OZA J. - This is a reference made under section 66(2) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Bombay, in pursuance of an order passed by this court in Misc. Civil Case No. 286 of 1966, decided on September 23, 1968.
The assessment year in question is 1958-59, the previous year being the financial year which ended on 31st March, 1958. The dispute pertains to the assessees income in the previous year from various sources including the business run in the name Rewa Transport Services, Rewa. From this head the assessee showed receipts at Rs. 3,23,053. The Income-tax Officer did not accept these receipts of the transport income shown in the assessees account books. He thought that the figure shown by the assessee as his earnings from the transport business against mileage of 3,86,878 was very low as compared to the receipts shown by the assessee himself in earlier years and the mileage covered by the assessee in those years. It was also observed that the receipts shown in the account books of the assessee were not verifiable as the assessee had not maintained counterfoils of the tickets issued in the previous year and in the daily collection sheets maintained by the assessee some 15 tickets issued by him had not been accounted for and the practice admittedly had been that one ticket could be issued to a group of persons. On this reasoning, the Income-tax Officer found that the correct position of income and profit could not be assessed from these accounts. He, therefore, applied the proviso to section 13 of the Indian Income-tax Act (hereinafter referred to as 'the Act') and proceeded to compute the assessees income from the transport business and determining by that process he found that Rs. 1,00,000 should be added to the receipts shown by the assessee. The Income-tax Officer adopted the method for determining the assessees income from the transport business on the basis of mileage covered and taking the average seating capacity of the bus to be 35 he found the optimum receipts on the basis of the rate of 7 pies per mile. In this manner, he calculated the optimum receipts for the passenger fare alone to be Rs. 4,93,674. According to the Income-tax Officer, the luggage receipts would be in addition to this and, therefore, he calculated the optimum receipts at the round figure of Rs. 50,000 and then allowing a ten per cent. margin he found that the total receipts would come to Rs. 4,50,000 whereas the receipts shown by the account books of the assessee were Rs. 3,23,053. Thus, he found that Rs. 1,26,947 were shown less. He, therefore, added a round figure of Rs. 1,00,000 to the receipts shown.
The assessee went in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner negatived the contention advanced by the assessee and maintained the order passed by the Income-tax Officer. The assessee thereafter preferred an appeal to the Appellate Tribunal and the Tribunal reduced the amount to Rs. 50,000 which was to be added to the receipts shown by the assessee and maintained the order passed by the Income-tax Officer. Dissatisfied by this order of the Appellate Tribunal the petitioner approached this court under section 66(2) of the Act and this court, after hearing, directed the Tribunal to state the case and refer the following questions to this court which it did :
'(1) Whether there was material before the Tribunal to come to a finding that the assessees account books do not disclose his true profits
(2) Whether, on the facts and circumstances of the case, the Tribunal was justified in estimating the earnings of the assessee from transport business at a figure arrived at by making an addition of Rs. 50,000 to the receipts of those earnings shown by the assessee ?'
Learned counsel appearing for the assessee at length contended that there is no finding given by the Income-tax Officer and maintained by the Appellate Tribunal that the income, profits and gains cannot be properly deduced from the method of accounting adopted by the assessee and, in the absence of such a clear finding by the taxing authorities, the proviso to section 13 of the Act could not be accounts maintained by the assessee was that some 15 tickets during the course of the whole year not accounted for in the collection sheets on the basis of which the accounts and total receipts of the assessee are ascertained. He, therefore, contended that this was not sufficient material on the basis of which the Income-tax Officer and the authorities in appeal could hold that a true position of profits and income could not be deduced from the accounts maintained by the assessee and, therefore, according to learned counsel, there was no material on the basis of which the proviso to section 13 of the Act was applied. Learned counsel contended that in the assessments of the previous year and the subsequent years the daily collection sheets have been accepted and at no point of time was the assessee called upon to produce the counterfoils of tickets and in that event not maintaining the counterfoils could not be made a ground to infer that the collections could not be verified. Learned counsel at length stated the method of accounting maintained by the assessee. According to him the assessee resides at Indore and his business was carried on at Rewa by the officers of the assessee and the regular system followed at Rewa was that every day when the vehicle returned on the return trip a collection sheet was prepared showing the ticket number which were issued, and the passengers taken on those tickets and the collections on the basis of those tickets. And on the basis of these daily collection sheets, according to learned counsel, the statement of accounts was prepared and on the basis the receipts have been shown in the accounts books of the assessee. In such a system of maintaining accounts, according to learned counsel, maintenance to counterfoils of the tickets was not necessary and according to learned counsel it was the practice not to maintain the counterfoils of tickets and at no point of time did the income-tax authorities demand production of these counterfoils, except for the present assessment year. Under these circumstances, it was contended that non-production of the counterfoils, as they were not maintained, should not be considered as a circumstance against the assessee. It was also contended by learned counsel that the accounts were audited as the assessee resided at Indore and he wanted to keep a check on the officers managing the business at Rewa, and once accounts have been audited it was not necessary for him to maintain the counterfoils of the tickets. He, however, contended that audit was not necessary as it was a private business of the assessee but still, the accounts having been audited there was no reason for the Income-tax Officer to come the conclusion that from these accounts maintained by the assessee the true position of profit and income could not be ascertained.
