JAGANMOHAN REDDY, J. - Pursuant to the orders of this Court in C. M. P. No. 1775 of 1954 dated 2nd August, 1955, the Income-tax Appellate Tribunal, Madras Bench, has now stated a case on the following question, viz.,
'Whether there is material on which the Tribunal could estimate the income at Rs. 30,000.'
The assessee is a money-lender and lent monies mainly on the ledge of jewellery and also on promissory notes. The assessment which is the subject matter of this reference was for 1951-52 on the income, profits and gains accrued during the accounting period which ended on 6th April, 1951. The assessee declared the net interest receipts at Rs. 19,922 and a total income of Rs. 17,214. It is stated that as a result of the Income-tax Inspectors inquiry, tree receipts one dated 29th May, 1950, by K. Jogi Naidu for Rs. 725, the second, dated 18th June, 1950, by N. Gangannas son Kondanna or Rs. 650 and the third dated 24th October, 1950, by P. Apparao for Rs. 400 were discovered. From these receipts it appears loans were given on interest ranging from 0-12-0 to 1-4-0 per cent. per mensem and on the assessee being asked to explain why the amounts covered by these receipts were not entered in the cash book, and ledger, he was bale to show only in so far as the loan of Rs. 400 of Apparao is concerned that it had been entered in the loan account, but by inadvertance it was not brought into the ledger. With respect to the other two receipts he urged that these loans were given by his daughter and that is why they were not brought into his accounts. The Income-tax Officer, Vizianagaram, disallowed this contention as the assessee was not able to prove that the loan really belonged to his daughter, that enquiries made by the Inspector also showed that the assessee was in the habit of lending money on pledge of jewellery at rates higher than those prescribed by the Pawn Brokers Act and omitting them from the books. In view of the assessees failure to establish his story that the money belonged to his daughter and on the basis of the enquiries made he estimated the assessees net interest income at Rs. 30,000. On appeal the Appellate Assistant Commissioner, Vijayawada, maintained that order on the ground that the explanation given by the assessee was highly unconvincing and improbable and that the daughter of the assessee was not known to be a money-lender, a fact which was admitted by the advocate of the assessee who stated that she was not lending any monies at all except for those two loans which were the only transactions of the daughter. The appellate Assistant Commissioner fount that the total advances by the assessee Were Rs. 9.29 lakhs, the credit balance in the appellants capital account being Rs. 1.74 lakhs. The major portion of the money required for the advances was obtained from the Imperial Bank and the Andhra Bank. From the former Rs. 3,58,479 was borrowed at an interest of 5 per cent. and from the letter a sum of Rs. 2,76,355 was borrowed at an interest of 6 per cent. In the result he held the estimate made by the Income-tax Officer was justified. On appeal, the Income-tax Tribunal also confirmed this assessment as the books did not disclose the true state of affairs and were correctly rejected and as the estimate of income made, having regard to Rs. 9 lakhs lent, did not seem either excessive or arbitrary.
Before us, learned advocate for the assessee was unable to show why the Income-tax authorities were not justified in rejecting the accounts, having regard to his inability to suppose the explanation that the two receipts were in fact obtained on the monies lent by his daughter. In the absence of a satisfactory explanation, the Income-tax authorities were justified in concluding that the assessee was not maintaining his books properly and that though there were only two receipts, it gave an indication as to the manner in which the assessee kept his accounts. If the monies, in fact, belonged to the assessees daughter and he had lent them for her, it is a reasonable presumption that a businessman like the assessee would, as a matter of ordinary commercial practice, bring these amounts into his accounts as monies belonging to his daughter. We are satisfied that the rejection of the account books was not improper.
