Naik, Actg. C.J.
1. This is a reference by the Income-tax Appellate Tribunal, Bombay Bench 'A', under Section 66(1) of the Income-tax Act, 1922, at the instance of the applicant-assessee, Messrs. Naubatram Nandram of Bilaspur.
2. The question referred to us for decision is :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 79,000 or any part thereof was liable to be taxed as deemed profit under Section 10(2A) of the Indian Income-tax Act, 1922 ?'
3. The facts relevant for our purpose, as stated in the statement of the case, may shortly be stated as under :
4. The assessee is a Hindu undivided family. The assessment year is 1958-59, for which the account year is Samvat year 2014, Diwali 1956 to Diwali 1957.
5. The assessee carried on various' businesses. One of them was exploiting forests and selling timber extracted therefrom.
6. In 1955 (Samvat 2010), the assessee obtained a long lease of a forest from the Raja of Dharamjaigarh. 'The consideration for the lease was Rs. 2,45,000. A portion of the forest was given by the assessee on a sublease to someone for a consideration of Rs. 30,000 and the rest.of the forest was worked by itself.
7. According to the assessee, the mention of Rs. 2,45,000 as the consideration for the lease was only provisional on the basis of the forest area being about 740 acres and the rate being Rs. 331 per acre. The agreement was that the forest area leased out to it would be got measured and it would pay the consideration at the rate of Rs. 331 per acre.
8. The assessee did not maintain any proper accounts of its business in respect of the aforesaid forest contract. However, in Samvat year 2011, corresponding to the assessment year 1955-56, in its account books it debited an amount of Rs. 2,15,000 on account of Dharamjaigarh forest account and credited Rs. 1,71,582 on account of sales of timber from the said forest. It also debited Rs. 1,08,215 towards the expenditure in working the lease of the forest. On the aforesaid sales of timber of Rs. 1,71,582, it estimated a profit at 10% for the purposes of income-tax. The department did not accept the sales at Rs. 1,71,582 nor the profits at 10% and assessed the assessee under the proviso to Section 13 of the Act, estimating the sales at Rs. 1,74,000 and profits at 20%.
9. For the subsequent years also, namely, for the assessment years 1956-57 (Samvat 2012) and 1957-58 (Samvat 2013), the sales shown at Rs. 2,84,023 and Rs. 1,46,085, respectively, were not accepted nor the profits estimated on them at 18% and 12%, respectively. Again, under the proviso to Section 13 of the Act, the department estimated the sales at Rs. 3,02,000 and profits at 20% for the assessment year 1956-57 and at Rs. 1,50,000 and 20% for the assessment year 1957-58.
10. In the assessment year 1958-59 (Samvat 2014), the assessee obtained a remission from his lessor, the Raja of Dharamjaigarh, of Rs. 79,000 made up of the following items :
reduction in the leaseconsideration on account of the area being about 590 acres which at Rs. 331 peracre worked out the lease consideration at Rs. 1,95,000 instead of Rs. 2,45,000.
difference in royalty.
reversal of a wrong entry made in1953.
11. The Income-tax Officer claimed to tax the aforesaid amount treating it as profit under Section 10(2A) of the Act.
12. The case of the assessee was that Section 10(2A) of the Act had no application to the facts and circumstances of the case, because-
(i) the profits had been estimated by applying a flat rate of 20% on estimated sales, so that there was never any question of 'allowances and deductions having been made' within the meaning of Section 10(2A) of the Act ;
(ii) the jungle had not been exhausted and if the total expenditure debited was deducted from the total sales over all these years, there was a surplus of Rs. 18,000 and odd only ; the income-tax department had already taken a gross profit of 20% on sales of rupees six lakhs and odd in all these years; and, therefore, the amount of Rs. 79,000 could not be taxed under Section 10(2A) ;
(iii) the reduction in royalty was mainly due to difference in measurement and not due to reduction in rates.
13. The Income-tax Officer did not accept any of the contentions. He held that the profits had been arrived at by applying a gross profit rate not because the royalty debited was not verified or not allowable but because there was no quantitative stock of timber felled, the expenses had not been vouchered, and no stock taking had been done. He further held that had the correct amount of royalty been shown initially and all the facts relating to the forest disclosed, 'the gross rate applicable would have been certainly much higher'. As regards the item of Rs. 5,000, he held that the assessee had no evidence to show that the entry in respect of it was merely by way of reversal of a wrong entry made in 1953.
14. The Appellate Assistant Commissioner, on appeal, upheld the taxability of the amount, inter alia, saying-
'The trading account was rejected not because the amount of royalty amounting to Rs. 2,15,000 was unverifiable but because there was no check over the timber extracted from the forest nor was there any check over the extraction expenses debited in the accounts. When a gross profit is estimated at a certain rate it is understood that reasonable and verifiable expenses debitable to the trading account have been allowed. As the amount of royalty paid to the Ruler of Dharamjaigarh was fully verifiable, it was clear that even though the gross profit was estimated by the Income-tax Officer the same was arrived at after taking into consideration the amount of royalty paid to the Ruler.'
