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2b5e4bd9dcac4801b928fa1d67972e20

The question did not relate to the three quarters for which the assessee had filed no returns and assessments were made under s. 10(4) of the Act.

6ANALYSIS

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At one place in its judgment, the High Court referred to a slight inaccuracy in the question framed, but it did not reframe the question so as to widen its scope and include the three quarters for which assessments were made under s. 10(4) of the Act.

6ANALYSIS

a86a5e761b8d4d9f8a16dfde893103f0

The question, as it stood and as it was answered by the High Court, did not relate to the propriety or legality of the assessments made under s. 10(4) of the Act.

6ANALYSIS

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We must, therefore, make it clear at the very outset that the question relates to those four quarters only for which assessments were made under s. 10(2)(b) of the Act, and the answer given to the question will govern those four quarters only.

6ANALYSIS

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Having thus indicated the precise scope of the question referred to the High Court, we proceed now to consider the main contention of the assessee.

6ANALYSIS

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We must first read the relevant provisions of the statuteunder which the assessments were made.

6ANALYSIS

a4618b9ad68646359e08b8a6724f78ce

Sub-section (1) of s. 10 of the Act states that if the Commissioner is satisfied without requiring the presence of a registered dealer or the production by him of any evidence that the returns furnished in respect of any period are correct and complete, he shall assess the amount of tax due from the dealer on the basis of such returns.

5STA

1c3ac1a92dce420e8b8c9c74adbba305

Clause (a) of sub-s. (2) states what the Commissioner shall do, if he is not satisfied without requiring the presence of a registered dealer who furnished the returns or production of evidence that the returns furnished in respect of any period are correct and complete; the clause states that in that event the Commissioner shall serve on the dealer a notice in the prescribed manner requiring him either to attend in person or to produce or cause to be produced any evidence on which such dealer may rely in support of his returns.

5STA

f96ae533efa54cd8aa86b9d7b9bf08af

Then comes cl. (b) of sub-s. (2) which must be quoted in extenso: " (b) On the day specified in the notice or as soon afterwards as may be, the Commissioner, after hearing such evidence as the dealer may produce, and such other evidence as the Commissioner may require on specified points, shall assess the amount of tax due from the dealer."

5STA

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These provisions are similar to the provisions contained in s. 23 of the Indian Income-tax Act.

6ANALYSIS

b11bb4f55ee24deeac67999c78ad02d9

Sub-section (1) of s. 10 of the Act corresponds to sub-s. (1) of s. 23 of the Indian Income-tax Act; clause (a) of sub-s. (2) of s. 10 of the Act corresponds to sub-s. (2) of s. 23 of the Indian Income-tax Act; and clause (b) of sub-s. (2) of S. 10 of the Act corresponds to sub-s. (3) of s. 23 of the Indian Income- tax Act, though there are some verbal differences between the two provisions.

6ANALYSIS

57a4f4ff7d984170a68dc51cdfd2a57f

Sub-section (3) of s. 23 of the Indian Income-tax Act requires the Income-tax Officer to assess the total income of the assessee and determine the sum payable by him on the basis of such assessment, by "an order in writing"; but cl. (b) of sub-s. (2) of s. 10 of the Act requires the Commissioner to assess the amount of tax due from the dealer and does not impose any liability as to "an order in writing."

5STA

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In spite of these differences, thetwo provisions are substantially the same and impose on the assessing authority a duty to assess the tax after hearing such evidence as the dealer may produce and such other evidence as the assessing authority may require on specified points.

6ANALYSIS

044cd4c9139949219084e87a35663e14

The point for our consideration is-can the assessing authority, purporting to act under s. 10(2)(b) of the Act, assess the amount of tax due from a dealer more or less arbitrarily or without basing the assessment on any materials whatsoever ?

9ISSUE

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In the question referred to the High Court, the expression used is, "make an assessment on any figure of gross turnover without giving any basis to justify the adoption of that figure".

