Commissioner of In­come Tax A- Range, Chittagong

 Vs.

Harendra Kumar Sil

Supreme Court

Appellate Division

(Civil)

Present:

FKMA Munim J

Ruhul Islam J

Badrul Haider Chowdhury J

Shahabuddin Ahmed J

Commissioner of In­come Tax A- Range, Chittagong. …….App­ellant(In Civil Appeal No. 34 of 1981)

Vs.

Harendra Kumar Sil………………………………………. Respondent.

And

Commissioner of Tax­es, Dacca (South) Zone, Dacca ……Appellant (In Civil Appeal No. 50 of 1981).

Vs.

M/s. Beauty Paints Supply & Co………………………………………….Respondent.

Judgment

January 19, 1982.

Case Referred to-

Commissioner of Income-tax v. M/s Ata Hossain Khan Ltd. 28 DLR (AD) 141.

Lawyers Involved:

Habibul Islam Bhuiyan, Advocate instructed by Md. Sajjadul Huq, Advo­cate-on Record—For the Appellant (In Civil Appeal No. 34 of 1981).

A M Mahmudur Rahman, Advocate instructed by Md. Sajjadul Huq, Advocate-on Record.—For the Appellant (In Civil Appeal No. 50 of 1981).

S.R. Pal, Senior Advocate (S.C. Das, Advocate with him instructed by Aminul Huq, Advocate-on-Record -For the Respondent (In Civil Appeal No. 34 of 1981).

C.R. Ali, Advocate instructed by Abu Backkar, Advocate-on Re­cord—For the Respondent (In Civil Appeal No. 50 of 1981).

Civil Appeal Nos. 34 and 50 of 1980.

(From the judgment and orders dated July 2, 1980 passed by the High Court Division in Application Nos. 10 of 1977 and 11 of 1978 respectively.)

Judgment

                 Ruhul Islam J.- These two appeals by special leave arise from the decision of the High Court Division under section 66(1) of the Income-tax Act answering the question raised by the assessee and remanding the case to the Deputy Commissioner of Taxes to determine the income, profits and gains of the assessee in accordance with the provisions of section 13 read with section 23 of the Income-tax Act Leave was granted to examine whe­ther the High Court Division was correct in answering the question raised by the assessee, although it is a pure question of fact. The assessee respondent filed an application under sub-section (1) of section 66 of the Income-tax Act raising the following question for the decision of the High Court Division:

“Whether on the facts and circumstances of the case the Tribunal was justified in confirming the rate of gross profit at 10 percent applied by the authorities below on a wrong appraisal of the fact that due to restriction in imports the rate of gross-profits applicable to the dealing of applicant increased during the previous year.”

In Civil Appeal No. 50 of 1981 the respondent Messrs. Beauty Paints Supply and Co. having wholesale business in dyes and chemicals, not wholesale business in paint as recorded by the Deputy Commissioner of Taxes in the assessment order showed total sale at Tk. 8,28,464.00 with Gross Profit (G.P.) at Tk. 57,879/- at the rate of 6.75%. The Deputy Commissioner of Taxes while assessing the income of the respondent found that the purchases made by the respondent were not supported by vouchers. He noted three such instances which are not supported by any voucher. He also noted that the cash memos produced by the assessee did not show the particulars of the customers and there was no stock register. According to the Deputy Commissioner of Taxes the disclosed gross profit was low. The Deputy Commissioner remarked that in the assessee’s line of busi­ness imports having declined price of the particular commodities increased and conse­quently the assessee earned profit at a very high rate, and he was of the opinion that the rate of gross profit of the material period could not be compared with the gross profit of earlier years. In Civil Appeal No. 50 of 1981 the Deputy Commissioner of Taxes after examining the accounts clearly recorded as follows: —

“BANGLA.”

2. With these remarks the Deputy Commi­ssioner of Taxes rejected the trading accounts of the assessee and made a fresh estimate in exercise of his power under section 13 of the Income-tax Act? for finding the true profit. Hs found the sale at Tk. 9,00,000/- and gross profit at the rate of 10% amounting to Tk. 90.000/- and after deduction of the gross profit as shown by the assessee added Tk 32.121/-. In appeal by the assessee the Appellate Joint Commissioner after examining the papers produced by the assessee found that the assessee is a wholesaler in dyes and chemicals and not a wholesaler in paint as recorded by, the Deputy Commissioner of Taxes. On examining the purchases found by the Deputy Commissioner not supported by vouchers he found that original printed vouchers produced before him provided complete details of the sellers in support of the said purchases; and all other purchases were also supported by vouchers. He, how­ever, found that the Deputy Commissioner’s finding regarding want of particulars of custo­mers in the cash memos was correct; and that it was also correct that the assessee did net keep any stock tally of goods. On these findings the Appellate Joint Commis­sioner reduced Tk. 32,121/- to Tk. 27,750/- and directed modification of the assessment order. The assessee took an appeal thereof to the Income-tax Appellate Tribunal. The Tribunal by its judgment and order dated November 23, 1976 dismissed the appeal and affirmed the judgment and order of the App­ellate Joint Commissioner with the following observation:-

“…..that Deputy Commissioner of Taxes finding regard to lack of particulars of customers in the cash memo is correct; that the assessee did not also keep any stock tally account for goods. The App­ellate Joint Commissioner of Taxes, there­fore, concluded that total rejection of tra­ding account was justified in view of the fact that purchases were vouched and ver­ifiable and also that since sales were not verifiable it would be reasonable to recon­struct the sales disclosed on the basis of 10% gross profit rate…..”