15. On a further appeal to the Tribunal, the taxability of the amount was reaffirmed. The Tribunal said :
'No doubt the assessee did not actually ascertain the profit as per the forest account, taking into account the lease money and allowed the profits to be estimated on the basis of the sales. But, then it is difficult to accept the argument that while estimating such profit, whether, as done by the assessee or as done by the Income-tax Officer, the lease money paid did not figure into the computation at all. There is no dispute that lease money is an expenditure or cost debitable to the trading account. Therefore, in any method of computing the G.P., the payment of lease money has to be considered and must accordingly be held to have been considered. It may be that the amount was debited in the accounts only in one year. But, then with reference to that amount debited, the sales were spread out over three years. Therefore, when the sales of each year were considered separately by the Income-tax Officer and the profits with reference thereto estimated, it must be that the proportionate lease money was taken into account as an expenditure debitable to the trading account. That, according to us, is what actually happened.'
16. However, it held that the whole amount would not be taxable but onlythe proportionate amount out of Rs. 79,000 in the proportion of Rs. 2,45,000to Rs. 2,15,000.
17. Before we answer the question referred to us for decision, we may briefly examine the provisions of Section 10(2A) of the Act.
18. Section 10(2A) of the Act reads as under :
'Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year.'
19. The provision says that where an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall by a legal fiction be chargeable as the business profits of that previous year. It is settled law that when something is deemed to have been done which, in fact and in truth was not done, the court is entitled and bound to ascertain for what purpose and between what persons the statutory fiction is to be resorted to. It is, therefore, necessary to first ascertain whether an allowance or deduction has been made in the assessment for any year because, unless it has been so made, the legal fiction will not operate between the assessee and the department. The sub-section is meant to fasten liability on the assessee who had been granted an allowance or a deduction. In other words, it creates a liability to tax only in cases where an allowance or deduction had in fact been granted earlier because the department then merely taxes as income what it had earlier allowed as deductions or allowances.
20. In the instant case, the assessee had not maintained any profit and loss account in respect of the forest contract in question. As stated by the Appellate Assistant Commissioner in his remand report (annexure 'D') which forms part of the case, the assessee had 'merely debited the expenses as incurred in a particular year and credited the sales of timber obtained from this forest'. Consequently, no profit or loss was ascertained on the basis of the account maintained in this fashion. Again, in the words of the Appellate Assistant Commissioner in annexure 'D', 'in the strict sense of the term, there was no question of his claiming any lease-money in any of the above years since a profit and loss account was not drawn up in the books of accounts. . . . The appellant's contention that the lease money was not debited to the trading account and not claimed as such deduction is correct as no trading account was maintained for this forest in the books of account. The appellant's contention that he did not work out the profits in any of the years in which he exploited the forest is also correct'. This position is also not controverted by the Tribunal nor is it controverted by the learned counsel for the Commissioner of Income-tax at the Bar. The position, therefore, is that no profit and loss account was maintained by the assessee. For the purpose of filing the income-tax returns, it only showed sale figures and adopted an estimated rate of profit on such sales. The income-tax authorities also did not calculate profits on the basis of any profit and loss account. They also calculated profits on the basis of an estimated percentage on estimated sales as the figure disclosing sales of timber in each year given by the assessee were not accepted. Consequently, in the computation of profits on percentage basis on sales there was never any occasion for the making of any allowance or deduction in the assessment for any year, much less that any such allowance or deduction had been made in the assessment of the assessee for any year in question.
21. It is, however, contended that, though the lease money was not actually allowed or deducted in the assessment of the assessee in any of the years in question as trading expenditure or cost incurred, the lease money figured in the estimation of percentage of profits as one of the data and that consequently it (the lease money) should be taken to have been allowed as a deduction or allowance within the meaning of Section 10(2A) of the Act.
22. In our opinion, the contention cannot be accepted. In the first place, Sub-section (2A) of Section 10 of the Act envisages an actual allowance or deduction and not a notional one and, in so far as there was no actual allowance or deduction in the assessment for any year in question, the sub-section shall have no application to the facts of the case. Secondly, the fact that the lease money was' one of the data which figured in the estimation of the percentage of profits estimated by the Income-tax Officer is not enough to attract the provisions of Section 10(2A) of the Act, because it is one thing to say that the payment of lease money was taken into consideration in estimating the percentage of profits and quite another to say that the lease money was in fact allowed as an allowance or deduction as the business expenditure in the assessment of profits for any year. It may be that if the lease money had been shown less, the percentage of profits may have been estimated at a higher rate ; but this cannot be a reason for holding that what the law [section 10(2A)] requires is not the actual making of an allowance or deduction in the assessment but the fact that it was taken into consideration, in the assessment for any year, for the purpose of estimating the percentage of profit to be charged on estimated sales of timber.
23. We are, therefore, of opinion that the sums of Rs. 50,000 and Rs. 24,000 cannot be taken to be the taxable income of the assessee for the assessment year 1958-59 under Section 10(2A) of the Act. As regards the item of Rs. 5,000, the Tribunal had found that it had not been established that it was a mere correction of a wrong entry made in 1953. In view of the aforesaid finding, the item of Rs. 5,000 was rightly included in the assessable income of the assessee for the assessment year 1958-59.
24. In the result, we answer the reference as follows :
25. On the facts and in the circumstances of the case, only the amount of Rs. 5,000 out of the amount of Rs. 79,000 was liable to be taxed as deemed profit under Section 10(2A) of the Indian Income-tax Act, 1922.
26. The costs of this reference shall be paid by the respondent, Commissioner of Income-tax. Counsel's fee Rs. 200.