6ANALYSIS

b78a755c7ea44f72b7c9cb51a1b67ece

That expression is perhaps a little ambiguous, but read in the context of the statement of the case, the question can only mean this: can the assessing authority adopt a figure of gross turnover by pure guess and without referring to any materials on which the figure is based ?

6ANALYSIS

04d18d22330a498d97ac4f5bf68c2ec9

It is clear to us that, understood in that sense, the High Court has answered the question incorrectly.

6ANALYSIS

a438c8cfdd6d49659bd56b64c75642ad

The High Court went into an elaborate consideration, by way of comparison and contrast, of sub-s. (4) and el. (b) of sub-s. (2) of s. 10 of the Act.

6ANALYSIS

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It is unnecessary for us to make any pronouncement in this appeal with regard to the precise scope of sub-s. (4) of s. 10 of the Act, which corresponds more or less to sub-s. (4) of s. 23 of the Indian Income-tax Act; nor is it necessary for us to decide if an assessment made under el. (b) of sub-s. (2) of s. 10 of the Act

6ANALYSIS

6d266cbfdf17478399186c155e8714ea

, when the account books of the assessee are disbelieved, stands exactly on the same footing as an assessment made under sub-s. (4) of s. 10 when the assessee has failed to furnish his returns.

6ANALYSIS

0e10a8234cd24f9cb881ff7c19c64cda

In some decisions relating to the corresponding provisions of the Indian Income-tax Act, it has been said that the difference between the two is one of degree only, the one being more summary than the other.

6ANALYSIS

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These are questions which do not really fall for decision in the present appeal, which is confined to interpreting the true nature and scope of el. (b) of sub- s. (2) of s. 10 of the Act.

6ANALYSIS

7dab038ba121469593c5bddbf4f1d94e

With regard to the corresponding provision in sub-s. (3) of s. 23 of the Indian Income-tax Act, there is a decision of thisCourt which, in our opinion, answers the question before us.

6ANALYSIS

f536137b57e04c4993be02623e2836c5

The decision is that of Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal(1).

4PRE_RELIED

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This Court observed: "As regards the second contention, we are in entire agreement with the learned Solicitor-General when he says that the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-s. (3) of s. 23 of the Act, the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all.

4PRE_RELIED

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There must be something more than bare suspicion to support the assessment under s. 23(3)."

4PRE_RELIED

094e2cba9e5e44528e377f3a7ff3b5f0

In our view, the aforesaid observations clearly show that the High Court was in error in answering the question in the affirmative.

6ANALYSIS

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Firstly, the High Court treated the question referred to it as a pure question of fact; if that were so, then the High Court should have rejected the reference on the ground that it was not competent to answer a question of fact.

6ANALYSIS

4478cd95df4e4d97b5b976fe78713c39

Then, the High Court proceeded to consider certain decisions relating to the interpretation of sub-ss. (3) and (4) of s. 23 of the Indian Income-tax Act, and held that there was no difference between an assessment under sub-s. (3) and an assessment under sub-s. (4) of s. 23.

6ANALYSIS

755ea04b71744f2387ba3e20e8c1301d

The High Court applied the same analogy and on that footing held that there being no difference between an assessment under cl. (b) of sub-s. (2) and an assessment under sub-s. (4) of s. 10 of the Act, the answer to the question must be in the affirmative.

6ANALYSIS

e708df10e5614ee3a35c9551da5d3c9d

In our view, the approach of the High Court to the question referred to it was erroneous and the answer given to the question by it solely on the basis of sub-s. (4) of s. 10 of the Act was vitiated by that wrong approach.

6ANALYSIS

29cb295e8a7d43debff291e7c1510734

It was not sub-s. (4) of s. 10 of the Act which the High Court had to consider; it had to consider the true scope and effect of cl. (b) of sub-s. (2) of s. 10 of the Act.

6ANALYSIS

28414a19363440bf8ea88f3a7a934d66

(1) [1955] 1 S.C.R. 941, 949.Learned counsel for the respondent has strongly urged two points in support of the answer which the High Court gave.

