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Judgment
Rajagopalan, J.—The assessee was a dealer in handloom products which included sarees, shirtings, towels and bed-sheets. In the years of
account corresponding to the assessment years 1951-52 and 1952-53, the assessees books disclosed respectively a turnover of Rs. 3,33,000 and
Rs. 4,59,000. The gross profits disclosed by his account books were 6.3 per cent and 3.6 per cent respectively for the two years. The Tribunal
agreed with the view taken by the Income Tax Officer and confirmed by the Appellate Assistant Commissioner that the gross profits of the
assessee compared unfavourably with those of other dealers. The books results were rejected, and on the application of the proviso to section 13
of the Income Tax Act, the income of each of the years was estimated by making additions to the disclosed profits. The Tribunal limited the
addition to Rs. 5,000 for 1951-52; for 1952-53 the Tribunal confirmed the addition of Rs. 10,000 made by the Income Tax Officer. The
directions of this court u/s 66(2) of the Act led to the reference of the following question :
Whether on the facts and in the circumstances of the case, the rejection of the books of account and the application of the proviso to section 13 of
the Income Tax Act were Justified?
In both the assessment years the Income Tax Officer declined to accept the assessees figures of purchases, supported by the bought notes that
he produced, on the ground that there were no independent vouchers. Neither the Assistant Commissioner nor the Tribunal could have considered
this as one of the defects in the system of accounts maintained by the assessee. When a similar question arose with reference to the 1949-50
assessment of the same assessee, the Tribunal pointed out ""when the bought notes as a rule show the names of the suppliers, variety of cloth, cloth
price and suppliers thumb impressions or signatures, it is not possible to brush them aside without making the slightest enquiry as the Income Tax
Officer has done."" The attention of the Tribunal was drawn to this earlier judgment in the memoranda of appeals which related to the assessments
for 1951-52 and 1952-53.
The Income Tax Officer noticed certain corrections and inaccuracies in the accounts, but the Assistant Commissioner was convinced that there
was nothing suspicious about these corrections, and the Tribunal apparently shared the view of the Appellate Assistant Commissioner.
Paragraphs 3 and 4 of the order of the Tribunal which contained the contentions considered by the Tribunal and its findings thereon ran :
On appeal before us, it was contended that there was no warrant for the application of the proviso to section 13. It was contended that goods
of one variety only were manufactured and that there was no need to keep a variety-war stock tally showing the stock particulars. We find that this
is not borne out by the records. It is clear therefrom that the assessee had dealt in a large variety of goods. In the absence of the variety-wise stock
tally for all these goods, there is no doubt that the proviso to section 13 applies.
So far as the second year is concerned, no attempt has been made before us to show that all the purchases had been properly vouched. We
had a look at the comparable cases for the two years in question and are left with the feeling that the percentage of 5.8 applied in respect of the
year 1952-53 is well below the average applied in all the other cases. Therefore, we see no reason to interfere with the addition made in respect of
that year.
The principal point made was there was no variety-wise stock tally. Annexure B contained quantitative stock particulars for 1951-52 and the
assessee gave similar particulars for 1952-53 in annexure A. Annexure B was filed only before the Appellate Assistant Commissioner but in next
year the assessee filed the statement (annexure A) even at the stage of assessment by the Income Tax Officer. In both the statements, particulars
were furnished for goods of the different counts of yarn 40, 60 and 80, and there was another heading styled ""miscellaneous"". These statements
were prepared from the account books of the assessee. Though it was pointed out that the statement of the first year was not signed by the
chartered accountant employed by the assessee, the correctness of the statement of neither year was found against. We have also pointed out that
neither the Appellate Assistant Commissioner nor the Tribunal found that any entry in the account books, either sale or purchase, was untrue.
There was no finding, for example, that the purchases were inflated or the sales were suppressed. Though in paragraph 4 of the order of the
Tribunal there was remark that all the purchases had not been properly vouched for, we have already pointed out that apparently was not the real
basis for rejecting the accounts. The Tribunal obviously realised the impossibility of independent sale vouchers to support the bought notes. There
was therefore nothing to show that the accounts of the assessee were not correct.
It is true that the gross profits disclosed by the assessees accounts were low. That by itself was not enough to reject the system of accounts
maintained by the assessee. Low gross profits should certainly put the Department on enquiry to verify if the entries in the account books were
spurious, or to verify if the system of accounts itself was defective, which made it impossible to accept the book results as disclosing the true profits
of the assessee. In other words, on the only ground that the gross profits were low and compared unfavourably with those of others, the system of
accounting adopted by an assessee cannot be rejected. What the proviso to section 13 requires is that the system of accounting adopted by the
assessee is defective. We may point out that even for these two years it was not the same rate of gross profits that resulted even after the additions
made by the Tribunal. The real basis for sustaining the additions was what was set out in paragraph 4, an extract from which we shall set out again
in this context :
We had a look at the comparable cases for the two years in question and are left with the feeling that the percentage of 5.8 applied in respect of
the year 1952-53 is well below the average applied in all the other cases.
With reference to the first year, as pointed out in paragraph 5 of the judgment, the addition was limited to Rs. 5,000, because the profits made
by others or adopted by the Department are ""slightly less than 8.3 per cent applied in the assessees case.
No doubt, in paragraph 3 the Tribunal recorded ""in the absence of a variety-wise stock tally for all goods, there is no doubt that the proviso to
section 13 applied."" What precisely the Tribunal required, we are really unable to gather either from its judgment or even from the statement of the
case. Annexure ""A"" and ""B"" prepared by the assessee and placed before the Tribunal did contain particulars of stock tally and a variety-wise stock
tally under each variety of yarn. Whether in addition to these statements the Tribunal wanted statements of particulars according to each variety of
handloom products and/or under each range of price, irrespective of the classes of goods within that range, is not clear. The Tribunal apparently
never called upon the assessee to furnish such particulars. Nor apparently did the Tribunal investigate whether such particulars could be gathered
from the accounts maintained by the assessee. It is true that the assessee did not maintain all through the year a separate variety-wise stock
account either on the basis stock books did no prevent the acceptance of the book results in the previous assessment years. We have also to point
out that no attempt was made by the Tribunal even with reference to the assessments with which we are now concerned to verify if the particulars
given in the accounts or in the statements, annexure ""A"" and ""B"", were inaccurate. The absence of stock book or a series of a stock books does
not appear to have been the real basis for rejecting the book does not appear to have been the real basis for rejecting the book does not appear to
have been the real basis for rejecting the book results. Annexure ""A"" and ""B"" were not rejected. They did furnish variety-wise stock particulars. As
we understand the judgment, the real ground on which the book results were rejected was that the gross profits were low. That, as we said, is not
enough to condemn the system of accounts that the assessee consistently adopted. It was not even enough without further investigation to reject the
accounts themselves in either of the years.
Though the statement of the case is more elaborate than the judgment of the Tribunal, the position still remains the same. The real ground for
applying the proviso to section 13 was that the gross profits disclosed by the book results appeared low and compared unfavourably with those of
others in the same line of business. That we must emphasise was not enough to reject the books of account.
We answer the question in the negative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsels fee
Rs. 250. Question answered in the negative.