(1) In this case, the assessee is a dealer in snake skins. For the assessment years 1950-51, 1951-52 and 1952-53, certain addition as have been made to his income. The basis of these additions is that he department refused to accept the assessee's contention that he had to reject a certain quantity of the tanned skins as unsuitable for sale. It is common ground that these snake skins find a market only abroad. The assessee claimed that after he had tanned his skins, he found certain of the skins were not upto standard. He therefore rejected them. The Income-tax Officer thought that the rejections were excessive. These rejections have been variously described in the orders of the officers below as shortages or wastages. But, it is not denied by the department at this stage that they represent rejections of unsaleable skins which were found to be not upto standard. It is also not in dispute that in spite of these rejections, the assessee's gross profit return was not low and, indeed, compared favourably with the returns of similar dealers. In dealing with the claim of the assessee on this head, the Income-tax Officer thought that the rejections came to 15 per cent, which is excessive. According to him, in another case, such rejections were found to be only 2.2 per cent. He was prepared to allow rejections up to 5 per cent.
The excess of skins were valued by the Income-tax Officer at Rs. 2,18,000, upon which he estimated a gross profit of 121/2 per cent and added back such estimated profit to the taxable income for 1950-51. Similar additions wee made for the other years. In his appeals before the Appellate Assistant Commissioner, the petitioner pointed out that he could not export such rejections and that it was not he case of the Income-tax Officer that there was any omission on the part of the assessee to account for sales. He also pointed out that the comparable case relied upon by the Income-tax Officer was not in fact a similar business at all. The appellate authority found that there was a case for addition, but reduced the addition.
(2) Further appeals to the Tribunal resulted in the assessee obtaining a greater relief in this regard, but the Tribunal still maintained the additions at certain figures.
(3) On the application of the assessee, this court directed the Tribunal to state a case and refer the following question for decision:
'Whether on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the addition of Rs. 30,000, 47,717 and 28,000, respectively in the assessment years 1950-51, 1951-52 and 1952-53'.
In so far as the assessment year 1952-53 is concerned, the sum of Rs. 28,000 added covers tow items; Rs. 18,000, relevant to the rejections, and Rs. 10,000 as due to inflated figures furnished by the assessee in the cost of tanning. Mr Abdul Kareem, learned counsel for the assessee, does not object to this addition of Rs. 10,000 but confines himself only to the additions made on the head of rejections.
(4) Once again we may emphasise that Mr. Balasubramaniam, learned counsel for the department, dies not dispute the contention of the assessee, that his gross profit margin is, in fact, somewhat higher than that, shown by other dealers similarly placed. Nor does he dispute who proposition that the comparable case relied upon by the department in support of its stand that only 5 per cent rejections could be allowed is not a really comparable cases, for, the turnover in the comparable case is far lower than the turnover of the assessee. It is unnecessary for us to refer to the precise details, as these facts are admitted. Nor is there any allegation made by the department that these rejected skins have in fact been sold by the assessee, or that any income has been derived by him thereby. This is clearly a case of a trader, dealing in a particular line of business, which commands only a foreign market, attempting to maintain a certain standard in the goods which he exports in order to retain his market. A person dependent on foreign trade has to see that by reason of the supply of sub-standard goods, his business is not affected. If, therefore, he finds that these goods will not be accepted by his buyers, he has no alternative but to reject them. Whether these goods will be ultimately destroyed or will find local sales is a different matter altogether.
Before the department can bring to tax any amount it must be established that the assessee has sold the goods and made any income thereby. When that circumstance is totally absent in this case, we are at a loss to see how and on what principle the assessee can be taxed on a notional income. For instance, if the assessee claimed that he had rejected 10,000 skins and those 10,000 skins were found non-existent, it may be presumed that the assessee had disposed of those skins in some way or other, thereby derived income which he has suppressed. But where the skins are there, not having been disposed of by the assessee, it is unreasonable to say that upon the notional sale value of those skins, profit could or should have been derived, which should be brought in as taxable income. The orders of the authorities below do not say that the assessee has dealt with these rejections at all, and, in the face of that irrefutable circumstance, there can in law be no addition on this head. We are accordingly satisfied that there was no justification whatsoever for making the additions of Rs. 30,000, 47,717 and 18,000 in respect of the three assessment years. The question is so answered in favour of the assessee. The assessee will be entitled to his costs. Counsel's Fee Rs. 250.
5. Reference answered.