THE COMMISSIONER OF INCOMETAX, LAHORE vs Messrs COLONY WOOLLEN
This matter concerns a petition for leave to appeal against a judgment of the Lahore High Court regarding tax assessment for the year 1966-67. The core legal question was whether the Income-tax Officer's rejection of the respondent's accounts and the subsequent addition of Rs. 50,000 to the trading account violated the first proviso to Section 13 of the Income-tax Act 1922. The High Court, relying on precedent, held that the assessment was violative of the statutory proviso due to the lack of a proper basis for the addition. Upon review, the Supreme Court noted the petitioner's argument that the High Court's reliance on the Rajput Metal Works Gujranwala case was inconsistent with established legal principles previously declared by the Supreme Court and the Privy Council. Consequently, the Supreme Court granted leave to appeal to examine whether the assessment was arbitrary and whether the legal interpretation applied by the High Court regarding the rejection of accounts and the exercise of discretion by the Income-tax Officer was correct under the governing statute.
- Whether an Income-tax Officer's addition to a trading account based on low profit rates violates the first proviso to Section 13 of the Income-tax Act 1922?
- Is an assessment made after scrutiny of accounts and historical profit ratios considered arbitrary under the Income-tax Act 1922?
- Section 13, Income-tax Act 1922
- Section 66(1), Income-tax Act 1922
ORDER
1. ' DORAB PATEL, J.---The dispute in this petition for leave relates to the accounts submitted by the respondent for the assessm ent year 1966-67. The Income-tax Officer scrutinised the accounts submitted in the light of the purchases of raw material by the respondent, the ratio of profits shown by the respondent in earlier years, etc., and on what appears to be a careful examination of the material he reached the conclusion that the accounts submitted were not fit to be accepted, therefore, he added Rs,50,000 to the respondent's trading account by his order dated 30-6-1971.
2. The respondent challenged this order in a direct appeal before the Income-tax Appellate Tribunal but as the appeal was dismissed it filed an application under section 66(1) of the Income-tax Act in the Lahore High Court in which it raised two questions. The first question was whether the assessm ent made by the Income-tax Officer was "violative of the first proviso to section 13 of the Income-tax Act 1922 for want ofomputation of an income on any basis". And the second question was whethr there was any material before the Tribunal for rejecting the accounts submitted by the respondent.
3. ' On the basis of a judgment of their own High Court in Rajput Metal Works Gujranwala v.
4. Commissioner of Income-tax Rawalpindi (1976) 33 Tax., the learned Judges, who heard the respondent's reference held:-- "In view of the law so laid down, we conclude that the Income-tax Officer in adding and the Tribunal in maintaining the addition of a sum of Rs,50,000 "for low rate of profit, excessive wastage and low production" violated the first proviso to section 13 of the Income-tax Act and we answer the question accordingly. In view of such an answer the reasons already given, we would not, for the present, like to deal with the second question...."
5. ' Hence this petition for leave.
6. Mr. Ilyas Khan submitted that the assessment made by the Income-tax Officer was not arbitrary, because it had been made after a careful scrutiny of the accounts submitted together with the earlier and on law his submission was that accounts of the respondent the view taken in the Rajput Metal Works Gujranwala's case was inconsistent with the law declared by us in Miss Assi v. Income- tax Appellate Tribunal PLD 1979 SC 949 and the judgment of the Privy Council in Commissioner of Income-tax, United and Central Provinces v. Badridas Ramrai, Shop, Akola, Owner Laxminarayan Badridas Shrawagi AIR 1937 P C 133. As these submissions require examination, we grant leave. The appeal will be made ready on the present record with liberty to the parties to file additional documents, if any.