7ARG_RESPONDENT

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Firstly, he has contended that, on a proper reading of the assessment orders and the orders of the Commissioner, it would appear that the gross turnover for the quarters in question was based on certain materials; therefore, the argument of learned counsel is that it is not correct to say that the figure of gross turnover was arbitrarily adopted or was adopted without reference to any evidence or any material at all.

7ARG_RESPONDENT

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We have examined the assessment orders in question, which form part of the statement of the case.

7ARG_RESPONDENT

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It is clear to us that what the Sales Tax Officer and the Commissioner did was to hold, for certain reasons, that the returns made by the assessee and the books of account filed by it were incorrect and undependable.

6ANALYSIS

121e4aa2fa0247a5b16dbe4a376c196a

It is not necessary to repeat those reasons, because we must accept the finding of fact arrived at by the assessing authorities that the returns and the books of account were not dependable.

6ANALYSIS

a45437b05ebd468f831f777b62093721

The assessing authorities rightly pointed out that several transactions were not entered in the books of account; and a surprise inspection made on July 15, 1947, disclosed certain transactions with a Bombay firm known as Messrs. Kishundas Lekhraj, which were not mentioned in the books of account; and finally, the assessee Was importing silver in the name of five confederates in order to suppress the details of the transactions etc.

6ANALYSIS

cfd9c369e55c4aa4848ea9bee3552ff1

The assessing authorities further pointed out that there was a discrepancy between the return filed for the quarter ending June 30, 1946, and the accounts filed in support of it; the return showed a gross turnover of Rs. 2,28,370-12-0 while the accounts revealed a gross turnover of Rs. 1,48,204.

6ANALYSIS

974bbf4272384171b4787ad49b14d2ea

All these we must accept as correct.

6ANALYSIS

6616eaf65466458199a135b71b619724

Having rejected the returns and the books of account, the assessing authorities proceeded to estimate the gross turnover.

6ANALYSIS

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In so estimating the gross turnover, they did not refer to any materials at all.

6ANALYSIS

c210a4f628ce4c5d9170c9ce0a009608

On the contrary, they indulged in a pure guess and adopted a figure without reference to any evidence or any material at all.

6ANALYSIS

29b5e1911a454249ad49d99ee68f02be

Let us take, for example, the assessment order for the quarter ending June 30, 1946.The

6ANALYSIS

6c8e122a38924812a75098616c906041

Sales Tax Officer said: "I reject the dealer's accounts and estimate a gross turnover of Rs. 4,00,000.

6ANALYSIS

1a3d72b765cf4c85b4bea906cde72a21

1 allow a deduction at 2% on the turnover and assess him on Rs. 3,92,000 to pay sales tax of Rs. 6,125."

6ANALYSIS

1fba1a3424c842139feacaa64f5d2092

For the quarter ending on September 30, 1946, the Sales Tax Officer said: "I reject his irregular account and estimate a gross turnover of Rs. 3,00,000 for the quarter and assess him on Rs. 2,94,000 to pay tax of Rs. 4,593-12-0."

6ANALYSIS

2c8357faf3bd4a17b8aa48d991ebc3c5

These and similar orders do not show that the assessment was made with reference to any evidence or material; on the contrary, they show that having rejected the books of account, the assessing authorities indulged in -pure guess and made an assessment without reference-to any evidence or any material at all.

6ANALYSIS

93f895052d05480abacd98eb71fcdf0d

This the assessing authorities were not entitled to do under cl. (b) of sub.s. (2) of s. 10 of the Act.

6ANALYSIS

f7f0f93c35ba4c5ba4c4769f9a3e533b

Secondly, learned counsel for the respondent has referred us to several decisions on which the High Court relied and has argued that on the basis of those decisions, it must be held that the answer given by the High Court to the question referred to it was a correct answer.

7ARG_RESPONDENT

6755fd521d2e4d939114f797166abb26

We propose to examine briefly some of those decisions, though, as we have stated earlier, the question is really answered by the observations made by this Court in Dhakeswari Cotton Mills' case (1).

6ANALYSIS

ed061f9d08b94817819aee8b61106aed

The first decision is the Privy Council decision in Income- tax Commissioner v. Badridas Ramrai Shop, Akola (2).

