Income Tax Appellate Tribunal - Nagpur
Commissioner Of Income-Tax, C. P. & U. P. vs Badridas Ramrai Shop, Akola. on 21 August, 1939
Equivalent citations: [1939]7ITR613(NAG)
ORDER
This order governs Mis. Civil Case No. 81 of 1936, Mis. Judicial Case No. 37-B of 1935, Mis. Civil Cases No. 46 of 1937 and Mis. Judicial Case No. 66-B of 1935.
These four matters are all concerned with points which arise under the Income-tax Act in the Assessments made upon the joint family owners of Badridas Ramrai Shop, a firm of money-lenders operating in Akola, Berar and elsewhere.
Mis. Civil Case No. 81 of 1936 and Mis. Judicial Case No. 37-B of 1935 relate to the year of assessment 1932-33 while the other two relate to the year of assessment 1933-34. The first two are only very faintly argued before us because it is apparent that the less said about the points there in dispute on behalf of the assessee the better because the assessees only hope is to get the assessment for the year 1933-34 reduced and he can only hope to do that by establishing that in that year he became a reformed character.
The particular assessee who made the returns, we understand, has since died but it is reasonable plain that for the years before his death until at least the year 1933-34 he was in the habit of placing before the Income-tax Officers false returns supported false books. One assessment year which is not before us, we understand was the subject of litigation which went eventually as far as the Judicial Committee. The case is found reported in Commissioner Shop, Akola (I. L. R. 1937 Nag. 197) and there their Lordships laid down that the Income-tax Officer was justified in making that estimate he can take into consideration local knowledge and repute as regards the assessees circumstances and his own knowledge of previous returns by and assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate, but that he is not bound to hold a local inquiry or to place on record a note of the details and results of such inquiry. Their Lordships speak at page 202 of "honest guess-work" and at pave 203 indicate that where the Income-tax Officer are operating under Section 23 (4) a guess made in such circumstances may be justified.
The next year of assessment subsequent to that which was under discussion in the case mentioned above is that of 1932-33 and the assessee in that year made what is admittedly a false return supported by what are admittedly false books. The following expedient was resorted to :-The return was made by the managing members of a joint Hindu family engaged in money lending business. That family consisted not only of the assessee making the return of that person and a number of his brothers. To those brothers were nationally imputed a considerable number of money-lending transactions. Particulars of these were suppressed and these transactions were not reflected in the books of the business, with the result that the books of the money-lending business only disclosed such transactions as this family thought fit to allocate to the family. The result did not in any way reflect the truth and we think that Mr. Khare exercised a wise discretion in not attempting to do anything with such a perfectly impossible case, especially as he had, in order to be able to say anything about the next assessment year 1933-34, to take up the position that in that year the assessee had abandoned his old practices.
The reformation is supposed to have come about after the return for the 1933-34 was made by the assessee. That return also is admittedly false. We have seen it. It shows a loss of Rs. 8,722-14-2. This loss was doubted by the Income-tax authorities and notice was given to the assessee under Section 23 (2) with notice is not before us although there has been some argument as to whether the assessee was given all the opportunity he should be given of explaining his position. But it is quite clear from the minutes made by the officer concerned that subsequent to the notice being given the assessee appeared with his books which were examined and from which it was deduced (a) that the books were unreliable and (b) that the return was defective. The reasons for these conclusions were so cogent that the assessee himself was convinced and he appeared to have taken his return back and re-presented it in an amended form without altering the date. The amended form shows that instead of suffering a loss of Rs. 8,722-14-2 the family had made a profit of Rs. 14,000. Thereupon, not unnaturally, the Income-tax Officer scrutinised the return again. As to this, on appeal, his superior makes the following observations :-
"On examination the Income-tax Officer for very definite reasons, found that (1) the lists did not entirely remove the defects points out by him(2) that there was no account in the books of the relevant account year for one Govind Mahadeo of Kalameshwar against whom the assessee had obtained a foreclosure decree (3) that interest realised through purchase of Mahadeo Dagdurams property had not been adjusted (4) that the claim put forward by the assessee that the accounts had been complete since 1987-88 was not true inasmuch as (a) no less that seven accounts had been inserted in the books of the year 1988-89 (the account year) and (b) there was no trace in them of the Bank of India and Srikishan Balkishandas account at any rate (5) that the interest, though trifling, received from a debtor from Nizamabad had not been adjusted and (6) that there were clear reasons to think that the cash book did not represent genuine balance."
