1968 (8) TMI 42 - HC - Income Tax

Income Tax Officer rejected the accounts - Method of accounting, having been accepted in the earlier years and the income, having been computed in the same manner as in the earlier years, there is no reason why the same should be rejected in the current year

Issues Involved:
1. Applicability of the proviso to section 13 of the Indian Income-tax Act, 1922.
2. Justification of the addition of Rs. 15,000 to the assessee-firm's income.

Issue-Wise Detailed Analysis:

1. Applicability of the proviso to section 13 of the Indian Income-tax Act, 1922:

The primary issue was whether the proviso to section 13 was applicable in this case. The Income-tax Officer (ITO) applied the proviso, arguing that the yield of polished rice shown by the assessee-firm was low, and there was no day-to-day dryage register to verify the excessive moisture and quality of the paddy. The ITO compared the yield with another case, where the yield was higher, and added Rs. 32,053 to the income disclosed by the assessee-firm.

The Appellate Assistant Commissioner (AAC) agreed with the ITO on the applicability of the proviso but reduced the addition to Rs. 15,000, citing several reasons, including the purchase of both inferior and superior quality paddy, the extent of purchases at the beginning of the season, and the yield of rice polish.

The Income-tax Appellate Tribunal upheld the AAC's decision, emphasizing the lack of a check on the dryage claimed by the assessee-firm and the absence of verification of paddy purchases.

However, the High Court found these grounds insufficient for applying the proviso to section 13. The court noted that the method of accounting had been accepted in previous years, and the ITO did not provide a clear basis for the sudden change in assessment. The court cited several cases, including Pandit Bros. v. Commissioner of Income-tax and C. Arumugaswami Nadar v. Commissioner of Income-tax, to support the view that low profits or the absence of a stock register were not sufficient grounds for applying the proviso to section 13. The court concluded that the income-tax authorities were not justified in applying the proviso in this case.

2. Justification of the addition of Rs. 15,000 to the assessee-firm's income:

The second issue was whether the addition of Rs. 15,000 was justified. The AAC had reduced the ITO's addition from Rs. 32,053 to Rs. 15,000, considering factors such as the quality of paddy and the yield of rice polish. The Appellate Tribunal upheld this addition based on their experience in similar cases and the lack of a check on the dryage claimed by the assessee-firm.

The High Court, however, found that neither the ITO nor the AAC had determined a clear basis or manner for computing the true income, profits, and gains of the assessee-firm. The court noted that the sale proceeds of rice polish, which amounted to Rs. 8,972, should have been considered, and the price of rice polish could account for the addition made by the ITO. The court cited Supreme Court judgments, including Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax and Raghubar Mandal Harihar Mandal v. State of Bihar, to emphasize that assessments should not be based on pure guesswork without reference to any evidence or material.

The court concluded that the income-tax authorities were not justified in arbitrarily adding Rs. 15,000 to the income of the assessee-firm without determining a clear basis or manner for the computation.

Conclusion:

The High Court answered both questions in the negative, holding that the proviso to section 13 was not applicable and the addition of Rs. 15,000 was not justified. The court emphasized the need for the income-tax authorities to provide a clear basis and manner for computing the true income, profits, and gains of the assessee-firm. The assessee-firm was awarded costs from the Commissioner of Income-tax, with a counsel's fee of Rs. 250.

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