Ganga Ram Balmokand v. Commissioner of Income tax

Din Mohammad, J.—This is a reference under sub-sec. (3) of section 66 of the Income-tax Act and has arisen in the following circumstances:—

The assessee is a firm of soap manufacturers carrying on business in partnership under the style of Messrs. Ganga Ram Balmo-kand, hereinafter called 'the firm', and the assessment in dispute relates to the year 1933-34. In response to a notice issued under Section 22 of the Income-tax Act, the firm furnished a return of its total income during the 'previous year' to which were appended trading and profit and loss accounts certified by a firm of professional accountants. On receipt of this return, the Income tax Officer served a notice on the firm under sub-section (4) of Section 22 and in compliance therewith the firm produced certain books of account, mainly consisting of a rokar (Day Book) and purchase and sale registers. The Income-tax Officer then served a notice on the firm under sub-section 2 of Section 23 of the Income-tax Act and in pursuance thereof the firm produced 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 Rs. 3,14,456 to Rs. 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 Rs. 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 by these officers and applied to the Commissioner under Section 66 to refer the questions of law formulated by it to this Court. To this the Commissioner did not agree and the firm then applied to the court under sub-Section (3) of Section 66. The position taken by the firm was that, inasmuch as the Commissioner had expressly stated that Section 13 of the Income-tax Act had not been applied in this case, the Income-tax Officer was bound under the terms of sub-section (3) of Section 23 of the Income-tax Act to assess the firm on the material placed before him and not arbitrarily to make his own estimate of the total income that had accrued to the firm and of the profits that had arisen therefrom. Impressed by the argument advanced by the firm, a Division Bench of this Court admitted the case to a hearing and ultimately issued a mandamus to the Commissioner to state the case. The question propounded by this court was in the following terms:

"Whether there was no material for the finding of the Income-tax authorities arrived at under Section 23 (3) of the Act that the sales should be raised from the figure shown in the books to Rs. 3,50,000 and that the correct flat rate for the calculation of profit was Rs. 7 per cent on the sales."

In the statement submitted by the Commissioner he has reiterated his assertion that the proviso to Section 13 cannot be applied to such cases, that the accounts of the firms were not rejected under that proviso, that it is not necessary to reject the accounts under the proviso before what is called a 'random assessment' can be made and that Section 23 (3) independently of the proviso to Section 13 empowers an Income-tax Officer to make an estimate of the taxable income to the best of his judgment. He has, however, indicated at the same time, if this court be not prepared to agree with him, the assessment in dispute can still be maintained under Section 23 (3) read with the proviso to Section 13.

I have given the case my most earnest consideration, in view of the importance of the question involved and the tenacity with which the Commissioner has adhered to his position, and have come to the conclusion that the Commissioner's view as regards the inapplicability of the proviso to Section 13 in such cases is not maintainable, and that he is equally wrong in suggesting that under Section 23 (3), unaffected by the proviso to Section 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 I 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., Section 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 Section 6. Of these, Section 10 relates to 'business'. Section 11 to 'professional earnings' and Section 12 to 'other sources'. Section 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 gains shall be computed, for the purposes of Secs. 10, 11 and 12, in accordance with the method of accounting regularly employed by the assessee. The proviso to this section provides for those cases in which either no method of accounting is found to have been regularly employed by the assessee or the method employed is such that in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom. In such cases the Act confers upon the Income-tax Officer a wide authority to make a computation upon such basis and in such manner as he may determine. It may be remarked here that Section 13 does not deal with assessment itself and consequently no order of assessement can be made under this section. Secs. 14 to 16 of Chapter III deal with exemptions, and Section 17 empowers an Income Tax Officer to reduce a tax in certain circumstances.

