DHAKESWARI COTTON MILLS LTD. versus COMMISSIONER OF INCOME TAX, WEST BENGAL

S.C.R. SUPREME COURT REPORTS

DHAKESWARI COTTON MILLS LTD.

COMMISSIONER OF INCOME TAX, WEST BENGAL

[MEHR CHAND MAHAJAN C.J.,· S.R. DAs, GHuLAM HASAN, BHAGWATI and VENKATARAMA AYYAR JJ.]

Constitution of India, Art. 136-Appeal by Special Leave-'-Supreme Court's powet-lndian Income-tax Act (XI of 1922), s. 23(3)-Assessm'ent when invalid. It is not possible to define with any precision the limitations of the powe'rs conferred on the Supreme Court by Art. 136 of the Constitution. This is an overriding and exceptional power and should be exercised sparingly and . with caution and only in special and extraordinary situation. Beyond this no set formula or rule can stand in the way of or fetter the exercise of the power conferred on the Supreme Court under Art. 136 of the Constitu-tion. Sufficient safeguard and guarantee for the exercise of this power lie in the trust reposed by the Constitution in the wisdom and good sense of judges of the Supreme Court. This power is not hedged in by technical hurdles of any kind when it is called in aid against any arbitrary adjudication or for advancing the cause of justice or for giving fair deal to litigant so that in-justice may not be perpetrated or perpetuated. Conclusiveness or finality given to any decision by any domestic law cannot deter the Supreme Court from exercising the power conferred under Art. 136 of the Constitution. The powers given to the Income-tax Officer under s. 23(3) of the Indian Income-tax Act, 1922, however wide, do not entitle him to base the assessment on pure guess without reference to any evidence or m~terial. An assessment under s. 23(3) of the Act cannot be made only on bare suspicion. An assessment so made without disclosing to the assessee the information supplied by the departmental representative and without giving any opportunity to the assessee to rebut the information so supplied and declining to take into consideration all materials . which the assessee wanted to produce in support of his case -constitutes violation of the fundamental rules of justice · and tails for the powers under Art. 136 of the Constitution.

Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab ( 1944 I.T.R. 393) approved.

CrvrL APPELLATE JURISDICTION : Civil Appeal No. 217 of 1953.

Appeal from the Judgment and Order dated the 16th day of January, 1950, of the Income-tax Appellate

, October 29.

1954 DhakJWtJri Cotton Mills Ltd. v. Commissioner of Jncomt~tax Wesl Bengal.

Tribunal, Calcutta in Income-tax Appeal · · No. 4658 of 1948-49 and E.P.T.A. No. 1137 of 1948-49.

N. C. Chatterjee and Veda Vyas, (S. K. Kapoor and Ganpat Rai, with them) for the appellant.

C. K. Daphtary, Solicitor-General for India ( G. N. Joshi, with him) for the respondent.

1954. October 29. The Judgment of the Court was delivered by MEHR CHAND MAHAJAN C.J.-The appellant is public limited joint stock company incorporated under the Indian Companies Act, 1913, with its registered office at Calcutta. It carries on the business of manu-facture and sale of cotton yarn and piece-goods. On the 28th of July, 1944, the Income-tax Officer issued notice to it under section 22(2) of the Indian Income-tax Act calling upon it to file the return of its income for the assessment year 1944-45 (account year being 1943-44). Before the expiry of the due date for filing the return the account books of the appellant company together with the documents relevant to the accounts, were taken into custody by the Sub-Divisional Officer, Narayanganj and it is alleged that these remained. in the custody of the court of the Sub-Divisional Magistrate till January, 1950, when they were handed back to the appellant. In this situation the assessee pleaded for extension of time to furnish the return. This request was refused, and show cause notice was ·issued under section 28(3) of the Act calling upon the appellant company why penalty should not· be imposed upon it for its ofailure to file the return. An officer of the company appeared befor.e the · Income-tax Officer and explained the cause for this default. In order to ascertain whether the explanation furnished by the assessee was genuine, the Income-tax Officer made inquiries from the court concerned about this matter. He also made request to the court to allow · him access to the books of account. The court, however, neither acceded to the demand that books of account be made available to the assessee nor did it permit the Income:tax Officer to. have .. access . . to them.. The

