1. On the dismissal of his applications by the Appellate Tribunal under Section 66(1) of the Income-tax Act, the assessee made two applications under Section 66(2) of the Act, one in respect of the assessment year 1945–46 and the other in respect of the assessment year 1946–47. They are Miscellaneous Civil Cases Nos. 201 and 202 of 1949. By an order dated the 7th April, 1952, this Court required the Appellate Tribunal to state the case on the questions of law indicated in the order. Accordingly the Tribunal has stated the case and referred the said questions of law. They are:
“(1) Whether in a case to which the proviso to Section 13 applies, the Income-tax Officer is bound to disclose in his order the basis and the manner of computation of the income, gains or profits, and to disclose the data on which he arrives at the result. .
(2) If the answer to this question is in the affirmative, is there any material on record to warrant the estimate of the profits at the several rates adopted in this case ?”
2. These questions arise for both the years.
3. The assessee, a Hindu undivided family, carrying on business in cloth and yarn, has two shops at Sagar one at Bada Bazar and the other at Katra locality. According to the Income-tax Officer, the method of accounting employed by the assessee is such that, in his opinion, income, profits and gains cannot be properly deduced therefrom. This finding was not disputed. Proviso to Section 13 is therefore applicable. In fact, the profits for the assessment years 1941–42 and onwards were determined under this proviso as stated in the statement of the case. After reproducing certain extracts from the assessment orders for the years 1941–42 to 1945–46, the statement of the case proceeds:
“The Income-tax Officer did not inform the assessee how he was going to compute the assessee's income from his business. The fact that no such information was given to the assessee by the Income-tax Officer was not one of the grounds before the Appellate Assistant Commissioner or the Appellate Tribunal. The same thing happened in connection with the assessment for the year 1946–47.”
4. In paragraphs 12 to 16 the Appellate Tribunal does not &ate any facts of the case but indicates the several ways in which the books of account can be manipulated without a proper day-to-day stock account. There is no finding of the Income-tax Officer that the books of the applicant were manipulated or that they were rejected. According to the Tribunal,
“Where the assessee's books of account are rejected, the Income-tax Officer has to find out, as best as he can, the income earned by the assessee in the year of account. Sometimes, the Income-tax Officer makes a lump sum addition to the income disclosed; sometimes he disallows a part of the expenses claimed by the assessee; sometimes he applies a percentage rate to the sales as disclosed by the assessee's books; sometimes he applies a rate to the sales as estimated by him. There is no hard and fast rule as to what method he should adopt in a particular case…. After all is said and done, an estimate is an “estimate. It is a leap in the dark.”
5. The Tribunal further states that when an assessment under Section 23(3) read with the proviso to Section 13 comes up before the Appellate Tribunal, comparable cases—there are no two truly comparable cases as the Tribunal concedes — are brought to its notice by the departmental representative and the assessee, and if the assessee fails to prove that the order appealed from is wrong, the assessment is maintained. The Tribunal concludes the statement of the case thus:—
“What we want to urge is that once an assessee's books of account are rejected, the best that the Income-tax Officer can do is to make a reasonable estimate, having regard to all the circumstances of the case.”
6. The first question admits of only one answer and that is in the affirmative. The proviso to Section 13 does not entitle the Income-tax Officer to have a leap in the dark but requires him to compute the income “upon such basis and in such manner as the Income-tax Officer may determine.” He has therefore to find out “the basis and the manner of computation.” The assessment is under Section 23(3) after hearing such evidence as the assessee may produce and such other evidence as the Income-tax Officer may require on specified points. The Income-tax Officer may use material not placed before him by the assessee; but in such a case natural justice demands that he should give the assessee an opportunity of showing, if he can, that the material is incorrect, though the officer is not bound to disclose the source of his information. It may be that there is an adequate explanation against the information sought to be used against the assessee or that the Income-tax Officer might be misinformed. Although there is no express provision in the Act to require the Income-tax Officer to make such disclosure, it is necessary on the principles of natural justice. In Sampchand Hukamchand, In re1, Kania, Ag. C.J, observed at page 256:—
“In fairness and in law, I think, it is the duty of the authority entrusted with the task of recording its finding, to give every opportunity to the other side to meet the case which the authority thought was in existence. Without giving such opportunity to the assessees it is not proper to rely on any evidence or any fact which he ultimately takes into consideration for arriving at his conclusion.”
7. See also Commissioner of Income-tax v. Khemchand Rant das [1940] 8 I.T.R 159,. The order is appealable and must stand scrutiny by an appellate court. It must therefore be a speaking order. If the basis and manner of com-putation are not disclosed in the order, the assessee's right of appeal may be illusory unless the appellate authority refers the matter back to the Income-tax Officer to disclose the basis and manner of his computation. If the profits are computed under this proviso upon a basis determined by the Income-tax Officer, profits included in such computation cannot be included again in the assessment for any subsequent year. The burden is on the assessee to prove that the profits sought to be assessed were included in the assessment for any preceding year. This burden cannot be adequately discharged unless the assessment orders disclose the basis and manner of computation. If after rejecting the method of accounting employed by the assessee, the Income-tax Officer were simply to add a particular amount to the income returned or to disallow a part of the business expenses properly incurred by the assessee and allowable under Section 10 of the Act, he would not be acting under the proviso to Section 13. The Income-tax Officer would be acting contrary to law if he were to disallow such business expenses or make an addition of a lump sum simply on the ground that the trading profits cannot be properly determined from the books of account. The Income-tax Officer is not entitled to discard the evidence of the books of account altogether merely because the proviso to Section 13 is attracted. As their Lordships of the Privy Council stated in Commissioner of Income-tax, Bombay v. Sarangpur Cotton Manufacturing Co. Ltd.:—
“But there may well be more complicated cases in which nevertheless, it is possible to deduce the true profit from the accounts and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Income-tax Officer as a discretionary power.”
