PANDA J. - These are two references under section 256(2) of the Income-tax Act, 1961, (hereinafter referred to as'the Act'), made at the instance of the assessee to answer the following question of law, namely :
'Whether, in the facts and circumstances of the case, the accounts of the assessee were liable to be rejected and estimates could be adopted by resorting to section 145 of the Income-tax Act of 1961 ?'
As the same question of law arose in both the cases, the two references were heard together and will be governed by this common judgment.
The assessee is M/s. Orissa Fisheries Development Corporation Ltd., Tulsipur, Cuttack (hereinafter referred to as 'the Corporation'). The assessment years involved are 1964-65 and 1965-66. The corporation carried on trading, inter alia, in fish in both the accounting years ending 31st March, 1964, and 31st March, 1965, for the respective accounting years.
For the assessment year 1964-65, the assessee corporation had shown a gross loss of Rs. 24,000 on the sales of fish of Rs. 6,11,120. For the assessment year 1965-66, it had returned a gross profit of Rs. 3,915 on sale of fish of Rs. 3,82,338. For both the years in question, the assessee was admittedly keeping accounts according to the mercantile system.
The assessee was making purchases of fish locally from places like Balugan and Berhampur in Orissa. Besides, it was purchasing fish from Hyderabad in Andhra Pradesh. It has mainly two centres of sale, one it Cuttack and the other at Bhubaneswar.
The learned Income-tax Officer on examination of the accounts produced by the assessee noticed that the sale of fish out of purchases made from Hyderabad were invariably entailing loss because of alleged shrinkage, shortage and wastage in transit. He, therefore, held :
(1) that though the assessee was aware of this loss over purchases of fish from Hyderabad from first few transactions, yet it continued running the business at a loss all the year through, and
(2) that it did not maintain proper accounts of stock of fish received and sold at different centres.
Accordingly, he rejected the books of accounts and estimated the gross profit at 20% for each of the years.
Being aggrieved by the said order, the assessee preferred an appeal before the Appellate Assistant Commissioner. The appellate authority found in respect of the stock accounts that they were maintained at different sale centres. But, according to him, 'no variety-wise' stock records were kept. His further finding was that the assessee had not maintained the stock records in a manner as to indicate therefrom the extent of shortage caused and, therefore, held that the claim of shortage was excessive and unreasonable.
Over the accounts of the sale centres, his finding was that they had not been properly maintained. So he agreed with the learned Income-tax Officer over the rejection of accounts, but, however, reduced the margin of profit from 20% to 15% for each of the year.
The assessee carried a second appeal before the Appellate Tribunal. After a full hearing and giving an opportunity to the assessee to produce its books of account for scrutiny and satisfaction, as a final court of fact, the Tribunal concluded saying :
'Non-maintenance of details of loss in transit or inability to render faithful account of shortage or driage or shrinkage in transit, indeed, was valid and conclusive evidence for throwing the book profit.'
The Tribunal, therefore, declined to interfere with the order of the authorities below and also rejected to petition of the assessee for a reference.
Thereafter, the assessee moved this court for a direction to the Tribunal to state the case and refer two questions said to be arising out of the appellate order of the Tribunal, namely :
'1. Whether, on the facts and in the circumstances of the case, and on mere general and wide remarks, detailed books of account and the audited statements are challenged and rejected, is proper and legal ?
2. Whether, on the facts and in the circumstances of the case, there was any justification for rejection of the books of account and for estimation of the income, by invoking the provisions of section 145 of the Income-tax Act, 1961, of the petitioner which is a State owned and State managed corporation whose beneficiary is none save and except the State Government of Orissa ?'
This court, after hearing the parties, called for a statement of facts on the sole point referred to above.
Although the facts are quite simple and so too the controversy, yet on behalf of the assessee and the revenue as well, elaborate arguments were advanced with several citations. But we consider it otiose to advert to all of them.
The contentions of Mr. Rath, the learned counsel for the assessee-petitioner, are that :
(i) The petitioner being a State Government sponsored corporation and incorporated under the Indian Companies Act, 1956, with the sole object of carrying on business in purchasing and selling fish at a fair price so as not to allow the local market price to go up easily, should not have been viewed as an ordinary assessee whose sole purpose is to make gain and earn a profit to itself.
