TMI Blog1937 (4) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced the head of the family and a munim in support of its accounts. The Income-tax Officer was however, not satisfied with the correctness or the completeness of the firm's accounts and he consequently raised the value of sales from ₹ 3,14,456 to ₹ 3,50,300. He further calculated the taxable income of the firm by discarding the rate of profits shown by the firm and applying a flat rate of ₹ 7 per cent to the amount determined by him. From this order the firm preferred an appeal to the Assistant Commissioner and in the first instance, he remanded the case to the Income-tax Officer for further enquiry. On receipt, however, of the report of the Income-tax Officer on remand, he declined to interfere with the order of assessment. It appears that both these officers were, among other things, mainly impressed by (1) the absence of any stock register and vouchers ; (2) the inability of the firm to prove the total consumption of raw materials as shown in its accounts ; (3) the huge amount of sales, and the abnormally low rate of profit shown by the firm as compared with the other soap manufacturers in the locality. The firm demurred to the action taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec. 13, an Income-tax Officer can make any estimate that he likes, even though it is not supported by any relevant or admissible material on the record. It will be necessary to examine the whole scheme of the Act in this connection. Chapter 1 deals with Charge of Income-tax and consists of two sections, viz., Secs. 3 and 4, the former dealing with Charge of Income-tax and the latter with Application of the Act. Chapter II is headed Income-tax authorities and comprises one section only, viz., Sec. 5, describing the various authorities that can be appointed under the Act. Then comes Chapter III dealing with Taxable Income and comprising Secs. 6 to 7. Sec. 6 enumerates the various heads of income chargeable to income-tax, and Secs. 7 to 12 deal in detail with the six heads of income mentioned in Sec. 6. Of these, Sec. 10 relates to ' business ', Sec. 11 to ' professional earnings ' and Sec. 12 to ' other sources '. Sec. 13 is restricted in its application to Secs. 10, 11 and 12 only, and deals with the method of computation of income under these sections. The substantive part of this section lays down that taxable income, profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire, on specified points, shall, by an order in writing, assess the total income of the assessee, and determine the sum payable by him on the basis of such assessment . Sub-sec. (4) empowers the Income-tax Officer ' to make the assessment to the best of his judgment ' in cases enumerated there. Out of the other sections in this Chapter Secs. 27, 30 and 37 are the only sections which require consideration. Sec. 27 lays down that in certain cases the assessee may apply to the Income-tax Officer to cancel the assessment and empowers the Income-tax Officer to do so and to make a fresh assessment in accordance with the provisions of Sec. 23, if he is satisfied that the grounds urged by the assessee are sufficient. Sec. 30 provides for appeals against assessment in those cases among others, in which an assessee objects to the amount or rate at which he is assessed under Sec. 23 or Sec. 27 and Sec. 37 confers certain powers of a civil Court for certain specified purposes on the Income-tax authorities. It will thus appear that the only section under which the method of computing income for the purposes of Sections 10, 11 and 12 is provided for is Sec. 13 and the only section under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy and it would have been obviously redundant to repeat in sub-sec. (3) of Sec. 23 what had already been provided for in Sec. 13. There is also no warrant for restricting the interpretation to be put on the words ' method employed ' as used in the second alternative dealt with in the proviso to Sec. 13. In ordinary parlance these words convey the idea of ' the manner in which accounts are kept ' and I see no reason to doubt that the same sense is conveyed here. If the accounts tendered by the assessee are found to be incorrect or incomplete, if they are ' cooked ' or ' fictitious ', it will not be wrong to say that the method of accounting is such that it is not possible to deduce the total income of the assessee therefrom. In my view, therefore, while making an assessment under sub-section (3) of Sec. 23, it is open to the Incometax Officer to invoke the proviso to Sec. 13, if after examining the accounts produced by the assessee under Sec. 22 (4) or after recording the evidence led by the assessee under Sec. 23 (2), he still remains unconvinced as to the reliability of the assessee's accounts, and considers that they do not serve as a safe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out ; but, if that is what they meant as a reason for refusing to look at what was undoubted evidence, they should have said so. There might then have been no difficulty whatever in sustaining their conclusion, which would have been to some such effect as this :- ' The books and accounts you produce are not satisfactory for one reason or another. That being so, we cannot regard them as proving your profits '. LORD SANDS added If the Commissioner had said that they thought the accounts were fictitious or ' cooked ', then that would have justified their disregarding these accounts, and in those circumstances, we might not have been justified in scrutinizing the grounds upon which they were proceeding and in considering whether they were supported by evidence which would satisfy a Court of law . LORD MORISON observed : In this case, the Commissioners have not made a statement to the effect that they were not satisfied with the statement of the profits which the appellant delivered to them and on that ground he agreed to the case being remitted back to the Commissioners for their further consideration. Further, even if it be assumed for the sak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; the Income-tax Officer is bound to assess the author of those accounts on those accounts alone. In Commissioner of Income Tax, Burma v. E. M. Chettiyar Firm (4 Rang. 239), the assessee had not submitted full accounts and the Assistant Commissioner had made his own estimate of the assessee's income and had enhanced the assessment. Three Judges of the Rangoon High Court upheld the order, remarking at the same time that it was not an order