Chapter IV is headed "Deductions and Assessment", and comprises Sees. 18 to 39. It will be seen that all those sections deal with actual assessment or questions arising from or relating to such assessment. Secs. 18 to 21 concern such matters as are not before us and may, therefore, be ignored. Section 22 is headed 'Return of Income'. Sub-Secs. (1) and (2) of Section 22 enjoin the various classes of assessees to submit returns by a prescribed date. Sub-S. (3), among other things, extends the time for the submission of a return. Sub-Sec. (4) empowers the Income-tax Officer to serve a notice on the assessee to produce such accounts or documents as the said Officer may require. Section 23 is headed 'Assessment'. Sub-Sec. (1) of this section enjoins the Income-tax Officer to assess the total income of the assessee on the basis of the return furnished by him in case the said officer is satisfied that the return made by the assessee is correct and complete. If, however, the said return is not found to be correct or complete, sub-sec. (2) authorizes the Income-tax Officer to serve a notice on the assessee either to attend at his office or "to produce, or to cause to be there produced, any evidence on which such person may rely in support of the return". Then follows sub-sec. (3) which is the centre of controversy before us. This sub-section lays down that "the Income-tax Officer after hearing such evidence as such person 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 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. Section 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. Section 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 Section 23 or Section 27 and Section 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 in Section 13 and the only section under which an assessment can be made, or in other words, the amount of rate at which an assessee is to be assessed is Section 23 and no other. To divorce, therefore, Section 13 from Section 23 or to consider that they occupy detached positions, one having no connection with the other, is to mis appreciate the whole tenor of the income-tax law.

The Commissioner seems to think that the words 'method employed' as used in the proviso to Section 13 bear a restricted sense and consequently the second alternative in the proviso can be invoked only in those cases where there is a defect in the method itself apart from the accounts. On the other hand he places a very wide interpretation on the word 'assess' as used in sub-see. (3) of Section 23 and considers that the Income-tax Officer can by virtue of this term make a 'random assessment' in all those cases where the accounts are defective apart from the method. Counsel for the firm supports the Commissioner in so far as his interpretation of the words 'method employed' is concerned and contends that as the method employed by the firm had not been objected to before the Income-tax Department, and has not been found to be defective in The present assessment, the proviso to Section 13 was out of the question. He, however, joins issue with the Commissioner on the interpretation of the word 'assess' as used in Section 23 (3), and argues that as the proviso to Section 13 could not be brought into play, the Income-tax Officer was bound to give his decision on the evidence before him and could not make an estimate of his own without placing material on the record to support his decision. He founds his argument on the absence of any such language in Section 23 (3) in relation to the power of the Income-tax Officer, as is used in the proviso to Section 13 or Section 23 (4). In my view, however, this argument is fundamentally wrong. As already stated, the proviso to Section 13 is not excluded by Section 23 (3). On the other hand, it is always available to be utilized under Section 23 (3) whenever those circumstances arise which justify its use. It was not necessary for the Legislature to mention specifically in Section 23 (3) what an Income-tax Officer should do in case the assessee's evidence in support of his accounts is held to be unreliable, inasmuch as Section 13 had already made a provision for that contingency and it would have been obviously redundant to repeat in sub-sec. (3) of Section 23 what had already been provided for in Section 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 Section 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 Section 23, it is open to the Income-tax Officer to invoke the proviso to Section 13, if after examining the accounts produced by the assessee under Section 22 (4) or after recording the evidence led by the assessee under Section 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 guide in calculating the assessee's taxable income.

In Commissioner of Income Tax, Burma v. Chan Lo Chwan AIR 1929 Rang. 102 three Judges of the Rangoon High Court held that where the assessee's accounts were not found to be genuine, the Income-tax Officer was under no obligation either in law or in common fairness to set out to the assessee all the reasons therefor, and could proceed to make an assessment upon materials, albeit insufficient. In the course of their judgment, the learned Judges remarked;—

"We quite fail to see why a party who has made a false return should be in a better position than one who has failed to make any return. Mr. Cowasjee urges that Section 13 only applies to the method and does not empower the Income-tax authority in any way. We cannot see any such limitation in the words of the proviso. . . .In this case, the Income-tax Officer clearly considered that the Income, profits and gains could not properly be detected from the respondent's statement, since he decided that the statement was not genuine. He was consequently entitled to adopt whatever method he thought best. Adapting the words of the Lord President in Macpherson's case (supra) , already alluded to, "if Chan Lo Chwan, (the assessee) does not choose to make an honest statement of account so that the amount of profits may be strictly determined, he cannot complain if a random assessment is made upon him by the Crown".

