1961-VIL-96-AP-DT

Equivalent Citation: [1962] 46 ITR 748

ANDHRA PRADESH HIGH COURT

Case Referred No. 30 of 1960

Dated: 21.12.1961

ROYAL MEDICAL HALL

Vs

COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH

For the Assessee : K. Ranganathachari for R. Rajeswararow and M. Venkatarow

For the Commissioner : C. Kondaiah

Bench

Satyanarayana Raju And Kumaraiah, JJ.

JUDGMENT

Kumaraiah, J.

As required by this court, the Income-tax Appellate Tribunal, Hyderabad, bench, has drawn a consolidated statement of the case, agreed to by the parties, and referred it under section 66(2) of the Indian Income-tax Act on the following question:

"Whether, on the facts and in the circumstances of the case, the proviso to section 13 of the Act Should be invoked?"

The reference relates to the assessment years 1952-53, 1953-54 and 1954-55, the relevant accounting period being the years 1951, 1952 and 1953 ending on 30th September of each year. The assessee is a partnership concern carrying on the business of chemist and druggists including dispensing of medicines at Hyderabad. It has a medical store and deals in medicines or retail as well as wholesaled basis. For the period under reference, the assessee's books disclosed a turnover of Rs 2.58, 3.16 and 3.78 lakhs on which the gross profit return was 7.8, 5.6 and 4.5 per cent. respectively. The Income-tax Officer did not accept the gross profits returned and for the various defects discovered in the method employed by the assessee as shown in his order, he was of the opinion that the true income and profits cannot be deducted from the account books. He, therefore, invoked the proviso to section 13 and after considering the assessee's reasons for the low rate of gross profits, estimated the gross profits for the three years in question at 12, 10 and 10 per cent. respectively. The Appellate Assistant Commissioner reduced the gross profit rates to 10, 8.5 and 8.5 per cent. respectively after a careful consideration of comparable cases and also the reasons given by the parties. When the matter came before the Appellate Tribunal, there was a difference of opinion between the Judicial Member and the Accountant Member. While the former held that the application of the proviso to section 13 was not justified, the Accountant Member held otherwise and confirmed the order of the Appellate Assistant Commissioner. The matter was then referred, according to the provisions of the Income-tax Act, to the President of the Tribunal who agreed with the Accountant Member and upheld the order of the Appellate Assistant Commissioner.

The matter now, as per reference, for consideration is whether, under the circumstances of the case, the proviso to section 13 of the Act could be invoked. Section 13 reads thus:

"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 deducted therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine."

Obviously enough, in two cases alone the proviso gives power to the Income-tax Officer to make a computation on such basis and is such manner as he may determine. The one is where he finds that the method of accounting employed is not the one as has been regularly employed by the assessee. The other is where he is of opinion that the method employed is such that the income, profits and gains cannot be deduced therefrom. The power is exercisable on fulfillment of any of the above conditions. So then, even though the assessee may have been employing a single method of accounting regularly, the Income-tax Officer has power to act under the proviso it, in his opinion, the income, profits and gains cannot be correctly deducted from the method employed. It is significant that the opinion of the Income-tax Officer is material under the provision. If, therefore, there is any material on which he could have possibly come to that opinion, his exercise of power will not be open to interference unless it is clear that he has acted arbitrarily or capriciously. That being the position in law, we may now proceed to consider whether there was any warrant for the invocation of the proviso to section 13, on the facts and circumstances of the present case. It is not disputed that the method of accounting followed for the assessment years in question is the one regularly employed by the assessee. The controversy is, therefore, confined only to the question whether the true income, profits and gains can be properly deduced therefrom. The Income-tax Officer in his order has, for the various defects shown by him, come to a definite conclusion that the true extent of gross profits cannot be properly deducted from the accounts maintained. The material on which he came to that conclusion is: (1) that the assessee claims to be both a wholesale and a retail dealer but has maintained one combined trading account in respect of both kinds of sale, notwithstanding that the extent of profits in each case is admittedly different from the other; (2) that the purchases and sales though vouched, the vouchers did not give full details and did not state the quantity of the goods sold; (3) that there are instances where the same medicine was sold, on the same day, at deferent rates, but the assessee did not give explanation for these variations in the sale rates and the lack of information as the identity of the purchasers, etc., rendered it impossible to ascertain the veracity of the entries; and (4) that there was no stock register maintained and the stocks were adjusted in the account on what is known as inventory basis and these were not capable of verification. The cumulative effect of this deficient and defective method, in the opinion of the Income-tax Officer, was that the trust profits could not be deduced therefrom. The Income-tax Officer tried also to verify the margin of profit and he found that the gross profits returned by the assessee as compared to the profits disclosed by the other traders in that line was low. He (the Income-tax Officer) therefore had to resort to the proviso and accordingly computed the profits for the respective years at 12, 10 and 10 per cent. These rates were, however, as already noticed, slightly reduced on appeal by the Appellate Assistant Commissioner whose order was upheld by the majority view of the Tribunal.

