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

, "At the end of the hearing of this appeal on 25th of November, 1949, the Income-tax Appellate Tribunal requested representative to produce for the examination of the Income-tax Appellate Tri shown or assessed in similar cotton mills. The depart the cases of other to collect mental representative wanted 3/4 day's time information on this point. On this the appellant wanted to be allowed to produce regard ing the gross profit rates shown or. assessed by other similar cotton mills, and he was also allowed to produce the 29th information on November the counsel for the appellant requested the 3rd of he should be allowed time till Saturday December to file the above information for· this purpose was allowed to him. On the 3rd December Mr. Banerjee the appellant's counsel saw the Account ant Member in his chamber and wanted to produce and · a trunk full of books and written arguments papers in support of his case. Mr. Banerjee was told that the arguments in the case had finished on the 25th and he was allowed time only to supply the court the gross profit rates sho~n or assessed in the cases of told that it was other similar cotton mills. He was take notice of any not fair to the other side point. On or about and time ' ,,+ : ... .. • .• • 1954 · Dhakeswari Cotton Mills Ltif. v. ·Commissioner of Income-tax, West Bengal. Mehr Chand Mahqjan C. JA S.C.R. SUPREME COURT REPORTS 945 the gross . was profit rates :evidence or ·record at additional his trunk of books · and papers . returned him. During the discussion of Mr. Banerjee with report Accountant· M.ember Mr. Banerjee produced ·a of some mills showing that in Bengal on the average amounted to 23 per cent. In the statement showing 23 per cent. gross profit there was another item called 'Pool profit' which was rate. Mr. Banerjee was bigger than the gross profits 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_ a 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 In that duced a book showing the wastage expected. book certain quality of cotton had been mentioned it was said that wastage of 34 per cent. was normal. In the case of the assessee he has shown a 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 to refer to a 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 this information In the light of all the year previous. it appears to us that the Incomeci:ax Officer was justi fied in making a substantial addition to the gross profit shown by the appellant. - .... Coming the question of what the amount of addition should be the departmental representative has. on our request filed a number of cases of other cotton mills which show a gross profit rates varying between 49 per cent. and 22 per cent. and 13 per cent. has been shown ....... . in one 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 1954 Dhaktswari Cotton Mills Ltd. v. Commissioner of Income-tax, .West Bengal. Mehr Charul Mahajan C. J. 946 SUPREME COURT REPORTS [1955] considered all the books. We have, however, relevant to this case and are of the opinion that the addition to from Rs. 36 Income-tax Officer to Rs. 16 lakhs lakhs made by the which would reduce to· about 35 per cent." should be reduced ·gross profit the sales The sum and substance of these decisions is that the Income-tax Officer estimated ·the gross profit on sales at 40 per cent. by a 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. regarding Dissatisfied with the decision of the Tribunal, the assessee wanted the Tribunal to state a case and refer to the High Court for its decision ten questions· of law. It seems that Dr. Pal who represented assessee the Tribunal had only argued one question before namely, whether the estimate of profit made Income-tax Officer · was excessive or whether 1t was justified on the material on the record. The other points appeal raised in the memorandum of 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 '.fribunal. The Tribu ing those abandoned before the nal came to the conclusion that ho question of. law arose on its order, and it, applica the assessee tion made by the assessee.. then applied to the High Court under section 66(2) of issue of a mandamus to the Tribunal the Act for the directing It to refer to the High Court the very same to refer. This questions of law which it had refused application was summarily rejected. The High Court also refused an application for leave to' appeal ·to this Court. Having exhausted all die 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. therefore, dismissed It appears that remedies - - .. 1954 Dhakeswari Cotton Mills Ltd. v. Commissioner of Income·tax, West Bengal. Mehr Chand Mahajan C. J. S.C.R. SUPREME COURT REPORTS 947 It was supplied further said that evidence, he Income-tax Mr. Chatterjee, the learned counsel for the appellant, contended inter alia that the assessment order made Income-tax Act had been under section 23(3) of the of natural justice, made in violation of the principles inasmuch as it was not based on any material whatso ever and that the evidence tendered by the appellant had been improperly rejected. the Trib11n:i \ acted without jurisdiction relying on the data 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 a Full in Seth Gurmukh Bench of the Lahore High Court 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 rely on evidence produced by the assessee as he considers to be false, yet if he proposes to make an estimate in disregard of 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 to put the proposed to be utilized assessee in possession of full particulars of the case he further give is expected to meet and that he him ample opportunity to meet it. It was said the Tribunal failed to disclose assessee material representative had given to it regarding the rates of gross profit of cotton mills varying between 49 per cent. and 13 per cent., the assessee and that if that disclosure had been made, 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 relevancy in the enquiry as to gross profits rates had no 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 to such an extent as the departmental information to the should (I) [1944] 12 I. T. R. 393· - >·-t f f- 1954 Dhakeswari Cotton Milll Ltd. v. Commissioner of Income-lax. JVest Ben,14al. Mehr Chand Mahajan G.J. 948 SUPREME COURT REPORTS [1955] the learned gross profit. In conclusion that now that the books of account of the company were available, it was only just and fair should examine Income-tax Officer and the