With these observations I am in respectful agreement and consider that this judgment lays down good law and interprets the proviso to Section 13 in the only correct manner possible.

The Commissioner has in this connection referred to an English case reported as Anderson v. Commissioners of Inland Revenue [1933] 18 Tax Cas 320 and remarked that 'it expressly separates questions of accounting method from question whether the accounts were cooked', but apart from the fact that the language and requirements of the English Act are different, that decision does not help him in the least. It rather goes against him, as it was observed in that case that if the Income-tax authorities had expressly stated that the accounts were unreliable, no interference with their estimate would have been called for. The Lord President remarked:—

"It may be they did find in fact that the books were badly kept, or that the profit and loss account had not been accurately made 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 sake of argument that the word 'method' has been used in any restricted sense in the second alternative in the proviso to Section 13, in a case like this where an Income-tax Officer rejects the assessee's accounts on the ground that he keeps no stock registers or vouchers or that he employs an inventory system only which is not conclusive in the matter of determining the true state of affairs, it cannot be said that he does not attack the method of accounting and can, therefore, make no use of the proviso to Section 13 in determining the taxable income. From whatever point of view one looks at the case, it passes one's comprehension why the proviso to Section 13 cannot be invoked in such cases in the rejection of an assessee's accounts.

It is true, as urged by the firm, that in Chapter IV of the Act, it is sub-section (4) of Section 23 alone that empowers an Income-tax Officer to assess to the best of his judgment and that, too, in case of default, but it does not follow that the absence of these words in sub-section (3) of See. 23 takes away the power vested in the Income-tax Officer by the terms of the proviso to Section 13. An assessment always follows the computation of income and if the computation of income for the purposes of assessment in certain circumstances lies in the discretion of the Income-tax Officer, he can, while disposing of a case under sub-section (3) of Section 23, compute the income in any manner that he deems best, when those circumstances exist, and assess accordingly. I am further disposed to think that the reason why the provisions of the proviso to Section 13 were not enacted in Section 13 itself or in the chapter relating to assessment was that Section 23 did not apply to three out of the six chargeable heads of income enumerated in Section 6, while Section 23 or for that matter the whole of Chapter IV was of general application and as Section 13 applied only to Secs. 10, 11 and 12, it was considered by the Legislature to be a convenient arrangement to insert it immediately after those sections. If the position maintained by the firm were accepted, it would lead to anomalous results, as in that case it would be impossible for the Income-tax Officer to disregard the accounts submitted by the assessee, however unreliable they might appear to be. It is preposterous to say that even if the accounts are found to be fictitious or 'cooked,' 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 AIR 1930 Rang. 4, 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 Section 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, their finding cannot be disturbed unless, of course, it is altogether capricious and injudicial. Secondly, the Income-tax Officer cannot be fixed with the knowledge of the state of the assessee's account and cannot consequently be expected to lead evidence to prove the assessee's transactions for the accounting year. Under Section 106 of the Evidence Act, the onus of proving a fact always lies on the person within whose knowledge especially that fact is and it cannot be denied that it is the assessee who is the person contemplated by this section.

I do not mean to say that an Income-tax Officer has a blank cheque to proceed in utter disregard of all judicial considerations. What I intend to convey is that in matters like these a very wide discretion vests in the Income-tax authorities in view of the exigencies of the case, and the control exercisable on them is very meagre. What alone has to be seen in such cases is whether the discretion has been judicially exercised and if it is once found to be so exercised, no Court can interfere with the order. In other words, a Court cannot replace its discretion for the discretion already exercised by a competent tribunal.

There are numerous Indian cases where neither the finding of the Income-tax authorities as to the falsity or incompleteness of the assessee's accounts was disturbed nor was the estimate of assessment made by them in consequent thereof.

In Narayan Atmaram Pathar…Applicant; v. Commissioner Of Income-Tax, Bombay…Opponent. AIR 1934 Bom. 297 a Division Bench of the Bombay High Court in a case where the Income-tax Officer had found that the income of the assessee could not be deduced from his books and had consequently made an assessment charging the assessee a fair rate of interest on the capital shown in his books, held that the computation was properly made under the proviso to Section 13.

