1965 (2) TMI 108 - HC - Income Tax

Summary

Issues Involved:
1. Justification for rejecting the account books.
2. Requirement of notice under Section 23(2) before making a best judgment assessment.
3. Basis for estimating the turnover at Rs. 10,50,000.
4. Opportunity for the assessee to rebut the proposed estimate of 9% gross profit.
5. Method of computation of gross profits and deductions applied.

Detailed Analysis:

1. Justification for Rejecting the Account Books:
The Income-tax Officer (ITO) rejected the account books due to several discrepancies: the turnover was significantly lower than expected, the outturn of rice from milling was less than other millers, and the purchase vouchers were deemed fabricated. Additionally, two primary account books were not produced despite being initialed by the income-tax inspector earlier. The court held that the rejection of the account books based on these grounds was justified and was a question of fact that could not be interfered with by the court.

2. Requirement of Notice under Section 23(2):
The assessee argued that the ITO should have issued a notice under Section 23(2) before making a best judgment assessment under Section 23(4). The court noted that there was no material to determine whether such a notice was issued. Since this issue was not raised before the lower authorities, the court could not accept the contention that the ITO lacked jurisdiction to make the best judgment assessment without giving the assessee an opportunity to support the return with other evidence.

3. Basis for Estimating the Turnover at Rs. 10,50,000:
The ITO estimated the turnover at Rs. 10,50,000 and the gross profit at 9% without providing a clear basis for these figures. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld these estimates but did not furnish any specific basis or disclose the comparable cases to the assessee. The court found this approach to be capricious and without validity, emphasizing that the income-tax authorities must disclose the basis for their estimates and provide the assessee an opportunity to rebut them.

4. Opportunity to Rebut the Proposed Estimate of 9% Gross Profit:
The court highlighted that the income-tax authorities did not disclose the comparable cases used to arrive at the 9% gross profit rate, nor did they give the assessee an opportunity to rebut this evidence. Citing precedents, the court reiterated that the authorities must provide a basis for their estimates and allow the assessee to contest them. The failure to do so rendered the assessment capricious and invalid.

5. Method of Computation of Gross Profits:
The ITO deducted Rs. 45,748 from the gross profit for expenses towards mill machinery, twine, mill lease amount, and establishment charges, thereby reducing the gross profit percentage. The court noted that the profit and loss account should include all items directly affecting the cost of goods sold, and any deductions not affecting this cost should be excluded. The court agreed with the assessee's contention that the deductions made by the ITO were not in accordance with accepted accounting principles. However, since the basis for turnover and profit rate was not disclosed, this point was deemed less significant.

Conclusion:
The court answered the reference in the negative, indicating that the assessment of Rs. 60,000 was not based on any material on record. The authorities were permitted to make a fresh assessment, and the assessee was awarded costs. The advocate's fee was fixed at Rs. 250.