Commissioner of Income-Tax, Dacca Zone, Dacca

Vs.

M/S. Ala Hossain Khan Ltd.

Supreme Court

Appellate Division

(Civil)

Present:

Syed A. B. Mahmud Husain, C. J.

Ahsanuddin Choudhury, J.

Kemaluddin Hossain, J.

D.C. Bhattacharya, J.

Commissioner of Income-Tax, Dacca Zone, Dacca……Appellant.

Vs.

M/S. Ala Hossain Khan Ltd……. Respondent.

Judgment,

November 19, 1975.

Cases Referred to:

Bombay Vs. Sarangpur Cotton Manufacturing Co. Ltd. in L.R. 65 I.A. 1 = A.I.R. 1938 P.C. 1 same case 42 C.W.N. 194; Commi­ssioner of Income-Tax, Madras Vs. A. Krishna-swami Mudaliar and others A.I.R. 1964 S.C. 1843; the Pioneers Sports Limited, Sialkot Vs. Commi­ssioner of Income-Tax, Punjab and another, in A.I.R. 1934 Lahore 876 = 1934 (II) I.T.R. 305, Bombay Cycle Stores Co. Ltd., Vs. Commissioner of Income-Tax Madhya Pradesh, 1958 (33) I.T.R. 13 and 5. Beerjah Reddiar Vs. Commissioner of Income-tax, Travancor Cochin, A.I.R. 1959 Kerala 220 same case 1960(38) 152 = 160(2) Taxation 130; Pandit Brothers Vs. Commissioner of Income-Tax reported in A.I.R. 1955 Pun­jab 42 same case 1954 (26) I.T.R. 159; Ghanshyamdas Farmanand Vs. Commissioner of Income-tax (1952-21 I.T.R. 79 at page 81).

Lawyers Involved:

A.W. Chowdhury, Senior Advocate, instructed by A. M. Khan Chowdhury, Advocate-on-Record -For the Appellant.

Md. Hasan, Advocate, instructed by S.M. Huq Advocate-on-Record—For the Respondent.

Civil Appeal No.  67-D of 1970.

(From the judgment and Order dated 1-5-1968 passed by the Dacca High Court in Income-Tax Reference Case No. 14 of 1966)

Judgment:

D. C.  Bhattacharya, J.—This appeal by special leave is against a judgment of a Division bench of the Dacca High Court on a reference order section 66(1) of the Income-Tax Act holding that the Income-Tax Appellate Tribunal was not justified, in the facts and circumstances of the case, in upholding the rejection of the accounts of the assessee and the enhancement of its profits as disclosed in the said accounts by taking recourse to the proviso to section 13 of the Income-Tax Act.

2. The assessee is a Private Limited Company which derives incomes from dealing in goods like paper board and glass and also from running photo offset and printing press including printing on containers, label printing, calendar printing on papers and also printing on tiny. The relevant assessment years were -1956-57, 1957-58 and 1958-59 and the rates of gross profits were shown at 34%, 33.6% and 35% respectively for the said years.

The Income-Tax Officer on a consideration of the return filed by the assessee for the year 1956-57 made the following observation in respect of his finding that the account, sub­mitted by the assessee, could not be accepted:

“In arriving at the G.P. of Rs. 44,511/- the assessee deducted Rs. 15,-129/- as depreciation. If this is added to G.P. shown, correct G.P. will come to Rs. 59, 640/-. This is about 34% G.P. shown is too low in assessee’s line of business. The assessee fails to furnish quantitative reconciliation of raw mater­ials purchased and consumed in manu­facturing different types of containers, etc. and finished products manufactured and sold. Thus the accounts remain unverifiable. Hence the position shown cannot be accepted.”

3. On a scrutiny of the loan account dis­closed by the assessee in respect of the said asses-ment   year, the Income-tax Officer found that a fresh loan of Rs. 30000/- was shown to have been taken from Mst. Sugra Begum, the mother of Ata Hossain Khan, the Managing Director of the Company. The Income-tax Officer was not satisfied as to the genuineness of this loan and held that the said sum of Rs. 30000/- was really the income of the assessee company kept outside (he books of account.

