Bhikaji and Sons vs Commissioner, E.P.T.

Jaganmohan Reddy, J.—We had by our order dated 7-8-1952, directed the Commissioner, Excess Profits Tax, to state a case upon the following question, viz.,

Whether in computing the capital employed in the business the Excess Profits Tax Officer was not bound to take into consideration the profits as defined in Sub-section 17 of Section 2 read with Section 6 and Sen. I, Excess Profits Tax Regulations and determine the said average amount of capital in accordance with Rule 4 of Sch. II.

The Excess Profits Tax Commissioner has in compliance with our orders have stated a case.

The facts as appear from the statement of the case are that the Petitioner Bhikaji & Son:; owned an oil mill at Warangal with nine expellers two of which were added during the year. The said firm carried on business in the purchase of groundnuts from which it obtained Kernel which in turn was crushed into oil and cake and then sold. The firm owned a country oil mill at Yellandu with two expellers, one of which was added during the year. The business at Warangal was carried on under the style of Bhikaji & Sons and that at Yellandu in the name of E.B. Nakra & Sons Oil Mills. In addition the Petitioner had at Yellandu bus service as well as a provision shop.

In compliance with the notice u/s 13(1), Excess Profits Tax Act the Petitioner made a return for the fourth chargeable accounting period declaring a profit of Rs. 1,31,648/- from all these businesses. Adjusting a sum of Rs. 51,430 on account of standard profits arrived at by taking into account the increase in the ''average amount of capital over that in the standard period it admitted an excess profit of Rs. 80,218 for the year in question. The Excess Profits Tax Officer called for the account books u/s 13(2) of the Act and examined them. He found that no manufacturing accounts were maintained and therefore the correctness of the yield kernel estimated by the Petitioner at 71.45 per cent, and the yield of oil admitted at 42.24 per cent at Warangal and 40.5 per cent, at Yellandu could not be verified. For the reasons set out in his order the Excess Profits Tax Officer estimated the yield of kernel and oil at 74 per cent, and 42.8 per cent respectively. He further found that the foundry at Warangal alleged to have been sold to one Mr. J.H. Noria actually belongs to the Petitioner. In the circumstances he refused to accept the profits returned and computed the same at Rs. 2,63,020.

On appeal the Deputy Commissioner reduced the, profits from Rs. 2,63,020 to Rs. 2,06,408 by giving relief�s in various items such as yield of kernel and the value of the deficit yield of oil etc. From the order of the Deputy Commissioner the Petitioner filed a petition under Sections 20 and 48(3), Excess Profits Tax Act seeking a revision of the orders of the Excess Profits Tax Officer and the Deputy Commissioner and in the alternative, to state a case to the High Court in respect of certain alleged questions of law relating to-

(i) clubbing of foundry business with the Petitioner''s business;

(ii) disallowance of salary of Rs. 6,000 paid to the manager of the foundry;

(iii) estimate adopted by the Excess Profits Tax Officer with regard to the yield of kernel and oil; and

(iv) not considering the Assessed profits in computing the average capital.

The Commissioner had, after considering the petition u/s 20. Excess Profits Tax Act, allowed relief in respect of yield of oil by reducing it from 42.8 per cent to 42.5 per cent as claimed by the Petitioner which resulted in the assessment being reduced by Rs. 17,193. He also allowed Rs. 2,000 representing audit fees claimed by the Petitioner. In this way, the profits were thus further reduced to Rs. 1,87,215. The Commissioner considered the petition u/s 48(3) but refused to state a case on the ground that none of the points raised therein involved any question of law.

The Commissioner in his opinion has submitted that the contention of the Petitioner, that in computing the average amount of capital in accordance with Rule 4 of Sch. II, the Excess Profits Tax Officer should have added half the profits as determined by the Taxation Authorities and not half the profits as admitted by the Petitioner in his books is not justified inasmuch as the additions ''made by the Taxation Authorities are two-fold in their character:

(i) Additions required to be made in pursuance of the provisions contained in Rule (1) of Sch. I of the E.P.T. Act such as the revaluation of the closing stock, disallowance of items of capital expenditure charged to revenue account.

(ii) Additions required to be made on account of secreted profits not brought to books such as the cost of difference between the yield of seed and oil as worked out by the Excess Profits Tax Officer and the Petitioner.

The Commissioner says that a sum of Rs. 39,750 has been computed as secreted profits which have been brought into the profits of Rs. 1,87,215, representing the differences between the yield of seed & oil as worked out by the Petitioner & E.P.T.O. He further says that even assuming without admitting that such secreted profits are included in the profits as defined in Sub-section (17) of Section 2, E.P.T. Act, the effect of such profits in ascertaining the average amount of capital is governed by the Rule 4 of Sch. II, which reads as follows:

For the purposes of ascertaining the average amount of capital employed in a business during any period the profits or losses made in that period shall, except so far as the contrary is shown be deemed.

