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PETITIONER: DHAKESWAR1 COTTON MILLS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX,WEST BENGAL

DATE OF JUDGMENT: 29/10/1954

BENCH: MAHAJAN, MEHAR CHAND (CJ) BENCH: MAHAJAN, MEHAR CHAND (CJ) DAS, SUDHI RANJAN HASAN, GHULAM BHAGWATI, NATWARLAL H. AIYYAR, T.L. VENKATARAMA

CITATION:  1955 AIR   65            1955 SCR  (1) 941  CITATOR INFO :  F          1955 SC 154  (1,2)  R          1955 SC 170  (20)  R          1957 SC  78  (8)  R          1957 SC 810  (4,6,8,9)  D          1959 SC 248  (3)  D          1959 SC 742  (5)  R          1959 SC1238  (27)  R          1959 SC1252  (14)  R          1959 SC1295  (14)  D          1960 SC 729  (4,7,9)  D          1961 SC1708  (9,11,15,17)  D          1962 SC1323  (2,6,7,8)  E          1963 SC 491  (2)  R          1963 SC 835  (4)  R          1968 SC1461  (10)  RF         1977 SC1627  (12)

ACT: Constitution  of  India, Art. 136-Appeal by  Special  Leave- Supreme Court’s power-Indian Income-tax Act (XI of 1922), s. 23(3)-Assessment when invalid.

HEADNOTE: It  is  not  possible  to  define  with  any  precision  the limitations of the powers conferred on the Supreme Court  by Art.  136  of the Constitution.  This is an  overriding  and exceptional power and should be exercised sparingly and with caution  and  only in special and  extraordinary  situation. Beyond this no set formula, or rule can stand in the way  of or fetter the exercise of the power conferred on the Supreme Court  under  Art.  136  of  the  Constitution.   Sufficient safeguard  and guarantee for the exercise of this power  lie in  the trust reposed by the Constitution in the wisdom  and good  sense of judges of the Supreme Court.  This  power  is not  hedged in by technical hurdles of any kind when  it  is called  in  aid against any arbitrary  adjudication  or  for advancing the cause of justice or for giving a fair deal  to a  litigant  so that in justice may not  be  perpetrated  or perpetuated.   Conclusiveness  or  finality  given  to   any

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decision by any domestic law cannot dater the Supreme  Court from  exercising the power conferred under Art. 136  of  the Constitution. The powers given to the Income-tax Officer under s. 23(3) of the  Indian  Income-tax  Act, 1922,  however  wide,  do  not entitle  him  to base the assessment on pure  guess  without reference to any evidence or material.  An assessment  under 9.  23(3) of the Act cannot be made only on  bare  suspcion. An assessment so made without disclosing to the assessee the information supplied by the departmental representative  and without giving any opportunity to the assessee to rebut  the information   so  supplied  and  declining  to   take   into consideration  all  materials which the assesses  wanted  to produce  in support of his case constitutes a  violation  of the  fundamental rules of justice and calls for  the  powers under Art. 136 of the Constitution. Seth  Gurmukh  Singh v. Commissioner of  Income-tax,  Punjab (1944 I.T.R. 393) approved.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 217 of 1953. Appeal  from the Judgment and Order dated the. 16th  day  of January, 1950, of the Income-tax Appellate 120 942 Tribunal, Calcutta in Income-tax Appeal No. 4658 of  1948-49 and E.P.T.A. No. 1137 of 1948-49. N.   C. Chatterjee and Veda Vyas, (S.  K. Kapoor and  Ganpat Rai, with them) for the appellant. C.   K. Daphtary, Solicitor-General for India (G.  N. Joshi, with him) for the respondent. 1954.  October 29.  The-Judgment of the Court was  delivered by MEHR  CHAND MAHAJAN C.J.-The appellant is a  public  limited joint stock company incorporated under the Indian  Companies Act,  1915,  with  its registered office  at  Calcutta.   It carries  on the business of manufacture and sale  of  cotton yarn  and  piece-goods.   On the 28th  of  July,  1944,  the Income-tax Officer issued a notice to it under section 22(2) of  the  Indian Income-tax Act calling upon it to  file  the return  of  its  income  for  the  assessment  year  1944-45 (account year being 1943-44).  Before the expiry of the  due date  for  filing  the  return  the  account  books  of  the appellant  company together with the documents  relevant  to the accounts, were taken into custody by the  Sub-Divisional Officer,  Narayanganj and it is alleged that these  remained in the custody of the court of the Sub-Divisional Magistrate till  January,  1950,  when they were  handed  back  to  the appellant.   In  this  situation the  assessee  pleaded  for extension  of time to furnish the return. This  request  was refused,  and a show cause notice was issued  under  section 28(3)  of  the Act calling upon the  appellant  company  why penalty  should  not be imposed upon it for its  failure  to file the return.  An officer of the company appeared  before the  Income-tax  Officer and explained the  cause  for  this default.   In  order to, ascertain whether  the  explanation furnished  by  the  assessee  was  genuine,  the  Income-tax Officer  made inquiries from the court concerned about  this matter.   He also made a request to the court to allow  him, access to the books of account.  The court, however, neither acceded  to  the  demand  that  books  of  account  be  made available  to the assesse nor did it permit  the  Income-tax Officer to have access to them.  The

