Santhilal and Co., Trichur vs Commr. of Income Tax, Mysore etc.

Menon, J.—These references relate to the assessments of Messrs. Shantilal and Co., Trichur, for the assessment years 1121, 1122, 1123 and 1124 (act counting years 31-3-1945, 31-3-1946, 31-3-1947 and 31-3-1948), the two questions referred as directed by this Court on 13-3-1953 being:

(1) Whether the estimate of the assessee''s total assessable income outside the State at Rs. 50,000/- is supported by any material? and

(2) Whether there is any evidence or material in the case to support the estimate of the assessee''s World Income at Rs. 100,000?

The word "outside the State" in question No. (1) is a typographical error for "inside the State" and the figure "Rs. 50,000" should be "Rs. 60,000" as far as the assessment year 1124 is concerned.

The assessments in respect of the four years are best judgment assessments under S. 28(4), Cochin income tax Act, VI of 1117, corresponding to Section 23(4) Indian income tax Act, 1922.

An assessment under Sub-section (4) of S. 23 is a summary assessment necessitated by the default of the assessee himself. The Income Tax Officer is bound to make an assessment under the said sub-section and all that can be said is that he should be guided only by considerations that are relevant, by rules of justice, equity and good conscience, and not by any desire to punish the assessee for the default he has made. It is axiomatic that such an assessment will ordinarily have to be on inadequate materials; Caprice, however, will have no place, ''Mala fides'' there should not be, and the word "judgment" will always postulate a fair and impartial approach.

The classic statement of the law on the subject is in - AIR 1937 133 (Privy Council) :

The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee''s circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guesswork in the matter, it must be honest guesswork. In that sense too the assessment must be to some extent arbitrary.

According to the Commissioner in appeal the "uncontested facts" are as follows:

Mr. Ochanlal C. Deve of Shantilal & Co., started business in Trichur on a considerable scale in 1942. He gets imitation stones both red and white ground and polished by employing local labour. The dalams from which the stones are cut to be later ground and polished are manufactured abroad, outside India, mostly in Switzerland. The polished imitation stones are used largely for jewellery, and also industrial purposes, on precision instruments, watches, etc. Since labour is costly at the places of manufacture of dalams they are imported to the East for cutting, grinding and polishing. Mr. Ochanlal is a native of Gujarat, the village of Pattan, in Baroda State. Mr. Ochanal is having stones ground and polished in this State because labour here is intelligent and clever and yet not very dear. In the South, Trichinopoly is another centre where the industry of cutting, grinding and polishing stones is carried on on a large scale. Mr. Ochanlal had, and most probably still has an office in Trichinopoly. The industry in Trichur is organised through contractors who get the work: done on the lines of a cottage industry. The contractors take the cut stones from the appellants, distribute them among the workmen and alter the stones are ground and polished collect and take them back to the appellants. The business is well organised and as many as about 6000 workers are reported to be on this job in and round about Trichur. The appellants were taxed for income tax for the first time on 1-3-1121 for the account year ending on 31-3-42. Cochin income was estimated then at Rs. 750/-. On 25-10-21, they were assessed for the next account year ending 31-3-43 on an estimated Cochin Income of Rs. 1250/-. On 25-12-23, they were assessed for the succeeding account year ending 31-3-44 on an estimated Cochin Income of Rs. 10,000 at the rate applicable to world income of a lakh of rupees. Next on 22-1-24, the first three assessments which are now under appeal were made for the first time by the Higher Circle Officer, the Deputy Commissioner, Northern Division. The fourth assessment under appeal was completed on 19-2-1124.

The Deputy Commissioner had estimated the total income from business for the four years in question at Rs. 100,000/- per year including the profits arising outside the State. He presumed that the entire profits outside the State had been remitted to the State and fixed the assessable income at the total figure.

In the appeals from the said assessments the Commissioner said:

I would put the total assessable annual income of the unregistered firm, Shantilal and Co., for the 3 account years beginning with 31-3-44 at Rs. 50,000 a year each. For the account year beginning with 31-3-47 I would put the assessable income at Rs. 10,000 more after providing for all expenses because according to the assessee''s own showing the firm has made much larger profit that year from the business of imitation stones.

Their World Income in all the four years is estimated at one lakh of rupees a year each.

and reduced the assessment accordingly.

The previous assessments as stated by their Lordships in the passage extracted above afford a basis for a proper estimate, and in this case if such a basis is adopted the best judgment assessments are more than justified.

