1. The assessee has a tailoring shop in Bombay and he supplies miscellaneous stores to ships on a fairly large scale. We are concerned in this reference with the assessment year 1946-47. For this year assessee returned a profit of Rs. 57,344 on gross receipts of Rs. 5,83,382 on the basis of his books of account. The Income-tax Officer took the view that the method of accounting adopted by the assessee did not make it possible for him to deduce the profits and gains of his business and therefore he computed the profits and gains upon a certain basis which he adopted. In other words, the Income-tax Officer acted under the power given to him by the proviso to Section 13 of the Income-tax Act. 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. As pointed out by the House of Lords in Sun Insurance Office v. Clark, where it becomes necessary to have recourse to some form of estimate by the Income-tax Department that method should be adopted which approximates most near to the truth, and Earl Loreburn, L.C., in his judgment at page 454 emphasises the fact that a rule of thumb may be very desirable, but could no be substituted for the only rule of law that he knew of, namely, that the true gains were to be ascertained as nearly as it could be done. It is also not correct as suggested by the Tribunal, which has felt rather sensitive about our asking them to state a case which arises under the proviso to Section 13, that this Court will never examine the method adopted by the Income-tax Officer in computing the profits and gains under the proviso to Section 13. The privy council itself in Commissioner of Income-tax v. Kameshwar Singh pointed out that if the Income-tax Officer had adopted a wrong method under the proviso to Section 13, the assessment might be set aside. Therefore it is always open the the Court on a reference to consider whether the method adopted by the Income-tax Officer is a wrong method, wrong in the sense that the method is not one which is likely to result in the true profits and gains being ascertained. It has also been held in Commissioner of Income-tax Officer v. S. Sen, that where two methods are available to the Income-tax Officer for the purpose of assessment, the one which is more just to the assessee had which involves a much less margin of chance and uncertainty should be taken as the basis. Therefore what the Income-tax Officer has always got to bear in mind in resorting to the proviso to Section 13 is the salutary principle that his main function is - again to repeat the words of Earl Loreburn, L.C. - to see that the true gains are ascertained as nearly as it can be done.
2. Therefore we must approach this reference from the point of view of the principles which have been accepted as well settled in construing the proviso to Section 13. In this case the Income-tax Officer found that the sales effected by the assessee in the accounting year approximated to Rs. 5,90,000. Out of these sales, sales of the value of Rs. 3,42,183 were so recorded in the books of account of the assessee that it was possible to assess the profits on those sales. With regard to the balance, viz., Rs. 2,47,817, it was impossible to ascertain what profits were realised by the sales effected by the assessee. The Department assessed the profits of the assessee on an overall basis fixing the profits at 20 per cent. on the sales effected by the assessee. When the matter came to the Tribunal, the Tribunal reduced the rate from 20 per cent. 18 per cent. Therefore the Tribunal applied a flat rate of 18 per cent. on all the sales effected by the assessee, viz., Rs. 5,90,000. The grievance made by Mr. Pandit on behalf of the assessee is that the Tribunal should have accepted the profits ascertained on the sales of Rs. 3,42,183 and should have applied a percentage according to their estimate of profits on the balance of Rs. 2,47,817. Mr. Pandit says that the Tribunal was wrong in applying a flat rate on all the sales when materials were available to the Department from which it could have ascertained what profits were realised for the sales approximating to Rs. 3,42,183. Mr. Pandit says that even when the proviso to Section 13 is availed of, it is not open to the Department to ignore genuine materials available in the accounts of the assessee. Mr. Pandit would have been quite right if either the Department or the Tribunal had ignored the profits which were realised on the sales of Rs. 3,42,183. As the Tribunal points out, two methods were open to the Tribunal. They could have accepted the profits as disclosed from the books of account of the assessee on the sales of Rs. 3,42,183 and then they could have proceeded to assess the profits on the balance of Rs. 2,47,817 by deciding what percentage of profit should be charged on those sales, or taking into consideration the profits on the sales of Rs. 3,42,183 they could have decided upon an average flat rate on all the sales effected by the assessee, and the Tribunal has chosen to adopt the latter method. One important thing is to be noted. From the statement of the case of the Tribunal it is perfectly clear that the result would have been the same whether the Tribunal had adopted the first or the second method. If they had adopted the method of assessing the profits on Rs. 3,42,183, they would have assessed the profits on the balance of Rs. 2,47,817 on a much higher percentage than 18 per cent. Instead of doing that they lumped together all the sales and applied an average flat rate on those sales. It is difficult to see how in adopting this method the Tribunal has adopted a wrong method or has not adopted the method which as far as possible approximates to the truth or helped the Tribunal in determining what true profits and gains of the assessee were. It is also important to note that the Tribunal makes it a point of drawing our attention to the fact that very often assessees disclose those sales where the profits are small and do not disclose the profits on sales where the profits are higher, or they show the profits on sales where the profits are small and do not disclose the profits on sales where the profits are higher. This aspect was also present to their mind when they determined upon the average rate of 18 per cent. Therefore on these facts in our opinion the Tribunal did not adopt a wrong method in assessing the profits as they did, nor did the Tribunal reject or not take into consideration any evidence which was material was material or relevant evidence placed before the Tribunal by the assessee.
3. We therefore answer the question submitted to us in the affirmative. Assessee must pay the costs.
4. Reference answered in the affirmative.