Ramgopal Shrikishen vs Comissioner C.P.T.

Jaganmohan Reddy, J.—The Petitioners are a firm consisting of two partners carrying on dealings in ground-nut, oils etc. in Nizamabad, Warangal and Sedam and the business of ginning and pressing of cotton in Bhainsa. They have also, a rice mill at Bodhan and ground-nut and cotton business at Madnur. The Petitioners had returned a profit of H. Section Rs. 2,73,007/- and showed an excess profit of Rs. 1,08,840/- for the fourth chargeable as counting period (C.A.). and an excess profit of H. Section Rs. 28,636/- for the fifth C.A.P. The Excess Profits Tax Officer computed profits for the fourth C.A.P. at H. Section Rs. 3,91,646/- and assessed excess profits accordingly, but on appeal the Deputy Commissioner granted certain reliefs & reduced the tax and deposit to the extent of Rs. 17,538/-. With respect to the fifth C.A.P. the Excess Profits Tax Officer determined the profits at Rs. 1,26,971/-& assessed the tax at Rs. 50,972/- but the Deputy Commissioner on appeal granted some reliefs & reduced the tax & deposit to the extent of Rs. 18,984/-. On an application u/s 20 of the Excess Profits Tax Regulation, the Commissioner maintained these findings of the Deputy Commissioner with respect to both the fourth and fifth C.A Ps. and under Sub-section (2) of Section 48 of the said Regulation refused to state a case on the points raised in the petition of the Assessee on the ground that none of the points involved a question of law. With respect to one of the points in the fifth C.A.P., he was of the opinion that the matter was concluded by a decision of the Privy. Council, reported in Commr. of Income Tax Bombay Presidency & Aden v. Khem Chand Ramdas 1938 ITR 521 (P.C. As against this order the Assessees have filed separate petitions for the fourth and fifth C.A. Ps. under Sub-section (3) of Section 48 for directing the Commissioner to state a case. The questions upon which they pray for such direction are as follows:

IV C.A.P.

whether the basis of yield of ground-nut oil and cake formulated by the E.P.T. Officer and upheld by the Deputy Nazim, E.P.T. is correct and applicable to this case and whether the said basis is warranted by any evidence on record that was put to the assesses and their explanation obtained? (SIC) applicable to this case and (SIC) the said basis is warranted by any evidence on record that was put to the asses-(SIC) and their explanation obtained?

Whether the finding that the loss in forward and hedging transactions done by Seram branch at Bombay did not accrue or arise in the Dominions is maintainable in view of the fact that there was no separate business firm at Bombay and such transactions were done and controlled from the Dominions?

It may be observed here that during the course of this argument the Petitioner''s learned Advocate (SIC)that he did not intend to press the second question in the fifth C.A.P., as such we do not propose to consider that question. This leaves the first question in the fourth and fifth C.A. Ps., which is common and concerns the fixation of flat rate of yield of oil. There can be no doubt that the findings of the Excess Profits Tax Officer and the Deputy Commissioner with respect to the Computation of the income, profits and gains from the books furnished by the Assessee are findings of fact, and in purr view the Income Tax authorities had sufficient material upon which they could have come to the conclusion that the income, profits and gains could not be computed from the books of account of the Assessees. The only question therefore, is whether the flat rate of 42.5 per cent. fixed by the Deputy Commissioner & maintained by the Commissioner raises any question of law. Generally, whether the Income Tax authorities are not satisfied with the correctness or completeness of the Assessee''s accounts, they can, taking into consideration the state of affairs and the fact that the yield was low compared to other firms doing similar business, fix a flat rate. The burden of displacing the estimate is upon the Assessee.

In (1934) 2 ITR 305 (Lahore) where it appeared that the company never used to keep a stock register and the refusal of the Income Tax Officer to accept the accounts was not due to any error in the method of accounting; but because he considered the rate of profits shown to be unreasonably low, it was, held that under those circumstances the Income Tax Officer was not Justified in making an assessment; under the proviso to Section 13 of the Income Tax Act. It was further held that it was a question of law in which the court is entitled to enquire whether there was any evidence on which the Income Tax Officer could have come In the decision that the method of accounting is such that the gains could not be computed except by the arbitrary method contemplated by the provision was also held that the mere fact that the company chose to charge a low rate of profit was no for. the Income Tax Officer to nor was the absence of an stock register, when admittedly the company had never used a stock register a valid reason for rejecting the account.

In (1937) 5 ITR 464 , another bench of the same High Court observed at page 478, that the above judgment proceeded on a wrong basis when it criticises adversely the reason of the Income Tax Officer for rejecting the accounts and held that the question whether the account books are reliable or not is a question of fact to be determined solely by the Income Tax Officer. If, therefore, it is once decided by the Income Tax Officer that the accounts are unreliable,, his finding cannot be disturbed unless it is altogether, capricious and unjudicial, merely on the ground that the material in support of those reasons is meager or insufficient.

Din Mohammad J. in the above case delivered the main judgment with which Cold stream J. agreed. He observed at page 489 with respect to the question of assessing at a flat rate under the proviso to Section 13 of the Income Tax Act, as follows:

The principal point for consideration before us is, whether the . present assessment based on estimate is justified - It only remains to consider whether the estimate is fair. In doing so, we have to examine the basis on which and the manner in which this estimate has been, made. The Income Tax Officer has taken into consideration the state of affairs in general; and the fact that the firm has a large business!; The firm was given ample opportunity to support its version but it failed to produce any material on the record to enable the Income Tax Officer to arrive at a definite figure. In these circumstances, as remarked by their Lordships of the Privy Council, in Commr. of Income Tax, B&O v. Kameshwar Singh of Darbhanga 12 Pat 318, the onus lay on the firm to displace the estimate.

