Kamlapat Motilal vs Commissioner Of Income-Tax, Uttar

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 29 January 1962

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

In the matter titled Kamlapat Motilal versus Commissioner of Income‑Tax, Uttar, reported as decided on 29 January 1962, the Supreme Court of India heard the case before a bench comprising Justice J.C. Shah, Justice M. Hidayatullah and Justice S.K. Das, the latter also authoring the judgment. The proceeding before the Court was an appeal by special leave from a judgment and order of the High Court of Allahabad dated 16 July 1956, in which the High Court had addressed a question referred to it under section 66(1) of the Indian Income‑Tax Act, 1922, concerning the appellant‑assessee. The specific question posed was whether the Appellate Assistant Commissioner was legally justified in issuing a notice under section 28 of the Income‑Tax Act in the circumstances of the case, particularly with regard to the item of Rs 76,836.

The appellant‑assessee is a partnership firm that operated a sugar mill at Cawnpore and was engaged in the manufacture of sugar by converting gur into refined sugar. For the assessment year 1942‑43, whose accounting period ran from 1 October 1940 to 30 September 1941, the firm filed a return of income, upon which the concerned Income‑Tax Officer made an assessment on 30 November 1944. In that assessment the officer added two separate sums to the income of the assessee: Rs 63,954 and Rs 76,836. The first sum, Rs 63,954, represented the market value of goods that were in the factory undergoing conversion from gur to sugar at the end of the accounting year. The firm's return had omitted any mention of this stock of “goods in process.” The officer determined that at the close of the relevant year the unrecorded stock comprised 7,956 maunds, while the stock at the beginning of the year was 850 maunds. The difference of 7,106 maunds was valued at Rs 9 per maund, resulting in the addition of Rs 63,954.

The second sum, Rs 76,836, was added back on the ground that the amount had been incorrectly shown as an expenditure for excise duty in the account year, whereas the sales that gave rise to that duty had occurred in the preceding year. Because the assessee maintained its books on the mercantile system of accounting, the officer held that the excise duty should have been debited as an expense in the earlier year, not in the year under assessment. The assessee therefore appealed to the Appellate Assistant Commissioner regarding both of these additions, advancing several points in support of its case, the substance of which need not be recited here. The Appellate Assistant Commissioner rejected the arguments advanced by the assessee and dismissed the appeal by his order dated 8 July, thereby confirming the additions made by the Income‑Tax Officer.

On 5 July 1946 the Income‑tax Officer issued a notice to the assessee under section 28(3) of the Income‑tax Act. The notice required the assessee to show cause why a penalty prescribed in subsection 28(1)(c) should not be imposed, on the allegation that the assessee had concealed or deliberately supplied inaccurate particulars of its income. The notice specifically pointed to two matters: first, that a stock of “goods in process” amounting to 7,106 maunds had not been accounted for in the returns; and second, that an amount of Rs 76,836, representing excise duty payable for a different assessment year, had been debited against the profits of the year under consideration. The assessee responded to the notice on 22 July 1946, submitting a written explanation of the facts. The Appellate Assistant Commissioner examined the explanation and, by an order dated 21 January 1947, rejected the assessee’s submission and imposed a penalty of Rs 50,000 under section 28(1)(c). Dissatisfied with both the assessment order that had been confirmed by the Appellate Assistant Commissioner and the penalty order, the assessee appealed to the Income‑tax Appellate Tribunal. The Tribunal, in its order dated 7 August 1947, re‑examined the valuation of the 7,106 maunds of “goods in process” and held that the appropriate rate should be Rs 6 per maund rather than the Rs 9 per maund fixed earlier by the Income‑tax Officer and affirmed by the Appellate Assistant Commissioner. Consequently, the assessed amount of Rs 63,954 was reduced to Rs 42,636. Regarding the Rs 76,836 excise duty, the Tribunal agreed with the Income‑tax Officer that the amount was not an expenditure of the year of account before it, but nevertheless recognised it as a legitimate business expense that ought to have been allowed in the year to which it actually related. The Tribunal therefore directed, under section 35 of the Income‑tax Act, that the excise duty of Rs 76,836 be adjusted as an allowable expenditure for the earlier assessment year of 1941‑42. In addition, while the Tribunal affirmed that the penalty under section 28(1)(c) was properly imposed, it reduced the quantum of the penalty to Rs 43,000.

Subsequent to the Tribunal’s order, the assessee moved the Tribunal seeking a reference of three questions of law that it claimed arose from the Tribunal’s decision. One of those questions, identified as question No 3, had already been set out at the beginning of the present judgment and had been referred to the High Court. The remaining two questions were: (1) whether, owing to the finding that the stock of sugar in process had never been shown in the accounts under section 13 of the Income‑tax Act and that the value of the closing stock of sugar in process for the preceding year (i.e., the 850 maunds of opening stock) had been deducted in computing the profits of the previous year, a penalty under section 28 of the Income‑tax Act could be imposed; and (2) whether, in view of the finding recorded by the Tribunal under section 31(4) of the Income‑tax Act in I.T.A. No 1200 of 1946‑47 and dated 17 August 1947, it was legally necessary to produce any further evidence beyond that finding and the applicant’s books of account, given that the finding was legally binding on the parties. The Tribunal refused to refer these two questions to the High Court, holding that they concerned findings of fact rather than questions of law. However, by an order dated 21 October 1948, the Tribunal later held that all three questions were modified from its original order and that the third question,

