Bombay Hardware Syndicate vs Commissioner of Income Tax

Ramanujam, J.—The assessee in this case is a firm carrying on business in hardware. During the accounting year ending October 23, 1957,

it applied and got a licence from the Chief Controller of Imports and Exports, New Delhi, for importing 205 electric motors under a scheme

formulated by the Government of India for import of electric motors for the use of the agriculturists. Under that scheme the applicant for an import

licence should get requisitions for the supply of electric motors from agriculturists who require motors and send them along with the application for

licence. During the assessment year 1958-59 corresponding to the accounting year ending October 23, 1957, the assessee had sold 198 motors

out of the said imports. It submitted a return of its income for that year showing its total income as Rs. 93,484.

The Income Tax Officer, in the course of the assessment proceedings wanted to find out whether the imported motors had in fact been sold to

the concerned agriculturists for the price mentioned in the relative bills. He, therefore, sent letters to 24 persons to whom the assessee had claimed

to have sold the motors. Of these, the letters addressed to 9 persons were returned by the postal authorities as ""not found"". 11 persons replied to

the effect that they had not been supplied with any electric motors. Two persons stated that they had paid extra money over and above the amount

shown in the bills issued by the assessee. Two others confirmed the transaction with the assessee. As a result of the said enquiry the Income Tax

Officer entertained a doubt as to the genuineness of the bills issued by the assessee. He, therefore, sent a letter to the assessee on February 6,

1960, setting out the nature of the enquiries he had made and requiring the assessee to state whether it wants to cross-examine the persons who

had sent replies adverse to the assessee, and if it so desires, calling upon it to pay the requisite batta for summoning those persons. The assessee

replied by its letter dated October 15, 1960, to the effect that it did not sell any motor for non-agriculturists for a price higher than the one set out

in the bill, that if the Income Tax Officer wants to rely on the statements of some of the agriculturists who had sent replies adverse to it, it is the

Income Tax Officer who has to offer them for cross-examination, and that it cannot pay the batta for those persons whose statements the Income

Tax Officer intends to rely. The Income Tax Officer, thereafter, had to proceed with the assessment on the materials on records.

The Income Tax Officer found that out of the 198 motors sold during the assessment year, 174 were of 10 H.P. and less and the other 24

motors ranged from 15 H.P. to 30 H.P. As the Income Tax Officer was not inclined to accept the return filed by the assessee and the relevant

bills, he proceeded to estimate the sale price of the motors which the assessee had sold during the year. He took the view that as there was very

great demand for imported motors during the year, out of the 174 motors sold by the assessee, half the number could have been sold at a higher

price of Rs. 100 each than the amount shown in the bills. He, therefore, estimated the suppressions in respect of the 87 motors at Rs. 8,700. In

respect of the 15 H.P. motors, he actually found that the assessee itself had billed one S. M. Raju Chettiar in the beginning of the next accounting

year for a sum of Rs. 2,375 while he had shown in the bills rendered in the accounting year the price of the motor at Rs. 1,035. Having regard to

this circumstance the Income Tax Officer took the difference in price at Rs. 1,340 for each of the 5 motors. With regard to eight 20 H.P. motors,

the Income Tax Officer fixed the excess price at Rs. 1,500 per motor. As regards the five 25 H.P. motors he fixed Rs. 2,000 per motor as the

difference in price. With reference to six 30 H.P. motors he estimated the difference in price at Rs. 3,117 per motor. Thus he arrived at the

difference in price for all the 111 motors at Rs. 56,102. As against this amount he took a round sum of Rs. 50,000 as the extra amount collected

by the assessee outside the books on the sale of the 111 motors.

The assessee had claimed to have paid the following amounts to three"" persons for securing the necessary requisitions from agriculturists for the

supply of motors and claimed deduction of the said amount.

Rs.

Thangavelu 2,500

R. S. S. Mani 2,500

Kabir 2,850

During the assessment proceedings the Income Tax Officer examined the said three persons. Thangavelu stated that he purchased for one of his

friends one electric motor and received a commission of Rs. 25. He stoutly denied that he had received a sum of Rs. 2,500 as commission and that

he had passed on a voucher for the said sum. R. S. S. Mani stated that he did not book any orders from the agriculturists and that he did not

receive any commission therefore. Kabir stated that through the influence of his brother, a police inspector in Chingleput District, he booked 100

orders from the ryots in Madurantakam taluk for the supply of pump-sets and those orders were handed over to the assessee and that he received

a sum of Rs. 2,500 as commission for the work done by him. The assessee was given statements of these three persons, but it did not desire to

cross-examine the above three persons but was satisfied with its mere assertion that the commission was in fact paid to the said three persons. At

that stage the Income Tax Officer became aware of a suit, O. S. No. 533 of 1958, filed by one N. Venkatakrishna Reddiar in the City Civil Court,