In view of these findings the Income-tax Officer refused to regard the amended return as correct and proceeded to assess and compute under the provisions of the proviso to Section 13 of the Income-tax Act. It is said that in so doing he was wrong in law, for section 22 (3) of the Income-tax Act permits an assessee who discovers that he has made an omission or a wrong statement in his return to make another return or a revised return at any time before the assessment is made, and it is said that this is a case where the assessee has discovered an omission or a wrong statement.
In our opinion Section 22(3) is designed to enable a person who has made a return which he subsequently discovers contains an omission or a wrong statement to correct that wrong statement at any time before the assessment is made. It does not apply to the case of a person who has made false return knowing it to be a false return and whose false return is discovered by the Income-tax Officer; were it otherwise, one would be left with an infinite progression of returns scrutinised, found false, returns altered, found false and so on. Where the assessee has made a false return and has been given notice to satisfy the Income-tax Officer as to the correctness of the return and produce his books which are scrutinised and found false or incomplete or unreliable, then the proviso to Section 13 comes into play. In this case the Income-tax Officer has been given a return which is not reliable. That return has been supported by books which are also not reliable. The position is in substance the same as arises when no return has been made at all but in law there is a curious difference between the two positions. If no return has been made at all or if a return has been made and the notice given has not been complied with, then Section 23 (4) applies and the Income-tax Officer has to make the assessment to the best of his judgment. The Privy Council in the case mentioned above has decided that where Section 23(4) applies so long as the Income-tax Officer does not act dishonestly, vindictively or capriciously but exercises his judgment, he may make such assessment as he thinks fit even to the extent of guessing what the assessment should be. But where there has been a return and the notice has been compiled with and it is found that the books which are put forward to support the return are unreliable, then one goes to Section 13. Section 13 is not an assessment but a computation section. Its provisions instruct the Income-tax authorities as to the method to be adopted in computing the profits and gains of business in question. Primarily the method is that adopted by the assessee.
Their Lordships of the Privy Council in Commissioner of Income-tax, Bombay v. Sarangpur Cotton Manufacturing Co. Ltd., Ahmedabad (A. I. R. 1938 P. C. 1) have shown the difference between "method" and "books". Normally, however, the method of arriving at a profit or a loss is not be ascertained by a perusal of the assessees books of account, though as is indicated in the above-mentioned Privy Council case there may be other factors necessary to be regarded before the method is completely discovered. But whatever the materials used for determining the method, obviously one fails to ascertain any method of it be found that those materials are unreliable. It is like attempting to arrive at a conclusion on the evidence of a perjured witness. One cannot find anything from unreliable books. One cannot discover what method is employed. One is therefore driven to go to the proviso to Section 13. The only difference between the proviso to Section 13 and the provisions of Section 23 (4) is that the latter authorizes the Income-tax Officer to make the assessment to "the best of his judgment" while the former tell the Income-tax Officer that he has to make his computation "upon such basis and in such manner as the Income-tax Officer may determine". In our opinion the proviso to Section 13 given the Income-tax Officer as wide, if not wider, power than he is given under Section 23 (4). This is not unreasonable because Section 23 (4) applies to a case where the assessee does nothing, whereas the proviso applies where the assessee does something positively false. In our opinion where a return has been made and notice has been give and a corrected return has been put in, the assessee is not entitled to further notice and to further scrutiny before the powers conferred by Section 13 are put into operation.
The Income-tax Commissioner in this case has on application by the assessee started the following point of law :
"In all the circumstances of this case, was there any evidence on which the Income-tax Officer could find that account produced by the assessee were incomplete and unreliable so as to reject the accounts to the extent which he has rejected them and to compute the assessees income in the way in which he has computed it ?"
