Parsram Parumal vs Commissioner Of Income-Tax, West

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 7 November 1960

Coram: J.C. Shah, M. Hidayatullah

In this matter, the Supreme Court recorded that the parties were Parsram Parumal and the Commissioner of Income‑Tax, West, and that the judgment was delivered on 7 November 1960 by a bench consisting of Justice J.C. Shah and Justice M. Hidayatullah. The Court noted that two separate appeals had been presented under the special‑leave provision of article 136 of the Constitution. The first appeal, numbered 407 of 1958, challenged an order issued by the Income‑Tax Appellate Tribunal, Calcutta Bench, on 7 December 1955, which had refused to state a case under section 66(1) of the Indian Income‑Tax Act, 1922. The second appeal, numbered 408 of 1958, contested a judgment of the High Court of Judicature at Calcutta dated 22 March 1957, which had summarily dismissed an application made under section 66(2) of the same Act seeking a direction that the Appellate Tribunal should state a case. Both appeals were granted special leave that was expressly limited to the question concerning the “transactions in sovereigns only.” Consequently, although numerous issues had been raised during the assessment proceedings before the tax authorities, the Court confined its consideration to the transactions involving sovereigns conducted from the appellant’s Bombay branch and excluded all other matters.

The appellant’s business was engaged in dealing with gold, silver and other commodities, and its head office was situated in Calcutta. For the accounting years corresponding to Samvat 2002 and 2003, which spanned from 4 November 1954 to 23 October 1946 and fell within the assessment year 1946‑47, the appellant also operated branch offices in Bombay, Karachi and other locations. During the relevant year of account, the appellant purchased a total of 1,80,997 sovereigns at its Bombay branch. Of these, 1,66,188 pieces were dispatched to the Karachi branch, 14,309 pieces were sold locally in Bombay, and 500 pieces were sent to the Calcutta office. The Income‑Tax Officer (Non‑Companies, I.T. cum. E.P.T.), District Calcutta, assessed the transactions in sovereigns and assessed a tax liability of Rs 56,901. The appellant contended that the 1,66,188 sovereigns sent to Karachi were transferred at cost price to the Karachi office and were therefore not sold, and that the sale of 14,309 pieces in Bombay generated a profit of Rs 6,462‑4‑0. To support this position, the appellant produced the journal of the Bombay branch that recorded the dispatch of the 1,66,188 sovereigns to Karachi, together with the commission and transport charges incurred. The appellant also submitted his “Noondh,” a register that detailed the transactions as entered in the books. The Income‑Tax Officer, however, observed that the gross profit of Rs 6,462 shown on the total sales amounting to Rs 1,13,80,331, representing a profit rate of merely 0.06 percent, was unusually low. He noted that no cash memos were available for either purchase or sale, and that when the appellant was asked to provide the addresses of the parties involved in the purchases and sales, the appellant claimed an inability to do so. The Officer further remarked that most of the sales appeared to have been made to the Karachi office and, as a result, the margin of profit was likely to be much less.

The Income‑Tax Officer proceeded to estimate the profit on the total sales of sovereigns at a rate of 0.5 percent, arriving at Rs 56,901. After deducting the amount of Rs 6,492 that the appellant had returned as his profit, the Officer added Rs 50,409 to the sovereign account as taxable income arising from the transactions in sovereigns carried out by the Bombay branch. The appellant appealed this assessment, and the Appellate Assistant Commissioner, Calcutta, affirmed the Officer’s order. In his confirming order, the Commissioner noted that the appellant’s representative had argued that the Income‑Tax Officer had wrongly rejected the profit claim because, out of the total 1,80,997 sovereigns purchased, 1,66,188 pieces had been sent to the Karachi office on commission, 500 pieces had been transferred to the Calcutta office at cost price, and the remaining 14,309 pieces had been sold to well‑known bullion merchants in Bombay. The representative also explained that cash memos and vouchers for the purchase and sale transactions were unavailable because it was not the customary practice in Bombay to maintain such documents. The Commissioner, however, observed the circumstances and affirmed the assessment as recorded.

The Income‑tax Officer had estimated the profit on the total sales of sovereigns at a rate of five‑tenths of one per cent, giving a profit figure of Rs 56,901. After deducting from this amount the Rs 6,492 that the appellant had returned as his profit, the officer added Rs 50,409 to the sovereign account as taxable income arising from the transactions carried out by the Bombay branch. The appellant challenged this assessment and appealed to the Appellate Assistant Commissioner in Calcutta. The Commissioner confirmed the officer’s order and made several observations. He noted that the appellant’s representative had claimed the officer had wrongly rejected the profit because, out of the total 1,80,997 sovereigns purchased, 1,66,188 pieces had been sent to the Karachi office on commission, 500 pieces had been sent to the Calcutta office at cost price, and the remaining 14,309 pieces had been sold to well‑known bullion merchants in Bombay. The representative also stated that cash memos and vouchers for these purchase and sale transactions were not available, since it was not the practice in Bombay to maintain such documents. The Commissioner, however, observed from the books of accounts that the assessee had failed to record the addresses of the parties with whom the transactions were made, rendering any verification impossible, and that the sales appeared to have been mostly cash transactions. In view of these facts and the very low rate of gross profit, the Commissioner considered that the Income‑tax Officer was justified in refusing to accept the trading result shown. He further remarked that, because there was no supporting evidence regarding the actual number of sovereigns transacted, he could not accept the appellant’s contention that the low profit margin was fully explained by the facts presented. The Commissioner found the officer’s estimate of a five‑tenths of one per cent gross profit rate to be reasonable, noting that the assessee had made considerable sales to the Karachi office. Dissatisfied with this decision, the appellant filed an appeal before the Income‑tax Appellate Tribunal. The Tribunal, citing paragraph 8 of its judgment, rejected the appellant’s contention, stating that “for the reasons given by the Appellate Assistant Commissioner with regard to the sovereign account in the Bombay branch, we find no reason to interfere in his decision.” Subsequently, the appellant applied to the Tribunal for a reference of certain questions to the Calcutta High Court. One of the questions, numbered 2, was framed as follows: “Whether, in the facts and circumstances of the case, the Tribunal should not have held that the turnover in Calcutta and its branches, on which the flat rate is to be applied, should be computed after deducting from it the sum of Rs 1,47,98,413 admittedly found by the Income‑tax Officer to have been transferred to Karachi from Calcutta and the various branches?”