The learned counsel for the assessee contends that the defects shown are inconsequential and do not warrant the invocation of the proviso. He has cited Pandit Bros. v. Commissioner of Income-tax [1954] 26 I.T.R. 159 and Bombay Cycle Stores Co. Ltd. v. Commissioner of Income-tax [1958] 33 I.T.R. 13 in support of his contention. But neither of the cases renders any assistance to him. In the first mentioned case, the Income-tax Officer was moved simply by a consideration that the profits as shown were low and that there was no stock register maintained. He failed to satisfy himself that the method employed did not enable him to correctly ascertain the income, profits and gains. He was bound under the statute to come to that opinion, before he could invoke the proviso. It was an essential prerequisite for assumption of power warranted by the proviso. In the absence of such a finding, the power exercised was improper. That is the main point on which the decision of the court was made to rest. Besides, there was also serious defect in the procedure adopted by the Income-tax Officer in that there was no ascertainable basis for his addition to the profits shown by the assessee and this step was inconsistent with the proviso to section 13 which enjoined that the computation should be on the basis which the Income- tax Officer may determine. In these circumstances, it was also held that the exercise of discretion was arbitrary or capricious. We do not, therefore, think that the first case cited can in any way apply to the facts of the instant case.

The same case be said of the other case cited. There the method of accounts employed by the assessee could enable the Income-tax Officer to deduce properly the income and profits. There was, therefore, no occasion for the officer to resort to the proviso. It must be remembered that the assessee is at liberty to adopt any method of bookkeeping. The method employed by him may be one of the well-known or recognised methods in the commercial world or may be a mixture of two or more methods. So long as he regularly adopts one single method and the method so employed enables the Income-tax Officer to deduce the profits, income and gains properly, the income-tax authorities, in the absence of vitiating circumstances, are bound by his accounts, But if, on the other hand, the account books are deficient or defective as a result of which the Income-tax Officer cannot arrive at the true extent of profits, even after considering every single material that is produced before him, his resort to the proviso cannot be open to question. In the present case, as we have already pointed out, the Income-tax Officer had considered all the materials and found that the manner in which the accounts were maintained was so defective and the information was so deficient, that it was not possible for him to discover the true income or profits of the assessee. In such circumstances, the Income-tax Officer has undoubted power of estimating the profits under the proviso to section 13. In Ghanshyamdas v. Commissioner of Income-tax [1952] 21 I.T.R. 79 ; A.I.R. 1952 Nag. 24, the Division Bench of the Nagar High Court consisting of B.P. Sinha C.J. and Hidayatullah J. Observed:

"What enables the officer concerned to resort to the proviso is his own inability to do so on the material placed before him. The system of accounting may be good or bad, but if profit and loss cannot be deduced properly therefrom the proviso can be invoked."

They further observed:

"In every case there must be an exercise of judgment by the officer. Once the judgment has been exercised against the assessee, it cannot be assailed unless it can be demonstrated that the action was not 'judicial' but 'capricious'."

On the question of defects alleged in the method of accounts maintained, the learned judges observed:

"It would thus appear that the question of the sufficiency of the books for the purpose of deducing the profits was gone into, and the department as well as the Tribunal are agreed that the method is such that the profit or loss cannot be properly deduced. There is foundation for this, and the question is whether this court, not sitting as an appellate court, can substitute its own judgment for that of the Appellate Tribunal."

