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international Forest Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtJammu and Kashmir High Court
Decided On
Case NumberIncome-tax Reference No. 9 of 1973
Judge
Reported in[1975]101ITR721(J& K)
ActsIncome Tax Act, 1961 - Sections 143(2), 185, 254(2) and 256(1); ;Commissions of Inquiry Act, 1952
Appellantinternational Forest Co.
RespondentCommissioner of Income-tax
Appellant Advocate H.L. Chadha and; M.A. Bakshi, Advs.
Respondent Advocate J.N. Bhan, Adv.
Cases ReferredIn Mehta Parikh and Co. v. Commissioner of Income
Excerpt:
- .....circle, for report after personal detailed inspection on the spot by the latter and the divisional forest officer, langet. pursuant to this direction the divisional forest officer vide hisno. 43-c dated may 11, 1962, reported to the conservator of forests that there was heavy incidence of rot in the compartment, that the range officer, mewar, had checked all the 1,200 trees felled up to that time by the assessee and found them unsound though they appeared to be free from any visible defect. the divisional forest officer further reported that he had also 'checked up a cross-section through and through in the coupe and was convinced that the assessee had been hard-hit because of severe rot prevailing throughout the coupe.' the divisional forest officer further reported that the percentage.....
Judgment:

Jaswant Singh, J.

1. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Chandigarh, has referred for our decision the following question of law arising from its,order dated December 11, 1970, passed in Income-tax Appeal No. 3078 of 1969-70 :

' Whether, on the facts and in the circumstances of the case, there was any material on record to justify the addition of Rs. 2,27,354 to the trading result and was the Tribunal right in law in sustaining this addition ?'

2. The facts leading to this reference are :

The assessee, M/s. International Forest Co., Srinagar, which is a firm registered under Section 185 of the Act, and carries on business as a forest lessee in the State of Jammu and Kashmir, tendered for and obtained in December, 1958, a lease of compartment No. 28 in Mewar Range of Langet Forest Division, Kashmir, against a royalty of Rs. 25,55,555. In the first year of its working the lease, the assessee did not effect any sale. On January 24, 1961, the assessee made a representation to the Chief Conservator of Forests, Jammu and Kashmir, complaining therein that on exploitation of the aforesaid forest compartment, it had found that over 65% of the trees marked fit for felling had turned out as unsound and praying that 'volume' proportionate thereto be issued to it in some adjoining forester the royalty be reduced to the volume found actually sound. This representation was forwarded by the Chief Conservator of Forests to the Conservator of Forests, North Circle, for report after personal detailed inspection on the spot by the latter and the Divisional Forest Officer, Langet. Pursuant to this direction the Divisional Forest Officer vide hisNo. 43-C dated May 11, 1962, reported to the Conservator of Forests that there was heavy incidence of rot in the compartment, that the Range Officer, Mewar, had checked all the 1,200 trees felled up to that time by the assessee and found them unsound though they appeared to be free from any visible defect. The Divisional Forest Officer further reported that he had also 'checked up a cross-section through and through in the coupe and was convinced that the assessee had been hard-hit because of severe rot prevailing throughout the coupe.' The Divisional Forest Officer further reported that the percentage of rot could be placed at a minimum of 55% and unless something was done to help the assessee it would be completely undone and there could be no hope of recovery of royalty from it.

3. On the matter eventually coming up before it, the Government vide its order FST/80 of 1963 dated July 17,1963, accorded sanction to the grant of remission of Rs. 9,99,000 to the assessee 'on account of incidence of rot' in its aforesaid lease of compartment No. 28, Mewar Range, Langet Division, North Circle, Kashmir. In the first three accounting years ending March 31, 1961, March 31, 1962, and March 31, 1963, the assessee declared the gross profit of Rs. 4,595, Rs. 17,694 and Rs. 4,59,093, respectively. These returns were accepted subject to some minor adjustments by the Income-tax Officer, Project Ward, Srinagar. In the year 1964, the assessee filed a return of income for the accounting year ending March 31, 1964, declaring a gross profit of Rs. 4,056. Subsequently, it filed a revised return of income declaring a loss of Rs. 2,449. The Income-tax Officer issued a notice to the assessee under Section 143(2)(b) of the Act which was complied with. On a scrutiny of the accounts, the Income-tax Officer noted that the assessee had omitted to show the sale of 36,000 c. ft. of timber which was actually sold by it at Pathankote, that the yield of sawn timber shown by the assessee was too low to be accepted keeping in view the previous record of the yield, that the sale of 42,520 c. ft. of timber shown to have been made to Shri Abdul Rehman Guru in lieu of Rs. 2,52,446 was fictitious and that the sale of mill rejections had not been shown at all by the assessee in its books of accounts. By his letter dated August 22, 1968, the Income-tax Officer called upon the assessee to furnish the complete address of Shri Abdul Rehman Guru and a copy of his accounts and to explain why the sale had been made in his favour at a very low rate. The Income-tax Officer also called upon the assessee to explain why there had been an omission on its part to show the aforesaid sale at the Pathankote depot and why low yield of sawn timber had been shown by it. The points raised by the Income-tax Officer were replied to by the assessee by its letter dated November 28, 1968. Not feeling satisfied with the explanation tendered by the assessee, the Income-tax Officer added a sum of Rs. 36,000 ' for suppression of sales ' made at the Pathankote depot andholding the plea taken by the assessee regarding the logs lying in the forest as on March 31,1963, and their conversion and sale in favour of Shri Abdul Rehman Guru of Doabagh as not verifiable and taking the yield of sawn timber at 50% he worked out the same at 72,805 c. ft. and made an addition of Rs. 2,27,354 to the trading account of the assessee.

