Amberson Marten, Kt., C.J.
1. In this Income-tax reference the question in dispute is how in the assessment annexture E of September 21, 1926', ought the companies' stock to be valued. Ought it to be valued by valuing at its true figure the company's stock both at the beginning and at the end of the year in question, or ought only the value of the stock at the end of the year to be taken at its correct figure.
2. The assessment is for the year 1926-1927 and is in respect of the profits for the year 1925-26. This is under Section 3 of the Indian Income-tax Act 1922 which imposes a tax in respect of profits of the previous year. Then if one turns to the definition of 'previous year' in Section 2(11), one finds it means 'the twelve months ending on March 31, next preceding the year for which the assessment is to be made', unless, as in the present case, the assessee usually makes up his accounts for a different year. We are told that the assessee makes up his accounts for each year ending December 31. Consequently the actual year we have to take here is the year ending December 31, 1925.
3. Similarly, in addition to the income-tax there is an assessment for super-tax which under Section 55.is levied for the same year. The assessment here is annexture El, and precisely the same point arises as regards that.
4. Now what is common ground is that at any rate the stock at Income-tax the end of the year 1925 was undervalued in the company's return. Ahmhbabad The company says it was also undervalued at the beginning of the year. That has not been strictly proved, but the whole case depends upon it, and therefore for the purposes of the present case we propose to assume that this is the case. Now what the Commissioner has done is this. He has rectified the value of the stock at the end of the year by substituting the true value of the stock aa at that date, but he has declined to make the corresponding alteration as regards the stock at the opening of the year. He says that that ought not to be done because under a well-known principle of accountancy the opening value must be taken at precisely the same figure as the closing value for the previous year, viz., December 31, 1921, and that if anything to the contrary is done you would get into great difficulties, and would also open the door to frauds on the public revenue.
5. We have not got definite evidence before us as to the previous balance sheets of the company, nor their assessment, nor as to the mode of valuation in each previous year. We are consequently unable to say on the materials before us whether it is the fact that in all previous years the stock was regularly undervalued, or whether it was not. Counsel for the company has told us on instructions that in fact this has been the regular practice of the company for the last ten years, and that it has been done not with any improper motive, but in order to provide something in the nature of a secret reserve. Writing down the stock, we all know, may be a method of obtaining a reserve fund, One is familiar with it, for instance, in the case of certain shipping companies who in good days used to write down the value of their ships to a mere trifling amount per ton. But we are not actually concerned in the present case to decide that point, because as I have said the evidence is not before us, Nor can we test counsel's statement that in 1918 the income-tax authorities objected to what the company had done, and in that year, took a revised valuation both at the beginning and at the end of the year, but that subsequently the old practice was continued.
6. Nor are we in a position to decide the point that during the past ten years or so this under-valuation has been known to the Commissioner. All that we have before us is his statement in para 8 'in the Balance Sheets, as regards these valuations the words 'under cost' or 'under market value' were used,' One may take it, therefore, that certainly the past balance-sheets were before the Commissioner, and that presumably before making the various assessments the balance-sheets were also before the Income-tax Officer for the several years in question. If that was so it would appear that to some degree at any rate it was known that the stock was being taken at under-cost.
7. Counsel, however, for the Crown says that this is a well-known expression in accountancy. It only means a reasonable margin of say five or ten per cent, in order to provide against risks, because after all an exact valuation of goods is not always an easy task. Some margin may fairly be allowed. But he contends that an expression like that would never cover a gross under-valuation as in the present case, for the erroneous valuation of the closing stock for the year 1925 is found by the Commissioner to be merely thirty-seven per cent, of the correct valuation.
8. On the other hand counsel for the company tendered before up a statement showing that over the past ten years there has really been no loss of tax to the Crown, but that taking one year with another, there has, if anything, been a loss to the company by adopting the methods that they have. For that purpose he tendered a statement showing the past value of the stock, and-so we understood-what would be the case if the true figures had been inserted. However, the statement was objected to by counsel for the Crown, and as it had not been laid before the Commissioner and undoubtedly required verification as regards the figures for the past years, we allowed the objection, and rejected the statement and did not look at it.
9. On the whole, however, we have not thought it necessary to send the case back for further evidence under Section 66 of the Act, though we have thought it proper to direct that the original assessment, which I have already alluded to of September 21, 1926, and also the supplementary assessment of December 17, 1926, should be treated as annextures to the reference. So also as regards the notice of the Income-tax Commissioner under Section 34 of the Act of November 2, 1923, and the reply of the company of December 1926.
