1. This is a reference made to us by the commissioner of Income-tax under Section 8(5) of the Taxation on Income (Investigation Commission) Act, No. XXX of 1947. The Central Government referred the case to the commission for investigation under section 5(1) of the Act. The commission has investigated the case and has made its report and on that report the central government has passed an order under section 8(2) directing appropriate assessment proceedings being taken against the assessee under the Indian income-tax Act and the Excess Profits Tax Act with a view to assess or re-assess the incomes shown in the schedule which had escaped assessment.
2. On this reference two questions of law have been raised, and in order to appreciate these two questions it is necessary to state a few facts. The assessee is a lorry driver and as pointed out in the report of the commission he started life from humble beginning. At one time he owned out four lorries, but by 1945 he had 24 lorries to his credit. In 1941-42 he did not show an income which was assessable, but from 1942-43 upto 1948-49 he showed an assessable income and he was assessed to tax. In 1941-42, 1942-43 and 1943-44 he produced books of account and he was assessed by the income tax Department on those books. From 1944-45 to 1948-49 no books of account were produced by the assessee before the Department and he was assessed on an estimate of his income. Before the commission certain books for the assessment years 1944-45 and 1945-46 were produced. These were produced by the employees of the assessee. The case of the assessee with regard to his books of account was that the books had been destroyed by fire that took place in an adjoining building. The commission came to the conclusion that the case of the assessee was false, that the books were being suppressed, and they succeeded in getting some of the books which were produced by the employees. The finding of the commission with regard to the books that were produced for the assessment years 1941-42, 1942-43 and 1943-44 was that these books were not genuine. The commission appointed an authorised official to collect various materials and the ultimate report of the commission was based on the rates for lorry hire that prevailed in the various years. They also considered the ratio of expenditure to income, they took into consideration the difficulty on the part of the assessee to procure petrol during the war years, they further gave a concession to the assessee by taking into consideration that fact that traffic was not at all times of the same character merely on the basis of a mathematical average, and taking all these into consideration they estimated the income of the assessee for various years.
3. The first question of law that arises for our consideration is whether the commission, which had power to investigate and report any case referred to them by the central government had any jurisdiction to estimate the income of the assessee to ascertain the loss of revenue, and what is urged by Sir Jamshedji on behalf of the assessee is that the power of the Commission does not include the power to estimate the income of an assessee. Sir Jamshedji says that it may be that the commission may have the power to determine the income of an assessee on evidence and on materials placed before it, but it has no power merely on an estimate to arrive at the income. Sir Jamshedji says the the function discharged by the commission is nothing better than a mere guess work and such a wide and extensive power has not been conferred upon the commission by the Act. In order to appreciate the contention of Sir Jamshedji we must look at the object with which the act was passed and the scheme of the legislation. As the preamble itself says, the Act was passed for the purpose of ascertaining whether the actual incidence of taxation on income was and has been in recent years in accordance with the provisions of law. That was one of the objects with which the Act was passed and a commission was set up. Section 3 deals with the constitution and functions of the commission, and the relevant function of the commission with which we are concerned is sub-clause (b) of Section 3 and that provides that one of the duties of the commission shall be to investigate in accordance with the provisions o this act any case refereed to it under section 5 and make a report thereon; and when we turn to section 5 it deals with the power of the central government to refer case for investigation, and that section provides that the central government may at any time before the 1st day of September 1948 refer to the commission for investigation and report any case or points in a case in which central government has prima facie reasons for believing that a person has to a substantial extent evaded payment of taxation on income, together with such material as may be available in support of such belief. Therefore, it is only when the central government has come to a prima facie conclusion that a particular person has succeeded in evading payment of tax to a substantial extent that it would refer a case to the commission and the investigation and report of the commission under section 3(b) is in relation to the reference made to it by the central government under section 5. Therefore what the commission has to investigate and ultimately report upon is the evasion of payment of taxation with regard to which the central government held a prima facie opinion. Then section 6 deals with the powers of the commission and the powers conferred upon the commission are very wide. They include the power to collect materials from various sources and also the power after materials have been collected to bring those materials on the record and the power also includes the appointment of an authorized official to assist the commission in examining witnesses and collecting materials.
