DERBYSHIRE, C.J. - The petitioners obtained a Rule nisi upon the Commissioner of Income-Tax, Assam, to show cause why he should not state a case on the question of law involved arising out of the order of the Assistant Commissioner in this matter or state such other questions of law as in the opinion of the Commissioner or this Court arose out of the order of the Assistant Commissioner.
The petitioners are the proprietors of a firm carrying on business as general dealers at Karimganj in Assam and Chandpur in Bengal. In the year 1937-38 the petitioners made a return, for income-tax purposes, of the profits of their business at Rs. 1,538. The Income-tax Officer did not accept the said return and issued a notice under Section 22(2) of the Act of 1922. Pursuant to that notice the petitioners appeared before him and produced certain books. The Income-Tax Officer after hearing the petitioners assessed them on a sum of Rs. 21,669. The petitioners appealed to the Assistant Commissioner who reduced the assessment to a sum of Rs. 17,000. The petitioners turnover during the year in question was Rs. 1,58,403 and the Income-Tax Officer had declined to accept the petitioners return on the ground that the income showed a profit of less than one per cent. on the turnover which was much below the rate of profit of similar firms in the neighbourhood.
From the file of the Income-Tax authorities kept in respect of the petitioners it is seen that from the year 1927 down to the year 1933 there were four years in which the petitioners made no return but were assessed to tax on varying amounts between two and three thousand rupees under Section 23(4) and in other years the returns were not accepted and they were assessed to tax on sums varying from two or three thousand rupees, sums much larger than those stated in their returns. In the year 1934-35 the petitioners returned their income at Rs. 606 and were assessed on Rs. 4,725. They did not appeal against this assessment. In 1935-36 the petitioners returned their income at Rs. 585 but were assessed on Rs. 4,600 but they did not appeal. In 1936-37 the petitioner returned their income at Rs. 561 but were assessed in respect of their business on Rs. 6,170 and they did not appeal.
In the year now in question the petitioners in making their return started with a value of stock based on their previous returns. It is obvious that such a basis cannot be the foundation of an accurate return, because the petitioners by submitting to the assessments made during the last three years - which were on sums much larger than the returns which they submitted without demur on their part, have admitted the in accuracy of their previous returns.
The Income-tax Officers, however, when hearing the petitioners before him, went into the figures relating to the petitioners, trade so far she was able in order to test the accuracy of the returns. He stated in his assessment :
'An analysis of the purchase and scale shows that under normal circumstances the assessee makes the profit at the following rates on whole scale business'.
Then he states the percentage of profits the petitioners makes on the various classes of goods. He says :
'Taking all these things into consideration I think that it will be conservative estimate if I fix the rate of profit in wholesalers business as 12 1/2 p.c. and that in the retail business at 15 p.c.'
That is with regard to the Karimganj business. As regards the Chandpur business the Income-tax Officer states :
'An analysis of his purchase and sale showed that his rate of profit in wholesalers business was never below 9 p.c. I therefore estimated his rate of profit at 9 p.c. on whole scale business.
As regards the retail business at Chandpur he states :
'Rates at which the goods have been sold have never been recorded. The only case in which details have been recorded is the Chandpur Electric Co. It appears that the assessee has sold goods to his concern at the rates of profit varying from 18 to 36 p.c. This high rate of profit is of course partly due to rise in the price of iron goods from Aswin 1343 B. S. onwards and is peculiar to the year only.
Taking this fact into consideration I consider that he made at least 20 p.c. in retail sale and estimated profit at 20 p.c.'
On those figures he assessed the profits of the Karimganj shop, after allowing for expenses, at Rs. 13,716 and the profits of the Chandpur shop at Rs. 6,583, in all Rs. 20,300. There were various additions in respect of other properties and the total assessment was made after allowing for expenses, on Rs. 21,699.
Now it appears to me that the Income-tax Officer was justified in doing that what he did. The petitioners had very bad records as far their income-tax returns was concerned. Sometimes they never made returns, and when did they make they had been invariably increased by very large amounts. In the three previous year there had been no appeal against those heavily increased assessment.
In the year in question the stock was obviously that carried over from the previous returns which were clearly wrong. The Income-tax Officer was justified in being thoroughly suspicious of the return and when he went into the figures of the returns and analysed them as far as he could, they indicated, wherever reliable data were available that the rates of profit were much higher than those shown in the returns. It was his duty to make the assessment under the section 23 (3) and in doing to be guided by the previous of section 13 of the Act.
It is clear to me - as it was to the Income-tax Officer -that the method of making the return based on precious false basis and the material of the return itself were both such that the income could not be properly deduced therefrom; and it was the duty of the Income-tax Officer, to make a computation in accordance with the provisions of the Act and in, particular, section 13 and 10 so as to arrive at the fair and prosper assessment of the income in question as far as it could be ascertained.
In my view the Income-tax Officer did that. The petitioners however appealed to the Assistant Commissioner who reduced the amount of assessment of the income by Rs. 4,000 odd. In making that reduction of the Karimganj shop in respect of the goods other than cigarettes, matches, and biris from 12 1/2 per cent. In doing so he had respect of similar sales by similar traders in the vicinity. The petitioners have not been prejudiced by that. A little alteration was made in the assessment in the respect of the Chandpur shop.
These are purely questions of the fact on those questions of the fact into which we have gone at some length we are of opinion that the Income-tax Officer came to a correct conclusion, what the Assistant Commissioner has done being in the petitioners favour.
In my view no question of law arrives in this Rule and the Rule must be discharged with costs the hearing fee being assessed at seven gold mohurs.
NASIM ALI, J. - I agree with my Lord the Chief Justice this Rule should be discharged.
The contention in support of this rule is that the assessment under the Section 23 (3) of the Income-tax Act is illegal inasmuch as the Income-Tax authorities not having found that from the method of accounting employed by the assessee in their account books, the income, profits and the gains of the business could not be properly deduced they were bound to compute the income, profits and the gains in accordance with the method of accounting shown in their account books in view of the provisions of Section 13 of the Act. The contention presupposes that the account books on which the assessees rely are genuine. It appears, however, from the findings of the Income Tax authorities that the account books which the assesses field and which were considered by the Income Tax Officer under the section 23(3) do not represent a true state of affairs of the business. Under these circumstances it cannot be said that the Income Tax authorities were bound to accept the profits as shown in the account books of the assessees as their income for the year in the question.
The next point urged in the support of this support of this rule is that in making the assessment under Section 23 (3) the Income Tax authorities relied on some extraneous material namely, the rate of profits in similar trades in the locality, without disclosing to the assessees that the same rate was going to be used against them. This contention has no substances in this case in as much as it appears from the order of the Income Tax Commissioner that the assessees admitted before him that the rate of profit in similar trades in the locality was much higher than the profits shown in the assessees, account books. Their only explanation was that their profit was less as they sold that goods at a very low rate in order to capture the market. From the mere fact that the rates of the profits of the other traders selling goods in the locality during the year in question have been taken into consideration it cannot be said that the assessees have been in any way prejudiced.