After the Tribunal declined the appellant’s request, the appellant turned to the High Court at Calcutta and asked that the Tribunal be instructed to provide a statement of the case on three specific questions. One of the questions presented to the Tribunal concerned the sovereign account and was phrased as follows: “Whether there was any material to hold that the Bombay branch of the petitioner sold 1,66,188 pieces of sovereign to the Karachi branch at market rates?” The High Court, however, dismissed the appellant’s application in a summary manner.

The proceedings before the income‑tax authorities showed that the appellant’s contention was not properly understood. The memoranda of appeal filed before the Appellate Assistant Commissioner and the Appellate Tribunal contained lengthy and somewhat vague grounds, which failed to articulate the appellant’s true position clearly. Moreover, the question referred to the Tribunal differed from the question on which the High Court was urged to order a statement of case. The question presented to the Appellate Tribunal was considerably broader in scope than the question presented to the High Court. Despite these procedural shortcomings and the unclear contentions, the Court observed that a question of law nevertheless arose from the Tribunal’s order.

The Income‑Tax Officer, as previously noted, had observed that in the relevant financial year the appellant had transferred 1,66,188 sovereign pieces to his Karachi branch and had sold 14,309 sovereign pieces in the local Bombay market. The officer estimated the gross profit at a rate of 0.5 percent on an assumed total turnover of Rs 1,13,80,331. The appellant argued that he owned both the Bombay and Karachi branches and that the transfer of sovereigns to the Karachi branch was merely a dispatch, not a sale. He further maintained that a commission charge of two annas per Rs 100, which was recorded in a separate account, should not be treated as profit and was therefore excluded from the Rs 6,464‑4‑0 disclosed as profit from sales in the Bombay branch. According to the appellant, the disclosed profit arose solely from the local sale of 14,309 pieces.

Representing the department, counsel contended that even if the dispatches from Bombay to Karachi were not treated as sales, the effect of the Income‑Tax Officer’s order was to assess profit on the local Bombay transactions. Counsel argued that this approach was necessary because the Bombay branch’s books of account were unreliable and the appellant’s evidence regarding prevailing market rates was unsatisfactory. The Court rejected this line of reasoning, holding that the Income‑Tax Officer had computed gross profit at a uniform rate on all transactions, including both the dispatches to Karachi and the local sales in Bombay, treating them all as sales.

The Court observed that the Income‑tax Officer had calculated the gross profit on all transactions involving sovereigns in the Bombay branch, treating both the dispatches of sovereigns to Karachi and the local sales in Bombay as sale transactions. The order issued by the Income‑tax Officer did not cite any evidence to support his claim that the Bombay branch had sold sovereigns to the Karachi branch. The Appellate Assistant Commissioner had not rejected the appellant’s contention that the sovereigns purchased by the Bombay branch were dispatched to the Karachi branch on a commission basis. The Assistant Commissioner’s criticism regarding the unsatisfactory nature of the evidence related only to the local sales and did not address the dispatches to Karachi. The Tribunal merely accepted the conclusion reached by the Appellate Assistant Commissioner and provided no independent reasons for its own order. Moreover, the income‑tax authorities had not found, by comparing the rates at which sovereigns were debited in the Bombay branch with the rates at which they were credited in the Karachi branch, that any profit had been earned by the Bombay branch. Although the commission account was not incorporated in the printed paper book, it was not suggested, as the appellant’s counsel argued, that the commission represented profit rather than service charges. Consequently, the Court identified a question of law arising from the Tribunal’s judgment that confirmed the Assistant Commissioner’s order. The Court directed the Tribunal to prepare and submit a statement of the case on the specific question of whether there was any material to hold that the Bombay branch of the assessee had sold 1,66,188 pieces of sovereigns to the Karachi branch.

The Court clarified that it was not concerned with the correctness of the rate applied by the Income‑tax Officer to the local sales of sovereigns in the Bombay market; its sole concern was whether there was material to support the contention that the Bombay branch had sold the 1,66,188 pieces to the Karachi branch. Accordingly, the Court held that no order was required in Appeal No. 407 of 1958, while Appeal No. 408 of 1958 was allowed, with costs awarded to the successful party.