MYSORE FERTILISER CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference directed to be made on the application of the assessee under section 66(2) of the Indian Income-tax Act, for the opinion of this court on the question which has been formulated as follows :

(2.) THE assessee is a firm carrying on business in the manufacture and sale of manure mixtures and also purchase and sale of fertilisers. For the assessment year 1953-54 (accounting year ending with March 31, 1953), the total turnover of the business was Rs. 38,01,430, out of which straight fertilisers sales were Rs. 12,26,580 and the sales of mixed fertilisers were Rs. 25,74,850. THE net turnover was Rs. 35,99,621 and the gross profit was 13.6%. During the course of inspection of the account books, the Income-tax Officer found various defects in the stock register, etc., and he considered that 13.6%, the gross profit arrived at by the assessee, was low when compared with not only the sales of another merchant doing similar business but also the assessees own results for the previous assessment year 1952-53, which came to 18.3%. THErefore, he was of the opinion that the account books maintained by the assessee did not show the true income of the business. THE Income-tax Officer observed :

(3.) THESE observations go to show that the Tribunal was not sure whether the percentage adopted by the Income-tax Officer was correct or incorrect. The Income-tax Officer takes the comparable case and arrives at a figure of gross profit at 17.7% on the turnover of straight fertilisers and mixtures. From this he estimates the percentage of profits for mixtures alone at 19.3%. Then he takes the case of the assessee. Though the assessee assets that he made a gross profit only at 14.9% for the previous year, he estimated the percentage of profit for the mixtures at 16.7%. Again he arrives at the gross profit for the whole turnover of the business of both straight fertilisers and mixtures at 18.3%. Thus the Income-tax Officer on the basis of this percentage of profit, seeks to add Rs. 50,000 as addition to the income returned by the assessee. This is not a case where the Income-tax Officer adopts a flat rate percentage on the estimated turnover of the business. But this is a case of an estimate on an estimate. He takes a comparable case and estimates the gross profit and then the gross profit arrived at in the comparative case is taken as the basis for fixing the percentage of gross profit in the assessees case. It is true that the true percentage to be adopted would depend upon the Income-tax Officers experience gained by similar assessments during the course of the assessment year and in the previous years and the percentage of profits made by the traders in that particular line of business. But he cannot increase the rate of the percentage of the gross profit of the compared case by an estimate and on that estimate he cannot arrive at an estimated gross profit in the case of the assessee. We feel that the Income-tax Officer had adopted a wrong method, and, under the provisions of section 13, it is always open to the court on a reference to consider whether the method adopted by the Income-tax Officer was a wrong method, wrong in the sense that the method is not one which is likely to result in the true profits and gains being ascertained. As pointed out by the House of Lords in Sun Insurance Office v. Clark, where it becomes necessary to recourse to some form of estimate by the income-tax department that method should be adopted which approximates most near to the truth, and Earl Loreburn L. C. in his judgment at page 454 emphasised the fact that a rule of thumb might be very desirable, but could not be substituted for the only rule of law that he knew of, namely, that the true gains were to be ascertained as nearly as it could be done. The law says that the Income-tax Officer shall make the assessment to the best of his judgment; it means that he must make it according to the rules of reason and justice, not according to private opinion, according to law and not humour and that the assessment is to be not arbitrary, vague and fanciful but legal and regular (see Chettiar P. K. N. P. R. Firm v. Commissioner of Income-tax. Similarly, it has been held in Commissioner of Income-tax v. Sen that where two methods are available to the Income-tax Officer for the purpose of assessment the one which is more just to the assessee and which involves a much less margin of chance of uncertainty should be taken as the basis. Further the Income-tax Officer having found that there was difference of Rs. 68,899 rounded it to Rs. 50,000, saying that he could not have made more than that amount as profit. This is clearly speculative. It has been held in K. S. Rashid and Sons, In re that no amount could be added merely to have a nice round figure.