4. Aggrieved by the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner, who dismissed the same relying on the system of valuation of closing stock and the schedule adopted by the forest department of the state as regards the out-turn of the sawn timber. The assessee then took the matter in second appeal to the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh. At the hearing of the appeal before the Tribunal, the assessee contended that there had been no suppression of sales as found by the officers below and that the estimated addition of Rs. 2,27,354 in the gross profit made by the officers below was unjustified and illegal. In the course of the hearing of the appeal before the Tribunal, the revenue relied upon the report of Ayyangar Commission set up by the Government of Jammu Kashmir in 1965, in support of the addition made by the Income-tax Officer. This was objected to by the assessee on the ground that it was never put to it at any stage of the proceedings, that it was ex parte on the very face of it and that it was irrelevant because the loss in question and the remission granted to the assessee on account of rot were not the subject-matter of an enquiry before the Commission. Although the Tribunal took note of the facts that it was not desirable that a quasi-judicial body like it should be swayed by political consideration which led to the appointment of Ayyangar Commission, that it should not be a party to the political controversies, that its function was strictly limited to weighing the facts on the record carefully and to finding out whether the assessment made was proper or not, and that the elementary rules of natural justice required that the material to be used against the assessee should be given to him and an opportunity should be afforded to him to controvert the same, that the Commission was not a technical committee, it allowed the departmental representative freely to cite the report of the Ayyangar Commission and relied on the same as an expert report of the committee which 'went into the matter deeply' observing that there was a lot of material in the report which was of value in estimating the existence of rot, its extent and the method of valuation which were technical matters. Remarking, inter alia, that the burden lay heavily on the assessee to prove the loss claimed by it, that the fact that the Kashmir Government accepted the claim and allowed a rebate to the assessee for incidence of rot was not binding on the income-tax department, that the report of the Divisional Forest Officer, regarding the incidence of rot, which was the sheet anchor of the assessee left certain thingsvague and obscure and could not be treated as conclusive for determining the loss sustained by the assessee, that the loss was not claimed for the years prior to the year in question, the Tribunal dismissed the appeal by its order dated December 11, 1970. Thereafter, the assessee moved the Income-tax Tribunal for rectification of its aforesaid order by means of an application under Section 254(2) of the Act which was rejected by the Tribunal, vide its order dated April 12, 1972, with the observation that there was no mistake apparent from the record to justify rectification. The assessee then made an application to the Tribunal for referring certain questions of law arising from its order dated December 11, 1970, for decision to this court. According to the request of the assessee the Tribunal has referred the aforesaid question of law for our decision.

5. Appearing for the assessee, Mr. Chadha has strenuously urged that the income-tax authorities have misdirected themselves, that there is no material on the record for holding the 42,250 c. ft, of timber was not sold in favour of Abdul Rehman Guru at the rate and for the consideration shown by the assessee, that simply because 42, 250 c, ft. of timber was shown to have been sold for Rs. 25,246 could not reasonably lead to the conclusion that there had been a suppression of sales on the part of the assessee, that the material on the record is not legally sufficient to sustain the estimated addition of Rs. 2,27,354 made by the income-tax authorities in the trading account for his client, that the schedule adopted by the forest department of the State regarding the yield of sawn timber has no statutory or legal force, that the report of the Ayyangar Commission which was not a judicial body being irrelevant and inadmissible in evidence could not be relied upon and that the Appellate Tribunal has erred in allowing it to be freely cited before it by the departmental representative and itself relying on the same, that neither the sale shown to have been made to Abdul Rehman Guru of Doabagh nor the report dated May 11, 1962, of the Divisional Forest Officer, Langet, could be brushed aside by the income-tax authorities, that the lesser out-turn of sawn timber could not sustain the addition which implied a finding of suppressed sales which had got to be proved by those making the addition and the aforesaid estimated addition being arbitrary and based on conjectures and surmises was bad and illegal.

