D. FALSHAW C.J. - The question framed for our consideration by the Income-tax Appellate Tribunal under the order of this court passed under section 66(2) of the Income-tax Act on the 30th of March, 1961, reads :
'Whether on the facts and circumstances of this case there was any material on which the income-tax authorities could legally make the assessment under the proviso to section 13 of the Income-tax Act, 1922, for the assessment years 1956-57 and 1957-58 ?'
The case refers to the income-tax assessment of the Punjab Trading Co. Ltd., Bhatinda, for assessment years 1956-57 and 1957-58, the accounting years ending on the 30th June, 1955, and the 30th of June, 1956. Among the business carried on by the company was the running of cotton ginning mills at Nabha and Bhatinda and also in the second assessment year at Patiala. For the years in question the companys accounts were apparently regularly maintained and had been audited by Messrs. D. Bhatia and Company, Chartered Accountants, New Delhi, but the Income-tax Officer in his assessments completed on the 28th of February, and 14th of December, 1957, held that the profit in respect of the cotton ginning business made by the assessee must be higher than what was shown in the account books. He, therefore, added Rs. 22,927 to the profits for the accounting year 1955-56 and Rs. 47,733 for the accounting year 1956-57. The Appellate Assistant Commissioner dismissed the assessees appeals after a detailed analysis of the factors involved on the broad ground that the assessee did not maintain any production register showing the day to day consumption of raw cotton and yield of ginned cotton and that the account books did not prove themselves.
Two appeals were filed before the Appellate Tribunal which were dismissed by the order dated the 18th of August, 1959. It was held that the income-tax authorities had given convincing reasons for invoking the proviso to section 13, but after going into the details of the yield of cotton ginned and the consumption of raw cotton considering the explanations offered by the assessee for the low yields in the years in question, reduced the additions to be made to the profits for the two years to Rs. 10,000 and Rs. 15,000 respectively. The Appellate Tribunal dismissed the assessees application under section 66(1) on the ground that the matter was concluded by findings of fact, but the application of the assessee to this court under section 66(2) was allowed to the extent of framing the question set out above for reference although other questions had been included in the application.
The basic reason for the refusal of the Income-tax Officer to accept the profits shown in the audited accounts of the assessee is contained in the table relating to yield per maund of raw cotton set out in the statement of the case as follows :
15 srs. 1 ch. Per maund
13 srs. 12 chs. Per maund
14 srs. 10 chs. Per maund Nabha.
14 srs. 8 1/2 chs. per maund - Bhatinda
14 srs. 3 3/4 chs. Per maund
13 srs. 6 chs. Per maund
13 srs. 5 1/4 chs. Per maund-Patiala
13 srs. . 8 3/4 chs. per maund - Bhatinda
The Income-tax Officer took into consideration the explanations put forward by the assessee for these low yields compared with those shown by the same assessee in the assessment years 1955-56, namely, (i) that the yield of cotton is lower in the case of first pickings and he had purchased the bulk of the kapas of the first pickings, and (ii) that he had purchased inferior qualities of cotton. However, the Income-tax Officer did not find it possible to accept those explanations and he based his additions to the profits on a calculation of what the value of a normal yield would have been.
The same explanations were put forward before the Appellate Assistant Commissioner who analysed the matter more thoroughly and at much greater length than had been done by the Income-tax Officer. He not only went carefully into the allegations about the first pickings, but also compared the yields shown by the assessee for the years in question with those shown by other proprietors of cotton ginning factories in the same neighbourhood during the same period. He also carefully examined the allegation that raw cotton of inferior quality had been purchased, but found no reasons to differ from the assessment made by the Income-tax Officer. He found that the most important feature of the case was the absence of any record about consumption of raw cotton and the production of ginned cotton from day to day and held that in the absence of this vital record the books of account could not be accepted in toto.
The provisions of the Act which we are required to interpret in relation to these facts are contained in section 13 which reads :
'13. Income, profits and gains shall be computed, for the a 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.'
It is contended on behalf of the assessee in this case that his accounts had been regularly maintained and properly audited, and moreover accounts similarly maintained and audited had been accepted in toto by the Income-tax Officer in previous years and that in these circumstances no question of applying the proviso arose. It is immediately clear that the first part of the proviso - 'if no method of accounting has been regularly employed' - has no application in the present case, and it is contended on behalf of the assessee that the second part is equally inapplicable, since the method of accounting employed was such that the profits could be clearly deduced therefrom. It is contended that the real ground on which the authorities have invoked the proviso is not that no proper method of accounting has been employed, but that incorrect figures have been introduced into the accounts relating to the yields of ginned cotton per maund of raw cotton, and it is contended that once the method of accounting is accepted by the Income-tax Officer he cannot invoke the proviso.