S.C.R. SUPREME COURT REPORTS

Income-tax Officer having thus satisfied himself about the genuineness of the- assessee's explanation, condoned the default in filing the return and dropped the proceedings taken against the company under section 28(3) of the Act. It seems that no further action in the matter was taken by the department till the year 1947. During that year the company requested the department to revive the proceedings. The proceedings having been revived the appellant company furnished -the return of its income for the assessment year 1944-45 on the 16th March, 1948. This return, however, was not com-plete document as without the assistance of the books the profits could not be computed according · to the provisions of law. On receipt of the return the Income-tax Officer issued notice under section 23(2) of the Act calling upon the company to supply further infor-mation on number of points and to prepare certain statements indicated in the notice. This requisition had to be complied with by the 19th · March, 1948. On that date the Chief Accounts Officer of the company appeared before the Income-tax Officer and asked for further time till the middle of the following wt:ek for furnishing the requisite particulars. This request was, however, · refused and assessment was completed on the 20th March, 1948. The excess profits . assessment was also made final on the 23rd March, 1948. The relevant part of the assessment order is in these terms :~ "From the point of view of profits, 1943 -was -a very good year, if not the best, for all cotton - mills. Expenses on cotton and fuel shows that - production was undoubtedly higher whereas it is found that the gross profit disclosed- by this company is low. · I con-clude that full amount_ of sales have not been- account-ed for. It is expected that actually the rate of gross profit ,should have been higher this year. In view of the higher costs of. establishment, I take -it that the rate of about 40%, i.e., near about ·the -rate disclosed in 1942 accounts, should have been maintained.• I add back the Rs. 36 la:khs for unaccounted sales". It may be mentioned - that in the. return the com-

pany had disclosed gross profit of 28 per cent. on

Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax Wes.t Bengal. Mehr Chand Mahajan C.J.

·Dhaktswari Cotton Mills Ltd. v.

Commissioner of Income-tax, West Bengal. Mehr Chand .Mahajan C. J.

S.C.R. SUPREME COURT REPORTS

additional :evidence or ·record at that stage and his trunk of books · and papers . was . returned to him. During the discussion of Mr. Banerjee with the Accountant· M.ember Mr. Banerjee produced ·a report showing that the gross profit rates of some mills in Bengal on the average amounted to 23 per cent. In the statement showing 23 per cent. gross profit rates there was another item called 'Pool profit' which was bigger than the gross profits rate. Mr. Banerjee was asked to explain what this word 'Pool profit' meant but he had no information on this point .......... For want of this information we are afraid it is not possible for us to attach_ great deal of importance to the gross profit percentage of 23 per cent. mentioned in the books produced by Mr. Banerjee.Mr. Banerjee during this discussion further pro-duced book showing the wastage expected. In that book certain quality of cotton had been mentioned and it was said that wastage of 34 per cent. was normal. In the case of the assessee he has shown wastage of 9 per cent. in. 1942, 26 per cent. in 1943 and 19 per cent. in 1944. The figure of 34 per cent. shown in that book would therefore seem to refer to particular quality of cotton very much inferior to the cotton generally used by the appdlant. The department's main case on the question of wastage is based on the appellant's own books according to which "his wastage Tn the year under review amounted to three times the wastage in the year previous. In the light of all this information it appears to us that the Incomeci:ax Officer was justi-fied in making substantial addition to the gross profit shown by the appellant. Coming to the question of what the amount of addition should be the departmental representative has. on our request filed number of cases of other cotton mills which show gross profit rates varying between 49 per cent. and 22 per cent. and in one case even 13 per cent. has been shown ....... . In the face of all the above facts it appears to us that ·the Income-tax Officer was justified in coming to the condusion that all sales had not been brought into

· Dhakeswari Cotton Mills Ltif. v. ·Commissioner of Income-tax, West Bengal.

Mehr Chand Mahqjan C. JA

Dhaktswari Cotton Mills Ltd. v. Commissioner of Income-tax, .West Bengal. Mehr Charul Mahajan C. J.

the books. We have, however, considered all facts relevant to this case and are of the opinion that the addition to the sales should be reduced from Rs. 36 lakhs made by the Income-tax Officer to Rs. 16 lakhs which would reduce the ·gross profit rate to· about 35 per cent."

The sum and substance of these decisions is that the Income-tax Officer estimated ·the gross profit on sales at 40 per cent. by pure guess, while the Tribunal reduced it to 35 per cent.· by applying some other rule of thumb. It is not clear from either of these judgments on what material these estimates were based. Dissatisfied with the decision of the Tribunal, the assessee wanted the Tribunal to state case and refer to the High Court for its decision ten questions· of law. It seems that Dr. Pal who represented the assessee before the Tribunal had only argued one question namely, whether the estimate of profit made by the Income-tax Officer · was excessive or whether 1t was justified on the material on the record. The other points raised in the memorandum of appeal regarding the validity or the correctness of the procedure of assess-ment had been abandoned. . The .questions which were submitted to the Tribunal and which it was asked to refer to the High Court concerned all the points includ-ing those abandoned before the '.fribunal. The Tribu-nal came to the conclusion that ho question of. law arose on its order, and it, therefore, dismissed the applica-tion made by the assessee.. It appears that the assessee then applied to the High Court under section 66(2) of the Act for the issue of mandamus to the Tribunal directing It to refer to the High Court the very same questions of law which it had refused to refer. This application was summarily rejected. The High Court also refused an application for leave to' appeal ·to this Court. Having exhausted all die remedies that were available to him under the· Income-tax Act, the assessee then made an application to this Court for special leave against the order of the Income-tax Tribunal under the provisions of article . 136 ·of the Constitution. Leave was allowed and ·this appeal is •now before us by virtue of. that leave. -