The assessee raised two specific questions for consideration. The first question asked whether a penalty provided for under section 28 of the Income‑tax Act could be imposed when the tribunal had found that the value of the closing stock of sugar in process for the preceding year – which amounted to 850 maunds of opening stock of sugar in process – had been deducted in computing the profits of that earlier year. The second question concerned whether, in view of the finding recorded under section 31(4) of the Income‑tax Act in Income‑tax Appeal No. 1200 of 1946‑47 and set out in the tribunal’s order dated 17 August 1947, it was legally necessary to produce any additional evidence beyond that finding and the applicant’s books of account, given that the finding was legally binding on the parties. The tribunal declined to refer either of these questions to the High Court, reasoning that they related to factual findings rather than questions of law. Subsequently, by an order dated 21 October 1948, the tribunal modified its original position and held that all three questions – including the third question previously discussed in this judgment – should be treated as questions of law. The third question concerned whether the Appellate Assistant Commissioner possessed the legal authority to issue a notice under section 28 of the Income‑tax Act when the Income‑tax Officer had not issued such a notice.

Regarding the two questions that the tribunal had refused to refer, the assessee did not invoke the High Court under section 66(2) of the Income‑tax Act. Instead, after the tribunal’s reference of the third question to the High Court, the assessee filed an application under subsections 4 and 5 of section 66, requesting that the High Court also ask the tribunal to state a case on the remaining two questions. The High Court rejected this application and proceeded solely with the third question. It held that the Appellate Assistant Commissioner was legally justified in issuing a notice under section 28 of the Income‑tax Act concerning the amount of Rs 76,836. In the present appeal, counsel for the assessee was unable to demonstrate any error in the High Court’s answer to the third question, which was the only question actually referred. Section 28 authorises the Appellate Assistant Commissioner to act where a person has concealed or deliberately furnished inaccurate particulars of income. The High Court correctly concluded that the commissioner was within his legal right to issue the notice under that provision.

The Court observed that the Appellate Assistant Commissioner was within his statutory authority to invoke section 28 of the Income‑tax Act against the assessee. The Commissioner had reached this conclusion after examining the appeal proceedings and becoming satisfied that the assessee had deliberately supplied inaccurate income particulars. Specifically, the assessee had debited an amount of Rs 76,836 as excise duty, an expense that pertained to a different financial year and therefore could not be deducted from the profits of the year presently under assessment. In the view of the Court, this deliberate misstatement justified the Commissioner’s issuance of a notice under section 28. The Court therefore affirmed that the Commissioner acted lawfully in issuing the notice, and this finding settled the matters raised in the appeal.

The Court then turned to the grievance raised by counsel for the assessee concerning the High Court’s dismissal of the assessee’s petition filed under sub‑sections (4) and (5) of section 66 of the Income‑tax Act. The counsel contended that the first and third questions referred to the Tribunal were inter‑related and that, despite the Tribunal’s refusal to refer the first question, the High Court could have asked the Tribunal to state a case on that question as well. The Court disagreed with this argument. Section 66(4) provides that if the High Court is not satisfied that the material placed before it is sufficient to determine the question, it may remit the case to the Tribunal for additions or alterations. However, this provision does not empower the High Court to request the Tribunal to state a case on a question that the Tribunal never referred because it regarded the question as a pure finding of fact. Sub‑section (4) cannot be used as a substitute for the procedure laid down in sub‑section (2). If the assessee was unhappy with the Tribunal’s refusal to state a case on certain questions, the appropriate remedy was to approach the High Court under section 66(2) within the prescribed time limit. The assessee failed to take that step and instead attempted to bypass the statutory requirement by invoking sub‑section (4), which the Court held to be impermissible. Sub‑section (4) is intended to be invoked only when the record before the Tribunal is incomplete—either because material facts are missing or because the Tribunal has not recorded its conclusions on those facts. While some decisions have held that under sub‑section (5) the High Court may, without introducing new questions, reformulate the questions posed by the Tribunal in order to bring out the real issue between the parties, such a power is contingent on the existence of the same underlying facts. In the present case, the first question concerned a factual finding distinct from the third question, which dealt solely with a point of law regarding the Commissioner’s authority. Consequently, the High Court could not re‑frame the first question, and the grievance was dismissed.

In this matter the Court observed that a High Court may, if necessary, resolve a legal point that is implicit in or encompassed by the question presented by the Tribunal, and may do so without requiring any additional facts to support that point. The Court noted, however, that those considerations were not applicable to the present case. The Court examined the three questions that had been raised and found that the first question was completely different from the third question. The Tribunal had characterised the first question as relating solely to a factual finding. Whether or not the first question was in fact related to the third question, the Court held that it could not be said that the first question was implicit in the third question, nor could the third question be required to be reframed in any other form. The third question, the Court explained, presented a very simple point of law: it asked whether the Appellate Assistant Commissioner was legally authorised to issue a notice under section 28 of the Income‑tax Act to the assessee with respect to the sum of Rs 76,836. The Court observed that this legal point bore no connection with the merits of the case, namely whether the penalty imposed under section 28 was correctly levied on the assessee. Consequently, the Court was of the opinion that the assessee could not raise any grievance against the High Court’s order that had rejected the petition filed under sub‑sections (4) and (5) of section 66. The Court further held that those sub‑sections offered no assistance to the assessee in the present circumstances. Accordingly, the appeal was dismissed. In view of the circumstances, the Court ordered that no costs be awarded.