- (1.) The appellant is a public limited joint stock company incorporated under the Indian Companies Act, 1913, with its registered office at Calcutta. It carries on the business of manufacture and sale of cotton yarn and piece-goods On the 28th of July, 1944, the Income-tax Officer issued a notice to it under section 22(2) of the Indian Income-tax Act calling upon it to file the return of its income for the assessment year 1944-45 (account year being 1943-44), Before the expiry of the due date due for filing the return the account books of the appellant company together with the documents relevant to the accounts, were taken into custody by the Sub-Divisional Officer, Narayanganj and it is alleged that these remained in the custody of the court of the Sub-Divisional Magistrate till January 1950, when they were handed back to the appellant. In this situation the assessee pleaded for extension of time to furnish, the return. This request was refused, and a show cause notice was issued under section 23(3) of the Act calling upon the appellant company why penalty should not be imposed upon it for its failure to file the return. An officer of the company appeared before the Income-tax Officer and explained the cause for this default. In order to ascertain whether the explanation furnished by the assessee was genuine, the Income-tax Officer made inquiries from the court concerned about this matter. He also made a request to the court to allow him access to the hooks of account. The court, however, neither acceded to the demand that hooks of account be made available to the assessee nor did it permit the Income-tax Officer to have access to them. The Income-tax Officer having thus satisfied himself about the genuineness of the assessee's explanation, condoned the default in filing the return and dropped the proceedings taken against the company under Section 28(3) of the Act.
(2.) It seems that no further action in the matter was taken by the department till the year 1947. During that year the company requested the department to revive the proceedings. The proceedings having been revived the appellant company furnished the return of its income for the assessment year 1944-45 on the 16th March, 1948. This return, however, was not a complete document as without the assistance of the books the profits could not be computed according to the provisions of law. On receipt of the return the Income-tax Officer issued a notice under Section 23(2) of the Act calling upon the company to supply further information on a number of points and to prepare certain statements indicated in the notice. This requisition had to he complied with by the 19th March, 1948. On that date the Chief Accounts Officer of the company appeared before the Income-tax Officer and asked for further time till the middle of the following week for furnishing the requisite particulars. This request was, however refused and assessment was completed on the 20th March, 1948. The excess profits assessment was also made final on the 23rd March, 1948. The relevant part of the assessment order is in these terms : "From the point of view of profits, 1943, was a very good year, if not the best, for all cotton mills. Expenses on cotton and fuel shows that production was undoubtedly higher whereas it is found that the gross profit by this company is low. I conclude that full amount of sales have not been accounted for. It is expected that actually the rate of gross profit should have been higher this year. In view of the higher costs of establishment, I take it that the rate of about 40 per cent, i.e., near about the rate disclosed in 1942 accounts should have been maintained. I add back the Rs. 36 lakhs for unaccounted sales". It may be mentioned that in the return the company had disclosed a gross profit of 28 per cent on sales amounting to Rupees 1,78,96,122/. The total amount of sales in the year 1942 was of the amount of Rupees 1,15,69,582/., disclosing a gross profit of 41 per cent. The establishment expenses, however, during that year were in the sum of Rs. 15,94,101/. while during the accounting year relevant to the year under assessment these had gone up to Rupees 34,74,735/- on account of labour troubles. A number of other causes were mentioned by the assessee for low rate of profit during the relevant period; but the Income-tax Officer took no notice of them. On appeal this order was upheld by the Appellate Assistant Commissioner. The assessee then appealed to the Tribunal against these decisions. What happened before the Tribunal may well be stated in terms of the Tribunal's order itself. This is what is mentioned in the judgment of the Tribunal : "At the end of the hearing of this appeal on 25th of November, 1949, the Income-tax Appellate Tribunal requested the departmental representative to produce for the examination of the Income-tax Appellate Tribunal the gross profit rates shown or assessed in the cases of other similar cotton mills.' The departmental representative wanted 3/4 days time to collect information on this point. On this the appellant also wanted to be allowed to produce information regarding the gross profit rates shown or assessed by other similar cotton mills, and he was also allowed to produce information on the point. On or about the 29th November the counsel for the appellant requested that he should be allowed time till Saturday the 3rd of December to file the above information and time for this purpose was allowed to him. On the 3rd December Mr. Banerjee the appellant's counsel saw the Accountant Member in his chamber and wanted to produce written arguments and a trunk full of books end papers in support of his case. Mr. Banerjee was told that the arguments in the case had finished on the 23th and he was allowed time only to supply to the court the gross profit rates shown or assessed in the cases of other similar cotton mills. He was told that it was not fair to the other side to take notice of any additional evidence or mind at that stage and his trunk of books and papers was returned to him. During the discussion of Mr. Banerjee with the Accountant Member Mr. Banerjee produced a report showing that the gross profit rates of some mills in Bengal on the average amounted to 23 per cant. In the statement showing 23 per cent. gross profit rates there was another item called 'Pool profit' which was bigger than the gross profit rate. Mr. Banerjee was asked to explain what this word 'Pool profit' meant but he had no information on this point...........For want of this information we are afraid it is not possible for us to attach a great deal of importance to the gross profit percentage of 23 per cent. mentioned in the books produced by Mr. Banerjee. Mr. Banerjee during this discussion further produced a book showing the wastage expected. In that book certain quality of cotton had been mentioned and it was said that wastage of 34 per cent, was normal. In the case of the assessee he has shown a wastage of 9 per cent. in 1942, 26 per cent in 1943 and 19 per cant in 1944. The figure of 34 per cent. shown in that book would therefore seem to refer to a particular quality of cotton very much inferior to the cotton generally used by the appellant. The department's main case on the question of wastage is based on the appellant's own books according to which his wastage in the year under review amounted to three times the wastage in the year previous. In the light of all the information it appears to us that the Income-tax Officer was justified in making a substantial addition to the gross profit shown by the appellant. Coming to the question of what the amount of addition should be the departmental representative has on our request filed a number of cases of other cotton mills which show a gross profit rates varying between 49 per cent. and 22 per cent and in one case even 13 per cent. had been shown............ In the face of all the above facts it appears to us that the Income-tax Officer was justified in coming to the conclusion that all sales had not been brought into books. We have, however, considered all facts relevant to this case and are of the opinion that the addition to the sales should be reduced from Rs. 36 lakhs made by the Income-tax Officer to Rs. 16 lakhs which would reduce the gross profit rate to about 35 per cent."
(3.) The sum and substance of these decisions is that the Income-tax Officer estimated the gross profit on sales at 40 per cent. by a pure guess, while the Tribunal reduced it to 35 per cent. by applying some other rule of thumb. It is not clear from either of these judgments on what material these estimates were based.;