under Sec. 23 (4). Counsel for the firm has strenuously contended that as the law allows the Income-tax Officer to examine evidence suo motu to test the truthfulness of the accounts, he can come to his own finding only on the basis of the evidence so examined. I am not, however, prepared to hold that any burden is imposed on the Income-tax authorities to prove by ' positive evidence ' that the accounts are unreliable or that the figure at which they assess is the correct figure. In the first place, the question of unreliability of accounts is a question of fact and primarily falls for the determination of the Income-tax authorities alone. If, therefore, it is once decided by them that the accounts are fictitious or unreliable, thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. P., the learned Additional Judicial Commissioner of Nagpur upheld an assessment made on the basis of the personal experience gained by the Income-tax Officer from the working of other factories and refused to issue a mandamus to the Commissioner holding that no question of law was involved. In I. L. R. 9 Patna 240 which went on appeal to their Lordships of the Privy Council (See Commissioner of Income-tax, Bihar and Orissa v. Sir Kameswar Singh I. L. R. XII Pat. 318, P. C. ; 1934 I. T. R. 94) it had been held that the question whether the assessee's accounts do or do not disclose his real income, is a question of fact, as to which the finding of the Commissioner of Income-tax is binding on the High Court. It was further observed that although, on the one hand, the amount at which an assessee's income is assessed must be based on evidence, on the other hand it is the duty of the assessee to keep such accounts as will show what his real income is, and on that basis the additions to the assessee's return made by the Income-tax Officer were upheld. Their Lordships of the Privy Council do not appear to have taken any exception to these remarks. On the other hand they h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax, C. P. the learned Judicial Commissioner of Nagpur held that the mere filing of a verified statement by an assessee and his statement on oath in support of it are not sufficient to discharge the onus which lies on him to prove the correctness of the return submitted by him. The onus is not under such circumstances shifted to the Income-tax authorities to disprove the correctness of the return. Counsel for the firm has in this connection referred to Pioneer Sports Ltd., Sialkot v. Commissioner of Income-tax, Punjab, and Jambudas v. Income-tax Commissioner but with all respect, I am constrained to remark, that those judgments have not viewed the question from a proper angle of vision. In Pioneer Sports Ltd., Sialkot v. Commissioner of Incometax, Punjab, a Division Bench of this Court, has held that the mere fact that a company shows a low rate of profit was no reason for the Income Tax Officer to reject the total profits nor was the absence of a stock register, which the company had admittedly never need before, and that the use of the proviso to Sec. 13 for the purpose of introducing an arbitrary manner of computing the profits was not justified. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not entitled to entertain and consequently there can be no mandamus. . . . I say, if that w a question of fact, the mere question of whether they appreciated-the evidence rightly or not, and whether they drew a right inference of fact, is not the subject-matter of a mandamus at all. There would be an appeal if there was an appeal, hut there is none . 80 far as the jurisdiction of the Income-tax authorities under the provisions of the Indian Income Tax Act is concerned, the law is practically, the same as in England. They ace the judges of fact while this court is a judge of law and all those matters which are barred from the jurisdiction of the Gourds in England are similarly barred here. The judgments relied upon by the firm therefore, do not render any help to the firm at all. In his statement, the Commissioner has referred to certain English decisions, among others, Stocks v. Sulley (4 T.C. 98), Tudor and Onions v. Ducker (8 T.C. 591), Hunt Co. v. Joly (14 T.C. 165), Wall v. Cooper (14 T.C. 553). Counsel for the firm has urged that those decisions are not strictly in point and can be of no avail in the determination of the question now before us, as the procedure under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioners and they are not satisfied . . . . I cannot possibly try that question. These are gentlemen who are entrusted with the duty of fairly administering the law and if it had been said that they were merely masquerading, that they had been pretending to do their duty but that they arbitrarily and injudicially said : ' We will not listen to you . . . . and we perversely decline ' if that was the sort of case against them, of course I cannot try it here ; it would be impossible to try it here. If you want to say anything of that sort, you should go for mandamus against them to hear a point of law . In Wall v. Cooper, the Commissioners refused to accept the accounts submitted by the assessee as satisfactory evidence and adjourned the proceedings on the assessees undertaking to furnish accounts certified by an accountant. Such accounts were, however, not produced and the random assessment was confirmed. It was held that the question was one of fact which it was for the Commissioners to determine. Here again ROWLATT, J., made some pertinent remarks, which are reproduced below : Somebody must decide whether the statements are wrong or not : I have no juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on legal and not mere heresay evidence, which may be the evidence of his officers or of members of the public, but without evidence that items which do not appear in an account should find a place therein, he is not entitled to assume on mere general heresay that those items should appear in the account . The case of Dunichand Dhaniram v. Commissioner of Income Tax, Punjab, was decided by the same Division Bench about the same time when the previous case was decided. There also the learned Judges observed that the proceedings of an Income-tax Officer were of a judicial nature and that the proviso to Sec. 13 did not justify him in estimating the income of the assessee arbitrarily, by guess work, or without indicating the basis of his assessment. They further remarked that the evidence produced by the assessee should be accepted unless rebutted by the other