SAMBASIVA RAO J. - The Income-tax Appellate Tribunal of Hyderabad referred the following question for our decision :
'Whether, on the facts and in the circumstances of this case, the information collected by the department was disclosed to the assessee and he was afforded an opportunity as directed by this court in R.C. No. 17/56 and whether there is any material which could form the basis of an order under section 13 of the Income-tax Act ?'
This case has had a long and tortuous history, having come to this court earlier on more than one occasion. The assessee is a firm engaged in the business of dyeing, printing and selling cloth. The assessment year for the purposes of income-tax assessment is 1947-48 for which the 'previous year' is the Telugu year Vyaya ended March 22, 1947. The chargeable accounting period for the business profits tax assessment is April 1, 1946, to March 31, 1947.
The assessees lines of business are diverse, through the most important of them was manufacture and sale of dyed and printed cloth. It held wholesale quota for Mettur mulls. Supplying of cloth for commission was another business. In so far as the manufacture and sale of dyed and printed cloth is concerned, the assessee did its manufacture and business in several ways. It purchased mill cloth, got it bleached, dyed and printed through professional dyers and sold the same. It also purchased dyes and chemicals, dyed some cloth in its own karkhana by engaging workers and sold the dyed cloth in the market. It also purchased dyed cloth in the market got it printed and sold it. Besides these, the assessee-firm bought and sold ready made dyed and printed cloth. In addition to these lines of dyed cloth business, it was also selling mill and handloom cloth undyed and unprinted.
The assessee filed its return for the account year Vyaya ending on 22nd March, 1947, showing an income of Rs. 32,354, out of which Rs. 30,859 was shown as income from business. It was called upon to produce its account books and accordingly it produced a day book and a ledger. The total turnover that was shown by the assessee was Rs. 1,69,728, out of which a sum of Rs. 30,676 was shown as the gross profit which worked out to 18 per cent. of the total turnover. The Income-tax Officer rejected the accounts on various grounds, that no stock register was produced, that the expenditure shown was fanciful, that there were purchases of dyes and chemicals not brought to account, etc. After rejecting the account books and the book results, he estimated the assessees income at Rs. 1,20,000. This assessment was confirmed both by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. A request by the assessee for a reference under section 66(1) of the Income-tax Act was rejected and it, therefore, ultimately took the matter before the High Court under section 66(2) of the Income-tax Act, which would be hereinafter referred to as the Act. Thereupon, this court directed the Tribunal to state a case on the question of law formulated by it. In obedience thereto, the Tribunal drew up a statement of the case and submitted the same High Court. That reference was numbered as R.C. 17 of 1956.
The court in its order dated 14th March, 1958, in R.C. No. 17 of 1956 remanded the case to the Tribunal making the following observation :
'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 material collected by him on private enquiry and which formed the basic for his conclusions. He merely rested content on the circumstances that in the year of account the manufacturers of the 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 assessees business consisted of, (a) buying mill cloth (Binnys) and selling it in the market as cloth, (b) buying 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 the final dyed and printed cloth in the market.
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.
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.
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.'
Having made this criticism, this court remanded the case and directed the Tribunal as follows :
'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. If the Tribunal thinks that for further enquiry the case should go to the Income-tax Officer to act up to the directions of this court. The department would also be entitled to rebut the evidence that the assessee may place before the authorities.'
On remand, the Appellate Tribunal looked into the matter and sent the case to the Income-tax Officer 'to act up to the directions of the High Court' as it took the view that it was the Income-tax Officer alone who could say what the nature of private enquiries was.
