The judgment of the court was delivered by

MIR IQBAL HUSAIN, J. - (C.P. No. 31 of 1956). This statement of the case under section 82(2) of the Hyderabad Income-tax Act was made by the Income-tax Appellate Tribunal, Bombay Branch, in consequence of a direction issued by the Bench of the Hyderabad High Court in its order in Case No. 114/B 5-2 of 1953-54 dated April 6, 1954, calling upon the Tribunal to refer the following question for the decision of the Hyderabad High Court. On the integration of States this case has come up for decision before this court. The question referred to is as follows :

"Whether the Income-tax Office indicated to the assessee his intention to assess on the basis of the average yield shown by other millers and whether a reasonable opportunity was given to the assessee to adduce evidence in rebuttal of the said average yield being made application to the assessee ?"

The facts of the case are briefly as follows :

The petitioner-assessee constitutes a firm trading in oils and cotton at Gulbarga with branches at Latur and other places in the erstwhile Hyderabad State. It carries on business as commission agent and also owns and runs oil mills. Its head office is at Gulbarga and there are branches at various other places. The assessment year is 1358. The accounting year is Samvat year 2004 which ended on October 30, 1948. I may straightaway say that we are only concerned now with the assessment regarding the Gulbarga Oil Mills as the assessment with regard to the rest does not fall within the jurisdiction of this court.

An order was passed by the Income-tax Officer. Second Circle, to the following effect :

"Deficit yield of oil. - The assessee has no manufacturing account. No record is kept of the yield of seed from ground-nut, oil and cake from seed. The assessee himself has estimated the yield of seed from the ground-nut at 73.7 per cent. and on this basis and with reference to the sales of oil and cake has worked the yield at 39 per cent. (oil) and 57.3 per cent. (oil cake) respectively. The result is low compared to the yield disclosed by the other merchants in the line. The assessee's auditor contended that the ground-nut used in this mill is of a bold variety and the yield is likely to be low. The normal yield in respect of fine variety ranges from 42 to 4 3 per cent. The yeild in respect of bold variety is 41 per cent. Adopting the following rates. viz., seeds 75 per cent., oil 41 percent., cake 58 per cent., the amount to be added back is (deficit of oil of 13,015 maunds at the rate of Rs. 14 per maund) Rs. 1,82,210. Deficit of cake of 20 tons at Rs. 100 per ton, Rs. 2,000."

I need not refer to the rest of the assessment order because that is not pertinent to the present case. Against this order an appeal was preferred to the Appellate Assistant Commissioner of Income-tax of Hyderabad who confirmed the order of the Income-tax Officer. The appeal to the Income-tax Appellate Tribunal, Bombay Branch, met with a similar fate. The assessee then prayed the Tribunal to refer this matter to the High Court as a matter of law arises for consideration, but that prayer was rejected. Thereupon, the assessee took up the matter before the High Court under section 82(2) of the Hyderabad Income-tax Act for directing the Appellate Tribunal to refer the question of law for decision of the High Court. That was considered by a Bench of the Hyderabad High Court in Case No. 114/B 5-2 of 1953-54 and the High Court made the following order :

"The Appellate Tribunal is directed to refer the case on the following question :..."

[The question has already been stated above.]

In pursuance of that order the Appellate Tribunal has referred the above-said question for the decision of this court.

It is strenuously contended by Sri Krishnamurthy, the learned advocate for the assessee, that the Income-tax Officer has failed to indicate the basis of the average yield shown by the other millers and no opportunity was given to the assessee to rebut the average yield taken as the basis for assessment when he took into consideration the yield as disclosed by other merchants in the line. His contention is that at least the names of those merchants should have been given and if that was done, the assessee would have been in a position to compare with his own, the machinery employed by those merchants, the quality of seeds purchased, season when they were purchased etc. and would have been in a position to give sufficient material for the consideration of the Income-tax Officer as to why his statement should be accepted as against the statement regarding the yield by other merchants. He further contends that this lack of opportunity has greatly prejudiced the case of the assessee.

