This is a reference made by the Income-tax Appellate Tribunal (hereinafter called the Tribunal) in compliance with the order of this Court passed under sub-section (2) of section 66 of the Indian Income-tax Act (hereinafter called the Act).
(1) Whether on the facts and circumstances of the case the Tribunal was right in holding that the cost price of bidi leaves had been inflated (2) Whether there was any material before the Tribunal that the price had been inflated by Rs. 21,403 (3) Whether on the facts and circumstances of the case the Tribunal was right in holding that the cost price of bidi leaves had been inflated (4) Whether there was any material before the Tribunal that the price had been inflated by Rs. 10,709 ?" 3. The assessee is a bidi merchant. It claimed Rs. 96,574 by way of expenses for purchase of bidi leaves required for the manufacture of bidis in the assessment year 1947-48. Out of this amount a sum of Rs. 21,403 was disallowed by the Income-tax Officer on the ground that the alleged price was inflated.
4. The facts found by the Income-tax Officer in his assessment order are that one Mohib Hussain from whom the bidi leaves were alleged to have been purchased had no independent business of his own but was a nominee of the assessee doing the work on a small commission. The entire amount required for the purpose of securing the lease of the forest and the expenses incurred in plucking the leaves were expended by the assessee.
5. It is common ground that the amount of leaves-money for securing the forest was Rs. 21,403. In the books of account of Mohib Hussain there are the following entries : "The cost of leaves has been so regulated as to leave a small sum as profits of Mohib Hussain, after covering up the expenses of lease-money amounting to no less than Rs. 21,403 in the account year." "This method has obviously been adopted by the assessee with a view to inflate the cost bidi leaves in assessees hands. I would, therefore, reduce the same by Rs. 21,403 the extent to which the most of leaves the been inflated.
7. These observations show that in the opinion of the Income-tax Officer the addition of the lease-money in the cost of leaves was an inflation in the price. The order of the Income-tax Officer was passed on 24th February, 1948. It is pertinent to note that the order was before the decision of the Judicial Committee of the Privy Council in Mohanlal Hargovind of Jubbulpore v. Commissioner of Income-tax, C. P.and Bera, Nagpur, and the view then prevailing was that lease-money paid for obtaining the forest for bidi leaves was an item of capital expenditure. It is clear that in the opinion of the Income-tax Officer, by the same method the assessee was securing a deduction of the lease-money which was not permissible in law, though it had not state it in so many words.
8. The learned counsel for the Department urges that the Income-tax Officer really has allowed the deduction of the lease-money but has not accepted the other items of expenses to the extend of Rs. 21,403. It is not possible for us to agree with this construction sought to be put by the learned counsel on the Income-tax Officer.
9. The facts for the assessment year 2948-49 are similar, though the amount of lease-money paid for that year was Rs. 10,709. The Income-tax Officer has in the assessment order for that year observed : "This method is followed with a view to inflate (sic) the cost price of bidi leaves to the extent of lease-money paid in the name of Mohib Hussain." On this finding it was held that the sale price was inflated to the extent of Rs. 10,709, and that amount was disallowed and added to the taxable income. These observations leave no doubt about the working of the mind of the Income-tax Officer. The cases for both the years were decided by the Income-tax Officer.
10. In dealing with the appeal from the assessment or order for the year 1947-48 the Appellate Assistant Commissioner held that the alleged business of plucking leaves did not belong to Mohib Hussain but was really of the assessee. The reasoning on which he upheld the order of the Income-tax Officer is that margin of profit in the business of plucking and selling bidi leaves was nearly 30 to 40% in some cases and even 50%. The books of account of Mohib Hussain showed that his margin of profit was only 2%. The expenses, therefore, appear to be inflated.
The finding is inconsistent with the previous finding that the business, in fact, did not belong to Mohib Hussain. When, as found by the Income-tax Officer as well as the Tribunal it was the assessee who himself was doing the work of plucking and collecting bidi leaves through Mohib Hussain on Payment of a small commission to him, the question of the alleged accrual of profits to Mohib Hussain in the business of plucking and selling the bidi leaves cannot arise.
II. Further, it is not disclosed on what material the learned Appeal-late Assistant Commissioner assumed that the margin of profit in that business was 30 to 40%. It does not appear from the record that the Assistant Commissioner communicated the information on which he had come to that conclusion to the assessee nor does it appear that any opportunity was given to the assessee to rebut that conclusion. It is clear that the Appellate Assistant Commissioner was acting purely on suspicion which he was not entitled to do : Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal.
12. The next ground on which reliance is placed by the learned Appellate Assistant Commissioner is that the carting charges of leaves were also separately charged by Mohib Hussain. This can hardly be a ground for holding that the price of the leaves was inflated. The amount of Rs. 96,574 included only the expenses incurred for plucking and collecting the bidi leaves, a small margin of commission paid to Mohib Hussain and the lease-money paid. The bidi leaves were still to be brought from the forest to the place of the business. The expenses incurred therefore cannot be deemed to be part of expenses for plucking and collecting by leaves, in the absence of a finding of fact that the alleged purchase by the assessee from Mohib Hussain was at the place where the assessee was doing its business.
13. The Appellate Assistant Commissioner has further observed in paragraph 8 of his order that the books of account did give details.
Relying on this observation it is urged on behalf of the Department that the books of account were not being satisfactorily maintained, and the income-tax authorities were justified in holding that the sale price was inflated. It is not possible for us to accept this contention. The Income-tax Officer did not find any faults with the books of account of the assessee firm. On the other hand, he observed that the books of account were we maintained. As already stated, it has been found by both the Income-tax Officer and the Appellate Assistant Commissioner that entire business of plucking and collecting the leaves was done by the assessee through Mohib Hussain on payment of a small commission. This necessarily follows that the entire business of plucking and collecting the leaves was done by the assessee through Mohib Hussain on Payment of small commission. This necessarily follows that there were entries in the books of account of the assessee in respect of the amounts paid by the assessee of Mohib Hussain for the work of plucking and collecting the leaves.
14. Further, it appears to us that the remarks contained about the account books in the aforesaid paragraph relate to the books of account of Mohib Hussain and not to those of the assessee. We are here not concerned with the books of account of Mohib Hussain but with those of the assessee.
15. By way of his conclusion the Appellate Assistant Commissioner observed : "The Income-tax Officer has held that the Price of bidi leaves is debited by the assessee at highly inflated rate and in my opinion this finding of the Income-tax Officer is hundred per cent. correct. He has estimated the excess at Rs. 21,403 equal to the amount of lease-money of the jungle, by a rough and ready method and I am sure the inflation is not less than this. I, therefore, confirm the finding and uphold the disallowance of Rs. 21,403 This is clearly an erroneous construction of the order of the Income-tax Officer. The Income-tax Officer did not adopt any rough or ready method to hold that the price of the bidi leaves was inflated but clearly held that the price had been inflated to the extent of the lease-money for the jungle.
16. The disallowance of the expenditure of Rs. 10,709 was also on the same ground.
17. The Tribunal has in its statement of the case stated that no additional fact was found by it. Thus, in the result the expenses incurred by the assessee in payment of the lease-money for securing the forest have been disallowed. This is clearly contrary to the decision of the Judicial Committee of the Privy Council in Mohanlal Hargovind of Jubbulpore v. Commissioner of Income-tax, C. P. and Berar, Nagpur.
18. For reasons stated above, our answers to the questions referred to us are in the negative. Costs shall be borne by the Commissioner of Income-tax, M. P. and Bhopal. Counsels fees Rs. 150.