4. Now, what is relied upon in section 6 by Sir Jamshedji is sub-section (5) of that section. That sub-section provides that if any person whose case is or the points in whose case are being invested by the commission refuses or fails to attend in person in compliance with a notice in that behalf duly served upon him or to give any evidence or to answer questions or to produce documents or to prepare and furnish statements when called upon to do so, the commission may, if satisfied that the refusal or failure was wilful, close the investigation of the case and proceed to draw up its report on the case or on the points to the best of its judgment; and Sir Jamshedji says that it is only when the circumstances mentioned in sub-section (5) are present the the power has been conferred upon the commission to make a best judgment estimate of the income of the assessee. Sir Jamshedji says that the conferment of special power under sub-section (5) excludes the conferment of general power in any other case. As in this case the circumstances referred to n sub-section (5) did not obtain, according to Sir Jamshedji, the Commission had no power to give a best judgment estimate of the income of the assessee. In advancing this argument Sir Jamshedji overlooks the very vital difference between the functions of the Commission as laid down in Section 3 and the powers of the Commission enumerated in section 6. The function and the duty of the commission is to investigate to what extent there has been an evasion of payment of tax and in order to investigate that, exhypothesi the commission must come to a conclusion as to what income has escaped tax and it is after that investigation that it must report to the central government and inform the central government that in its opinion income has escaped tax and the extent of that income. It is only in the discharge of those functions and duties that the commission has got to exercise certain powers and those powers are enumerated in section 6(5) and that sub-section gives the power to the commission to proceed ex parte against a recalcitrant assessee and to estimate the income to the best of its judgment in the absence of any evidence. It is also significant that sub-section (5) of section 6 gives the power to the commission to impose a penalty upon the assessee for refusal or failure to co-operate as it were with the commission. According to Sir Jamshedji, if the commission has no materials before it on which it could base its report as to the income which has escaped tax, then the only power of the commission is under sub-section (2) of section 5 viz. to report to the central government that in its opinion further investigation is not likely to reveal any substantial evasion of taxation on income and on such report being made the investigation shall be deemed to be closed. It is clear that sub-section (2) of section 5 deals with acre where either the commission on the materials before it or even by exercising its best judgment is unable to decide what income has escaped taxation, or it may deal with a case where in the onion of the commission no substantial evasion of taxation has taken place and when according to the commission the circumstances are such and the materials are such that the investigation should be closed. But sub-section (2) of section 5 cannot possibly deal with a case where in the opinion of the commission there has been a substantial evasion of tax and that evasion can be determined by such materials as the commission can bring on record.
5. Sir Jamshedji says that what the commission has done in effect is to assess the assessee under section 23(4) according to best judgment assessment, and Sir Jamshedji's contention is that unless express power was conferred upon the commission as is conferred upon the income-tax officer under section 23(4), it is not pen to the commission to estimate the income of the assessee on a best judgment basis. Sir Jamshedji draws attention to the fact that when the Excess profits Tax act was enacted, certain section of the income tax act were incorporated in that Act, and sir jamshedji says that if the intention of the Legislature was to confer the power upon the commission which the income tax officer has under section 23(4), we would have found a provision whereby section 23(4) would have been incorporated in the Act. The difference between the excess profits tax act and the act we are considering is obvious the excess profits Tax Act was a taxing statute. The excess profits under that Act were brought to tax and charged to taxation and therefore the charging section had to provide the machinery which was similar to the machinery employed for taxing income to income-tax. The act in question which we are considering is not a taxing statute. It does not deal with assessment of income. It does not bring any income to tax, Its only purpose is to bring about an investigation into the income of certain persons which has escaped tax, and therefor there was no reason to incorporate in this act section 23(4) or other section of the income-tax Act, because after the report is made by the commission the central government under section 8(2) after considering the report has to direct that proceedings will be taken against the person whose case was reported by the commission and upon such direction proceedings have to be taken and completed under the appropriate law, notwithstanding the restrictions contained in section 34 of the income-tax Act or section 15 of the Excess Profits Tax Act. Therefore the scheme of the act is that the central government on a prima facie case being made out first refers a matter to the commission, the commission investigates and determines the income which has escaped tax and makes a report, the report is then considered by the central government and if the central government is satisfied by the report is refers the matter to the income tax department and the excess profits tax department and on that reference being made the person concerned is assessed or re-assessed and he is then liable to pay tax which is determined by the proper authority. Therefore the commission does not assess the tax which the assessee is liable to pay on his income, nor does it empty any assessing machinery because it is not its function to carry out any assessment, and that is the reason why we decided on not find the section of the income-tax Act incorporated in this Act as we find in the Excess Profits Tax Act.
