We have to ascertain whether there was any evidence or material before the Tribunal to estimate the profits. It is not disputed that the books of account of the assessee were not accepted. That being so, profit had to be estimated. Such estimate was made by the authorities on the basis of the performance of the predecessor-in-interest of the assessee, namely, the partnership firm. On such material the Income-tax Officer, the Appellate Assistant Commissioner, and, the Tribunal came to their respective conclusions. Apart from, the performance of the firm the Tribunal had before it the disclosed turnover of the assessee. It cannot be said that there was no material before the Tribunal to come to a conclusion.
The Supreme Court has laid down the law clearly in the case of in the case of Commissioner of Income-tax v. K.Y. Pilliah & Sons. Once the books, of account of an assessee are rejected then profit has to be estimated. If same material is available the Tribunal can proceed to estimate profits on such material. The conclusion of the Tribunal has not been challenged as being perverse and in any event cannot be held to be mere guess-work.
Calcutta High Court
Dabros Industrial Co. (P.) Ltd.
Commissioner Of Income-Tax
Date- 18 July, 1975
1977 108 ITR 424 Cal
Author: D K Sen
Bench: S Deb, D K Sen
JUDGMENT – Dipak Kumar Sen, J.
1. The facts found in this reference tinder Section 256(2) of the Income-tax Act, 19.61, are briefly stated as follows :
A business of manufacture of sprayers and dusters for plant protection was being carried on till 1st May, 1965, by a firm of seven partners. On the 1st May, 1965, Dabros Industrial Company (P.) Ltd., the assessee, was incorporated and took over the business from the firm. The seven partners of the firm became directors of the company.
2. In the assessment year in question, i.e., 1966-67, the previous year ending on the 31st December, 1965, the assessee on the basis of a total turnover of Rs. 3,25,756 disclosed a gross profit of Rs. 49,290 calculated at the rate of about 15%. The Income-tax Officer found that the assessee did not maintain any day to day stock book, manufacturing accounts, raw material consumption accounts or production accounts. In the absence of the aforesaid, he held that it was not possible to arrive at the correct profits on the figure disclosed by the assessee. Applying Section 145(1) of the Income-tax Act, 1961, he made an addition of Rs. 15,861 on estimate calculating gross profits at the rate of 20% of the total turnover. According to him this estimate was reasonable.
3. In appeal to the Appellate Assistant Commissioner the assessee contended that the estimated rate of 20% was excessive. The Appellate Assistant Commissioner confirmed that there were defects in the accounts and as such the books of the assessee could not be accepted. Considering all the facts, the Appellate Assistant Commissioner reduced the addition by a sum of Rs. 6,500 on the estimated rate of gross profits of about 18%. This estimate was made in the background of the gross profits earned by the partnership firm. For the assessment year 1962-63 the firm had disclosed gross profits at the rate of 18% on its total turnover.
4. The assessee went up in further appeal to the Tribunal. It was contended before the Tribunal that the partnership firm was maintaining accounts in a different manner and salaries of the supervisory staff, etc., were being debited by the firm to its profit and loss accounts instead of to its trading and manufacturing accounts as was being done by the assessee. The assessee further contended that its sale prices being fixed in advance, sometimes more than a year ahead, and the cost of manufacture being on the increase, it could not be assumed that a steady rate of profit would be maintained. The basis of the accounts of the assessee was disputed by the departmental representative. The Tribunal held that there was no material before it to come to a definite finding as to the manner in which accounts were being kept by the assessee. The Tribunal observed that as the sales were vouched, the possible leakage in the accounts could be in the manufacturing costs, where, in view of the turnover, there would not be much scope for such leakage. Considering all the facts and circumstances of the case, the Tribunal reduced the addition to Rs. 7,000. The question which has been referred to us from this order of the Tribunal is as follows:
“Whether there was any evidence or material before the Tribunal on which it could sustain the addition of Rs. 7,000?”
5. Mr. S. Bhattacharjee, learned counsel for the assessee, contended before us that there was no basis or material on which any addition could be made to the disclosed profits of the assessee in the instant case and as such the order of the Tribunal could not be sustained. In support of his contention he relied on several decisions.
