Income Tax Appellate Tribunal - Nagpur
Shamrao B. Deshmukh vs Commissioner Of Income-Tax, C. P. & U. P. on 26 March, 1939
Equivalent citations: [1939]7ITR515(NAG)
ORDER
The application before us in lone under Section 66(3) whereby it is prayed that the Commissioner of Income-tax be directed to state a case, he having refused so to do. His refusal is to be found in his order dated 25-9-35 (p. 105 paper book). That states that three matters were raised before him : (1) the addition of Rs. 18,244 and 13,833 to the income of the Badegaon shop of the assessee, (2) bad debts, (3) certain expenses.
As to (2) that was withdrawn by the assessee. It is nevertheless made the basis of the fourth point in the application. It was abandoned without argument before us.
As to (3) that line of attack was not taken before the Assistant Commissioner. Accordingly no appeal on that point lay to the Commissioner and no question falls to be stated by him relative to that matter.
We are left with (1), As to that the facts would appear to be that a return was made, it was questioned, and the Income-tax Officer under the powers conferred upon him by Section 23(2) served a notice requiring the assessee to produce his books as evidence of the correctness of the return. The assessee produced his books which were scrutinized and found to be unreliable : whereupon the Income-tax Officer proceeded to assess him under Section 23(3). So far as we have been able to find out the assessee did not tender any further evidence and the Income-tax Officer did not require evidence on specified points but proceeded on an analysis of the books aided by a statement, derived from the books, prepared by the assessee and checked by the Income tax officer the exact nature of which we have in vain endeavoured to understand owing to lack of material. The statement in question is headed "Translation of list of Debtors on record." It is very far from being self explanatory and its meaning has not been made clear.
Having found that the books were unreliable the Income-tax Officer by order assessed the income under Section 23(3) and appears to have arrived at that assessment by including a computation arrived at by exercising the powers conferred upon him by the proviso to Section 13.
Before proceeding further we think it desirable to point out the difference between Section 13 and Section 23 and to explain our judgment reported the Income-tax Commissioner v. Achhrulal Mannalal.
Section 23 is concerned with assessment; Section 13 with computation. In Income-tax Commissioner v. Achhrulal Mannalal, words are used from which it is possible to argue, as was argued in this case that assessment, in certain circumstances, can and must be under Section 13. As stated that is not we think correct. The correct way of stating the proposition is that in such circumstances assessment can and must be in accordance with a computation made under Section 13. The difference is of no importance in our opinion but is a mere matter of phraseology. What is of importance is that the Income-tax Officer must when assessing under Section 23(3) apply his mind to Section 13 proviso in cases where he is rejecting the evidence of the books.
Put in another way Section 13 requires that the income, profits and gains, in cases falling within Sections 10, 11 and 12, shall be computed in a particular mode. That mode is "in accordance with the method of accounting regularly employed by the assessee."
Thus, if assessee has books disclosing a method of accounting regularly employed by him his income etc., must be computed by following that method.
But the proviso operates if the method is such that the income etc. cannot be deduced "therefrom" (one would have though the word "thereby" would have been more apt, it being difficult to deduce anything "from" a "method").
If the income cannot be so deduced then some other method of arriving at the income must be followed and proviso accordingly requires that "then the computation shall be made upon such basis and in such manner as the Income tax officer may determine."
Clearly, if the books are unreliable no method employed in the keeping of them can be founded the basis of a computation. The books are simply unreliable.
Commissioner of Income-tax, Bombay v. Sarangpur Cotton Manufacturing Co., Ltd., Ahmedabad, is an example showing how "method" as distinct from "books" has to be followed in making the computation. There the books showed a profit of X rupees but the method followed by the assessee was to revalue stocks from time to time. A revaluation, on an intelligible basis showed that at the beginning of the accounting year the stocks were undervalued by Rs. 3,97,634 and at the end by Rs. 3,43,353. The difference was accordingly deducted from profits. This "method" was disclosed in a letter and was not to be derived from the books. It was found in that case that the Income-tax Officer never exercised his judgment under the proviso. He never considered whether the method was one from which the profits could be deduced but cut out the deduction founded on the revaluations and restored X rupees as the profits. Their Lordships state :
"........ Their Lordships are further of opinion that if he had so exercised his judgment the Income-tax Officer would not reasonably have come to any other opinion than that the profit shown in the profit and loss account could not be the true figure for Income-tax purposes."
We understand this to mean that had he posed himself the question granted the profits cannot be deduced from (or by) this method, is the profit X ? He would have answered, as a reasonable man, No. In the present case the Income-tax Assistant Commissioner in his order dated 1-6-35 on appeal from the Income-tax Officer observed as follows :
"It is true that no specific omission has been pointed out this year but this does not indicate that there was no omission at all. It only means that omissions that might have been there were not detected by the Income tax officer. The extremely defective method of accounting which the appellant has been following from year to year, which consists of not tallying the book balance with the actual balance in hand..... would cover any number of omissions, some of which were accidentally discovered during the assessment year 1930-31 leading to the prosecution proceedings against the appellant, which culminated in composition, would certainly entitle the Income-tax Officer to determine the appellants income of the Badegaon shop on a fair basis."
