TMI Blog1954 (3) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... tively that he was disallowing any part of the establishment expenses on the ground that such part represented payments for other than bona fide commercial reasons. The Income-tax Officer in making the addition of ₹ 5,000 in the handicrafts account said as follows :-- There is no stock book and it is not possible to verify that the whole of the stock was accounted for. I would increase the gross profit by ₹ 5,000 which would turn the gross loss of ₹ 1,872 into a net profit of ₹ 3,128. Hence added. It may be added here that the Income-tax Officer was wrong in mentioning the figure of ₹ 1,872 as a gross loss. It was really a net loss because the gross profits on this account amounted to as much as ₹ 15,874 and the Income-tax Officer himself referred to ₹ 1,872 as the net result of loss in the sentence next previous to the one quoted above. Similarly, the Income-tax Officer in making an addition of ₹ 7,000 in the New Delhi branch shop account said :-- There is no stock book and it is not possible to verify that the whole of the stock is accounted for. I would increase the gross profit by ₹ 7,000. The net profit would th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 35. One was that in the third sentence of the order it was said that the assessee returned a net loss of little less than ₹ 14,000 for the year under reference. The return was, however, of a net profit of that sum. Therefore, the word loss had to be corrected as profit . Again, after the sentence The assessee does not maintain a stock account, the following sentence occurred in the order of the Tribunal: There is no proper record of the goods sold. This was not correct and the sentence, There is no proper record of the goods sold had to be deleted under Section 35. It is contended for the assessee that the criterion which was ultimately adopted by the Tribunal, viz., of the ratio between the net profits shown and the turnover, was a wrong criterion, particularly in view of the circumstance that the Tribunal had expressly said that the additions made by the Income-tax Officer were not by way of add-back of specific items from the salary account, which incidentally describes the correct position as it stood on the basis of the Income-tax Officer's order. The assessee also contends that if the Tribunal had not been under the misapprehension that the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olidated statement of total profit and loss was prepared for the information of the Income-tax Officer. The Income-tax Office on going through the accounts found that taxable profits should have been declared at a higher figure. He examined the accounts of each separate branch and accepted the statements given by the firm in respect of the Old Delhi and the Simla branches. With regard to the branch known as Handicrafts, New Delhi, he was of the opinion that since no stock book had been maintained by the firm the gross profits were liable to be increased by a sum of ₹ 5,000. The exact words of his order are important and I quote them- There is no stock book and it is not possible to verify that the whole of the stock was accounted for. I would increase the gross profit by ₹ 5,000 which would turn the gross loss of ₹ 1,872 into a net profit of ₹ 3,128. A similar addition of ₹ 7,000 to the net profits was made in respect of the fourth branch, Connaught Place, New Delhi. In respect of this branch the Income-tax Officer observed- There is no stock book and it is not possible to verify that the whole of the stock is accounted for. I would increas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no proper records of the goods sold. As the profit disclosed by the assessee in the year under reference is extremely low, we think that the Income-tax authorities are right in making an estimate of the appellant's income under the proviso to Section 13. Dealing with the estimate made as a whole, i.e., a net business income of ₹ 26,597 on a total turnover of about ₹ 9 lakhs, we think a very reasonable estimate has been made by the Income-tax authorities. It is clear from these orders that two considerations were responsible for these decisions. In the first place, the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal took the view that the profits disclosed by the firm were low. In the second place, they were influenced by the fact that no stock register had been maintained. It is clear that the account books maintained by the firm were accepted as correct, for the Income-tax Officer does not anywhere say that he rejected these account books. After the dismissal of his appeal by the Income-tax Appellate Tribunal the assessee moved the Tribunal for the statement of the case to this Court under Section 66. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd gains can properly be deduced therefrom, and to proceed according to his judgment on this question. The grievances of the assessee in this case are that (1) there was no finding by the Income-tax Officer that the method employed by him was improper or that the account books could not be relied upon as disclosing a true state of affairs, and (2) he did not compute the taxable profit on any basis as required by the proviso to Section 13. I have been at some pains to quote the exact words employed by the Income-tax Officer and the appellate tribunals who dealt with this case. There is no finding that there was material before the Income- tax Officer to lead him to the conclusion that a proper statement of income, profits and gains could not be deduced from the material placed before him. All he said was that the profits appeared to be somewhat low and there was no stock register. In my view the fact that the profits are low is merely a warning to him to look into the accounts more carefully and see whether there is material to lead him to the conclusion that there is something false in the account books. The mere fact that the profits are low is not material upon which a fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount altogether merely because the proviso to Section 13 is attracted. In this case it was conceded that the account books did not disclose the true state of affairs and that case therefore was much weaker from the assessee's point of view than the case before us. In another case A. Moosa and Sons, Bombay v. Commissioner of Income-tax, Bombay City [1953] 23 I.T.R. 73, Chagla, C.J., observed:- The proviso to Section 13 leaves it to the Income-tax Officer to compute the profits upon such basis and in such manner as he may determine. Although the discretion is vested in the Income-tax Officer, the discretion cannot be exercised arbitrarily or capriciously or dishonestly. He must exercise his judgment in such a manner as would make it possible for his to ascertain the profits and gains of the assessee most approximating to the truth. His Lordship observed later:- Therefore it is always open to the Court on a reference to consider whether the method adopted by the Income-tax Office is 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. A reference is made to an observation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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