10. Now those last two documents bring me to a technical point that was raised in the case, and it is this. The supplemental assessment by the Income-tax Officer of December 17, 1926, was made under Section 23(3) of the Act, read with Section 34. There was an appeal to the Commissioner, and he at para 10 of his reference states:-
The case has not been dealt with under Section 34 which has nothing to do with it and it is no use dragging it in. The Income-tax Officer having found the method of accounting employed by the assessees to be such that it did not disclose the true profits, has taken action under the proviso to Section 13 and it is submitted that this proviso has been correctly applied.
11. It is now admitted that in this respect the Commissioner was inaccurate. The proper section to apply here was Section 84. It was under this section that the assessment before him was actually made, and it was not open to the Commissioner to ignore the section and yet to treat the previous assessment as wrong. Further, as regards Section 13 there is no provision for a notice under Section 13. Other sections deal with notices. Section 13 merely deals with the manner in which a particular assessment is to be arrived at so far as regards the method of accounting to be adopted.
12. That being so, an argument was submitted to us by the company that it was necessary for the Income-tax Officer to issue in addition to a notice under Section 84, a notice under Section 23(2), if the officer had reason to believe that the supplemental return made in pursuance of the notice under Section 84 was incorrect. However, this was merely a technical point. One answer made to it was that under Section 34, the provisions of the Act were only to apply so far as may be' to a notice issued under Section 34, and that accordingly a further notice under Section 23(2) was unnecessary. However, eventually it became unnecessary for us to decide this point because counsel for the company was willing to waive it, and to treat the case as if any notice necessary under Section 23(2) had in fact been given.
13. I can, therefore, now deal with the point we have really got to decide, and in my judgment that point depends on Section 3, viz., the charging section, What then was the income of this company for the previous year, viz., the year ending December 31, 1925. Supposing for the sake of argument the company had only started business in that year, it would to my mind be clear that whatever the company's return had said, the proper mode of ascertaining the profits would be to take at its correct figure the value of the stock both at the beginning and the end of the year. It would be wrong to adopt the method of accepting the company's return for the beginning of the year and only to rectify the figures at the end of the year. But it is argued that the Commissioner is entitled to do that in the present case, and thereby in effect to put an under-value on the stock at the beginning of the year, because that under-value existed at the close of the preceding year as the company had been trading in the previous year.
14. Then the argument runs that under the rigid rules of accountancy it follows that whether the closing figure of the year before was right or wrong, it must be adopted at the beginning of the year 1925. But to my mind there is a fallacy in adopting that as an universal rule incapable of any alteration. I quite appreciate that in an ordinary way that may be the proper course to adopt in arriving at the profits, although in Commissioner of Income-tax v. Chengalvaraya Ghetti I.L.R (1925) Mad. 836 it is described as a rough and ready manner of ascertaining the profits. But if, for instance, a mistake or an error has been made in the previous year as regards the stock in question surely there must be some way of correcting it in the subsequent year. If, for instance, for any particular year a company has to show a true profit and loss account, or a true balance-sheet, you don't necessarily arrive at a true result by accepting the valuation of the previous year. You may still get a fictitious profit for the particular year you are dealing with.
15. So, here, it seems to me that the method which the Commissioner proposes will result in a fictitious profit. It will not be a true profit for the particular year in question, viz, the year ending December 31, 1925, but will be something entirely different. The Commissioner's proposal may in this particular case benefit the Crown. In other cases it might not, but with that we are not concerned. The true principle to my mind is that under the Act you must ascertain the true profits for a particular year.
16. But I wish to guard myself very clearly against it being thought that we are in any way laying down any proposition, which will enable people to play fast and loose with their closing and their opening valuations. We are doing nothing of the sort, and nothing that I have said is to be taken to lead any one to believe that it is open to an assessee to adopt any arbitrary method of valuation he may like, and still less that he may take any course which will tend to defraud the revenue.
17. On the contrary, with all respect, I entirely agree with the decision of the Madras High Court in Commissioner of Income-tax v. Ghengalvaraya Chetti I.L.R (1925) Mad. 836. There what the assessee had done was this. He had originally bought some stock at Rs. 18-8-0 a piece, and for his financial year ending on April 12, 1922, he put its real value down at the end of that year at Rs. 6 a piece. On that he showed a loss for that particular year, and thereby I take it escaped assessment. But when it came to his return for the year beginning April 13, 1922, he did not put the stock at the real value of Rs. 6 a piece, but he inserted a fictitious sum of Rs. 13-8-0 a piece merely because that was what he paid for it in the year before assessment. The result naturally was this that it enabled him to escape the tax on profits for the year beginning April 13, 1922. But what does Sir Murray Coutts-Trotter say as to this (p. 842):-
The question is not so much of law but of business common sense. But there is a principle involved which determines the legal position, and I think the answer is clear that, as the value of the stock on the 13th of April 1922 was in fact and in truth Rs. 6 a piece, the assessee is not entitled to reduce what are truthfully called his profits by putting the fictitious value of Rs. 13-8-0 a piece on the stock-in-trade merely because that was the sum he happened to pay for it before the year of assessment. In my opinion, to allow this to be done would be to let the assesses ascertain not his profit or loss, but to debit himself with the same loss on the same goods in toto for perhaps a course of years. That cannot be permitted.