Tribunal these books in order to determine the correctness of the return furnished by the assessee. counsel special The learned Solicitor-General who appeared for the Income-tax, West Bengal, combated Commissioner of the contentions raised by Mr. Chatterjee on a two-fold instance, without questioning ground : ( 1) in the first the jurisdiction of this Court to grant against an order of an Income-tax Tribunal, he argued that such leave should not be granted when remedies provided by Income-tax Act itself were available for correcting errors of the Tribunal, and had been It was said that the power taken but without success. conferred on this Court by article 136 of the Consti tution being an extraordinary power, its exercise should be limited to cases of patent and glaring errors of pro justice cedure, or where there has been a failure because of the violation of the rules of natural justice or like causes but that this discretionary power should reviewing findings not be exercised for the purpose of of fact when the law dealing with the subject has declared those findings as final and conclusive. (2) That Income-tax Officer and affirmed the finding given by the by the Appellate Assistant Commissioner Tribunal was based on material and it could not be said this matter. that these bodies had acted arbitrarily in Income-tax Officer has very It was contended that the rules of wide powers and is not fettered by technical evidence and pleadings, and that the only restnct10n is that he must act honestly on the on his judgment him, but not material however inadequate before rnpriciously owing to the disparity Income-tax Officer was disclosed assessee conclusion the full sales made by him during the accounting year, and that on that basis he was entitled on his own the rate of gross information to make an estimate of profit'. suggested of wastage arbitrarily. the rate entitled It was k ' • • ... ... • ' 1954 Dhakeswari Cotton Mills Ltd. v. Commissioner of lncome-t@1 West Bengal. Mehr Chand Mahajan C. J. S.C.R: SUPREME COURT REPORTS 949 As regards the exercise is not possible first contention of to define with any precision learned Solicitor-General, we are unable to accede to it. It is the limitations not possible 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 to fetter 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 a sufficient safeguard the power will only be used to advance cause of justice, and that its exercise will be governed by well established principles which the exercise of overriding constitutional powers. It is, however, plain that when the Court reaches the conclusion that a per son has been dealt with arbitrarily or that a Court or India has not given a tribunal within the territory of fair deal to a technical hurdles of then no 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 that it is the duty of this Court to see that injustice is of Courts not perpetuated or perpetrated by decisions certain ·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. tribunals because laws have made and guarantee litigant, govern As regards the second contention, we are in entire agreement with the learned Solicitor-General when he Income-tax Officer is not fettered by says that the technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because that in making the assessment under sub-section (3) of section 23 of the Act, the Income-tax Officer is not entitled to it is equally . -).. • - - .. .. 950 SUPREME COURT REPORTS [1955] 1954 Dhakeswari Cotton Mills Ltd. v. CommiJJioner of income·tax, West Bengal. Mehr Chand Mahajan C. J. an assessment without make a pure gues·s and make . reference to any evidepce or any material at all. There must be something more than bare suspicion to _sup port the ~ssessmeni:- unde_r section _23(3). The rule· of law on this subiect has, m our opm1on, been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab (supra). from the representative of It is somewhat surprising that In this case we are of the opinion that the Tribunal rules of justice in reach violated certain fundamental to the ing its conclusions. Fi.rstly, it did not disclose to it by assessee what information had been supplied it did not give the departmental representative. Next, rebut the material any opportunity to the company to furnished to it by him, and lastly, it declined to take all the material that the assessee wanted to produce in support of its case. The result is that the assessee had not had a fair hearing. The estimate of the gross rate of profit on sales, both by the Income-tax Officer and the Tribunal seems to be based on surmises, suspicions tl1e and conjectures. the depart Tribunal took cotton ment a statement of gross profit rates of other the assessee mills without showing that statement show that and without giving him an opportunity to that statement had no relevancy whatsoever to the case of die mill in question. mills which had disclosed these rates were situate in Bengal or elsewhere, and whether diese mills were and circumstanced. Not only did similarly the information given by the the Tribunal not show representative of the department appellant, but it refused even to look at the trunk load of books and papers which Mr. Banerjee Accow1tant-Member in his chamber. No harm would have been done if after notice to the department trunk had been opened and some time devoted .to see what it contained. The assessment in this case and in the connected appeal,* we are told, was above figure of Rs. 55 lakhs and it was meet and proper when dealing widi a matter of this magnitude not to employ It is not known whether produced situated to the before *Civil Appeal No. 21Rof 1953, not reported. *; i - • • ·• ' . S.C.R. SUPREME COURT REPORTS 951 impatience, particularly unnecessary haste and show the department that the books when it was known to the Sub of the assessee were in · the custody of 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 It is thus a fit but acted on pure guess and suspicion. case for the exercise of our power under article 136. 1 954 · Dhakesu:ari Cotton Mills Hf. v. Commission<r of Income-tax, West Bengal. Mehr Chand MahajanC.J - 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 inquiries made by to meet the substance of·any private 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 a fresh assessment after taking such further ~vidence as assessee or by the department. The costs of these proceedings will abide the result. Income-tax Officer if it is intended is furnished 5-89 S. C. Jndia/59 . •