019-NLR-NLR-V-54-GAMINI-BUS-COMPANY-LTD-Appellant-and-COMMISSIONER-OF-INCOME-TAX-Respondent.pdf
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Qamini Bus Company Ltd. v. Commissioner of Income Tax
[In 'THTi Pkxvx Council]
Present: Viscount Simon, Lord Normand, Lord Oaksey,Lord Reid and Sir Lionel LeachGAMENT BUS COMPANY, LTD., Appellant, andCOMMISSIONER OP INCOME TAX, RespondentPnrvY Council Appeal No. 36 op 1951S. C. 82—Income Tax, Case Stated 10/216/BRA 208
Income tax—Right of Assessor to reject returns of income—Power to make his ownestimates—Assessment—Scope of discretion vested in income tax authorities—Official secrecy—Scope of rule—Income Tax Ordinance {Cap. 188), ss. 4 {1),64 (2), 86 (2).
Under section 64 (2) of the Income Tax Ordinance, where a person hasfurnished a return of income the Assessor may reject the return without givingreasons. Where the Assessor gives reasons for rejecting the return, the questionwhether the reasons are in fact adequate or inadequate is quite immaterialif the Assessor honestly came to the conclusion that he should not accept thereturn but should substitute estimates of his own.
When assessing the income of a ’bus company in an appeal preferred undersection 69 of the Income Tax Ordinance, the Commissioner of Income Taxtook into consideration, at any rate in part, certain information relating to theprofits made by seven other ’bus companies. This information was reliedon to establish that the profits of a ’bus company bore a fairly constant ratioto the company’s expenditure on petrol and oil. It was set out in a documentmarked R 14 by the Assessor who produced it. The names of the seven ’buscompanies were not given in the document and the information was extractedfrom files in the Income Tax Department.
Held, that the admission and use of R 14 did not constitute a breach ofofficial secrecy within the meaning of section 4 (1) of the Income Tax Ordinance.The document did not necessarily make a disclosure of “ the affairs of anyperson ” within the meaning of that section.
Held further, (i) that the information given in R 14 was not improperly putbefore the Commissioner, even though the assessee was not given an opportunityof examining the files from which the information relating to other ’bus com-panies was extracted, or of ascertaining which companies they were. Therewas no breach of the principles of fair play and natural justice in puttingforward the information.
i'ii) that it would be wholly improper to reject the accounts submitted bythe appellant company and to substitute a higher figure of assessment merelybecause, in the case of other taxpayers in the same line of business, the con-clusion had been reached that their accounts were not properly kept. Eachtaxpayer is entitled to have his assessment fixed, if his return is not accepted,at a figure which the taxing authorities honestly believe to be proper in hisindividual case. In the present case, however, the grounds on which thedecision was based did not appear to involve any misuse of the figures appearingin R 14.. Those grounds were that the income-tax authorities were entitledto reject the return made by the company and to substitute their own higherestimate of profits ; that before the Board of Review the burden lay upon theappellant to disprove the correctness of this estimate and to establish somelower figure ; that reliance on a ratio between net profit and the expenditure on5LTV
2J. N. B 20705-1,592 (10/52)
98 VTSCOUNT SIMON.—Gamini Btta Go. Ltd. v. Gommiaaioner of Income Tax
petrol and oil was legitimate ; and that It 14 showed that there weresolid grounds for accepting such a ratio in calculating the appellant’s properassessment.
•/.PPEAL from a judgment of the Supreme Court.
Frederick Grant, Q.C., with Dingle Foot and G. D. Kumar a kulas inghe,for the appellant.
J.Millard Tucker, Q.C., with Sir Reginald Hills, for the respondent.
Cur. adv. vult.
July 29, 1952.[Delivered by Viscount Simon]—
This is an Appeal from a judgment of the Supreme Court of Ceylon,dated the 18th July, 1950, on a Case Stated by the Board of Review undersection 74 of the Ceylon Income Tax Ordinance. By that judgmentthe Supreme Court (Dias S.P.J., and Swan J.) confirmed the decisionof the Board of Review dated 25th May, 1949, whereby the Board upheldfour assessments made on the appellant company by the Commissionerof Income Tax. As originally drawn up, the Board in the Case Statedindicated .its doubt whether any question of law really arose, but aninterim Order of the Supreme Court directed the following questionsto be embodied in the Case Stated, so that the Supreme Court couldadjudicate upon them :
(а)Was there evidence or material on which the Board could reject
the appellant company’s accounts, and .was the Board justifiedin rejecting them ?
(б)Was a document marked R 14 wrongly admitted in evidence at
the hearing of the Appeal by the Commissioner of Income Tax ?
(c) In making his Order did the Commissioner of Income Tax act onmaterial which was not properly in evidence at the hearing ofthe Appeal by him ?