The learned judges refused to interfere on that basis. In S.N. Namasivayam Chettiar v. Commissioner of Income-tax [1960] 38 I.T.R. 579 (S.C.) the Income-tax Officer, in view of serious defects in the method of accounts employed including non-maintenance of stock register, came to the conclusion that the profits cannot be properly ascertained from the books, and resorted to the proviso to section 13. One of the contentions raised was that there was failure of natural justice in that the income-tax authorities had, without giving an opportunity to the assessee to meet the case, taken into account the profits in other cases for coming to a conclusion as regards the proper rate in the particular case. Their Lordships of the Supreme Court held that this was a plea which was never taken before and further the circumstance alleged did not form the basis for computation of the proper rate but was taken into account only to lend support to the conclusion reached. Then their Lordships considered the other objections raised in relation to sufficiency of grounds for rejection of accounts. It was submitted before their Lordships that the non-production of the stock account was not such a defect as to entitle the taxing authorities to reject the books and apply the proviso to section 13 and, for this contention, reliance was placed on Pandit Bros. v. Commissioner of Income-tax [1954] 26 I.T.R. 159. Their Lordships observed that the circumstances of that case were entirely different. Therein, the want of a stock register was not a very serious defect, for the accounts as maintained were found to be correct and disclosed the trust state of affairs. They further observed that there was also a further reason and it was that the Income-tax Officer had resorted to the proviso without giving the finding that the true profits cannot be properly deduced from the account books. Their Lordships, in the course of the judgment, referred to the decision of the Nagpur High Court in Ghanshyamdas Permanand v. Commissioner of Income-tax [1952] 21 I.T.R. 79 ; A.I.R. 1952 Nag. 24, which was to the effect that the maintenance of the stock register is of great importance because that is a means of verifying the assessees' accounts by having a quantitative tally; and if after taking into account all the materials including the want of stock register, it is found that from the method of accounting the correct profits of the business are not deducible, the proviso to section 13 of the Income-tax Act would be attracted. Their Lordship dealing with the power of the Income-tax Officer in the matter observed:

"...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."

Thus the argument in relating to the inconsequential nature of the defects pointed out by the Income-tax Officer did not commend itself to their Lordships. It must be remembered that the jurisdiction of the High Court under the Income-tax Act is largely advisory and the findings of fact by the Tribunal have indeed their finality unless vitiated. In Commissioner of Income-tax v. Calcutta Agency Ltd. [1951] 19 I.T.R. 191 ; [1950] S.C.R. 1008 it was observed that "the jurisdiction of the High Court in the matter of income-tax references made by the Appellate Tribunal under the Indian Income-tax Act is an advisory jurisdiction and under the Act the decision of the Tribunal on facts is final, unless it can be successfully assailed on the ground that there was no evidence for the conclusions on facts recorded by the Tribunal. It is therefore the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. Any departure from this rule of law will convert the High Court into a fact-finding authority, which it is not under the advisory jurisdiction." It is important to note that, in this case, the income-tax authorities and the Appellate Tribunal have taken the view that the method of accounting was defective and deficient and that it was not possible to deduce properly the true profits. This view of the Tribunal cannot be said to be based on no evidence nor can it be assailed on any question of law so that it may be subjected to the advisory jurisdiction of the High Court. That apart, the defects shown are obviously very material. The deficient method employed cannot possibly enable the authorities to assess the true rate of profits. The Appellate Tribunal by its majority had rightly held that, in the facts and circumstances of the case, it was legitimate for the Income-tax Officer to resort to the proviso. It is argued that at the time when the income-tax authorities had rejected the book results and proceeded to make an estimate they did not give a reasonable opportunity to the assessee to explain the circumstances including comparable cases which were taken into consideration. This procedure, it is urged, is opposed to the principle laid down in the two unreported decisions of this court in Siddamsetti Ramanandam v. Commissioner of Income-tax Judgment in R.C. No. 38/1957 dated 5-3-1959 (unreported) and Koduri Butchirajalingam Oil Mills, Warrangal v. Commissioner of Income-tax, Judgment in R.C. No. 39/1959 dated 1-2-1961 (unreported). But this point, if true, does not seem to have been taken at any stage of the proceedings before the Appellate Assistant Commissioner or the Appellate Tribunal. It does not arise out of the reference either. There is no occasion, therefore, to entertain such a plea. The result is that the plea now taken on behalf of the assessee fails. The question referred to is answered in the affirmative. The assessee shall pay the costs of this reference which are fix at Rs 250.

Question answered in the affirmative.