4. The Income-tax Officer recorded similar findings as to non-acceptability of the assessee company’s accounts for the assessment years 1957-58 and 1958-59. The loan account for the said years also showed a loan of Rs. 70,000/: and that of Rs. 53.000/- respectively, alleged to have been taken from the said Mst. Sugra Begum. The Income-tax Officer disbelieved the said loans as well and added them towards the income of the company for the said years. The Income-tax Officer thus assessed the gross profits of the assessee company at 436/- 447/- and 447/- for the assessment years 1956-57, 1957-58 and 1958-59 respectively, after adding the amounts of the alleged loans as the suppressed income of the assessee com­pany for the respective years.

5. On an appeal by the assessee company the Appellate Assistant Commissioner of Income-tax upheld the rejection of the asse­ssee’s accounts and the addition of the loan figures to the income of the assessee for the relevant years and gave the following reasons in support of such an action of the Department.

“(i) There is no stock book showing day to day consumption of raw materials for manufacturing goods.

(ii) There is no quantitative reconcilia­tion of raw materials purchased and con­sumed in manufacturing different types of containers etc. There is also no quanti­tative reconciliation of finished products manufactured and sold.

(iii) The accounts on the whole were unverifiable.

(iv) There are unexplained and un­proved loans of Rs. 30,000/, Rs. 70,000/-and Rs. 53,000/- during assessment years 1956-57, 1957-58 and 1958-59 respectively.”

The Appellate Assistant Commissioner of Income-lax proceeded to record his finding in the following manner:

“The defects found by the Income-tax Officer exist in the books of account. Con­sidering the nature of the defects, I have no hesitation in holding that the case comes within the purview of proviso to section 13.”

6. On the question of assessment of the income also, the view of the Income-tax Officer was affirmed in the following words.

“The percentage of profit in this specia­lised industrial business must be high. Most of the manufacturing materials have been imported from abroad. There is also absence of competition when finished goods come out in the market for sale as there is no second industry of this nature in East Pakistan. I therefore support the I.T.O’s additions in ail the years and reject the appe­llant’s contentions…”

7. On a further appeal to the Income-tax Appellate Tribunal, the Tribunal held the rejection of the accounts of the assessee and the computation of its income under the provi­so to section 13 of the Income-tax Act but did not accept the propriety of the action of the Income-tax Officer is adding the alleged loan amounts as suppressed income of the assessee company.

8. On an analysis of the various figures as disclosed in the account submitted by the assessee company the Tribunal came to the view that the said figures were not reconcilable, and held that inasmuch as the assessee company, which had no rival, enjoyed a sort of monopoly and earned a profit rate of 40% in 1955-56 assessment year, this rate, which was not an unreasonable one, should be applied on the disclosed sales for the 3 years under considera­tion. On this view of the matter, the compu­tation of income as done by the Income-tax Officer was modified by directing that the profit rate of 40% should be accepted in respect of the said years.

9. A certain question of law said to have arisen from the said order was, thereafter re­ferred by the Tribunal to the Dacca High Court under section 66(1) of the Income-tax Act but the High Court having found the state­ment of the case as drawn up by the Tribunal unsatisfactory, the case was sent back to the Tribunal for further necessary facts and ma­terials, and the question was framed afresh by the Tribunal in the   following manner:

“Whether in the facts and circumstances of the case the Tribunal was justified in up­holding the rejection of accounts and taking recourse to enhancement of profit disclosed by the assessee.”

10. In considering the said  question, as referred under section 66(1) of the Income-tax Act, the Dacca High Court having taken the view that the Tribunal acted  under the proviso to section 13 of the Income-tax Act merely on the ground of lowness of profit and absence of a stock register held, relying upon certain decisions, that mere lowness of profit and ab­sence of a stock register could not be regarded as sufficient for justifying an action under the proviso to section 13 of the Income-tax Act and that there was no sound basis whatsoever for fixing 40% as the rate of profit for the 3 years in question. The question referred was thus answered in the negative by the High Court.

11. Special Lease was granted by the Supreme Court of Pakistan to consider whether the High Court correctly interpreted the pro­vision of section 13 of the Income-tax Act.