A scrutiny of the order of the Income-tax Officer reveals that he compares the yield disclosed by the books of account of the assessee with those of other merchants in the line. If so, it was incumbent on the Income-tax Officer to have apprised the assessee either by notice or by writing of the data on which he based his conclusions. It was further incumbent on the Income-tax Officer to have called for an explanation in this regard from the assessee. In other words, an opportunity should have been given to the assessee to satisfy the Income-tax Officer as to why his statement should be believed as against the statement of yield given by other merchants in the same line. The learned Government Pleader frankly admits that there is no statement to the effect that any notice was given in this regard to the assessee; nor is there any record made in the files of the Income-tax Officer to show that he has done so, but he argues that the internal evidence will have to be taken into consideration and, if that is done, there is a clear indication that this matter was brought to the notice of the assessee. He desires the court to read between the two lines in the order of the Income-tax Officer which I have underlined. His contention is that the assessee's auditor has stated that the ground-nut used in this mill is of a bold variety and, therefore, the yield is likely to be low. That statement would not have been made by the auditor if his attention was not drawn to the yield disclosed by the other merchants in the line.

I would like to adopt two tests to find out whether this contention should be accepted or not. The first is this : As already stated there is nothing in the records of the Income-tax Officer to show that he has brought this matter to the notice of the assessee. Hence there is nothing at all to support the contention of the learned Government Pleader that the assessee was apprised of this matter and was asked to explain as to how the yield was low as compared with the yield shown by merchants in the same line. The second test that I would like to adopt is this : have the appellate authorities considered this matter or given any definite clue indicating that the assessee was apprised of the information that was in the hands of the Income-tax Officer. Though it is not necessary for the Income-tax Officer to disclose all the information, perhaps confidential, which he has gathered with regard to the accounts of the other merchants, still if he had thrown out a broad hint or given their names or indicated the data which enabled him to arrive at the conclusion, that would have been enough. Taking into consideration the order of the Appellate Assistant Commissioner of Income-tax, I fail to find any statement indicating that the Income-tax Officer had apprised the assessee about the date much less an opportunity was given to the assessee to explain the difference in the yield.

Now let me consider the two appellate orders. The Appellate Assistant Commissioner of Income-tax has contented himself by using the following words in this regard while referring to the deficit yield of oil and cake in Gulbargh Oil Mills :

"This result was found to be low when compared to the yield disclosed by other merchants."

That shows that the very basis employed by the Income-tax Officer has been accepted by the Appellate Assistant Commissioner without any indication as to whether the assessee was apprised of the names of other merchants, etc., so as to enable the assessee to give a satisfactory explanation.

The Appellate Tribunal has also not given any indication as to whether this matter was brought to the notice of the assessee and whether the assessee was given sufficient opportunity to give an explanation in this regard. In fact, in the grounds of appeal before the Tribunal I find that a particular reference has been made to the lack of opportunity. The relevant ground is as follows :

"The Tribunal, however, in spite of this ground has not considered whether the Income-tax Officer has given sufficient opportunity to the assessee to satisfy him regarding the deficiency of yield as compared with the yield shown by the other merchants in the same line. But on the other hand, the learned Members of the Tribunal have given their own reaction and stated the basis for checking the assessment made by the Income-tax Officer."

In their order they state as follows :

"The Tribunal has on a number of occasions considered what could be regarded as normal yield in the nature of business carried on by the assessee. In those cases, the Tribunal took into account certain factors such as the varieties of ground-nuts and the area under cultivation. It also considered certain treatises dealing with the question of yield in the ground-nut trade. After considering the various factors the Tribunal has considered what would be the reasonable normal yield in the case of businesses like that of the assessee. In the light of this material before the Tribunal, we find that the percentages of yield taken by the income-tax authorities in the present case are reasonable and we see no reason to interfere with the decision of the income-tax authorities."

Perhaps the Income-tax Tribunal is right in checking the result arrived at by the Income-tax Officer with reference to the area under cultivation, treatises etc., but the important aspect that has missed attention is whether the assessee has been fairly treated, whether he has had the opportunity to furnish a suitable explanation regarding the low yields of oil, oil-cakes etc., as compared to that of the other merchants. This unfortunately has escaped the attention of the Tribunal. Hence rightly was the matter considered by the Bench of the Hyderabad High Court and if I should say so with respect, they have rightly referred this matter for the decision by the High Court.

The principles governing the cases of this nature are well enunciated in Kanga's book on The Law and Practice of Income-tax, IV Edition, page 551, under the heading "Private sources of information". The learned authors state as follows :

"The Income-tax Officer is not debarred from relying on private sources of information, which sources he may not disclose to the assessee at all. But in case he proposes to use against the assessee the result of any private inquiry made by him, he should communicate to the assessee the substance of such information so as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him sufficient opportunity to meet it."