6. He cited three judgments of Jaganmohan Reddy J. in the Andhra Pradesh High Court. The first judgment is in the case of Jonnalagadda Yedukondala Rao v. Commissioner of Income-tax  36 ITR 485 (AP). In this case the assessee ran a number of buses in two routes and maintained separate accounts in respect of the said two routes. The assessee’s books were not accepted and his gross income was determined by the Income-tax Officer and the Appellate Assistant Commissioner on appeal by adding lump sums to the amount disclosed. On further appeal, the Appellate Tribunal also rejected the accounts of the assessee and arrived at a gross income at a certain rate for the buses but did not give the basis on which the amount was fixed. The High Court held that the rate adopted by the Tribunal was capriciously fixed without any basis.
7. The next judgment of the same learned judge is in the case of Yaggina Veeraraghavulu and Mavuleti Somaraju & Co. v. Commissioner of Income-tax  62 ITR 528 (AP). In this case the assessee, an unregistered firm, was carrying on business of rice-milling. For the assessment year in question the assessee declared net profits on the basis of gross profits calculated at the rate of 4.5% on the turnover. It was found that this rate of gross profits was low compared to other rice millers. It was also found that the vouchers produced by the assessee in support of the purchase price paid for paddy were not accepted and were found to have been fabricated and no stock accounts were maintained separately for each variety of rice. The account books originally found in the business premises of the assessee by the income-tax inspector were not produced at the assessment.
8. On the aforesaid facts the Income-tax Officer estimated the assessee’s turnover at a much higher figure and also increased the rate of gross profits from 4’5% to 9%. In appeal the Appellate Assistant Commissioner upheld the estimate of turnover as also the rate of profits as found by the Income-tax Officer. Further appeal by the assessee to the Appellate Tribunal was dismissed. The High Court held that the assessee was entitled to know the basis of such estimate and was entitled to an opportunity to rebut the same. The High Court also found that there was no basis for arriving at a particular figure of turnover and consequently held that there was no basis or material for the assessment.
9. The last judgment of the learned judge cited was in the case of S. Sarabhaiah Setty & Sons v. Commissioner of Income-tax  64 ITR 175 (AP), where the propositions laid down in the earlier case were reiterated.
10. Lastly, Mr. Bhattacharjee cited a decision of this court in the case of Bajrangbali Engineering Co. Pvt. Ltd, v. Commissioner of Income-tax  66 ITR 82 (Cal). Here the assessee, a private limited company, carried on business as a dealer in scrap iron and other commodities. In the assessment year an overall turnover showing a gross profit at the rate of 6’3% was disclosed while in the immediately preceding year such rate of gross profit was 8.5%. Explanation of the assessee for decline in profits was not considered to be satisfactory by the Income-tax Officer who also found defects in the stock books and accounts. He, accordingly, rejected the figure of profits and made an addition of Rs. 2 lakhs raising the gross profit rate on the total turnover to a little over 9%.
11. On appeal, the Appellate Assistant Commissioner sustained an addition of Rs. 1,28,825.
12. In further appeal before the Tribunal the assessee obtained partial relief and only an addition of Rs. 65,000 to the profits shown was upheld.
13. On reference, the High Court held that the further addition had been made by mere guess-work on the assumption of certain leakages for which there was no basis. The High Court opined that there was no material before the Tribunal to support the addition.
14. Mr. Ajit Sengupta, learned counsel for the revenue, in reply cited three decisions in support of the order of the Tribunal. The first is a decision of the Supreme Court in the case of Commissioner of Income-tax v. K.Y. Pilliah & Sons . The assessee in that case had declared a, certain amount as income from business, found to be based on gross profits calculated at the rate of 3.8% of the turnover.
15. In the case of others carrying on similar business in the same locality such gross profits worked out at 6 to 7%. Relevant vouchers for purchases by the assessee were not produced and there was no evidence of actual payment of credit purchases, which remained unproved. It was further discovered that the assessee had been selling cloth in other names which were not entered in the books of account. The total sales made in other names were also ascertained. The Income-tax Officer on such basis estimated a turnover at a higher figure than that disclosed by the assessee and estimated the gross profits at the rate of 6.6% on such estimated turnover. The order of the taxing officer was sustained up to the Tribunal.
