S. N. Namasivayam Chettiar vs The Commissioner of Income-tax, Madras

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

Court: supreme-court

Case Number: Civil Appeals No. 218 of 1955 and 219 to 223 of 1955

Decision Date: 3 February 1960

Coram: J. L. Kapur, M. Hidayatullah

In this case the Supreme Court of India heard an appeal filed by S N Namasivayam Chettiar against the Commissioner of Income‑Tax, Madras. The judgment was delivered on 3 February 1960. The opinion was authored by Justice J L Kapur, who sat with Justice M Hidayatullah. The citation of the decision is 1960 AIR 729 and 1960 S C R (2) 885. The matter concerned the provisions of the Indian Income‑Tax Act, 1922, specifically section 13 and its proviso, the rejection of accounts, the estimation of profits, and the effect of non‑production of a stock register.

The appellant was a resident and ordinarily resident of India who carried on a business of trading grains and other foodstuffs for cattle in Colombo. For the assessment years in question the Income‑Tax Officer refused to accept the accounts that the appellant had produced. The officer disallowed the accounts on several grounds, including the absence of vouchers and the fact that the appellant had neither kept nor produced a stock account or a manufacturing account. Accordingly the officer made an estimate of the appellant’s profits. The appellant appealed the assessment to the Income‑Tax Appellate Tribunal, which affirmed the officer’s view. The Tribunal held that the books produced by the appellant were insufficient to determine the correct profit, and therefore the proviso to section 13 of the 1922 Act applied.

The Tribunal, after considering all relevant factors, computed the appellant’s profit at fifteen per cent on grains imported from India and twelve and a half per cent on grains purchased in Ceylon. In support of this computation the Tribunal observed that in certain other cases that had come to its notice the rates of profit had risen to twenty per cent. The appellant challenged the assessment on two principal grounds. First, he contended that the principle of natural justice had been violated because the Tribunal had considered the profit rates of other cases without giving the appellant an opportunity to explain those cases. In support of this argument the appellant relied on the decision in Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income‑Tax, West Bengal [1955] S C R 941. Second, the appellant argued that the failure to produce a stock register was not a defect sufficient to justify the rejection of his books and the operation of the proviso to section 13.

The Court held that the profit percentages observed in other traders’ cases were not the basis upon which the Tribunal arrived at a conclusion as to the percentage at which the appellant’s income should be computed. Rather, those percentages were merely ancillary support for the Tribunal’s conclusion, and consequently the precedent set in Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income‑Tax, West Bengal, was not applicable to the present case. The Court further observed that maintaining a stock register is of great importance because it provides a quantitative means of verifying the assessee’s accounts. The Court explained that if, after taking into account all the material, including the absence of a stock register, it is found that the method of accounting does not permit the correct deduction of profits, then the operation of the proviso to section 13 of the Act is triggered.

The judgment delivered by Kapur J. recorded that the matter arose from six separate appeals, namely Civil Appeal No. 218 of 1955 and Civil Appeals Nos. 219 to 223 of 1955, each brought by special leave against orders of the Income‑tax Appellate Tribunal, Madras. The first appeal concerned the assessment for the year 1943‑1944, while the remaining appeals dealt with the assessment years 1944‑1945, 1946‑1947 and with the chargeable accounting periods from January 1943 to February 1944 and from February 1945 to February 1946. In every case the appellant was the assessee and the respondent was the Commissioner of Income‑tax and Excess Profits Tax, Madras. The appellant was described as a resident and ordinarily resident of India who conducted extensive trade in Colombo involving grains, fodder, gram and other foodstuffs for cattle and poultry. For the assessment year 1943‑1944 the appellant reported a turnover of Rs 17,74,825 and a gross profit of Rs 63,217, which amounted to roughly three and a half per cent. In the two preceding assessment years the appellant’s gross profits had been nine per cent and eight per cent respectively.

