M. S. MENON, J. - On September 16, 1955, we passed the following order :
This is a reference by the Income-tax Appellate Tribunal, Madras 'B' Bench, in compliance with a requistion under section 66(2) of the Indian Income-tax Act, 1922. The assessee is an unregistered firm consisting of five partners and carrying on business in cocoanut oil at Alleppey under the name and style of 'Swamy Brothers'. The assessment concerned is the assessment for the year 1124 M.E. (accounting period 1123 M.E.). It was made under section 30(4) of the Travancore Income-tax Act, 1121, corresponding to section 23(4) of the Indian Income-tax Act, 1922, and the question that we have to determine is :
'Whether there was material for the Tribunal to reject the book results and estimate the income from cocoanut oil and empty tins in the manner it has done ?'
2. According to the assessee the business was nothing more than a commission agency business form which the firm derived a commission of 0.75 per cent. (12 annas per Rs. 100) of the turnover, The Income-tax Officer declined to accept this contention and held the firms business cannot be considered as a commission agency business, pure and simple, and estimated the gross profit at 2.75 per cent. of the turnover.
3. The matter was taken up in appeal before the Appellate Assistant Commissioner of Income-tax, Trivandrum, as Income-tax Appeal No. 513/1952-52, and before the Income-tax Appellate Tribunal, Madras 'B' Bench, as I.T.A. No. 6483 of 1952-53. The Appellate Assistant Commissioner by an order dated December 10, 1952, and the Appellate Tribunal by an order dated June 30, 1953, rejected the contention of the assessee and upheld the estimate of the gross profit at 2.75 per cent. of the turnover.
4. Learned counsel for the assessee agrees that we may proceed on the basis that the assessee was not a commission agent, pure and simple, and that an estimate of the gross profit and percentage higher than 0.75 per cent. of the turnover is possible in this case. His only contention is that there was no material before the Tribunal for the estimate that has been made, viz., the estimate of the gross profits at 2.75 per cent. of the turnover.
5. It is clear from the order of the Tribunal that it based its conclusion on the proportion that the gross profits bore to the turnover in the case of other assessees :
'The case has to depend upon comparable cases. The departmental representative brought to our notice comparable cases which showed gross profit varying between 3 to 4 per cent. In estimating the gross income the Income-tax Officer adopted 2.75 per cent. and after deducting 0.75 per cent. for the commission accounted for in the commission account the addition was restricted to 2 per cent. In the circumstances of this case where the assessee is not strictly a commission agent the margin of 2 per cent. determined by the departmental officers is not all excessive. In fact it compares very favourably with the rates disclosed by the other merchants carrying on business under similar circumstances.'
6. The same was the approach of the Income-tax Officer :
'Another oil dealer who does business on the same lines as a assessee has shown a gross profit of 2.9 per cent. on the turn over. I will adopt a gross profit of 2.75 in this case on the admitted sale of cocoanut oils. Assessee has already accounted for a profit of 0.75 in commission account. The balance of 2 per cent. will be worked out on the admitted sales and added back to the admitted income of Rs. 14,931, This is Rs. 56,023.'
7. According to the learned counsel for the assessee no detail of the cases that were considered to be comparable was ever given to the assessee and in view of that though those cases may be sufficient to provoke a suspicion that 0.75 per cent. is not adequate they cannot possibly be used as materials to sustain an assessment. In support of his contention he drew our attention to the decision of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax a case of an assessment under section 23(3) of the Indian Income-tax Act, 1922, in which the petitioner invoked his remedies under that Act without success and then moved the Supreme Court under article 136 of the Constitution. The Supreme Court said :
'In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next, it did not give any opportunity to the company to rebut the material furnished to it by him......'
