1967 (5) TMI 13 - HC - Income Tax

Court rules in favor of assessee, criticizes Tribunal's arbitrary estimation of profits

The court ruled in favor of the assessee, finding that the Tribunal did not have adequate material to support the addition of Rs. 65,000 to the profits ... Whether, on the facts and in the circumstances of the case, there was any material before the Tribunal to estimate an addition on sales of disposal goods - Held, no Issues Involved:1. Whether there was any material before the Tribunal to estimate an addition of Rs. 65,000 on sales of disposal goods.Detailed Analysis:Issue 1: Material Before the Tribunal for Estimation of AdditionThe primary issue for consideration was whether the Tribunal had any material to justify an addition of Rs. 65,000 to the profits from the sales of disposal goods. The context of this issue is rooted in the discrepancies observed in the assessee's account books and the subsequent actions taken by the Income-tax Officer (ITO), the Appellate Assistant Commissioner (AAC), and the Tribunal.Background and Initial Assessment:The assessee, a private limited company dealing in scrap iron and other commodities, reported a gross profit rate of 6.3% for the accounting year ending March 31, 1953, compared to 8.5% in the previous year. The ITO found the explanation for the lower profit rate unsatisfactory, citing improper maintenance of stock books and unverifiable purchases and sales. Consequently, the ITO rejected the book version of profits and added Rs. 2,00,000 to the disclosed profits, raising the gross profit rate to over 9%.Appeal Before the Appellate Assistant Commissioner:The assessee appealed to the AAC, who found that all purchases and sales were vouched and there was no evidence of unaccounted purchases. The AAC concluded that the gross profit rate of 2% on scrap iron sales was reasonable and did not warrant any addition. However, for the sale of disposal goods, the AAC estimated a gross profit rate of 16% on an enhanced turnover, resulting in an addition of Rs. 1,28,825 instead of the Rs. 2,00,000 added by the ITO.Second Appeal Before the Tribunal:The assessee then appealed to the Tribunal, contending that the 16% gross profit rate applied by the AAC was unduly high. The Tribunal noted the fluctuating gross profit rates in subsequent years and the impact of sales in lots, which had a lower profit margin. The Tribunal reduced the addition to Rs. 65,000, considering the vouched purchases and sales, the varied nature of disposal goods, and the lower profit margin on sales in lots.Arguments and Judgment:The assessee's counsel argued that the Tribunal did not exercise its discretion judicially or objectively in adding Rs. 65,000 to the profits. The revenue's counsel contended that the ITO had the duty to estimate profits due to unreliable books and that the Tribunal's addition was justified based on the assessee's own profit percentages.The court found that the Tribunal's addition of Rs. 65,000 was not based on any specific principle or relevant materials but was rather a crude guess. The Tribunal's reference to profit rates in subsequent years and the impact of sales in lots did not justify the arbitrary addition. The court emphasized that the revenue authorities must proceed judicially and not arbitrarily when estimating profits under the proviso to section 13 of the Indian Income-tax Act.Conclusion:The court answered the question in the negative, indicating that the Tribunal did not have sufficient material to justify the addition of Rs. 65,000. The Tribunal should have based its calculation on arithmetical computations rather than assumptions of leakages. The court did not make any order as to costs.Separate Judgment:MASUD J. concurred with the judgment delivered by BANERJEE J., agreeing with the conclusion and reasoning provided.Final Outcome:Question answered in the negative.