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TMI Blog1937 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the Company for assessment, which included the income, profits and gains as per profits and loss account for the accounting year as Rs. 1,89,086 and (c) a covering letter which explained the adjustment of the figure in the profit and loss account so as to arrive at the figure of income in the return, and which was in the following terms : " We herewith beg to enclose the Income-tax Form No. 4449 for the year 1931-32 duly filled in showing therein the profits as per statement shown below, which please receive and pass the receipt for the same. Rs. Profits as per Balance-sheet for the year ending 2,64,086 December 31, 1930 3,43,353 Add Difference for the undervaluation in Stock ---- at the end of 1930 (at market rate). 6,07,439 3,97,634 Less Difference for the undervaluation in Stock at the end of 1929. 2,09,805 10,719 Less Premium received by sale of Government -Bond of 1932 1,89,086 " The printed copy of the Balance-sheet for the year 1930 is enclosed herewith which please note. " On receipt of the above return the Income-tax Officer issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant to review the above orders under Sec. 33 of the Act, or alternatively, to make a reference of questions of law to the High Court under Sec. 66(2) of the Act. The appellant declined to review the orders, and, on the ground that no legal point was involved he also declined to make a reference. Thereafter the High Court, on an application by the assessee under Sec. 66(3) of the Act, required the appellant to make a reference and he made the present reference with the question of law as formulated by the High Court, viz., " Whether in view of the provisions of Sec. 13 of the Incometax Act or otherwise the Income-tax Officer was right in computing for the purpose of Sec. 10 of the Act, income, profits and gains in accordance with the method of accounting regularly employed by the assessees whether or not that method in fact shows the true income, profits and gains. " The appellant suggested the substitution of another question, but his suggestion was not adopted by the High Court. The Court, however without referring the case back amended the question referred as follows : " Whether in the circumstances of the case the Income-tax Officer was entitled to compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which nevertheless, it is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe the duty of the Income-tax Officer as a discretionary power. Despite some statements in the reference which will be referred to later, their Lordships agree with the High Court that the facts stated make clear that here the Income-tax Officer has never exercised his judgment under the proviso, and their Lordships are further of opinion that, if he had so exercised his judgment, the Income-tax Officer would not reasonably have come to any other opinion than that the profit shown in the profit and loss account could not be the true figure for income-tax purposes. It is necessary now to consider some of the statements to be found in the reference, in addition to the passage already cited from the assessment order of the Income-tax Officer. In the order of the Assistant Commissioner on the appeal the following passages occur : " It is only for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed by them for years past. This makes clear that the method of accounting regularly employed by the respondents comes within the meaning of Sec. 13 and it, therefore, became the duty of the Income-tax Officer to consider whether, in his judgment, the income, profits and gains for the purpose of Sec. 10 could be properly deduced from the accounts. In their Lordships opinion, it is abundantly clear that he never applied his mind to this question, but held himself entitled to hold the respondents to the figures of profit brought out in these accounts. The Assistant Commissioner took the same view, although he recognised that these figures did not show real profits. The views expressed by these two officers make it impossible to accept three statements by the appellant in the letter of reference, viz., (a) in para 4 : " After examination of the accounts, the Income tax Officer being satisfied that the accounts showed the true income, profits or gains, accepted them " : (b) in para 52 ; " The Income-tax Officer however accepted as correct the profit of Rs. 2,64,086 as shown in the assessee's profit and loss account and considered that there was no need to revalue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he duty of the Income-tax Officer, where there is such a method of accounting to consider whether income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question. It is clear that the Income-tax Officer acted on the same view as that expressed by the Assistant Commissioner, and did not perform the duty above stated. The case of Commissioner of Income-tax, Bombay v. Ahmedabad New Cotton Mills Co. Ltd., is of no assistance on the present question. Their Lordships prefer the original question formulated by the High Court and embodied in the letter of reference, subject to the conclusion of their Lordships that the facts show that the method of accounting regularly employed by the assessees does not show the true income, profits or gains, and the question should therefore, be amended as follows : " Whether in view of the provisions of Sec. 13 of the Incometax Act or otherwise, the Income Tax Officer was right in computing for the purpose of Sec. 10 of that Act, the income, profits and gains in accordance with the method of accounting regularly employed by the assessee when that method in fact does not show the true i ..... 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