Newton Chikli Collieries Ltd. vs Commissioner Of Income-Tax, Madhya...

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 19 October, 1960

Coram: J.C. Shah, S.K. Das

The case titled Newton Chikli Collieries Ltd. versus Commissioner of Income‑Tax, Madhya Pradesh, was reported as decided on 19 October 1960. The judgment was authored by S K Das and the bench comprised Justice J C Shah and Justice S K Das. Messrs Newton Chikli Collieries Limited, a private company incorporated under the Indian Companies Act, appeared as the assessee appellant. The company was engaged in the extraction of coal from a group of mines known as the Newton Chikli Collieries. Until January 1946 the controlling shareholding in the company rested with certain Europeans, and Mrs Jackson served as managing director up to that date, after which K C Shah assumed the position of managing director. For the assessment year 1949‑50, which corresponded to the accounting year ending 31 December 1948, the company was assessed under both the Income‑Tax Act and the Business Profits Tax Act. In the course of that assessment the Income‑Tax Officer added back a sum of Rs 50,000 on the basis that the amount recorded under the head “wages and salaries” had been excessively inflated. The company had shown wages and salaries of Rs 12,18,409 for the relevant year, whereas the preceding year reflected Rs 8,04,766. The assessing authority observed defects in the maintenance of the acquittance rolls and wage records and stated: “For such defects as were noticed in the keeping of acquittance rolls and wages record, we are of the opinion that the original addition of Rs 50,000, made by the Income‑tax Officer for inflation in wages was quite sufficient. There was no justification in making a further addition of Rs 2 ½ lakhs.” The assessee subsequently filed an application before the Tribunal under section 66(1) of the Indian Income‑Tax Act, 1922, and section 19 of the Business Profits Tax Act, 1947, seeking a reference of certain questions of law arising out of the Tribunal’s order to the High Court. The Tribunal declined to refer the matters, holding that the finding of wage inflation was a factual determination and thus did not raise any legal question. It may be noted that the request for reference in respect of the business profits tax rested on the same ground as that concerning income tax, both relating to the alleged inflation of wages and the addition of Rs 50,000; consequently the Tribunal saw no need to address the business profits tax assessment separately. The assessee then approached the Nagpur High Court under section 66(2) of the Indian Income‑Tax Act. The High Court directed the Tribunal to state a case on three specific questions of law: (1) whether any material was placed before the Tribunal to support the finding that wages had been inflated; (2) whether any material on record substantiated the estimate of Rs 50,000; and (3) whether the disallowance of Rs 50,000 amounted to a valid deduction from expenditure under section 10 of the Act.

The Tribunal subsequently framed the issues, and by its judgment and order dated 24 February 1955 the High Court addressed the three questions that had been referred to it. The High Court found against the assessee on the first two questions and, as a consequence, also decided the third question against the assessee. After that decision the company obtained special leave to appeal from this Court, and the present appeal was filed in accordance with the leave that had been granted. Counsel for the appellant argued that the High Court had erred in its answers and relied on two principal grounds. The first ground contended that there was no material from which any inference could be drawn that the expenses recorded under the head “wages and salaries” had been inflated by the company in the year of account in question. He pointed out that the Tribunal, in its order dated 20 April 1951, had accepted the explanations offered by the company for the rise in the wage bill, and after accepting those explanations the Tribunal had expressed the opinion that the original addition of Rs 50,000 made by the Income‑Tax Officer was justified, without finding any basis for a conclusion that wages had been inflated. The second ground asserted that the company had not been given an opportunity to explain the alleged defects in the acquittance rolls; consequently, the addition of Rs 50,000 was made without any material basis and, moreover, violated section 23(3) of the Income‑Tax Act. Before examining these two contentions, the Court found it necessary to define the precise scope of the appeal before it. Neither the High Court nor this Court was hearing an appeal against the assessments themselves; rather, the limited question, as before the High Court, was whether any material existed before the Tribunal that could support a finding that wages had been inflated. If such material existed enabling a reasonable inference of inflation, the matter would be concluded. After hearing the appellant’s counsel, the Court agreed with the High Court’s view that material did exist. The counsel had carefully taken the Court through the explanations the company had provided for the increase in wages, referring to the Government resolution of 10 October 1947, the higher cost of cutting coal, the increase in the number of workmen, and the added expense of explosives, kerosene oil and other items that previously had been borne by the workers but were now to be borne by the company in the year concerned. He also highlighted that the Income‑Tax Officer had proceeded on the basis of coal dispatched rather than coal raised during the six‑year period for which a comparative statement had been prepared.

The Court observed that the Income‑tax Officer had based his comparative statement on the quantity of coal that was dispatched rather than on the quantity of coal that was actually raised during the six‑year period under review. When the figures were recalculated on the proper basis of tons of coal raised, the increase in the cost per hundred tons amounted to Rs 715 for the year 1948 compared with Rs 526 for the year 1947. The appellant argued that this rise was still lower than the increase authorised by the Government’s own price‑adjustment order. All of these contentions had been fully examined by the High Court, which nevertheless concluded that the tax authorities possessed material sufficient to infer that the “wages and salaries” head had been inflated. Before the Income‑tax Officer, the sole explanation offered by the assessee for the rise in wage outlays was the effect of the Government resolution dated 10 October 1947. When the officer requested a department‑wise comparative statement of salaries paid each year from 1939, the company failed to produce such a statement and instead submitted a statement merely indicating the increased rates of salary. No documentary evidence was presented to demonstrate how wages had risen between 1939 and 1948. Examination of the monthly acquittance rolls revealed several irregularities: many wage payments were acknowledged by individuals other than the actual payees, and even where the payees were literate, acknowledgments were made by thumb impressions. The company contended that the colliery operated in shifts, so on occasion a workman present at the time of payment might receive another’s wages, and that some entries lacked acknowledgments altogether because they were omitted inadvertently. Whether these explanations were accurate was not decided at this stage. The Court held that the tax authorities’ decision to reject the company’s explanations did not render their finding of wage inflation unsupported by material. The existence of the documents and statements, even if the authorities deemed them unconvincing, constituted material on which a reasonable inference could be drawn. Moreover, the Court found that the refusal to accept the company’s explanations did not transform the factual issue of wage inflation into a question of law. Accordingly, the High Court’s determination on the first question was affirmed.