6. Mr. J. N. Bhan has on the other hand, contended that the story of inflated loss put forth by the assessee was a mere make-belief, that the report of the Divisional Forest Officer, which was the mainstay of the case of the assessee was not conclusive, that the Tribunal did not rely upon the report of the Ayyangar Commission but took note of it merely as an expert report and there was enough material on the record to justify the aforesaid addition of Rs. 2,27,354 in the trading result of the assessee.

7. We have given our thoughtful consideration to the submissions made by the learned counsel for the parties and have gone through the entire record accompanying the statement of the case drawn up by the Income-tax Appellate Tribunal.

8. It appears that the aforesaid addition of Rs. 2,27,354 in the trading result of the assessee was made by the Income-tax Officer and affirmed by the Appellate Assistant Commissioner mainly on the grounds that the yield of sawn timber shown by the assessee for the accounting year in question was very low as compared to that shown in the earlier years, and that the pleas taken by the assessee that, the low out-turn was due to rot and that the logs lying in the forest were all rotten and hence converted into Paselas and sold to Abdul Rehman Guru were neither verifiable nor acceptable. The Appellate Assistant Commissioner also appears to have affirmed the assessment made by the Income-tax Officer, taking into consideration the comparative analysis of the out-turn of the previous years, and the schedule adopted by the Jammu and Kashmir Forest Department according to which the expected out-turn from the marked volume is taken at 55% for Deodar and holding that 'the evidentiary value of the correspondi ence of the forest department of Jammu and Kashmir which pointed out rock-bottom minimum could not be of much assistance to the assessee.' On the matter coming up before the Appellate Tribunal it also brushed aside the report regarding the assessment of rot made by the concerned Divisional Forest Officer on May 11, 1962 characterising it as inconclusive and despite the pious declaration made by it that the report of the Ayyangar Commission had not been properly brought on the record and no opportunity had been given to the assessee of proving its case regarding the recitals in the particular paragraphs of the report dealing with rot, it relied on it as an expert report of immense value in estimating the existence, nature and extent of rot.

9. We would like at the very outset to observe that mere low yield or out-turn of sawn timber in the accounting year or the manifestation of meagre gross profit, which are the sheet anchors of the orders of the income-tax authorities and that of the Appellate Tribunal could not be taken as indicative of suppression of sales on the part of the assessee.

10. In R. B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income-tax : [1970]75ITR260(Bom) .where the Income-tax Officer added a sum of rupees one lakh to the assessee's income on the ground that the excessive dead loss of cotton indicated suppression of production figures, and on appeal the Appellate Assistant Commissioner reduced the amount to rupees fifty thousand, it was held by the Bombay High Court that the mere fact that the percentage of dead loss of cotton is high in a particular year cannotlead to an inference that thereby there has been a suppression of the production in a spinning mill. It was further held therein that the mere fact that the profits were low is not a circumstance or material aliunde which could justify addition of the profits.

11. Again the mere fact that lesser out-turn of sawn timber has been shown by the assessee in the accounting year in question as compared to previous year could not be treated as a valid ground for rejecting its amounts and as indicative of any attempt on the part of the assessee to defraud the income-tax department.

12. In B. F. Varghese (No. 2) v. Stele of Keralal : [1969]72ITR726(Ker) .the Kerala High Court held that the fact that the yield disclosed by the books of accounts does not satisfactorily compare with the yield as estimated by the assessing authority for the previous year is no ground for rejecting the accounts of an assessee as the yield would vary from year to year to a large extent, depending on several factors and the yield obtained in one year would not furnish any guidance for estimating the yield for any subsequent year. It was further held in this case that in the absence of any omission, irregularity or other defect in the method of maintaining the accounts or positive evidence to show that the accounts did not disclose the whole income of the assessee, his books of accounts cannot be rejected.