18. The present case seems to me to be the converse of the Madras case. It is not the assessee who is trying to put a fictitious value on the goods at the beginning of the year, but the Commissioner, who in effect has declined to allow the assessees to go into the question as to what was the true value of the goods in the beginning of the year. To my mind it would be clearly wrong of us in this converse case to allow the Commissioner to put a fictitious value on the goods at the opening year, just as it was in the case of the assessees in the Madras case.
19. And I notice further that the formal answer which was returned by the Chief Justice ran to this effect (p. 843):-
In our opinion, the answer that we should return to the question is that the assessee, having elected in the previous year to value his stock at the market price) of Rs. 6 a piece for the purpose of showing his trade loss during that year, is not entitled in the succeeding account to revert to the purchase price figure as representing the value of the goods, but is bound by the market price which he has fixed and been assessed on in the previous year unless he can show that he made a mistake as to the market value.
20. It is, therefore, made plain in that case that if a mistake has been made it can be rectified. I do not read that word 'mistake' as being confined to a mistake under the Indian Contract Act. I think it would also cover an error. Here ex hypothesi there was an error made, viz., that a wrong valuation was put on the stock at the beginning of the year as well as at the end of the year. In my judgment then both the errors should be corrected and not merely one.
21. Then there was something said in the course of the case about fraud and dishonesty and so on. Personally, I regret that that was introduced into the discussion, because if any such odious charges are to be raised, they should be raised expressly so that the accused person may know exactly what he has to meet. Further, there should be specific evidence on the point so that the Court itself may know what is the case before it. We have nothing of that sort bore. So far as I am aware on the papers before us no such charge of fraud or dishonesty was made. At any rate when the matter came before the Commissioner he formulated no charges of dishonesty. Moreover, he has by his counsel declined to allow us in the case before us to go into the figures of the balance-sheets of the previous years. The case, therefore, is very different from the Madras case where the Commissioner laid before the Court all the material figures for the preceding years so that the Court could see precisely what had been done and precisely what was objected to by the Commissioner in that particular case.
22. The matter may further be tested by this that there are several clauses in the Act for protecting the public against frauds on the revenue. For instance, under Section 23 there is power to the Commissioner to impose a penalty on an assessee who deliberately furnishes inaccurate particulars. But it is not suggested here that the Commissioner has attempted to do anything of the sort, or has served any such notice on the assessee, or that he has complied in any way with the provisions of the section which requires the assessee to be heard and to be given an opportunity of being heard before any such order is made. Similarly, under Section 52 certain false statements are to be treated as offences committed under Section 177 of the Indian Penal Code. Of course in addition to those penalties there is a provision made under Sections 34 for reopening assessments within a certain period of time. If that period of time expired then it may be that so far as the civil remedy is concerned, the amount in question cannot be recovered. But that would not necessarily apply to criminal proceedings.
23. The particular method of assessment which is now proposed by the Commissioner lends some support to the arguments of the appellants' counsel that what the Commissioner is really trying to do is not to recover the tax on the true profits for the year in question, but on the profits for the previous year or years which he is unable owing; to lapse of time to recover under Section 34. With that, however, we are not concerned. As I have already pointed out, the proper course is to determine the profits for the year ending December 31, 1925.
24. There was one other point made at the end of the case, viz., as to the position of the Commissioner under a 13. It is clear that of prima facie the method of accounting adopted by the assessee is to be employed. On the other hand if the Commissioner is dissatisfied with it, and thinks that by that method the income mills cannot properly be deduced, then 'the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
25. Now we have not got to determine whether the decision of the Commissioner is final if he does come to a particular determination on the proper method of assessing profits. This is because he has very properly, if I may say so, submitted to us by this reference what in law is the proper basis on which he should exercise his determination under Section 13. It is on that footing, therefore, that we proceed to determine this case, and to state what in our opinion should be the proper basis to adopt.
26. As regards the formal question submitted to us I share the Commissioner's objections to its form. I also think that it goes beyond the real point for decision and is too generally stated to admit of an answer Yes or No being given without being exposed to a risk of misunderstanding.
