This is a reference under Section 66 (3) of the Indian Income-tax Act. In 1935 notice was issued to the assessee by the Income-tax Officer directing him to furnish a return of his income for the year from Dewali 1933 to Dewali 19334 for assessment in the year 1935-36. The assessee accordingly furnished a return, which showed a total income of Rs. 22,975 under three heads, namely (1) poverty, (2) business, and (3) money. lending On the 11th February 1936 the Income of Rs. 31,760. In respect to income from business he calculated profits at a flat rate of 16 per cent. on sales under the proviso to Section 13 of the Act.
The assessee appealed against the assessment order, but only in respect of the income from property which had been assessed by the Income-tax Officer. Thereupon the Assistant Commissioner issued notice to the assessee requiring him to show cause why his assessment under the head of business should not be enhanced under Section 31 (3) of the Act. The assessee appeared and showed cause but the Assistant Commissioner dismissed his appeal in respect to the assessment of income from business Rs. 18,870 to Rs. 31,500. In computing this amount the Assistant Commissioner applied a rate of 26.7 per cent. upon sales, calculated upon an average for six years.
The assessee then applied to the Income-tax, and in the result that Officer reduced the rate from 26.7 per cent. to 18 per cent.
The assessee then applied to the Income-tax, Commissioner under Section 66 (2) of the Act requiring him to refer certain question of law to this Court, but that application was rejected. Thereafter the assessee applied to this Court under Section 66 (3), and a Bench of this Court, of which one of us was a member, called upon the Commissioner to state a case and refer the following question of law.
'Whether under the circumstances of the case the Assistant Commissioner of Income-tax and the Commissioner of Income-tax had authority under the law to change the basis of profit from 16 per cent. as calculated by the Income-tax Officer to any higher percentage? '
The Commissioner is of opinion that the question should be answered in the affirmative.
Learned counsel for the assessee pleads that under the proviso to Section 13 of the Act Income-tax Officer is the sole arbiter as regards the basis and the manner of the assessment and his discretion cannot be interfered with so long as it was reasonably and not arbitrarily exercised.
In Ganeshi Lal v. Commissioner of Income-tax, C. P. & U. P., this board held that where the Income-tax Officer has exercised his judgment and has not acted arbitrarily in arriving at the conclusion that the income, profits and gains were not properly deducible from the assessees regularly kept books of account, then having regard to the language of the provision, his discretion in this matter cannot be interfered with; but we do not think the language of the provise affords support for the contention that his basis or his method of computation is not liable to interference by the highest authorities of the department. There are no reported decisions exactly in point but we may refer to the case of Commissioner of Income-tax, Bihar & Orissa v. Kameswar Singh of Darbhanga2. There the assessee had kept his books on what was described as a 'hybrid system; it was his practice to enter sums of money, as he received them in a deposit register which was not made available to the revenue authorities and he did this with out discriminating between interest and capital payments and thereafter he allocated and treated as income certain portions of these sums of money which he attributed to interest. The Income-tax Officer discarded the assessees method of accounting and adopted a method which he thought proper. At page 111 (of 1933 A. I. R.) their Lordships of the Privy Council say :
'There can be no question that in the circumstances the Income-tax Officer was entitled to disregard the assessees income, profit and gains does not of course exempt his computation from examination on appeal and, if it appears that he has adopted a wrong method, the assessment may be se aside.'
This is clear authority for the proposition that the basis and manner of assessment applied by the Income-tax Officer can be set aside in appeal by the Assistant Commissioner under Section 31 (3) (b) of the Act. Section (31) (3) (a) empowers the Assistant Commissioner inter alia to enhance the assessment; and one of the obvious ways of enhancing an assessment which has been made under the proviso to section 13 is to raise the percentage rat where that is the method which the Income-tax Officer has adopted. Section 31 (3) of the Act gives wide powers to the Assistant Commissioner in respect to any order of assessment, and Section 32 (3) of the Act gives even wider powers to the Commissioner, for it provides that 'in disposing of the appeal the Commissioner, may, after giving the appellant an opportunity of being heard, pass such orders thereon as he thinks fit'. We do not think that there is anything in the Act to restrict to an assessment made under the proviso to Section 13, the powers which the higher authorities of the Department have under Section 31 and32 in respect to assessments generally. In our opinion the question which has been referred to us should be answered in the affirmative.
The assessee will pay the costs of this reference. The Advocate-General is entitled to a fee of Rs. 200. A copy of our judgment under the signature of the Registrar and the seal of the Court will be sent to the Commissioner of Income-tax.
Reference answered in the affirmative.