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943 Income-tax Officer having thus satisfied himself about  ,the genuineness  of  the assessee’s  explanation,  condoned  the default  in  filing the return and dropped  the  proceedings taken against the company under section 28(3) of the Act. It  seems that no further action in the matter was taken  by the  department  till the year 1947.  During that  year  the company  requested the department toreador the  proceedings. The  proceedings having been revived the  appellant  company furnished  the return of its income for the assessment  year 1944-45 on the 16th March, 1948.  This return, however,  was not  a  complete document as without the assistance  of  the books  the  profits could not be computed according  to  the ,provisions of law.  On receipt of the return the Income-tax Officer  issued  a  notice under section 23(2)  of  the  Act calling upon the company to supply further information on  a number of points and to prepare certain statements indicated in the notice.  This requisition had to be complied with  by the  19th  March,  1948.  On that date  the  Chief  Accounts Officer  of  the  company  appeared  before  the  Income-tax Officer  and asked for further time till the middle  of  the following  week  for furnishing the  requisite  particulars. This  request  was,  however, refused  -and  assessment  was completed  on  the  20th March, 1948.   The  excess  profits assessment was also made final on the 23rd March, 1948.  The relevant part of the assessment order is in these terms:- "From  the  point of view of profits, 1943 was a  very  good year,  if not the best, for all cotton mills.   Expenses  on cotton and fuel shows that production was undoubtedly higher whereas it is found that the gross profit disclosed by  this company  is low.  I conclude that full amount of sales  have not  been accounted for.  It is expected that actually  the- rate of gross profit should have been higher this year.   In view  of the higher costs of establishment, I take  it  that the  rate of about 40%, i.e., near about the rate  disclosed in  1942 accounts, should have been maintained. I  add  back the Rs. 36 lakhs for unaccounted sales". It  may  be  mentioned that in the return  the  company  had disclosed a gross :profit of 28 per cent,. on 944 sales  amounting  to Rs. 1,78,96,122.  The total  amount  of sales  in  the  year  1942  was of  the  amount  of  Rs.  1, 15,69,582,  disclosing  a gross profit of 41  percent.   The establishment  expenses, however, during that year -were  in the  sum of Rs. 15,94,101, while during the accounting  year relevant  to the year under assessment these had gone up  to Rs.  34,74,735 on account of labour troubles.  A  number  of other causes were mentioned by the assessee for the low rate of  profit  during the relevant period; but  the  Income-tax Officer  took no notice of them.  On appeal this  order  was upheld   by  the  Appellate  Assistant  Commissioner.    The assessee  then  appealed  to  the  Tribunal  against   these decisions.   What happened before the Tribunal may  well  be stated  in terms of the Tribunal’s order itself.   ’this  is what is mentioned in the judgment of the Tribunal:- "At  the  end  of  the hearing of this  appeal  on  25th  of November, 1949, the Income-tax Appellate Tribunal  requested the   departmental   representative  to  produce   for   the examination  of the Income-tax Appellate Tribunal the  gross profit rates shown or assessed in the cases of other similar cotton  mills.  The departmental representative  wanted  3/4 days’  time to collect information on this point.   On  this the   appellant  also  wanted  to  be  allowed  to   produce information  regarding  the  gross  profit  rates  shown  or assessed  by  other similar cotton mills, and  he  was  also