12. Mr. A. W. Chowdhury, learned Coun­sel  appearing for the appellant, has submitted that the learned Judges of the High  Court erred in failing to interpret correctly the pro­vision of section 13 of the Income-tax Act an appreciate the facts of the case in their correct perspective and that they should not have dis­approved of the action of the Revenue Authority and  the Tribunal in rejecting the  assessee’s account and enhancing its income under the first proviso to section 13 of the Income-tax Act, on the basis of certain judicial authorities which had no application to the facts of the instant case. Learned Counsel has contended that the Revenue Authorities and the Tribunal gave sufficient and cogent reasons for rejecting the accounts of the assesses and computing its profits under the said   proviso. According to the learned Counsel, the assessee having had a sort of monopoly in its business, the computation of the assessee’s profits for the years under consideration at 40% which was the rate of profits earned by the assessee in the preceding year, cannot be said to have lacked in sound basis.

13. Mr. Md. Hasan, learned Counsel for the assessee respondent has, on the other hand, contended that having regard to the provi­sion of section 13 of the Income Tax Act the Tribunal acted arbitrarily in upholding the rejection of the accounts of the assessee which have not been found to have been irregularly kept and in computing its profits for the assess­ment years in question on the basis of the rate of a preceding year. Learned   Counsel has argued that the basis of the action of the Reve­nue Authorities and the Tribunal merely on the ground of low profits charged by the assessee for the relevant and the absence of a stock re­gister was wholly.

14. In order to appreciate the respective contentions of the parties we shall have to examine the relevant provision of section 13 of the Income-Tax Act, under which the Reve­nue Authorities purported to act and for that purpose the said provision may be usefully quoted as follows:

“Income profits and gains shall be com­puted, for the purposes of sections 10 and 12, in accordance with the method of ac­counting regularly employed by the assessee:

Provided that if no method of accounting has been regularly employed or if the me­thod employed is such that in the opinion of the income-tax Officer the incomes profits and gains cannot properly be de­duced therefrom, then the computation shall be made upon such basis and in such manner, as the Income-Tax Officer may determine……….”

15.  We thus see that under the substantive provision of the said section the income, profits and gains of an assessee shall have to be com­puted for the purpose of assessment of income tax in accordance with the method of accoun­ting regularly employed by the assessee. This general provision is subject to a proviso which lays down that if no method of accounting has been regularly employed or if the method of accounting is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot be properly deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-Tax Officer may determine. It appears, no doubt, from the substantive provision of the section that in a case where there is a regular method of accounting employed by the   assessee,   the computation of the taxable income shall have to be made on the basis of the said method of accounting regularly employed by the assessee. But when the said provision is read along with the first proviso, it becomes clear that in such a case it is the duty of the Income-tax Officer to find whether for the purpose of assessment of tax income, profits and gains of the   assessee can be properly deduced from such accounts.

16. In construing the provision of section 13 of the Act, the Judicial Committee of the Privy Council expressed the view in the case of Commissioner of Income tax, Bombay Vs. Sarangpur Cotton Manufacturing Co. Ltd. in L.R. 65 I.A. l same case A.I.R. 1938 P.C. 1 same case 42 C.W.N. 194 that in a case where the method of accounting regularly employed by the assessee came within the meaning of section 13, it was the duly of the Income-tax Officer to consider whether, in his judgment, the income, profits and gains for the purpose of section 10 could be properly deduced from the accounts. Lord Thankerton, in delivering the judgment of the Judicial Committee, made the following observation in this regard:

“Their Lordships desire to acid that the view of the Assistant Commissioner that the Income-Tax Officer is prima facie entitled to accept the profits shown by the accounts, where there is a method of accounting re­gularly employed by the assessee, is not a correct view. It is the duty of the. Income-Tax Officer, where there is such a method of accounting, to consider whether the income, profits and gains can properly be deduced therefrom and to proceed according to his judgment on this question.”

17. The Supreme Court of India has similarly held in the case of Commissioner of Income-tax Vs. M/s McMillan & Co., 1958-33 I.T.R. 182 same case A.I.R. 1958 S.C.  207 that in the context of the words used in the proviso to section 13 they impose a statutory duty on the Income-tax Officer to examine in every case the method of accounting and to see (i) whether or not it is regularly employed and (ii) to  determine whether the  income, profits and gains can properly be deduced there­from.

