1954 (3) TMI 70 - HC - Income Tax

High Court: Additions to business profits need material evidence, not just absence of stock account.

PANDIT BROS. Versus COMMISSIONER OF INCOME-TAX, DELHI

The High Court ruled that additions to business profits cannot be made solely based on insufficient net profits and the absence of a stock account. The ... - Issues Involved:1. Whether any addition may be made to the book version of business profits where no stock account is maintained, on the sole ground that the net profits disclosed appear to be insufficient in relation to the total turnover.Issue-wise Detailed Analysis:1. Additions to Business Profits Based on Insufficient Net Profits and Absence of Stock Account:The High Court was tasked with determining whether additions to the book version of business profits could be justified solely on the grounds that the net profits disclosed were insufficient in relation to the total turnover, especially when no stock account was maintained. The case arose from the assessment year 1950-51 for the assessee, a firm with four branches.The Income-tax Officer (ITO) found that the taxable profits should have been higher than declared. He focused on two branches, Handicrafts, New Delhi, and Connaught Place, New Delhi, where no stock books were maintained. The ITO increased the gross profits by Rs. 5,000 and Rs. 7,000 respectively, citing the inability to verify the stock and the high expense ratio. The ITO's exact words were: 'There is no stock book and it is not possible to verify that the whole of the stock was accounted for. I would increase the gross profit by Rs. 5,000 which would turn the gross loss of Rs. 1,872 into a net profit of Rs. 3,128.' Similarly, for the Connaught Place branch: 'There is no stock book and it is not possible to verify that the whole of the stock is accounted for. I would increase the gross profit by Rs. 7,000. The net profit would thus work to Rs. 8,073.'On appeal, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the ITO's decision, emphasizing the low disclosed profits and the absence of a stock register. The Tribunal stated: 'As the profits disclosed by the assessee in the year under reference is extremely low, we think that the Income-tax authorities were right in making an estimate of the appellant's income under the proviso to Section 13.'The High Court examined the proviso to Section 13 of the Indian Income-tax Act, 1922, which allows the ITO to determine the computation basis if the method of accounting is such that the income, profits, and gains cannot be properly deduced. The Court noted that while the assessee maintained regular accounts of purchases and sales, the absence of a stock register alone did not justify the application of the proviso to Section 13. The Court emphasized that the ITO must have material evidence to conclude that the method employed is defective.The Court found that the ITO did not adopt any specific basis for the additions but acted arbitrarily. The High Court referenced several precedents, including the Privy Council's observation in Commissioner of Income-tax, Bombay Presidency and Aden v. Sarangpur Cotton Manufacturing Co. Ltd. of Ahmedabad, which stated that the ITO must consider whether the income, profits, and gains can properly be deduced from the method of accounting employed.The Court concluded that there was no definite finding by the ITO that the method of accounting was such that the income could not be deduced. The absence of a stock register and low profits were not sufficient grounds for such a finding. The Court held that the ITO must discover evidence or material aliunde before making such additions.Judgment:The High Court answered the referred question in the negative, stating that additions to the book version of business profits cannot be made solely on the grounds of insufficient net profits and the absence of a stock account. The assessee was awarded costs, with counsel fees assessed at Rs. 100.