3. The contention of the appellant is that the question framed by the assesses is a pare question of fact, and no question of law arises from the judgment of the Appellate Tribunal and no reference lay under section   66 (i) of the Income-tax Act, but the learned Judges without examining whether the question raised by the assessee for decision is a question of Saw, on an erroneous view of the provision of law, answered the question in the negative.

4. In support of the contention Mr. A.M. Mahmudur Rahman, the learned Advocate submitted that the gross profit shown by the assessee, upon due consideration of the mate­rials produced by the assessee, was found low in respect of business and trade in the account­ing year, being a question of fact,  at best it would be agitated before Appellate Joint Co­mmissioner. In the instant case, the Appellate Joint Commissioner partly accepted the case of the assessee and reduced. The learned Ad­vocate submitted that the Deputy Commi­ssioner while applying 10% rate determining gross profit resorted to estimating under sec­tion of the Act to find out the profit after dis­believing the true accounts of the assessee. The Appellate Joint Commissioner on examining the papers produced  by the assessee which included originally printed vouchers found that the papers showed complete details of the sellers in respect of the purchases shown by assessee, and to that extent the findings of the Deputy Commissioner of Taxes were modified. He, however, found that the cash memos pro­duced by the assessee did not contain the particulars of the consumers, and in this state of the record found that the Deputy Commi­ssioner of Taxes was justified in rejecting the trading account and estimating the turnover. According to the Appellate Joint Commis­sioner, as the sales were not verifiable it would be reasonable to reconstruct the dis­closed sales for adopting a reasonable gross profit. He also approved the remark of the Commissioner of Taxes relating to the rate of gross profit shown in the return; and his application of gross profit at 10% was found reasonable. With these findings the Appellate Joint Commissioner decided that Tk. 27,750/- should be added towards reconstruction of the disclosed sales for adopting gross profit at 10% and thereby addition of Tk. 32,121/- by the Deputy Commissioner of Taxes was replaced by Tk. 27,750/- and accordingly the assessment was modified.

5. There being valid ground for rejecting trading accounts as shown  above,  we find there is sufficient force in the submissions made by the learned Advocate that the High Court Division was not justified in setting aside the decision of the Tribunal with the following observation:—

“That Income-tax authorities can­not reject any trading account of an assessee without complying with the provisions of section 13 of the Income-tax Act. The impugned decision of the Tribunal must be held to have been made illegally and it is accordingly set aside.”

The orders of the Income-tax authorities show that there were grounds for rejecting the trading accounts of the assessee and resorting to the power conferred under section 13 of the Income-tax Act. Determination of rate of gross profit for the particular year in respect of the particular business or trade is purely a question of fact, and that being so it could not be made a ground for making reference under section 66(1) of the Income-tax Act. The learned Advocate rightly made a grievance that there being sufficient compliance with the proviso to section 13 of the- Income-tax Act, the High Court Division seriously erred in allowing the application and answer­ing the question in the negative, Proviso to  section 13 of the Income-tax  Act  reads  as under:—

“Provided that, if no method of ac­counting has been regularly employed, or if the method employed is such that, in the opinion of the Deputy Commis­sioner of Taxes, the income, profits and gains cannot properly be deducted there, from then the computation shall be made upon such basis and in such man­ner as the Deputy Commissioner of Taxes may determine.”

Section 13 lays down the manner how the computation of the assessable income is to be made if the assessing officer finds that the assessee does not maintain accounts in ac­cordance with method of accounting regularly employed, or accounts maintained by the assessee, in the opinion of the assessing officer, the income, profits and gains cannot be properly deduced therefrom. Thus, the assessing officer has been given the power to reject the accounts of the assessee and take recourse to the proviso to section 13. In such a case, the assessing officer is competent to change the basis of gross profit as calculated by the assessee and raise it to a higher per­centage. In such a case the assessing officer is only required to record with reasons that the system of accounting employed by the assessee does not reflect true income and, therefore, true income cannot be properly deduced therefrom.