The previous assessments show that the assessable income had risen from Rs. 750/- in the accounting year, ending 31-3-1342 to Rs. 1250/- in the accounting year ending 31-3-1943 and to Rs. 10,000 in the accounting year ending 31-3-1944. This is a progressive increase by 66 2/3 per cent, between the first and second years and by 700 per cent, between the second and third years and in the right of such an increase as disclosed by the assessments, we think, that there were ample material and justification for an estimate of the Cochin income at Rs. 50,000 for the assessment years 1121, 1122 and 1123 and at Rs. 60,000 for the assessment year 1124. The assessment for 1120 was at the rate applicable to a world income of a lakh of rupees and the same figure has been adopted for the world income of all the four years in question.

Apart from the progressive expansion of the business as disclosed by the previous assessments the Deputy Commissioner had other materials to guide him: (i) the steady growth of investments; (ii) the entries in the bank accounts and references to letters of credit and large scale operations; (iii) the books obtained as the result of a surprise visit to the firms'' office by the Income Tax Inspector and Examiner of Accounts; and (iv) his own personal knowledge of the trade and the chances and quantum of profits therefrom.

Section 109(3), Cochin income tax Act VI of 1117, requires that the Commissioner should give his opinion while forwarding the statement of the case and the opinion offered by him reads as follows:

The Deputy Commissioner of income tax who was the assessing authority in this case had to fix the income of the assessee on estimate as the assessee did not co-operate in filing the return nor in producing the accounts when called for. The total income of the assessee was fixed at Rs. 1,00,000/- and this included the profits arising outside Cochin, as well. As the firm was held as ''Resident and Ordinarily Resident'' of Cochin, the Deputy Commissioner of income tax presumed that the profits accruing and arising outside Cochin had been remitted to Cochin. The progressive expansion of the business in Cochin and the steady growth of investments by the assessee in that State led the assessing authority to presume that the profits accruing outside Cochin had been systematically remitted to Cochin. So the Deputy Commissioner of income tax subjected the entire profits to Cochin income tax. However, the Commissioner of income tax, Cochin, on appeal, held that the profits accruing outside the State were Rs. 50,000/- and that such profits had not been remitted, though there were not ample materials for such a finding. The profits which were held to have accrued outside Cochin, but not remitted to the State were included in the total income for rate purposes only within the meaning of S. 17(2)(c), Cochin Income Tax Act corresponding to S. 14(2)(c) of the Indian Income Tax Act.

I am of the opinion that the estimate made by the Deputy Commissioner of Income Tax is quite reasonable and is supported by proper evidence. The assessee firm deliberately with-held the Books of accounts and even denied having kept accounts at all. But when the Income Tax Inspector and Examiner of accounts made a surprise visit to the firm''s office, in Mamath Lane, where Shri Shantilal was living, they came upon some of the books kept for the business which Shri Shantilal had no time to keep away. And when he perceived the presence of some departmental officers, he caused the room containing the other accounts to be locked up with a view to prevent the entrance of the officers and left the place abruptly to avoid the embarrassing situation. The conclusion is obvious. The firm with definite purpose avoided the production of account books. The Deputy Commissioner of income Tax had gathered materials regarding the quantum of raw stones imported, labour charges incurred, the volume of bank transactions and the investments made by the firm on house properties and deposits in banks and other accumulations. Added to this, he also found as a matter of fact that the firm had been trading in the names of Indian Jewel Company, Shirian & Co., Yegneah & Co. outside the State. The firm had also cinema business and a distribution office at Bangalore. The assessment order is relevant for further details regarding the activities of the firm and acquisition of wealth by it. The firm had income both in and outside Cochin and in the circumstances of the case the total income fixed at Rs. 1 lakh by the Deputy Commissioner of income tax and Rs. 50,000/- out of the said total income treated as income accruing or arising outside Cochin by the Appellate Authority is, in my opinion, a modest estimate.

For the foregoing definite facts, I submit that the Commissioner had sufficient materials for the decision that has been arrived at by him and the answer to both the questions should be in the affirmative.

We are in agreement with the opinion expressed and are satisfied that the best judgment assessments are based on adequate materials and legitimate inferences, and that both the questions referred have to be answered in the affirmative. The references are answered accordingly.

The petitioner will pay the costs of the respondent in all the four references, the Advocate''s fee we fix for each case being Rs. 100/-.