In Jewan Shah Maya Shah v. Commissioner of Income tax [1934] 2 ITR 343 a Bench of this Court remarked that the question of rejection of the accounts as unreliable was expressly reserved to the assessing Officer and consequently upheld an estimate made by him of the taxable income of the assessee.

In Rochiram Khattar, In re [1933] 6 ITC 127 again a case from this Court, an estimate of income made by the Income-tax Officer on the ground that the accounts were incomplete was maintained and approved.

In Ibrahimbhai Mulla Badruddin v. Commissioner of Income tax [1931] 5 ITC 302 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 [1933] 1 I.T.R. 94 (PC) 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 have supported the action of the Income-tax Officer in adopting a method of his own under the proviso to Section 13 while discarding the assessee's method adding only that the computation of the Income-tax Officer is not exempt from examination on appeal, and if it is found to be wrong, the assessment may be set aside,

In Nathuram v. Commissioner of Income tax [1936] 9 ITC 178 a Division Bench of this Court presided over by the Hon'ble the Chief Justice and Monre, J., observed:—"The argument placed before us for the assessee is that the books, which were arithmetically correct, were produced to the Income-tax authorities and unless they could show that items in those books were incorrect, they were bound to accept the books; in other words, it was necessary for the Income-tax authorities to produce evidence or cause to be produced evidence before themselves showing that the statements in the books or some of them were false. We cannot agree with the proposition advanced by the learned counsel, though we do certainly agree with his contention that the procedure of the assessing authority is a judicial one and that he ought to act upon evidence. But, in our opinion, in a case such as this……he has the right to require a satisfactory explanation…..and in the absence of a satisfactory explanation or if he receives an explanation which he cannot believe, the assessing Officer is entitled to regard the account as unsatisfactory. . .. That is all that has been done in the present case by the Income-tax Officer". It will appear that in that case circumstantial evidence was regarded as sufficient to support the conclusion arrived at by the Income-tax Officer.

In Tara Chand Pohumal v. Commissioner of Income-tax, Punjab [1936] 4 ITR 313, which again is a case from this Court, the Income-tax Officer had added a sum of Rs. 10,000 to the income shown in the books as he had come to the conclusion that there were omissions in the accounts, the total value of which could not be accurately determined and that the accounts did not represent a complete and correct version of the actual business. While remarking that the Income-tax Officer should have proceeded on judicial principles, the existence of one omission was held to be sufficient by a Division Bench of this Court to justify the action taken by the Income-tax Officer.

In Bhikhaji Vyankatesh v. Commissioner of Income-tax AIR 1927 Nag. 283 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 [1934] 2 ITR 305 and Jambudas…Applicant; v. Income Tax Commissioner, C.P…Non-Applicant. AIR 1927 Nag. 336 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 ’s case (supra) 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 used before, and that the use of the proviso to Section 13 for the purpose of introducing an arbitrary manner of computing the profits was not justified. In my view, this judgment proceeds on a wrong basis when it criticises adversely the reasons of the Income-tax Officer for rejecting the accounts. Whether the account-books are reliable or not is a question of fact, to be determined solely by the Income-tax Officer, and when he gives reasons for doing so, which are not apparently capricious or injudicial, it is not possible to disturb his finding merely on the ground that the material in support of those reasons is meagre or insufficient.

In Jambudas case (supra) the learned Additional Judicial Commissioner of Nagpur has observed as follows :—

"The Income-tax Department must always bear in mind that the normal presumption is in favour of good faith and not of bad faith on the part of the assessee. The applicant was, therefore, entitled to ask the Crown to start with a presumption that the entry in the Khata was made in the ordinary course and with no intention to conceal the income, and it was for the Crown to prove the contrary. Suffice it to say at this stage that as the learned Commissioner does not seem to have approached the case from the right point of view of burden of proof, there is likelihood of the conclusions drawn by him being vitiated for want of proper appreciation of facts or for misapplication of the law to them. This Court can always test the soundness in point of law of the conclusions drawn from proved facts".

