The questions referred for the opinion of this court are :
'(1) Whether on the facts and in the circumstances of the case there was material before the Income-tax Officer to discard the assessees books of account and disallow the loss and depreciation allowance claimed by the assessee for his business, Gujrat Pottery Works, for the assessment year 1947-48 merely because there were certain mistakes in recording the English year in the cash book and certain pay sheets were not found to be in order ?
(2) Whether on the facts and in the circumstances of the case, there was material before the Tribunal to disallow the loss amounting to Rs. 29,946 as determined by the Appellate Assistant Commissioner, and depreciation relating to the business of Gujrat Pottery Works for assessment year 1947-48 claimed by the assessee merely because the cash book was held to have been written not from day to day but much later ?'
The assessee is a firm of five partners and runs a glass works at Allahabad and Pottery works styled Gujrat Pottery Works at Derol, District Panchmahals and some other business which it is not necessary to mention. The pottery business was started in the year relating to the assessment year 1942-43 and the income-tax authority found that from the very start it has always been running at a loss. Losses claimed each year in respect of this business were set off against the profits which the firm had from other business. In the relevant year, the books of account produced by the assessee showed a loss of Rs. 53,454 in the pottery works. The Income-tax Officer in the course of his examination of the books found that the cash book produced was not a book written from day to day. Certain errors in the writing of the English year pertaining to several dates were considered by the from day to day but and been subsequently prepared. he thought it had been prepared for income-tax purpose. The Income-tax Officer, therefore, refused to allow the loss claimed by the assessee. He, however, did not make an estimate of profits either. The depreciation allowance claimed by the assessee amounting to Rs. 16,030 was also not allowed by the Income-tax Officer.
On appeal, the Appellate Assistant Commissioner took the view that the error in the writing of the English year of some dates did not justify the discarding of the account books altogether. He appears to have examined the accounts himself and after observing certain items of expenditures on the ground mentioned by him in his order he computed the net loss from the pottery business to be Rs. 29,946. The Appellate Assistant Commissioner directed that this amount of Rs. 29,946 besides such depreciation allowance as the assessee may be found entitled to should be set off against the other profits of the firm.
The Income-tax Officer preferred an appeal and the Income-tax Appellate Tribunal agreeing with the Income-tax Officer held that the books were rightly rejected and allowed the appeal in its entirety setting aside the order passed by the Appellate Assistant Commissioner.
On the assessees application the questions of law mentioned above have been referred for the opinion of this court.
We have heard learned counsel for the assessee at some length. The Income-tax Officer who examined the account books found that the cash book was not a book of original entries. He found as a fact that this account book had been prepared subsequently. He has mentioned that on certain dates, the English year was written as 1947 instead of 1946. The Income-tax Officer was of opinion that if the entries had been made regularly from day to day in 1946 this error of writing the year 1947 instead of 1946 would not have occurred. We are unable to say that the view taken by the Income-tax Officer was necessarily wrong. He had the jurisdiction to examine the books and to decide as to whether they were reliable. The relevant portion of the order passed by the Appellate Assistant Commissioner has also been placed before us. The learned Appellate Assistant Commissioner also does not say that the cash book appeared to be a book which had been written from day to day. He say that it may be that the cash book was subsequently written. He, however, took the view that the entries in the cash book represented the various items of the business dealings with the firm and the veracity of these entries should have been considered. he found that there were vouchers for receipts and disbursements and believed them to be true. He was of opinion that the books of account as a whole should not have been discarded. The Income-tax Appellate Tribunal agreed with the Income-tax Officer and held that the cash book not having been written from day to day was not dependable for income-tax purposes. Whether the cash book was a genuine book on which an assumption could be based is a question of fact and we do not think this court can be called upon to express any opinion in the matter. We do however find that there was some material on which the cash book could be held to be unreliable. The Income-tax Officer has observed in his assessment order that the stock register looked quite fresh and appeared to have been written at a few sittings while the cash book also did not look to be the book of original entry. We, therefore, think that there was material before the Income-tax Officer on which he could discard the assessees books of account.
Section 13 of the Income-tax Act requires that the income profits and gains shall be computed for the purposes of section 10 in accordance with the method of accounting regularly employed by the assessee. The proviso to this section says that if no method of accounting has been regularly employed, of 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. When the Income-tax Officer found in the instant case that the cash book had not been written from day to day he in effect found that no method of accounting had been regularly employed by the assessee. It is not enough that the account of the assessee should be according to some method. It is also necessary that the method should be one which the assessee has regularly employed. It is not necessary in this case to pronounce as to whether the word 'regularly' means year after year or it means regularly throughout the accounting period in question. But in the instant case the finding recorded by the officer shows that he did not find that the accounts produced before him were genuine accounts regularly maintained by the assessee. The Income-tax Officer was, therefore, justified in making an assessment under the proviso to section 13 of the Act and it cannot be said that h was wrong when he did not accept the figure of loss disclosed by the assessees account book which was produced before him. The Income-tax Officer did not determine any income as having been earned by the assessee from this business. it was mentioned that it was necessary for the Income-tax Officer to enter upon a computation of the income and this he could do on some basis which the proviso required him to do. In the instant case he had not adopted any basis nor had he computed any income. It is open to question as to whether the Income-tax Officer should simply say that he would not take any income from that source. This question however has not been raised by the the assessee and has not been referred to us. We, therefore, would not like to express any opinion on it.
Relating to depreciation however, we are of opinion that the matter stands on a different footing. The depreciation has to be allowed to an assessee under the provisions of the statute. Section 10(2) of the Act lays down how profits and gains shall be computed after making allowance mentioned thereunder. In respect of buildings, machinery, plant or furniture being the property of the assessee, a depreciation allowance has to be made in computing the profits. This, therefore, is not a matter depending on the genuineness of the books of account. Special depreciation has been allowed in the earlier years and in respect of which necessary particulars had been furnished by the assessee. The Income-tax Officer appears to have ignored the mandatory requirements of the statute in this connection. Section 10(2) says : 'Such profits or gains shall be computed after making the following allowances...'
We have heard learned counsel for the Department but he has not been able to show why the depreciation should not have been allowed to the assessee. We are, therefore, of opinion that on the facts and in the circumstances of the case, there was some material before the Income-tax Officer on which he could discard the assessees books of account and disallow the loss claimed by the assessee for the business. Gujrat Pottery Works, for the assessment year 1947-48, but we are of opinion that he could not refuse to grant the depreciation allowance claimed by the assessee in respect of that business for that year. The Income-tax Appellate Tribunal is the final authority to find facts under the Income-tax Act and we are of opinion that there was material before the Tribunal on which it could disallow the loss determined by the Income-tax Officer (sic.).
For the reasons already stated above, we are of opinion that the Income-tax Appellate Tribunal could not disallow the depreciation claimed by the assessee in respect of the business of Gujrat Pottery Works mentioned above. Under the circumstances of the case, the parties will bear their own costs of these proceedings. The fee of the learned counsel for the Income-tax Department is assessed at Rs. 200.