1952 (10) TMI 45 - HC - Income Tax

Summary

Issues:
Assessment of profits under the proviso to Section 13 of the Income-tax Act based on the method adopted by the Income-tax Officer.

Detailed Analysis:

The judgment by the High Court of Bombay dealt with the assessment of profits for the assessment year 1946-47 for an assessee who ran a tailoring shop in Bombay and supplied miscellaneous stores to ships. The Income-tax Officer, under the proviso to Section 13 of the Income-tax Act, computed the profits and gains of the business based on a method he determined, as the assessee's accounting method was deemed inadequate. The court emphasized that the Income-tax Officer must exercise his discretion judiciously to ascertain the profits and gains of the assessee as accurately as possible, following the principle established in Sun Insurance Office v. Clark (1912) and Commissioner of Income-tax v. Kameshwar Singh (1933). The court clarified that it has the authority to review the method adopted by the Income-tax Officer if it is deemed incorrect and not likely to ascertain the true profits and gains of the assessee.

In this case, the Income-tax Officer found that out of the total sales of approximately &8377; 5,90,000, sales worth &8377; 3,42,183 were recorded in a manner allowing for the assessment of profits. However, for the remaining sales of &8377; 2,47,817, it was impossible to ascertain the profits. The Income-tax Department assessed the profits by applying a flat rate of 20 percent on all sales, which was later reduced to 18 percent by the Tribunal. The assessee contended that the Tribunal should have accepted the profits from the recorded sales and applied a percentage to estimate profits for the unrecorded sales. The court noted that the Tribunal had the discretion to adopt either method, and in this case, applying an average flat rate on all sales did not result in a wrong method as it approximated the true profits.

The court highlighted that the Tribunal's decision would have yielded a similar result regardless of the method chosen, and it was crucial to consider that assessees might manipulate accounts to show lower profits on disclosed sales. Therefore, the Tribunal's choice of applying an average flat rate was not incorrect, as it did not ignore relevant evidence or adopt a method deviating from ascertaining the true profits. Consequently, the court answered the question in the affirmative, ruling in favor of the Department, and directed the assessee to bear the costs.

In conclusion, the judgment underscored the importance of the Income-tax Officer's discretion in determining profits under the proviso to Section 13, ensuring that the method adopted aligns with the objective of ascertaining the true gains of the assessee as accurately as possible.