H.N. Seth, J. - (1.) THE Income-tax Appellate Tribunal, " B " Bench, Allahabad, has, at the instance of the Commissioner of Income-tax, made this reference under Section 256 (1) of the Income-tax Act, 1961.
(2.) THE assessee in this case is K. S. Wazir Mohd. and Sons, a registered firm, carrying on business of building contractors and the assessment year involved is the year 1965-66. Brief facts as they emerge from the statement of the case read along with the annexures attached thereto are that in the relevant accounting year the assessee derived income from two sets of contract businesses, described as the Kanpur set and the Lucknow set, as also by way of interest on certain fixed deposits in the savings bank. For the purposes of this case, the income derived by way of interest on fixed deposits is not material. In its income-tax return, the assessee showed its total receipts from the two sets of contract businesses as Rs. 12,45,000 resulting in a net profit of Rs. 42,209. The Income-tax Officer proceeded to make the assessment under Section 143(3) of the Income-tax Act. He thought that the amount of profit disclosed by the assessee, which came to slightly more than 3'3% of the total receipts, was very low. Accordingly, he scrutinized the books of the assessee and found that neither the cash book had been written from day to day, nor had the daily balance been struck. Although the assessee had mentioned that it had furnished the particulars of its closing stock in its trading account, yet that had not been done. Subsequently, the assessee estimated its closing stock at Rs. 1,549, but did not disclose the basis for estimating or valuing the same. The expenses claimed by the assessee were mostly unvouched and they had not been debited correctly. Some of the car expenses which should not have been debited in the material account were found debited therein. He, accordingly, found the account books of the assessee to be unreliable and after rejecting them proceeded to make the assessment on the' basis of the material available on the record. In respect of the business relating to the Kanpur set the assessee showed its total receipts as Rs. 6,29,554 which included a sum of Rs. 5,72,621 in respect of two contracts and some miscellaneous receipts, resulting in a net profit amouting to Rs. 27,765, i.e., about 4% of the receipts. In the opinion of the Income-tax Officer, the profit disclosed was too low. The assessee attempted to explain the low rate of profit by stating that ever since the contracts in question had been entered, the price of material and wages had increased. In this connection the Income-tax Officer observed : " Assessee's condition of accounts, however, as disclosed above is very unsatisfactory. In view of this, however, a net rate of 8% will be applied so as to give an income of Rs. 50,364. The assessee received raw material of Rs. 27,766 on which a not rate of 5% will be applied so as to give an income of Rs. 1,388. Income from this set thus comes to Rs. 51,752 subject to depreciation."
(3.) WHILE dealing with the business relating to the Lucknow set, the Income-tax Officer found that the assessee had disclosed its total receipts and net profit as Rs. 6,18,145 and Rs. 14,444. The rate of profit thus came to about 2% which, in his opinion, was absurd. Again, the assessee attempted to explain the low rate of profit by alleging that the contracts in question had been entered into in the year 1962, It was expected that the work under those contracts would be completed within one year. However, the work continued right up to the year 1964 by which time the cost of material and wages had shot up. WHILE dealing with this point of the case the Income-tax Officer observed: " There is some force in the assessee's contention. Looking, however, to the fact that this remains unproved in the absence of proper account net rate of 8% will be applied on payments of Rs. 6,18,145 so as to give a profit of Rs. 49,452. A net rate of 5% will be applied on raw material received on Rs. 39,400 so as to give a profit of Rs. 1,970. The income from this set comes to Rs. 51,422." The Income-tax Officer, thereafter, added the income of the assessee from the aforementioned two businesses as also the income derived by it by way of interest on fixed deposits and, after making certain allowances, computed its taxable income as Rs. 97,213. As the income returned by the assessee was below 80% of the assessed income, the Income-tax Officer directed that notice under Section 271(1)(c)/274 of the Income-tax Act be issued to the assessee requiring it to show cause why a penalty for concealing and for furnishing wrong particulars of its income be not imposed upon it. As the minimum penalty imposable exceeded Rs. 1,000, the Income-tax Officer referred the penalty proceedings to the Inspecting Assistant Commissioner. The assessee submitted to the assessment order but it appeared before the Inspecting Assistant Commissioner to contest the penalty notice. It was urged on its behalf that, according to the view expressed by some of the Income-tax Appellate Tribunals, in cases where additions are made on estimate basis, no penalty under Section 27(1)(c) read along with the Explanation thereto, can be imposed. The Inspecting Assistant Commissioner rejected the explanation offered by the assessee and observed; " Those decisions of the Appellate Tribunal referred to by the learned Attorney have not been accepted by the department and with due respect I must differ from the view of the Tribunal." ;