COMMISSIONER OF INCOME TAX Vs. THOMAS K T

JUDGEMENT

(1.) THIS is a reference sent up by the Income-tax Appellate Tribunal, Cochin Bench, at the instance of the revenue under Section 256(1) of the I.T. Act. The assessee is an individual and the assessment year is 1970-71. The assessee has income from purchase and sale of latex. The ITO found that the total sales during this year were of the value of Rs. 15.64 lakhs and gross profit thereon, 9.7%. THIS was less than the gross profit rate for the earlier year. He, therefore, made an examination of the accounts and found that there was heavy inflation of expenses under the latex collection account and transport account and that the amount shown in the account had no relation to the actuals. To support his conclusion he had referred to the instances of collection and transport charges being shown even during periods of rainy months when there was no rubber tapping. He had also found that the Claim for expenses was disproportionate to the dry rubber content of the latex collected. He was of the view that the expenses debited were not really incurred by the assessee, and that the plantation owners do not generally permit coolies of the purchasers of the latex to do the collection work. But, he observed on this last aspect, that he was not going into the merits of the question, whether this expenditure was actually incurred by the assessee or not, as the assessee contended that the collection was done by his coolies, and as it was not necessary to enter into this controversy, he was definitely of the view that the expenditure shown was hjghly inflated. The officer scrutinised the transport expenses for carrying latex from various estates to the assessee's factory premises. He was of the view that the expenses were disproportionate to the amount of latex transported and were, besides, artificial and arbitrary. During certain months, where the number of barrels transported did not vary, the expenditure incurred was found varying. In view of these circumstances and grounds disclosed, the ITO rejected the books of accounts and estimated a gross profit rate of 17.5% and made an addition of Rs. 1,22,000. The officer also noted that there were a number of credits in the capital account of the assessee, and the explanations offered by him were unsatisfactory.

(2.) THE ITO also initiated penalty proceedings and referred the matter to the IAC. THE assessee, in his turn, had appealed to the AAC. While the penalty proceedings were pending before the IAC, the appeal was taken up and the AAC disposed of the same on 31st March, 1975. THE AAC referred in his order to certain materials and circumstances which would strengthen the additions made by the ITO. THEse were brought to his notice in the course of hearing of the appeal, and were the result of enquiries made by him regarding the ITO's contention that the expenses debited were bogus or fictitious or exaggerated. It was stated by the AAC that he had contacted several estate owners from whom latex had been purchased and these owners had stated that the expenditure was borne by them for collecting latex and for putting the same into the tank for being heated with ammonia gas. THE gas alone was provided by the assessee. Till the barrels reach the assessee's lorry, all the expenses were met by the estate owners. THE correspondence and letters on this subject from the estate owners were shown to the assessee and were referred to by the AAC in his order. THE AAC concurred in the conclusion that the expenses were inflated and upheld the additions to the trading account. He also upheld the additions made by way of cash credits.

(3.) IT was against the above background of the orders passed by the Appellate Tribunal that it referred the following questions of law for our determination.