It appears from the above decision though (as I have already observed) the question of the Income Tax Officer being unable to compute the income, profits and gains from the account books of the Assessee is a question of fact, the fixation of flat rate also should be upon some reasonable considerations and that the Assessee should be given an opportunity to rebut by evidence the basis which forms the fixation of the flat rate by the Income Tax Officer. The observations of Sir Terrel C.J. in the Maharajadhiraja of Dharbhanga v. Commr. of Income Tax 9 pat 240 (S.B.) at pages 270 and 271 with respect to the fixation of flat rate were approved by their Lordships of the Privy Council in appeal from the above judgment in 60 Ind App. 146 . Their Lordships stated:

In the High Court (Terrel C.J.) after pointing out that the question is one of quantum only says, ''Learned Counsel for the Assessee has argued that the officer is not entitled to make a guess without evidence and I agree with that contention, but in this case the state of affaire in the previous years, coupled with the fact that'' the Assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions, afford ample material for the assessment made. I would answer the question in the affirmative. The other-Judges concurred! and their Lordships also agree, adding only that if the Assessee wished to displace the taxing officer''s estimate,'' it was open to him to adduce! evidence of all his purchase transactions during'' the year and of the financial results there of which he apparently made no attempt to do.

In Ferozshah v. Commissioner of Income Tax Punjab and N. W. F. P. Province Lahore 60 Ind App 325 (P.C), where the Assessee objected to a flat rate of 321/2 percent fixed by the Income Tax Officer taking into consideration that no profit and loss account had been prepared by-the Assessee, and the rate of profit could not be deduced from his books, their Lordships dealing with the order of the High Court observed at page 333 as follows:

As to the assessment at a flat rate of profit to 321/2 percent, they pointed out that no objection had been taKen by the Appellant to the the same assessment lor the two preceding years, 1924-5- 1925-6, and it had not been shown that the Income Tax Officer was not well warranted in maintaining the same percentage in respect of the year of assessment. The question was If one of the fact for him to decide.

In both these cases, the observations of their Bordships proceeded on the basis that the Assessee has given an opportunity to rebut by evidence the fixation of flat rate by the Income Tax authorizes It appears to us that after the rejection of accounts and before an assessment under the provision to Sub-Section 13 fixing a fiat rate is made, the Assessee should be afforded an opportunity the repute by evidence the rate to be fixed, it is argued that the yield of oil depends on several I factors, namely, that it differs from locality to facility, on the quality of the ground-nuts crushed into oil and the make and condition of the machinery & such other considerations as have been Numerated in his petition. The Advocate for the Petitioners submits that he should have been given an opportunity to rebut by evidence that the basis on which the flat rate fixed was not Justified. In (1944) 12 ITR 393 , LAL MOHAN KRISHNA LAL PAUL Vs. COMMISSIONER OF Income Tax, BENGAL., , Mohanlal v. Commissioner E.P.T. 1355 Nazair-e-Osmania 691 and Saith Mal v. Commissioner E.P.T 1355 Nazair-e-Osmania 512 the Lahore, the calcutta & the Hyderabad High Court have held that where the Income Tax Officer proposed to make an estimate in disregard of the accounts or other materials produced by the Assessee, though he is entitled to rely on materials gathered from other sources, natural justice demands that he should draw the Assessee''s attention to it before making the order and give him an opportunity to adduce material in rebuttal. These observations are in (SIC) with the observations of the Privy council in Maharaja of Darbhanga''s case, ''(12 Pat 18.P.C.), and Ferozshah''s case referred to above.

The question in this case, therefore, would He whether the Assessee was given an opportunity (SIC) the basis of the fixation of the flat rate. (SIC) a persual of the orders of the Excess Profits Tax officer and the Deputy Commissioner, it (SIC) to us that the Assessee''s admitted out-turn (SIC) admits that the machinery of the Assessee is not in the same condition so as to give results similar to those in the previous years, he utilises this fact only to reduce the maximum of 42.3 percent of the previous years to that of 42.5 percent. There is nothing in his order to show that the Assessee was given an opportunity by the Excess Profits Tax Officer to lead evidence to rebut the flat rate fixed by him, nor on what basis he fixed the maximum in the previous years, notwithstanding the fact that the machinery was not in the same condition as in the previous years. It is also not clear from the order whether 42.8 percent yield in the previous years was the yield immediately before the assessment years, nor does it disclose that he has taken the yield of oil in similar trades in Warangal and Sedam into consideration in arriving at the figure of 42.5 percent. Further, when the E.P.T. authorizes had accepted the percentage of the yield of the Assessee as disclosed by them for the first, second and third C.R. Ps., why similar percentage of yield of oil for the fourth and fifth C.A. Ps. has been rejected is also not evident. In these circum stances, what we have to consider is whether the Income Tax authorities exercised their judgment in arriving at the conclusion and did not act arbitrarily. This is a question of law for us to consider.

For the a foresaid reasons, we think the Commissioner E.P.T. should state a case on the following question which is common to both the fourth and fifth C.A. Ps. IV & V C. A. Ps.

Whether the basis of yield of ground-nut oil and cake formulated by the E.P.T. Officer and upheld by the Deputy Nazim and Nazim, E.P.T., s correct and applicable to this case and whether the said basis is warranted by any evidence on record that was put to the Assessees and their explanation obtained.

In stating the case, the Commissioner will say what documents and materials were before him at the time when he considered the orders of the E.P.T. Officer and the Deputy Commissioner, and such documents will be annexed to the statement of the case. Time given four weeks. Four copies of the statement of the case and relevant documents will be submitted to the High Court and a copy thereof furnished to the Assessees.