It was also contended that the explanation given by the assessee that the fall in the total receipts as compared to the previous year was attributable to causes which were reasonable and which the authorities should have accepted as, according to learned counsel, on formation of Madhya Pradesh, Rewa lost the importance that it had and it was also contended that some more permits on the route where the passenger buses of the assessee were plying were granted. This explanation, according to learned counsel, clearly explained the circumstances which would justify the fall in the total receipts as compared to previous years.
It was further contended by learned counsel that having counsel that having applied the proviso to section 13 of the Act, the Income-tax Officer in computing the total receipts has purely based his conclusions on surmises and there is no justification for adding Rs. 1,00,000 as ordered by the Income-tax Officer or Rs. 50,000 as ultimately has been ordered by the Appellate Tribunal. According to learned counsel, the authorities were not entitled to act on the basis of surmises and assumptions and they have not followed any comparable or proper method as, according to learned counsel, even those assessees having transport business in the same area have been assessed on total receipts much less than those of the assessee in the present case. In support of his contentions learned counsel referred to a series of decisions and contended that the assessment order passed by the Income-tax Officer and ultimately maintained by the Appellate Tribunal is not justified.
Learned counsel appearing for the department on the other hand contended that the Income-tax Officer has given a clear finding that it was not possible for him to adduce the true position of income and profits from the accounts maintained by the assessee and he, therefore, applied the proviso to section 13 of the Act. According to learned counsel, in fact, the questions referred themselves go to show that there is no controversy that the Income-tax Officer applied the proviso to section 13 and that he gave a clear finding, as question No. (1) referred to only is that whether there was material before the Tribunal to come to the finding that the assessees accounts books do not disclose the true profits. He, therefore, contended that this question itself pre-supposes a finding which is required for applying the proviso to section 13. And, therefore, the contention advanced by the Income-tax Officer or the Tribunal which would justify the application of the proviso cannot be accepted. Learned counsel also contended that it is not a question of insignificant mistakes because 15 tickets were not accounted for which could be detected by the Income-tax Officer, but according to learned counsel this put the Income-tax Officer to inquiry and the material on the basis of which he could be satisfied was not available. Consequently, it could not be said that there was no material before the Income-tax Officer to come to the conclusion that accounts produced by the assessee did not disclose the true position. It was also contended that the Income-tax Officer has not acted either with caprice or arbitrarily. On the contrary, he has applied a rational rule for assessing the total receipts and even after applying the rule he has given concessions for possible eventualities and ultimately the Appellate Tribunal reduced the sum to be added to the total receipts to half, from Rs. 1,00,000 to Rs. 50,000 and, therefore, it could not be said that the income-tax authorities acted in a manner which is not justified. Learned counsel, therefore, contended that there is no reason to interfere with the findings arrived at by the Appellate Tribunal.
It was at length contended by learned counsel for the assessee that the Income-tax Officer did not arrive at a finding that the true position of income and profits could not be deduced from the accounts, which was necessary for application of the proviso to section 13. The question referred to us mentioned above, clearly go to show that the first question pre-supposes a finding of that nature. These questions were framed by a Division Bench of this court on a petition by the assessee and the order direction the Tribunal to state the case passed by the Division Bench of this court clearly goes to show that it was not the grievance made before the Division Bench that there is no finding to attract the proviso to section 13 and it was as a result of this that, although the petition was allowed and the Tribunal was directed to state the case, yet the questions framed were as they have now been referred by the Tribunal to us and the first question quoted above clearly goes to show that the only grievance made was that there was no material before the Tribunal to come to a finding that the assessees account books do not disclose his true profits. Even apart from it, the order passed by the Income-tax Officer and the Appellate Assistant Commissioner and the Tribunal goes to show that they have been harping on the question that the accounts shown by the assessee are not sufficient to deduce the true position of income and profits. Consequently, it could not be contended that there is no specific finding given by the Income-tax Officer or the appellate authorities and, therefore, the proviso to section 13 cannot be attracted. Apart from it, is clear that the only two question referred to us do not indicate that the question about the finding also was a debatable question and that not having been referred, it is not possible for us to embark upon an inquiry into that matter.
