D D KAPOOR AND G DALMIA Vs. COMMR OF INCOME TAX

JUDGEMENT

(1.) In these cases the assessee firm executed military contracts for the Central Public Works Department. The execution of the contracts was commenced on 2-6-1942 and ended sometime before 31-3-1946., For the assessment years 1943-44, 1944-45 and 1945-46 the assessee firm, filed returns showing respectively an income of Rs. 68,688, Rs. 40,087 and Rs. 56,077. The assessee adopted the cash system of accounting and the profit and loss account and balance-sheet were prepared by a Chartered Accountant on the cash basis. For the assessment year 1943-44 the Income-tax Officer held that the account was defective and did not disclose the assessee's true profits for the accounting year. The Income-tax Officer added a sum. of Rs. 30,169 representing 5 per cent, of the gross value of the work done during the accounting year in order to compensate for the leakages that were discovered in the books of account. After making certain other adjustments the Income-tax Officer estimated the profit from the contract business for the year 1943-44 to be Rs. 1,27,747. For the assessment years 1944-45 and 1945-46 the Income-tax Officer rejected the accounts filed, by the assessee and estimated the profits from the contract business at 25 per cent, of the gross value of the work done and billed for during the year. The income was accordingly estimated for the year 1944-45 to be Rs. 2,40,124, and for the year 1945-46 to be Rs. 1,06,984. The assessee preferred an appeal to the Appellate Assistant Commissioner against the assessments for all the three years. The Appellate Assistant Commissioner was of the opinion that the cash basis of accounting adopted by the assessee should be taken as the basis for assessment. The Appellate Assistant Commissioner deleted the addition of Rs. 30,169 made by the Income-tax Officer for the assessment year 1943-44. For the two assessment years 1944-45 and 1945-46 the Appellate Assistant Commissioner noticed several defects in the books of account produced by the assessee. He found that there were inadmissible items of expenditure and that there were other items of expenditure which had been inflated by the assessee. The Appellate Assistant Commissioner therefore determined the mtrome ot the assessee to be Bs. 91,178 for the year 1943-44, Ra. 1,74,236 for the year 1944-45 and Rs. 90,567 for the year 1945-46. As regards the assessment year 1943-44 the Income tax Department preferred an appeal to the Tribunal and for the two other assessment years the assessee preferred appeals from the decision, of the Appellate Assistant Commissioner to the Appellate Tribunal. The Tribunal expressed the, opinion that cash basis for the business of the assessee was an unsatisfactory basis for assessment. The Tribunal stated that the basis of the assessment should be altered and accounts of the whole period of the contract should be reviewed and necessary apportionment made on some accepted scientific basis of assessment. The Tribunal also took note of the fact that assessment for the years 1946-47 and 1947-48 were made on cash basis and that these assessments have become final and conclusive. The Tribunal added that any relief to be given to the assessee for these years should be taken into account and dealt with in the present appeals. The Tribunal therefore remanded the case to the Income-tax Officer for making enquiry on the following points :

(2.) As directed by the High Court the Tribunal has stated a case on the following questions of law-