18. The scope and import of section 13 came up for further examination before the Supreme Court of India in the case of Commi­ssioner of Income-Tax, Madras Vs. A. Krishna-swami Mudaliar and others A.I.R.  1964   S.C. 1843, where similar view about the duty of the Income-Tax Officer under section 13 has been expressed in the following words:-

“The only departure made by section 13 of the Indian Income-Tax Act from the tax legislation in England is that whereas under the English legislation the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee under the Indian Income-Tax Act, prima facie the Income-Tax Officer has for the purpose of sections 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profits may properly be deduced, the Income-Tax Officer is bound to compute the profits in accordance with the method of accounting. But where, in the opinion of the Income-Tax Officer, the profits cannot properly be de­duced from the system of accounting adop­ted by the assessee, it is open to him to adopt a more suitable basis for computation of true profits.”

19. In our opinion, the duty of the Income-Tax Officer under section 13 of the Income-Tax Act has been correctly spelt out in the above-mentioned decisions. The duty of the Income-Tax Officer, according to the said provisions, is, firstly, to find out whether the accounts sub­mitted by the assessee is according to the method of accounting regularly employed by him and ;secondly, whether income, profits and gains of the assessee can, for the purpose of taxation, be properly deduced from the accounts submitted by the assessee. The Income-Tax Officer may discard the account submitted by the assessee as the basis of his computation only when no method of accounting has been regularly emplo­yed by the assessee or when, in his opinion, the taxable income cannot be properly deduced from the. account submitted by the assessee. Before purporting to act under the said proviso the officer concerned shall have to come to a definite finding either that no method of ac­counting has been regularly employed or that the method of accounting is such that in his opinion the income, profits and gains of the assessee cannot be properly ascertained from such account. This opinion of the Income-Tax Officer, as has been referred to in the second part of the proviso, cannot be a mere subjective or arbitrary one, but it has to be formed judicially that is to say, there must be some material basis for such an opinion. It is now a well-established principle of law that if any person or administrative body is invested with a power to do an act which may affect certain individual or his rights such a person or body has the concomitant duty to exercise that power judicially. The opinion of the Income-Tax Officer that the computation of the taxable income of an assessee cannot be pro­perly deduced from the account submitted by the assessee may affect the assessee very much so as to augment his financial burden by increas­ing his tax liability. The formation of such an opinion should, therefore, have an objective foundation which is amenable to judicial scru­tiny.

20. The learned Judges of the High Court relying upon three judicial authorities, namely, the Pioneers Sports Limited, Sialkot Vs. Commi­ssioner of Income-Tax, Punjab and another, in A.I.R. 1934 Lahore 876 same case 1934 (II) I.T.R. 305, Bombay Cycle Stores Co. Ltd., Vs. Commissioner of Income-Tax Madhya Pradesh, 1958 (33) I.T.R. 13 and 5. Beerjah Reddiar Vs. Commissioner of Income-tax, Travancor Cochin, A.I.R. 1959 Kerala 220 same case 1960(38) 152 same case 160(2) Taxation 130, have come to the view that mere low profits as disclosed from the account of the assessee and absence of a stock register cannot be regarded as materials on the basis of which the opinion of the Revenue Authorities, an envisaged in the proviso to section 13 of the Income-Tax Act, can be properly formed.

21. It cannot be gain said that mere low profits unattended or unaccompanied by some other factors cannot be a circumstance from which a Revenue Officer can conclude that the taxable income cannot be properly deduced from the account submitted by the assessee. A substantial fall in the rate of profits may alert the officer inducing a kind of circums­pection on his part. But that alone certainly cannot, be the ground for rejecting the account submitted by the assessee. The question whe­ther the absence of stock register is a proper basis entitling, the revere officer to make computation of the assessable income of the assessee under the proviso to section 13 of the Income-Tax Act is one of fact which is depen­dent upon the facts   and circumstances of a particular case.

22. The case of the Pioneer Sports Limited, Sialkot, on which reliance   was placed by the High Court, a Division Bench  of the Lahore High Court held that the mere fact  that the assessee might choose to charge a low rate of profit  was  no  reason  for   the    Income-Tax Officer to reject the total profits as stated by the company in the return and that the company having admittedly never used a stock register, the absence of a, stock register also could not be a reason for justifying the assumption of the Income-Tax Officer that the profits could not be properly deduced from the return submitted by them when there was no other reason except the fact of reduced profits to justify this assump­tion.