Thus, the substance of the information should be given to the assessee; he should be put in possession of full particulars of the case he is expected to meet and he should be given sufficient opportunity to meet those particulars. So far as the present case is concerned, I find from the order of the Income-tax Officer that no such opportunity was given to the assessee; no particulars were furnished to enable him to satisfy the Income-tax Officer regarding the yield as stated in his books of account as compared with the yield of the merchants in the same line. Natural justice demands that such information should be given to the assessee. This does not mean to say that the Income-tax Officer should disclose to the assessee the private sources of information of a confidential nature. But what prevents an Income-tax Officer to inform the assessee the names of the merchants in the same line whose statements are taken into consideration ? If that were done, the assessee could have been in a position to compare the kind of machinery employed by those merchants, the quality of seeds used by them, the season when those seeds were purchased etc. With his and would be in a position to justify his statement of yield as compared to those merchants.

In the connection, I am armed by the leading decision on the subject of the Supreme Court, Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax. This is the first of the series of Dhakeswari cases. His Lordship Mahajan, C.J., delivering the judgment of the court, has stated as follows :

"As regards the second contention, 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 Gurmukh Singh v. Commissioner of Income-tax."

Further on, his Lordship adds :

"In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by the departmental representative. Next it did not give any opportunity to the company to rebut the material furnished to it by him..."

I stop at this. This case is on all fours with the facts of the present case. I consider that no sufficient opportunity was given to the assessee. The case referred to in the Supreme Court decision is the case of the Full Bench of the Lahore High Court in Gurmukh Singh v. Commissioner of Income-tax. His Lordship Din Mohammed, J., who delivered the judgment, has stated as follows :

"The very nature of the proceedings conducted by him necessitates the use of such media for collecting information as he may not like to disclose to the assessee, and he is perfectly within his right if on enquiry by the assessee he refuses to disclose the source for information. But if he makes up his mind to reject the evidence of the assessee on any grounds which appeal to him to be sufficient for that purpose, it is but fair and just that he should acquaint the assessee with those grounds so as to enable him to disabuse his mind, if possible, by explaining them away as baseless or untenable."

A similar view has been held by a Full Bench decision of the Madras High Court in Gunda Subbayya v. Commissioner of Income-tax. His Lordship Leach, C.J., has stated as follows :

"It is true that the Income-tax Officer when making an assessment on material which he himself has gathered will not be bound to disclose to the assessee the material on which he proposes to act or to refer to it in his order, but natural justice demands that he should draw the assessee's attention to it before making the order. It is desirable that the Income-tax Officer should indicate in his order the material on which he has made his assessment; but he is not bound to disclose the source of his information."

There are numerous other decisions on the topic. Enough if I refer to a couple of them, viz., of the erstwhile Hyderabad High Court and the Andhra Pradesh High Court. The decision is Ramgopal Shrikishen v. Commissioner of Excess Profits Tax, wherein it is stated as follows :

"The question in this case, therefore, would be whether the assessee was given an opportunity to rebut the basis of the fixation of the flat rate.

"Thus, though the question of the Income-tax Officer being unable to compute the income, profits and gains from the account books of the assessee is a question of fact, the fixation of flat rate after the rejection of the accounts should be upon some reasonable considerations and the assessee should be given an opportunity to rebut by evidence the basis which forms the fixation of the flat rate by the Income-tax Officer."

The learned Judges who decided this case are the very judges who have given the order referring this matter to the court. The last decision that I would like to refer to is Nagulakonda Venkata Subba Rao v. Commissioner of Income-tax. Even in that case there is an order of his Lordship Jaganmohan Reddy, J., who has referred this matter to this court. It is stated as follows :

"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, 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."

The Full Bench decision of the Madras High Court in Gunda Subbayya v. Commissioner of Income-tax, has been relied upon by his Lordship.

Taking into consideration all the facts and circumstances of this case I find that the question that has been referred to us for decision should be answered in the negative. The petition is allowed with costs. Advocate's fee Rs. 100 (one set of costs).

(C.P. 30 of 1956) This order will govern the connected petition No. 31 of 1956 a copy of which should be kept in the file of the connected petition.