CHANDRA REDDY, C.J. - The questions referred to this court under section 66(2) of the Indian Income-tax Act are these :
'1. Whether there is material to hold that Subbarao purchased the stock in question and suppressed then in the account of the previous years and
2. If they were suppressed stock, could the petitioner be assessed on the basis of suppressed stock for the accounting year 1942-43 ?'
This reference arises out of the assessment made on Jaldu Anantha Raghuramayya, alias Ramarao, adopted son of the Jaldu Venkata Subbarao, who was carrying on business in timber. Venkata Subbarao died on 22nd June, 1942. Soon after his death, the executors and trustees took over the management of his estate. During the assessment proceedings for the year 1943-44, the examination of the accounts of the Masulipatnam timer deport produced by the executors revealed excess sales and closing stock of the value of Rs. 75,073. When called upon to explain the excess sales and closing stock, the executors could not give a satisfactory explanation. They contented themselves by saying that all the accounts and records were already produced and the contentions on their behalf were put forward at the time of the original assessment. In that state of affairs, a sum of Rs. 75,073 representing the excess sales and closing stock was added to the book version of profits on the ground that this income was in addition to the book profits.
This addition was challenged both before the Appellate Assistant Commissioner and before the Income-tax Appellate Tribunal on the ground that the late Subbarao must be presumed to have purchased some stock and kept it unaccounted for in the books of account. On this assumption, a request was made that this should be deleted. The assessees appeal was rejected by the Appellate Assistant Commissioner on the ground that there was no evidence of purchase by the law Subbarao either during the year of accounts or in years prior to that without bringing such purchase into the books of account. The further appeal carried to the Income-tax Appellate Tribunal was not successful.
The Tribunal concurred with the view of the Appellate Assistant Commissioner that there was no material on record to hold that Subbarao purchased any stock which he had not brought into the accounts. The opinion of the Tribunal was that 'the excess now brought to light represents the excess shortage or wastage claimed in prior years and also short measurements that had been resorted to in the prior years.' The Tribunal observed :
'In any case, this sum of money represented sales and excess stocks during the year and as such has to go to the credit of the revenue account and it therefore forms the income of the assessee.
It appears from the order of the Tribunal that another point was urged, namely, that this income did not represent the income of one year and that it should be spread over a number of years. This was rejected by the Tribunal in the view that the assessee by not taking the actual inventory of stock at the end of each of the prior years, deprived the Department of the correct profit and the books version showed only an artificial figure based on the entries made in the books and it was not open for him to argue that the figures furnished by him during the prior years were wrong and that a part of the sum in dispute related to those years.
After the rejection of the appeal, the assessee requested the Tribunal to make a reference under section 66(1) of the Indian Income-tax Act for the opinion of this court. This petition was disallowed as the Tribunal felt that no question of law arose on the facts of the case. On the application of the assessee this court directed the Tribunal to refer the two questions aforementioned for the opinion of the court.
The statement of the case recites that there was no evidence regarding purchases and there were no cash withdrawals for purchases in the assessees account books, nor did the assessee produce any bill for such alleged purchases and that, in the absence of positive proof regarding purchases, the Tribunal rejected the plea. It is also stated in the statement of the case :
'It was common experience in time accounts that there would be unaccounted for stocks in timber busies on account of short measurements, sale of irregular pieces, wastage claimed in turning rounds and irregular pieces into sizes and sawing etc.'
On this material, there can be no doubt that the assessee has failed to establish that he realised the sum in dispute by the sale of timber purchased by Venkata Subbarao in the previous years but not brought into accounts.
Having regard to this situation, the learned counsel for the assessee did not persist in the attitude adopted by his client before the Department officers and the Tribunal as also at the time when the request was made to this court, under section 66(2) of the Indian Income-tax Act. But he advanced the argument that as the amounts in dispute represented the value of stocks which were suppressed in previous years, they could not be regarded as the income of the year of account.
This does not arise on the questions that were formulated by this court under section 66(2) of the Act. The second question will fall to be answered only if foundation was laid by the assessee that Venkata Subbarao purchase certain stocks and suppressed them in the accounts of the previous years. It is only if it is assumed that there was suppression of stocks that the further point would arise, namely, whether the assessee could be assessed on the basis of suppressed stock for the accounting year 1942-43. If the first point is answered in the negative, the second does not arise.
It may be mentioned that even the alternative contention before the Appellate Tribunal bore only on the time of the realisation of the amounts, as could be gathered from the following observation of the Tribunal in its order :
'It is not open for him now to come and argue that the figure furnished by him during the prior years were wrong and that a part of the sum in dispute related to those years.'
This particular argument was not put forward before the Tribunal in the application under section 66(1) of the Income-tax Act. Nor does it appear that this raised before this court when the Tribunal was directed to refer the questions mentioned above under section 66(2) of the Act. Even otherwise, this submission is unsubstantial. Section 3 of the Act which is the charging section provides :
'Where any Central Act enacts that income-tax shall be charged for any year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons of the partners of the firm or the members of the association individually.'
The application of the Act is provided in section 4, which declares that the 'total income of any previous year of any person includes all income, profits an gains from whatever source derived which are received or are deemed to be received in the taxable territories in such year by or on behalf of such person.' The section itself provides that this is subject to other provision of the Act.
The pertinent question, therefore, is whether the income, profits and gains were received in the relevant accounting years. What is urged by Sri Rajeswara Rao is that though sales were actually effected in the year of account, the income must be deemed to have been received during the years when the assessee could get a rebate on the ground of either shortage or wastage. The basis of this contention is a passage in the commentary on The Indian Income-tax Act by A. C. Sampath Iyengar. At page 583, the following passage occurs :
'Profits of a business can only be ascertained by a comparison of the assets of the business at the opening and close of the accounting year. Such assets would include the stock-in-trade of the business. Profits may exist not necessarily in cash but also in kind. It is not necessary that the goods should actually be sold and realised into money, - the process of sale is merely the conversion of profits in kind into profits in cash. The profits secured by a business may be represented by a sum of money or its equivalent in commodities, or debts due, and assets generally.'
We do not think that this passage really comes to the rescue of the assessee. The question as to when exactly as assessee is said to have received the income or profits has to be largely determined with reference to the system of accounting employed by him. It is pointed out by the Tribunal that according to the method followed by the assessee this sum was received by him during the year of account. It seems that he was bringing into account the sales effected by him and was not maintaining an account of the stocks he had; nor was he in the habit of taking inventory of the stocks on hand. This clearly shows that he treated that income as received only as and when he sold the stocks. In these circumstances, we reach the conclusion that the additional sum of Rs. 75,073 was income received by him during the year 1942-43.
For the reasons mentioned above, we answer the two questions referred to us against the assessee. The assessee will pay the costs of the Department. The advocates fee is fixed at Rs. 150.
Reference answered accordingly.