TARE C.J. - By order dated December 6, 1967, passed in Misc. Civil Case No. 239 of 1965, a Division Bench of this court required the Income-tax Appellate Tribunal to state the following question for consideration by this court under section 66(2) of the Indian Income-tax Act, 1922 :
'Whether there was any evidence before the Tribunal for computing the gross profit in the manner it di ?'
The said reference arose on the following facts : The petitioner is a registered firm consisting of eight partners doing the business of bidi manufacture. The assessment year in question was 1957-58 and the accounting year was Samvat year 2012, ending on November 2, 1956. The petitioner-firm manufactured two brands of bidis, i.e., Nos. 22 and 207. The bidis were mostly sent from Sagar, which is the assessees head office, by railway wagons to Delhi, Agra and Lucknow. The main raw material, namely, tobacco, was imported/from Gujarat, while tendu leaves were Purchased from the forest contractors of Madhya Pradesh. The market for the bidis was mostly in Punjab and Uttar Pradesh and the selling centres were at Delhi, Lucknow and Agra. In the accounting year a centre was opened at Ambala, but the same was close down during the year itself and the trading result at that centre was incorporated in the Delhi accounts. The petitioner-firm follows a peculiar method of accounting based on its policy of charging uniform rates for bidis at all distributing centres. The bills that it makes out start with the standard price which it has fixed for its distributors and from this standard price are deducted sales tax either charged as such or by way of profit-rebate and commission payable to the distributors. In the account books sales are shown at the gross amount determined on the basis of the standard rates and deductions on account of sales tax, profit-rebate and commission are separately claimed in the profit and loss account. The petitioner-firm bears the entire freight up to the destination of the goods as also octroi duty levied at the point of entrance into the market. These expenses are, however, charged not to the trading account but to the profit and loss account. On this basis in the accounting year the petitioner-firm had shown sales totalling Rs. 1,29,48,168 and claimed deduction of Rs. 5,35,165 on account of commission, profit-rebate and sales tax and freight and other expenses amounting to Rs. 4,39,283. On this material the Income-tax Officer worked out the gross profit by treating both the items as deductions in the trading account and it also reduced the sales by the amount of Rs. 5,35,165, which was the reduction given by the assessee in its bills. On that basis it worked out the margin of profit at Rs. 12.5%.
The Appellate Assistant Commissioner charged the amount of Rs. 5,35,165 to the trading account, but out of the other expenses he considered only an amount of Rs. 80,411 as the amount chargeable to the trading account, the same being expenditure incurred at Sagar in connection with the movement of the raw materials. On this basis the gross profit was calculated by the Appellate Assistant Commissioner at 15.6% on the sales totalling Rs. 1,14,00,000. On the basis adopted by the Appellate Assistant Commissioner in the immediately preceding year the margin would come to Rs. 17.2% on sales amounting to Rs. 1,13,89,574.
By applying the proviso to section 13 of the Indian Income-tax Act, 1922, to the trading results of the petitioner-firm, the Income-tax Officer held that the gross profit shown by the assessee was low as compared to the profit of the preceding year. It was also observed that there was no proper quantity check on the pattis or tendu leaves given to manufacturing centres, that the quantitative yield of bidis from tobacco was not satisfactory and that, above all, there was sufficient evidence to show that the assessee had kept out of its books large consignments of goods despatched in a clandestine manner. Therefore, the Income-tax Officer estimated the sales at Rs. 1,20,00,000 as against Rs. 1,14,13,003 and applied a margin of 22.5% as against 12.5% shown and made an addition of Rs. 12,78,509.
On an appeal to the Appellate Assistant Commissioner, he maintained the figure of Rs. 1,20,00,000 as the sales effected, but he applied a margin of 19% as profit and further he gave the assessee the credit of freight and octroi expenses amounting to Rs. 3,58,873 while arriving at the gross profit shown by the assessee itself. The addition finally sustained by the Appellate Assistant Commissioner came to Rs. 4,75,000.
When the matter went to the Income-tax Appellate Tribunal, the learned Members of the Tribunal held that the proviso to section 13 of the Indian Income-tax Act, 1922, was applicable to the trading results. However, after coming to the estimate, the Tribunal reduced the addition to Rs. 2,35,000. As such, the Tribunal reduced the margin of profit applicable to the petitioner-firm from 19% to 17%. According to the Tribunal, there was a contradiction between the basis adopted by the Appellate Assistant Commissioner and the actual working done by him. Therefore, in the view of the learned members of the Income-tax Appellate Tribunal, the margin of profit would work out to 17%. Thereafter, upon an order passed by a Division Bench of this court, the Tribunal has referred the said question for our consideration.