But the question in this case is not so much the justification of the rejection of the account books as the arbitrariness of the estimate made by the Income-tax authorities. It is contended that the Income-tax authorities neither disclosed nor gave the assessee an opportunity or rebut the materials or basis of the estimate. The assessment is one under sub-section (3) of section 23 of the Indian Income-tax Act which requires that the Income-tax Officer after hearing such evidence as the assessee May produce and such other evidence as the Income-tax Officer May require on specified points shall be an order in writing assess the total income of the assessee on the basis of such assessment. In making such assessment it is fair and equitable to conclude that the assessee will be given an opportunity of showing, if he can, that the material of the basis upon which the Income-tax Officer proposes to assess his income is incorrect. This view has been taken not only by this High Court, but also by several High Courts in India and by the Privy Council and the Supreme Court. In Maharaja of Dharbhangas case, in appeal from the same case reported in I. L. R. 9 Patna 240, their Lordships agreed with the Patna High Court that the Income-tax Officer is not entitled to guess, adding that 'if the assessee wished to displace the taxing officers estimate, it was open to him to adduce evidence of all his purchase transactions during the year and of the financial results thereof,
which he apparently made no attempt to do.' Again in Ferozshah v. Commissioner of Income-tax, Punjab, their Lordships took into account the fact that the assessee did not object to the assessment during the previous two years at a flat rate of 32 1/2 per cent. and since the same percentage was maintained in the accounting year, they disallowed the contention of the assessee. In both those cases the observation of their Lordships proceeded on the assumption that the assessee was given an opportunity to rebut by evidence the fixation of flat rate by the Income-tax authorities. In Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab, Lal Mohan Krishna Lal Paul v. Commissioner of Income-tax, Bengal, Seth Nathuram Munnalal v. Commissioner of Income-tax, C. P. and Berar and Dewan Bahadur Ramgopal Sri Kishen v. Commissioner of E. P. T., Hyderabad, the Lahore, Calcutta, Nagpur and the erstwhile Hyderabad High Courts respectively held that where the Income-tax Officer or the Excess Profits Tax Officer under an analogous provision proposes to make an assessment in disregard of the material produced by the assessee, natural justice demands that he should draw the assessees attention to it and give him an opportunity to produce evidence in rebuttal. It May be noted that the Income-tax Officers in the discharge of their duties under the Act receive a good deal of information which is not at all evidence according to the accepted notions of law. Consequently it is only fair and just that the accuracy or otherwise of such information will here to be ascertained and the only was of doing so is to give an opportunity to the assessee who can urge his plea as to whether the Income-tax Officer in misinformed. At any rate, after giving this opportunity the Income-tax Office will always be in a better position to know as to what extent that information is rich and whether he should act upon it or not. In Gunda Subbiah v. Commissioner of Income-tax, Madras, Leach, C.J., delivering the judgment of the Full Bench, also expressed the view 'when considering whether an order is right, the appellate authority will have to refer the matter back to the Income-tax Officer in order to find our what the position is. Moreover, this Court has often to consider an order of an Income-tax Officer and it is convenient to this Court to know from the order itself why it was passed.' In two decisions of this Court my Lord the Chief Justice and Satyanarayana Raju, J., considered a similar question on the analogous provisions of the Sales Tax Act in Madupalli Anjaneyulu & Co. v. State of Andhra and Vuddagiri Kanakaraju & Sons v. The Andhra State, and held that where an estimate of profit is made on the basis of profit earned by similar trades, similarly situated and circumstance, then there must be material before the assessing authority which must furnish the basis for estimation of the profit and that it is the duty of the assessing authority to intimate the assessee the amount of profit earned in trades similarly situated circumstances and give an opportunity to the assessee to show cause why his profits should not similarly be estimated. Finally their Lordships of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, West Bengal, put their seal of authority on this proposition when they observed at page 782 :
'.....We are in entire agreement with the learned Solicitor-General when he says that the Income-tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which May not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-section (3) of section 23 of the Act, the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to suppose the assessment under section 23 (3). The rule of law on this subject has, in our opinion, been fairly and rightly stated by the Lahore High Court in the a case of Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab.'
In our view the mere statement of the Income-tax authorities that on the enquiries instituted by the Income-tax Officer they were reliably informed that the assessee was not only in the habit of omitting transactions from his books, but was known to charge much higher rates of interest than the prescribed one, is not sufficient. It is not in the first place shown that the assessee was given an opportunity, nor is it sufficient to justify the assessment which not only does not furnish the basis on which the estimate is made but which, without doubt, can be said to be a guess. In the result our answer to the question referred to us is in the negative. The reference is answered accordingly with costs to the assessee-applicant which we assess at Rs. 250.
Reference answered in the negative.