8. He also drew our attention to Gunda Subbayya v. Commissioner of Income-tax, a case of assessment under section 23(3) of the Indian Income-tax Act, 1922, and to Narayan Chandra Baidya v. Commissioner of Income-tax, a case of assessment under section 23(4) of the Indian Income-tax Act, 1922. In the former case the Madras High Court dealt with the question as to :
'Whether the Income-tax Officer when making an assessment on material which he himself has gathered shall disclose it to the assessee before making his assessment and give him an opportunity to adduce material in rebuttal'
as follows :
'There is nothing in the Act itself which requires the Income-tax Officer to disclose to the assessee the material on which he proposes to act or to refer to it in his order but natural justice demands that the should draw the assessees attention to it before making the order. Information which the Income-tax Officer has received may not always be accurate and it is only fair when he proposes to act on material which he has obtained from an outside source that he should give the assessee an opportunity of showing, if he can, that the Income-tax Officer has been misinformed';
and, in the latter, the Calcutta High Court took the view that although the strict letter of the law may not require it natural justice demands.
'that before charging any person with financial liability he should be informed of the material on which the charge was going to be imposed giving an opportunity to relent the effect of the material if he can.'
9. Learned counsel for the Department disputes the correctness of the proposition in so far as it relates to assessments under section 23(4) of the Indian Income-tax Act, 1922, which according to him are akin to the ex parte procedure of a civil court. He also points out, and quite correctly, that the contention itself will arise for consideration only if as a matter of the fact the opportunity claimed was not afforded to the assessee and that his instructions are insufficient to either admit or deny the correctness of the statement that the cases on the basis of which the estimate was made were not put to the assessee and the firms explanation, if any, obtained thereon.
10. The statement of the case before us does not deal with this matter and in view of that we have come to the conclusion that we should refer the case back to the Income-tax Appellate Tribunal under section 66(4) of the Indian Income-tax Act, 1922, to make such additions thereto as are necessary to enable us to determine the question. Order accordingly.
11. The contention dealt with in paragraph 5 of the order of the Appellate Tribunal regarding cocoanut oil tins is also not dealt with in the statement of the case. Learned counsel for the assessee states before us that his client is prepared to accept the decision of the Appellate Tribunal on that point and in view of this an addition to the statement of the case on that account is not necessary and is not hereby directed.
A supplementary statement has since been submitted by the Income-tax Appellate Tribunal. Paragraph II of that statement reads as follows :
'The records are not clear as to whether the compared case was actually put to the assessee by the Income-tax Officer before the assessment was completed and its objections for comparison invited. The objection to the comparison with the case revealing 2.9 percent. is stated to be that the period of account covered is the S. Y. 2003 ended October 23, 1947, whereas for the assessee, the period the year 1123 M.E. from August 18, 1947 to August 19, 1948.'
In view of this and the decisions we have mentioned in paragraphs 7 and 8 of the order dated September 16, 1955, we must hold that the Department was not entitled to rely on the material on which it has relied without first extending to the assessee an opportunity for an explanation and it follows that we must answer the question referred in the negative.
The concluding paragraph in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax , reads as follows :
'In the result we allow this appeal, set aside the order of the Tribunal and remand the case to it with directions that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate and then afford him full opportunity to meet the substance of any private inquiries made by the Income-tax Officer if it is intended to make the estimate on the foot of those enquiries. It will also be open to the Department to place any evidence or material on the record to support the estimate made by the Income-tax Officer or by Tribunal in its judgment. The Tribunal, if it thinks fit may remit the case to the Income-tax Officer for making a fresh assessment after taking such further evidence as is furnished by the assessee or by the Department.'
If any guidance is required as regards future procedure, the directions given by he Supreme Court in the paragraph extracted above should suffice.
Counsel for the Department submitted to us that the ground on which we are answering the question in the negative was not raised before the Appellate Assistant Commissioner of Income-tax, Trivandrum, or the Income-tax Appellate Tribunal, Madras, and that the assessee should be precluded from raising it on that account. This point was never urged before us at any time prior to our order of September 16, 1955. The memoranda of the two appeals also are not before us. We must hence hold that the Department is not entitled to raise the contention at this stage, and refuse to consider the case from that point of view.
The question referred is answered as above. A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Appellate Tribunal, Madras, as provided by sub-section (5) of section 66 of the Income-tax Act, 1922.
In the circumstances of the case we make no order as to costs.
Question answered in the negative.