P. Jaganmohan Reddy, J.:— Pursuant to the orders of this Court in C.M.P No. 1775 of 1954 dated 2-8-1955, the Income-tax Appellate Tribunal, Madras Bench, has now stated a case on the following question, viz.,

“Whether there is material on which the Tribunal could estimate the income at Rs. 30,000/-”

2. The assessee is a money-lender and lent monies mainly on the pledge of jewellery and also on promissory notes. The assessment which is the subject matter of this reference was for 1951-1952 on the income, profits and gains accrued during the accounting period which ended on 6-4-1951. The assessee declared the net interest receipts at Rs. 19,922/- and a total income of Rs. 17,214/-. It is stated that as a result of the Income-tax Inspector's enquiry, three receipts one dated 29-5-1950 by K. Joginaidu for Rs. 725/-, the second dated 18-6-1950 by N. Ganganna's son Kondanna for Rs. 650/- and the third dated 24-10-1950 by P. Apparao for Rs. 400/- were discovered. From these receipts it appears loans were given on interest ranging from 0-12-0 to 1-4-0% per mensem and on the assessee being asked to explain why the amounts covered by these receipts were not entered in the cash book, and ledger, he was able to show only in so far as the loan of Rs. 400/- of Apparao is concerned that it had been entered in the loan account, but by inadvertence it was not brought into the ledger. With respect to the other two receipts he urged that these loans were given by his daughter and that is why they were not brought into his accounts. The Income-tax Officer, Vizianagaram, disallowed this contention as the assessee was not able to prove that the loan really belonged to his daughter that enquiries made by the Inspector also show that the assessee was in the habit of lending money on pledge of jewellery at rates higher than those prescribed by the Pawn Brokers Act and omitting them from the books. In view of the assessee's failure to establish his story that the money belonged to his daughter and on the basis of the enquiries made he estimated the assessee's net interest income at Rs. 30,000/-. On appeal the Appellate Assistant Commissioner, Vijayawada maintained that order on the ground that the explanation given by the assessee was highly unconvincing and improbable and that the daughter of the assessee was not known to be a money-lender, a fact which was admitted by the advocate of the assessee who stated that she was not lending any monies at all except for these two loans which were the only transactions of the daughter. The Appellate Assistant Commissioner found that the total advances by the assessee were Rs. 9.29 lakhs, the credit balance in the appellant's capital account being Rs. 1.74 lakhs. The major portion of the money required for the advances was obtained from the Imperial Bank and the Andhra Bank. From the former Rs. 3,58,479/- was borrowed at an interest of 5% and from the latter a sum of Rs. 2,76355/- was borrowed at an interest of 6%. In the result he held the estimate made by the Income-tax Officer was justified. On appeal the Income Tax Tribunal also confirmed this assessment as the books did not disclose the true state of affairs and were correctly rejected, and as the estimate of income made, having regard to Rs. 9 lakhs lent, did not seem either excessive or arbitrary.

3. Before us, learned advocate for the assessee was unable to show why the Income-tax authorities were not justified in rejecting the accounts having regard to his inability to support the explanation that the two receipts were in fact obtained on the monies lent by his daughter. In the absence of a satisfactory explanation, the Income-tax authorities were justified in concluding that the assessee was not maintaining his books properly and that though there were only two receipts, it gave an indication as to the manner in which the assessee kept his accounts. If the monies, in fact, belonged to the assessee's daughter and he had lent them for her, it is a reasonable presumption that a businessman like the assessee would as a matter of ordinary commercial practice, bring these amounts into his accounts as monies belonging to his daughter. We are satisfied that the rejection of the account books was not improper.

