1940 (9) TMI 17 - HC - Income Tax

Proviso to Section 13 Applied: Court Upholds Income-tax Officer's Decision on Gold Transactions

Ganeshi Lal Chhappan Lal Versus Commissioner of Income-tax

The court held that the proviso to Section 13 of the Indian Income-tax Act was applicable in the case, justifying the Income-tax Officer's decision to ... - Issues Involved:1. Applicability of the proviso to Section 13 of the Indian Income-tax Act.2. Justification for accepting book profits for silver transactions and rejecting them for gold transactions without giving notice.Issue-wise Detailed Analysis:1. Applicability of the Proviso to Section 13 of the Indian Income-tax Act:The primary issue was whether the proviso to Section 13 of the Indian Income-tax Act was applicable in the circumstances of this case. The assessee, a firm engaged in sarrafa business, had its account books maintained according to the mercantile accountancy system and regularly kept. However, the profits from gold transactions as shown in the books were deemed 'ridiculously low' by the Income-tax authorities, leading them to apply a flat rate under the proviso to Section 13.The Commissioner of Income-tax argued that the Income-tax Officer (ITO) alone has the discretion to decide if the method of accounting reflects true profits. This position was supported by precedents such as Ganga Ram Balmokand v. The Commissioner of Income-tax, Punjab, which held that the burden was on the assessee to prove that the profits disclosed by the books were the real profits. The Commissioner also cited Badri Shah Sohan Lal v. The Commissioner of Income-tax, Punjab, where a low rate of profit disclosed by the books justified rejecting the accounts due to the absence of vouchers or other material for verification.The court observed that the discretion vested in the ITO by the proviso to Section 13 should not be arbitrary. Referring to the Privy Council decision in Commissioner of Income-tax, Bombay Presidency and Aden v. Sarangpur Cotton Manufacturing Company, Ltd., it was emphasized that the ITO must consider whether the income, profits, and gains can be properly deduced from the method of accounting employed by the assessee.The court concluded that the ITO did not act arbitrarily but exercised his judgment, supported by material evidence. Factors such as the excessively low profits from gold transactions, the lack of details in the assessee's books regarding the nature and sellers of ornaments, and the favorable market conditions for gold were considered. The ITO's decision to apply the proviso to Section 13 was thus justified.2. Justification for Accepting Book Profits for Silver Transactions and Rejecting Them for Gold Transactions Without Giving Notice:The second issue was whether the income-tax authorities were justified in accepting the book profits for silver transactions while rejecting them for gold transactions without giving notice to the assessee. The court noted that notices were issued to the assessee under Sections 22 (4) and 23 (2) of the Act, and the assessee's munib was specifically questioned regarding the profits from gold and silver transactions.The court held that there was no obligation on the authorities to serve any other kind of notice upon the assessee. The assessee was not prejudiced by the lack of additional notice, as the necessary inquiries and notices were already served. Therefore, the income-tax authorities were justified in their actions.Conclusion:1. The proviso to Section 13 of the Act was applicable in the circumstances of this case.2. There was no necessity for the income-tax authorities to issue a separate notice to the assessee before accepting the book profits for silver transactions and rejecting them for gold transactions.A copy of this judgment under the seal of the Court and the signature of the Registrar will be sent to the Commissioner of Income-tax.