The Income‑tax Officer, by an order dated 20 March 1948, rejected the appellant’s accounts and recalculated the gross profit by adding Rs 2,38,831 to the income declared. Consequently the officer increased the turnover to Rs 20,00,000 and the gross income to Rs 3,00,000, thereby arriving at a profit of fifteen per cent on the estimated turnover. The appellant appealed this assessment to the Appellate Assistant Commissioner, whose decision affirmed the officer’s order. The Income‑tax Appellate Tribunal, by its order of 14 September 1951, after identifying various deficiencies, rejected the appellant’s account books but accepted the turnover figure supplied by the appellant. The tribunal then computed profits at fifteen per cent on grains imported from India and at one‑twenty‑one per cent on grains purchased in Ceylon, concluding that the 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... was also examined. The judgment noted that where the correct profit could not be derived from the books, the operation of the proviso to section 13 of the Income‑tax Act would be attracted. In reaching its conclusion, the Court relied on the authorities Ghansyam Das Peramanand v. Commissioner of Income‑tax (C.P. & Beray, 1952 21 I.T.R. 79), Bombay Cycle Stores Company Ltd. v. Commissioner of Income‑tax (1958 33 I.T.R. 13) and Commissioner of Income‑tax v. McMillan and Co. (1958 S.C.R. 689). The parties were represented by counsel: S. Chowdhuri, N. A. Palkhivala and Naunit Lal for the appellant; H. N. Sanyal, Additional Solicitor‑General of India, R. Ganapathi Iyer and D. Gupta for the respondent. The common issue in all six appeals was whether the proviso to section 13 of the Income‑tax Act applied to the facts and circumstances of each case, and the Court disposed of all the appeals together in a single judgment.

In this matter, the assessment covering the period from 10 February 1942 to 16 January 1943 had been determined on the basis of the income‑tax assessment for the fiscal year 1943‑44. On 21 November 1951, the appellant filed an application before the Tribunal requesting that a case be stated under section 66(1) of the Income‑Tax Act. The application sought answers to four specific questions. The first question asked whether, given the circumstances of the case, the Tribunal was justified in holding that section 13 of the Indian Income‑Tax Act applied. The second question inquired whether the reasons set out by the Appellate Tribunal in paragraph 2 of its judgment were sufficient to invoke section 13 of the Act. The third question concerned whether the Tribunal, having disagreed with the department on the assessment, possessed jurisdiction to apply section 13 and to make an assessment on an alleged estimate. The fourth question asked whether the Tribunal was justified in making an assessment under section 13 without giving the assessee an adequate opportunity to meet the material on which the assessment ultimately rested.

The Tribunal responded on 12 February 1950, holding that no question of law arose in the proceedings and consequently declined to state a case, thereby rejecting the appellant’s application. The appellant then turned to the High Court of Madras, filing an application under section 66(2) of the Act that raised the same four questions of law. The High Court dismissed that application on 26 February 1953. The appellant subsequently sought special leave to appeal against the High Court’s order. With the permission of this Court, the appellant amended the petition so that it also challenged the Tribunal’s order dated 14 September 1951, in addition to the High Court’s decision. In the other appeals that were pending, the sequence of proceedings before the Income‑Tax Officer, the Appellate Assistant Commissioner and the Income‑Tax Appellate Tribunal followed the same pattern as in the present case.

For the assessment years 1944‑45 and 1946‑47, the appellant disclosed a turnover of Rs 10,35,748 and Rs 5,98,728 respectively, and reported gross‑profit rates of 10.7 per cent and 8.7 per cent respectively. Because the books of account for those years were also rejected, the Income‑Tax Appellate Tribunal applied section 13 and estimated the gross‑profit rates at twelve and one‑half per cent for 1944‑45 and ten per cent for 1946‑47. The appellant again applied to the Tribunal under section 66(1) for a case to be stated before the High Court, this time raising two points. The first point asked whether, on the facts and in the circumstances, the department was correct in acting under the proviso to section 13 of the Act despite the absence of a finding that income, profits and gains could not be properly deduced from the books produced or that no regular method of accounting had been employed. The second point asked whether, on the facts and in the circumstances, the department possessed sufficient material to justify the rates of twelve and one‑half per cent and ten per cent gross profit on the total turnover, on the ground that the rates derived from the figures submitted by the assessee would have resulted in a lower figure.