4PRE_RELIED

06aa409cc2de494eacc75d4d09606b9c

Lord Russell of Killowen in delivering the judgment of their Lordships made the following observations as respects a " best of judgment " assessment within the meaning of s. 23 (4) of the Indian Income-tax Act: " The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information.

4PRE_RELIED

c37425023140414f85063da880230cbe

He must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter.

6ANALYSIS

335b2029703b4ce389267ec7df00f5ab

He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by, and assessments of, the assessee, (1) [1955] S.C.R. 94I, 949. (2) (1937) 64 I.A. 102, 114-115.and all other matters which he thinks will assist him in arriving at a fair and proper estimate: and though there must necessarily be guess-work in the matter, it must be honest guess-work.

6ANALYSIS

759e461a9be54e49a9df155abca83de6

" We find nothing in those observations which runs counter to the observations made in Dhakeswari Cotton Mills' case(1). No doubt it is true that when the returns and the books of account are rejected, the assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion.

4PRE_RELIED

7cb02963189c4651bef5d0825f927627

To use the words of Lord Russell of Killowen again, " he must make what he honestly believes to be a fair estimate of the proper figure of assessment" and for this purpose he must take into consideration such materials as the assessing officer has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate.

6ANALYSIS

10dc59ae6f8645289d6d9f24a1dd3aeb

In the case under our consideration, the assessing officer did not do so, and that is where the grievance of the assessee arises.

6ANALYSIS

cc9a619e0fc74faf9eebdb54c271c4ea

The next decision is Ganga Ram Balmokand v. Commissioner of Income Tax, Punjab (2).

4PRE_RELIED

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It was held therein that where the income-tax authorities were not satisfied with the correctness or completeness of the assessees' accounts and, taking into consideration the state of affairs in general and the fact that the assessees had a large business and the profit shown by them was abnormally low in comparison with that of other persons carrying on the same business in the locality, calculated the taxable income by applying a flat rate of 7 per cent., the authorities were justified in applying such a flat rate, and the burden was on the assessees to displace the estimate.

4PRE_RELIED

71b96d0fd4ee4d2e84ee826d3e34e6f8

There again, the estimate made was not a pure guess and was based on some materials which the Income-tax Officer had before him.

4PRE_RELIED

1e4c561c43d44a0bbbd4dacedf270c3b

Din Mohammad J. who gave the leading judgment, observed: " It cannot be denied that there must be some material before the Income-tax Officer on which (1) [1955] 1 S.C.R. 941, 949. (2) [1937] 5 I.T.R. 464.to base his estimate, but no hard and fast rule can be laid down by the Court to define what sort of material is required on which his estimate can be founded."

4PRE_RELIED

8780d8ce001947049a00e5a62bb9acc0

With that observation we generally agree.

6ANALYSIS

489dcfc639b24c318d171f3bf3465d74

If, in this case, the Sales Tax authorities had based their estimate on some material before them, no objection could have been taken; but the question which was referred to the High, Court and which arose out of the orders of assessment was whether it was open to the said authorities to make an assessment on a figure of gross, turnover, without referring to any materials to justify the adoption of that figure.

6ANALYSIS

eadd55bfa0364d5ca97c541f73946b5c

In answering that question in the affirmative, the High Court has given a carte blanche to the Sales Tax authorities and has, in our opinion, misdirected itself as to the true scope and effect of cl. (b) of sub-s. (2) of s. 10 of the Act.

6ANALYSIS

e9b6624f2acc4ff58bb8dfb27227c785

The next decision is Gunda Subbayya v. Commissioner of Income-tax, Madras (1).

3PRE_NOT_RELIED

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This decision also does not help the respondent.

6ANALYSIS

104d683e9d5042f68c8f9e4fcb8ca175

It was held in that decision that though there is nothing in the Indian Income-tax Act which imposes a duty on an Incometax Officer, who makes an assessment under s. 23 (3), to disclose to the assessee the material on which he proposes to act, natural justice requires that he should draw the assessee's attention to it and give him an opportunity to show that the officer's information is wrong and he should also indicate in his order the material on which he has made his estimate.

