1970 (4) TMI 52 - HC - Income Tax

Rejection of method of accounting adopted by assessee - was there any material on the basis of which it can reasonably be said that the method of accounting employed is such that the income profits and gains cannot properly be deduced therefrom

Issues Involved:
1. Whether the method of accounting employed by the assessee was such that the income, profits, and gains could not be properly deduced therefrom.
2. Whether there was sufficient material on record to reject the books of account of the assessee as unreliable.

Issue-Wise Detailed Analysis:

1. Method of Accounting:
The primary legal question was whether the method of accounting employed by the assessee was such that the income, profits, and gains could not be properly deduced therefrom. The Income-tax Officer (ITO) rejected the assessee's claim of gross profits of 7.8% based on several findings:
- The assessee falsely claimed to be a wholesale dealer when the majority of sales were retail.
- Wholesale sales on credit showed profits between 8-10%, suggesting higher retail profits than disclosed.
- The assessee failed to substantiate comparative purchase and sale rates, with no quantitative tally of purchases and sales.
- The balance-sheet showed a significant unexplained excess of assets over liabilities.

The ITO concluded that the method of accounting did not allow for proper deduction of profits and assessed the gross profits at 10%. The Appellate Assistant Commissioner (AAC) upheld this finding, noting the lack of quantitative reconciliation despite sales exceeding Rs. 7 lakhs, rendering the disclosed profits unverifiable. The Appellate Tribunal also supported the ITO's application of the proviso to section 13, following the Supreme Court's decision in S. N. Namasivayam Chettiar v. Commissioner of Income-tax.

2. Sufficient Material to Reject Books of Account:
The assessee contended that the ITO did not make a necessary finding that the method of accounting was improper and that there was no material to reject the books of account as unreliable. The revenue argued that sufficient material existed to justify the rejection.

The court examined the facts and legal precedents:
- Section 13 of the Indian Income-tax Act, 1922, allows computation of income on a different basis if the method of accounting does not properly deduce profits.
- The court found that the ITO, AAC, and Tribunal implicitly made the necessary finding that the method of accounting was inadequate, even if not explicitly stated.
- The absence of a quantitative tally of stocks, coupled with other discrepancies, provided sufficient grounds for the ITO's actions.

The court referred to the cases of Pandit Bros. v. Commissioner of Income-tax and S. N. Namasivayam Chettiar v. Commissioner of Income-tax. In Pandit Bros., the court held that low profits alone were not sufficient for rejecting accounts, but the absence of a stock register could be a significant factor. The Supreme Court in Namasivayam Chettiar emphasized the importance of a stock register for verifying accounts and justified the application of the proviso to section 13 when correct profits could not be deduced.

In the present case, the significant excess in the balance-sheet, the false claim of being a wholesale dealer, and the lack of quantitative tally justified the ITO's decision. The court concluded that the surrounding circumstances and the absence of a quantitative tally were sufficient material for rejecting the assessee's method of accounting.

Conclusion:
The court answered the question in the affirmative, affirming that there was material to justify the rejection of the assessee's books of account and the method of accounting employed was inadequate for proper deduction of profits. The assessee was ordered to pay costs.

← Previous Next →