By our order dated the 13th of January 1938 we directed the learned Commissioner of Income-tax, Central and United Provinces, to formulate a question of law which we thought arose out of the assessment of Ram Khelawan Thakur Prasad, a Hindu undivided family, for 1932-33 and then to refer the same for our decision. In pursuance of that direction the learned Commissioner has submitted a statement of the case and has sought our decision on the following question :-
'Whether the assessment made by the Income-tax Officer was based on evidence upon which he was empowered to act and whether it is in accordance with the provisions of Section 13 of the Act ?'
The fact are that the Income-tax Officer of Gorakhpur was holding an enquiry in connection with the assessment of the assessee mentioned above in the assessment year 1932-33 and in that connection he had to compute the profits or gains of the assessee for the year of account ending with Dasehra 1988 corresponding to October 1931. A return was submitted by the assessee and then the account-books were called for. The Income-tax Officer looked into those accounts and came to the conclusion that they were not reliable. In other words, he had the provisions of Section 13 of the Income-tax Act before him and he came to the conclusion that the method employed by the assessee was such that his income, profits and gains could not properly be deduced therefrom. He had then to make the computation 'upon such basis and in such manner' as he may determine. The basis and the manner have to be obviously judicial and legal and not arbitrary or capricious. We have gone through the whole of the assessment order of the Income-tax Officer and we find the following paragraph there :-
'The assessee is one of the biggest money-lenders in the district and as already stated above carries on money-lending on pro-notes, bonds and security of ornaments. Keeping in view his local reputation and the conditions of the business during the year, I estimate an income of Rs. 34,000 net.'
Now 'local reputation' can hardly be said to be a judicial basis or legal basis under Section 13 of the Act and it is contended on behalf of the assessee that the entire assessment is vitiated because it is based on local reputation which is not admissible evidence as held by this Court in Gopinath Naik v. Commissioner of Income-tax.
It is contended by Dr. Asthana on behalf of the Department that the assessment was based on the assessment of income made during previous years. We have looked in vain in the assessment order of the Income-tax Officer for any reference to the assessments made in pervious years for the purpose of arriving at the conclusion at which he has arrived in assessing the income of the assessee for money-lending at Rs. 34,000. Dr. Asthana then referred us to the appellate order of the Assistant Commissioner of Income-tax. For aught we know the Assistant Commissioner of Income-tax never called for a report from the Income-tax Officer, nor does it appear that the Commissioner of Income-tax has at any time before submitting the case to us called for any report from the Income-tax Officer. The Assistant Commissioner at one place says. Consequently he (i.e., the Income-tax Officer) rejected the accounts in to and in framing the estimate was apparently guided by assessments made in past years.' At another place he says, 'The Income-tax Officer has computed the income on the basis of assessments in past years', and at a third place he says, 'Thus there was no alternative for the Income-tax Officer but to look to estimates framed in past years.' The Assistant Commissioner nowhere says that he himself looked into the assessments made in previous years in order to test the order of the Income-tax Officer. He assumes - as is clear from the word 'apparently' used by the Assistant Commissioner at one place - that the Income-tax Officer looked into the assessments of the previous years and the present assessment was made on the basis of the previous assessments. The plain words of a judgment are the best guide for finding out how the Judge worked and in the present case we find that the Income-tax Officer acted only on local reputation and the conditions of the business during the year and the Assistant Commissioner who heard the appeal against the decision of the Income-tax Officer did not look - at least nowhere says that he did - at the previous records.
The position, therefore, is that the assessee had a just grievance and we have no option but to decide in his favour. The answer that we give to the question referred to us is that from the assessment order of the Income-tax Officer it does not appear that the assessment made by him was based on evidence upon which he was empowered to act and, therefore, it was not in accordance with the provisions of Section 13 of the Act. The assessee will get the costs of this reference and we fix the fee of the counsel for the Department at Rs. 200. A copy of our judgment under the seal of the Court and the signature of the Registrar will be sent to the Commissioner of Income-tax.
Reference answered in the negative.