The Income-tax Officer went into the matter again, having disclosed the following information to the assessee :
1. The substance of private enquiry;
2. The basis for estimating the suppressed income and consequently the total income; and
3. The result in similar cases comparable to the assessees case.
On holding an enquiry he submitted a remand report. The remand report by the Income-tax Officer was that his private enquiry showed that the assessee had made a turnover of not less than Rs. 2,35,000 in its business of manufacture and sale of dyed and printed cloth. With this information as the basis, the Income-tax Officer employed two methods in arriving at the suppressed income and consequently the total income from the entire business. Relying upon two comparable cases, the officer fixed the rate of profit a 50% of the total turnover of Rs. 2,35,000 in the manufacture of dyed and printed cloth. He, thus, arrived at the figure of Rs. 1,17,500 as gross profit on the estimated turnover in the manufacture and sale of dyed and printed cloth. Having fixed these two figures of the estimated turnover and the gross profits in the manufacture and sale of dyed and printed cloth, he adopted two methods to arrive at the total income from the business done by the assessee during the period under assessment. Under the first method, he arrived at the figure of Rs. 1,20,692 and under method No. 2, at Rs. 1,20,922 as the total income from the entire business during the current period. He, therefore, fixed the income in round figures at Rs. 1,20,000. The assessee took objections before the Appellate Tribunal to this estimate and report prepared by the Income-tax Officer. One was the turnover of Rs. 2,35,000 was for all the different kinds of business carried on by the assessee and was not in respect of the business of manufacture and sale of dyed and printed cloth only. Another objection of the assessee was that the Income-tax Officer had not disclosed the nature of the local enquiries made at the time of the original assessment. It also raised the contention that no material which could form the basis of an order for computation under section 13 of the Act, was communicated to the assessee and no information and explanation was sought from it by the Income-tax Officer, in respect thereof. The Appellate Tribunal, however, repelled these objection and held that the assessment made by the department was fair and reasonable and needed no revision. It accordingly dismissed the assessees appeal. Thereupon, the reference has been made, formulating the question of reference as stated at the outset of this order.
Neither the learned counsel for the assessee nor the learned counsel for the department has objected before us to the remand that was already made by this court in R.C. No. 17/56. The decision of the Supreme Court in Keshav Mills Co. Ltd. v. Commissioner of Income-tax has been brought to our notice, which laid down that the High court in calling for a supplementary statement of the case under section 66(4) of the Act can require the Tribunal to include in such supplementary statement only such material and evidence as may be already on the record but which has not been included in the statement of the case made initially under section 66(1) or section 66(2) of the Act and that it has no jurisdiction to direct the Appellate Tribunal to collect additional material and make it a part of the supplementary statement.
It is stated before us that since the supplementary statement was submitted only on such material and evidence as was already on the record and no additional evidence was taken on record after the matter was sent back by this court, the supplementary statement now submitted by the Appellate Tribunal may be considered. We, therefore, proceed to consider the question referred to us by the Appellate Tribunal.
Shri Narasaraju, the learned counsel for the assessee, contended before us that the Income-tax Officer and the Tribunal, while fixing the total income of the assessee at Rs. 1,20,000 did not act on any material, but acted on pure guess and suspicion and that no details of the information that was at the disposal of the department as to the computation of the total turnover and the gross-profit thereon were furnished to his client. He contended that the assessee was entitled to be furnished the department with the details of such information, in order that the assessee had an opportunity to rebut the same. Unless these details were furnished to the assessee, the assessee could not ascertain the correctness or otherwise of those details and rebut them before the taxing officer. In support of this contention, he relied upon a decision of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax. C.J., speaking for the court, observed :
'In this we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. The estimate of the gross rate on sales, both by the Income-tax Officer and the Tribunal, seems to be based on surmises, suspicions and conjectures.
It is somewhat surprising that the tribunal took from the representative of the department a statement of gross profit rates of other cotton mills without showing that 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 these rates were situate in Bengal or elsewhere and whether these mills were similarly situated and circumstanced.'
He also invited our attention to the decision of a Bench of this court, of which one of us was a member, in Nagulakonda Venkata Subba Rao v. Commissioner of Income-tax. Jaganmohan Reddy J.; as he then was, speaking for the Bench, observed at page 785 :
'In making such assessment it is fair and equitable to conclude that the assessee will be given an opportunity of showing, if he can, that the material or the basis upon which the Income-tax Officer proposes to assess his income is incorrect.'