4. But the question in this case is not so much the justification of the rejection of the account books as the arbitratiness of the estimate made by the Income-tax authorities. It is contended that the Income-tax authorities neither disclosed, nor gave the assessee an opportunity to rebut, the materials or basis of the estimate. The assessment is one under Sub-section (3) of Section 23 of the Indian Income-tax Act which requires that the Income-tax Officer after hearing such evidence as the assessee may produce and such other evidence as the Income-tax Officer may require on specified points shall, by an order in writing assess the total income of the asssessee on the basis of such assessment. In making such assessment it is fair and equitable to conclude that the assesses will be given an opportunity of showing, if he can, that the material or the basis upon which the Income-tax Officer proposes to assess his income is incorrect. This view has been taken not only by this High Court, but also by several High Courts in India and by the Privy Council and the Supreme Court. In The Maharaja of Dharbhanga's case 60 I.A 146., in appeal from the same case reported in I.L.R 9 Patna 240, their Lordships agreed with the Patna High Court that the Income-tax Officer is not entitled to guess, adding that “if the assessee wished to displace the taxing officer's estimate, it was open to him to adduce evidence of all his purchase transactions during the year and of the financial results thereof, which he apparently made no attempt to do”. Again in Ferozshah v. Commissioner of Income Tax, Punjab 60 I.A 325., their Lordships took into, account the fact that the assessee did not object to the assessment during the previous two years at a flat rate of 32½% and since the same percentage was maintained in the accounting year, they disallowed the contention of the assessee. In both these cases the observations of their Lordships proceeded on the assumption that the assessee was given an opportunity to rebut by evidence the fixation of flat rate by the Income-tax authorities. In Seth Gurmukh v. Commissioner of Income Tax, Punjab XII I.T.R 393., Lal Mohon Krishna Lal Paul…Assessee; v. Commissioner Of Income-Tax, Bengal XII I.T.R 446., Seth Nathuram Mummalal v. Commissioner of Income tax, C.P and Berar XXV I.T.R 216., and Dewanbahadur Ramgopal Shri Kishen v. Commissioner of E.P.T, Hyderabad I.L.R 1952 Hyd. 728., the Lahore, Calcutta, Nagpur and the erstwhile Hyderabad High Courts respectively held that where the Income-tax Officer or the Excess Profits-tax Officer under an analogous provision proposes to make an assessment in disregard of the material produced by the assessee, natural justice demands that he should draw the assessee's attention to it and give him an opportunity to produce evidence in rebuttal. It may be noted that the Income-tax Officers in the discharge of their duties under the Act receive a good deal of information which is not all evidence according to the accepted notions of law. Consequently it is only fair and just that the accuracy or otherwise of such information will have to be ascertained and the only way of doing so is to give an opportunity to the assessee who can urge his plea as to whether the income-tax Officer is misinformed. At any rate, after giving this opportunity the Income-tax Officer will always be in a better position to know as to what extent that information is right and whether he should act upon it or not. In Gunda Subbiah v. Commissioner of Income Tax, Madras, Leach, C.J, delivering the judgment of the Full Bench, also expressed the view “when considering whether an order is right, the appellate authority must, of course, know on what it is based and if the basis of the order is not disclosed in the order itself it means that the appellate authority will have to refer the matter back to the Income-tax Officer in order to find out what the position is. Moreover, this Court has often to consider an order of an Income-tax Officer and it is convenient to this Court to know from the order itself why it was passed.” In two decisions of this Court my Lord the Chief Justice and Satyanarayana Raju, J., considered a similar question on the analogous provisions of the Sales Tax Act in Madupalli Anjaneyulu & Co. v. State of Andhra and Vuddagiri Kanakaraju & Sons v. The Andhra State and held that where an estimate of profit is made on the basis of profit earned by similar trades, similarly situated and circumstanced, then there must be material before the assessing authority which must furnish the basis for estimation of the profit and that it is the duty of the assessing authority to intimate the assessee the amount of profit earned in trades similarly situated and circumstanced and give an opportunity to the assessee to show cause why his profits should not similarly be estimated. Finally their Lordships of the Supreme Court in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income tax West Bengal put their seal of authority on this proposition when they observed at page 782:

“….We are in entire agreement with the learned Solicitor-General when he says that the Income-tax Officer is not fettered by technical rules of evidence and pleadings and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment under Sub-section (3) of Section 23 of the Act, the Income-tax Officer is not entitled to make a pure guess and make, an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has in our opinion been fairly and rightly stated by the Lahore High Court in the case of Seth Gurumukh Singh v. Commissioner of Income tax Punjab (XII I.T.R 393).”

5. In our view the mere statement of the Income-tax authorities that on the enquiries instituted by the Income-tax Officer they were reliably inferred that the assessee was not only in the habit of omitting transactions from his books, but was known to charge much higher rates of interest than the prescribed one, is not sufficient. It is not in the first place shown that the assessee was given an opportunity, nor is it sufficient to justify the assessment which not only does not furnish the basis on which the estimate is made but which, without doubt, can be said to be a guess. In the result our answer to the question referred to is in the negative. The reference is answered accordingly with costs to the assessee-applicant which we assess at Rs. 250/-.

T.A.B

6. Reference answered.