Decided on March 24,1954

PANDIT BROS. Appellant


Khosla, J. - (1.) This is a reference made to this Court by the Income-tax Appellate Tribunal, Delhi, under Section 60 (1), Income-tax Act. The following question of law has been referred to this Court: "Whether any addition may be made to the book version of business profits where no stock account is maintained, on the sole ground that the net profits disclosed appear to be insufficient in relation to the total turn-over?"
(2.) The assessee in this case is Messrs. Pandit Bros., Delhi, and the year of assessment is 1950-51. In order to understand the exact import of the issue involved it is necessary to set out briefly the facts which have given rise to this reference.
(3.) Messrs. Pandit Bros, had during the assessment year four branches: (a) Chandni Chowk, Delhi, (b) Connaught Place, New Delhi; (c) Handicrafts, New Delhi; and (d) The Mall, Simla. Accounts of these four branches were maintained separately but since they were all owned by the same firm a consolidated statement of total profit and loss was prepared for the information of the Income-tax Officer. The Income-tax Officer on going through the accounts found that taxable profits should have been declared at a higher figure. He examined the accounts of each separate branch and accepted the statements given by the firm in respect of the Old Delhi and the Simla branches. With regard to the branch known as Handicrafts, New Delhi, he was of the opinion that since no stock book had been maintained by the firm the gross profits were liable to be increased by a sum of Rs. 5000/- . The exact words of his order are important and I quote them: "There is no stock book and it is not possible to verify that the whole of the stock was accounted for. I would increase the gross profit by Rs. 5,000/- which would turn the gross loss of Rs. 1,8727- into a net profit of Rs. 3,1287-." A similar addition of Rs. 7,000/- to the net profits was made in respect of the fourth branch Conna- ught Place, New Delhi. In respect of this branch the Income- tax Officer observed : "There is no stock book and it is not possible to verify that the whole of the stock is accounted for. I would increase the gross profit by Rs. 7,000/-. The net profit would thus work to Rs. 8,073/-." In the course of his order the Income-tax Officer observed that the expense ratio for these two branches was unusually high as compared to the expense ratio obtaining at the Old Delhi Branch. This was one of the reasons he gave for increasing the taxable figure of profits. An appeal was preferred to the Appellate Assistant Commissioner and by a brief order he dismissed the appeal. He observed: "And the profits disclosed keeping in view the quality of goods sold by the assessee and the inflatory tendencies in the market were insufficient. The expense ratio was very high. The employees appear to be paid not exactly on businesslike principles -- there appears to be a lot of philanthropic motives behind the very high payments made to them which are disproportionate to their qualifications and the nature of work done by them. They would not be able to get anywhere near the remunerations which the assessee is paying to them, anywhere else in the open market. Only those expenses are allowable which can be brought down to strictly business principles. Philanthropy and business are strangers. The disallowance of Rs. 5000/- and Rs. 7000/-made by the Income-tax Officer to bring the results up to the normalities appear to be in order." The matter was taken up again on appeal to the Income-tax Appellate Tribunal. The Tribunal also upheld the decision of the Income-tax Officer and seemed to take the view that the salaries, bonus and deamess allowance paid to the staff amounted to a large figure. It is somewhat strange that the increase did not represent the figure which, according to the Income-tax Officer, had been paid to the employees 'mala fide'. Indeed, there was no determination of such figure by him or by any of the Appellate Tribunals. The Income-tax Appellate Tribunal drew attention to this circumstance and observed: "It may be that an assessee is not a good businessman and pays larger salary to his employees. What has to be found by the tax authorities is whether the payment made is wholly and solely for the purposes of the assessee's business." Therefore the Income-tax Appellate Tribunal did observe that the increase could not be made on this ground. The order of Income-tax Officer was upheld for the following reasons given by the Tribunal: "There is no proper records of the goods sold. As the profit disclosed by the assessee in the year under reference is extremely low, we think that the Income-tax authorities are right in making an estimate of the appellant's income under the proviso to Section 13. Dealing with the estimate made as a whole, i.e., a net business income of RS. 26,597/- on a total turnover of about Rs. 9 lakhs, we think a very reasonable estimate has been made by the Income-tax authorities." It is clear from these orders that two considerations were responsible for these decisions. In the first place, the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal took the view that the profits disclosed by the firm were low. In the second place, they were influenced by the fact that no stock register had been maintained. It is clear that the account books maintained by the firm were accepted as correct, for the Income-tax Officer does not anywhere say that he rejected these account books. After the dismissal of his appeal by the Income-tax Appellate Tribunal the assessee moved the Tribunal for the statement of the case to this Court under Section 66. The case was stated and the question which has been set out in the earlier part of my judgment was drawn up and sent to this Court for decision.;

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