With respect to the second contention, the Court found that the assessee could not complain that it had been denied an opportunity to be heard as envisaged in section 23(3) of the Act. The company had not complied with the officer’s demand for a comparative statement of salaries paid each year department‑wise from 1939; instead it furnished a statement showing only the increased salary rates, which offered no assistance in ascertaining the actual rise in wages. The company later produced the monthly acquittance rolls of workmen but failed to produce any such rolls for workmen who were paid on a weekly basis, claiming that those rolls did not exist. Section 23(3) does not require that the assessee be given a fresh opportunity to introduce new evidence or explanations for every reason the officer may cite in his order. The Income‑tax Officer had already considered all material the company supplied in response to his notices, as well as material he obtained independently. The appellate authority also examined the company’s explanation that the wage increase stemmed from the Government resolution of 10 October 1947. Since the assessee did not provide the comparative statement sought and the documents it did produce did not clarify the magnitude of the wage increase between 1939 and 1948, the Court concluded that the company’s grievance under section 23(3) was untenable.

In this case the assessee company produced acquittance rolls only for workmen who were paid on a monthly basis and did not produce any such rolls for workmen on a weekly wage basis, claiming that no weekly‑wage rolls existed. The Court observed that Section 23 (3) of the Act does not require that, for every reason the Income‑tax Officer may give for his order, the assessee must be provided an opportunity to present fresh evidence or a fresh explanation. The Income‑tax Officer, however, examined all material that the assessee submitted in response to the notices, as well as any material the Officer obtained independently. The Appellate Assistant Commissioner also took into account the explanations offered by the assessee, including the contention that the rise in wages resulted from the Government resolution dated 10 October 1947. When the Officer directed the assessee to file a comparative statement showing salaries paid each year, broken down by department, from the year 1939, the assessee failed to comply with that request. Instead, it filed a statement that merely displayed the increased salary rates, without offering any evidence of the actual increase that had occurred between 1939 and 1948. The monthly acquittance rolls that were produced revealed several irregularities. Firstly, many payments were acknowledged by individuals other than the actual payees; secondly, even for literate workers, acknowledgments were often made by affixing thumb impressions rather than signatures. The assessee argued before the Court that the colliery operated in shifts, and that on occasion a worker who was present at the time of wage payment might have taken another worker’s wages, thereby explaining the use of another person’s acknowledgment. There were also instances where no acknowledgment was obtained at all. The explanation given for these lapses was that acknowledgments had not been taken due to inadvertence. The Court noted that it was not required at this stage to determine whether those explanations were correct. The fact that the income‑tax authorities chose not to accept those explanations as satisfactory did not convert the finding of wage inflation into a finding unsupported by material. The necessary materials existed; the only issue was that the authorities did not accept the explanations provided by the assessee. The Court held that the refusal to accept the assessee’s explanations did not transform a factual question of wage inflation into a question of law, and therefore affirmed the High Court’s decision on the first point. Regarding the second contention, the Court found that the assessee could not legitimately complain that it had not been afforded an opportunity under Section 23 (3) of the Act. The assessee had failed to produce the comparative statement that the Income‑tax Officer had requested; the statement it did file merely showed increased salary rates and offered no assistance. Although the assessee later produced the monthly acquittance rolls, it again failed to produce any rolls for weekly‑wage workers, alleging that such rolls did not exist. Consequently, the Court concluded that Section 23 (3) does not oblige the authorities to give the assessee a fresh opportunity to produce new evidence for every reason that underlies the Officer’s order.

The Court observed that the assessee was required to be afforded a chance to present new evidence or a fresh explanation. It noted that the Income‑tax Officer had examined every document and material that the assessee company had submitted in response to the notices, as well as any material that the officer considered independently of those notices. The Court further stated that the Appellate Assistant Commissioner had also taken into account the explanations offered by the assessee concerning the shortcomings identified by the Income‑tax Officer. While the Tribunal had accepted certain explanations as satisfactory, it had nevertheless concluded that the irregularities in the maintenance of the acquittance rolls and the wage records demonstrated an inflation of wages. Accordingly, the Tribunal held that the Income‑tax Officer was justified in adding back an amount of Rs. 50,000 on that ground. The Court explained that this determination of the Tribunal could be interpreted in only one way: it confirmed the existence of wage inflation. Consequently, the Court found it unreasonable for the assessee to claim that it had not been given an opportunity to explain the deficiencies in the acquittance rolls. The Court then turned to the two arguments raised by the appellant, describing them as lacking any merit. It affirmed that the High Court had correctly answered the questions referred to it. As a result, the appeal was dismissed, and the appellant was ordered to bear the costs of the proceedings.