1. This is reference under section 66 of the Indian Income-tax Act, 1922, referring the following questions to us :
'1. Whether, on the facts and in the circumstances of the case, the proviso to section 13 of the Indian Income-tax Act, 1922, was rightly applied in respect of the three branches of the assessee-company, namely, 'Eastern Stores, Madras', 'Kishinchand Chellaram, Otacamund' and 'Kishinchand Chellaram, Coonoor'
2. Whether the Tribunal was justified in law and/or misdirected itself in law in rejecting the books of accounts of the assessee-company merely on the ground that the stock tally was not maintained by the asessee and/or that the gross profits was lower than the previous year ?'
2. Though two questions have been formulated, the questions which really arises before us is only one and that question is, viz, whether there was any relevant material on which any reasonable person could possibly hold that the true profits of the assessee could not be determined and resort must, therefore, be had to the proviso to section 13 of the Indian Income-tax Act, 1922. The relevant assessment year was 1950-51 and the court is concerned in this reference with the branches of the assessee-firm at Madras, Otacamund and Coonoor. The Income-tax Officer rejected the books of account of the assessee-company and restored to the provisions of the proviso to section 13 on the ground that, having regard to the method of accounting employed by the assessee-company, the income, profits, and gains could not be properly deducted from the books. He, therefore, estimated the true profits of which of the said branches at a certain percentage under that proviso. On appeal by the assessee, the Appellate Assistant Commissioner was of the same view, viz, that the main defect in the assessee's books of account was the absence of stock tallies and the fact that the sales had not been recorded with identifiable details as to the quality of the goods sold. On further appeal to the Tribunal, that view was confirmed, the Tribunal observing as follows.'
3. However, at all the three places it was found that there were no stock tallies and the sales were not recorded with identifiable details. These defects are such that the income, profits and gains of the assessee cannot be properly deduced from the method of accounting an the proviso to section 13 would, therefore, clearly apply.'
4. We are not concerned with the actual percentage of profits that was applied by each of the taxing authorities, and I am, therefore, not referring to the same. It is out of that decision of the Tribunal that the present reference has arisen.
5. It has been the contention of Mr. Advani on behalf of the assessee, both before the Tribunal as well as before us, that in the case of a retail business of the magnitude of the assessee it was not physically possible to have identifiable vouchers or to maintain stock tallies, and that it was sufficient that a yearly inventory of the stock had been maintained. Now, whether in a business of the nature or magnitude of that of the assessee stock tallies could or should have been maintained and vouchers with identifiable details produced are question of fact on which it was for the revenue authorities to arrive at a conclusion. Mr. Advani may be right in his contention on the point, but the Tribunal has taken the view that stock tallies should have been mentioned and vouchers with identifiable details as to quality should have been produced in the present case, and, as the Supreme Court has laid down in Chettair's case : 38ITR579(SC) and again in Chhabildas's case : 59ITR733(SC) , to both of which I will presently refer, it is not open to us to go behind those findings of fact. In any event, Mr. Advani's contention that in the case of a retail business the question of stock tallies could never be maintained does not appear to be correct, for in some of the reported cases, even in the case of some retail business, the question of stock tallies has arisen and has been determined. One such case was the case before a Bench of this court, viz, that of Dhondiram Dalichand v. Commissioner of Income-tax : 81ITR609(Bom) where, though the assessee made a false claim that he was a wholesale dealer, the real position was that his business was substantially that of retail transactions. The view taken in that case by this court was (at page 619) that the books of account produced by the assessee did not disclose any quantitative tally in connection with its sales and purchases, and the method of accounting could, therefore, be held to be a method wherefrom the true profits made by the assessee could not be deduced. The observation made in the concluding part of the judgment in the said case that the circumstances found by the Income-tax Officer along with the absence of the quantitative tally about the stocks of purchases and sales were 'Sufficient material' for the purpose of restoring to the proviso to section 13 appears to have been merely a rejection of the argument on behalf of the assessee which was advanced in those terms before the Bench in the said case, and cannot be read as laying down that it is the function of the court to inquire into the sufficiency of that material. It is too well settled by now to take such a view.