27. Accordingly I would propose to give a limited answer so as to meet the real dispute in the present case. I would, therefore, reply as follows, via., 'In the assessment of the company for the year 1926-27 in respect of profits for the year 1925-26 the assessment Exhibits E and El ought to be varied by valuing at their true valuation the company's stocks both at the beginning and at the end of the year in question and not only by revaluing the stock at the end of the year.'
28. I wish to add some observations on the reference itself. I am very jealous of the reputation of the Bombay High Court, and I aim very anxious that the work we have to do in important cases should be done in the best possible way. This is not merely from any selfish motive, because all lawyers of experience know that the better the work is done by the Bar and by the solicitors down to their humblest clerk, the easier becomes the task of the Bench, and the more likelihood is there of a correct decision being arrived at by that Bench, and also, I may say so with all respect, by any tribunal that may be superior to it. Bombay with its vast and growing commercial business is naturally attracting business of various sorts of a larger and more complicated nature. This in its turn results in greater complexity and importance in cases under the recent Income-tax Act of 1922 which in itself is a far more complicated enactment than the one which existed previously, though I am happy to think that at present we have a less complicated Act to deal with than the Income-Tax Act in England, But I will ask counsel for the Grown and the income-tax authorities to consider whether in these heavy cases involving lacs of rupees of public money, and 'for the matter of that lacs of tax payable by private individuals or companies, is it not advisable to have the references submitted to the Court stated with all that precision and with all the relevant documents which a proper determination of the case requires. I think that in many respects the cases stated by the Income-Tax Commissioners in England may be regarded as models of lucidity in what is admittedly a very difficult subject.
29. I will accordingly ask that each reference should be clearly stated, and that all. relevant documents should be annexed to the petition so that we may know exactly what we have to deal with. It is not sufficient, in my opinion, merely to raise a general point of law. This Court is not a debating society. We give our decision on the cases that actually arise before us, and the practice of the Courts is to pay the closest attention to the facts of individual cases because it is only in that way and by testing the facts of a particular case and after hearing arguments, that the true principles of law may be elucidated and applied in any particular case, It is, therefore, of great importance that the Commissioner's findings of fact should be definite and adequate.
30. As regards the costs of this reference, we think they must be borne by the Commissioner as on the Original Side scale.
31. This is a reference arising out of the assessment for the year 1926-27 ending March 31, 1927, of the Ahmedabad New Cotton Mills Coy. Ltd. to income-tax and super-tax. The assessees, whom 1 shall call the company, are taxed on the balance-sheet ending December 31,192o, and it is with reference to that balance-sheet that the question for our decision arises.
32. Shortly put, the opening balance of stock, according to the system of accountancy adopted by the assessees, is valued not at the cost price or the market value whichever was the lower but at what is described in the balance-sheet as under-cost. That w the first item on the debit side and as regards the closing stock balance on the credit side of the same account the valuation adopted by the company is described as under-cost. What the extent of the under-cost is is a matter which is not proved before us.
33. Shortly put, the Commissioner says that the aasessees have in this balance sheet and in previous years assessed their stock balance at a value considerably below what it should be assessed at, and he claims that in the year under assessment the closing stock balance should be valued at a figure which he save is its correct value. That the value he places on it is correct is admitted. But he objects to the opening balance being valued in a similar way.
34. The objections of the Commissioner are baaed, firstly, on the rule of accountancy under which he suggests that the closing balance of the previous year must be the same as the opening balance of the succeeding year. Consequently, as the assessees have adopted a particular valuation as the closing balance of the previous year that valuation must be adopted for the opening balance of the year in question.
35. It appears to me that no rule of accountancy can be invoked for the purpose of perpetuating an error in the balance-sheet and if there be an error in the valuation of the opening balance for the year in question, there must be some way of correcting it in order to make the balance-sheet a true one. Nor do I think that the case in Commissioner of Income Tax v. Chengalvaraya Chetti I.L.R (1925) Mad. 836 has any application to the facts of this case, because what the assesses there was seeking to do was to take the opening rate of Rs. 13 of the prior year as the opening balance for the year for which he was being assessed. The opening balance in the year under assessment was not the correct closing balance of the previous year. Then it seems to me that if the principle contended for by the Commissioner were adopted, what would be valued for the year in question would not be the actual profits for that year, but it might very likely include profits which might have been recovered the year before or in previous years, and to allow the Commissioner to now recover such profits in the way he claims would be practically to allow him to go behind the limitation provided by Section 34 of the Act which enables the Commissioner to recover the profits which have escaped taxation provided he does so within a year of the termination of the year under assessment. It is to be noted that there are other methods by which any assessee who attempts to deliberately undervalue his stock might be brought to book. They have already been referred to by the learned Chief Justice in his judgment with which I respectfully agree.
36. Under the circumstances I am of opinion that the question referred for our opinion should be answered in the way suggested by the Chief Justice.