6. In Civil Appeal No. 34 of 1981 the respondent Harendra Kumar Sil, a retail dealer in grocery, disclosed his total turnover, for the assessment year 1973-1974, in the grocer account at Tk. 82,992-00 and gross profit at Tk. 12,781/- that is the gross profit at the rate of 15.4%. The Deputy Commis­sioner of Taxes on examining the account found that the assessee’s accounts did not reveal a true and realistic picture of the assessee’s business activity and that the books of accounts were not maintained in course of day to day business trading but were manufactured afterwards. On this finding, the Deputy Commissioner of Taxes rejected the accounts and estimated total turnover at Tk. 6,69,500.00 and gross profit was adopted at the rate of 16% thereon, and thereby making an addition of Tk. 94,339.00 in the grocery account. The Deputy Commissioner of Taxes after examining the accounts clearly recorded as follows:—

”Above defects in cash book itself suggest that the books of accounts were not maintained in course of day-to-day trading but were manufactured afterwards. In view of all the above defects I reject the books of accounts and take recourse to estimate.”

The Appellate Joint Commissioner, however. did not accept the estimate made by the Deputy Commissioner of Taxes as correct. He reduced the estimate of total sales to Tk. 5,50,000.00 against Tk. 6,69,500/-, but confirmed the gross profit at the rate of 16% as against 15.4% as shown by the assessee. Against this decision of the Appellate Joint Commissioner there were two appeals to the Income-tax Appellate Tribunal—one preferred by the assessee and the other preferred by the Department. Both the appeals were dismissed. The Tribunal dismissed the appeals with the following observation:

“Since the bulk of sales are retail, esti­mate of gross pro it rate at 16% made by the Deputy Commissioner of Taxes and confirmed by the Appellate Joint Commissioner of Taxes appears to be justified. No material has been placed before us so as to justify any inter­ference with the order of the Appellate Joint Commissioner of Taxes which is hereby confirmed.”

7. From the discussions in the judgments it appears that there is hardly any scope to argue that estimates on sales and gross profits on sales by the Deputy Commissioner of Tax as well as by the Appellate Joint Commis­sioner are arbitrary, excessive or without any materials. We find there is substance in the contention of the appellant that determina­tion of the rate of gross profit in a parti­cular accounting year in respect of particular business and trade is a question of fact. We also find that there is substance in the conten­tion that the learned Judges of the High Court Division were not justified in making the remark that there is nothing to show from the judgments of the Appellate Joint Commis­sioner and the Tribunal that the method em­ployed by the assessee was such that no income, profits and gains could be properly deduced therefrom. The common question as framed in the two applications under section 66(1) of the Income-tax Act is a pure question of fact, and that being the position learned Judges cle­arly erred in law in entertaining the references under section 66(1) of the Income tax Act made by assessee-respondent.

8. The learned  Advocates appearing for the respondents in both the appeals submit­ted that mere low profit or absence  of book register cannot be said to be good reasons for taking recourse to section 13 by the Deputy Commissioner of Taxes for rejecting the acco­unts maintained by the assessee and making fresh estimate.

9. Mr. S.R. Pal (appearing in Civil Appeal No. 34 of 1981) argued that the respondent maintained his day-to-day accounts regularly, allowing the method of accounting regularly employed by him; and that the accounts could not be rejected by the Deputy Commissioner of Taxes merely on the basis of some unfoun­ded suspicion and speculation as to its correctness.

10. It is tree mere low profit by itself may not be a ground for rejecting the accounts. So also, some defects in the books of account may not be a ground for rejecting the accounts. Basic foundation for rejecting the accounts must be a clear finding by assessing officer that from the accounts as contained by the assessee incomes, profits and gains cannot be properly deduced therefrom. It has already been noted above that in rejecting the trading accounts of the respective assessee the Deputy Commissioner of Taxes elaborately discussed and gave his reasons for rejecting the acc­ounts and taking recourse to section 13 for making estimate of the total sale to find out the gross profit. If the findings are based on materials, then the estimate made by the ass­essing officer cannot be said to be arbitrary Mr. Pal found it difficult to place his case on that plain.

11. Mr. C.R. Ali appearing for the respon­dent in Civil Appeal No. 50 of 1981 practically adopted the arguments advanced by Mr. S.R. Pal. He only added that the finding of the Appellate Joint Commissioner of Taxes shows that the Deputy Commissioner of Taxes was not justified in rejecting the trading accounts of the assessee and estimating the total turn­over, and the learned Judges of the High Court Division were not in error in allowing the reference application and answering the question raised therein in the negative.

12. The learned Advocates for the res­pondents sought support from some of the observations made by this Division in the case of Commissioner of Income-tax v. M/s Ata Hossain Khan Ltd. 28 DLR (AD) 141. On examining the judgment as reported, we find it difficult to apply any of the observa­tions made therein to the facts of the instant cases. In the instant cases it has been very dearly shown that the trading accounts of the respective assessee was rejected on valid grounds and action of the Deputy Commi­ssioner of Taxes for taking recourse to section 13 and making estimate for finding oat the total sale and the gross profit or for that matter of the Appellate Joint Commissioner of Taxes modifying the orders, cannot be assailed on any such ground.

In that view of the matter, both the appeals must succeed. The Judgment and order by the High Court Division are set aside. The appeals are allowed without any order as to costs.

Ed.

Source: 3 BLD (AD) 1983, 48