13. The income-tax authorities were also wrong in brushing aside the, report of the Divisional Forest Officer dated May 11, 1962, regarding the incidence of rot. There was no material on the record to show that there was collusion between the assessee and the Divisional Forest Officer, or that the assessment of rot made by him was exaggerated or incorrect, if the authorities thought that certain things which had been left vague and obscure by him needed clarification they ought to have sent for and examined him. Without adopting that course they ought not to have ignored his report.

14. The sale alleged to have been made in favour of Shri Abdul Rehman Guru of Doabagh could also have been easily verified by the Income-tax Officer by sending for the former and examining him. Without doing so it was not just and proper for the Income-tax Officer to have treated it as fictitious and thus to have abstained from relying on it.

15. Now, so far as the Schedule adopted by the forest department for working out the yield of sawn timber is concerned, we have no hesitation in agreeing with the learned counsel for the assessee that it has no statutory or legal force and cannot even otherwise be relied upon as the yield depends upon various factors. Reference in this connection may be made to the decision of the Calcutta High Court in Director-General, Ordnance Factories Employees' Association v. Union of India and Director'General, Ordnance,Factories : (1970)ILLJ707Cal where it was held that the statements in Government of India Manual had no statutory force.

16. The report of the Ayyangar Commission by which the Appellate Tribunal seems to have been greatly influenced despite the pious declaration made by it was also not legally admissible in evidence. It was merely a report of an administrative body set up by the Government of Jammu and Kashmir to inform its own mind regarding some matters of public importance. A perusal ;of the preamble and the note appended to Notification No. SRO 39 dated January 30, 1965, published in the Jammu and Kashmir Government Gazette dated January 30, 1965, would show that a commission of inquiry consisting of Shri N. Rajagopala Ayyangar, retired judge of tho Supreme Court of India, was constituted to inquire into and report regarding certain allegations of pecuniary and other benefits by Bakshi Ghulam Mohd. for himself, for members of his family, and for certain other relatives and persons in whom he was interested between October, 1947, and October, 1963, when he was holding various offices including the offices of Deputy Prime Minister and Prime Minister of the State of Jammu and Kashmir by abusing and exploiting the official position held by him. It would also be noted that the lease of the assessee did not form the subject matter of inquiry by the Commission and it was not required to go into the circumstances leading to the remission of a portion of royalty payable by the assessce for the aforesaid lease sanctioned in its favour. The report, therefore, though valuable to the Government in certain respects, was neither admissible in evidence nor could any reliance be placed upon it by a judicial or a quasi-judicial body like the Income-tax Appellate Tribunal. We are fortified in this view by a catena of authorities.

17. Relying on the decision of the Privy Council in the case of In re Maharaja Madhava Singh [1905] ILK 32 Cal 1 a Division Bench of the Nagpur High Court held in M. V. Rajwa.de v. Dr. S. M. Hassan AIR 1954 Nag 71 that the Commission governed by the Commissions of Inquiry Act, 1952, is a fact-finding body which is appointed by the State Government 'for the information of its own mind' in order that it should not act, in exercise of its executive power 'otherwise than in accordance with the dictates of justice and equity 'in ordering a departmental enquiry against its officers and is not meant to produce any document of a judicial nature.

18. As held in Ram Krishna Dalmia v. S.R. Tendolkar : [1959]1SCR279 and reaffirmed in P. V. Jagannath Rao v. State of Orissa AIR 1969 SC a commission is appointed under the Commissions of Inquiry Act merely to investigate and record its findings and recommendations and the inquiry and the report made by itcannot be looked upon as a judicial inquiry in the sense of its being exercise of judicial functions properly so called.

19. In Director-General, Ordinance Factories Employees' Association v. Union of India, it was held that the pay Commission's observations had no legal force but were only matters for consideration of the administrative authorities.

20. Reference in this connection may also be made to a decision of the Privy Council in Martand Rao v. Malhar Rao AIR 1928 PC 10 where it was held that the opinion expressed in official reports should not be treated as conclusive in respect of matters requiring judicial determination, however eminent the authors of such reports may be.

21. Reference in this connection may also be made with advantage to H. Mathewson v. Secretary of State AIR 1924 Pat 616 were it was held that Government reports have no judicial authority where they express opinion on private rights of the parties.

22. Even if it be taken that the income-tax authorities are not bound by strict rules of evidence, the report of the Ayyangar Commission could not be referred to and relied upon by the Appellate Tribunal unless it had not only invited the attention of the assessee to the passages on which it intended to rely, but had also given an opportunity to the assessee to explain those passages and to adduce evidence against the truth of the recitals contained therein. Reference in this connection may be made to a decision of their Lordships of the Supreme Court in Commissioner of Income-tax v. East Coast Commercial Co. Ltd. : [1967]63ITR449(SC) where it was held that the report of the Income-tax Investigation Commission could not be relied upon without giving an opportunity to the assessee to explain the passages of the report sought to be relied upon and to tender evidence against the truth of the recitals contained therein.