The first of these questions is easily disposed of. The Assessor hadbefore him a return of income made by the appellant company for eachof the four years 1943-44, 1944-45, 1945—46 and 1946—47, and accountsfurnished by the appellant company were tendered in support of thesereturns. By section 64 (2) of the Ordinance, the Assessor might either(a) accept the returns and make assessments on that basis, or (b) if hedid not accept the returns, himself estimate the amounts of the assessableincome of the appellant company and assess accordingly. The Assessordid not accept the returns made by the appellant company and estimatedthe amount of assessable income of the appellant company in each ofthe four years at substantially larger sums. He was, of course, perfectlyentitled to do this according to the best of his judgment and it was notnecessary for him to give his reasons for rejecting the appellant’s returnsor for arriving at his own estimates. It appears, however, from thedocuments before their Lordships, that the company’s returns wererejected for two main reasons. The tendered accounts professed to showthat, in the. first six weeks of the company’s ’bus services, it made aprofit of about 2,270 rupees a week, which is equivalent to 118,000 rupeesper annum. Yet in the accounts tendered for subsequent periods, each
VTSCOTJNT SIMON".—Gamini Bus Co. Ltd,, v. Commissioner of Income Tax 99
extending over a year or a little less, the rate of profit only workedout at the rate of something like one-third or even only a quarter ofthis per week, although conditions in these later periods were consideredto be very favourable to such a company. The second main reasongiven for rejecting the appellant company’s accounts was that carbon-copies of the ticket-books were missing and without these it was consideredthat the Way Bills could not be adequately checked.
Whether these reasons were in fact adequate or inadequate is quiteimmaterial if the Assessor honestly came to the conclusion that he shouldnot accept the company’s returns, but should substitute estimates ofhis own. Indeed, when the company appealed to the Commissioner undersection 69, it was conceded that the case was one for estimated assessments,though it was urged that the gross receipts as shown in the accounts shouldbe treated as the starting point from which these assessments might bearrived at by proper deductions. The Commissioner was not preparedto reach revised figures by accepting from the company’s accounts thegross receipts as shown therein and Mr. Grant was bound to admit thathe was free to arrive at his own estimates of higher income independentlyof the accounts. The Ordinance, by section 69, confers on a personaggrieved by the Assessor’s estimate the right to carry the matter to theCommissioner and to call on him to “ review and revise ” such assessment.This process is described as an appeal and by sub-section (6) in disposingof the appeal the Commissioner may “ confirm, reduce, increase, orannul the assessment ”, From the determination of the Commissionerthere is provided, by sections 70 and 71 of the Ordinance, an appeal to theBoard of Review, and by section 73 (4) the onus of proving that theassessment as determined by the Commissioner is excessive rests on theappellant.
In the present case, the determination of the Commissioner was thatthe assessment made for the year 1943—44 should be confirmed, but thatthe subsequent assessments should be somewhat reduced, though therevised figures were still largely in excess of what the company had putforward. On appeal, the Board of Review confirmed the Commissioner’sdecision. The Commissioner’s determination is an elaborate documentsetting out his reasons and shows that the Assessor as well as the-appellantcompany’s advocate attended and put forward arguments. One of thedocuments which the Assessor produced was a statement marked R 14,the admission and use of which are impeached in the second and thirdquestions raised in the Case Stated. It is this document which raisesthe main point of difficulty.
The assessments arrived at by the Commissioner and confirmed bythe Board of Review appear to have been reached, at any rate in part,upon the view that the profits of a ’bus company in this area bear afairly constant ratio to the company’s expenditure on petrol and oil.Since the amount of the appellant’s expenditure on these supplies isrecorded, this would enable the approximate profit to be arrived at.The view that such a ratio exists in the case of such ’bus companiesand may be taken as a guide to proper assessments is a view whichthe Assessor and the Commissioner of Income Tax are entitled to hold
100 VISCOUNT SIMON.—Oamini Bus Go. Ltd. v. Gormnissioner of Income Tax
and to apply, according to their judgment. In It 14 the expenditureof seven other ’bus companies on petrol and oil was set out and thenet profit upon which these companies were assessed was also tabulatedso as to show an average ratio of profits to this expenditure in the ratioof 1’51 for 1943—44, of ‘86 for 1944-45, and of 174 for 1945-46. Thenames of the other ’bus companies were not given and the figures wereextracted from files in the Income Tax Department. In the course ofthe argument for the appellant, three objections were taken to theproduction and use of this document.
It was. contended that the production of R 14 was a breach ofsection 4 (1) of the Income Tax Ordinance, which provides as follows :—
“ Except in the performance of his duties under this Ordinance,every person who has been appointed under or who is or has beenemployed in carrying out or assisting any person to carry out theprovisions of this Ordinance, shall preserve and aid in preserving secrecywith regard to all matters relating to the affairs of any person whichmay come to his knowledge in the performance of his duties under thisOrdinance, and shall not communicate any such matter to any personother than the person to whom such matter relates or his authorisedrepresentative, nor suffer or permit any person to have access to anyrecords in the possession, custody or control of the Commissioner.”
