Somnath Iyer, J.
1. The assessee is a firm which trades in motor spares and the assessment years are 1961-62 and 1962-63. In respect of both these assessment years, the Income-tax Officer made a best judgment assessment having rejected the accounts produced by the assessee under Section 13 of the Indian Income Tax Act, 1922, in one case and under the proviso to sub-section (1) of S. 145 of the Income-tax Act. 1961, in the other. The appeals preferred to the Assistant Commissioner and the Income Tax Appellate Tribunal were dismissed. This reference is made by the Tribunal to us under Section 66(2) of the old Act and Section 256(2) of the new Act.
2. The question of law referred to us reads:
'Whether on the facts and in the circumstances of these cases, the Income-tax Appellate Tribunal was right in law in holding that the Income-tax Officer could act on the proviso to Section 13 of the Income-tax Act, 1922, for completing the assessment for the assessment year 1961-62 and on the proviso to sub-section (1) of Section 145 of the Income-tax Act, 1961, for completing the assessment for the assessment year 1962-63?'
3. The principal reason why the Income-tax Officer reached the conclusion under the proviso to Section 13 of the old Act and under the corresponding provision of the new Act that the system of accounting employed by the assessee did not assist a proper deduction of the income, profits and gains was that the assessee did not maintain a stock register. Having rejected the accounts on this ground, he proceeded to observe that since the gross profit returned by the assessee was low, he could make an assessment on the basis of comparable cases.
4. The Income-tax Officer stated that the purchases and sales were all supported by vouchers and the statement of the case submitted by the appellate tribunal recites that the system of accounting employed by the assessee in respect of the years with which we are concerned was also the system of accounting employed during the earlier period and that in respect of the assessment year 1960-61, the enhancement of the gross profit by the Income-tax Officer who discarded the accounts with respect to spare parts was set aside in appeal.
5. In the order made by the appellate Assistant Commissioner in the cases before us, he stated that the Income-tax Officer made to him an elucidation with respect to the real reason for the rejection of the accounts. That elucidation reads:
'As regards the Income-tax Officer's ground of the absence of verification of stock, he explains at the hearing that this is merely based on the method of valuation of stock.'
6. This explanation makes it clear that the Income-tax Officer's restricted criticism of the assessee's stock inventory was confined to the valuation of stock and did not extend to the correctness of the other particulars stated in it.
7. That that was the only reason for which the Income-tax Officer did not, as he himself stated, depend on the accounts was missed by the Appellate Tribunal. In the course of its judgment, the appellate Tribunal which did not say that the accounts maintained by the assessee were not correct, made the criticism that the assessee had not maintained a day-to-day stock book. The relevant part of its judgment reads:
'It is admitted that the assessee had not maintained a day-to-day stock book. We consider its absence as a vital defect. In its absence it is not possible to say whether all the purchases had been accounted for by way of sales or closing stock. Even though the closing stock had been valued at cost, it is impossible to find out whether all the quantities of unsold items had been accounted for in the closing stock.'
8. So, no one doubted the accuracy of the accounts. On the contrary, the statement of the case says that the Income-tax Officer's finding was that the purchases and sales were supported by vouchers.
9. Now, Section 13 of the old Act which corresponds to Section 145(1) of the new Act which compels the computation of the assessee's income on the basis of his accounts if regularly maintained, allows him the choice of their pattern provided the system selected properly reflects the income. It does not authorise their exclusion, which, is permissible only if they do not assist such computation merely for the reason that they do not conform to a particular pattern. Such is the effect of the enunciation made by the Privy Council in Commissioner of Income-tax, Bombay v. Sarangpur Cotton ., Ahmedabad , which reads:
'Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes--in this case, for the purposes of the company's business--and does not relate to a method of making up the statutory return for assessment to income-tax, Secondly, the section clearly makes such a method of accounting a compulsory basis of computation, unless, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefore.' (Page 6 of Ind App) = (at p. 3 of AIR).
10. So long as it is not impossible to deduce the true income from the accounts, its computation could not be made in any other way, and so, the Privy Council proceeded to observe:
'The simplest case would be where it appears the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which, nevertheless. It is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe this duty of the Income-tax Officer as a discretionary power.' (page 7 of Ind App) = (at p. 3 of AIR).
11. The appellate Tribunal which did not say that no method of accounting was regularly employed by the assessee, did not also find that the manner in which he maintained his accounts did not enable a proper determination of his income. It addressed itself to what in this case was an irrelevant question whether all the unsold items were included in the stock inventory and thought that that investigation was not possible since there was no day-to-day stock book.
12. It is clear that the difficulty encountered by the Tribunal even on that matter was not real since all the purchases and sales were admittedly disclosed, and so, it was not impossible without the aid of a day-to-day stock account to detect the non-inclusion in the inventory, of goods purchased but not sold.
13. Now, the Tribunal did not dissent from the Income-tax Officer's finding that there was a true disclosure of all the sales and purchases in the accounts maintained by the assessee in his own way. So, the correctness of the stock inventory could be impeached only if an item purchased, which was not sold, was not in it. The Income-tax Officer who it is plain, discovered no such imperfection, depended as he explained to the Appellate Assistant Commissioner, on no other infirmity in the stock inventory than that pertaining to valuation. But that feature of the inventory even if true has no materiality in the sphere computation of income.
14. So, our answer to the question before us, therefore, is that the Income-tax Appellate Tribunal was in error in affirming the assessments made by the Income-tax Officer under the proviso to Section 13 of the Income-tax Act, 1922 in respect of the assessment year 1961-62 of under the proviso to sub-section (1) of Section 145 of the Income-tax of the Income-tax Act, 1961, in respect of the assessment year 1962-63.
15. In the circumstances, no costs.
16. Reference answered.