Case: S.N. Namasivayam Chettiar Vs. Commissioner of Income Tax, Madras

44. Civil Appeals Nos. 219 to 223 relate to the assessment years 1944-1945, 1946-47 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, Madras2. The appellant is a resident and ordinarily resident in India and carried on extensive trade in Colombo in grains, fodder, gram and other food-stuffs for cattle and poultry. For the assessment year 1943-1944 the appellant showed a turnover of Rs. 17,74,825 and a gross profit of Rs. 63,217 which is about 3.5 per cent. For the two previous assessment years the appellants 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. 2,38,831 to the returned income. Thus he raised the turnover to Rs. 20,00,000 and the gross income to Rs. 3,00,000 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 appellants turnover and computed the profits at 15 per cent. on grains imported from India and 12 1/2 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 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 Tribunal for stating a case under S. 66 (1) 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 restedBut 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 S,. 66 (2) of the Act on the same four questions of law. This applications was dismissed by the High Court on February 26, 1953. Against this order 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, 19513. 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 1946-1947 the appellant disclosed a turnover of Rs. 10,35,748 and Rs. 5,98,728 respectively and the gross profits rates were 10.7 per cent. and 8.7 per cent. respectively. As the books of accounts in regard to these years also were rejected, the Income-tax Appellate Tribunal applied S. 13 and estimated the gross profit rates at 12 1/2 per cent, and 10 per cent for the respective years. The appellant applied to the Tribunal under S. 66 (1) 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 the 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 1/2 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 figureThe Tribunal dismissed the application on January 15, 1954. The appellant did not apply to the High Court under S. 66 (2) 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 S. 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 S. 13 of the Income-tax Act.

Reasoning: 5. It was rightly argued that the power to compute profits under the proviso to S. 13 arises only where no method of accounting has been regularly employed by the assessee and where the method employed in such that the income, profits and gains 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 Income-tax 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 had regularly employed a method of accounting it can be discarded under the proviso if the method does not show correct profits of the yearAfter giving this finding the Tribunal accepted the turnover as shown in the appellants 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 12 1/2 per cent. It was on this material that the Tribunal adopted the figure of profit as estimate 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 cent8. 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 purchases 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 15.8 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 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 conclusion12. 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 i.e., 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 dismissed13. 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 assessment appeals and, as we have dismissed those appeals, these appeals also must be dismissed.