23. Similarly the Bombay High Court expressed the view in the case of Bombay Cycle Store Company Limited that the mere absence of the register could not be a sufficient ground for invoking the aid of the proviso to section 13. It is, however, pertinent to reproduce here the reasoning of the Bombay High Court as expressed in the said case, explaining the circumstances under which such a view about the absence of a stock register could be taken:

“Whether the absence of stock register is or is not material must depend upon the other circumstances of the case and the other material which is available to the Income-Tax Officer and if the acc­ount notwithstanding the ‘absence of the stock register enable the Income-tax Officer to deduce properly-the income, profits and gains of the business, the mere absence of the register will not be a sufficient ground for invoking the proviso-to section 13.”

24. The other case relied on by the learned Judges of the Dacca High Court for the view that the low profits and absence of a stock regis­ter was not a sufficient ground for rejecting the account of the assessee under the proviso to section 13 of the Income-Tax Act was a Judgment of the Kerala High Court of the In­dian jurisdiction in the case of S. Veeriah Reddiar Vs. Commissioner of Income-Tax Travancore, Cochin, Bangalore, reported in I960 (38) I.T.R. 152. The relevant finding in the said case of the question of the absence of stock register has been expressed in the follow­ing manner:

“Coming to the absence of a stock register it has to be pointed out that this is not a case in which the closing stock could not have been ascertained at all. There was an inventory showing the quan­tities of the closing stock in the Head Office and the various Branches and also their value. The correctness or other­wise of the inventory could easily have been ascertained by checking it with the opening stock, the purchase and the sales, none of which is now questioned- by the Department. When the opening stock are not questioned if there is material to show the quantity and value of the clo­sing stock, the profits or loss can easily be ascertained, and so, the absence of»a regular stock register or a stock register kept according to the Government noti­fication under the Textile” Control Regulations would not be sufficient ground to reject the assessee’s method of accounting in such a case,”

25. We may notice here another judgment of the Punjab High Court of Indian jurisdiction in the case of Pandit Brothers Vs. Commissioner of Income-Tax reported in A.I.R. 1955 Pun­jab 42 same case 1954 (26) I.T.R. 159 which has been cited by the learned Counsel for the respondent and was also referred with appro­val   in the aforesaid judgment of the Kerala High Court. The following passage from the said judgment of the Punjab High Court deal­ing with the question of low profits   and the absence of a stock register, may be usefully quo­ted:

“All the (Income-tax Officer said was that the profits appeared to be some­what low and there was no stock register. In my view the fact that the profits are low is merely a warning to him to look into the accounts more carefully and see whether there is material to lead him to the conclusion that there is something false in the account books. The mere fact that the profits are low is not material upon which a finding under section 13 can be based because the assessee may be incompetent or his method of business may be uneconomic. Again the fact that there is no stock register only cautions him against the falsity of the returns made by the assessee. He cannot say that merely because there is no stock register the account books must be false. The account books in this case were accepted as correct and disclosing a time of state of affairs. The absence of one register cannot amount to material and there must be material be­fore the Income-tax Officer before he can apply the provisions of the proviso to section 13.”

The judgment proceeded to add:-

“The mere fact that the profits app­eared to him to be insufficient and the fact that there was no stock register maintained by the assessee are not in my view materials upon which such a finding (i.e. a finding that the income, profits and gains, could not properly be deduced from the assessee’s method of accounting) can be given, but these are circumstances which may provoke an inquiry. The In­come-tax Officer must discover evi­dence or material ‘aliunde’ before he can give such a finding.”

26.  On a careful consideration of the afo­resaid decisions, it appears that the said cases are authorities for the proposition that mere low profits and the absence of a stock register cannot be regarded to be good reasons for hold­ing that the taxable income of the assessee can­not be properly deduced from the account submitted by the assessee. If his accounts which are otherwise unexceptionable, that is to say, if the receipts and payments and other figures as have been entered into the books of account of the assessee are found to be correct and are verifiable there is no reason to hold merely on the ground of low profits and absence of a stock register that the income of the assessee cannot be properly deduced from the said acc­ount and in that circumstance the Income-Tax Officer has no jurisdiction to take recourse to the proviso to section ]3 of the Income-Tax Act for computation of the assessee’s income, In our consideration, the correct view of law was taken in those decision. It will, however, be wrong, in our opinion, to say that in the present case the decision of the Revenue Autho­rities and the Appellate Tribunal to compute the income of the assessee under the proviso of section 13 of the Act was solely on the ground of low profits and the absence of a stock re­gister.