(ii) The assessee being a Government sponsored concern was subjected to internal audit and being a company under the Companies Act, had its statutory audits also, which were furnished along with the returns to the Income-tax Officer who was not justified in rejecting the books of account which stood the test of prior audits.
(iii) It is none of the business of the revenue to advise the assessee to have stopped purchasing fish from Hyderabad when from the early purchases of the year, it was aware that the endeavor was resulting in loss.
(iv) Since the assessee did business in a wholesale scale, it was a laborious process to mention each day's shrinkage, driage and wastage. Accordingly, it adopted a flat rate of 5% loss on that account, as is prevalent in large commercial undertakings. But, however, the revenue became over-technical and instead of taking a practical view of the matter, unreasonably did not accept the same.
(v) There is no evidence that the assessee was dealing in fish of several varieties so as to demand keeping of account variety-wise as observed by the learned Appellate Assistant Commissioner and hence this finding is a mere conjecture based on no evidence.
(vi) When the revenue has accepted the accounts so far as the purchases are concerned and the manner of accounting has not been found fault with, there is no basis for rejecting the same and indulging in a best judgment assessment.
(vii) There being no flaw found in the total purchase and sale, even in the absence of municipal certificates regarding the shrinkage or driage which has been deducted at a flat rate of 5% only, the most that the revenue is entitled to was to reject that 5% of deduction and not arbitrarily calculate the income initially at 20% and then reduce it to 15%.
On behalf of the revenue, it was contended by Mr. Misra, the learned standing counsel, that :
(i) The annual reports based on audit, on which the assessee relies so much and which have been filed along with the application for reference in this court, do not support the case of the assessee; on the other hand, they unmistakably disclose grave lacuna in maintenance of accounts which have been very much commented upon by the chartered accountant who effected the audit.
(ii) In the absence of any definite date regarding the actual shortage, driage or shrinkage in each day's consignment from Hyderabad which could have been very faithfully recorded particularly in the case of a corporation run not ostensibly for profit, a flat rate towards shrinkage and driage is unacceptable, opposed as it is to all canons of ordinary business.
(iii) It being the specific case of the assessee that at the time of receipt of the consignment it obtained municipal certificate regarding the wastage, shrinkage and driage, there was no difficulty in reflecting the same in the books of account or to produce the municipal receipts in support of the same.
(iv) All the courts of fact right up to the Tribunal were anxious that the assessee should produce facts and figures in support of its assertion, but the assessee evidently failed to do so as is crystal clear from the following observation of the Tribunal :
'Even before us the assessee could not produce stock books or municipal certificate although the assessee's counsel was very much boisterous as to the maintenance of perfect accounts. Merely because the stock registers were maintained by the assessee, it cannot be taken as valid and conclusive evidence for acceptance of books regarding the defects noted by the Income-tax Officer. Non-maintenance of details of loss in transit or inability to render faithful account of shortage or driage or shrinkage of fish weight in transit, indeed, are valid and conclusive evidence for throwing the book profit. Now coming to the reasonableness of the rate of 15% the revenue has given cogent reasons for adoption of the same and, therefore, we do not also find any reason to reduce the same.'
Relying on this finding of the Tribunal, the final court of fact, the learned standing counsel was very much emphatic that there is no question of law to be canvassed before this court.
Albeit the various points raised on behalf of the contesting parties, regard being had to the question of reference, the sole point for consideration is the propriety of the revenue in rejecting the books of accounts produced by the assessee and then making a best judgment assessment. Though the answer to this question appears simple enough, yet regard being had to the tenacious arguments advanced from either side, sometimes both the parties relying on the same citations, we feel drawn to clear some of the cobwebs that cloud before the issue.
In the case of Homi Jehangir Gheesta v. Commissioner of Income-tax : 41ITR135(SC) , their Lordships of the Supreme Court had laid down, following their earlier decision in Omar Salay Mohamed Sait v. Commissioner of Income-tax : 37ITR151(SC) , thus :
'In determining whether an order of the Appellate Tribunal would give rise to a question of law the court must read the order of the Tribunal as a whole to determine whether every material fact, for and against the assessee, had been considered fairly and with due care; whether the evidence pro and con has been considered in reaching the final conclusion; and whether the conclusion reached by the Tribunal has been coloured by irrelevant considerations or matters of prejudice.