Mr. Chatterjee, the learned counsel for the appellant, contended inter alia that the assessment order made under section 23(3) of the Income-tax Act had been made in violation of the principles of natural justice, inasmuch as it was not based on any material whatso-ever and that the evidence tendered by the appellant had been improperly rejected. It was further said that the Trib11n:i \ acted without jurisdiction in relying on the data supplied by the Income-tax department behind the back of the appellant company, and with-out giving it an opportunity to rebut or explain the same. Reliance was placed on the decision of Full Bench of the Lahore High Court in Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab( [1 ]), for the proposition that while proceeding under sub-section (3) of section 23, the Income-tax Officer, though not bound to rely on evidence produced by the assessee as he considers to be false, yet if he proposes to make an estimate in disregard of that evidence, he should in fairness disclose to the assessee the material on which he is going to found that estimate; and that 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 utilized to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and that he should further give him ample opportunity to meet it. It was said that the Tribunal failed to disclose to the assessee the material that the departmental representative had given to it regarding the rates of gross profit of cotton mills varying between 49 per cent. and 13 per cent., and that if that disclosure had been made, the assessee would have satisfied the Tribunal that the mills which had shown gross profits at rates mentioned above · had no similarity of any kind with the appellant company's mill or to other mills in Bengal and therefore those rates had no relevancy in the enquiry as to gross profits of the assessee company's mill. It was also argued that both the Income-tax Officer and the Tribunal acted arbitrarily and on suspicion in estimating the rate of (I) [1944] 12 I. T. R. 393·

1954 Dhakeswari Cotton Mills Ltd. v.

Commissioner of Income·tax, West Bengal. Mehr Chand Mahajan C. J.

1954 Dhakeswari Cotton Milll Ltd. v. Commissioner of Income-lax. JVest Ben,14al.

Mehr Chand Mahajan G.J.

S.C.R: SUPREME COURT REPORTS

As regards the first contention of the learned Solicitor-General, we are unable to accede to it. It is not possible to define with any precision the limitations on the exercise of the discretionary jurisdiction vested in this Court by the · constitutional provision made in article 136. The limitations, whatever they be, are implicit in the nature and character of the power itself. It being an exceptional and overriding power, naturally it has to be exercised sparingly and with caution and only in special and extraordinary situations. Beyond that it is not possible to fetter the exercise of this power by any set formula or rule. All that can be said is that the Constitution having trusted the wisdom and good sense of the Judges of this Court in this matter, that itself is sufficient safeguard and guarantee that the power will only be used to advance the cause of justice, and that its exercise will be governed by well established principles which govern the exercise of overriding constitutional powers. It is, however, plain that when the Court reaches the conclusion that per-son has been dealt with arbitrarily or that Court or tribunal within the territory of India has not given fair deal to litigant, then no technical hurdles of any kind like the finality of finding of facts or other-wise can stand in the way of the exercise of this power because the whole intent and purpose of this article is that it is the duty of this Court to see that injustice is not perpetuated or perpetrated by decisions of Courts and tribunals because certain laws have made the ·decisions of these Courts or tribunals final and con-clusive. What we have said above sufficiently disposes of the first contention raised by the learned Solicitor-General. 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 Court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-section (3) of section 23 of the Act, the Income-tax Officer is not entitled to

' [1]954 Dhakeswari Cotton Mills Ltd. v.

Commissioner of lncome-t@1 West Bengal. Mehr Chand Mahajan C. J.

S.C.R. SUPREME COURT REPORTS

unnecessary haste and show impatience, particularly when it was known to the department that the books of the assessee were in · the custody of the Sub-Divisional Officer, Narayanganj. We think that both the Income-tax Officer and the Tribunal in estimating the gross profit rate on sales did not act on any material but acted on pure guess and suspicion. It is thus fit case for the exercise of our power under article 136. In the result we allow this appeal, set aside the order of the ·Tribunal and remand the case to it with direc-tions that in arriving at its estimate of gross profits and sales it should give full opportunity to the assessee to place any relevant material on the point that it has before the Tribunal, whether it is found in the books of account or elsewhere and it should also disclose to the assessee the material on which the Tribunal is going to found its estimate ~nd then afford him full opportunity to meet the substance of·any private inquiries made by the Income-tax Officer if it is intended to make the estimate on the foot of those enquiries. It will also be open to the department to p1a·cc any evidence or mate-rial on the record to support the 11'.stimate made by the Income-tax Officer or by the Tribunal in its judgment. The Tribunal if it thinks fit may remit the case to the Income-tax Officer for making fresh assessment after taking such further ~vidence as is furnished by the assessee or by the department. The costs of these proceedings will abide the result.

5-89 S. C. Jndia/59 .

1954 · Dhakesu:ari Cotton Mills Hf. v. Commission<r of Income-tax, West Bengal. Mehr Chand MahajanC.J