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Issues Involved:
1. Applicability of proviso to Section 13 of the Income-tax Act. 2. Assessment of profits from incomplete contracts. 3. Method of accounting employed by the assessee. 4. Determination of profits for the accounting year. Issue-wise Detailed Analysis: 1. Applicability of Proviso to Section 13 of the Income-tax Act: The core issue revolves around whether the proviso to Section 13 of the Income-tax Act is applicable to the accounts maintained for the contract business, which were not closed to profit at the end of each previous year but were closed to profit only after the completion of a contract. Section 13 states that income, profits, and gains shall be computed in accordance with the method of accounting regularly employed by the assessee. However, if the method employed does not reflect the true profits, the Income-tax Officer has the authority to determine the basis of computation. The Tribunal held that the proviso to Section 13 applied because the accounts maintained by the assessee did not reflect the true profits for the accounting year. 2. Assessment of Profits from Incomplete Contracts: The Tribunal found that the assessee had executed 9/10th of the military contract work within the accounting year and received about Rs. 3,00,000 from the military department. Despite the contract being completed on 3rd December 1944, the Tribunal held that the profits for the accounting year should be determined. The Tribunal observed that there is a well-known method of ascertaining profits accruing in any particular period in a contract by deducting total expenses from receipts and adding the value of work in progress. The Tribunal concluded that the assessee's method of accounting did not reflect true profits and applied the proviso to Section 13, allowing the Income-tax Officer to estimate the profits. 3. Method of Accounting Employed by the Assessee: The assessee argued that the accounts were maintained on a completed contract basis and that profits should be ascertained upon the completion of the contract. However, the Tribunal found that this method did not reflect the true profits for the preceding year. The Tribunal noted that the assessee had not kept proper accounts for previous years and had produced defective account books for the current year. The Tribunal concluded that the method of accounting followed by the assessee did not reflect the true profits, thus justifying the application of the proviso to Section 13. 4. Determination of Profits for the Accounting Year: The Tribunal held that the Income-tax Officer was entitled to compute the profits of the assessee on an estimated basis due to the defective state of the accounts. The Tribunal emphasized that the charge of income-tax is imposed on the profits and gains of the assessee for the accounting year, and it is the duty of the Income-tax authorities to ascertain such profits. The Tribunal referred to established accountancy practices and judicial precedents to support the view that profits from incomplete contracts can be estimated for the accounting year. The Tribunal ultimately determined the net income from the military contract as Rs. 55,135 and included this amount in the total income of the assessee. Conclusion: The High Court agreed with the Tribunal's findings and held that the proviso to Section 13 of the Income-tax Act was rightly applied. The accounts maintained by the assessee did not reflect the true profits for the accounting year, and the Income-tax Officer was justified in estimating the profits. The High Court answered the referred question in the affirmative, supporting the Income-tax Department's position. The assessee was ordered to pay the costs of the reference.
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