The Tribunal rejected the appellant’s application on 15 January 1954. The appellant chose not to invoke section 66(2) of the Income Tax Act before the High Court; instead, it sought and obtained special leave from this Court to challenge the Tribunal’s order that had applied the proviso to section 13 of the Income Tax Act. All six related appeals were considered together, and the Court was asked to determine whether the Income Tax Appellate Tribunal was justified in invoking the proviso to section 13. The appellant, in Civil Appeals numbered 218, 219 and 221 of 1955, argued that the Tribunal had no authority to apply the proviso and, assuming it did apply, the percentage of profit that the Tribunal calculated was unjustified because it was based on material to which the appellant had not been given an opportunity to respond. The appellant relied on the principle articulated in Dhakeshwari Cotton Mills Ltd. v. The Commissioner of Income‑tax, West Bengal, reported in 1955 I S·C·R 941, where the Court held that a breach of natural justice occurs when the information relied upon by a tribunal is not disclosed to the assessee and the assessee is denied a chance to rebut that material. Such a breach was presented as a ground for interfering with the Tribunal’s order.

The appellant further contended that the power to assess profit under the proviso to section 13 arises only when the assessee has not regularly employed a method of accounting, or when the method employed is such that income, profit and gain cannot be properly ascertained from it. This argument implies that a regularly employed accounting method should ordinarily be accepted, although the Income Tax Officer may resort to the proviso if the method fails to reveal the true profit for the year. In other words, even a regularly used accounting system may be set aside under the proviso if it does not produce an accurate picture of profit. The Appellate Tribunal, by its order dated 14 September 1951, concluded that correct profit could not be deduced from the books produced by the assessee and therefore applied the proviso to section 13. The Tribunal gave several reasons for its finding: (1) vouchers for several purchases made in Colombo had not been produced, and for purchases exceeding Rs 3,00,000 no vouchers were forthcoming, rendering the entries in the account books unverifiable; (2) there was no quantitative tally for the grains and other materials purchased by the appellant, which were ground into powder, turned into fodder, packed in various sizes and then sold, making it impossible, in the Tribunal’s view, to accept the accounts where turnover was about Rs 17 lakhs without such a tally; and (3) a fairly big sum

The Tribunal observed that a substantial sum of money appeared to have been paid for obtaining a licence for export from India, and that purchases amounting to Rs 19,000 were recorded as having been made in Tuticorin while the assessee’s cash balance reflected only a modest amount. It also noted that several cheques issued by outsiders had been entered in the assessee’s books without any documentary proof as to why those cheques were paid to the assessee, and that a considerable amount of money had been invested in the purchase of property in India without any corresponding receipt of funds from Colombo. In view of these irregularities, the Tribunal held that the correct profit could not be deduced from the books presented by the assessee and therefore the proviso to Section 13 of the Income‑Tax Act applied. The Tribunal therefore framed the question as one of estimating the profit. After reaching this finding, the Tribunal nevertheless accepted the turnover shown in the appellant’s books. In computing the profit, the Tribunal considered several relevant circumstances: export of food grains from India was permitted only under a licence; there was an acute shortage of cattle fodder in Ceylon which compelled the appellant to resort to questionable means to obtain grains; for a considerable part of the accounting year there was no price control in Colombo; and the appellant, being a manufacturer of forage that mixed various grains, powdered them and packed them in different weights, was likely to earn higher margins than traders dealing solely in grain. Taking all these factors into account, the Tribunal concluded that a profit rate of fifteen per cent applied to imported grains, but that the same rate was excessive for locally sourced purchases, and consequently reduced the profit rate for local purchases to one‑twenty‑first per cent. On this basis the Tribunal adopted the profit figure estimated by the Income‑Tax Officer. To reinforce its view, the Tribunal added that in certain other cases it had observed profit rates rising to twenty per cent.

The appellant argued that the Tribunal had breached the principles of natural justice by relying on profit rates observed in other cases without giving the appellant an opportunity to comment on those cases, and cited the decision in Dhakeshwari Cotton Mills Ltd. v. The Commissioner of Income‑Tax, West Bengal, where the Supreme Court held that failure to disclose material information to the assessee and to provide a chance to rebut it constituted a ground for interfering with the tribunal’s order. The Court, however, found that no such breach occurred in the present appeal. No information similar to that disclosed in Dhakeshwari’s case had been supplied to the Tribunal, nor had the Tribunal relied upon undisclosed material. Consequently, the Court held that there was no requirement to afford the appellant an opportunity to address the external profit rates, as those references were merely illustrative and not the foundation for the Tribunal’s conclusion or the percentage it applied.