He adds "....... the appellant, who would intentionally keep his accounts in accordance with a method, which is a clear negation of all the principles of accountancy, does not deserve to be told that he has violated an elementary principle, but even if such a warning were necessary it must be presumed to have been conveyed to the appellant on 3-10-32 when the appellant himself was examined by the Income-tax Officer in the case for 1931-32 and when he admitted these defects."
Going back a stage from the Assistant Commissioner to the Income-tax officer we find him, in his order of 19-3-34, observing as follows :
"The accounts books of this shop are again found to be unreliable. The cash balance represent merely book balances. From the assessment records of 1931-32 and 1932-33 it is clear that the cash book was unreliable.... The assessee has made no attempts to reconcile the book balances with the actual cash in hand."
He accordingly treated the books as unreliable and proceeded to assess under Section 23(3).
This had been done in the previous year but in that year the assessment was arrived at by adding to the assessees figure a lump sum addition of Rs. 25,000, was reduced to Rs. 20,000, and on appeal to the Commissioner was deleted altogether on the ground (see quoted passage in the order dated 1-6-35 at pp. 96 & 97) ".... the appropriate course for the Income-tax Officer would have been to make an assessment on some basis that could be subjected to scrutiny on appeal or revision. A lump addition of the kind made by the Income-tax officer is hardly justifiable."
Having thus been told that a lump addition was "hardly justifiable" the Income-tax Officer when it came to the year of accounting under consideration adopted another mode. He made an effort to find out what the true position was from the books. He arrived at a particular figure. The fundamental question is : Is that figure open to challenge in this Cour ?
It is necessary, however, at this stage to advert to the so called questions of law mentioned in the application before us :
"(1) Was the Income-tax Officer justified in treating the account books of Badegaon Shop unreliable when the cash balances represent book balances ?
(2) In view of the admitted absence of any specific omission of any income in the account year, was the Income-tax Department entitled to assess the assessee on the income invented by its officers ignoring the income deduced from the books or lists showing income ?
(3) Is the principle of assessment propounded by the Income-tax Officer and accepted by the Assistant Commissioner and Commissioner sound in la ?"
In our opinion the first question raises no question of law. See Diwan Chand v. Income-tax Commissioner and Firm Gokul Chand v. Commissioner of Income-tax. As their Lordships of the Judicial Committee observed in Commissioner of Income-tax, U. P. & Central Provinces v. Badridas Ramrai Shop, Akola : "No question of law was involved; nor is it possible to turn a mere question of fact into a question of law by asking whether as a matter of law the officer came to a correct conclusion upon a matter of fact."
As to the second question we do not consider that it is fairly posed or raises any question here involved. This is not a case of an officer "inventing" an assessment. It is a case of an officer faced with unreliable books doing his best with bad materials.
In Commissioner of Income-tax, Bihar and Orissa v. Maharajadhiraj of Darbhanga their Lordships indicated that an officer computing in accordance with the provisions of Section 13 proviso must not guess, but in arriving at his estimate can take into account the state of affairs in previous and in the case of a large business can assume recoveries and so forth. If, on such materials, he makes an estimate, that estimate stands unless the assessee can prove that it is wrong.
In Commissioner of Income-tax, United and Central Provinces v. Badridas Ram Rai, Akola (1937 Nag. 191 at 203) their Lordships of the Judicial Committee when dealing with Sec. 23(4) approved Abdul Bari Chowdhury v. Commissioner of Income-tax, Burma which laid down that a mere guess may be acted upon in an ex parte assessment and if the Income-tax Officer guesses there is no appeal.
As their Lordships observe at pp. 201 and 202 : "The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously because he must exercise judgment in the matter.....". But their Lordships make it plain that if he proceeds in an intelligible way as a reasonable man his conclusion cannot be challenged in a Civil Court.
That, of course, is a case under Section 23(4) and this is a case of assessment under Section 23(3) which assessment is arrived at as the result of a computation made by the Income-tax Officer under the proviso to Section 13.
Section 23(4) says : "the Income-tax Officer shall make the assessments to the best of his judgment."
Section 13 Proviso says : "the computation shall be, made upon such basis and in such manner as the Income-tax Officer may determine."
Suppose the Income-tax Officer says : "I will check this by going right through these books, ignoring the balances which are mere paper balances", can the result arrived at be stigmatized as a guessi ? We think not. Is the High Court to check up the figures and decide whether the result is correct ? We think not. There is here neither arbitrary guess work nor capriciousness, vindictiveness or dishonesty. The Income-tax Officer has decided to go to work, in a situation rendered difficult by the assessees misleading books, in a rational way in an effort to arrive at a fair figure.
As to the third question we have not had our attention drawn to any principle of assessment other that this : the Income-tax Officer having doubted the return, having given notice, having received and examined books, has rejected those books as unreliable and has proceeded to assess under Section 23(3) and for the purpose of arriving at his figure has computed as directed by Section 13 proviso. In order not to guess, he has, with the help of the assessee, analysed the assessees books from various angles and has arrived at an estimate and on that estimate has assessed the assessee. We see no principle here but merely a compliance with the provisions of the Act.
In our opinion therefore there is no question of law involved in either of the questions put or arising out of the circumstances of this assessment.
The applications are accordingly dismissed with costs. Counsels fee 75 rupees.
Application dismissed.