The following further observation at page 786 was also relied on :
'It may be noted that the Income-tax Officer in the discharge of their duties under the Act receive a good deal of information which is not at all evidence according to the accepted notions of law. Consequently, it is only fair and just that the accuracy or otherwise of such information will have to be ascertained and the only way of doing so is to give an opportunity to the assessee who can urge his plea as to whether the Income-tax Officer is misinformed.'
Ultimately, while answering the reference in favour of the assessee, their Lordships held at page 787 :
'It is not in the first place shown that the assessee was given an opportunity, nor is it sufficient to justify has assessment which not only does not furnish the basis on which the estimate is made but which, without doubt, can be said to be a guess.'
Shri Narasaraju on the basis of these decisions contended that no sufficient opportunity was afforded to his client and the assessment does not furnish a basis on which the estimate is made.
In this connection it is also pertinent to note that this court, while remitting the case back to the Tribunal, while referring to the various types of business carried on by the assessee, observed :
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.'
The question is whether the department had any scientific basis and material in working out the profit and income or it merely followed a rule of thumb in fixing it at Rs. 1,20,000 or fixing it on the basis of the rate of 50% profit out of the total turnover.
Shri Kondaiah, the learned counsel for the department, strenuously contended before us that the criticism levelled by the learned counsel for the assessee is unwarranted and unjustified as the department has afforded ample opportunity to the assessee and gave him such material for the assessment as would form the basis for an order under section 13 of the Act. He invited us to the several passages in the statements of the Tribunal, the remand report of the Income-tax Officer and other records, in an endeavour to show that ample opportunity and material were made available to the assessee.
The crux of the order passed by the department is that on private enquiry the Income-tax Officer came to know that the assessee had made a turnover of not less than Rs. 2,35,000 in its business of manufacture and sale of dyed and printed cloth. It is only this information as a basis, the Income-tax Officer employed his two methods in arriving at the suppressed income and, consequently, at the total income from the entire business. It was the complaint of the assessee even on the previous occasion, that the material gathered from such private enquiries, which led to the estimate of the total turnover at Rs. 2,35,000 was not disclosed to him. This court even then upheld that objection of the assessee and, therefore, directed that the department should disclose the material gathered from private enquiries to the assessee and give full opportunity to the assessee to place before it any relevant material to meet the substance of the private enquiry. The record, however, does not disclose that such material was furnished to the assessee, so that an opportunity was afforded to him to meet the substance of the private enquiry. The statement of the case itself says in paragraph 8 that the Income-tax Officer gave to the assessee only 'the substance of the private enquiry.'
The communication bearing G.I.R. No. 103-P/47-48 dated 25th May, 1959, from the Income-tax Officer to the assessee which he sent, purporting to disclose the basis on which the assessment was made and the material gathered from the private enquiries, which went to form the above basis, in pursuance of the orders of this court as well as the Appellate Tribunal itself, states as follows :
'For the various reasons discussed at length in the assessment order, your account books were rejected and the total income was estimated by virtue of local and private enquiries as well as by comparison of results obtained in other similar cases. The substance of the private enquiry is that you have made the turnover of not less than Rs. 2,35,000 in the account year and the suppressed turnover will be Rs. 1,10,000 roundly. Taking the profit at 50 per cent. On the suppressed turnover, the suppressed income was determined at Rs. 55,000....'
It is seen from the above, that excepting a bald statement that the substance of the private enquiry was that the assessee had made a turnover of not less than Rs. 2,35,000, no other detail or information was contained in this communication. What is it that the assessee can rebut in this bald statement which is nothing but an assertion that a total turnover of not less than 2,35,000 was made By any stretch of imagination it cannot be held from this, that the material gathered from the private enquiry was disclosed to the assessee and much less that they were disclosed in such a manner as to afford a full opportunity to the assessee to rebut the substance of the private enquiry. The Appellate Tribunal also, while rejecting the contention raised on behalf of the assessee that the estimate of turnover at Rs. 2,35,000 was for all varieties of business, observed in paragraph 2 of its order that :
'We do not agree with him in that respect, for we find in the note appended to the assessment order, which, perhaps, was not communicated to the assessee along with the assessment order, the Income-tax Officer has given definite indications that the estimate of Rs. 2,35,000 was in regard to turnover in manufacture and sale of dyed and printing cloth only.'
