The Order of the Court was delivered by the Honble Chief Justice.
These are petitions under section 66(2) of the Indian Income-tax Act requesting this Court to direct the Income-tax Appellate Tribunal to state a case and refer the following questions of law alleged to arise out of their order :-
(1) 'Whether on the facts and in the circumstances of the case there was any material to justify the estimate of income at Rs. 40,000 ?'
(2) 'Whether on the facts and in the circumstances of the case, there being no instance of any purchase or sale outside the books there was any justification for rejecting the book results and estimating the income at Rs. 40,000 ?' and
(3) 'Whether on the facts and in the circumstances of the case the Tribunal had jurisdiction to base its decision on a new point not urged by the Income-tax Officer either in the assessment order before the Appellate Assistant Commissioner or in his grounds of appeal before the Appellate Tribunal ?'
The petitioner is running a rice mill in Srikakulam, Krishna District. He had a licence for procuring paddy, for milling it and for selling rice to the District Supply Officer and other persons designated by him. For the accounting period 22nd January, 1948, to 31st March, 1949, his accounts disclosed a turnover of Rs. 5,90,298. He showed a taxable income of Rs. 2,469. This was not accepted by the Income-tax Officer for the reasons mentioned in his order and he estimated the income at Rs. 65,000. On appeal, the Appellate Assistant Commissioner reduced the addition by Rs. 40,000, i.e., he estimated the income only at Rs. 25,000. Both the assessee and the department preferred appeals to the Income-tax Appellate Tribunal. The Tribunal dismissed the appeal filed by the assessee and in the appeal filed by the department they estimated the net income at Rs. 40,000 instead of Rs. 25,000 accepted by the Appellate Assistant Commissioner.
Mr. Kuppuswamy, learned counsel for the petitioner, contended that the Tribunal acted under the proviso to section 13 of the Indian Income-tax Act and therefore they should have accepted the accounts as the basis for ascertaining the taxable income.
Section 13 says :-
'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.'
This argument, if we may say so, is based upon a misconception. The Income-tax Officer did not act at all under the aforesaid proviso. The order of the Income-tax officer shows that he did not accept the accounts and he has given various reasons for not doing so. After giving his reasons he observed :
'For the foregoing reasons, I am unable to accept that the accounts produced by the assessee are a complete and correct record of his business and that they reflect his true profits in the business carried on during the year. Having regard to the extent of the business carried on during the year, as admitted in the books and to the business carried on without bringing such transactions to the books of account as indicated by the fact that all the paddy bags milled were not included in the accounts and to the large number of cash credits noticed in the personal accounts of the assessee and his near relatives, I determine the income at Rs. 65,000.'
It will, therefore, be seen that the Income-tax Officer acted under section 23(3) of the Indian Income-tax Act. On appeal, the Appellate Assistant Commissioner, though he differed from many of the reasons given by the Income-tax Officer, did not accept the accounts as showing the entire transactions of the assessee for he concluded his order with the following remarks :-
'Now coming to the general question whether the income of Rs. 2,469 disclosed on sales of Rs. 5,90,298 is correct and complete, I am not satisfied that the appellant derived only such a paltry income from the large business carried on by him. The gross rate of profit shown by the appellant on the basis of his books is only 4%. It cannot be said that the trade conditions in rice milling were not favourable in the account year. As already seen, there was definitely understatement of yield of rice and looking at the matter in the most favourable light for the appellant there was excess consumption of crude oil. For these reasons I consider that the Income-tax Officer was justified in not accepting the very low profit of Rs. 2,469. But the determination of the income at Rs. 65,000 is far too high. By fixing the income at Rs. 65,000 the Income-tax Officer has enhanced the gross rate of profit to 15% or so which is an unheard of thing. Taking therefore the general trade conditions and the rate of profit derived in the account year into consideration, I consider that a reasonable estimate would have been Rs. 25,000 and substitute this for the sum of Rs. 65,000 determined by the Income-tax Officer.'