27. We have already noticed that in the orders of the Revenue Authorities and the Appellate Tribunal, which have been quoted above, it has been pointed out that, apart from taking notice of low profits and absence of stock register, there was no quantitative reconciliation between the raw materials purchased and consumed in manufacturing different types of containers etc. and that there was also no quantitative reconciliation between the finished products manufactured and sold, that the acc­ounts were on the whole unverifiable and that there were unexplained and unproved loans amounting to a total of Rs. 1,53,000/- during the relevant assessment years. As regards the unproved loans the Income-tax Officer and the Appellate Assistant Commissioner held that the said loans were nothing but the income from sales suppressed from books of account, whereas the Appellate Tribunal, though not subscribing to the view that the said amounts represented sales dept out of the books of accounts, did not accept the story that they were advances as loans by the mother of the Managing Director of the Company but at the same time did not express any opinion as to the real nature of the so called loans. The pith and substance of the decision of the Revenue Authorities as well as the; Appellate Tribunal appears to be that the accounts as submitted by the assessee cannot be accepted because in the absence of the stock register there is no quantitative reconciliation between the raw materials purchased and consumed and the finished goods manufactured and sold and that the said accounts were, on the whole, unverifiable. The said Revenue Officers as well as Appellate Tribunal can-.e also to be the view that the introduction of a substantial amount of money as loan in the books oi acc­ount of each of the assessment years, which was not really a loan has falsified the said books of account. The Tribunal pointed out that there was incongruity in respect of the various figures as entered into the books of account for which no explanation was, according to the Tribunal, available. The Tribunal also held that the amount of money which was introduced in the business as loans also could not be pro­perly explained by the assessee. Under the circumstances it is difficult to hold that the view of the Tribunal that the account as sub­mitted by the assessee cannot be accepted to be correct and that the taxable income of the assessee cannot be properly deduced therefrom was unreasonable.

28. Learned Counsel for the assessee has placed his reliance in this count upon the eases of Pandit Brothers Vs. Commissioner of In­come-tax, and S. Veeriah Reddiar Vs. Commis­sioner of Income-tax, Travancore-Cochin, to which reference has already been made for the purpose of showing that the dictum laid down in the said cases as to low profits and absence of a stock  register being by them­selves alone not sufficient for invoking the aid of the proviso to section 13 of the Act has no manner of application to the facts of the ins­tant case.

29. The importance of a stock register for the purpose of computation of the income, profits and gains of an assessee was examined by the  Supreme court of India in the case S. N. Namasivayam Chettiar Vs. Commissioner of Income-tax, Madras reported in 1960-2 Taxation  (HI-277) same case A.I.R. I960 (S.C.)729 in which it has been held that if after taking into account of the absence  of a stock register coupled with other materials the tax authorities are of the opinion that the correct profits and gains cannot be deduced, they would be justified in applying the proviso to section 13. After referring to the decision of the Pun­jab High Court in the case of Pandit Brothers Vs. Commissioner of Income-tax, the Supreme Court of India made the following observa­tion in the case of S.N. Namasivayam Chettiar:

“The want of stock register was, in that particular case, not a very serious defect because the account books had been found and accepted as correct and disclosed a true state of affairs. It cannot therefore be said that that case laid down as a proposition of law that the want of a stock register by which a proper check could be made was not such a serious de­fect as to make the proviso to section 13 inapplicable.