6ANALYSIS

c6a854b0db4c47eaa41f43a207ce4da2

This decision is really against the respondent and does not lay down any rule which may be said to be inconsistent with the observations made by this Court in Dhakeswari Cotton Mills' case (2).

6ANALYSIS

6e29d225f9014e3db812e171a24ab7fb

The decision of the Lahore High Court in Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab (3) was specifically approved by this Court in Dhakeswari Cotton Mills' case (2).

4PRE_RELIED

e07309e55b994283b1eee0f12b0398a1

The rules laid down in that decision were these: (1) While proceeding under sub-s. (3) of s. 23 of the Income-tax Act, the Income-tax Officer is not bound to -rely on such evidence produced by the assessee as he considers to be false; (2) if he proposes to make an estimate in disregard of (1) [1939] 7 I.T.R. 2 1. (2) [1955] 1 S.C.R. 941, 949. (3) [1944] 12 I.T.R. 393.the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate; (3) he is not however debarred from relying on private sources of information, which sources he may not disclose to the assessee at all; and (4) in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it, if possible.

6ANALYSIS

66d3b62823434fc5a79a01aadbc5957f

The decision does not lay down that it is open to the Income-tax Officer to make an estimate on pure guess and without reference to any material or evidence before him.

6ANALYSIS

47148b1d2b3d4ed5bc9a8cf8f4fc5671

The last decision to which we have been referred is the decision in Malik Damsaz Khan v. Commissioner of Income-tax (1).

6ANALYSIS

5a36806a48b84c2a95bebe1214ce8b36

That again is a decision of the Privy Council.

6ANALYSIS

fa992e6a56024506af9b42258e8775fb

In that case, the validity of the assessment under s. 23 (3) of the Indian Income-tax Act was not challenged by the assessee and the appeal was directed solely to the amount of assessment.

6ANALYSIS

bdbe860aee3a45f5b688aaa2c5aa5ff9

Their Lordships observed: 'But it appears to them that it was clearly competent for the Income-tax Officer in the circumstances of the present case to accept the return as a valid return and proceed to assessment under section 23 (1) or section 23 (3) as the case might be.

6ANALYSIS

5d500600514f47e79633b67ffb59a629

Since he was not satisfied that the return was correct and complete he could not proceed under section 23 (1); he, therefore, as appeared upon the face of the assessment, proceeded under section 23 (3).

6ANALYSIS

a0d5b355993348a8930c79cd907fd219

Neither in the incompleteness of the return nor in the fact that in any accompanying statement the appellant referred to his return as an estimate can their Lordships find any possible justification for the plea that the assessment was incompetent or that the Appellate Assistant Commissioner had no jurisdiction to entertain the appeal proceedings which the appellant himself initiated. " (1) [1947] 15 I.T.R. 445.These observations do not help the respondent in any way; nor do they lay down any rule contrary to the rules laid down in Seth Gurmukh Singh's case (1).

2RATIO

068b71cbdfe34cb19de4055f6b97c479

For these reasons we hold that the High Court, was in error in answering the question referred to it.

1RPC

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The appeal is accordingly allowed and the judgment and order of the High Court are set aside.

1RPC

d8c7ae703abb4193a1310aa3d60447ae

The answer to the question referred to the High Court is in the negative.

1RPC

95e4c6aa931e4258ae352981eee46217

The appellant will be entitled to its costs both in this Court and in the High Court.

1RPC

7323f9247fbc4618bf006ef103d7cb3a

PETITIONER: P.K. BADIANI Vs. RESPONDENT: THE COMMISSIONER OF INCOME TAX, BOMBAY DATE OF JUDGMENT21/09/1976

12PREAMBLE

f4ef6327cd35498592d5eaec3a1eb716

BENCH: UNTWALIA, N.L. BENCH: UNTWALIA, N.L. KHANNA, HANS RAJ SINGH, JASWANT CITATION: 1977 SCR (1) 638 1977 AIR 560 1976 SCC (4) 562 ACT: Income tax Act (11 of 1922), ss. 2(6A)(e) and 10(2)(vi-b)--Development rebate treated as accumulated profits--Withdrawal of amount by shareholder from Company's account--If withdrawal can be treated as dividend since amount withdrawn is within accumulated profits. HEADNOTE: Under s. 2(6A)(e), Income Tax Act, 1922, dividend includes any payment by a company, not being a company in which the public are substantially interested within the meaning of s. 23A, of any sum by way of advance to a share- holder to the extent to which the company possesses accumu- lated profits.

