TMI Blog1966 (5) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Tribunal, on an application made before this court the Tribunal was asked to state a case. The Tribunal has thus stated the case and referred the following two questions of law for opinion to this court : "(1) Whether, on the facts and circumstances of the case, the proviso to section 13 of the Income-tax Act is attracted ? and (2) Whether there was any material on the record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee ? " This is the subject-matter of Income-tax Reference No. 8/64. Both these references have been argued together and we propose to give our opinion to the three questions by one consolidated order. The assessee is a limited company engaged in the manufacture and sale of bolted tanks, welded tanks, pulleys, steel plates, etc. It also carried on business as the dealer in miscellaneous hardware articles. The business of the company was started on 15th April, 1951, and the first assessment year was 1952-53. The assessment years in question are 1953-54, 1954-55 and 1955-56. Some old machinery were purchased during the accounting period for the year 1952-53. During the accounting year for 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the 1st day of April, 1948, the section 15C will not be applicable to this undertaking. " Industrial undertaking " has not been defined anywhere in the Income-tax Act. Section 15C(1) will apply to all undertaking unless it is an undertaking formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948. It is not the case where the assessee-industry was formed by the splitting up or the reconstruction of business already in existence. The Tribunal has held that this section will not apply to the assessee as it has been formed by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948. The contention of the assessee is that at the initial stage the industry itself should have been formed by the transfer to a new business of building, machinery or plant used in the business. The Tribunal held that there is no dispute that the undertaking started its manufacturing operation by purchasing old machineries. There is also no dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears that although the assessee was manufacturing various items such as bolted tanks, welded tanks, pulleys, steel plates, etc., there was no daily consumption register or any production register which could afford a check as to the actual production in the assessee's factory from day-to-day. Further, the stock account also cannot be reconciled because the assessee only makes an inventory of the stock at the end of the year of all the goods together. There is no separate stock reconciliation account. " From these observations it is clear that it could not be said that there were no reasonable grounds for the Income-tax Officer to form an opinion that from the method of accounting of the assessee his profits could not be ascertained. The law, so far as section 13 of the Act is concerned, is summed up in the case of Commissioner of Income-tax v. A. Krishmaswami Mudaliar, as follows : " . . . . the expression ' in the opinion of the Income-tax Officer ' in theroviso to section 13 of the Indian Income-tax Act, 1922, does not confer a mere discretionary power ; in the context, it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, however, does not give power to the Income-tax Officer to arbitrarily add to the profits disclosed by the assessee in his return supported by the account books. The power given to the Income-tax Officer under section 13 proviso, cannot be equated with the power given to him to make best judgment assessment under section 23(4) of the Act. It will be convenient to refer to the case of Seth Nathuram Munnalal v. Commissioner of Income-tax. In this case the second question referred to was as follows : " If the answer to this question is in the affirmative, is there any material on record to warrant the estimate of the profits at the several rates adopted in this case ? " Dealing with this question it was observed that the statement of the case is not satisfactory. This was evidently due to the view of the Appellate Tribunal that the assessment was a leap in the dark. It was held that as the trading profits could not be properly doduced from the account books for want of opening and closing stocks, the proviso to section 13 was attracted ; but that did not entitle the Income-tax Officer to reject the books, as unreliable. If the assessee fails to satisfy the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer which was different from the one adopted by the assessee. Reference may also be made to the case of Pandit Bros. v. Commissioner of Income-tax. The reference should thus be answered accordingly. NAYUDU J. -The facts of the case have been set out in the judgment of the Chief justice and, therefore, need not be repeated. I am in agreement with the answers proposed by the Chief Justice to question No. 1 in Ref. No. 1/63 and question No. 1 in Ref. No. 8/64. I regret I am unable to agree with the conclusion reached in regard to and the answer proposed to question No. 2 in Ref. No. 8/64. I am clearly of opinion that the answer to this question should be in the affirmative and not in the negative. The two questions referred to the High Court for opinion are as follows : " (1) Whether, on the facts and circumstances of the case, the proviso to section 13 of the Income-tax Act is attracted ? and (2) Whether there was any material on the record for the basis adopted by the Income-tax Officer or the Tribunal for computing the income of the assessee ? " As already pointed out, I am in agreement with the Chief Justice that the answer to question No. 1 above s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified the fixation of the assessable income made by the Income-tax Officer. That this is the correct position of law has been laid down by a Division Bench decision of this court, to which I was a party, in Civil Rule No. 1(M) of 1966, wherein the following observations were made and may be quoted with advantage : " It is not for this court to enter into the merits and sit in judgment over the correctness of the decision made, so long as there is some material before the Tribunal as well as the Income-tax Officer, from which the disputed assessment could be said to have been made. " In the Privy Council decision in Feroz Shah v. Income-tax Commissioner, their Lordships of the Privy Council took a similar view, when they observed that the only judicial determination that was open to them to make, was " whether there was any evidence before these officers, upon which they might so find ? " and the test their Lordships set themselves is contained in the following sentence in the judgment : " In these circumstances it is in their Lordships' judgment, impossible to say that there was no evidence before the Income-tax Officer ....... " Hence, all that we have to consider is whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrant a higher rate of profits. It is thus clear that there were materials before the Income-tax Officer as well as the Appellate Assistant Commissioner of Income-tax, on which the computation was based. The Tribunal considered that the application of gross profits at the rate of 46.8% and 48%, respectively, for the two years 1953-54 and 1954-55 as determined by the Income-tax Officer and the Appellate Assistant Commissioner, were slightly on the high side, and accordingly reduced the percentage to a figure which would support the addition of Rs. 3,000 for the assessment year 1953-54 and Rs. 10.000 for 1954-55, these figures of Rs. 3,000 and Rs. 10,000 being less than the figures of gross profits that would have to be added, had the percentages determined by the Income-tax Officer and the Appellate Assistant Commissioner been retained. Hence, the mere fact that the Tribunal reduced the figure, which undoubtedly is to the advantage of the assessee, this cannot at all be called into question, when there was material before the Income-tax Officer to support the computation made by him. It would be extraordinary and, to my mind, inconsistent, to say that there was no material to sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 which was confirmed by the Tribunal. It is not disputed that the proviso to section 13 of the Indian Incometax Act, 1922, is applicable to the present case. This section reads as follows : " 13. Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee : Provided that, if no method of accounting has been regularly employed, or if the method employed is such that in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. " It must, however, be noted that although the proviso gives discretion to the Income-tax Officer to make the computation " upon such basis, and in such manner as the Income-tax Officer may determine ", this discretion cannot be exercised arbitrarily. The question to determine in every such case will be whether there is any material for the basis adopted by the Income-tax Officer or the Tribunal, as the case may be, for computing the income of the assessee. The material which is irrelevant or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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