For this view, reliance has been placed on a quotation from a judgment of their Lordships of the Privy Council which reads as follows:—"The proper legal effect: of proved facts is a question of law". I may say with all respect that the learned Additional Judicial Commissioner has misapplied this quotation in so far as to justify his interference with conclusions of fact arrived at from proved facts. Such conclusions are themselves questions of fact and not questions of law.

In Queen v. Special Commissioner of Income Tax [1894] 3 Tax Cas 289 , In re Fletcher (3 Tax Cas. 289 at pages 220 and 291) Lord Esher observed: "It is a question of the true inference which they had to draw as a matter of evidence upon the facts which they had in evidence before them. But to draw an inference of fact from evidence before you is not a question of law at all. The inference is a question of fact just as much as the direct evidence of fact, and it would be an appeal against facts, which we are not entitled to entertain and consequently there can be no mandamus. ... I say, if that is 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, but there is none". So 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 are the judges of fact while this court is a judge of law and all those matters which are barred from the jurisdiction of the Courts 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 [1899] 4 T.C. 98 Tudor and Onions v. Ducker [1924] 8 T.C. 591 Hunt & Co. v. Joly [1929] 14 T.C. 165, Wall v. Cooper [1922] 14 T.C. 552. 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 the English Act is to some extent different from the procedure prescribed under the Indian Act. This is no doubt so, but the general principle enunciated in those judgments, in my opinion, can be of some use in deciding who is the proper person to declare whether the accounts furnished by the assessee can be relied upon or not.

In Sulley’s case (supra) the Commissioners held that they were not bound to act upon the evidence produced by the assessee and fixed a valuation of their own on the lease produced by him. The Lord President remarked that it is plain that the Commissioners were not concluded by the production of that lease, and that they were entitled to rely upon other competent sources of information in order to form the best judgment they could. In the same case, Lord Adam observed: 'Now the Commissioners in considering that . . . . did not disregard it but they did not treat it as conclusive, and they were entitled in terms of the 63rd section to fix the assessment according to their own belief and judgment. And that is exactly what they did'.

In Ducker’s case (supra) , the question for the opinion of the Court was whether, in the absence of evidence in support of the appeal, the Commissioners were right in confirming the additional assessments Rowlatt, J., observed:—"These people have only attacked it by producing a certificate of a discredited accountant, saying it ought to be taken in spite of what had happened, and the Commissioner said: 'No, we want evidence' and they did not get it, and therefore, they confirmed the assessments. I think they were right".

In Joly’s case (supra) , the assessees had delivered to the Inspector of Taxes balance sheets and trading and profit and loss accounts of their business and the Inspector asked that the accounts should be certified by a qualified accountant. On the assessees' refusal to comply with this requirement, an estimate was made by the Additional Commissioners which was far in excess of the return made by the assesses. Rowlatt, J., remarked:—

"Then what happened was that he (the Inspector of Taxes) was not satisfied. He was perfectly entitled not to be satisfied, I cannot conceive why he should not be dissatisfied. It was not because he was raising a point of law, it was because he was saying 'I am not satisfied'. The matter goes before the Additional Commissioners 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 Cooper’s case (supra) , 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 jurisdiction to do anything. Somebody must be the ultimate judge of every thing in this world. Questions of fact are decided by the Commissioners, and they have decided it. It may be unfortunate for you or not: but their decision ends the matter".

It will be obvious from the quotations reproduced above that very wide discretion vests in the Income-tax authorities to accept or not the accounts tendered by the assessee and that it is only in the case of capricious and injudicial exercise of that discretion that any question of law can be said to arise; otherwise their judgment is final.