It was observed that no information of the kind mentioned had been supplied to the Tribunal, and consequently there was no requirement to grant the appellant the opportunity that he claimed he was entitled to. The Tribunal, in the present matter, concluded that the method of accounting adopted by the appellant did not allow the correct profit to be ascertained for a number of reasons that had been set out in the earlier discussion. The Tribunal noted that its reference to profits obtained in other cases was made solely to support its conclusion, and that such reference was not the foundation on which the conclusion itself was based, nor was it the basis for arriving at the percentage of profit that was ultimately applied.

In fact, the Income‑tax Officer who also rejected the appellant’s accounts arrived at the same conclusion for comparable reasons. He held that the appellant’s records lacked necessary vouchers, that neither a stock account nor a manufacturing account had been kept or produced, that cheques drawn by other parties had been credited to the appellant’s accounts without any explanation, and that purchases of goods and property had been made by the appellant despite an apparent insufficiency of cash on hand. The Officer further observed that, in other cases where grains were purchased in India and sold in Colombo, the rates of profit were higher, ranging from twenty per cent to thirty‑nine per cent. He therefore computed the profits for the various grains involved in the appellant’s business and found that the average rate of gross profit worked out to fifteen point eight per cent, adding his opinion that the gross profit on fodder should have been even higher. He also took into account the bombing of Colombo in April 1942, which had caused panic in the town and could have prevented the appellant from achieving the same profit margin during part of the accounting year. Based on an estimate of sales of twenty lacs and a gross profit of three lacs, he arrived at a profit rate of fifteen per cent on turnover. It appears that neither the Income‑tax Officer nor the Appellate Tribunal used the profits earned by other traders as a basis for fixing the percentage of income to be assessed; rather, they employed that material for an ancillary purpose. It is therefore extremely doubtful that the orders of either the Officer or the Tribunal would have been different had there been no reference to the rates of profit observed in other cases. In other words, the profits observed in other cases were not the reason for fixing the fifteen per cent profit rate, but only an auxiliary support for that conclusion. Throughout his grounds of appeal, the appellant has stressed the inapplicability of section 13 of the Income Tax Act and its proviso, but he has not raised this particular alleged violation of the principles of natural justice, which has been specifically pointed out before us. In his appeal to the appellate Assistant Commissioner, no objection was taken to the

In this case the Court noted that the Income‑tax Officer had referred to the rate of profits made by other dealers in grains, but that the appellant’s grounds of appeal to the Tribunal did not contain any objection to that reference, and the Tribunal’s own submissions also omitted any such objection. The appellant further failed to raise a specific ground in the application made under section 66(1) of the Income‑Tax Act, and the application under section 66(2) did not appear to raise the matter at all. The High Court order dated 26 February 1953 makes no indication that the issue of the Officer’s reference to other dealers’ profit rates was ever raised before it; the order simply recorded that the appellant’s books of account were defective and that they afforded no data for arriving at the correct profits of the business. The order also referred to the non‑production of invoices and to an unexplained steep fall in profits during the year when compared with the previous years. The High Court found no legal flaw in the Appellate Tribunal’s order that would justify directing the case to be restated. In the special leave petition filed in this Court, the appellant did not make any pointed reference to the material that is now alleged to have been used by the Tribunal without giving the appellant an opportunity to explain that material. An amended petition, permitted by this Court and filed on 28 April 1954, likewise omitted any specific reference to the material that is presently being objected to. Dhakeshwari’s Case (1) cannot, in our opinion, apply to the facts of this case, (1) [1955] I.S.C.R 941. It was then urged that the four reasons given, which we have set out above, could not make section 13 applicable. For the rejection of accounts, several reasons were given by the Appellate Tribunal; one of those reasons was the non‑production of stock registers and manufacturing accounts. This reason was originally put forward by the Income‑tax Officer and adopted by the Tribunal. The appellant submitted that the non‑production of a stock account was not a defect sufficient to entitle the taxing authorities to reject the books and to apply the proviso to section 13. Reliance was placed on the Punjab High Court judgment in Pandit Brothers v. The Commissioner of Income‑tax, Delhi (1). The facts in that case were very different. In that case the Income‑tax Officer added a certain sum to the assessee’s profits on the ground that the expense ratio was too high, the profits disclosed were too low, and there was no stock register. The Punjab High Court found that the assessee maintained regular accounts of his purchases and sales and that there was no finding by the Income‑tax Officer that, in his opinion, the income could not properly be deduced therefrom. Khosla, said: “There is no finding that there was material before the Income‑tax Officer to lead him to the conclusion that a proper statement of income, profits and gains could not be deduced from the material placed before him. All he said was that the”