Arguments were advanced at length to maintain that the manner in which accounts have been maintained by the assessee are regular and accounts are maintained so well that there is no scope the income-tax authorities to come to the conclusion that from these accounts the true position about the income and profits could not be found. But it is not in dispute that this court hearing a reference cannot go into the facts to come to the conclusion as to whether on the facts before the income-tax authorities the conclusion arrived at by them are justified or not, admittedly, this court is not exercising appellate jurisdiction. The question that has been referred above is only the limited question as to whether there was material before the Tribunal to come to this conclusion.
Reference was made by learned counsel for the assessee to Commissioner of Income-tax v.Padamchand Ramgopal  76 ITR and it was contended that insignificant mistakes could not justify the Income-tax Officer to reject the accounts of the assessee as a whole. In this decision their Lordships were considering assessments of the years 1954-55 to 1957-58, and the accounts during this period (1954-55 to 1957-58) were rejected as unreliable on the basis of insignificant mistakes discovered in the respondents accounts for the year 1953-54. And it was in this context that it was observed at page 720 :
'Further, they afforded no basis for rejecting the accounts for other years.'
Apparently, therefore, this case does not help in any manner the assessee. Another decision of the Supreme Courts on which reliance was placed is Commissioner of Income-tax v. S. P. Jain : 87ITR370(SC) .In that case, it appears that the findings arrived at by the Appellate Tribunal were based on inadmissible material and the Tribunal failed to take into accounts the relevant material and it was in this context that it was observed at page 381 :
'In our view, the High Court and this court have always the jurisdiction to intervene if it appars that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on evidence or where the finding is consistent with the evidence or contradictory of it, or it has acted on material party relevant and partly irrelevant, or where the Tribunal draws upon its own imagination, imports fact and circumstances not apparent from the record, or bases it conclusion on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated.'
It, therefore, only follows that if the conclusion arrived at by the Tribunal are not based on any material or are based on irrelevant material the finding is not binding on this court. In fact, it appears that it is because of this that the Division Bench of this court framed question No. (1) as it has been framed. If we come to the conclusion that there is material for the Income-tax Officer or the Appellate Tribunal to come to the conclusion that the true position of income and profits could not be deduced from the accounts of the assessee, then alone the proviso to section 13 of the Act could be attracted.
Learned counsel for the assessee placed reliance on Motipur Sugar Factory (P.) Ltd. v. Commissioner of Income-tax : 95ITR401(Patna) , where the accounts of the assessee were rejected under section 13 for nonproduction of parchas of the sugarcane and their Lordships of the Patna High Court rejected the view taken by the Tribunal; in support of his contention that if the counterfoils of the tickets could not be produced, still the daily collection sheets showed the correct position of accounts and, therefore, it could not be said that there was sufficient material for the income-tax authorities to apply the proviso to section 13. In that decision it is no doubt true that the parchas were not produced and, therefore, the accounts did not clearly show the weight of the sugarcane purchased and on this basis it appears that the authorities applied the proviso to section 13. But their Lordships of the Patna High Courts did not accept the view of the Tribunal mainly on two grounds, (i) that the assessee had produced a letter from the Central Excise authority showing that entire manufacturing process of sugar was subject to supervision and checking of Central Officer posted at the factory, and (ii) that the accounts of the assessee had also audited by a reputed firm of chartered accountants. In that case their Lordships observed at page 410 :
'The assessee also produced a letter from the Central Excise authority showing that the entire manufacturing process of sugar from the weighment of cane to the bagging of sugar was subject to the supervision and checking of the Central Excise Officer posted at the factory. The cane cess register as prescribed by the State Government was also produced by the assessee. It is an admitted position that the accounts of the assessee had been audited by a reputed firm of chartered accountants, M/s. S.R. Batliboi and Company. It appears from the order of the Income-tax Officer that all the registers, accounts books, etc., which were produced by the assessee were rejected simply on the ground that the parchas were not produced. As I have already held, parchas were not relevant documents for the purpose of showing the real purchase of sugarcane by the assessee. The observation which has been made by the Tribunal in connection with the documents filed by the assessee has been quoted in extenso. From this observation it appears that the Tribunal also rejected the accounts books, register, etc., because the parchas were not produced by the assessee. The Tribunal has treated the parchas as primary evidence and the other records as subsidiary evidence. It is difficult to comprehend the reasoning of the Tribunal when actually the parchas could not be primary evidence of the fact of actual purchase of sugarcane by the assessee-company. In Income-tax Appeal No. 1341-Pat. of 1969-70, which I have referred to above the Tribunal has relied on those very documents and register, which were produced by the assessee in the instant case, to show the actual purchase of sugarcane. The Tribunal in that case has made the following observation :.... a separate ledger account for each of the growers is maintained and a ledger folio is given in the weighment register. Under the circumstances, if one wants to verify the purchases of sugarcane he should rely on the weighment register and not on a slip or purja which was just in the shape of an identity slip or a card that the goods of the holder would be weighed by the company or would be purchased by the company. On examining the weighment register we were satisfied that unless any discrepancy is found in the weighments register, it could not be said that the purchases were inflated by the company.'
