1. As directed by the Nagpur High Court, two questions of law have been referred to us by the Tribunal, and they are :
'(1) Was the Tribunal entitled to compute the gross income from the sales of bicycles and motor-cycles under the proviso to section 13 of the Indian Income-tax Act, even though the gross profits ascertained by reference to the accounts of the assessee were found to be correct
(2) Were the Income-tax authorities right in adding Rs. 12,174 paid in respect of sales tax to the income of the assessee even though it had not realised it from its customers ?'
2. Now, the assessee is a private limited company which dealt in motor-cycles, cycles and accessories in the assessment year 1950-51. The accounting year was the year ending 31st December, 1949. The Income-tax Officer found that the profits and gains could not properly be deduced from the accounts kept by the assessee, applied the proviso to section 13 and estimated the sales at Rs. 10 lakhs and a flat rate of 20 per cent. as profits. The appellate Assistant Commissioner on appeal reduced the estimate of sales to Rs. 9 lakhs and applied a flat rate of 17 1/2 per cent. The Tribunal maintained the estimate of sales made by the Appellate Assistant Commissioner, but further reduced the rate of gross profits 12 per cent. and stated in their order that in reducing this rate they had duly taken into account the claim of the assessee in respect of a sum of Rs. 9,200. The effect of the Tribunal's order was that the assessee got a reduction of Rs. 49,500 in the estimated profits.
3. Now, question No. (1) as framed appears to proceed on the footing that the Income-tax authorities had found that the gross profits ascertained by reference to the accounts of the assessee were correct. We find no justification for such an assumption on the record. We asked Mr. Palkhivala, who appears for the assessee, to point out from the order of the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal where they had so found and he was unable to draw our attention to any such finding.He pointed out from the order of the Income-tax Officer that the assessee was called upon to furnish quantitative analysis of the goods sold, but was able to sort out the quantities of sales of cycles and motor-cycles only and expressed his inability to furnish such details in respect of accessories.He relied upon this for the inference that the Income-tax Officer found that the gross profits in respect of sales of cycles and motor-cycles only could be correctly ascertained from the accounts. It appears to us to be impossible to read this passage in the order of the Income-tax Officer as a finding that the gross profits could be correctly ascertained from the accounts as kept. The Income-tax Officer dealt with and considered in great detail all material that was placed before him by the assessee; he noticed and commented upon the important fact that no stock register was kept; and considering all these facts,he stated :
'I am not prepared to accept the result of the trading accounts, as well as the sale position at Bombay branch, and would estimate them at Rs. 10,00,000.'
4. It is clear, therefore, that the Income-tax Officer did not accept the gross profits ascertained by reference to the accounts to be correct, nor did the Appellate Assistant Commissioner or the Tribunal accept such accounts. The basis for the first question, therefore, appears to be lacking. However, Mr.Palkhivala has attempted to argue under this question two distinct propositions. The first branch of his argument is that the proviso to section 13 was wrongly applied in this case; and the second branch was that even assuming that the proviso was correctly applied, in making the estimate the Income-tax Officer was bound to make as near an estimate as he could to the actual profits, and if in respect of bicycles and motor-cycles the correct profit could be ascertained from the books, notwithstanding the fact that it could not be so ascertained in respect of accessories, the Income-tax Officer should have accepted the profits so ascertained as his own estimate. Now, dealing with the first part of the argument, the proviso to section 13 confers a power upon the Income-tax Officer to make a computation on such basis and in such manner as he may determine if, in his opinion, the income, profits and gains cannot properly be deduced therefrom. The opinion is to be that of the Income-tax Officer, and if there was any material on which he could possibly have come to that opinion, nobody can interfere with the exercise of that power by the Income-tax Officer of invoking the proviso to section 13.
5. Mr. Palkhivala has drawn our attention to a decision in Pandit Bros. v. Commissioner of Income-tax where the Punjab High Court, in dealing with a case where there was absence of a stock register, as in this case, has observed at page 166 :
'Again, the fact that there is no stock register only cautions him (the Income-tax Officer) against the falsity of the returns made by the assessee....'