(a) to have accrued at an even rate throughout the period; and

(b) to have resulted as they accrued, in a corresponding increase, as the case may be, in the capital employed in the business.

The presumption raised by the above rule is according to him rebutted.

Lastly he submits that if the sum of Rs. 39,750 which according to him has been computed as secreted profits is deducted from the profits of Rs. 1,87,215, it would be found that the profits actually utilised work out to Rs. 1,47,465/- which is less than the profits declared by the Assessee and which have been treated as profits utilised in the business for the purposes of working out the average amount of capital.

These contentions of the E.P.T. Commissioner are challenged by the Applicant''s Advocate who points out that under Rule 4 of Sch. II corresponding to Rule 5 of Sch. II, Indian E.P.T. Act a presumption is raised in his favour that profits computed in accordance with the Act have been utilised evenly in the business, for purposes of computing the average amount of capital employed in the business. The learned (sic) for the Department does not dispute this presumption of law; but contends that if any profits have been secreted or not utilised in the business during the year or where it can be shown that profits have not been utilised evenly throughout the year, the Assessee is not entitled to get the benefit of that provision.

In support of this contention he urges that the Commissioner''s submission that Rs. 39,750, which according to him are the secreted profits, have not been utilised in the business & ought to he accepted. On examination of these figures, we find prima facie that there is some discrepancy and at any rate no question of secreted profits arises. If Rs. 39,750 is the secreted profits, then this amount should have been added to the book profits declared by the Assessee which would have been the correct compilation of profits earned during the year. The contention that Rs. 39,750 is the secreted profits would save boon correct in relation to the Assessed profits of Rs. 1,87,215 if the book profits declared by the Assessee was Rs. 1,47,465/. But that is not so in this case. I could have understood, if the Commissioner had stated that the secreted profits are the profits which, is the difference between the computed profits of Rs. 1,87,215 and the declared book profits of the Assessee of Rs. 1,59,765, which would amount to Rs. 27,450. This no has not done.

It is true that where profits accrue during the year and they or any part thereof are withdrawn from time to time, they cannot be taken to increase or decrease the capital employed in the business during the assessment year. This is a proposition which cannot be seriously contested by either side. The learned Advocate for the Applicant, however, submits that he is entitled to the benefit of the presumption, which arises in his favour under Rule 4 of Schedule II, Hyderabad E.P.T. Act, namely that the profits or losses made during any period, unless the contrary is shown, be deemed to have accrued at an even rate throughout the period & to have resulted as they accrued in a corresponding increase or decrease as the case may be, in the capital employed in the business. This presumption has to be rebutted by a positive finding of fact by the Income Tax authorities & unless they give such a finding the presumption will operate in his favour and the profits computed under Sch. II are the profits which are deemed to have been utilised in the business at an even rate for the purposes of increase or decrease in the capital employed during the year of assessment in question. We think that this contention is valid. We have been unable to ascertain from any of the orders of the Income Tax authorities any specific finding as to the amounts which have been withdrawn from the business and the period during which they were withdrawn, after they have been earned.

As we have already pointed out, the present contention on behalf of the Income Tax Commissioner that Rs. 39,750 should be deemed to be the secreted profits has no basis. From the statement of the case it clearly appears that because the E.P.T. authorities were not able to verify the yield of kernel and oil, they estimated the yield by reason of which the computed profits have increased in relation to the declared profits. There has been no finding as such of any items of profit being withdrawn or suppressed or secreted. A mere statement by the Commissioner at the stage of an application for reference that a certain sum has been secreted is not in our view sufficient. In the absence of there being no specific finding of the Commissioner or the Income Tax authorities as to the amounts of secreted profits and the particular period during which they were withdrawn, the presumption under Rule 4 of Sch. II operates in favour of the Assessee and the computed profits should be taken into account for working out the average amount of capital employed.

In the case of DEVKARAN NANJEE BANKING CO., LTD. Vs. COMMISSIONER OF EXCESS PROFITS TAX, BOMBAY CITY., Chagla, C.J. at P. 53, after referring to the presumptions arising under Rule 5 of Sch. II, Indian E.P.T. Act observes:

Sir Jamshedji is right in the two contentions that he has put forward. His first contention is that the expression "profits or losses" used in this rule roust be construed to mean "statutory profits" as defined in the Act itself, and the definition of "profits" in the Act is: "Profits" means "profits as determined in accordance with the First Schedule." Profits in this rule cannot mean book profits or actual profits. Sir Jamshedji is also right in his contention that the legislature has laid down an artificial method of determining the profits or losses and also determining the increase or decrease in the capital employed in the business. But the legislature has provided one safeguard and that is that it leaves it open to the Income Tax Department to prove the contrary which would demolish the presumption raised by Rule 5.

As we have already observed in this case, the Income Tax authorities have not rebutted that presumption and as such, the Assessee will be entitled to the benefit of the provisions of Sch. II.

Our answer to the question is in the affirmative. The reference is, therefore, answered accordingly with costs to the Assessee which we fix at Rs. 100.