Support for this view is derived from a number of reported cases. The first of these is Pioneer Sports Ltd. v. Commissioner of Income-tax. In that case the Income-tax Officer had regarded the margin of profits revealed in the assessees accounts as too low and he increased it from about Rs. 40,000 to Rs. 60,000 observing that a trading account based on an inventory not supported by a stock book could only be accepted if it disclosed a reasonable rate of profit, and since the assessee did not do so he rejected the result arrived at as incorrect and acted under the proviso to section 13. It was held by Addison and Sale JJ. that if there was no evidence to justify the Income-tax Officers rejection of the method of accounting the assessment should be made under the first part of section 13 and not under the proviso and when there is no other reason except the fact of reduced profit to justify the assumption that profits cannot be deduced from a method of accounting which admittedly has been regularly employed by the petitioner and has been accepted in the past, the use of the proviso to section 13 for the purpose of introduction of an arbitrary manner of computing the profits is not justified.
The next case is Pandit Bros. v. commissioner of Income-tax, in which J. L. Kapur and Khosla JJ. held as follows :
'In order that the second part of the proviso should apply there must be material before the Income-tax Officer to lead him to the conclusion that the method employed is defective or that the case requires reconsideration and a new computation must be made. The mere fact that the profits are low is not material upon which a finding under section 13 can be based, because the assessee may be incompetent or his methods of business may be uneconomic. Again, the fact that there is no stock register only cautions him against the falsity of the returns made by the assessee. He cannot say that merely because there is no stock register the account books must be false. Where therefore the account books are accepted as correct and disclosing a true state of affairs, the absence of one register cannot amount to material for applying the provisions of the proviso to section 13.'
Similarly in Veeriah Reddiar v. Commissioner of Income-tax, G. Kumara Pillai and T. K. Joseph JJ. held that neither low profits nor the absence of a variety-wise or regular stock register is material on the strength of which a finding under the proviso to section 13 could be based and assessment thereunder could be made.
The effect of these decisions appears to be that if accounts are, prima facie, regularly and properly kept and the Income-tax Officer cannot lay his finger on any particular flaw in the method of accountancy, he is bound to accept the profit disclosed by such accounts, and the effect of this would be that if any assessee produced a plausible set of regularly kept accounts the Income-tax Officer is powerless to do anything about the profit shown therein. This, however, is clearly not a correct view of the law as can be seen from the decision in Commissioner of Income-tax v. Sarangpur Cotton ., in which their Lordships observed as follows :
'Section 13 relates to a method of accounting regularly employed by the assessee for his own purposes and does not relate to a method of making up the statutory return for assessment to income-tax. The Income-tax Officer is not, prima facie, entitled to accept under section 13 the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee. It is the duty of the Income-tax Officer, where there is such a method of accounting, to consider whether the income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question. He is not right in computing for the purpose of section to income, profits and gains in accordance with the method of accounting regularly employed by the assessee when that method in fact does not show the true income, profits and gains.'
Perhaps the greatest strength is derived by the Commissioner from the decision in S. N. Namasivayam Chettiar v. Commissioner of Income-tax , a decision of the Supreme Court by Kapur and Hidayatullah JJ., the former of whom was party to the judgment in Pandit Bros. case, cited above, and who delivered the judgment in this case. The case of Pandit Bros. was cited in the course of arguments and Kapur J. observed that it cannot be said that that case laid down as a proposition of law that the want of a stock register by which a proper check could be made was not such a serious defect as to make the proviso to section 13 inapplicable. It was further held that it is for the income-tax authorities to consider the material which is placed before them and if after taking into account in any case the absence of a stock register coupled with other materials they are of the opinion that correct profits and against cannot be deduced then they would be justified in applying the proviso to section 13. It was further held, following an observation in commissioner of Income-tax v. McMillan & Co., that the Income-tax Officer, even if he accepts the assessees method of accounting, is not bound by the figure of profits shown in the accounts.
In my opinion it cannot possibly be said that in the present case there was no material for invoking the proviso to section 13. The reason given by the Income-tax Officer, and even more so the elaborate analysis made by the Appellate Assistant Commissioner, clearly show that the yield of ginned cotton per maund of raw cotton in the assessees ginning factories for the years in question could not possibly be correct, and even if it were open to us to question the findings of these officers which were upheld by the Appellate Tribunal, I do not think it would be possible to differ from their conclusions. I also consider that in a business of this kind, which merely consists of buying raw material and selling it after processing, the absence of a register showing the daily working of each factory is just as material as the absence of a stock register in the case of an ordinary merchant. I am therefore of the opinion that the question referred to us must be answered in the affirmative. The Commissioner will have his costs from the assessee. Counsels fee Rs. 250
A. N. GROVER J. - I agree.
Question answered in the affirmative.