6. A yearly inventory of the nature on which Mr. Advani relied cannot possibly serve the purpose of a stock tally, for whilst it only shows the opening stock and the closing stock of goods in that year, it does not show the purchases made during the year or the sales effected during the year. The mere difference between the opening balance and the closing balance would not be any evidence that the same represented sales from which the profits made by the assessee could be deduced.
7. As far as the present case is concerned, the principles are, fortunately for us, laid down by the highest court. They have been laid down by the Supreme Court in the case of S. N. Namasivayam Chettiar v. Commissioner of Income-tax : 38ITR579(SC) . The assessee, in that case, carried on business in grains, fodder etc., and the Appellate Tribunal held that the correct profits of the assessee could not be deducted from books for various reasons, one of which was that there was no quantitative tally for the grains and for other materials purchased by the assessee and it was not possible to accept the books of accounts, where the turnover was as large as Rs. 17 lakhs without a quantitative tally. The Supreme Court laid down (at page 588) that if, after taking into account all the materials, including the want of a stock register, it was found that from the method of accounting the correct profits of the business were not deductible, the operation of the proviso to section 13 of the Income-tax Act would be attracted, and that it was for the income-tax authorities to consider the material which was placed before them and, if, after taking into account in any case the absence of a stock register coupled with other materials, they were of opinion that the correct profits and gains could not be deducted, then they would be justified in applying the proviso to section 13. From the law as was laid down by the Supreme Court, it is quite clear that the question as to whether, in a particular case, the absence of a stock register or a stock tally results in a situation in which the correct profits and gains cannot be deducted is one for the income-tax authorities to consider, and that if they were of opinion that the profits and gains could not be deduced by reason of those infirmities, the court cannot interfere if the taxing authorities resorted to the proviso to section 13. The Supreme Court also observed, after discussing an earlier decision of a High Court, that it could not be said as a proposition of law that the want of a stock register by which a proper check could be made was not such a serious defect as to make the proviso to section 13 inapplicable. In the case of Chhabildas Tribhuvandas Shah v. Commissioner of Income-tax : 59ITR733(SC) , the Supreme Court, reiterated (at page 737) that the court is not concerned with the correctness of the conclusion of the Tribunal, but is concerned only with the question whether there was any material in support of the finding of the Appellate Tribunal relating to the applicability of the proviso to section 13 as the question as to whether income, profits and gains could or could not be properly deduced from the method of accounting regularly adopted by the assessee was a question of fact which had to be determined by the taxing authorities. It was pointed out clearly by the Supreme Court in the concluding part of its judgment in the said case that the only question of law that could possibly arise was whether there was any material for the finding of the taxing authorities in regard to the same. The decision of this court in the case of R. B. Jessaram Fatehchand (Sugar Dept). v. Commissioner of Income-tax : 75ITR33(Bom) also cited before us, but I do not propose to deal with it, as has no relevance to the question which we have to consider.
8. Mr. Advani relied strongly on the judgment of the Punjab and Haryana High Court in the case of Jhandu Mal Tara Chand Rice Mills v. Commissioner of Income-tax , but I am afraid with respect to the learned judges who decided that case, that the said case does not lay down any ratio or proposition of law which could be of any assistance to us to this reference. The assessee-firm in the said case dealt in rice and its accounts were accepted in all the years up to and inclusive of assessment year 1957-58, but for the assessment year 1958-59, the Income-tax Officer rejected its accounts and applied the proviso to section 13 on the ground that no day-to-day dry age register has been maintained and that the yield shown by the assessee was low as compared with the yield of other dealers in rice. The court in its judgment referred to a large number of authorities, which it sought to distinguish on facts, and came to the conclusion of the Act to the facts of the case before them. If, by that, the court intended to lay down that it could go into the sufficiency of the material, I said that what they appeared to have really held is (vide page 201) that the mere fact that the yield of rice in the case of the assessee-firm was lowering the proviso to section 13. In the context in which this view is expressed by the court, it appears to me that the words 'sufficient ground' must be read as 'sufficient reason.' As already stated earlier, I do not find any proposition of law laid down by the Punjab and Haryana High Court in Jhandu Mal Chand Rice Mill's case which could be of any assistance either to Mr. Advani or to the court in the present reference. Mr. Advani also cited the judgment of the High Court of Kerala in the case of M. Durai Raj v. Commissioner of Income-tax : 83ITR484(Ker) , in which the assessee was a wholesale dealer in rice and the Income-tax officer rejected its books on the ground, inter alia, of the non-maintenance of a stock book on the basis of weight, the stock book having been maintained on the basis of number of bags, and the court took the view that in a wholesale business like that of the assessee the maintenance of a stock register in terms of weight would be a very laborious process, and that the assessee having admittedly maintained his accounts according to the method regularly employed by him, and the profits and gains of the business being computable from those accounts, the taxing authorities were not justified in rejecting those books. I am not really concerned with the actual facts or the decision in the said case, but the Kerala High Court has laid down the legal position in a case like the present one correctly and with remarkable clarity. It stated as follows at page 492 :
'Whether the accounts of the assessee are maintained according to the method regularly employed by him, whether they are correct and complete, and whether the income can be properly computed from the accounts are all pure questions of fact. The Appellate Tribunal's finding on these matters are not liable to attack for want of sufficiency of materials. But if the findings are not supported by any materials or if the materials relied on are irrelevant or they are such that no Tribunal can reasonably come to such findings on the said materials, then a question of law would arise, and the High Court would be justified in holding that the findings cannot be sustained on any materials.'