8. It is certainly not a “leap in the dark”. The Income-tax Officer is not entitled to make a guess without evidence: Commissioner of Income-tax v. Kameshwar Singh.
9. As appears from the concluding observations in the statement of the case, the Appellate Tribunal does not make a distinction between an assessment under Section 23(3) where the proviso to Section 13 is invoked, and an assessment “to the best of judgment” under Section 23(4). If the Income-tax Officer has made “best judgment assessments” under Section 23(3) in the instant case, they are bad in law. Under Section 23(3) the Income-tax Officer has to determine the income on the evidence before him produced by the assessee or collected by him, while under sub-section (4) he acts in the absence of such evidence because the assessee is in default in supplying information. As their Lordships of the (Judicial Committee stated in Commissioner of Income-tax v. Laxminarayan Badridas in an assessment under sub-section (4):—
“He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and his own knowledge of previous returns by and assessments of the assessee and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess work in the matter, it must be honest guess work. In that sense, too, the assessment must be, to some extent, arbitrary.”
10. As stated in Pandit Pandurang v. Commissioner of Income-tax, in an assessment under the proviso to Section 13,
“The taxing authorities must find out the true income of the assessee as, after all, income-tax is leviable on income, profits and gains and not on imaginary sums which do not represent true income.” We therefore answer the first question in the affirmative.
11. As regards the second question, unfortunately the statement of the case is not satisfactory. This is evidently due to the view of the Appellate Tribunal that the assessment was a leap in the dark. Instead of referring the case back under Section 66(4) and wasting considerable time, we propose to examine the orders of the Income-tax Officer to see if there is any material on record to warrant the estimate of profits at the several rates adopted by the Income-tax Officer.
12. The assessee has returned profits by estimate. This is obviously unwarranted. As the trading profits could not be properly deduced from the account books for want of opening and closing stocks, the proviso to Section 13 was attracted; but that did not entitle the Income-tax Officer to reject the books. In fact, the Income-tax Officer has jtot rejected the books as unreliable. He rejected the method of deducing the gross profits. Under such circumstances, the Income-tax Officer could have ascertained the rate of profits from the books of account and from outside information of returns and examination of books of local merchants in similar circumstances. If the assessee fails to satisfy the Income-tax Officer as to the correctness of the percentage of profits returned by him, it is open to the officer to take a higher percentage consistent with the state of trade in the locality or with any special circumstances of the assessee which warrant a higher rate of profits. As already stated, the Income-tax Officer must disclose the basis and manner of computation and make his order a speaking order.
13. For the Bada Bazar shop the Income-tax Officer has taken the figures of sales from the books of the assessee and estimated the trading profits at 15 per cent, for both the years. This rate was adopted for the preceding assessment year 1944–45 and it was maintained in appeal. The sales are mostly of handloom and other fabrics whose prices were not controlled. Sales were retail to a large extent. The Income-tax Officer has stated that the prices of handloom cloth went higher during the accounting year owing to the control of mill-made cloth. There is no record of quantitative and qualitative particulars. It was therefore impossible to deduce the percentage from the trading account. As the Appellate Assistant Commissioner has stated, he had seen higher margin of profits in some cases. The Appellate Tribunal was satisfied that this was a reasonable percentage of profits.
14. As regards the cloth business of the Katra Bazar shop, the sales were both of mill-made and handloom cloth and the nature of sales was wholesale and retail. Although the Appellate Assistant Commissioner specifically asked the assessee to give a classification of such sales, the assessee expressed his inability to provide the necessary information in the absence of the necessary details in the books of account. It would therefore be proper for the Income-tax Officer to determine the percentage as if all sales were retail. The Income-tax Officer found great disparity between the figures of purchase arid sales which can be due to a large margin of profit or a heavy opening stock. In the absence of any data to show that there was an excessive opening stock and in the absence of any other check on margin of profit which can be gathered from the books of account, the Income-tax Officer computed the profits at 12 per cent, on sales as disclosed in the books. This percentage was adopted by the Appellate Assistant Commissioner for the previous year. As stated by him, the account year was better than the preceding year. Consequently, the assessee must have earned higher profits and not lower. This rate was maintained by the Appellate Tribunal.
15. As regards sales of standard cloth, the assessee was entitled to a profit of 31/4 per cent, on the ex-mill price. In the absence of any details, the Income-tax Officer determine the trading profits at 1.5 per cent, making allowance for the expenses and margin of profits paid to sub-dealers. It was really very easy for the assessee to give proper details of the trading income and expenditure under this head and he has not chosen to do so.
16. The orders of the Income-tax Officer were scrutinized minutely by the Appellate Assistant Commissioner and he accepted the assessee's contention regarding the trading profits of yarn business.
17. Under these circumstances : we hold that there is material on record to warrant an estimate of the profits at the several rates adopted in this case. Under the circumstances of the case we make no order as to costs. A copy of this judgment be sent to the Appellate Tribunal under Section 66(5) of the Act.
18. Reference answered accordingly.