. Dissatisfied with the decision of the Tribunal, the assessee wanted the Tribunal to state a case and refer to the High Court for its decision ten questions of law. It seems that Dr. Pal who represented the assessee before the Tribunal had only argued one question namely, whether the estimate of profit made by thex Officer was excessive or whether it was justified on the material on the record. The other points raised in the memorandum of appeal regarding the validity or the correctness of the procedure of assessment had been abandoned11. The questions which were submitted to the Tribunal. and which it was asked to refer to the High Court concerned all the points including those abandoned before the Tribunal. The Tribunal came to the conclusion that no question of law arose on its order, and it, therefore, dismissed the application made by the assessee. It appears that the assessee then applied to the High Court under section 66(2) of the Act for the issue of a mandamus to the Tribunal directing it to refer to the High Court the very same questions of law which it had refused to refer. This application was summarily rejected. The High Court also refused an application for leave to appeal to this Court12. Having exhausted all the remedies that were available to him under thex Act, the assessee then made an application to this Court for special leave against the order of thex Tribunal under the provisions of article 136 of the Constitution. Leave was allowed and this appeal is now before us by virtue of that leave.

Reasoning: 18. As regards the first contention of the learned SolicitorGeneral, we are unable to accede to it. It is not possible to define with any precision the limitations on the exercise of the discretionary jurisdiction vested in this Court by the constitutional provision made in article 136. The limitations, whatever they be, are implicit in the nature and character of the power itself. It being an exceptional and overriding power, naturally it has to be exercised sparingly and with caution and only in special and extraordinary situations. Beyond that it is not possible to fetter the exercise of this power by any set formula or rule20. As regards the second contention, we are in entire agreement with the learnedl when he says that thex Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment undern (3) of section 23 of the Act, thex Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has, in our opinion, been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of, Punjab (Supra)21. In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and, lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. The estimate of the gross rate of profit on sales, both by thex Officer and the Tribunal seems to be based on surmises, suspicions and conjectures22. It is somewhat surprising that the Tribunal took from the representative of the department a statement of gross profit rates of other cotton mills without showing that statement to the assessee and without giving him an opportunity to show that statement had no relevancy whatsoever to the case of the mill in question. It is not known whether the mills which had disclosed these rates were situate in Bengal or elsewhere, and whether these mills were similarly situated and circumstances. Not only did the Tribunal not show the information given by the representative of the department to the appellant, but it refused even to look at the trunk load of books and papers which Mr. Banerjee produced before ther in his chamber. No harm would have been done if after notice to the department the trunk had been opened and some time devoted to see what it contained23. The assessment in this case and in the connected appeal, * we are told, was above the figure of Rs. 55 lakhs and it was meet and proper when dealing with a matter of this magnitude not to employ*civil Appeal NO218 Of 1953, not reported, unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in the custody of, thel Officer, Narayanganj. We think that both thex Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It is thus a fit case for the exercise of our power under article 136.