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allowed  to produce information on the point.  On  or  about the  29th November the counsel for the  appellant  requested that  he  should be allowed time till Saturday  the  3rd  of December  to  file the above information and time  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 written arguments and a trunk full of books and 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 to the court the gross profit rates shown or assessed in the cases  of other similar cotton mills.  He was told  that  it was pot fair to the other side to take notice of any 945 additional evidence or record at that stage and his trunk of books and papers was returned to him.  During the discussion of  Mr.  Banerjee with the Accountant  Member  Mr.  Banerjee produced  a report’ showing that the gross profit  rates  of some mills in Bengal on the average amounted to 23 per cent. In  the  statement showing 23 per cent. gross  profit  rates there was another item called ’Pool profit’ which was bigger than  the  gross profits rate.  Mr. Banerjee  was  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 produced a  book showing the wastage expected.  In that book certain  quality of cotton had been mentioned and 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 seem to refer to a  particular quality of cotton very much inferior to the cotton generally used  by the appellant.  The department’s main case  on  the question  of wastage is based on the appellant’s  own  books according  to  which his wastage in the  year  under  review amounted  to three times the wastage in the  year  previous. In  the light of all this information it appears to us  that the Income-tax Officer was justified in making a substantial addition to the gross profit shown by the appellant. Coming to 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 in one case even 13 per cent. has been shown............ In the face of all the above facts it appears to us that the Income-tax Officer was justified in coming to the conclusion that all sales had not been brought into 946 the books.  We have, however, considered all facts  relevant to this case and are of the opinion that the addition to the sales  should  be  reduced from Rs. 36  lakhs  made  by  the Income-tax  Officer to Rs. 16 lakhs Which would  reduce  the gross profit rate to about 35 per cent. 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. Dissatisfied with the decision of the Tribunal, the assessee wanted  the Tribunal to state a case and refer to  the  High

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Court for its decision ten questions of law.  It seems  that Dr. Pal who represented the assessee before the Tribunal had only  argued  one question namely, whether the  estimate  of profit  made  by  the Income-tax Officer  was  excessive  or whether it was justified on the material on the record.  The other  points raised in the memorandum of  appeal  regarding the 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 including  those  abandoned before  the Tribunal.  The Tribunal came to  the  conclusion that  no  question  of  law arose  on  its  order,  and  it, therefore,  dismissed the application made by the  assessee. It appears that the assessee then applied to the High  Court under  section 66(2) of the Act for the issue of a  mandamus to the Tribunal directing it to refer to the High Court  the very  same questions of law which it had refused  to  refer. This  application  was summarily rejected.  The  High  Court also  refused  an application for leave to  appeal  to  this Court.    Having  exhausted  all  the  remedies  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. 947 Mr.  Chatterjee,  the  learned counsel  for  the  appellant, contended  inter alia that the assessment order  made  under section  23(3)  of  the  Income-tax Act  had  been  made  in violation of the principles of natural justice, inasmuch  as it  was  not based on any material whatsoever and  that  the evidence  tendered  by  the appellant  had  been  improperly rejected.   It  was  further said that  the  Tribunal  acted without jurisdiction in relying on the data supplied by  the Income-tax  department  behind  the back  of  the  appellant company,  and without giving it an opportunity to  rebut  or explain the same.  Reliance was placed on the decision of  a Full Bench of the Lahore High Court in Seth Gurmukh 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 to rely on evidence produced by the assessee as he considers to be false, yet if he  proposes  to  make  an estimate  in  disregard  of  that evidence, he 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 information so  proposed to be utilized to such an extent as to put  the assessee in possession of full particulars of the case he is expected  to meet and that he should further give him  ample opportunity  to  meet  it.  It was said  that  the  Tribunal failed  to  disclose to the assessee the material  that  the departmental  representative had given-to it  regarding  the rates of gross profit of cotton mills varying between 49 per cent. and 13 per cent., and that if that disclosure had been made,  the assessee 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  rates  had no relevancy in the enquiry  as  to  gross profits 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 (1)  [1944] 12 I.T.R. 393.

