VENKATADRI J. - This is a reference directed to be made on the application of the assessee under section 66(2) of the Indian Income-tax Act, for the opinion of this court on the question which has been formulated as follows :
'Whether the Tribunal was justified in sustaining the addition of Rs. 50,000 to the income disclosed by the assessee ?'
The assessee is a firm carrying on business in the manufacture and sale of manure mixtures and also purchase and sale of fertilisers. For the assessment year 1953-54 (accounting year ending with March 31, 1953), the total turnover of the business was Rs. 38,01,430, out of which straight fertilisers sales were Rs. 12,26,580 and the sales of mixed fertilisers were Rs. 25,74,850. The net turnover was Rs. 35,99,621 and the gross profit was 13.6%. During the course of inspection of the account books, the Income-tax Officer found various defects in the stock register, etc., and he considered that 13.6%, the gross profit arrived at by the assessee, was low when compared with not only the sales of another merchant doing similar business but also the assessees own results for the previous assessment year 1952-53, which came to 18.3%. Therefore, he was of the opinion that the account books maintained by the assessee did not show the true income of the business. The Income-tax Officer observed :
'The overall profit in the assessees case last year on the basis of the assessed profit came to 18.3%.'
On that basis, he estimated the undisclosed profits at Rs. 50,000 and added it to the sum of Rs. 2,80,429 he arrived at. The officer thus determined the income at Rs. 3,30,429.
The assessee filed an appeal to the Appellate Assistant Commissioner and contended, inter alia, that the Income-tax Officer was wrong in proceeding on the prior years gross profit as 18.3%, whereas it was really only about 14.9% and that the addition of Rs. 50,000 was not called for. The Appellate Assistant Commissioner rejected the contentions and held that the addition of Rs. 50,000 was not excessive and that therefore no interference was called for. The assessee carried the matter on further appeal to the Appellate Tribunal. Before the Tribunal, statements showing the comparative figures for the assessment years 1951-52, 1952-53 and 1953-54 were filed. The assessee pointed out that the proportion of the sales of straight fertilisers to the total turnover was 32.2% for the current year as against 22.5% for the prior year, and that, as the rate of profit in straight fertilisers would be very much less than in mixed fertilisers, the average rate of gross profit for the current year would be less than that in the prior year, and that the difference between the rates was only 1.3%. It was also pointed out that the sales in the assessment year were less than the sales during the prior year, whereas the expenses for the two years remained more or less constant. The Tribunal, however, dismissed the appeal, holding that the enhancement on sales was called for and that the estimate by the officer in that regard was reasonable and did not require any modification. The appeal was dismissed.
Aggrieved with the order of the Tribunal, the assessee preferred an application under section 66(1) of the Act. The Tribunal dismissed the application. The assessee therefore filed an application under section 66(2) of the Act, and this court directed the Tribunal to state a case on the question of law already set out.
The assessee is carrying on business in the manufacture and sale of manure mixtures and purchase and sale of fertilisers. In the case of sale of straight fertilisers, the margin of profit was low compared with profit from sale of mixed fertilisers. The assessee, no doubt, conceded that the books maintained by him were defective and as such the Income-tax Officer was right in applying the proviso to section 13 of the Act to ascertain the correct income from the business. But the contention of the assessee was that the basis adopted by the Income-tax Officer for arriving at the gross profit at 18.3% for the year 1952-53 was itself wrong, while according to the assessee the real gross profit for 1952-53 was only 14.9%. While dealing with the assessment for the year 1952-53, the Income-tax Officer compared it with the rate of gross profit of another merchant which was about 16.7%. Again adopting his own method of comparison, the Income-tax Officer arrived at the gross profit on the mixtures of the assessee at 16.7% and that of the compared case at 19.3%. The assessee, according to the officer, could not satisfactorily explain the low percentage. On the basis of the rates worked out in the comparable cases, the officer worked out the gross profit at Rs. 5,61,940 against the return of Rs. 4,93,041 the difference being about Rs. 50,000 and added this sum to the sum of Rs. 2,80,429 arrived at by him. He also observed :
'... having regard to the larger turnover in the assessees case than in the case of the similar merchant, it might be that the assessee did not get as much profit as 19.3%.'
The whole basis of the calculation adopted by the Income-tax Officer has neither rhyme, reason nor consistency. In the statement of the case even the Tribunal felt a doubt that the gross profit in 1952-53 may be only 14.9% and not 16.7%. They also observed that they might be permitted to add :
'With regard to the contention that the gross profit rate was 13.5% it may be said that the correct rate of profit works out to 17.5%... after taking into account the railway freights and carriage outwards...'
These observations go to show that the Tribunal was not sure whether the percentage adopted by the Income-tax Officer was correct or incorrect. The Income-tax Officer takes the comparable case and arrives at a figure of gross profit at 17.7% on the turnover of straight fertilisers and mixtures. From this he estimates the percentage of profits for mixtures alone at 19.3%. Then he takes the case of the assessee. Though the assessee assets that he made a gross profit only at 14.9% for the previous year, he estimated the percentage of profit for the mixtures at 16.7%. Again he arrives at the gross profit for the whole turnover of the business of both straight fertilisers and mixtures at 18.3%. Thus the Income-tax Officer on the basis of this percentage of profit, seeks to add Rs. 50,000 as addition to the income returned by the assessee. This is not a case where the Income-tax Officer adopts a flat rate percentage on the estimated turnover of the business. But this is a case of an estimate on an estimate. He takes a comparable case and estimates the gross profit and then the gross profit arrived at in the comparative case is taken as the basis for fixing the percentage of gross profit in the assessees case. It is true that the true percentage to be adopted would depend upon the Income-tax Officers experience gained by similar assessments during the course of the assessment year and in the previous years and the percentage of profits made by the traders in that particular line of business. But he cannot increase the rate of the percentage of the gross profit of the compared case by an estimate and on that estimate he cannot arrive at an estimated gross profit in the case of the assessee. We feel that the Income-tax Officer had adopted a wrong method, and, under the provisions of section 13, it is always open to the court on a reference to consider whether the method adopted by the Income-tax Officer was a wrong method, wrong in the sense that the method is not one which is likely to result in the true profits and gains being ascertained. As pointed out by the House of Lords in Sun Insurance Office v. Clark, where it becomes necessary to recourse to some form of estimate by the income-tax department that method should be adopted which approximates most near to the truth, and Earl Loreburn L. C. in his judgment at page 454 emphasised the fact that a rule of thumb might be very desirable, but could not be substituted for the only rule of law that he knew of, namely, that the true gains were to be ascertained as nearly as it could be done. The law says that the Income-tax Officer shall make the assessment to the best of his judgment; it means that he must make it according to the rules of reason and justice, not according to private opinion, according to law and not humour and that the assessment is to be not arbitrary, vague and fanciful but legal and regular (see Chettiar P. K. N. P. R. Firm v. Commissioner of Income-tax. Similarly, it has been held in Commissioner of Income-tax v. Sen that where two methods are available to the Income-tax Officer for the purpose of assessment the one which is more just to the assessee and which involves a much less margin of chance of uncertainty should be taken as the basis. Further the Income-tax Officer having found that there was difference of Rs. 68,899 rounded it to Rs. 50,000, saying that he could not have made more than that amount as profit. This is clearly speculative. It has been held in K. S. Rashid & Sons, In re that no amount could be added merely to have a nice round figure.
In the result, we answer the question in the negative and against the department. The result is that the assessment will have to be recomputed in the light of the observations made by us in the judgment. No costs.
Question answered in the negative.