This takes us to another question mooted at the Bar as to how for the proceedings before an Income-tax Officer can be called judicial proceedings and to what extent he is bound to conduct himself in the manner in which an ordinary court of law is expected to proceed. Counsel for the firm has referred to Section 37 of the Income-tax Act and contended that, to all intents and purposes, ail proceedings before an Income-tax Officer under Section 23 (3) are judicial proceedings and that he is bound by all the rules of evidence which bind an ordinary Court. In this connection, he has mainly relied on Baijnath v. Commissioner of Income Tax, Punjab [1926] 2 I.T.C. 176, Dunichand Dhaniram Commissioner of income Tax, Punjab [1926] I.L.R. 7 Lah. 201. Muhammad Hayat v. Commissioner of Income Tax, Punjab AIR 1931 Lah. 87, Binjraj Hukamchand, In re, (5 I.T.C. 303), Commissioner of Income Tax v. Bombay Trust Corporation (A.I.R. 1936 P.C. 269) and Gopi-nath Naik v. Commissioner of Income Tax AIR 1936 All. 286.

In Baijnath’s case (supra), the Commissioner had, in the statement of the case submitted by him, remarked that if an assessee withheld evidence that he alone could furnish and on which alone an accurate computation of his income could be based, there was no way open to the Income-tax Officer but to make an estimate of his income and to base assessment on such materials as were available to him. On this, a very brief judgment was delivered by a Division Bench of this Court composed of Le Rossignol and Martineau JJ. Upholding the assessment. In the course of the judgment, however, the following observation was made:—

"We agree with the petitioner that the Income-tax Officer should be governed in his procedure by judicial considerations. He should base the assessment 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 ’s case (supra) 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 Section 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 here say.

The case of Muhammad Hayat ’s case (supra), 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 authority of both the cases discussed above: "The proceedings taken by him (the Income-tax Officer) are not regulated by strict judicial principles, and he has sometimes to depend on materials which would be wholly inadmissible in a Court of Law. At the same time he cannot act in a purely arbitrary manner. It is true that a finding of fact recorded by him cannot be impeached even when it is not based upon any material, nor is it open to the High Court to say with respect to a particular case that the assessment has been made contrary to the rules of justice and good conscience. The High Court is, however, entitled to make a pronouncement upon the meaning of Section 23 (4) and to lay down that the Income-tax Officer cannot be said to make an assessment to the best of his judgment, if he is not guided by the dictates of justice and fair play. An assessment resting upon the whim and caprice of the Income-tax Officer cannot be elevated to the dignity of an assessment made to the best of his judgment". It would be obvious from this quotation that the discretion vested in an Income-tax Officer in cases where he is entitled by law to make an estimate to the best of his judgment is fettered only by this consideration that it should be exercised in accordance with the dictates of natural Justice. It is true that the same learned Judge in reference to , Section 23 (3) observed:

"After he (the Income-tax Officer) has received the evidence produced by the assessee and also the evidence, if any, which he has himself called for on the points specified by him, he must assess the income on the material produced before him and has no right to make an assessment to the best of his judgment", but this remark, in my view, was not intended to apply to those cases where the proviso to Section 13 had come into play.

In Binjraj Hukamchand ’s case (supra) Sir George Rankin, CJ. observed:—

"When as in this case an assessee produces his books for the year of account and complies with any other requirements as to specific documents so that he is assessed in the ordinary way under Section 23 (3) and not as being in default, the Income-tax authorities cannot assess him upon any figure of profits not warranted by evidence which they have before them". These observations, too like those made in Muhammad Hayat's case (supra )take no account of the proviso to Section 13.

In Commissioner of Income Tax, Bombay v. Bombay Trust Corporation [1936] 4 ITR 323 (PC) 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). Section 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 fraudulent, the value of the books as evidence can be considered as overthrown". This quotation clearly indicates that, in cases of unreliable, inconsistent or fictitious accounts, an Income-tax Officer can disregard the books of account tendered by the assessee and proceed in any manner that he deems best.

In Gopinath Naik’s case (supra) two Judges had differed and the case was then referred to Sir Shah Muhammad Sulaiman, C.J. Niamat Ullah, J., while discussing sub-sec. (3) of Section 23, observed as follows:—

"It seems to me that where the Income-tax Officer acts under Section 23 (3), the assessment must be based on 'evidence'. The obligation to hear evidence which may be produced by the assessee or may be called for by the Income-tax-Officer himself is a clear index to the further obligation to 'determine' the sum payable by the assessee on the basis of the evidence adduced in the case. Where the assessee himself does not produce any evidence, the Income-tax Officer cannot be at a loss to make the assessment, because the law has given him ample powers to call for evidence. Where the assessee himself does not produce any evidence, comparatively slight evidence, coupled, with the inference drawn from the conduct of the assessee, will be enough for compliance with the requirements of Section 23 (3)".

