1968 (11) TMI 26 - HC - Income Tax

Best judgment assessment under section 13 of the Indian Income-tax Act, 1922, in one case and under the proviso to sub-section (1) of section 145 of the Income-tax Act, 1961, in the other - rejection of accounts produced by the assessee being based merely on method of valuation of stock - whether assessment was justified

Summary

Issues:
Assessment based on rejected accounts under section 13 of the Indian Income-tax Act, 1922, and proviso to sub-section (1) of section 145 of the Income-tax Act, 1961.

Analysis:
The judgment pertains to a firm trading in motor spares for the assessment years 1961-62 and 1962-63, where the Income-tax Officer made best judgment assessments after rejecting the accounts produced by the assessee. The question of law referred was whether the Income-tax Officer was correct in using the provisos to complete the assessments for the respective years. The crux of the issue was the rejection of accounts due to the absence of a stock register, leading the Income-tax Officer to base the assessment on comparable cases due to low gross profit.

The Appellate Tribunal focused on the absence of a day-to-day stock book as a vital defect, hindering the determination of whether all purchases were accounted for in sales or closing stock. However, it was noted that the purchases and sales were supported by vouchers, indicating the accuracy of the accounts. The Income-tax Officer's rejection was based on the valuation of stock, not on the correctness of other particulars in the accounts, as clarified in the explanation provided.

The judgment emphasized that the method of accounting regularly employed by the assessee should be the basis for income computation unless it is impossible to deduce the true income from the accounts. The Tribunal's concern regarding the stock inventory's accuracy was deemed irrelevant since all purchases and sales were disclosed, and any imperfections in valuation did not impact income computation. Therefore, the Tribunal erred in affirming the assessments based on the rejected accounts under the respective provisions.

In conclusion, the High Court held that the Income-tax Appellate Tribunal was mistaken in upholding the assessments made by the Income-tax Officer under the specified provisions for the respective assessment years. The judgment clarified the importance of the regular method of accounting for income computation and highlighted that valuation issues in stock inventory do not affect income determination. No costs were awarded in the circumstances.