Chhabildas Tribhuvandas Shah And Ors. 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: 21 September 1964

Coram: J.C. Shah, K. Subba Rao, S.M. Sikri

In this case the appellant filed a tax return that declared a total income of Rs 78,350 for the assessment year 1954‑55. The Income‑Tax Officer issued an assessment order on 26 February 1958 in which he rejected the trading accounts supplied by the appellant and consequently added Rs 75,000 to the assessed income. The officer explained that the profits shown for the year under review were considerably lower than those of the preceding year and that the accounts did not contain any day‑to‑day stock details that could be used for verification. He also noted that the amounts withdrawn by the partners for personal expenditure were extremely small, specifically Rs 6,900 withdrawn by Shri R. S. Sanghvi and Rs 6,300 withdrawn by Shri C. T. Shah, and he regarded these figures as another indication that the declared profit was unreasonably low.

The appellant challenged the addition before the Appellate Assistant Commissioner. By his order dated 16 October 1958 the Commissioner accepted the appeal and removed the addition of Rs 75,000. However, he observed that the closing stock of Eveready torches had been undervalued by Rs 4,490, and therefore allowed a reduction of Rs 70,510 only. The Commissioner accepted the appellant’s argument that, because the business dealt in hundreds of different items of varying sizes and varieties, maintaining a detailed stock account would be an overly burdensome task. He further observed that if sales made on a commission basis were excluded from the total sales, the average profit margin would rise to about five and a half per cent, a level he considered neither unreasonable nor excessively low. The Commissioner also remarked that the Income‑Tax Officer had failed to cite any precedent showing that the profit margin disclosed by the appellant was higher than that recorded in the books. He found no defect in the accounts, no evidence of suppressed sales, and noted that purchases and sales were properly vouched and that the parties to the transactions were identifiable.

Unsatisfied with this decision, the Income‑Tax Officer appealed to the Income‑Tax Appellate Tribunal. The Tribunal restored the addition that had been made by the Officer, but reduced it by the amount of Rs 4,490 that had been allowed for the undervalued stock.

During the proceedings it was pointed out to the Tribunal that the Appellate Assistant Commissioner had overlooked the fact that in the preceding year goods purchased from the National Carbon Company Ltd. appeared in the respondent’s trading account. If those goods were excluded from the accounts, the profit margin for the earlier year would be 11.3 per cent, compared with the 5.8 per cent margin for the year under dispute, as calculated by the Assistant Commissioner.

The Tribunal then made an observation, stating: “Since

The Court observed that the respondents primarily conducted their business on a wholesale basis, and therefore it should have been straightforward to reconcile the quantities of the major items appearing in the trading account. Because such a reconciliation was not presented, the reduction in the profit margin could not be satisfactorily explained by any proper analysis of the trading account. The difficulty in explaining the margin decline was further increased by the fact that the respondents possessed an import quota valued at approximately Rs. 8,00,000, which should have provided a substantial profit margin. Consequently, the Court was convinced that the proviso to section 13 was clearly applicable to the trading results in this case and, given the nature of the wholesale business and the availability of imported material, the profit margin determined by the Income‑tax Officer appeared reasonable. The assessee then sought a statement of the case from the Income‑tax Appellate Tribunal under section 66(1) of the Indian Income‑tax Act. The Tribunal, by an order dated 19 December 1960, refused the application, holding that its conclusions were essentially findings of fact based on adequate and proper material recorded in the file and that no question of law arose. The assessee subsequently approached the High Court under section 66(2) of the same Act; the High Court dismissed the petition by order dated 3 October 1961. This Court, however, granted special leave to appeal, and the present appeal is now before it for disposal. Counsel for the appellant submitted that the Appellate Tribunal ought to have referred to the High Court the question of law that had been raised by the assessee. The question was framed as follows: “Whether the order of the Tribunal, that the proviso to section 13 was clearly applicable to the trading results in this case, and resorting the addition made by the Income‑tax officer to the extent of Rs. 70,510 is an order made without due consideration of the evidence and relevant materials on record and after considerating materials which are irrelevant to the enquiry or on material partly relevant and partly irrelevant and upon conjectures, surmises and suspicions not supported by any evidence on record or partly upon inadmissible material and such as whether the Tribunal was wrong in restoring the additional should, therefore, be deleted from the assessment.” The counsel further urged that the proviso to section 13 could not be applied to the facts of this case. He explained that the Tribunal had relied on only two grounds for invoking the proviso: first, that the appellant did not maintain a stock register, and second, that the profit for the year was lower than in previous years. He contended that, as a matter of law, these two circumstances could never attract the operation of the proviso. In support of this argument, he relied upon the decision of the Lahore High Court in Pioneer Sports Ltd.