6. The order contention of Sir Jamshedji is that if we were to put this construction on the Act, it would cause grave injustice to the assessee because he would be deprived of his right of appeal to the appellate assistant Commissioner and the Tribunal under the income-tax Act. Sir Jamshedji says that if assessment was to be made under Section 34 and if income was to be determined in the ordinary course of assessment under the income-tax Act, his client would have a right to appeal and to have the findings of the income-tax officer decided by a higher tribunal. But Sir Jamshedji says that in the present case by reason of sub-section (4) of Section 8 his client is denied the right of appeal. Sub-section (4) of section 8 makes the findings, recorded by the Commission on the case or on the points referred to it, final. Sir Jamshedji's contention is that it was never the intention of the Legislature to make a mere estimate of the income arrived at by the commission final. According to sir Jamshedji, what was intended to be made final was the decision of the commission arrived at on proper evidence or on certain materials such as suppression of books, etc., but certainly not a mere estimate arrived at without evidence and without proper materials. In our pinion, that contention of Sir Jamshedji is also fallacious, because the whole scheme of the act again is to make the decision of the commission to the extent that it determines the income which has escaped tax final to do away with all provisions with regard to appeals which are to be down in the income-tax Act, and to give to the assessee only the power to have a matter referred to the high court under sub-section (5) of section 8 of the Act. There is another aspect of the case to which attention might be drawn. The whole of the contention advanced by Sir Jamashedji has proceeded on the basis that the Commission has arrived at a best judgment determination of the assessee's income. In other words, the Commission has exercised the powers which an Income-tax Officer might exercise under Section 23(4) of the Income-tax Act. Sir Jamshedji obviously finds it difficult to contend that the commission would have no power to determine the income of a person whose case was referred to it, if that determination was based on evidence and materials placed before it. The real, main and the only grievance is that the income in this case has been arrived at on the mere speculation or guess work.
7. Now, when we look at the scheme of the Income-tax Act and consider the provisions of section 23(3) and 23(4), the authorities make it clear that both when assessment is made under Section 23(3) and when the assessment is made under Section 23(4), it is competent to the income tax officer to estimate the income of the assessee. Under sub-section (3) the assessment is made when evidence is produced before the officer. When that is the case the officer may act in one of two ways. He may accept the evidence, he may accept the books of account, and he may base his assessment solely upon the evidence produced by the assessee; or the income-tax officer may not accept the books account or the evidence of the assessee as genuine or reliable and he may collect other evidence besides that evidence and he may act not on figures to be found in the books of account of the assessee, but on his own estimate of the assessees income. In that sense the assessment of the Income-tax officer would be a best judgment assessment, but still it would be an assessment under section 23(3). Under section 23(4) the income-tax officer acts when there is no evidence before him, when there is a default on the part of the assessee, and in the absence of any evidence he has got to exercise his best judgment to arrive at the assessment of the income of the assessee. But whether it is under sub-section (3) or under sub-section (4) that the income-tax officer proceeds his estimate of the assessees income cannot be either arbitrary or capricious. Therefor the line that divides sub-section (3) and (4) of section 23 is a very thin line. It would not be true to say that it is only in the case of sub-section (4) of section 23 that the Income-tax Officer estimates the income by using his best judgment, and under sub-section (3) there is no question of estimate and no question best judgment.
8. Sir Nusserwanji was drawn our attention to one or two authorities which make this position clear. In Gunda Subbayya v. Commissioner of Income-tax, Madras, it was pointed out by a Bench of the Madras High court consisting of Sir Lionel Leach, C.J. Madhavan Nair, J., and Varadachariar, J. that the only difference between an assessment under sub-section (3) in a case where the assessee's books are found unreliable and ar rejected and the assessee fails to produce other evidence, and an assessment under sub-section (4) is that the act contemplates a more summary method when the income tax officer is acting under sub-section (4). to the same effect is the judgment of the Rangoon High Court in Commissioner of Income tax, Burma v. Messrs. Ein Shin  and the distinction there drawn between sub-sections (3) and (4) by Chief Justice Roberts, Mr. Justice Blagden and Mr. Justice Wright was that in the case of sub-section (3) the income-tax officer has to arrive at an assessment to the best of his judgment on the evidence before him, whilst under sub-section (4) he has to arrive at an assessment to the best of his judgment in the absence of such evidence. Therefore, the judgment or the estimate of the Income-tax officer is emphasised whether he is acting under sub-section (3) or sub-section (4).