The Court observed that the statement “profits appeared to be somewhat low and there was no stock register” reflected the facts of the earlier case, but noted that in that case the absence of a stock register was not considered a serious defect because the account books had been examined, found correct, and shown the true state of affairs. Consequently, the Court held that the earlier decision could not be taken as establishing a legal principle that the lack of a stock register, which would permit a proper check, was not a serious defect capable of rendering the proviso to section 13 inapplicable. The Court then referred to the Nagpur High Court decision in Ghanshyam Das Permanand v. Commissioner of Income‑tax, C.P. & Berar (2), which emphasized the great importance of maintaining a stock register because it provides a quantitative tally that assists in verifying the assessee’s accounts. The Court explained that in a case such as the present one, if, after considering all the material—including the absence of a stock register—it is concluded that the accounting method does not enable deduction of the correct profits of the business, then the operation of the proviso to section 13 of the Income‑tax Act would be attracted, as held in Bombay Cycle Stores Company Ltd. v. Commissioner of Income‑tax (1). The Court also cited its own earlier decision in Commissioner of Income‑tax v. Mac Millan & Co. (2), stating that even when the Income‑tax Officer accepts the assessee’s method of accounting, he is not bound by the profit figures shown in the accounts. It is therefore the responsibility of the Income‑tax Authorities to examine all material placed before them, and if, after taking into account the lack of a stock register together with other evidence, they are of the opinion that correct profits and gains cannot be deduced, they are justified in applying the proviso to section 13. Accordingly, the Court concluded that when the Tribunal applied the proviso to section 13 on the basis of the various deficiencies highlighted by the Income‑tax Officer and accepted by the Appellate Tribunal, there was no error in the Appellate Tribunal’s order that would warrant interference under Article 136. Regarding Appeal No. 220 of 1955 for the assessment year 1946‑1947, the objection was that the Tribunal had erred by relying on an earlier decision of the Tribunal in an identical situation involving the same assessee for previous years. Since the Court had already held that there was no error in the Tribunal’s order concerning the previous years, it found that the Tribunal’s observation was not erroneous. Consequently, that appeal was dismissed. The remaining appeals arising under the Excess Profits Tax Act for the various chargeable accounting periods were dependent on the outcome of the Income‑tax appeals, and as those had been dismissed, the Court ordered that those appeals also be dismissed.

In citing the precedent reported at 33 I.T.R. 13. (2) [1958] 33 I.T.R. 182, 197, the Court observed that the earlier assessment appeals that formed the background of the present proceedings had already been dismissed by the Tribunal. On that basis, the Court concluded that the present set of appeals, which relied on the same factual and legal issues as the earlier dismissed appeals, could not succeed and therefore had to be dismissed as well. The Court accordingly ordered that each of the six appeals pending before it be dismissed in their entirety and that costs be awarded against the appellants. Because the six appeals had been consolidated for determination, the Court directed that a single, unified set of costs be imposed rather than separate cost orders for each individual appeal, thereby simplifying the cost assessment. The Court’s order expressly provided that the consolidated appeals were dismissed together and that the cost liability would be shared collectively by the parties to all six appeals. No further relief or amendment of the assessment was granted, and the matter was concluded with the dismissal of all appeals and the fixation of one set of costs. The Court further indicated that the awarded costs should be paid by the appellants within the period fixed by the procedural rules. This final order brought the proceedings to a complete close.