TAMBE, J. - (1.) THIS is a reference under S. 66(1) of the Indian INCOME TAX ACT, 1922 (hereinafter called "the Act") at the instance of the assessee. The question that falls for consideration is the construction of S. 28 (1)(c) of the Act. We are here concerned with the asst. year 1948 -49, the relevant previous year being S. Y. 2003.
(2.) THE assessee is a firm dealing in hessian twine, gunny bags, etc., on wholesale basis. In S.Y. 2003, the Disposal Directorate sold to Laxmichand Govindji, a kariana merchant of Rajkot, 2 lakhs anti gas water -proof bags under a delivery order dt. May, 1947, in the name of L. G. Vaidya (Laxmichand Govindji). The payment of Rs. 1,80,000 for these bags was made by a firm known as Bhivandiwala and Co. on 16th May, 1947. The payment was made by the said firm on behalf of Laxmichand. The next day of payment, Bhivandiwala and Co. received a sum of Rs. 90,000 from Laxmichand (L. G. Vaidya). The assessee under the power of attorney from the said Laxmichand of date 12th June, 1947, sold the aforesaid bags from its (assessee's) own godown during the S.Ys 2003 to 2005, the corresponding assessment years being 1948 - 49, 1949 -50 and 1950 -51. The sale proceeds were credited to the account of Laxmichand. Out of these sale proceeds, the assessee paid the remaining balance of Rs. 90,000 to Bhivandiwala and Co. in due course of time. At the end of S.Y. 2005, the credit balance of the sale proceeds amounting to Rs. 53,785 was in the books of account of the assessee. The said balance was not repaid by the assessee to Laxminchand till the year 2010 and, even at that time, it is said that the said amount was paid in cash. In respect of these transactions, the assessee showed a profit of Rs. 10,000 for the entire lot of 2 lakhs of bags. The profits were shown as commission at Rs. 5 per 100 units. The said amount of profits, Rs. 10,000, was spread over the relevant three previous years for the asst. yrs. 1948 - 49, 1949 -50 and 1950 -51. Now the books of account of Laxmichand did not disclose any transaction in respect of the sales of these gunny bags nor were there any entries relating thereto. In his return for the asst. yr. 1949 -50, the relevant previous year being S.Y. 2004, Laxmichand disclosed an income of Rs. 1,000 as estimated profits from this business of sale of bags besides his profits in the kariana business. The ITO started inquires. Laxmichand later submitted a revised return declaring Rs. 13,000 as true profits from this business.
(3.) IN the course of the said inquires, the ITO also commenced inquiry as regards the balance of Rs. 53,785 in the books of account of the assessee of S.Y 2005. He examined various witnesses including Laxminchand and Maneklal of Bhivandiwala and Co. and as a result of the inquiries, he came to the conclusion that the transactions relating to gunny bags was really the business of the assessee and not of Laxmichand. He further found that from the said business, the assessee had earned profits amounting to Rs. 24,000 in S.Y. 2003. Rs. 13.000 in S.Y. 2004 and Rs. 12,000 in S.Y. 2005, which the assessee had suppressed in filing its return for the corresponding asst. yrs.. 1948 - 49, 1949 -50 and 1950 -51. The ITO further found that the amount of Rs. 90,000 said to have been paid by Laxmichand to Bhivandiwala and Co. on 17th May, 1947, was in fact paid not by Laxmichand but by the assessee itself from a source not disclosed by the assessee to the Department. He accordingly included this amount of Rs. 90,000 also in the total income of the assessee for the asst. year 1948 -49. The ITO also issued a notice under Sub -S. (3) of S. 28 to the assessee, calling upon it to show cause why a penalty should not be imposed upon it for concealing the income in the said three assessment years. ;