The decisions of the Supreme Court in Dhirajlal Girdharilal v. Commissioner of Income-tax : 26ITR736(SC) and Omar Salay Mohamed Sait v. Commissioner of Income-tax : 37ITR151(SC) do not, however, require that the order of the Tribunal must be examined sentence by sentence, through a microscope as it were, so as to discover a minor lapse here or an incautious opinion there to be used as a peg on which to hang an issue of law. In considering probabilities properly arising from the facts alleged or proved, the Tribunal does not indulge in conjectures, surmises or suspicions.'
In the often-quoted case of Commissioner of Income-tax v. S. P. Jain : 87ITR370(SC) , it has been held :
'(i) That though the questions referred to the High Court did not challenge the validity of the findings given by the Tribunal, as the Tribunal had failed to take into account the relevant material on record in arriving at its finding and had further acted on inadmissible evidence and misread the evidence and based its conclusion on conjectures and surmises, the court could ignore the findings of the Tribunal, and re-examine the issues arising for decision on the basis of the material on record.
(ii) That, on the facts, the only reasonable inference that could be drawn from the circumstances was that the Rana was a mere name-lender and that the income-tax authorities were fully justified in drawing an inference that the Rana was a name-lender for the assessee.
The High Court and the Supreme Court have always the jurisdiction to interfere with the findings of the Appellate Tribunal if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination and imports facts and circumstances not apparent from the record or bases its conclusions on mere conjectures or surmises or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated.'
To say the least, these are the two extreme judicial pronouncements of high authority but only circumscribed in the context of facts of those cases. They do not claim to touch, far less alter the normal law laid down by their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. Calcutta Agency Ltd. : 19ITR191(SC) :
'The jurisdiction of the High Court in the matter of income-tax references made by the Appellate Tribunal under the Indian Income-tax Act is an advisory jurisdiction and under the Act the decision of the Tribunal on facts is final, unless it can be successfully assailed on the ground that there was no evidence for the conclusions on facts recorded by the Tribunal. It is, therefore, the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. Any departure from this rule of law will convert the High Court into a fact-finding authority, which it is not under the advisory jurisdiction.
As the statement of the case prepared by the Appellate Tribunal under the rules framed under the Income-tax Act is prepared with the knowledge of the parties concerned and they have a full opportunity to apply for any addition or deletion from that statement, if the parties approved of that statement, that is the agreed statement of facts by the parties on which the High Court has to pronounce its judgment. The High Court would be committing an error if it takes the arguments of counsel for assessee as if they were facts and bases its conclusion on those arguments.
The instant case, simple as it is, does not offer any difficulty. Having indicated the right approach in answering the reference, we may now advert to some of the points raised by the contending parties. It was argued on behalf of the assessee that loss, low profits or absence of variety-wise stock registers are not valid grounds to sustain the finding of rejection of accounts. For this, reliance was placed on the case of S. Veeriah Reddiar v. Commissioner of Income-tax : 38ITR152(Ker) . But that case is clearly distinguishable. Even then there is no quarrel over the proposition that low profits and absence of variety-wise stock ar not necessary grounds for rejection of books of account.
The next argument advanced that the assessee is a Government sponsored institution, that its board of directors consists of employees of the State Government, that the directors continue to hold the office of the member of the board of the corporation on being nominated by the Government of Orissa, that the entire share capital of the petitioner-corporation is held by the State Government of Orissa and that the State Government extend loan facilities to the petitioner-corporation from time to time or that the avowed purpose for which the corporation was created was for developing and rearing fish to keep the price level of fish at a reasonable rate are utterly irrelevant considerations to influence the judgment of the taxing authorities. Once the assessee has indulged in business, it has to keep its accounts in a proper manner as any other concern or businessman is expected to do. No assessee should gloat under the impression that he or it is entitled to any preferential treatment at the hands of the revenue and if it did, it is surely disillusioned. Even concerns entirely run by Government harbour the impression that as a wing of the Government, they could claim favourable considerations. Further, however noble or laudable the purpose might be, that cannot tilt the issue in favour of an assessee. The only concern of the revenue is a fair and proper maintenance of the accounts of business with its profits. If it is open and above board, the revenue would be satisfied, but if otherwise, it would not be justified in giving any considerations to the motive or the respectability of the person or persons running the business so as to employ a different standard in examining the accounts of such a concern. The assessee in this case was expected to keep its accounts like any other ordinary assessee and the revenue was perfectly justified in scrutinising its accounts like the accounts of any other concern, irrespective of its object or status.
