GANESHILAL CHHAPPAN LAL Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) This is a case which has been stated under Section 66(3), Income-tax Act. The assessee is a firm at Aligarh named Ganeshi Lal Chhappan Lal. The firm does sarrafa business and its main activity consists in buying ornaments and selling the gold and silver which is obtained from them. The firm melts the ornaments and converts them into gold and silver bars and these it sells in the market, some locally, but the bulk at Bombay. The bars are all tested at the Mint in Bombay and the quantity of dross is there imprinted on each bar; and thereafter the bars are sold in the market at a discount which corresponds with the percentage of dross as certified by the Mint. The assessee's account books are maintained according to the mercantile accountancy system. They are regularly kept, and up to the year 1934-35 tax was assessed upon their basis; but in that year the profits in gold transactions, as revealed by the books of the firm, were only 21/2 per cent, and this was not accepted as correct by the income-tax authorities, who applied the proviso to Section 13 of the Act and assessed the income of the firm in respect to these transactions upon a 5 per cent, basis. For the year 1935-36 the assessment year with which we are now concerned, it was found that the profits from transactions in gold were only 0.2 per cent, on a turnover of Rs. 5,56,411, and the Income-tax Officer, for reasons which he has given and which we shall discuss hereafter, again applied a flat rate under the proviso to Section 13. He applied a rate of 3 per cent, in respect to the sales at Bombay and 5 per, cent, in respect of local sales. He accepted the books of account as regards silver transactions.

(2.) There was an appeal to the Assistant Commissioner of Income-tax and he agreed with the Income-tax Officer that the profits of gold transactions, as shown in the books of the firm, were "ridiculously low" and were not acceptable; but he reduced the rate of profit from 3 to 21/2 in respect to the sales which were effected at Bombay. The assessee then applied to the Commissioner of Income- tax for review under Section 33 of the Act, and "in the alternative he requested that officer to refer certain questions of law to this Court under Section 66(2). The Commissioner declined to exercise his powers of review under Section 33 and also declined to state a case under Section 66(2). Thereafter, the assessee applied to this Court under Section 66(3) and a Bench of this Court, of which one of us was a member, by its order dated 1 September 1939 directed the Commissioner of Income-tax to state a case for the decision of this Court. The question or rather the questions of law, as formulated by the assessee and as now referred to this Court, are as follows: Whether under the circumstances of this case the provisions of Section 13, Income-tax Act, at all come into play, and whether there was any legal evidence on the record to justify the order of the income-tax authorities in accepting the book pro-fits of one commodity and rejecting the same for transactions of the other commodity without giving notice.

(3.) The opinion of the Commissioner of Income-tax is that the two questions involved should be answered in affirmative. We shall first consider whether the proviso to Section 13 of the Act was in the circumstances applicable. Learned Counsel for the assessee contends that the income-tax officer erred in expressing the opinion that the profits of the firm were not deducible from its books; be says that if that officer had applied certain tests, the correctness of the profits as revealed in the books of account would have become manifest. We shall discuss at a later stage the tests which are suggested by the learned Counsel. Meanwhile, we propose to state the view which is taken by the Commissioner and to discuss the law on the subject. The Commissioner says: The real point arising in this case, therefore, is whether the method of accounting employed in respect of the transactions in gold is such that the income, profits and gains can properly be deduced therefrom. As to this point, I respectfully submit that the words of the section itself show that it is for the Income-tax Officer, and the Income-tax Officer alone, to decide as a question of fact whether the method of accounting reflects the true profits. This position hag been repeatedly maintained by the High Courts in India. The only question of law involved is whether there were materials upon which the Income-tax Officer could find as a fact that the method of accounting employed for the gold transactions did not reflect the true profits.