16. One of the questions referred to the High Court was–See :
“Whether the estimate of the income of the assessee confirmed by the Income-tax Appellate Tribunal rests upon irrelevant considerations and the estimate is not made in accordance with law?”
17. The Supreme Court held that as the true income, profits and gains could be ascertained from the books and as other transactions exceeding Rs. 1 lakh were admittedly kept out of the accounts the Income-tax Officer could lawfully estimate the turnover and it could not be said that the same was not reasonably made. On estimate of profits the Supreme Court observed as follows–See :
“Once the books of account of the assessees were rejected and the rate of gross profit earned by them was found unreliable, it was open to the Income-tax Officer to estimate the gross profit at a rate at which profit was earned in similar business by other merchants. We are unable to hold that the reasons recorded by the Tribunal in support of its order levying tax on profits computed on estimated turnover of Rs. 12 lakhs at the rate of 6.5% were ‘irrelevant’.”
18. Mr. Sengupta next cited another decision of the Supreme Court in the case of State of Kerala v. C. Velukutty for the observations contained in the judgment of Subba Rao J, which ran as follows I “What is the scope of Section 12(2)(b) of the Act? The expression ‘to the best of his judgment’ in the said clause is presumably borrowed from Section 23(4) of the Income-tax Act. The said expression in the Income-tax Act was the subject of judicial scrutiny. The Privy Council in Commissioner of Income-tax v. Laxminarain Badridas  5 ITR 170, 180 (PC) has considered those words. Therein it observed :
“He (the assessing authority) must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary,”
The Privy Council, while recognizing that an assessment made by an officer to the best of his judgment involved some guess-work, emphasized that he must exercise his judgment after taking into consideration the relevant material. The view expressed by the Privy Council in the context of the Income tax Act was followed when a similar question arose under the Sales Tax Act. A Division Bench of the Calcutta High Court in Jagadish Prosad Pannalal v. Member, Board of Revenue  2 STC 21 (Cal) confirmed the assessment made by the sales tax authorities, as in making the best judgment assessment the said authorities considered all the available materials and applied their mind and tried their best to come to a correct conclusion. So, too, a Division Bench of the Patna High Court in Doma Sahu Kishun Lal Sao v. State of Bihar  2 STC 37 (Pat) refused to interfere with the best judgment assessment of a Sales Tax Officer as he took every relevant material into consideration, namely, the situation of the shop, the rush of the customers and the stock in the shop and also the estimate made by the Assistant Commissioners in the previous quarters.”
19. Lastly, Mr. Sengupta cited a decision of the Supreme Court in the case of S.N. Namasivayam Chettiar v. Commissioner of Income-tax . In this case for the relevant assessment year the assessee disclosed a turnover and declared gross profit at the rate of 3.5% much lower than that in the previous years. The Tribunal found that the correct profits could not be deduced from the books of the assessee. Applying the proviso to Section 13 of the Indian Income-tax Act, 1922, and taking into consideration various facts profits were computed on estimate.
20. The Supreme Court held that there was no error in the order of the Tribunal. Reference was made by the Tribunal to profits made in other cases only to support the computation of profits on estimate. As no information was supplied to the Tribunal by anyone which was taken into consideration it was not necessary to give any opportunity to the assessee to explain.
21. The question before us is limited. We have to ascertain whether there was any evidence or material before the Tribunal to estimate the profits. It is not disputed that the books of account of the assessee were not accepted. That being so, profit had to be estimated. Such estimate was made by the authorities on the basis of the performance of the predecessor-in-interest of the assessee, namely, the partnership firm. On such material the Income-tax Officer, the Appellate Assistant Commissioner, and, the Tribunal came to their respective conclusions. Apart from, the performance of the firm the Tribunal had before it the disclosed turnover of the assessee. It cannot be said that there was no material before the Tribunal to come to a conclusion.
22. The Supreme Court has laid down the law clearly. Once the books, of account of an assessee are rejected then profit has to be estimated. If same material is available the Tribunal can proceed to estimate profits on such material. The conclusion of the Tribunal has not been challenged as being perverse and in any event cannot be held to be mere guess-work.
23. We answer the question referred to us in the affirmative and in favour of the revenue.
24. There will be no order as to costs.
25. I agree.