In our opinion the answer is to be found in the judgment of their Lordships of the Judicial Committee reported in Feroze Shah v. Income-tax Commissioner, Punjab (A. I. R. 1933 P. C. 198) and on the facts of this case here. To start with the assessee had to thoroughly bad income-tax record. His books had been scrutinised in the past and had been found unreliable and he had been prosecuted the prosecuted being compounded. In this particular year, that is to say his best year, the Income-tax Officer scrutinised his books and found that the closing balances did not tally with the opening balances for the various years. He scrutinised the return and found that it was false. It is said that it is only after that that the assessee made an endeavour, an honest endeavour, to correct his return and to complete his books. As we have already observed, at that stage a further examination and scrutiny was undertaken by the Income-tax Officer and for all the reasons above enumerated he was of the opinion that the reformation was not complete, that the return was still inaccurate and that the books were still unreliable. In our opinion, in the light of the decision in Feroze Shah v. Income-tax Commissioner, Punjab (supra) and the general sense of the matter, the Income-tax Officer did not act without evidence. The answer accordingly to the question put is in the affirmative.
As to the various questions which the assessee has raised and which are to be found at page 22 of the paper book in Mis. Judicial Case No. 66-B of 1935 we are of the opinion that none of these raises a question in relation to which it would be proper to call upon the Income-tax Officer to state a case. The one that has been most pressed is No. 6 which is in the following words :
"Whether the Income-tax Officer was justified in law in passing the order of assessment and in disallowing claim without telling the assessee the grounds on which the return was not being accepted and further by not giving the assessee an opportunity of substantiating the correctness of the return and off rebutting the grounds of the Income-tax Officers disbelief ?"
In our opinion the answer to the first part of the question, if we had directed a case to be started on it, would be clearly in the affirmative, and the latter part of the question assumes things which are not correct.
It was further argued and somewhat pressed that in this case the Income-tax Officer was wrong in fixing a flat rate in the way he has and that even if that could be justified, the quantum of the flat rate could not be justified. The Income-tax Officer has sin the face of these incomplete and unsatisfactory books, operating under the provisos to Section 13, adopted a method which can be described as follows : He finds that the firm is a money-lending firm. He finds that its capital is so much. He assumes that that capital is utilized to make loans. He takes an average interest percentage on the whole of the capital which he assumes is in use. He assumes that everybody pays on that average rate. He arrives at an income based on those assumption and assessees accordingly. It is said that it is an arbitrary way of arriving at the income and that it is a mere guess-work. In our opinion it is not a guess-work nor is it arbitrary. We see nothing vindictive or capricious or unfair in what the Income-tax Officer has done in this case. On the other hand, the Income-tax Officer has pointed out that he has not based his figures on the maximum interest rates charged. He has indeed worked out the average and arrived at a figure which was little more than what was eventually allowed on appeal. That average can be justified if one regards the rates charged which sometimes amount to 24 per cent. and sometimes to 36 per cent. He has taken 15 per cent. as the average.
But it is said, assuming that the method can be supported, the result is unfair because there came into operation in Berar in 1936 the Reduction of Interest Act which had the result of causing the interest that could be recovered on certain kinds of loans to be reduced as from the 1st January 1932 and the reduction was such that in the case of secured debts not more than 9 per cent. and in the case of unsecured debts not more than 13 per cent. could be recovered.
In our opinion, however, it would not be proper for us to arrogate to ourselves the powers that have been conferred by the Act upon the Income-tax Officer. It is for him to determine what the computation is, not fur us. We might take this and that into consideration. He might think that it would be fair to take note of the operation of the Reduction of Interest Act. He might think that it is not desirable to take note of that Act for many reasons and among others for the reason that the Reduction of Interest Act did not come into operation until 1936 and could not possibly affect any recoveries made in the years 1932, 1933, 1934, or 1935 although it might affect the recoveries made after the coming into operation of the Act. In all the circumstances therefore we are of opinion that as to Mis. judicial Cases Nos. 37-B of 1935 and 66-B of 1935 which are references made by the Commissioner of Income-tax raising the point of law above mentioned, the question is answered as above stated and that as to Mis. Civil Cases Nos. 81 of 1936 and 46 of 1937 the applications are dismissed with costs which we fix at Rs. 350. Rs. 200 already paid will be credited towards the costs.
Reference answered in the affirmative.