The Income-tax Appellate Tribunal also gave convincing reasons for their estimate. As regards the registers kept by the assessee, they did not give any weight to them on the ground that he had only kept two registers inward and outward registers showing the paddy given for milling and rice secured from such million respectively and that a careful scrutiny of those registers showed that they were registers kept for the purposes of the Control authorities and could not furnish the basis for any correlation between the actual quantity of paddy milled and the rice yielded therefrom. They ignored the tests carried bout by the Government to ascertain the normal yield of dehusked rice for the reason the tests were carried on in respect of double polished rice whereas the rice in question was single polished rice. They agreed with the Income-tax authorities that they yield of 71.6 per cent. shown by the assessee was not satisfactory. They accepted the finding of the Income-tax Officer that the assessee had paid much more than the controlled rates and that he had not given any plausible reasons why the said extra rates were paid and drew an inference that as he paid extra sums he would have collected an extra sum on sales. They also disagreed with the Appellate Assistant Commissioner and accepted the conclusion of the Income-tax Officer that the extra crude oil had been used for milling more paddy which the assessee had not brought into the books. They also found by comparing the books maintained for the accounting year with that of the previous years that the assessee had paid cartage and weighing cooly much beyond the proportion required for 37,138 bags shown to have been milled by him. They did not accept even the 37,138 bags shown in the accounts for it differed from the figure given by the assessee in the statement furnished to them. On that basis they came to the conclusion that the unexplained extra and heavy carting and weighing coolies taken with the excess consumption of fuel oil, showed that more paddy had gone into the mill than what the assessee had chosen to show. Finally they concluded their order with the following remarks :
'Taking into consideration the number of bags said to have been milled and the fact that the assessee was the owner of the mill and as such there was no rent to be paid, the net income of Rs. 2,469 is absurdly low. In view of our findings that the yield was low, that there was inflation in purchases with a possibility of deflation of sales and the heaviness in expenditure which pointed to the fact that some more paddy had gone into the mill than what was disclosed in the books, we would estimate the net income at Rs. 40,000 as against Rs. 25,000 estimated by the Appellate Assistant Commissioner.'
It will be seen from the gist of the three orders that the petitioner was assessed under section 23(3) of the Income-tax Act.
The distinction between the scope of section 13 and that of section 23(3) has been brought out by a Special Bench of the Madras High Court in Gunda Subbayya v. Commissioner of Income-tax, Madras. There, the Income-tax Officer found that the assessees books were unreliable and consequently rejected them. The assessee failed to produce other evidence on which the Income-tax Officer could make a proper assessment of the assessees income. The Income-tax Officer on the material gathered by him made an assessment under section 23(3) of the Act. In the course of the arguments before the learned Judges, it was contended that section 13 could be read in conjunction with section 23(3) and that the effect of so doing was to bring sub-section (3) of section 23 in the with sub-section (4) and in support of that contention decisions of other High Courts were cited. Leach, C. J., who delivered the judgment on behalf of the Bench expressed the view at page 374 in the following terms :
'It seems to me that all the section really says is that, if the method of accounting employed by the assessee is a method which does not properly disclose the income, profits and gains of the assessee, the Income-tax Officer can adopt his own method. But in doing so he must have reference to the accounts before him as section 13 does not contemplate the rejection of the accounts. Section 13 adds nothing to and takes nothing away from section 23(3).'
We respectfully accept the said observations as laying down the correct law on the subject. If the Income-tax Officer intends to act under that proviso, he can adopt his own method but in doing so he must have reference to the accounts furnished by the assessee. But in this case as aforesaid the Income-tax Officer rejected the assessees accounts and determined the income under section 23(3).
The order of the Tribunal, a gist of which we have given supra, gives valid and relevant reasons for determining the income under section 23(3). The finding arrived at by them is one of fact and there are no grounds for directing them to state a case.
The applications fail and are dismissed with costs. Advocates fee Rs. 100 in each.