V.G. Oak, C.J.
1. This is a reference under Section 66 of the Indian Income-tax Act, 1922 (hereafter referred to as the Act). Shri Ram Arora is the assessee. He has been assessed as an individual for the assessment year 1950-51. The relevant accounting period was from December 13, 1948, to August 29, 1949.
2. The assessee carried on business in foodgrains. He had also some business in brick-kiln. He had some income from immovable property. In the present reference we are largely concerned with the assessee's business in foodgrains,
3. There was a scheme for collecting grains for the Government under the Grain Procurement Order of 1944. Cultivators had to bring their quotas of foodgrains to kacha arhatias, who held licences for the purpose. Kacha arhatias brought the grains so collected to purchasing agents appointed by the Government for the purpose. The assessee was such a purchasing agent for procuring foodgrains. The purchasing agents had to maintain prescribed registers. There was some difficulty in collecting foodgrains from cultivators. The assessee, therefore, purchased foodgrains from the open market. The difference in the price in open market and the sanctioned purchase price was known as ''tota money'.
4. According to the accounts maintained by the assessee, there was a net loss of Rs. 700 under the foodgrains business. The Income-tax Officer did not accept the accounts furnished by the assessee. It was estimated that the net income of the assessee from foodgrains business amounted to Rs. 30,000. Income-tax was assessed accordingly. The assessment was confirmed in appeal by the Appellate Assistant Commissioner and the Appellate Tribunal in spite of the assessee's protest (hat the figure of Rs. 30,000 as net income from foodgrains business was arbitrary.
5. The assessee applied to the Tribunal for referring certain questions of law to this court. The application was dismissed by the Tribunal. The assessee, therefore, applied to this court under Section 66(2) of the Act. That application was allowed by this court. The court directed the Tribunal to state a case and refer a certain question to this court. In accordance with that direction, the Appellate Tribunal, Delhi Bench 'A', has referred the following question of law to this court ;
'Whether, on the facts and in the circumstances of the present case, there could be any applicability of the proviso under Section 13 of the Act and whether the Income-tax Officer was justified in applying the same on the basis of the observations of the learned sessions judge ?'
6. Dr. R. R. Misra, appearing for the department, raised a preliminary objection that the present reference is incompetent. He urged that at no stage did the assessee raise the question of applicability of the proviso to Section 13 of the Act. Consequently, no such question can be referred to this court under Section 66 of the Act.
7. Dr. Misra invited our attention to the grounds of appeal before the Appellate Assistant Commissioner and the Appellate Tribunal These are annexures 'B' and 'C' to the statement of the case. Annexure 'C-1' is a copy of the Tribunal's judgment dated June 22, 1955. It is true, that none of these three documents makes a pointed reference to the proviso to Section 13 of the Act. But we find that the assessee has been urging throughout that the estimate of Rs. 30,000 as net profit from foodgrains business was arbitrary. That contention implied the point that there was no justification for rejecting the assessee's account books. In a sense the case does raise the question of applicability of the proviso Section 13 of the Act. Since the point does indirectly arise out of the decision of the Appellate Tribunal, we proceed to record our answer to the question referred to this court.
8. The question referred to this court mentions observations of the sessions judge. Shri Ram, the assessee, and a number of persons were prosecuted for criminal conspiracy and other offences. Shri Ram was convicted by the Additional Sessions Judge, Meerut, on November 3, 1952, for cheating. Annexure 'C-2' to the statement of the case is a copy of the judgment of the sessions judge, dated November 3, 1952.
9. The assessee claimed deductions on account of alleged payments towards tulai and kacha arhatia commission. The sessions judge recorded a conviction for cheating against Shri Ram on the footing that he was not entitled to recover these amounts from the Government.
10. The Income-tax Officer noted that the account books of the assessee were lying in the Court of the Sessions Judge, Meerut. The Income-tax Officer was able to examine the account books there. The assessee produced a number of witnesses to prove payments of tulai and commission charges. These witnesses could not give details of the payments on the ground that their own account books were lying with the anti-corruption department.
11. Annexure 'A' is a copy of the Income-tax Officer's order dated December 21, 1953. He has quoted one passage from the judgment of the sessions judge about criminal conspiracy. It was mentioned in the passage that there was an agreement of criminal conspiracy to forge records. In the first place, Shri Ram's name is not expressly mentioned in that passage. Secondly, Shri Ram was ultimately acquitted of the charge of criminal conspiracy.
12. On page 5 of his order the Income-tax Officer observed thus :
'Since payments debited under various heads such as tulai, kacha arhatia commission, etc., etc., have not been proved by the assessee, it is not possible to accept the account books of grain procurement scheme on their face value.... As the assessee's account books of grain procurement scheme do not inspire any confidence I estimate his net income from this source at Rs. 30,000 in round figures....'
13. The question is whether the estimate was permissible under the proviso to Section 13 of the Act.
14. Section 13 deals with the method of accounting. Section 13 states :
'Income . . . 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.'
15. The proviso to Section 13 is applicable under two circumstances. Firstly, there may be a case where the assessee has not followed any regular method of accounting. Secondly, the accounts may be in such a condition that income cannot properly be deduced from the accounts maintained. In the instant case the assessee did maintain account books for his foodgraines business. The Income-tax Officer examined the account books in the court of the Sessions Judge, Meerut. The present case does not fall under the first limb of the proviso.
16. We have, therefore, to ascertain whether this was a case where income could not properly be deduced from the assessee's account books. It is true that the Income-tax Officer has found some faults with the accounts. But such faults do not necessarily bring a case within the scope of the proviso to Section 13 of the Act. According to the finding of the authorities, charges for tidal and kach arhatia commission were claimed, although such expenditure was not in fact incurred by the assesssee. That may be a good ground for disallowing those particular charges. But from that circumstance it could not be said that income of the assessee could not be deduced from the accounts maintained by him. The present case is not covered by either of the two limbs of the proviso to Section 13. The discussion before us was confined to the assessee's income from foodgrains business. So, our answer to the question referred to the court should also be deemed to be confined to the foodgrains business.
17. Our answers to both the parts of the question referred to the court are in the negative, and in favour of the assessee. The assessee shall get Rs. 200 is costs of the reference from the Commissioner of Income-tax, U. P.