It is, therefore, evident that a certain note containing the indications of the total estimate was not communicated to the assessee. In view of these circumstances we cannot but agree with the contention of the learned counsel for the assessee that the material relating to the private enquiry was not furnished to the assessee and that full opportunity was not afforded in such a manner as to give full opportunity to him to meet the substance of the private enquiry.
The department also tried to support and sustain its estimate of the total turnover of the assessees business of manufacture and sale of dyed and printed cloth at Rs. 2,35,000 by the following reasoning. It thought that the assessee had not brought into account, purchases of dyes and chemicals to the extent of Rs. 4,533 which were utilised for manufacture outside the accounts. The value of dyes and chemicals shown in accounts, as having been utilised in the manufacture of dyeing and printing was Rs. 5,136. Against this, the assessee had shown a turnover of Rs. 1,24,347. Working on this ratio, the department estimated that the turnover not brought to account relating to the dyes and chemicals of the value of Rs. 4,533 would come to Rs. 1,11,912. If this was added to the disclosed turnover of Rs. 1,24,347 shown in respect of the business of manufacture of dyeing and printing cloth, the total turnover also comes to about Rs. 2,35,000 which was the same as disclosed by private information. This reasoning and basis of the estimate does not appear to be warranted and justified. Even supposing that the dyes and chemicals of the value of Rs. 4,533 were not brought into account by the assessee, it would not necessarily follow that it has utilised them in that part of the business of manufacture of dyed and printed cloth, which was suppressed. It is also very material to note that excepting the department coming to its own conclusions and suppositions, no questions were addressed to the assessee and no information was sought from him, as to the purchase of and the use to which these chemicals and dyes of the value of Rs. 4,533 were put. The entire proceeding is singularly devoid of any data as to how much dye produces how much cloth. The remand report discloses that there ware other lines of business done by the assessee during the relevant period, the return in regard to which was accepted by the department. In the table demonstrating method No. 1, the remand report discloses some more items which might require the use of dyes and chemicals. For instance, turnover in dyed cloth (including manufacture of dyed cloth) and turnover in printed cloth in respect of printed cloth purchases, are shown as Rs. 15,509 and Rs. 14,747, respectively. It is not in dispute that the assessee was doing in this particular year under assessment, a variety of business like the purchase of mill cloth such as koras and mulls, and handloom cloth and getting them dyed and printed and selling them. It was also dying cloth in its own karkhana by engaging coolies and selling the dyed cloth in the market. It was also purchasing dyed cloth in the market and getting them printed and was selling it after such printing. All these obviously require the use of dyes and chemicals. The department had no material to show, and at any rate no such material has been placed on record to show, that the unaccounted dyes and chemicals of the value of Rs. 4,533 went into and were also utilised in the suppressed turnover which would form part of the business of manufacture and sale of dyed and printed cloth as distinct from other lines of business which were admittedly carried on by the assessee and in respect of which the return of the assessee was accepted.
There is also another hurdle in the way of the department. It is stated that even in respect of business of manufacture of dyed and printed cloth, it covered two different categories of manufacture : one is manufacture of dyeing and printing of cloth in the own karkhana of the assessee and the other, dyeing and printing of cloth outside the karkhana through professional dyers and printers. The Income-tax Officer stated that the manufacture and sale of dyed and printed cloth through professional dyers and printers, constituted a major portion of the business and the manufacture in the assessees own karkhana was of a negligible extent. If that is so, there is no material before the department to know where exactly this unaccounted quantity of dyes and chemicals worth Rs. 4,533 was utilised. Whether they were used in the assessees own karkhana or whether they were utilised in getting the cloth dyed and printed outside through professional dyers and printers, would be a very material question, not only in estimating the total turnover of the business but also in computing the profits, because it is quite possible that profits, if the cloth was dyed and printed in the assessees own karkhana, might be different from the profits if the cloth was dyed and printed outside. It is not the case of the department that the assessee got its cloth dyed and printed by outside professionals with the help of the dyes and chemicals, it itself supplied. On the other hand, the original order of assessment of the Income-tax Officer, bearing G.I.R. No. 103-P/47-48, which is annexure 'D' to the statement of the case, states :
'The assessee purchased mill cloth, viz., koras and mulls and handloom cloth, got the cloth bleached, dyed and printed through professional dyers to a large extent and sold the same. They also purchased dyes and chemicals dyed some cloth in their own karkhana by engaging dyeing coolies and sold the same.'
