K.K. Desai, J.
1. The questions of law that arise for decision in this reference under section 66(2) of the Indian Income-tax Act, 1922, is as follows :
'Was there any material on the basis of which it can reasonably be said that, in the facts and circumstances of the case, the method of accounting employed is such that the income, profits and gains cannot properly be deduced therefrom ?'
2. The applicant-assessed carries on business in handloom cloth at Poona and at Bombay. For the assessment year 1958-59, corresponding to the accounting year S. Y. 2013, the Income-tax Officer rejected the assessee's case that he had made gross profits of 7.8 per cent. as disclosed in the return. For the purpose of arriving at the above finding, the Income-tax Officer relied upon the following circumstances :
(1) To show that he could only make low profits, the assessee had made a false case that he was a wholesale dealer and not a retail dealer. The fact was the from the above sales of the value of Rs. 7,34,038 the retail sales effected by the assessee were of the value of about Rs. 6,00,000.
(2) The wholesale sales made on credit disclosed that the assessee had made profits between 8 to 10 per cent. on the cost, though it was true that from these profits he claimed deduction of transport charges amounting to about 2 per cent. According to the Income-tax Officer, the margin of profit on retail sales must be much higher than disclosed by the assessee.
(3) The assessee had, in spite of inquiries, failed to substantiate comparative purchase and sale rates. The finding in this connection was that the books of account maintained by the assessee did not disclose any comparative statement of stocks of purchases and sales. The result of the above method of accounts adopted by the assessee was that the profits made by the assessee could not be correctly deduced from his books of account.
(4) In the balance-sheet that the assessee had produced there was a huge excess of Rs. 4,263 in the assets disclosed as against the liabilities. There was no explanation why such huge excess regarding assets was shown in the balance-sheet.
3. The Income-tax Officer accordingly relied upon several other circumstances and assessed the assessee on footing of his having made gross profits of 10 per cent.
4. The Appellate Assistant Commissioner accepted the above finding of the Income-tax Officer and in that connection observed that '..... even though his sales during the year exceeded Rs. 7 lakhs, he has not attempted to maintain a quantitative reconciliation with regard to any of the items involved in his trade'. He, therefore, held that the profits disclosed by the assessee remained quite verifiable. Having accepted the findings made by the Income-tax Officer, he rejected the appeal filed by the assessee. He rejected the contention of the assessee that the true profits could be deduced from the method of accounting adopted by the assessee.
5. In this connection, the Appellate Tribunal referred to the finding made by the Income-tax Officer that the assessee's business was retail business. It further held that the department was right in applying the proviso to section 13 because that was in accordance with the decision of the Supreme Court in the case of S. N. Namasivayam Chettiar v. Commissioner of Income-tax. The appeal of the assessee in connection with this question was rejected.
6. Mr. Trivedi for the assessee has raised two contentions which are as follows :
(1) The Income-tax Officer failed to make the necessary finding that the method of accounting employed by the assessee was not such as from which profits could not be properly deduced. Such a finding was essential and necessary before the Income-tax Officer proceeded to consider the case of the assessee in accordance with the contents of the proviso to section 13.
(2) There was no material on the record on the basis of which the books of account of the assessee and the profits disclosed by the books could be rejected as unreliable. The contention had the effect of stating that there was no material on the record for holding that the method of accounting employed by the assessee was such that profits made by the assessee could not be properly deduced therefrom.
7. In reply, Mr. Joshi for the revenue contended that the above first contention did not arise under the question referred to us. As regards the second contention, he relied upon the findings of fact made by the Income-tax Officer as well as the Appellate Assistant Commissioner. He stated that the facts in the present case disclosed sufficient material on the basis whereof the department was entitled to make a finding that the method accounting employed by the assessee was such that therefrom the true profits made by the assessee could not be properly deduced.
8. Now, in connection with the contentions made by him, Mr. Trivedi relied upon the decisions in the cases of Pandit Bros. v. Commissioner of Income-tax and R. B. Bansilal Abirchand Spinning & Weaving Mills v. Commissioner of Income-tax. Mr. Joshi relied upon the decision of the Supreme Court in the case of S. N. Namasivayam Chettiar v. Commissioner of Income-tax. He desired to rely upon certain further authorities, but we prevented him from reading those authorities.
9. It is first necessary to notice the contents of section 13 which provides 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 income, 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.'
10. It requires to be at once stated that the discussions contained in the orders made by the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal are clearly towards exercising the powers available under the above proviso for computation of the profits made by the assessee upon basis other than the profits disclosed by the assessee. It is abundantly clear on a reading of the orders of the above three authorities that whilst exercising the powers available to them under the proviso they have without stating in so many words exercised the powers upon the footing that they had made a finding in their orders that the method of accounting employed by the assessee was such that the profits made by the assessee could not be properly deduced therefrom. These authorities were aware that without making such a finding the powers available under the proviso could not be exercised. The law in that connection is clear. It is true that in words such a finding is not recorded in the orders made by these authorities. Even so, we are unable to accept Mr. Trivedi's contention that these orders have not the effect of impliedly recording a finding that these authorities in fact found that the method of accounting adopted by the assessee was such that therefrom profits made by the assessee could not properly be deduced.