On this, it is to be observed that section 4 is to be read with section86 (2), which provides severe penalties to be imposed by a magistrate forthe offence. The section lays down a very necessary rule of conduct to beobserved by the officials concerned, since it is of the highest importancethat the affairs of an individual and identifiable income-tax payer shouldnot be disclosed, in breach of section 4, to anyone outside. Section 4is not primarily a rule of evidence, though it would be very improperto disregard it when putting forward a document like R 14. But R 14does not necessarily make a disclosure of ” the affairs of any person ”within the meaning of the section, for it contains no name except thatof the appellant company, and the other entries are extracted anonymouslyfrom numbered official files. Their Lordships would strongly deprecatethe production or use of such a document if it did in effect discloseinformation about other identified or identifiable taxpayers, but it isobvious that the document was prepared and produced not for thispurpose but to help to show that the ratio above referred to betweennet profits as assessed and the cost of petrol and oil was a fairly constantratio in many cases, and that in using the suggested ratio as a test theAssessor, and the Commissioner after him, were not acting capriciouslyor at random. Mr. Grant admitted that the ratio might properly havebeen supported by a document containing total figures, so that underthis head the objection is to details which make up the totals and whichneed not have been included at all. Their Lordships do not considerthat section 4 was infringed and this renders it unnecessary to decidewhether, if it was infringed, this would in itself invalidate the assessment.
It is next said that, even if the first objection fails, it was unfairto make any use of R 14 since the appellants could not be given anopportunity of examining the files from which the figures of other ’bus
VISCOUNT SIMON.—Gamini Bus Go. Ltd. v. Commissioner oj Income Tax 101
companies were extracted, or of ascertaining which companies they were.This, indeed, is the ground on which R 14 is attacked in the Notice ofAppeal to the Board of Review against the decision of the Commissioner.The answer appears to be that the company could have no complaint ifthe taxing authorities had asserted and applied the alleged ratio withoutgiving these details, and that the appellants can hardly he treated assuffering an injury because more detailed figures were not withheld.Their liordships agree with the Supreme Court in thinking that thefigures given in R 14 as going to illustrate and confirm the ratio were not-improperly put before the Commissioner or the Board of Review, andthat there was no breach of the principles of fair play and naturaljustice in putting them forward. It is true that the figures of net profit-in R 14 are the figures at which the various ’bus companies were assessedto taxation, and in most cases are very different from the figures in theirown income tax returns. But this comment only goes to the weight to beattached to the resulting ratio and does not destroy the whole effect of thecontention that the ratio is supported by experience in other instances*
The third objection only emerged late in the argument before theJudicial Committee. R 14 also contains figures, in the case of theseother ’bus companies, which show that in the view of the income-taxauthorities nearly all of them understated the profit they had made.If there was reason to think that the effective argument based on R 14 was-that, as other ’bus companies held made false returns, the appellantcompany had done so also, their Lordships would have no hesitation indeclaring that such an argument is wholly inadmissible and that adocument put forward to support it is open to the gravest objection.The contention that this was the use made of R 14 receives, at firstsight, some support from the document drawn up by the Commissionerin which he attributes to the Assessor the argument that gross receipt®are “ generally understated ” in the case of ’bus companies. But thisappears to be intended only as a retort to the argument on behalf ofthe appellant urging that the gross receipts as shown in the company’saccounts should be accepted. The Commissioner uses R 14 only toconfirm the ratio put forward. The Supreme Court approaches the matterin the same way. Although there are columns in R 14 which mightlend themselves to be used to support an illegitimate argument, thegrounds on which the decision was based do not appear to involve anymisuse of these figures. Those grounds were that the income-taxauthorities were entitled to reject the return made by the company and to-substitute their own higher estimate of profits ; that before the Board ofReview the burden lay upon the appellant to disprove the correctness ofthis estimate and to establish sonie lower figure ; that reliance on a ratiobetween net profit and the expenditure on petrol and oil was legitimate ;and that R 14 showed that there were solid grounds-for accepting sucha ratio in calculating the appellant’s proper assessment.
Their Lordships cannot conclude this part of their judgment without-emphasising in the plainest terms that it would be wholly improper tojustify the rejection of the appellant’s accounts and the substitution ofa higher figure of assessment merely because, in the case of other tax-payers in the same line of business, the conclusion has been reached that-2*J. N. B 20705 (10/52)
H02
Abdul Sathar v. Bogtstra
their accounts were not accurately kept, and that their returns requiredto be rejected. Each taxpayer is entitled to have his assessment fixed,if his own return is not accepted, at a figure which the taxing authoritieshonestly believe to be proper in his individual case, and no argumentthat in this class of business the figure of return is habitually understatedcan be used to prove that this happened in his case also.
Objection was also taken by the appellant to a document marked It 12-which was produced by the Assessor before the Commissioner and is-referred to in the latter’s Determination. It 12 contains figures used inthe computation of profits of another (but unidentified) ’bus companyfor the year 1947—48, and is apparently intended to reinforce the argumentthat a figure of gross takings derived from Way Bills requires to bechecked by Ticket Books. Be that as it may, their Lordships do notconsider that It 12 or any other document criticised affords adequateground for the appellant’s objection.
Their Lordships are therefore in agreement with the Supreme Courtand will humbly advise Her Majesty that the appeal should be dismissed.
The appellant must bear the costs.
Appeal dismissed .