12PREAMBLE

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The appellant-assessee was a shareholder in a company in which the public were not substantially interested within the meaning of s. 23A.

12PREAMBLE

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He had withdrawn some amounts from the company's account.

12PREAMBLE

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The company had been allowed devel- opment rebate under s. 10(2)(vi-b) and that amount was debited in the profit and loss account of the company for the accounting year leaving a small balance of profit in the profit and loss account.

12PREAMBLE

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The Appellate Assistant Commis-

12PREAMBLE

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sioner treated the entire sum, that is, the amount allowed as development rebate and the amount of balance in the profit and loss account, as the amount of accumulated prof- its possessed by the company.

12PREAMBLE

40004a0a29be406a88d1ca54c435a481

Treating the withdrawals by the appellant as advances by the company to him and finding the highest amount of advance to the assessee to be within the total figure of accumulated profits as arrived at by him, he directed the addition of the advance to the asses- see's income as dividend under s. 2(6A)(e) of the Act.

12PREAMBLE

4e99af94a67b41a5991c391b545cb3e6

The Tribunal held that the development rebate was not liable to be treated as accumulated profits; but, on reference.

12PREAMBLE

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the High Court substantially confirmed the order of the Appel- late Assistant Commissioner.

12PREAMBLE

a2c222e107514edaa95a3364b0e51b09

On the question whether the development rebate could be treated as accumulated profits in the hands of the company under s. 2(6A)(e), the appellant contended that the develop- ment rebate, being identical with initial depreciation is in the nature of depreciation allowance, and since it is de- ductible from the assessable profits of the company, it is also a type of outgoing expenditure or out-of-pocket cost, and was therefore, deductible from the company's commercial profits. Dismissing the appeal, HELD:

12PREAMBLE

093d4e3152264917891241df584ef120

The development rebate reserve created by the company, although it does not form part of the assessable profits, undoubtedly forms part of the commercial profits and hence constituted accumulated profits of the company.. within the meaning of s. 2(6A)(e).

12PREAMBLE

c19ae701ed734823bf6f6c3b9ef0b6b2

[648D] (1) The term 'profits' in taxation law varies in its meaning according to the context.

12PREAMBLE

dddb14b2bbf3458a9cf3a1e67fa46e26

The expression 'accumu- lated profits' occurring in s. 2(6A) means profits in the commercial sense that is profits in the real and true sense of the term and not assessable or taxable profits. [642E] E.D. Sassoon & Company Ltd. and Others v. Commissioner of Income-tax, Bombay City 26 ITR 27 at page 46, Commission- er of Income-taX, Bombay v. Ahmedbhai Umarbhai. & Co., Bombay 18 ITR 472 at 502, Commissioner of Income-tax.

12PREAMBLE

847883585b094ddf8f398d16a688cf70

Bombay City v. Bipinchandra Maganlal & Co. Ltd. 41 ITR 290 and Gobaid Motor Service (P) Ltd. v. Commissioner of Income-tax,

12PREAMBLE

2ca0238f1ee6423989203097f854cc15

Madras 60 ITR 417 followed.

12PREAMBLE

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(2) Although they are not identical and differ in some material particulars, initial depreciation and development rebate are similar in nature as both are by 639 way of incentive for installation of new machinery or plant.

12PREAMBLE

ccf745108e544df1a167659ac7399ad8

But the initial depreciation or the development rebate is not a recurring allowance for the subsequent years like the normal depreciation allowance provided in s. 10(2)(vi) or the additional depreciation provided in s. 10(2)(vi-a).

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