In this connection we might further observe that 17% margin of profit was applied to the assessment year 1956-57 and in the assessment year in question, namely, 1957-58, the petitioner-firm showed the margin of profit at 15.6% in the return. Therefore, the question arises whether there was any evidence before the Tribunal for computing the gross profit in the manner that it did. It is an accepted proposition that insufficiency of material or a wrong conclusion on facts will not entitle this court to interfere with the conclusions arrived at by the Income-tax Appellate Tribunal. The powers of this court to interfere would only arise if there be no evidence at all. We might further observe that the word 'evidence' is not to be understood in the sense of evidence under the Indian Evidence Act, 1872. The word 'evidence' may have been broadly used. What is really necessary is that there ought to be some material before the Tribunal for arriving at a particular conclusion. Therefore, we take the word 'evidence' to be synonymous with the word material.
Before answering the question, we may advert to section 13 of the Indian Income-tax Act, 1922, and see if the proviso to the said section is attracted. It was an unanimous opinion of the Income-tax authorities that the said proviso was attracted. Section 13 is as follows :
'13. Method of accounting. - Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee :
Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
We may observe that the proviso lays down that if the assessee does not follow the regular method of accounting or if the Income-tax Officer cannot ascertain the income, profits and gains from the accounts maintained by the assessee, in that event, the Income-tax Officer has been given the power to adopt such basis as he may determine. The power is wide enough to adopt any basis which may be permissible under the provisions of the Income-tax Act and, in such cases, it is usually the best judgment assessment in which there is bound to be some arbitrariness. But all the same, it is necessary for that basis that there should be some material before the Income-tax Officer. He cannot act if there be no material at all.
Section 23 of the Indian Income-tax Act, 1922, was more or less akin to section 143 of the Income-tax Act, 1961, although it contained some more provisions. But the general principles in spite of the change in the law have, in our opinion, not very much changed.
In this connection we might advert to the view of the learned author, Kanga, in his book The Law and Practice of Income-tax, sixth edition, volume No.1, at page 726, under the heading 'Basis of Estimates'.
'The Income-tax officer may, in the absence of any better evidence, fall back on the assessment of the last preceding year, even if that assessment had been a best judgment assessment.'
For this proposition reliance was placed by the author on Gopinath Naik v. Commissioner of Income-tax and Harakchand Radhakishan v. Commissioner of Income-tax.
Further on, the learned author observes that :
'He may estimate the income after taking into consideration the state of affairs in earlier years and previous returns by and assessments of the taxpayer.'
For this proposition the learned author relies on the pronouncement of their Lordships of the Privy Council in Commissioner of Income-tax v. Maharajadhiraja kameshwar Singh of Darbhanga.
Further on, the learned author observes that :
'The Income-tax Officer may also take into consideration recent investments and acquisitions made and expenditure incurred by the assessee, and local knowledge and repute in regard to the assessees circumstances. But an assessment cannot be based solely on local reputation and the conditions of business during the year. The Income-tax Officer may found his estimate upon his personal observation and inspection of the assessees business.
Even where the account books are found to be false, the Income-tax Officer may use and act on any admissions which they contain. For instance, he may accept the figure of sales and estimate the profits without accepting the trading account as a whole or he may accept the expenditure shown in the books and on the basis estimate the sales.'
According to the learned author the assessment year under this subsection should disclose the basis on which the assessment is made, for it is an appealable order under section 246 and the appellate authority must know the ground on which the assessment was based.
Thus, in the opinion of the learned author, any previous assessment would furnish a good basis for the Income-tax Officer to arrive at a conclusion under the proviso to section 13 of the Indian Income-tax Act, 1922.
In the present case it is an admitted fact that the formula of 17% of profits was applied to the previous year, i.e., for the assessment year 1956-57, and it was for that reason that the learned Members of the Tribunal adopted that basis for arriving at the figure of 17% margin of profit. We may further observe that even according to the finding of the Income-tax Appellate Tribunal, an allowance of 2% was due to the assessee on account of the higher over-head costs of supervision. It was from that point of view that the Tribunal reduced the margin of profit from 19% to 17%.