From this statement, it appears as though that the Income-tax Officer was proceeding on the assumption that the dyes and chemicals purchased by the assessee were only used by him for dyeing and printing the cloth in its own karkhana. If, therefore, these unaccounted dyes and chemicals were used in the assessees own karkhana, then the turnover in the karkhana itself would be of large proportions, while the Income-tax Officer stated, evidently on the basis of the private enquiry, that the munufacture and sale of dyed and printed cloth done through professional dyers and printers constituted the major portion of its business and that the manufacture in the karkhana was of a negligible extent. If these unaccounted chemicals and dyes of the value of Rs. 4,533 were also to be taken as used in the assessees own karkhana, then the insignificant portion of the business (as opined by the Income-tax Officer) done in the karkhana itself would be Rs. 2,35,000, the figure arrived at by the Income-tax Officer on the basis of the chemicals used. If that were to be the case, the turnover resulting from the manufacture done outside the karkhana which is found to be the major portion should be much higher and the estimate of Rs. 2,35,000 would not fit into these calculations. Thus, no proper nexus or connection is made out between the unaccounted chemicals and the estimate of the total turnover. Judged from any angle, this estimate of Rs. 2,35,000 on the basis of the unaccounted chemicals and dyes appears to be unwarranted.
Equally unwarranted in our view is the adoption of the rate of profit at 50% of the total turnover. The assessee estimated his profit only at 18% while the department puts it at 50%. This is done by the department on the basis of the disclosed gross-profit rate in some comparable cases. Even in that section of the business of the assessee which deals with dyeing and printing of cloth and selling it, there were different ways of manufacture adopted by the assessee. As has already been stated, the assessee purchased koras, mulls and handloom cloth, got them bleached, dyed and printed through professional dyers. It also purchased dyes and chemicals, dyed some cloth in its own karkhana by engaging dyeing coolies and sold the same. It also purchased the dyed cloth from other merchants and got it printed by professional printers. It also carried on purchase and sale of dyed and printed cloth. It is also quite possible that the profit in one method of manufacture of dyed and printed cloth might be different from the profit in another method of manufacture. A scrutiny of the record does not disclose any consider ation by the department as to the possible rates of profit from these different methods of manufacture. No material or data has been placed before us which could have formed the basis of the decision of the department in this behalf. It is known whether the comparable businesses on the basis of which 50% rate of profit was fixed by the department were doing dyeing and printing trade in all the methods which the assessee adopted during the year under assessment. That is why this court in its order in R.C. No. 17/56 observed that :
'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.'
There is no basis for the department to reject the assessees contention that the total turnover should be analysed into different types of trade and different rates with reference to different types should be adopted. In the absence of any material or data connecting the comparable businesses with the different methods of manufacture adopted by the assessee or indicating that the same rate of profit, viz., 50%, was uniformly derived by the assessee in all the different types of manufacture, the conclusion is irresistible that the department is not justified in importing the rule of thumb into the matter and imposing a flat and uniform rate of 50% in all the classes of manufacture. Therefore, we are not satisfied that there is any legal and acceptable basis for fixing the rate of profit at 50% of the total turnover.
In view of these conclusions, we have no hesitation in holding that the information collected by the department was not completely disclosed to the assessee and it was not afforded an adequate opportunity of rebuttal as directed by this court in R.C. No. 17/56 and that there is no material which could form the basis of an order under section 13 of the Act. We, therefore, answer both questions of the reference in the negative against the department and in favour of the assessee. The assessee would be entitled to his costs. Advocates fee Rs. 250.
Questions answered in the negative.