Aluminium Industries (P) Ltd. vs Commissioner of Income Tax

V.D. Gyani, J.—The following questions of law u/s 256(2) of the Income Tax Act has been referred to for this Court''s opinion in pursuance to an order dated 6.10.88 passed by this Court in Civil Rule No. 82 (M)/77:

Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the addition of Rs. 50,000/- to the book profits of the Assessee on the only premises that the gross profit was low without giving a specific finding that the accounts of the Assessee are not correct and complete and/or that the income can not be properly deduced from the accounting method employed by the Assessee?

The Assessee is a private limited company, having an office at Calcutta for its store purchase and raw material manufacturing machineries and tools used in tea industry and oil company, owned by a family and its Directors are all brothers and sons of Late Rajaram Agarwalla. It had other business concerns as well. The method of accounting followed by mercantile and the matter relates to the assessment year 1974-75. Taking note of the auditors report for the relevant year (as extracted below), the I.T.O. found certain discrepancies on sales and gross profit as noted in the statement of earlier year as well. He observed that what justification could there be for such adjustment in debitting the entire account, the profit and loss account. He was therefore unable to accept the fall in profit during the year, vis-a-vis a higher margin of profit as noted by him in other comparable cases. In absence of qualitative verification he considered past record as well and concluded that trading account as furnished by the Assessee could not be accepted and held that Rs. 50,000/- should be added to the book of profit. Thus, the total income was taken as Rs. 20,000/- for the year 1974-75 as per the assessment order dated 8.11.76, annexure - A, The matter was taken up in appeal before the AAC contending that the addition was not justified. The AAC on consideration of submissions made by the Assessee hold that the profit as shown by the Assessee at 17,3% was fair and the addition of Rs. 50,000/- was not justified, accordingly ordered its deletion.

The Revenue took up the matter before the Tribunal in appeal against the aforesaid deletion of the addition, The Assessee also filed cross objection supporting AAC''s order, Noting the installed capacity of the company capable of producing a stock goods worth Rs. 50,000/- and the absence of qualitative information relating to the actual production, the purchase of raw material and opening and closing of stocks coupled with the reason assigned by the management considered the adverse nature of companies activities, the Tribunal was of the view that the matter could not be treated lightly, The statement of the management was found to be vague. the explanation as regards fall in gross profit unacceptable in view of serious defects in maintaining the book of accounts by the Assessee The Tribunal points out that in a similar comparable case, the rate of gross profit was 37% and ultimately held that there was no justification for deleting the addition of Rs. 50,000/-, consequently the order passed by the A AC was reversed and that of the I.T.O by the Tribunal''s order dated 8.11.76, Annexure-C. The Assessee filed Misc. Application No. 21 (Gau) of 1976-77 urging that certain facts have not been appreciated correctly, but the Tribunal rejected the same. It is in these circumstances that the above question has been referred for this Court''s opinion.

Referring to the Tribunal''s order Dr. Saraf, learned Counsel appearing for the Assessee submitted that the Tribunal was swayed away by the rate of gross profit as shown by the Assessee for the immediately preceding assessment year which was 19.7% as against the gross profit. @ 15.7% shows for the assessment year in question. He argued that there could be no uniformity in the matter of gross profit every year, the explanation offered by the Assessee of the fall in the rate of gross profit, as declared by the Assessee and compared with the immediately preceding assessment year should have been accepted. According to him there was absolutely no justification for saddling the Assessee with an addition of Rs. 50,000/-.

Mr. Talukdar, learned St. Counsel for the Revenue, on the other hand, referred to the findings as recorded by the, I.T.O, and the Tribunal urged that the Tribunal was justified in upholding the addition as it did. The crux of the matter as rightly pointed out by the learned Counsel for the Assessee lies in the fact whether this addition to the book of profit of the Assessee made solely on, the ground that it was low without giving a specific finding with the accounts of the Assessee, were not correct and complete, or that the income should not be properly determined and deduced from the accounting method employed by the Assesee, Adverting to the Tribunal''s order, particularly paragraph 8 thereof, it would be seen that the Tribunal has gone by the fact as noted by it - "We have also seen that there are defects and indeed serious defects in the maintenance of books of accounts of the Assessee. Going through the assessment order Annexure - A, it is clear that the I.T.O. does not say a word about any such defects, much less serious defects in the maintenance of books of accounts of the Assessee. There is no finding recorded by the I.T.O on this point. The mere fact that there was a less rate of gross profit declared by an Assessee as compared to the previous year would not by itself be sufficient to justify the addition. The Bombay High Court in R.B. Bansilal Abirchand Spinning and Weaving Mills Vs. Commissioner of Income Tax, Poona, held that the mere fact of percentage of loss or gross profit is high or low in a particular year does hot necessarily lead to inference that there has been a suppression of production. Similarly, the mere fact that the profits were low is not a circumstance or material alienied to justify addition of profits. It would be seen from both the orders Annexure - A and C as passed by the I.T.O. and the Tribunal that the sheet anchor of this order is the fall in profit. Even in cases of best justment (Sic, Judgment) it must be based on adequate and relevant material. It is now well settled that the Income Tax Officer while making a best justment (Sic, Judgment) assessment should make an intelligible well grounded estimate and such estimate must be based on adequate and relevant material, in as much as, such estimate, is to be made in case of default committed by the Assessee either in not making the return or not complying with all the terms of a notice u/s 143(2) or a direction made u/s 142(2A). It is on any one or more of this defaults that the Income Tax Officer has to make a best Judgment assessment after taking into account all relevant materials which may be derived from the record; or which may have given into his position in the course of assessment proceeding and which the Assessee does not explain or contradict in respect of a particular given to him. The condition enumerated in Clause (a), (b) and (c) u/s 144 of the Act relating to best justment (Sic, Judgment) assessment must be fulfilled before taking recourse to the best Judgment assessment. The order Annexure - A and C do not reflect such considerations although the Tribunal at one stage has observed "In our opinion the Income Tax Officer was justified in making the addition of Rs. 50,000/- which marginally increased the rate of gross profit of the Assessee. There is no justification for deleting this amount of Rs. 50,000/-. Now going through the I.T.O''s order, it would be evident that the essential requirement of Section 144 have not at all been complied with.

In view of the foregoing discussion, the question, as referred, is answered in the negative, that is, in favour of the Assessee and against the revenue.