The Court examined the earlier authority of the Lahore High Court in a case styled v. Commissioner of Income‑tax. In that decision the Lahore High Court had ruled that the failure of a company to maintain a stock register and the fact that its profits for the year under review were lower than in preceding years did not, by themselves, justify the Income‑tax Officer in rejecting the total profits reported by the company. The Court noted that an “economic blizzard” which had affected trade during the year 1930‑31 and continued thereafter could adequately explain the reduction in profits. However, the Lahore High Court later dissented in the case of Ganga Ram Balmokand v. Commissioner of Income‑tax, holding that the reliability of the accounts was a factual issue to be decided solely by the Income‑tax Officer. The Court further emphasized that when the Officer provides reasons that are not evidently capricious or judicially unreasonable, the Tribunal could not disturb his finding merely because the material supporting those reasons appeared meagre or insufficient. The next authority cited by counsel was the Punjab High Court decision in Pandit Bros v. Commissioner of Income‑tax. The question referred to that Court was whether an addition could be made to the book profits when no stock account was kept, on the sole ground that the disclosed net profits seemed insufficient compared with total turnover. The Punjab High Court held that low profits merely signalled the Income‑tax Officer to examine the accounts more closely to determine whether any material existed that might indicate falsity in the accounts, and that the absence of a stock register only served as a caution regarding the paucity of the return made by the assessee. The Court observed that the Income‑tax Officer, in comparing the present year with previous years, had merely noted the lower profits. In the present case, the Court found that this decision did not apply to the facts before it because the circumstances and material differed substantially.

The Court then turned to the central issue of whether the finding of the Appellate Tribunal—that the income, profits and gains could not be properly deduced from the method of accounting employed by the appellant—was supported by any material. The Tribunal had offered two principal reasons for its conclusion. First, it observed that the appellant conducted the business mainly on a wholesale basis, a situation in which it would ordinarily be possible to reconcile quantities for the major items of the trading account; the lack of such a reconciliation was presented as a relevant consideration. Second, the Tribunal noted that the margin had fallen sharply and that this decline was difficult to explain given that the appellant possessed an import quota valued at approximately eight lakh rupees, a quota that would normally generate a substantial profit margin because imported goods usually command high margins. Both reasons were identified by the Court as relevant facts. The Court held that these facts constituted material sufficient to support the Tribunal’s finding. Consequently, the Court concluded that there was material in support of the impugned finding of the Appellate Tribunal.

The Court held that there was adequate material to support the finding of the Appellate Tribunal that had been assailed. It emphasized that its examination was limited to the existence of any evidential support for that finding and was not a re‑evaluation of whether the Tribunal’s conclusion was right or wrong. In cases where the proviso to section 13 of the Income‑Tax Act is invoked, the essential question that the Income‑Tax Officer must decide is a factual one: whether the assessee’s income, profits and gains can be correctly derived from the method of accounting that the assessee regularly follows. This question of fact does not present any unusual legal difficulty; the only legal issue that may arise is the question of whether the factual finding is founded on material. The Court observed that the High Court was correct in refusing to order a fresh statement of the case because the issue of materiality could be addressed on the basis of the material already before the Tribunal and the High Court.

Accordingly, the Court concluded that the appeal could not succeed. It ordered that the appeal be dismissed and that the costs of the proceedings be awarded against the appellant. The dismissal of the appeal was therefore confirmed, and the matter was closed with the appellant bearing the costs.