9. Having laid down the correct approach as a matter of law, the High Court in the said case proceeded to apply the same to the facts before it and came to the conclusion (at page 493) that the grounds stated by the Tribunal in the case before them were neither valid nor relevant in rejecting the accounts of the assessee. I am not really concerned with that conclusion of the High Court which is based on the material before it. Before parting with this case, I may observe that the Kerala High Court has in its judgment referred to an earlier decision of its own in the case of S. Veeriah Reddiar v. Commissioner of Income-tax : 38ITR152(Ker) , which was also cited by Mr. Advani. The ratio of S. Veeriah Reddiar's case as set out in M. Durai Raj's case : 83ITR484(Ker) is that no assessment under the proviso to section 13 can be sustained if the taxing authorities have not considered and recorded a finding against the assessee as to whether he had been regularly employing a method of accounting or whether his income, profits and gains could properly deduced. from his method of accounting, and that the taxing authorities decision on these matters was not to be a subjective or arbitrary decision but a judicial decision and could not be accepted 'if there is no material to support his finding'. There can be quarrel with that proposition.
10. Turning to the facts of the present case, in the light of the legal principles laid down in the cases discussed by me above, and particularly, the principles laid down by the Supreme Court in S. N. Namasivayam Chettiar's case : 38ITR579(SC) and Chhabildas's case : 59ITR733(SC) and by the Kerala High Court in M. Durai Raj's case : 83ITR484(Ker) in the passage quoted by me earlier in this judgment the finding of the Tribunal is three-fold, viz, (1). that there were no stock tallies; (2) that the sales were nor recorded with identifiable details, which would mean identifiable details as to the quality of the goods; and 3. that those defects were such that the income profits and gains of the assessee-firm could not be properly deducted from the method of accounting adopted by it and the proviso to section 13 would, therefore, apply. As laid down by the Supreme Court in S. N. Namasivayam Chettiar's case : 38ITR579(SC) at page 588, each of these matter is a matter on which the taxing authorities have to arrive at their own opinion. Unless, therefore, there was no material on which the taxing authorities could have arrived at that opinion, this court would not be justified in taking a contrary view on the reference. Indeed, the fact that there were no stock tallies, as well as the fact that quite a few sales were not recorded with identifiable details, have not been disputed even in the course of arguments before us. The main contention of Mr. Advani both before us as well as before the Tribunal, was that having regard to the nature and magnitude of the business of the assess-firm, it was not possible at all for the assessee-firm to maintain stock tallies or to record its sales with identifiable details, but that contention must be held to have been negatived by the Tribunal, by necessary implication. Having regard to these findings of the Tribunal which are conclusive and binding upon us, the present reference must be answered against the asasessee-firm.
S.K. Desai, J.
11. I agree and have nothing to add. By the Court :
The question referred to us are answered as follows :
Question No. 1. - In the affirmative.
Question No. 2. - Unnecessary in view of the answer to question No. 1. The assessee must pay the commissioner's costs of the reference.