Madras, claiming commission from the assessee for procuring all the orders from the agriculturists. The Income Tax Officer also came across a

letter written by the assessee to the said Venkatakrishna Reddiar on August 29, 1956, which showed that it is that Venkatakrishna Reddiar who

should have procured the orders from the agriculturists for the supply of motors. The substance of that letter is that the order for the imported

motors had been passed in Delhi, that each person would be receiving a registered letter from Delhi, that Venkatakrishna Reddiar should go to

every village and request the persons to receive the registered letter, that some had signed for two, that they should sign in a similar manner and

accept the registered letter, that in no case these letters should be returned, that Venkatakrishna Reddiar should arrange with the postman to

deliver these letters, that the-obtaining of the signatures in the first instance was not so important, that if the replies were sent they would get all the

motors and that there was nothing to fear if one person signed for three. Relying on these circumstances the Income Tax Officer held that the said

three persons could not have taken part in procuring orders from agriculturists and that they could not have been paid the three sums referred to

above. In that view the Income Tax Officer rejected the assessee''s claim for deduction in respect of the said aggregate sum of Rs. 7,850.

Ultimately, the Income Tax Officer computed the total income of the assessee chargeable to tax at Rs. 1,80,411 as against the total income of Rs.

93,484 returned by the assessee.

The assessee went in appeal before the Appellate Assistant Commissioner. In that appeal the assessee questioned the addition of Rs. 50,000 as

undisclosed profit in the sale of motors as well as the rejection of its claim for deduction of a sum of Rs. 7,850 towards the commission, paid to the

said three parties. The Appellate Assistant Commissioner, however, affirmed the order of the Income Tax Officer in this regard.

There was a further appeal to the Income Tax Appellate Tribunal. Before the Tribunal the assessee contended that the commission of Rs. 7,850

paid to the three persons by names, Thangavelu, Mani and Kabir, should have been allowed as an expenditure incurred by the assessee for

securing the requisite applications from the agriculturists for the supply of motors which is prerequisite for making an application for an import

licence. The Tribunal, however, took into account the statements given by those persons as also the judgment of the Civil Court granting a decree

to Venkatakrishna Reddiar for commission for procuring the applications from the agriculturists and also the letter dated August 29, 1956, sent by

the assessee to Venkatakrishna Reddiar even before the import licence was granted showing that the assessee should have been assisted by

Venkatakrishna Reddiar in procuring the applications from the ryots, and came to the conclusion that no commission had been paid to the said

three persons. It, therefore, upheld the rejection of the claim for deduction by the Income Tax Officer.

As regards the addition of a sum of Rs. 50,000 as undisclosed profits from the sale of imported motors, the Tribunal felt that the income tax

Officer is justified in not accepting the returns submitted and the bills produced by the assessee and making an estimate of the sale price of the

motors imported. The Tribunal also felt that the estimate made by the Income Tax Officer was reasonable. Before the Tribunal it was contended

by the assessee that the assessing officer has erred in acting on the materials which were procured behind its back without giving a reasonable

opportunity to it to counter the same and that it was not correct or proper for the Income Tax Officer to have called upon the assessee to deposit

batta for summoning the witnesses who were, in a manner of speaking, department''s witnesses. This contention was, however, rejected by the

Tribunal on the ground that the Income Tax Officer was not bound by the rules of evidence, though he is bound to act in consonance with natural

justice and that in this case he has given an opportunity to the assessee to explain the material appearing against it but the assessee did not avail of

the opportunity on a technical ground that he is not bound to pay the batta for those persons. The Tribunal ultimately dismissed the appeal so far as

it relates to the above two items. At the instance of the assessee the following two questions have been referred to this court u/s 66(2) of the Indian

Income Tax Act, 1922.

Whether, on the facts and in the circumstances of the case, the Tribunal is right in disallowing a sum of Rs. 7,850 paid as commission to the

three parties ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in confirming the addition of Rs. 50,000 to the business in

imported electric motors ?

The learned counsel for the assessee mainly contends that the Income Tax Officer was not justified in acting on the materials gathered behind the

back of the assessee without giving him an opportunity to rebut the same, and that but for those materials there is no reason to doubt the return

filed and the bills produced by the assessee in relation to the sales of imported motors. The learned counsel refers to the offer made to the assessee

by the Income Tax Officer to cross-examine the persons who had sent replies adverse to it on condition that it pays the necessary batta, and says

that the demand for payment of batta by the Income Tax Officer is not justified and that it is for the Income Tax Officer to offer them for cross-

examination if he wants to rely on their statements for the purpose of assessment.

The materials gathered by the Income Tax Officer are in the form of letters by a number of ryots and of statements given by the three persons

to whom the assessee claims to have paid the commission. In some of the letters it has been stated that the parties paid Rs. 100 to Rs. 150 in

excess of the billed amount. In some of the other letters it has been stated that they applied for certain electric motors and placed orders with the

assessee through Venkatakrishna Reddiar but that the electric motors had not been supplied at all. One of the materials is a letter written by the

assessee to Venkatakrishna Reddiar and this has not been disowned by the assessee. This letter shows that one person had been made to sign two

or three applications for electric motors in different names on the suggestion of the assessee. Further, one of the bills has been issued in the name of

one N. Sundararamanujam for an electric motor of 25 H.P. The said party had sent a reply to the query by the Income Tax Officer that he had not

been supplied with any motor. On a further enquiry the Income Tax Officer found that the motor had been supplied to one Periasami for his use in

the rice mill and that he had paid Rs. 3,117 in excess of the bill amount of Rs. 4,182.28. According to the learned counsel for the assessee those

materials should not have been acted upon by the Income Tax Officer and, therefore, the estimate of suppressed income based on those materials

cannot, in law, be sustained.