Bajpai, J., disagreed with Niamat Ullah J., in the conclusion arrived at by them and the case was placed before Sir Shah Mohammad Sulaiman, C.J. He agreed with Niamat Ullah, J., but observed: "I see no objection in the Income-tax Officer or the Assistant Commissioner acting upon the assessment for the previous year if no better evidence is forthcoming. An Income-tax Officer, and for the matter of that, an Assistant Commissioner is not bound to accept either the correctness of the return or the genuineness and completeness of the account books produced before him or the truth of the evidence produced by the assessee. If he has ground for believing that such evidence is untrustworthy, he can certainly reject it. Having rejected such evidence it is open to him to pursue the inquiry further and take more evidence which he considers necessary; but he is not bound to do so. In the absence of any better evidence he is certainly entitled to fall back on the assessment of income made during the previous year, even though that 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 sence 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 Halwai, In re [1928] 3 ITC 48, the assessee produced evidence in support of his return which was rejected by the Income-tax Officer and the assessment was consequently based on estimate from inspection of the shop conducted either personally or vicariously. The same objection as here was raised to the assessment made and the case was taken before a Division Bench of the Allahabad High Court. The learned Judges refuted the argument advanced by the assessee and observed as follows :—

"They (the assessment proceedings) are judicial proceedings in the colloquial sense, because the income-tax authorities have to make up their minds judicially, with fairness to the public and to the assessee, between whom they stand, after taking all the facts, or such facts as they can, into account, but they are not judicial proceedings in the strictly scientific sense of the term, so as to raise questions in appeal to some higher tribunal as to whether the gentleman making the assessment has decided against the weight of evidence, or decided a fact of which there is no evidence, or has disregarded evidence which he ought to have taken into account. To open the door for one moment to such a contention would turn this Court into a Court of appeal of fact with regard to every assessment in which the assessee was dissatisfied with the decision. He (the Income-tax Officer), and he alone, is to determine the amount of the assessment and the sum payable. It is a question of fact of which he is the sole judge, and he must use his best judgment first to obtain, and secondly to weigh, the available evidence. It is to some extent a private inquisition, it is confidential, it is not supposed to be disclosed to the public, and it is certainly not open to review, especially because frequently the Income-tax Officer is compelled to draw inferences and to consider evidence which might not be justified by the Evidence Act. If an assessee wants to be treated fairly, the least he can do is to treat the Income-tax Officer fairly and lay the facts fully before him. The sooner it is understood that these are questions of fact, and questions of fact only and that the slightest attempt to open the door to appeals to this Court on what are alleged to be mixed questions of law and fact, but are really only questions of a fair figure of assessment, must be discouraged, the better"

In Maharaja of Darbhanga's case (supra) 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 there of which he apparently made no attempt to do."

In Harmukhari Dulichand, In re AIR 1928 Cal. 587, Sir George Rankin, C.J. observed as follows:—"It has been said that the Income-tax Officer must proceed in a judicial manner and Section 37: has been mentioned in this connection. Fundamentally, no doubt, the Income-tax Officer must proceed in a judicial spirit and come to a judicial conclusion upon properly ascertained facts though I would point out that the Income-tax Officer is not a Court, he has not the procedure of a court, and he is to some extent a party or Judge in his own case… It is idle and absurd for a person who has books of account and deliberately withholds, them to complain of not being treated in a judical manner. The judicial manner is a manner which proceeds upon evidence, and the basis of the statute is to see that available evidence is produced. It is then and only then that the assessment is to be made upon a judicial consideration of the evidence. Otherwise it is to be made 'to the best of his judgment' and brevi manu". It may be remarked that in the present case too, the Income-tax Officer had reason to believe that the firm had not produced certain account books which they possessed and this circumstance was used as one of the reasons for not placing reliance on the accounts submitted by the firm,

