SETH NATHURAM MUNNALAL Vs. COMMISSIONER OF INCOME TAX C P AND BERAR

JUDGEMENT

(1.) ON the dismissal of his applications by the Appellate Tribunal under Section 66(1) of the Income-tax Act, the assessee made two application 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 April 7, 1952, this Court required the Appellate Tribunal to state the case on the questions of law indicated in the order. Accordingly the Tribunal has state 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 ?" These questions arise for both the years.

(2.) 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 there from. 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.

(3.) 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 Sarupchand Hukamchand, In re 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." See also Commissioner of Income-tax v. Khemchand Ramdas. 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 assessees 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 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 never theless, 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 powers." 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. At 106.