admissible evidence and not by mere heresay. The case of Muhammad Hayat v. Commissioner of Income Tax, Punjab, was decided by five Judges of this Court and the principal judgment was delivered by Sir Shadi Lal, C. J. In the course of his judgment the learned Judge made the following remarks which, in my view, shake the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income-tax, Bombay v. Bombay Trust Corporation the following observations were made by their Lordships of the Privy Council which have been relied upon by the firm : However sceptical the attitude which the Income-tax authorities may think fit to adopt towards the declarations offered and the entries made in the Bombay Company's books, it is necessary, if the assessment made is to be supported, that there shall be some evidence to show that . . . The only rule of evidence to be discovered in the Indian Evidence Act having any bearing upon this question would appear to be illustration (d), Sec. 114, Indian Evidence Act . . . This rule cannot in the present case supply the want of evidence . These observations of their Lordships of the Privy Council, however, are not relevant to the present case, as their Lordships were not considering a case of unreliable accounts. Their Lordships have, in continuation of this passage, observed as follows : Their Lordships are not considering a case in which by reason of the entries in an assessee's books of account being inconsistent, or by reason of positive evidence showing that certain entries in his books are erroneous or fraudul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat assessment might have been the ' best judgment estimate '. The above discussion of the authorities relied on by the firm would show that there is no warrant for urging that in spite of the unreliability of the books of account produced by the assessee, the Income-tax Officer is bound to base the assessment on those accounts in the absence of any positive evidence to the contrary. It cannot be denied that there must be some material before the Income-tax Officer on which to base his estimate but no hard and last rule can be laid down by the Court to define what sort of material is required on which his estimate can be founded. The law nowhere contemplates that the Income-tax Officer is a party to the case in the sense in which an ordinary party to civil litigation is, and he cannot be expected to be in possession of such evidence as would be required from an ordinary litigant to refute the case of his adversary. The following authorities may with advantage be referred to in this connection in order to have a clear conception of the rights and obligations of the Income-tax authorities, and the true nature of the proceedings conducted before them. In Bhagat Halw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pat. 318), their Lordships of the Privy Council upheld the action of the High Court in maintaining an assessment based on guesswork. The remarks made by the learned Chief Justice of the Patna High Court with which their Lordships agreed are quoted in the judgment and are contained in I. L. R. 9 Pat. 240 at pp. 270 and 271. The learned Chief Justice no doubt remarked that the Income-tax Officer was not entitled to make a guess without evidence but the evidence that was considered sufficient in that connection was the state of affairs in the previous years coupled with the fact that the assessee had a large mortgage loan business. This received the approval of their Lordships, who further observed : If the assessee wished to displace the Taxing Officer's estimate, it was open to him to adduce evidence on all the purchase transactions during the year and of the financial results thereof which he apparently made no attempt to do. In Harmukhari Dulichand, In re, Sir George Rankin, C. J., observed as follows :- It has been said that the Income-tax Officer must proceed in a judicial manner and Sec. 37 has been mentioned in this connection. Fundamentally, no doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every such tribunal must be the same . In the same Judgment at page 137 LORD SHAW observed : The judgments of the majority of the court below appear to me, if I may say so with respect, to be dominated by the idea that the analogy of judicial methods or procedure should apply to departmental action. Judicial methods may, in many points of administration, be entirely unsuitable, and produce delays, expense, and public and private injury. The department must obey the statute . . . . and if administration is to be beneficial and effective it must be the master of its own procedure . At page 138 his Lordship added But that the judiciary should presume to impose its own methods on administrative or executive Officers is a usurpation. And the assumption that the methods of natural justice are ex necessitate those of Courts of justice is wholly unfounded . . . . . It is unnecessary for me to dwell further on the subject or to try to formulate the principles deducible from the judgments discussed above, as they come out clearly in the quotations themselves. Suffice it to say, that an Income-tax Officer is invested with plenary powers in the matter of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court is empowered to decide the questions of law raised thereby. This sub-section also does not confine the High Court to the decision of the question of law as formulated by the Commissioner or the Court issuing the mandamus On the other hand, it confers upon it full power to decide the question of law in the form it actually arises from the statement of the case made by the Commissioner. If any authority is needed for this proposition, reference may be made to Shiva Prasad Gupta, In re. In my view, therefore, it is competent to this Court to clarify the issue of law involved in the statement of the case made by the Commissioner and to give its considered opinion on the question really at issue. Not to do so would amount to a refusal to do its duty. The principal point for consideration before us is, whether the present assessment based on estimate is justified, and although the Commissioner has defended it on grounds other than the proviso to Sec. 13, it is open to us to justify it on the basis of the said proviso. I have already expressed an opinion that the said proviso can be applied to a case like this and would consequently hold that the Income-tax Officer was just ..... X X X X Extracts X X X X X X X X Extracts X X X X
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