Alfred Henry Lionel Leach, C.J.
1. In accordance with the direction of the Court given under Section 66(3) of the Indian Income-tax Act the Commissioner of Income-tax has referred the following question for the Court's decision:
When there is evidence on which the Income-tax Officer can base a finding that the assessee's books are unreliable and consequently rejects them and the assessee fails to produce other evidence, can the Income-tax Officer assess under Section 23(3) of the Act to the best of his judgment?
The words 'to the best of his judgment' are used only in Sub-section (4), which requires the Income-tax Officer to make the assessment to the best of his judgment when there has been a default of the nature contemplated by the sub-section. Sub-section (3) directs the Income-tax Officer to make the assessment after hearing such evidence as the assessee may produce and such other evidence as the Income-tax Officer may require him to produce on specified points. No direction is given to the Income-tax Officer when assessing under Sub-section (3) and the assessee fails to produce evidence or produces evidence which the Income-tax Officer considers unreliable or incomplete. The question is whether in such a case the Income-tax Officer should proceed to assess as he would do in a case falling under Sub-section (4).
2. The provisions of the two sub-sections have been frequently debat ed in the Courts, but it is not necessary for the purpose of deciding the question referred to enter upon a discussion of the reported cases. When assessing under either of the two subsections the Income-tax Officer must have material on which to base his assessment. An order of assessment made under Sub-section (3) is appealable, whereas an order made under Sub-section (4) is not, but this does not mean that the Income-tax Officer can make an assessment under Sub-section (4) capriciously. The assessment must be to the best of his judgment, and the word 'judgment' itself implies consideration of something. Here it must be the consideration of facts relating to the income of the assessee. And the same principle applies when the Income-tax Officer is acting under Sub-section (3). Where in a case falling under that sub-section the assessee has failed to produce evidence on which the Income-tax Officer can make a proper assessment of the assessee's income, the Income-tax Officer must himself take steps to procure material for the purpose if it is not already in his possession. He has power under Section 37 to call witnesses and he can make his own inquiries. When he has material on which he can assess, he must consider it and make an assessment to the best of his judgment. I use the word 'material' advisedly because the Income-tax Officer is not confined to what would be evidence in a Court of law. The only difference between an assessment under Sub-section (3) in a case like the one mentioned in the reference and an assessment under Sub-section (4) is that the Act contemplates a more summary method when the Income-tax Officer is acting under Sub-section (4) and this is by reason of the deliberate default of the assessee.
3. The interpretation to be placed on Sub-section (3) is to be gathered from the judgment of the Privy Council in the case of Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraj of Darbhanga . In that case the assessee stated that he had an income of Rs. 4,364 from a certain source. The Income-tax Officer did not accept this figure, and passed an order assessing him on an income from this particular source of Rs. 1,04,364. In due course the Commissioner of Income-tax referred the following question to the Patna High Court for its decision:
Whether the assessing officer was right in making an estimate of Rs. 1,04,364 under this head as he has done?
4. The High Court answered this question in the affirmative
and Terrell, C.J., in the course of his judgment observed:
Learned Counsel for the assessee has argued that the officer is not entitled to make a guess without evidence and I agree with that contention, but in this case the state of affairs in the previous years, coupled with the fact that the assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions, afford ample material for the assessment made.
5. The other Judges concurred and the Privy Council also agreed:
Adding only that, if the assessee wished to displace the taxing officer's estimate, it was open to him to adduce evidence of all his purchase transactions during the year and of the financial results thereof, which he apparently made no attempt to do.
6. The Income-tax Officer had assessed the assessee to the best of his judgment on the material before him and the material was sufficient for the purpose.
7. There are two other questions which are bound up with the question under discussion, namely, whether the Income-tax Officer when making an assessment on material which he himself has gathered shall disclose it to the assessee before making his assessment and give him an opportunity to adduce material in rebuttal and whether the Income-tax Officer should in his order of assessment set out the facts which he has taken into consideration when estimating the assessee's income for the year. There is nothing in the Act itself which requires the Income-tax Officer to disclose to the assessee the material on which he proposes to act or to refer to it in his order but natural justice demands that he should draw the assessee's attention to it before making the order. Information which the Income-tax Officer has received may not always be accurate and it is only fair when he proposes to act on material which lie has obtained from an outside source that he should give the assessee an opportunity of showing, if he can, that the Income-tax Officer has been misinformed, but the Income-tax Officer is obviously not bound to disclose the source of his information.
8. An order made by an Income-tax Officer under Section 23(3) is appealable. When considering whether an order is right, the appellate authority must, of course, know on what it is based and if the basis of the order is not disclosed in the order itself, it means that the appellate authority will have to refer the matter back to the Income-tax Officer in order to find out what the position is. Moreover, this Court has often to consider an order of an Income-tax Officer and it is convenient to this Court to know from the order itself why it was passed. From every point of view it is desirable that the Income-tax Officer should indicate in his order the material on which he has made his assessment, but I realize that he cannot be compelled to do so.
9. In the reference made by the Commissioner of Income-tax and also in the course of the arguments, mention has been made of Section 13. The Commissioner of Income-tax suggests that Section 13 can be read in conjunction with Section 23(3) and that the effect of so doing is to bring Sub-section (3) of Section 23 in line with Sub-section (4). In Ganga Ram-Balmokand v. Commissioner of Income-tax, Punjab I.L.R.(1937) 19 Lah. 10 the Lahore High Court appears to have read the section in this way and the Rangoon High Court appears to have done the same in Chan Low Chwan v. Commissioner of Income-tax (1959) I.L.R. 7 Rang. 281 (F.B.). I find myself unable to take the same view. Section 13 reads as follows:
Income, profits and gains shall be computed, for the purposes of Sections 10, 11 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.
10. It seems to me that all the section really says is that, if the method of accounting employed by the assessee is a method which does not properly disclose the income, profits and gains of the assessee, the Income-tax Officer can adopt his own method. But in doing so he must have reference to the accounts before him as Section 13 does not contemplate the rejection of the accounts. Section 13 adds nothing to and takes nothing away from Section 23(3).
11. The reference will be answered in the sense I have indicated and the Income-tax authorities will carry out the assessment in the light of the observations made in this judgment. We consider that this is a case in which there should be no order as to costs but we direct, that the deposit made by the assessee be returned to him.