However, the learned counsel for the petitioner urged that 2% of over-head costs of supervision should have been allowed from the last years margin of profits at 17% and, therefore, his suggestion was that the percentage to be arrived at ought to be at 15%. We may observe that the sales effected by the firm were larger in the assessment year than in the previous year and, therefore, the margin of profit calculated by the Tribunal on the same basis as the previous year cannot be said to be erroneous. We may observe that the Tribunal had some material before itself which could form the basis of the conclusions it arrived at. Due consideration was also given to the increase in over-head costs of supervision of management. In this connection we might advert to the case of Gopinath Naik v. Commissioner of Income-tax wherein Sulaiman C.J., agreeing with Niamatullah J., held that if the Income-tax Officer having reason to believe that the return was incorrect and incomplete and due to that he made private inquiries behind the back of the assessee after starting proceedings under section 23(3) of the Indian Income-tax Act, 1922, and he made an assessment on the basis of the result of his inquiries and on an appeal the Assistant Commissioner also made private inquiries and made an assessment on the basis of the result of his inquiries and also relying on the previous orders of assessment, the majority of their Lordships held that the inquiries made by the Income-tax authorities behind the back of the assessee were illegal and were not justified and the result to such private inquires could not have been the basis of assessment. However, their Lordships also laid down that the previous orders of assessment could be a proper basis if there was no better evidence forthcoming.
In this view of the matter, we have no doubt that previous orders of assessment, although they may even be best judgment assessments, would form good material or good evidence for the purpose of computing assessment for the year in question, as was done by the Income-tax Appellate Tribunal.
In this connection we might observe that what their Lordships of the Privy council laid down in Commissioner Income-tax v. Maharajadhiraja Kameshwar Singh of Darbhanga was that where the assessee keeps his books on a hybrid system and it is his practice to enter sums as he received them in a deposit register not made available to the revenue authorities, without discriminating between interest and capital payments, and then subsequently to allocate and treat as income certain portions of these sums which he attributed to interest, the Income-tax authorities will not be acting illegally in computing the total income of the assessee for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous years which have been held in suspense and no part of which has previously been returned as income. Thus, according to their Lordships of the Privy council, the previous years returns are material and would furnish good evidence for arriving at a conclusion in the matter of computing profits for the subsequent assessment years.
The learned counsel for the petitioner, however, invited attention to the pronouncement of their Lordships of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax. It is true that in that case their Lordships laid down that the Income-tax Officer is not fettered by technical rules of evidence and pleadings and is entitled to act on material which may not be accepted as evidence in a court of law, it is equally clear that in making the assessment under sub-section (3) of section 23 of the Act, the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3) of the Indian Income-tax Act, 1922. Thus the Income-tax authorities are not entitled to base their conclusions on pure guess work. But there must be something more. We may observe that, in the present case, that something more is in the shape of the previous orders of assessment, which would form good material for arriving at a conclusion.
Similar was the pronouncement of their Lordships of the Supreme Court in Mehta Parikh and Co. v. Commissioner of Income-tax wherein their Lordships of the Supreme Court laid down that the decision of the Tribunal must rest not on suspicion but on legal testimony. As laid down by their Lordships in the earlier case mentioned above that legal testimony need not necessarily be evidence under the Indian Evidence Act and it may be sufficient if that constitutes some material or some basis for arriving at the conclusion. Viewed in this light the said Supreme Court case is clearly distinguishable.
The learned counsel for the petitioner further invited attention to the observations of their Lordships of the Supreme Court in Omar Salay Mohamed Sait v. Commissioner of Income-tax It is true that their Lordships of the Supreme Court have laid down that if the Tribunal is guided by irrelevant considerations or admission of irrelevant evidence, that becomes a question of law and the conclusions arrived at can be said to have been vitiated by reason of having relied upon conjectures, surmises and suspicions not supported by any evidence on record or party supported by evidence and partly upon inadmissible material. Their Lordships also laid down that the conclusions reached by the Tribunal should not be coloured by any irrelevant considerations or matter of prejudice and if there are any circumstances which required to be explained by the assessee, the assessee should be given an opportunity of doing so.
As laid down by their Lordships of the Supreme Court in Homi Jehangir Gheesta v. Commissioner of Income-tax the mere fact that the income-tax authorities rejected the explanation offered by the assessee will not be enough to draw an inference that any item which is unexplained will constitute income. However, under certain circumstances, the income-tax authorities would be justified in drawing an inference that it amounts to income and the income-tax authorities are not required to prove the fact by direct evidence.
As a result of the discussion aforesaid, we are of the opinion that the Income-tax Appellate Tribunal could certainly act on the basis of the previous orders of assessment and acting on that the Tribunal could certainly justifiably hold that the margin of profits for the assessment year 1957-58 would be 17%, which was also the basis adopted for the previous year 1956-57. This, in our opinion, constituted good material or good evidence for the Tribunal to arrive at a conclusion. Therefore, we answer the reference as follows :
'There was not only evidence, but good evidence before the Tribunal for computing the gross profits in the manner that it did.'
Let the reference be returned to the Tribunal. However, as the matter was not free from doubt, we direct that there shall be no order as to costs of this reference as the matter was certainly debatable.