9. Once that distinction between sub-section (3) and (4) is realised, the whole substratum of Sir Jamshedji's contention disappears, because when we looks at the facts of this case the assessment made by the commission, if we might use that expression is really not under sub-section (4) but sub-section (3). This is not a case where there was any default on the part of the assessee. This wan not a case where the commission had no materials at all. On the contrary, this was a case where the commission has materials on which it based its judgment, and the materials were, first, certain genuine books produced by the employees of the assessee, rates for which lorries could be hired during the relevant period, and the ratio between income and expenditure. It was on these materials that the commission exercised its best judgment and arrived at an estimate of the income of the assessee. Therefore, this was not a case at all where the commission could have acts ex pale in default of any evidence being led by the assessee and acted under section 23(4). Therefore, this case, if analogy were to be used, falls rather under section 23(3) than under Section 23(4) and as we said before hen Sir Jamshedji is not bold enough to contend seriously that the commission has not power to determine the income of the person whose case is referred to it on proper materials and evidence placed before it.
10. Sir Jamshedji has attempted to urge that the estimate made by the commission was not its own estimate but the estimate of the authorised official employed by it. We have not permitted him to urge that joint because that was not the question which we asked the commission to refer to us. He has also suggested that it is not clear what were the terms of reference made to the commission by the central government when the case was referred to it. The order of reference is not before us, but there again no question can arise with regard to the order of reference made by the Central Government, because the grievance on this reference of the assessee is not that the commission was not properly constituted or that the case was not properly referred to it, but the grievance is that the case having been properly referred to it, the commission has acted in excess of its jurisdiction. In our opinion, therefore, as far as question (1) is concerned, the Commission had the jurisdiction to estimate the income of the assessee to ascertain the loss of revenue.
11. The second question of law which has been referred to us is whether the commission erred in law in not giving effect to the service agreements for the year 1943 onwards. The position with regard to this question is this. The case of the assessee was that he had entered into certain agreements with three persons by the names of Mirza Muzaffar Baig, Tauzh-Uddin Khan and Abdul Baka Khan for sharing profits which he earned in the lorry business, and he relied on certain service agreement. The contention of Sir Jamshedji is that the Tribunal acted arbitrarily and capriciously in giving effect to these service agreements, for the years prior to 1943 and not giving effect to these agreement subsequent to 1943. The view taken by the Commission, as is clear from its report, is that it is not satisfied as to the genuineness of these service agreements. It was not even satisfied whether these three persons were at any time in the service of the assessee at all, nor was it satisfied, if they were in the service, of the assessee, on the terms they were employed, and the commission has given a very good ground as to why it has not accepted these agreements as genuine. The assessee produced certain receipts showing that certain amounts has been received by these persons under these service agreements and the commission pertinently points out that these receipts proceeded on the basis of the income disclosed by the assessee and not the genuine income as now ascertained. Therefore, the commission points out that if there was a genuine service agreement to share profits, the profits that would have been shared would have been the genuine profits that would have been shared would have been the genuine profits and not the profits disclosed for the purposes of tax. Having come to that conclusion, as a matter of concession, inasmuch as the commission was making a rough estimate of the income of the assessee, it allowed to the assessee ask deduction such amounts as he claimed to have paid to these three persons in the accounting years 1940,1941 and 1942. With regard to the accounts of 1943 and 1944 it pointed out that the account books were available and it directed that if these account books showed that any sums were actually paid pursuant to these service agreements then only these sums should be allowed as deductions. We fail to see how any question of law arises on this decisions of the commission. No fault can be found with the real decision of the commission that the service agreements were not proved or were not genuine and that these three persons really did not share profits as alleged by the assessee. If any fault is to be found with the commissions report at all, it can only be with the concession made by the commission as in indulgence to the assessee, and surely no question of law can arise out of a concession made by the commission to the assessee, to which concession in law the assessee was not entitled.
12. The result, therefore, is that we must answer the first question submitted to us in the affirmative and the second question in the negative. The applicant must pay the costs.
13. Reference answered accordingly.