The main attack of the assessee was that since it deals with fish on a wholesale basis, it does not deal with the commodity variety-wise. Further, there is no evidence that it deals with fish variety-wise. Consequently, the pith of the argument was that such a finding of the revenue is based on irrelevant or non-existent materials. Obviously, it is on that basis that a statement of facts was called for by this court. The argument from the side of the revenue was that the Tribunal's finding of fact is 'not based on non-maintenance of accounts variety-wise'. We find there is much substance in this contention of the revenue. The assessment order did not refer to any variety-wise maintenance of accounts. The relevant portion of the assessment order (1964-65) is thus :
'It is found that no proper accounts for the stock of fish received and sold at different centres was maintained, in other words there was no stock books to check what was the quantity received and quantity lost in transit due to damage and quantity sold. It was explained that the storage was uniformly taken at 5%. In the absence of the stock account the shortage cannot be worked out. It was admitted that the shortage was sometimes worked out on the basis of the certificate from municipality. It is also admitted that the certificate was not obtained regularly. Considering these, the loss shown cannot be accepted.
As to the gross profit rate to be taken it is found in the subsequent years, the G.P. (gross profit) worked out in respect of one item of sale at 35%. Considering that this year there were outside purchase, I take G.P. @ 20% on sale of Rs. 6,11,120. ............'
Two things emerge out of this assessment order. Firstly, the learned assessing Officer found that no proper account for the stock of fish received and sold at different centres was maintained and, secondly, in the absence of stock account, the shortage could not be worked out. The flat rate of 5% shortage, in the absence of municipal certificate, which admittedly were not obtained regularly, was unacceptable and that in view of the gross profit in a subsequent year in respect of one item of sale at 35%, he took the gross profit at 20% of the sale. We find no infirmity in this assessment order nor anything substantial has been pointed out to us to treat it as pepper corn. Further, in prima facie demolishes the main argument advanced for the assessee that it does not deal with different kinds of fish from the observation 'in respect of one item of sale at 35%'. Besides, it is repugnant to all common sense that from different ponds in Orissa,from Balugan as well as distant place like Hyderabad, it is the same variety of flat rate. This is something alike to all business, may that be whole-sale, and much more so, when the sources of supply and collection are different. Be that as it may, the order of the Income-tax Officer does not refer to rejection of accounts for non-maintenance thereof variety-wise. At the first appellate stage, the learned Appellate Assistant Commissioner accepted some of the grounds and introduced a new set of grounds in justification of rejection of books of accounts of the assessee and in that context observed thus :
'It is urged by the learned representative that the Income-tax Officer was wrong in mentioning that no stock records were maintained. They are maintained in different sale centres. Such stock records were produced before me, but I find that no variety-wise stock records were, of course, kept, though quantity of fish supplied and sold were mentioned in the register. In the above circumstances, it is strongly contended that the Income-tax Officer failed to appreciate the circumstances of loss and made an unduly high addition to the profit without understanding the conditions of the trade. Moreover, it was not for the Income-tax Officer to suggest the lines of business or purchases made therein. The corporation had certain schemes which did not, unfortunately, work to the favour of the corporation. As such, the loss was sustained.........
I have also looked into the accounts of the centres. They do not appear to have been properly maintained. In view of all these, the loss as shown by the assessee cannot be accepted as the correct resultant position in dealing in fish.'
Evidently, this order of the learned first appellate authority does not give the impression that the books of account were only rejected on the ground that accounts were not kept variety-wise.