It appears that it is in the context of these facts that their Lordships of the Patna High Court ruled that application of the proviso to section 13 on this material was not justified.
Another case on which reliance was placed by learned counsel for the assessee was Md. Umer v. Commissioner of income-tax : 101ITR525(Patna) , to contend that in that case the Tribunal rejected the accounts because the cash memos were not produced and he, therefore, wanted to contend that the non-production of the counterfoils of the tickets could not be said to be material justifying the application of the proviso to section 13. In that case because their Lordships no doubt found that the non-production of the cash memos was not sufficient and further found that there was no finding that any of the entries in the books of account was not correct and it was on the basis of those facts that their Lordships held that rejection of the accounts was not justified in that case. Apparently, this decision also, therefore, is not of much assistance to the case of the present assessee. The decision reported in Vijaya Trader v. Commissioner of Income-tax : 74ITR279(KAR) on which also reliance was placed only lays down the proposition that so long as it is not impossible to deduce the true income from the accounts, its computation could not be made in any other way, and there could be hardly any challenge to this proposition. It is in fact on the basis of the finding that the true position about income and profits could not be deduced from the accounts submitted by the assessee in the instant case that the proviso to section 13 of the Act has been applied and the Income-tax Officer has added to the total receipts on the basis of his own calculations.
Learned counsel referred to the decision reported in R. B. Jessaram Fatehchand v. Commissioner of Income-tax : 75ITR33(Bom) and R. B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income tax : 75ITR260(Bom) . In both these decision on their own facts it was stated that the material was not sufficient on the basis of which the accounts books of the assessee could be rejected and the proviso to section 13 of the Act could be applied. Apparently, they do not decide any question of law and in the light of the question that been referred in the present case we have to decide as to whether there was material for application of the proviso to section 13 of the Act. The decision reported in Commissioner of Income-tax v. McMillan & Co. : 33ITR182(SC) lays down that whether the income, profits and gains can properly be deduced from the assessees method of accounting is undoubtedly a matter which the Appellate Assistant Commissioner can go into when he has seisin of the appeal from the order of assessment of the Income-tax Officer. Apparently, therefore, this decision is of no help so far as the present case is concerned. It is, therefore, clear that if the Income-tax Officer had material to come to the conclusion that the true position of gain could not be deduced from the accounts maintained by the assessee he had jurisdiction to proceed under the proviso to section 13 of the Act.
It was contended that non-production of counterfoils was not material because the accounts were audited by a renowned firm of chartered accountants. Although this arguments was advanced at the bar and it was also contended that a report of the auditors was placed on record, but there is nothing to indicate that there was any statement or an explanation submitted by the assessee that until the accounts were audited the counterfoils were maintained and it is only after the audit that they have been disposed of. There is nothing is the order of Income-tax Officer to indicate that the audit report was made on the basis of the explanation submitted by the assessee. We, therefore, have nothing to infer that this fact that the auditors audited the accounts with the aid of the counterfoils was placed before the Income-tax Officer at the time of the assessment. Learned counsel appearing for the assessee frankly stated that he is not in a position to make a statement that while auditing, the auditors inspected all the counterfoils. In such a situation it could not be said that the auditors report which is now suggested to be on the basis of the counterfoils was placed before the authorities in that perspective. Ultimately, therefore, the material which was placed before the Income-tax Officer was the collection-sheets which he found to be wrong as some tickets he discovered were not accounted for and in order to verify that situation the only material, which could have been produced, were the counterfoils, and admittedly they were not produced before the Income-tax Officer. On this material the Income-tax Officer felt that from the accounts of the assessee the true position of the profits could not be deduced and in our opinion there was material on the basis of which this view could be reasonably taken. Consequently, we cannot hold that there was no material before the Tribunal to come to the finding that assessees that the assessees accounts books did not disclose his true profits.