11. As we have arrived at the above conclusion, we do not find it necessary in that connection to consider the objection raised by Mr. Joshi that the first contention made by Mr. Trivedi does not arise from the question raised in this reference.
12. The facts in the case of Pandit Bros. v. Commissioner of Income-tax were to some extent similar to the facts in the present case. In that case also, the books of account of the assessee were held to have been maintained in regular course. The books were accepted as correct. One thing that was missing was, however, a stock register. The Income-tax Officer was of the view that this was an important document. In the absence of this document, in his view, the profits earned by the assessee in that case could not be correctly determined. Now, in connection with that finding of the Income-tax Officer, the question raised before the court was 'whether any addition may be made to the book version of business profits, where no stock account is maintained, on the sole ground that the net profits disclosed appear to be insufficient in relation to the total turnover ?' On that question, the contentions made before the court were that 'there was no finding by the Income-tax Officer that the method of accounting employed by the assessee was improper or that the account books could not be relied upon as disclosing a true state of affairs and that the Income-tax Officer had not computed the taxable profit on any basis. . . .' In connection with these contentions, the court examined the facts found by the Income-tax Officer and the Appellate Assistant Commissioner and observed :
'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 methods 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.'
13. Mr. Trivedi's submission on the basis of the above observations was that the fact that quantitative tally of stocks was not produced was not sufficient ground for exercising powers under the proviso to section 13.
14. In the case of S. N. Namasivayam Chettiar v. Commissioner of Income-tax the case of Pandit Bros. v. Commissioner of Income-tax was relied upon on behalf of the assessee. In that connection, the Supreme Court observed :
'The facts in that case were very different. The Income-tax Officer there added a certain sum to the assessee's profits disclosed on the ground that the expense ratio was too high and the profits disclosed were too low and there was no stock register. The finding in that case was that the assessee maintained regular accounts of his purchases and sales and there was no finding by the Income-tax Officer that in his opinion the income could not properly be deduced therefrom.'
15. The Supreme Court then quoted a passage from the decision in Pandit Bros. v. Commissioner of Income-tax and further observed :
'The want of a 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.'
16. The further relevant observations of the court were :
'The importance of such a register was pointed out by the Nagpur High Court in Ghanshyamdas Permanand v. Commissioner of Income-tax. 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 accounting the correct profits of the business are not deductible, the operation of the proviso to section 13 of the Income-tax Act would be attracted : Bombay Cycle Stores Co. Ltd. v. Commissioner of Income-tax. It may also be added, as was held by this court in Commissioner of Income-tax v. McMillan & Co. 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.. . . .'
17. The question is as to how the law thus announced by the Supreme Court applied to the facts in the present case. Now, in that connection, apparently, the question that arose before the Income-tax Officer was as to whether the method of accounting adopted by the assessee in the present case was such that therefrom the profits made by the assessee could not be properly deduced. The question arose, because, in spite of the fact that the assessee had produced two sets of accounts both closed and adjusted for its head office as well as its branch at Bombay, the balance-sheets produced by the assessee disclosed huge excess of Rs. 4,268 on the assets side over the liabilities. Such discrepancy and difference could never have existed if the method of accounting adopted by the assessee was regular and correct. The Income-tax Officer accordingly appears to have made investigation in connection with the method of accounting adopted by the assessee. He then made the important finding that the assessee had made a false case that he was a wholesale dealer. Apparently, that case was made for explaining the low margin of profits disclosed. The books of accounts produced by the assessee did not disclose any quantitative tally in connection with its sales and purchases. The method of accounting could, therefore, be held to be a method wherefrom the true profits made by the assessee could not be deduced. It would have been a good practical step on behalf of the assessee upon enquiries made to prove to the Income-tax Officer the quantities of total stocks of purchases made and as to how the record of sales completely disclosed the quantities of his total sales. The assessee did not take that practical step even until the stage of the hearing before the Appellate Tribunal was completed. In that connection, the Income-tax Officer made his findings on the surrounding circumstances and facts as already recited above. The Appellate Assistant Commissioner definitely held that the method of accounting adopted by the assessee and disclosed by him 'remained quite unverifiable as regards the profits made by the assessee.' The material of all the surrounding circumstances and facts as found by the Income-tax Officer and the Appellate Assistant Commissioner induced them to hold that in the present case the absence of the quantitative tally regarding the sales and purchases made by the assessee was such that it was necessary to exercise powers available under the proviso to section 13. We are unable to accept Mr. Trivedi's submission that in the present case the absence of the quantitative tally about the stocks of purchase and the sales when considered along with the other circumstances was not sufficient material to enable the department to proceed to assess the profits of the assessee by exercising the powers available under the proviso to section 13. The circumstances found by the Income-tax Officer as already recited above along with the absence of the quantitative tally about the stocks of purchases and sales were sufficient material for the above purpose.
18. The result of the above discussion is that the question referred is answered in the affirmative. The assessee will pay costs.
19. Question answered in the affirmative.