- (1.) ON the dismissal of his applications by the Appellate Tribunal under s. 66(1) of the IT Act, the assessee made two applications under s. 66(2) of the Act, one in respect of the asst. yr. 1945 - 46 and the other in respect of the asst. yr. 1946 -47. They are Miscellaneous Civil Cases Nos. 201 and 202 of 1949. By an order dt. 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 s. 13 applies, the ITO 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 - These questions arise for both the years.
(2.) THE assessee, an HUF, 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 ITO, 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 s. 13 is therefore, applicable. In fact, the profits for the asst. yrs. 1941 -42 and onwards were determined under this proviso as stated in the statement of the case.
(3.) AFTER reproducing certain extracts from the assessment orders for the years 1941 -42 to 1945 - 46, the statement of the case proceeds : "The ITO 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 ITO was not one of the grounds before the AAC or the Appellate Tribunal. The same thing happened in connection with the assessment for the year 1946 -47." In paragraphs 12 to 16 the Appellate Tribunal does not state 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 ITO 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 ITO has to find out, as best as he can, the income earned by the assessee in the year of account. Sometimes, the ITO 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." The Tribunal further states that when an assessment under s. 23(3) read with the proviso to s. 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 ITO can do is to make a reasonable estimate, having regard to all the circumstances of the case." The first question admits of only one answer and that is in the affirmative. The proviso to s. 13 does not entitle the ITO to have a leap in the dark but requires him to compute the income "upon such basis and in such manner as the ITO may determine". He has therefore, to find out "the basis and the manner of computation". The assessment is under s. 23(3) after hearing such evidence as the assessee may produce and such other evidence as the ITO may require on specified points. The ITO 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 ITO might be misinformed. Although there is no express provision in the Act to require the ITO to make such disclosure, it is necessary on the principles of natural justice. In Sarupchand Hukamchand, In re (1945) 13 ITR 245 (Bom) Kania, Actg. 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." See also CIT vs. Khemchand Ramdas (1940) 8 ITR 159 (JCC -SIND) : TC1R.426. 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 computation 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 ITO to disclose the basis and manner of his computation. If the profits are computed under this proviso upon a basis determined by the ITO, 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 ITO 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 s. 10 of the Act, he would not be acting under the proviso to s. 13. The ITO 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 ITO is not entitled to discard the evidence of the books of account altogether merely because the proviso to s. 13 is attracted. As their Lordships of the Privy Council stated in CIT vs. Sarangpur Cotton Manufacturing Co. Ltd. (1938) 6 ITR 36 (PC) : TC1R.109 "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 ITO under the proviso must be properly exercised. It is misleading to describe the duty of the ITO as a discretionary power." It is certainly not a "leap in the dark". The ITO is not entitled to make a guess without evidence: CIT vs. Kameshwar Singh (1933) 1 ITR 94 (PC) : TC1R.154. ;