The importance of such a register was pointed out by the Nagpur High Court in Ghanshyamdas Farmanand Vs. Commissioner of Income-tax (1952-21 I.T.R. 79 at page 81). In cases such as the instant case, the keeping of a stock register is of great importance be­cause that is a means of verifying the assessee’s accounts by having a “quanti­tative tally”. If, after taking into acc­ount all the materials including the want of a stock register, it is found that from the method of account the correct profits of the business are not deductable the operation of the proviso to section 13 of the Income-tax Act would be attrac­ted, Bombay Cycle Stores Co. Ltd., Vs. Commissioner of Income-tax (1958) 33 I.T.R. 13). It may be also added, as was held by this Court in Com­missioner of Income-Tax Vs. McMillan & Co (1958) 33 I.T.R. 182, 197 that the Income-tax Officer even if he acc­epts the assessee’s method of accounting, is not bound by the figure of pro­fits shown in the accounts. It is for the Income-tax authorities to consider the material which is placed before them and, if, after taking into account in any case the absence of a stock register coupled with other materials they are of the opi­nion that correct profits and gains can­not be deduced, then they would be justi­fied in applying the proviso to section 13. In our opinion, therefore, when the Tribunal applied the proviso to sec­tion 13 because of the various blemishes which were pointed out “by the Income-tax Officer and accepted by the Appellate Tribunal, it cannot be said that there was any error in the order of the Appellate Tribunal justifying the interference of this court under Article 136.” 30.   We find ourselves in substantial agree­ment   with the above-quoted view of the Su­preme Court of India as regards the scope of the proviso to section 13 of the Income-tax Act and are of the view that the Revenue Autho­rities and the Income-tax Appellate Tribunal correctly took recourse to the said proviso in discarding the accounts submitted by the assessee and making a computation of the income, profits and gains of the assessee on a basis and in a manner, as may be properly determined by them. We are, therefore, of opinion that having regard to the facts of the case the High Court was not correct in taking the view that the Reve­nue Authorities and the Tribunal committed an error in computating the income of the assessee under the said proviso.

31. Relying upon the decision of the Bom­bay High Court in the case of A. Moosa and Sons Bombay Vs. Commissioner of Income-tax Bombay City, reported in A.I.R. 1953 Bern. 239 same case 1953 (23) I.T.R. 73, learned Counsel for the respondent has also contended that it is not duly necessary that there should be materials, apart from the showing of low profits and absence of a stock register, for the finding that the taxable income cannot be ascertained from the account submitted by the assessee but also that there should be valid basis for the computation of the assessee’s income by the Income-tax Officer. Learned Counsel has next contended that the action of the Tri­bunal in rejecting the account of the assessee altogether and his direction that the same rate of profits as approved in the preceding assess­ment year, namely, 1954-55 should apply with­out reference to the actual income of the asses­see was wholly untenable. In this context the learned Counsel has drawn the attention of the Court to a passage from the decision of Pandit Brothers Vs. Commissioner of Income-tax in which it has been stated that the statute gives the Income-tax Officer a power to deter­mine his own basis for computation of the ta­xable income for there must be a basis but that he must not act in wholly an arbitrary manner. A similar observation of Chief Justice Chagla, as made in the following passage of the decision in the case of A. Moosa & Sons Bombay Vs. Commissioner of Income-Tax Bombay City, was placed before the Court:

“The proviso to section 13 leaves it to the Income-tax Officer to compute the profits upon such basis and in such manner as he may determine. Although the discretion is vested in the Income tax Officer, the discretion cannot be exercised arbitrarily or capriciously or dishonestly. He must exercise his judgment in such a manner as would make it possible for him to ascertain the profits and gains of the assessee most approximating to the truth.”

Learned Counsel has further contended that the decision of the Tribunal to apply the rate of profit for the year 1954-55 to the three succeeding assessment years was wholly arbitrary.

32. We do not think that there is much force in this contention of learned Counsel, It has been pointed out by the Tribunal that the assessee enjoyed a sort of monopoly in their business and the profit rate at 40% in the assessment year 1954-55 as shown by the assessee was no unreasonable. The books of account as submitted by the assessee having been found defective and unreliable and the assessee having no rival in the business, there was no comparable case. No circumstance which could have affected the business of the assessee in the absence of any competition in the market and might result in reduced rate of profits could be shown to have come into existence during the relevant years. Under the circumstances it does not appear to us that the decision of the Income-Tax Tribunal to apply the rate of profit for the previous assessment year to the assessment years in question was arbitrary. We are, therefore, of opinion that the High Court was not correct in holding that there was no sound basis for fixing 40 % as the rate of profit for the three years under assessment.

The result, therefore, is that this appeal is allowed with costs and the judgment and order of the High Court are set aside and that of the Appellate Tribunal restored.

Ed.

Source:  1976, (AD)