1. The assessee is a firm engaged in business of dyeing, printing and selling cloth. The present reference arises out of the assessment for the year 1947-48. The assessee purchased mill cloth such as Koras and Mulls and handloom cloth and got them dyed and printed and sold them. The company also purchased dyes and chemicals, dyed them in their own 'Karkhana' by engaging coolies and sold the dyed cloth in the market. They also purchased dyed cloth in the market, got them printed and sold them. Besides these, the assessee firm bought and sold ready made dyed and printed cloth, besides selling mill and handloom cloth undyed and unprinted.
2. A return for the account year 'Vyaya' ending with 22-3-1947 was submitted by the assessee which showed an income of Rs. 30,859/- from the business, Rs. 840/- from other sources. The assessee was called upon to produce his account books and he produced a Day Book and a ledger. In the statement enclosed to the return, a sum of Rs. 30,676/- was shown as the gross profit on a turn over of Rs. 1,69,728/- working out to 18 per cent.
3. The Income-tax Officer rejected the accounts submitted by the assessee for the following among other grounds that (a) no stock register was produced and large stocks of cloth appeared to him to have been suppressed, (b) the expenditure shown as having been incurred in dyeing and printing was fanciful, (c) the quantity of cloth dyed and printed had not been shown, (d) number of unexplained cash credits were shown and (e) the books contained entries of fictitious purchases and sales.
As the account books could not be relied upon, he came to the conclusion that the assessee's income could be determined only on the basis of the income made by similar businessmen. Therefore on the basis of independent enquiries made by him, he came to the conclusion that the assessee must have made an income of not less than Rs. 1,20,000/- during the year of account. He arrived at this figure being of the opinion that the information that he gathered from enquiries showed that in the yew under account manufacturers of dyed and printed cloth made bumper profits going up to 50 per cent. The assessee appealed to the Appellate Assistant Commissioner, Income Tax, Vijayawara.
The appellate authority confirmed the assessment and dismissed the appeal. The matter was taken in further appeal before the Income Tar Appellate Tribunal, Madras 'B' Bench. The Tribunal was of opinion that the order of the Income Tax Officer and the Appellate Assistant Commissioner could not ba interfered with and therefore dismissed the appeal. Thereupon the assessee applied for a reference by the Tribunal to the High Court of the question of law arising in the case. The High Court directed on 13-7-1955, the Tribunal to state the questions of law arising in the case and hence this reference.
(4) The questions that have been referred to us are:
1. Is the assessment made by the Income-tax Authorities without disclosing to the assessee the materials on which the assessment was made valid?
2. Is the assessee precluded from raising that plea in view of his conduct in the various of these proceedings?
3. Whether the assessment made on the baste of a flat rate is legal? and
4. To what extent can the Income Tax Authorities disclose particulars on which they base their assessment without contravening the provisions of the Indian Income tax Act?
5. The Income-tax Officer, as has been shown above rejected the accounts of the assessee, and proceeded to determine the extent of profits on the basis of the result of his enquiries. The proviso to Section 13 of the Income Tax Act empowers the Income-tax Officer to assess the profits, on such basis and in such manner as he thinks proper where ha conies to the conclusion that the income and profits could not be properly deduced from the accounts of the assessee.
But it has to be observed that the power of the Income-tax Officer under this proviso is not an arbitrary power. He must exercise his discretion and judgment judicially and reasonably. Further, if the Income-tax Officer proposed to use against the assesses the result of any private enquiry made by him, he should put him in possession of the full particulars and give him an opportunity to meet the same. Although the assessing authority having had no other means of arriving at the correct amount of profit by reason of the accounts of the assessee being unsatisfactory, could have recourse to the method of independent enquiries about profits made by like concerns doing similar business, he cannot come to his own conclusions without affording an opportunity to the assessee to be able to satisfy the Income-tax Authorities that the cases relied upon by him were not comparable cases and were distinguishable on various grounds.
The Income-tax Officer cannot be said to make an assessment to the best of his judgment if he is not guided by the dictates of justice and fairplay. Natural justice demands that he should draw the attention of the assessee to the particular case, the authority had in view. The Income-tax authority is not competent to make a random assessment based on his private enquiries which may not be revealed to the assessee. Local enquiry and the placing on record a note of the results of such enquiry are essential to sustain an ex parte assessment.