(3.) As regards the first question Mr. Dutt on behalf of the assessee made the submission that the order of the Tribunal was arbitrary and no reason has been given by the Tribunal to support the figure of the estimate of the income for the three assessment years. Counsel argued that there was no material to support the figures of assessment reached by the Tribunal for'the three assessment years. In my opinion there is no justification for this argument. The final order of the Tribunal dated 7-9-1950 must be read in the context of the order of remand dated 8-3-1950 passed by the Tribunal and the remand report of the Income-tax Officer dated 30-6-1950. The final order of the Tribunal is expressly based upon the defects found by the Income-tax Officer in his assessment order ana those mentioned by the Income-tax Officer in tne remand report. In view of the defects discovered in the books of the assessee the Tribunal took the view that the case fell within the ambit of the proviso to Section 13 of the Act. The Tribunal considered, In other words, that the method of accounting adopted by the assessee did. not reflect the true profits of the preceding year and therefore the income-tax authorities were entitled to compute the profit upon an estimated basis. Mr. Dutt put forward the argument that the Tribunal ought not to have applied the proviso to S; 13 but should have accepted the method of accounting adopted by the assessee. I do not think that his argument is warranted. For the year 1943-44 the Income-tax Officer noticed that the account books did not reflect the assessee's true profits in the year of account. He mentioned that the closing stock of material and stores was not proved by any consumption account and that the expenditure of Rs. 2,25,658 claimed by the assessee as a deduction was not satisfactorily proved. The Income-tax Officer doubted the correctness of the labour charges of Rs. 70,439 claimed by the assessee and another item of Rs. 11,132 claimed by the assessee as a deduction. In view of these de-fects the Income-tax Officer held that the return filed by the assessee should be increased by 5 per cent, of the gross profits, viz., a sum of Rs. 30,169. For the year 1944-45 the Income-tax Officer noticed that there were no stock accounts for the materials purchased nor was there a day-to-day consumption account. He observed that the vari-ous expenses claimed by the assessee could not be verified. The Income-tax Officer also noticed that the profit shown by the other contractors doing similar business was as higher as 40 per cent, of the receipt and no proper reason was given by the assessee for the low rate of profit disclosed by the accounts. For the year 1945-46 also the Income-tax Officer noted that the mess expenses amounting to Rs. 29,253 had been noted without any details and the correctness of the stocks of material and stores left at the end of the year could not be verified and there were unexplained cash credits in tire personal accounts of K. L. Kapoor and N. K. Ka-poor. The Income-tax Officer therefore held that the accounts filed by the assessee for the years 1944-45 and 1945-46 should be rejected and an estimate of the income should be made on the gross value of the work done and billed for during the respective accounting years. The report of the Income-tax Officer on remand also indicates that there were serious defects to the books of the assessee. The Income-tax Officer has noted that the system of accounting did not enable the authorities to ascertain the assessee's income from every job individually. He further stated that the various expenses claimed by the assessee could not be verified. Some expenses were not vouched for and some of the expenses which were vouched for were fictitious. For the year 1943-44 the Income-tax Officer found that the Chowraha road construction account revealed that the assessee tried to minimise his profit by inflated debits. For the year 1944-45 the Income-tax officer reported that the expenditure amounting to Rs. 27,087 was not supported by vouchers. There was also inflation of Rs. 25,000 in the expenditure claimed by the assessee. The Income-tax Officer noticed similar defects in the account for the year 1945-46. In view of the defects pointed out by the la-come-tax Officer in the assessment order and in the remand report the Tribunal had ample justi-fication to apply the proviso to Section 13 and to hold that the profits of the assessee from the contract business for the three assessment years should be made by estimate. On behalf of the assessee it was also argued by Mr. Dutt that the estimate was arbitrary. I am . unable to accept this argument. The Tribunal has given reasons for rejecting the system of account maintained by the assessee and for holding that estimate should be made of the income of the assessee for all the three assessment years. The deposition has been analysed by the Tribunal in the statement of the case at p. 11 and it has been shown that the estimate made by the Tribunal is reasonable and not arbitrary. It appears that the net profit from the entire contract business for all the years (from 1943-44 to 1947-48) was estimated by the Tribunal to be Rs. 4,09,259 which works out roughly at 25 per cent, of Rs. 16,58,322 which was the total amount of the net cash received by the assessee. The amount of income determined for the two assessment years (1946-47 and 1947-48) upon the assessee was Rs. 58,892 and Rs. 35,367. The total amount is Rs. 94,259 and if this amount is deducted from Rs. 4,09,259 the result would be Rs. 3,15,000 and the Tribunal has distributed this amount of profit between the three assessment years, 1943-44, 1944-45 and 1945-46, roughly according to the cash receipts in those years. I see no substance therefore in the argument that the estimate made by the Tribunal for the three assessment years is in any. way arbitrary. It should be added that in the assessment order the Income-tax Officer has noted that in case of other contractors doing similar work the profit has been found to vary from 25 per cent, to 40 per cent.