23. We are, therefore, of the opinion that the income-tax authorities, and the Appellate Tribunal erred in relying upon the aforesaid schedule of the forest department. The Appellate Tribunal also acted illegally in allowing the report of the Ayyangar Commission to be cited before it and relying on the same as expert report without giving an opportunity to the assessee to adduce evidence to controvert the recitals made therein.

24. We would also like to observe that even if the Income-tax Officer considered the material placed before him by the assessee to be unreliable keeping in view the comparative statement of accounts of the previous years, he could not proceed to make an arbitrary addition and base his conclusion purely on guess-work. He ought to have related his estimate to some evidence or material on the record as it is now well-settled that if theprofits shown by the assessee in his return are not accepted, it is for the taxing authorities to prove that the assessee made more profits.

25. Reference in this connection may be made to the decision of the Supreme Court in Stale of Orissa v. Maharajah Shri B. P. Singh Deo : [1970]76ITR690(SC) where it was held that the mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an arbitrary order. The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment.Again in Raghubar Mandal Harihar Mandal v. State of Bihar : [1958]1SCR37 their Lordships of the Supreme Court held :

'There must be something more than bare suspicion to support the assessment. When the returns and the books of account are rejected, the assessing officer must make an estimate and to that extent he must make a guess, but the estimate must be related to some evidence or material and it must be something more than mere suspicion.'

26. Reference in this connection may also be made to a decision of the Nagpur High Court in R. B. N. J. Naidu v. Commissioner of Income-tax . Now, even assuming that there was some material on the record to support the impugned addition of Rs. 2,27,354, the orders passed by the income-tax authorities and the Appellate Tribunal are vitiated by the fact that reliance was also placed by them on irrelevant and inadmissible evidence like the report of the Ayyangar Commission and the aforesaid schedule of the forest department.

27. In Dhirajlal Girdharilalv. Commissioner of Income-tax : [1954]26ITR736(SC) their Lordships of the Supreme Court observed that if the court of fact whose decision on a question of fact is final arrives at a decision by considering material which is irrelevant to the enquiry or by considering material which is partly relevant and partly irrelevant, or bases its decision partly on conjectures, surmises and suspicions, and partly on evidence, then in such a situation, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its findings and such a finding is vitiated because of the use of inadmissible material.

28. In Surajmal Champalal v. Commissioner of Income-tax : [1967]66ITR396(Patna) .a Bench of thePatna High Court held that if an estimate be based partly on irrelevantmaterial and partly on relevant material, it is difficult to sustain theestimate because it cannot be said as to what extent and which part of thefigure of estimate was dependent upon the irrelevant portion of thematerial.

29. Again, in Omar Salay Mohamed Sait v. Commissioner of Income-tax : [1959]37ITR151(SC) their Lordships of the Supreme Court said that the conclusions reached by the Tribunal should not be coloured by any irrelevant considerations or matters of prejudice, that on no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises, nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings even though on questions of fact, will be liable to be set aside by the court.

30. In view of the foregoing discussion and on a careful review of the entire record, we are of the opinion that there was no legal material on the record to justify the addition of Rs. 2,27,354 to the trading result of the assessee and the Tribunal was also not right in law in sustaining this addition.

31. In Mehta Parikh and Co. v. Commissioner of Income-tax [1956] 30 ITR 181 S. R. Das C. J. and Bhagwati J. held :

'Facts proved or admitted may provide evidence to support further conclusions to be deduced from them which conclusions may themselves be conclusions of fact and such inference from facts proved or admitted could be matters of law. The court would be entitled to intervene if it appears that the fact-finding authority has acted without any evidence or upon a view of the facts, which could not reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question.'

32. Venkatarama Ayyar J. preferred to rest his decision in the last preceding case on the ground that the finding of the Tribunal that high denomination notes of the value of Rs. 30,000 represented concealed profits was not supported by any evidence and was, in consequence, erroneous in point of law and liable to be set aside.

33. Again, in Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. : [1968]68ITR200(SC) their Lordships of the Supreme Court held that a finding of fact may be defective in law if there is no evidence to support it or if the finding is unreasonable or perverse.

34. The reference is answered in the negative.

S.M.F. Ali, C.J.

35. I agree.


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