In R. v. Special Commissioner of Income Tax, Elmhirst ex-parate [1936] 52 T.L.R. 143, it was held that in making assessments and in dealing with appeals, the Commissioners are not in the position of Judges deciding an issue inter paries but are exercising a statutory authority and a statutory duty which is to assess or estimate the amount on which, to the best of their judgments, the subject ought to be taxed. The Master of the Rolls observed: "They are not in the position of Judges deciding an issue between two particular parties. Their obligation is wider than that. It is to exercise their judgment on such material as comes before them and to obtain any material which they think is necessary and which they ought to have, and on the material to make the assessment or the estimate which the law requires them to make".

In Local Government Board v. Alridge 1915 A. C. 120, at page 132 Viscount Haldane, L.C., defined the expression "acting judicially" in the following manner:—

"They must deal with the question referred to them without bias, and they must give to each of the parties the opportunity of adequately presenting the case made. The decision must be come to in the spirit and with the sense of responsibility of a tribunal whose duty it is to meet out justice. But it does not follow that the procedure of 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 them-selves. Suffice it to say, that an Income-tax Officer is invested with plenary powers in the matter of asessment, and drastic though at first sight these powers may appear to be, they are designed to impress upon the minds of the assessees that if they expect equity from the Income-tax authorities, they must do equity themselves and come with clean hands before them. My conclusions, therefore, are —

(1)That both the Commissioner and the firm are wrong in thinking that the proviso to Section 13 is not meant to be applied to the rejection of the accounts in a case like this, where accounts are found to be unreliable or fictitious;

(2)that the proviso to Section 13 can be utilized in computing the income of the assessee when on weighing the evidence produced under Section 23 (3), the finding of the Income-tax Officer is adverse to the assessee;

(3)that under the terms of the proviso, the Income-tax Officer is the only proper person to decide whether the accounts are such as reflect the true income of the assessee, and if he holds the contrary, he is at liberty to compute the taxable income of the assessee upon such basis and in such manner as he may determine;

(4)that the proceedings before the Income-tax Officer are not judicial proceedings in the sense in which this term is ordinarily used, and that all that is required of him is to proceed without bias and give sufficient opportunity to the assessee to place his case before him, or in other words, to conduct himself in accordance with the rules of justice, equity and good conscience; and

(5)that the control exercisable by the High Court on the Income-tax Officer in these circumstances is slight.

Counsel for the firm has finally urged that in view of the fact that the question as formulated by the Court issuing the mandamus leaves us no choice to determine any other aspect of the case but that envisaged in the question we are bound to give a reply to the question but within the terms of the question. I may say at once that I do not consider that the proposition advanced by the counsel is legally sound. Under sub-section (3) of Section 66, the High Court, if not satisfied of the correctness of the Commissioner's decision, is empowered to require the Commissioner to state the case and to refer it. It is nowhere laid down that a question is to be formulated by the Court issuing the mandamus. Further, subsection (5) of the same section lays down that upon the hearing of any such case the High 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 ’s case (supra), 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 Section 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 justified in law in making an estimate of his own. It only remains to consider whether the estimate is fair In doing so, we have to examine the basis on which and manner in which this estimate has been made. The Income-tax Officer has taken into consideration the state of affairs in general and the fact that the firm has a large business. The firm was given ample opportunity to support its version but it failed to produce any material on the record to enable the Income-tax Officer to arrive at a definite figure. In these circumstances, as remarked by their Lordships of the Privy Council, in Maharaja of Darbhanga's case (supra ) the onus lay on the firm to displace the estimate. Not having made any attempt to do so, it should suffer. I would, therefore, uphold the estimate.

This being so, the question of the flat rate need not detain us long. The Income-tax Officer had enough material before him to fix the amount and it cannot be said that the amount fixed by him is unfair.

Keeping in view the real question at issue and the discussion made above, I would answer the question in the negative. I would, however, make no order as to costs as the position adhered to by the Commissioner was obviously wrong.

Coldstream, J.—I agree