6. and Mr. Palkhivala urges that the absence of the stock register would not, therefore, by itself warrant the opinion of the Income-tax Officer that the true profits could not be deduced from the accounts kept. Now, in the first instance, in the case relied upon by Mr. Palkhivala, it must be noticed that the Income-tax Officer had not found that the case fell within the proviso to section 13. In other words, he had not come to the conclusion that the income, profits and gains could not be properly deduced from the accounts that were kept. That, in itself, was sufficient to make the application of the proviso unwarranted. Moreover, the observation relied upon states only a proposition which appears to us to be quit obvious. Whether the absence of a stock register is or is not material must depend upon the other circumstances of the case and the other material which is available to the Income-tax Officer, and if the accounts, notwithstanding the absence of the stock register, enable the Income-tax Officer to deduce properly the income, profits and gains of the business, the mere absence of the register will not be a sufficient ground for invoking the proviso to section 13. But obviously, in this case, it is clear from a mere perusal of the order of the Income-tax Officer that he did rely only on the absence of a stock register, but considered in detail every single material that was produced including statements prepared by the assessee, and came to the conclusion that from all this material he could not deduce correctly the profits of the business. In our opinion, therefore, the Income-tax Officer was fully justified in forming the opinion that he did and applying the proviso to section 13.
7. Turning to the latter part of the argument, although, as we have pointed out earlier, there is nothing on the record to show that the gross profits ascertained by reference to the accounts of the assessee were found to be correct, in paragraph 9 of the statement of the case the Tribunal states as follows :
'It appears that an effort was made by the assessee to claim, in respect of sales where the assessee has proved the margin of profit, that the account should be accepted.'
8. Mr. Palkhivala wishes to rely upon this as a finding of fact that the margin of profit was accepted in respect of sales of bicycles and motor-cycles only and not accepted in respect of accessories. That, in our opinion, is not the correct reading of the case. The statement only says that in respect of some sales the margin of profit was proved and the Tribunal proceeds to point out that since they had to make an estimate on the total turnover, if they had accepted the profit which was proved in respect of some sales, they would have had to allow a considerably higher average gross profit in respect of the balance. Therefore, although it may be that the margin of profits on some sales was proved, when we are dealing with a turnover of Rs. 9 lakhs the mere fact that such a margin has been proved does not make it incumbent that the estimate should be made in respect of the rest of the business only and not in respect of specific items of sale where the margin has been proved; and indeed, if any other course was adopted and the actual figures proved in respect some sales were accepted, as regards the balance of the sales a higher or lower rate may well be estimated having regard to the margin of profit shown or proved in the actual sales. In our opinion, therefore, where section 13 was invoked from the mere fact that some sales had been proved in which the margin of profit was also proved, it was not incumbent on the Income-tax Officer to grant in respect of these sales the actual profit and estimate it in respect of the other.
9. Our answer to question No. 1, which, as we have pointed out, appears to have been based on an incorrect assumption, will, therefore, be as indicated in our judgment, because answering the question as it stands would be answering it on an incorrect assumption.
10. The second question raised relates to an amount of sales tax of Rs. 12,174 which was added to the total income of the assessee by the taxing authorities. It appears that in the appeal before the Tribunal the point had not been taken that this amount should be excluded from the total income of the assessee; but by a subsequent written application dated the 20th of October the assessee sought leave to raise this question and apparently the Tribunal allowed them to do so. There is no reference to this amount in the order of the Tribunal; and when the order came to the notice of the assessee, they presented a rectification application on the 12th January, 1953, pointing out that there was no reference to the question of exclusion of this amount. On that the Tribunal made an order on the 10th of February, 1954, in which they state that this amount was taken into account when the Tribunal gave reduction of Rs. 49,500 to the assessees. Mr. Palkhivala has attempted to persuade us to hold that sine the order of the Tribunal does not mention this amount, this statement should be disregarded and in fact the amount was lost sight of by Tribunal when they passed their order. We cannot countenance any such suggestion. We accept the statement of fact from the Tribunal that this item was present to their minds and was taken into account by them in arriving at the percentage of gross profits to be allowed on the entire turnover of Rs. 9 lakhs. If we accept that fact, it may still be open to Mr. Palkhivala to contend that the Tribunal should be asked separately to determine the question of Rs. 12,174; but the consequence of it would necessarily be, in view of the statement of the Tribunal, that they would like to reconsider their estimate of the percentage of gross profits. Mr. Palkhivala does not desire, therefore, that such a course should be adopted. As we accept the statement of the Tribunal, this question of exclusion of Rs. 12,174 from the total income has already been taken into account by the Tribunal and question No. 2, therefore, does not survive for disposal.
11. The result, therefore, is that the assessees fail on this reference and shall pay the costs of the Income-tax Commissioner.
Reference answered accordingly.