Having regard to the peculiar facts and circumstances of this case, we are not inclined to consider here the broader question put forward by

the assessee that statements made to the Income Tax Officer behind the back of the assessee cannot be acted upon without examining the

concerned persons in the presence of the assessee when it has not admitted the truth or correctness of those statements. We are of the view that

the assessment in this case is not entirely based on the materials referred to above. These materials were sufficient to cause a doubt in the mind of

the Income Tax Officer about the truth or correctness of the return filed and the bills produced by the assessee. Once the Income Tax Officer is

not satisfied that the return filed by the assessee is correct and complete, he can always call upon the assessee to produce any evidence on which it

may rely in support of its return. In this case the assessee was given a notice and in that notice it was made aware of the materials appearing against

him and it was asked to prove the correctness of the return. The assessee has chosen to take up a technical stand that it is not bound to call any

witness. This stand of the assessee is not tenable at all. Sub-section (1) of Section 23 of the Income Tax Act of 1922 states that if the Income Tax

Officer is satisfied without requiring the presence of the assessee or the production by him of any evidence that a return made u/s 22 is correct and

complete, he shall assess the total income of the assessee on the basis of the return. Sub-section (2) states that if the Income Tax Officer is not

satisfied without requiring the presence of the assessee who made the return or the production of evidence that a return made u/s 22 is correct and

complete, he shall serve on such person a notice requiring him to produce or cause the production of any evidence on which he may rely in support

of the return. Sub-section (4) proceeds to state that if any person makes a return but fails to satisfy the Income Tax Officer that the return filed by

him is correct and complete, the Income Tax Officer shall make the assessment to the best of his judgment. Therefore, once the Income Tax

Officer entertains a doubt as to the truth and correctness of the return, it is for the assessee to satisfy him by producing the necessary materials. The

assessee cannot say that its obligation stops once it files the return and that the Income Tax Officer is bound to accept its return as it is. In the event

of an assessee failing to establish the truth and correctness of the return, it is open to the Income Tax Officer to reject the return. The power to

reject the return and the evidence in support thereof is inherent and implied in the Income Tax Officer''s power to enquire into the total income of

the assessee. In this case the Income Tax Officer''s enquiry showed that the return filed by the assessee could not be true and correct. Therefore,

he called upon the assessee to substantiate the truth and correctness of the return by cross-examining the persons who gave replies to the Income

Tax Officer adverse to the assessee. But the assessee did not avail of that opportunity but insisted that its return should be accepted. As already

stated, the Income Tax Officer is not bound to accept the return unless he is satisfied about its truth and correctness.

It is well established that the High Court in a reference u/s 66 of the Income Tax Act cannot set aside a finding of fact arrived at by the Income

Tax authorities as altogether vitiated if there is some admissible material to support the finding quite apart from the result of the confidential

enquiries made. In this case the materials gathered by the Income Tax Officer have been referred to only to show that the return submitted by the

assessee cannot be true. Some of the materials have been admitted by the assessee and they can undoubtedly be acted upon by the Income Tax

Officer, One such material is the letter sent by the assessee to Venkatakrishna Reddiar which shows that the assessee was anxious to get an import

licence and how he stooped to procure bogus requisitions for the supply of motors. There is also the undisputed fact that the said Venkatakrishna

Reddiar obtained a decree against the assessee from a civil court for recovery of commission for the part played by him in procuring the necessary

requisitions from agriculturists. There is also the further fact that two out of the three persons to whom the assessee claimed to have paid

commission of various amounts had denied the payment of commission and the assessee when given an opportunity to examine those persons did

not desire to cross-examine them. Further, one of the bills of the assessee showed that the same type of motor had fetched twice the price in the

beginning of the next accounting year when compared with the one billed for in the assessment year. The Income Tax Officer had also taken note

of the very high demand in the market for imported motors. Having regard to the above materials and the circumstances, the Income Tax Officer

estimated the sale price of motors as indicated above. The assessee had not at any stage questioned the quantum of the estimate. Its only plea was

that the Income Tax Officer should not have made any estimate and should have accepted the return filed by him. Once it is found that there is a

case for rejection of the return and for estimating the sale proceeds, then we are of the view that the circumstances and the materials referred to

here are sufficient to sustain the estimate made by the Income Tax Officer.

As regards the rejection of the claim for deduction of Rs. 7,850 paid as commission, the Tribunal was justified in holding, on the materials on

record, that the said three persons did not procure any application from the ryots and as such they could not have been paid any commission. We

accept this factual finding which are supported by the materials referred to above.

The result is that both the questions are answered in the affirmative and against the assessee. The revenue will have its costs. Counsel''s fee Rs.

250.