Next, coming to the final court of fact, the Tribunal says :
'The assessee's counsel argues that since the concern was entirely owned by the State Government and being impersonal in nature, there was no motive to conceal or suppress any part of the profit. Regular and systematic books of accounts were maintained and, therefore, the very basis of resort to estimate is frustrated.
The submissions of the learned counsel for the assessee are in abstract and does not carry any weight to us as it matters little whether the State indulged in trading or a private party. Once any person indulged in trade and the fiscal law became applicable to them, sequel examination and process to determine the true and fair profit follows. Now, coming to the defects noted by the Income-tax Officer, the Appellate Assistant Commissioner has accepted the factum of maintenance of stock register but failed to record any finding as to the obtaining of irregular certificate from the municipality. The departmental representative has also referred to us the finding of the Income-tax Officer about the estimate of shortage of 5% regardless of actual shortage in transit or in storage. The estimate at uniform rate may be based on experience but fails to answer the description for acceptance of the book result. Even before us the assessee could not produce stock books or municipal certificate, although the assessee's counsel was very much boisterous as to the maintenance of perfect accounts. Merely because the stock registers were maintained by the assessee, it cannot be taken as valid and conclusive evidence for acceptance of book results regardless of the defects noted by the Income-tax Officer. Non-maintenance of details of loss in transit or inability to render a faithful account of shortage or driage or shrinkage of fish weight in transit, indeed, are valid and conclusive evidence for throwing the book profit. Now, coming to the reasonableness of the rate of 15%, the revenue has given cogent reasons for adoption of the same and, therefore, we do not also find any reasons to reduce the same.'
This order of the Tribunal also does not indicate that it relied on non-maintenance of accounts variety-wise. Thus, the very basis of the argument for the assessee vanishes. After that, what remains is the rejection of accounts. All the courts of fact have rejected it not on irrelevant grounds or on airy nothing which can be dubbed as capricious or whimsical. This court, in a matter of reference, is not a court of appeal. Its jurisdiction, as already indicated, is advisory. Unless there is something palpably irrelevant, patently beyond record or contrary to law or fact, this court is very chary in interfering with the finding of the Tribunal. The annual report filed on behalf of the assessee before us as per item No. 4 is at page 8. Second annual report for the year ended 31st March, 1964 (annexure '5' to S. J. C. No. 37 of 1973), indicates that :
'There is no proper control over the fish stock sold through different concerns.
The comment has been noted and remedial action will be taken in due course.' (item No. 4).
'There is no system of internal check in vogue.
The comment has been noted and necessary action will be taken in due course.' (item No. 5)
The third annual report for the year ended 31st March 1965 (annexure '5' to S. J. C. No. 39 of 1973), shows as per item No. 2 that :
'There is no system of proper internal check, particularly in relation to branch transaction.
Internal check has been started since 1965-66.' (item No. 2 at page 8).
The reports of the board of directors of the corporation with the comments of the chartered accountant and the comments of the board of directors thereon amply justify rejection of accounts as uniformly held by the revenue authorities.
The only point that remains to be considered is the question of computation. It needs no interpretation that a businessman pays on which he gets, less the current expenses for getting it and the proper statutory allowances. The argument advanced that the purchase and the sale figures having been accepted by the revenue, there was no scope for any arbitrary enhancement is fallacious. It is exactly to meet such contingencies that the proviso to section 145 of the Act has been enacted. It lays down that in any case where the accounts are correct and complete but the method employed is such that the income, profits and gains cannot properly be deduced therefrom, the Income-tax Officer is bound under this proviso to compute the income upon the basis and in a manner determined by himself. Even if the assessee has regularly employed a well-recognised method of accounting, e.g., the life or last-in-first-out method or the 'lease stock-system', the Income-tax Officer must still discard it and act under the proviso if the method does not show correctly the profits of the year. The only limitation is that after rightly discarding the assessee's method of accounting, the Income-tax Officer should not himself adopt a wrong or improper method of computation. From the foregoing discussion it would follow that we have been satisfied that the orders of the Tribunal suffers from no inherent infirmity justifying interference.
In the result, therefore, we would answer the reference in the affirmative and in favour of the revenue. There will be no order as to costs. Counsel's fee is assessed at Rs. 150.
S. K. RAY, ACTG. C.J. - I agree