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948 gross profit.  In conclusion the learned counsel urged  that now that the books of account of the company were available, it  was only just and fair that the ’Income-tax Officer  and the  Tribunal  should  examine  these  book,%  in  order  to determine  the  correctness of the return furnished  by  the assessee. The   learned   Solicitor-General  who  appeared   for   the Commissioner  of  Income-tax,  West  Bengal,  combated   the contentions raised by ’Mr.  Chatterjee on a two-fold ground: (1)   In  the  first  instance,  without   questioning   the jurisdiction of this Court to grant special leave against an order  of an Income-tax Tribunal, he argued that such  leave should not be granted when remedies provided by the  Income- tax  Act itself were available for correcting errors of  the Tribunal,  and had been taken but without success.   It  was said  that the power conferred on this Court by article  136 of  the  Constitution  being  an  extraordinary  power,  its exercise  should be limited to cases of patent  and  glaring errors  of procedure, or where there has been a  failure  of justice  because  of the violation of the rules  of  natural justice  or  like causes but that this  discretionary  power should  not  be  exercised  for  the  purpose  of  reviewing findings  of fact when the law dealing with the subject  has declared  those findings as final and conclusive.  (2)  That the finding given by the Income-tax Officer and affirmed  by the  Appellate Assistant Commissioner and the  Tribunal  was based on material and it could not be said that these bodies had acted arbitrarily in this matter.  It was contended that the  Income-tax  Officer  has very wide powers  and  is  not fettered  by technical rules of evidence and pleadings,  and that  the only restriction on his judgment is that  he  must act honestly on the material however inadequate before  him, but not capriciously or arbitrarily.  It was suggested  that owing to the disparity of the rate of wastage the Income-tax Officer  was  entitled  to reach  the  conclusion  that  the assessee had not disclosed the full sales made by him during the accounting year, and that on that basis he was  entitled on  his own information to make an estimate of the  rate  of gross profit. 949 As  regards the first contention of the  learned  Solicitor- General, we are unable to accede to it.  It is not  possible to define with any precision the limitations 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 is not possible to fetter  the  exercise of this 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 and  guarantee that the power will only be used  to  advance the cause of justice, and that its exercise will be governed by well established principles which govern the exercise  of overriding  constitutional  powers.  It is,  however,  plain that when the Court reaches the conclusion that a person has been  dealt  with arbitrarily or that a  Court  or  tribunal within the territory of India has not given a fair deal to a litigant,  then  no technical hurdles of any kind  like  the finality  of finding of facts or otherwise can stand in  the way  of the exercise of this power because the whole  intent

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and  purpose of this article is that it is the duty of  this Court   to  see  that  injustice  is  not   perpetuated   or perpetrated  by  decisions of Courts and  tribunals  because certain  laws  have made the decisions of  these  Courts  or tribunals  final  and conclusive.  What we have  said  above sufficiently disposes of the first contention raised by  the learned Solicitor-General. As regards the second contention, we are in entire agreement with  the  learned Solicitor-General when he says  that  the Income-tax  Officer  is not fettered by 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 it  is  equally clear that in making the assessment under sub-section (3) of section  23  of  the  Act, the  Income-tax  Officer  is  not entitled to 950 make  a pure guess and make an assessment without  reference to  any  evidence  or any material at all.   There  must  be something more than bare suspicion to support the assessment under  section 23(3).  The rule of law on this subject  has, in our opinion, been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab (Supra). In  this  case  we  are of the  opinion  that  the  Tribunal violated  certain fundamental rules of justice  in  reaching its  conclusions.   Firstly,  it did  not  disclose  to  the assessee  what  information had been supplied to it  by  the departmental  representative.   Next, it did  not  give  any opportunity  to the company to rebut the material  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 and conjectures.  It  is somewhat   surprising  that  the  Tribunal  took  from   the representative of the department a statement of gross profit rates  of other cotton mills without showing that  statement to  the  assessee and without giving him an  opportunity  to show that statement had no relevancy whatsoever to the  case of the mill in question.  It is not known whether the  mills which  had disclosed these rates were situate in  Bengal  or elsewhere,  and whether these mills were similarly  situated and  circumstances.  Not only did the Tribunal not show  the information given by the representative of the department to the appellant, but it refused even to look at the trunk load of  books and papers which Mr. Banerjee produced before  the Accountant-Member  in his chamber.  No harm would have  been done  if after notice to the department the 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 the figure of Rs. 55 lakhs and it was  meet and proper when dealing with a matter of this magnitude  not to employ *civil Appeal NO- 218 Of 1953, not reported, 951 unnecessary haste and show impatience, particularly when  it was  known to the department that the books of the  assessee were   in  the  custody  of,  the  Sub-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 but acted on  pure  guess  and suspicion.   It is thus a fit case for the exercise  of  our power under article 136.

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In  the result we allow this appeal, set aside the order  of the Tribunal and remand the case to it with directions  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  and then afford him full opportunity to  meet  the substance  of any private inquiries made by  the  Income-tax Officer  if it is intended to make the estimate on the  foot of those enquiries.  It will also be open to the  department to  place any evidence or material on the record to  support the  estimate  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  evidence  as   is furnished by the assessee or by the department.  The  coats; of these proceedings will abide the result. Case remitted. 952