JAGANMOHAN REDDY J. - We had directed the Appellate Tribunal to state a case on the following question, namely, whether, on the facts and in the circumstances of the case, the estimate of gross profit at 17.5% could be sustained. In pursuance of the above directions, the Tribunal has now stated a case, from which it appears that the assessee, a Hindu undivided family, carries on business in fancy goods, electrical goods, watches, radios, etc. in the name and style of 'Vasavi General Traders' at Guntakal. It disclosed a net loss of Rs. 2,049 from the business for the assessment year 1953-54, for which the relevant accounting period is the year ending October 18, 1952. The books of account of the assessee were found by the Income-tax Officer to be defective and not maintained in accordance with the vouchers, some of which were subsequently found in the possession of the assessee. In the circumstances, he held that the account books were incomplete and reliable, and thereafter proceeded to make the 'best judgment' assessment by estimating the profits on a total sale of Rs. 1,00,000, and the gross profits thereon at 17.5%. The result was that after deducting the loss of Rs. 2,049 from the gross profits of Rs. 11,525 he made an assessment of Rs. 9,476.
In appeal, the Appellate Assistant Commissioner agreed with the view of the Income-tax Officer that the books of account were not maintained in the regular course of business and, therefore, were unreliable and could not be taken into account for computing the profits of the assessee. It also agreed with the Income-tax Officer in his estimate of gross profits at 17.5% and stated : 'This is very fair in view in fact that the appellant was dealing in fancy goods, electrical goods, watches, etc.' The Tribunal also maintained the findings of the Appellate Assistant Commissioner. In respect of the estimate, it stated : 'As far as the estimate of gross profit at 17.5% is concerned, even here we do not find any room for interference by us. The assessee was dealing in radios, watches, tricycles, etc., wherein the assessee could have earned a very good margin of profit. Apart from it, it would have been open to the department to have added the entire difference in turnover, we mean the difference between the turnover estimated and the turnover disclosed to the profits disclosed. If that had been made, the addition that has been made now will be very small compared with that. The department did not choose to do so. The assessee has been let off rather cheaply by it.'
We have extracted the above observations to show that the foundations for the conclusion are erroneous. Apart from there being no reasons given for agreeing with the conclusions of the Appellate Assistant Commissioner and the Income-tax Officer, to say that it was open to the department to have added the entire difference in the turnover, i.e., the difference between the turnover estimated and the turnover disclosed to the profits disclosed, is a result which does not appear to be based on any principle of accountancy of law. The plethora of decisions of the High Courts of this country, as affirmed by their Lordships of the Supreme Court, have consistently insisted upon the income-tax authorities stating the basis of the estimate and their giving an opportunity to the assessee to rebut that basis. But we regret to find that time and again this principle has not been kept in view. Merely to make an estimate and say that it is reasonable, apart from the fact that it does not disclose the basis for arriving at that conclusion, appears to us to be capricious. All that the Income-tax Officer stated on this aspect to use of the matter is the following :
'I have, therefore, no alternative but to estimate the assessees income. Having regard to all the circumstances, I estimate the total sales at Rs. 1,00,000 and the gross profit thereon at 17.5%. Doing so, the difference in gross profit is Rs. 11,525; deducting the loss of Rs. 2,049 disclosed, the net income from his business is determined to be Rs. 9,476.'
The Appellate Assistant Commissioner stated thus :
'Regarding the gross profit estimate of 17.5%, I would say that this very fair in view of the fact that the appellant was dealing in fancy goods, electrical goods, watches, etc.'
From the above observations as well as from those observations of the Tribunal extracted above, the assessee has no way of knowing how and on what basis the income-tax authorities considered 17.5% over the total sales as a reasonable estimate of gross profits. If this is so, it could not be expected that the assessee could meet the case of the department that 17.5% is a reasonable basis. We could cite a good many cases, but in a recent judgment of ours in R. C. No. 23/62 (Yaggina Veeraghavalu v. Commissioner of Income-tax, dated February 5, 1965, we reviewed the case-law and held that Income-tax Officers should not only have a basis for determining the assessment, but they must give an opportunity to the assessee to rebut to it. We had in that case referred to several decisions including the judgment of their Lordships of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax. We do not to go over the same ground again.
The result is that the answer to the reference is in the negative and in favour of the assessee. Reference answered accordingly with costs. Advocates fee Rs. 250.
Reference answered in favour of the assessee.