The next question referred to us is about the estimate which ultimately has been done by the Appellate Tribunal by adding Rs. 50,000 to the receipt of earning shown by the assessee. It is not in dispute that the Income-tax Officer has not in an arbitrary manner fixed the amount, although it was seriously contended that the Income-tax Officer, after calculating on the basis of ideal condition, found the figure which he wanted to add to the receipts of the assessee and thereafter reduced it arbitrarily. But it appears that the Income-tax Officer applied a rational principle on the basis of previous years and after arriving at a figure he gave advantage of the assessee for possible eventualities and reduced the figure and ultimately brought it to Rs. 1,00,000. But, ultimately, after the decision of the Appellate Tribunal, the appellate authorities have reduced it even further to the amount of Rs. 50,000. Learned counsel placed reliance on a decision reported in Harakchand Radhakisan v. Commissioner of Income-tax to contend that the figure arrived at by the authorities is merely based on conjecture. In that decision, it was observed at page 201 :
'The Tribunal in its order has observed that after rejecting the results as per books the Income-tax Officer made an addition of Rs. 27,445 and of Rs. 4,740 and that the assessees books disclosed a total refraction of 6.4% which was not established. The order of the Tribunal is mainly based on the rates usually adopted in this part of the country. The Assistant Income-tax Commissioner has based his order on the circumstance that the rates applied by the Income-tax Officer were the same as were applied by his predecessor in respect of the assessment for the immediately preceding year. The Income-tax Officer has based his assessment on the conjecture that the refraction should be allowed at the rate of 2%, the oil yield should be 32% and the oil cake production should be 66%. There is no material which would justify such an inference. No scientific data was before any of the income-tax authorities from which it could be inferred that the normal yield of the oil should be 32% and of oil cake 66% and that the allowable refraction should be 2%. Even there was no material on the record to show on what basis the predecessor of the Appellate Assistant Commissioner had applied the same rates in respect of the assessment for the immediately preceding year. There was no material to show what was the quality of the seeds used in the previous year. The Appellate Assistant Commissioner rejected the results of the subsequent year on the ground that there was no material to show that the seeds were of the same quality, but he has failed upon the rates fixed by his predecessor at the previous year without there being any material to show that the quality of the seeds in the year immediately preceding the assessment year was the same as that of the assessment year.'
On the fact of that case it appears that their Lordships found it difficult to justify the refraction at the rate of 2% and taking the oil yield at 32% and of the oil cake to be 66%, as these figures were arrived at by the Income-tax Officer purely on imagination. But so far as the present case is concerned the Income-tax Officer calculated on the basis of mileage covered and on the basis of collection per mile in the previous assessment years and even after calculating this he gave credit for eventualities and reduced the figure to Rs. 1,00,000 which further the appellate authorities reduced to half. In this view of the matter, it is not possible for us to hold that the Tribunal was not justified in estimating the earning of the assessee from the transport business at a figure arrived at by the making of an addition of Rs. 50,000 to the receipts of those earnings.
In the light of the discussion above, therefore, our answers to both the questions referred are in the affirmative.
The original assessee in the case, when the reference was made, was Shri Sohanlal G. Sanghi. It appears that unfortunately he died during the pendency of these proceeding and an application has been made by his legal representatives. This is a reference and it could only be said that as the assessee, Shri Sohanlal G. Sanghi, died during the pendency of these proceedings he was represented by-(1) Suresh Kumar, s/o Sohanlal Sanghi, (2) Satish Chandra, s/o Sohanlal Sanghi, (3) Sharad Kumar s/o Sohanlal Sanghi, and (4) Shrimati Snehalata, w/o Sohanlal Sanghi, before us.
In the circumstances of this case, parties are directed to bear their own costs.