1973 (2) TMI 38 - HC - Income Tax

Rejection of account books vis-a-vis rejection of method of accounting - right of the officer to reject account books - method of accounting can be rejected under s. 13 but the account books can be rejected under section 23(3). This is because the power to reject the accounts is inherent in the power to call for evidence in support of the return and investigate the same

Issues Involved:
1. Jurisdiction of the Income-tax Officer to estimate income without rejecting the accounts specifically or without applying the proviso to section 13 of the Indian Income-tax Act, 1922.
2. Material on record for the estimated additions and rejection of the reported losses.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Income-tax Officer to Estimate Income:
The primary issue was whether the Income-tax Officer (ITO) could estimate the income of the assessee without specifically rejecting the accounts or invoking the proviso to section 13 of the Indian Income-tax Act, 1922. The court examined the scope of section 13 and section 23 to determine the ITO's authority in such cases.

Section 13 mandates that income should be computed according to the method of accounting regularly employed by the assessee, with a proviso allowing the ITO to determine the computation method if the regular method is inadequate. Section 23(3) allows the ITO to assess the total income based on evidence produced by the assessee and any additional evidence required by the ITO. The court clarified that section 23(3) does not explicitly require the rejection of accounts before making an assessment not based on the return.

The court held that the ITO has the inherent power to reject the accounts if found unreliable, false, or incomplete, and this power is traceable to section 23(3) rather than the proviso to section 13. The rejection of accounts can be inferred from the assessment order itself if it is not based entirely on the return and book results. Therefore, the ITO can estimate the income without invoking the proviso to section 13, provided the assessment order indicates the unreliability of the accounts.

2. Material on Record for Estimated Additions:
The second issue was whether there was sufficient material on record to justify the estimated additions made by the ITO and the rejection of the reported losses. The court noted that the assessee's books of account had been consistently rejected since 1949-50 due to excessive wastage claims and shortfall in yarn production.

The ITO had found that the assessee's explanations for the excessive wastage and under-production were unconvincing. The ITO's assessment was based on the comparison with past performance and the lack of evidence to support the assessee's claims of inferior cotton quality and inefficient labor. The Appellate Assistant Commissioner and the Tribunal had also considered these factors and reduced the estimated production to some extent based on the age of the machinery.

The court referred to several precedents, including the Supreme Court's decision in Dhakeswari Cotton Mills Ltd. v. Commissioner of Income-tax, which emphasized that the ITO is not bound by technical rules of evidence but must base the assessment on some material beyond mere suspicion. The court concluded that the authorities had sufficient material to reject the book results and estimate the income based on prior years' performance.

Conclusion:
The court answered both questions in the affirmative and against the assessee, upholding the ITO's jurisdiction to estimate income under section 23(3) without invoking the proviso to section 13 and finding sufficient material on record to justify the estimated additions. The revenue was awarded costs from the assessee, with counsel's fee set at Rs. 250.

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