If the Income-tax Officer proposes to act upon, information collected by him independently on private enquiries, he should disclose to the assessee the nature of that information to rebut it. There ought to be an opportunity to the assessee to displace the taxing officer's estimate by adducing evidence. That it is always open to the assessee and the assessee has a right to displace the Taxing Officer's estimate by placing evidence to rebut the same is well settled by the decision of the Privy Council in the case of the Commissioner of Income-tax v. Kameshwar Singh of Darhhanga, ILR 12 Pat 318: (AIR 1933 PC 108).
6. The non-disclosure to the assessee of the information supplied to the Income-tax Department by its representative has been regarded as amounting to a violation of the fundamental rules of justice. Their Lordships of the Supreme Court had occasion to consider this aspect of the case in Dhakeswari Cotton Mills Ltd. v. Commr. of Income-tax of West Bengal, 1955 SCJ 122: ((S) AIR 1955 SC 65) and in that case Mahajan, C. J., observed:
'It is somewhat surprising that the Tribunal took from the representative of the Department a statement of gross profits rates of other cotton mills without showing that a statement to the assessee and without giving him an opportunity to show that the statement had no relevancy whatsoever to the case of the mill in question. It is not known whether the mills which had disclosed the rates were situate in Bengal of elsewhere and whether these miliswere similarly situatedand circumstanced. ...'
Under those circumstances their Lordships held that the Tribunal violated certain fundamental rules of justice in reaching its conclusions.
7. The facts of the case before us do not show that any attempt was made by the Income-tax Officer to draw the attention of the assessee to the materials collected by him on private enquiry and which formed the basis for his conclusions. He merely rest content on the circumstance that in the year of account the manufacturers of dyed and printed cloth like the assessee made bumper profits shooting up to 50 per cent, and over. It was all the more necessary in a business of the kind that the assessee firm was doing that the information gathered with regard to other manufacturers should have been placed before the assessee, because in a business of this kind there could be no two truly comparable cases.
The assessee's business consisted of (a) buying mill cloth (Binny's) and selling it in the market as cloth (b) buying and selling handloom cloth and selling the same as such, (c) buying mill cloth and handloom cloth, getting it dyed and printed in his own karkhana and selling the same and (d) buying mill cloth and handloom cloth and getting it dyed and printed elsewhere and selling it the final dyed and printed cloth in the market.
8. The profit in business (a) is bound to be different from the profit made in business (b) likewise the percentage of the profit in business (c) could not be the same in business (d). These factors have necessarily to be taken into consideration in arriving at the amount of profit. There could not be a rule of thumb in these matters.
9. Just as the Income-tax Officer ignored this aspect of the matter completely, the Appellate Assistant Commissioner and the Tribunal also appear to have bestowed no thought over it The Tribunal says in its order:
'The Departmental representative brought to our notice cases where the gross profits in dyeing and printing was 50 or 55. Due to the special circumstances that were present during the year of account and a great demand for dyed and printed goods in that year the rate does not appear to be vindictive or capricious. It is on the whole fair.' (P. 98 of the Printed Book)
10. The Tribunal seems to have taken it for granted that the assessee would have made as much profit as the others, because of the boom period, without going into the matter as to whether such profit could be made in the particular variety of business undertaken by the assessee.
11. The result is that we set aside the order of the Tribunal and remand the case to it with the direction that it do disclose the material gathered from private enquiries to the assessee and give full opportunity to the assessee to place any relevant material to meet the substance of the private enquiry. It the Tribunal thinks that for further enquiry the case should go to the Income-tax Officer, it might send it to the Income-tax Officer to act up to the directions of this Court. The department would also be entitled to rebut the evidence the assessee may place before the authorities.
12. In the view that we have taken, we answer the questions of law referred to us as follows:
Q. 1. in the negative.
2. in the negative.
3. in the negative.
4. All particulars on which they base the assessment.
13. The assessee would be entitled to his costs. Advocate's fee Rs. 250/-.