A.R. Somnath Iyer, J.
1. The assessee is a hotelier and, with respect to the assessment year 1962-63, he disclosed a net income of Rs. 4,998. The turnover concerning his sales amounted, according to his return, to Rs. 1,08,718 and the gross profit shown in the return was 22.3 per cent. of that turnover.
2. The Income-tax Officer who did not accept the accounts produced by the assessee estimated the gross turnover to be Rs. 1,16,000 and he estimated the gross profits at 28 per cent. of that turnover.
3. The Appellate Assistant Commissioner did not disturb the estimation of the turnover made by the Income-tax Officers but he was of the opinion that there was excessive estimation of the gross profits. He, therefore, reduced the addition made by the Income-tax Officer to the net income by Rs. 4,000. The estimation of the gross profits made by the Appellate Assistant Commissioner amounted to 24 per cent. of the turnover.
4. But, in the appeal preferred by the Income-tax Officer to the Appellate Tribunal, the order of the Appellate Assistant Commissioner was reversed and that of the Income-tax Officer was restored. The Tribunal was of the view that the Appellate Assistant Commissioner had given no cogent reasons for the reduced estimate of the gross profits. It pointed out that, in the earlier years, the assessee's gross profits were estimated at 27.5 per cent. of the turnover in respect of one year and at 30 per cent. in respect of another. It was also of the opinion that the increase in the turnover, with respect to the assessment year 1962-63 with which the Tribunal was concerned, did not justify the reduction of the gross profit to 24 per cent. of the turnover. This conclusion it reached for the reason that the general rule that increase in the turnover results in a fall in the gross profits is not a rule of universal application.
In this reference directed by this court under section 256(2) of the Income-tax Act, 1961, the question of law which is before us reads :
'Whether, on the facts and in the circumstances of this case, there was material for the Tribunal to set aside the order of the Appellate Assistant Commissioner which gave the assessee a reduction of Rs. 4,000?'
Now, the Income-tax Officer's assessment order, which makes it clear that he did not depend upon the percentage selected for the earlier periods, reads :
'The sales shown are of Rs. 1,08,718 as against Rs. 98,183 of the last year and the gross profit works out only at 22.3 per cent. which is low in a business like this where the sales absolutely have no check. There is also no check over some of the purchases. The receipts are not proportionate to the materials consumed. In such circumstances, I estimate the sales at Rs. 1,16,000 and adopt a gross profit of 28 per cent. as done in other cases.'
6. This part of the order demonstrates that he merely adopted a working rule on which he depended in the case of other assessees.
7. While this is so, the Appellate Assistant Commissioner depended upon the theory that an increase in the turnover results in a diminution in the gross profits. The estimates for the earlier periods constituted a new basis on which the Appellate Tribunal founded its order.
8. Other things being equal, profits estimated during an earlier period may, in a proper case, guide the estimation of the profits of a subsequent year. But the earlier estimates can have relevance only if the conditions in which the business activity of the later period is conducted are so similar to those of the earlier period that it would be reasonable to infer that the proportion between the turnover and the profits remains unaltered.
9. But there was no institution of any such comparison by the Income-tax Officer since he did not depend upon the estimation of the profits of the earlier years. His estimation depended on a formula evolved for other assessees without a disclosure of its basis or the grounds for the belief that they were comparable cases.
10. The Appellate Tribunal which made its estimate by an entirely new process bestowed no thought to the question whether the earlier estimates could properly reflect subsequent profits. It assumed they did. The estimate so made, in the erroneous belief that a formula for an estimate once evolved constitutes an infallible basis for all subsequent estimates, cannot be sustained for the reason that what it overlooked was that, normally, a change in market conditions disturbs the old ratio between the turnover and the profits.
11. The view that we take was also the view taken by the High Court of Assam in Steelworth Ltd. v. Commissioner of Income-tax. Mehrotra C. J. from whom Nayudu J. dissented, but in whose opinion Dutta J. concurred, said this :
'There is no material to justify the addition made by the income-tax authorities to the gross profit shown by the assessee in his account books. The additions were made on ad hoc basis and not on the evidence such as the trading conditions in similar trade or on the reconstruction of the accounts books of the assessee on the basis selected by the Income-tax Officer which was different from the one adopted by the assessee.'
Dutta J., expressing the same view, observed :
'In the case before us the profit disclosed by the assessee and accepted by the department in the return for the assessment year 1952-53 was made the basis of the computation of profit for the subsequent three years. But the profit of a previous year is quite irrelevant for the purpose of computing the profit of a subsequent year in the absence of materials which may enable the assessing authority to compare the market conditions of the two years. There is no such material and it is not understood on what material the Tribunal said that for 1953-54 and 1954-55 'the trading conditions' were better.'
12. Our answer to the question before us should, therefore, be in favour of the assessee, and our answer is that there was no material for the Tribunal to set aside the order of the Appellate Assistant Commissioner which gave the assessee a reduction of Rs. 4,000.
13. No costs.