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TMI Blog1965 (2) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 84,999 returned by the assessee, it would be only 4.5% on the turnover. This was considered to be low compared to other rice millers whose gross profits ranged from 8% to 12%; the outturn of rice from the milling of paddy admitted by the assessee was only 66.7%, while the other millers had accounted for an outturn of about 71%; that the vouchers produced in support of the purchase price paid for paddy were not made out in the regular course of the carrying on of the business but had been fabricated with a view to manipulate the purchase rates; and that although the assessee was dealing in different varieties of rice, no stock accounts were maintained separately for each variety. Apart from these defects, the Income-tax Officer also found that two account books, which the income-tax inspector had earlier, on his visit to the premises, initialled and which the assessee was directed to produce by a notice under section 22(4) of the Act were not produced, and that those account books being important primary books of account would have disclosed a true state of affairs. According to the statement of the case of the Tribunal, the inspector had found three books, viz., (1) a ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer had quoted where the rate of profit is at 9%. An appeal to the Appellate Tribunal was dismissed with the following remarks: The Appellate Assistant Commissioner has, however, reduced the addition so made by the Income-tax Officer at ₹ 55,000 to ₹ 33,500. We think, in the circumstances of the case, the estimate was justified and is fair. Mr. K. Ramachandra Rao for the assessee complains: (1)that the income-tax authorities were not justified in rejecting the account books, (2)that even after rejecting the account books, the Income-tax Officer onght to have given the assessee a notice under section 23(2) to support the return by other evidence, the failure of which disentitled the Income- tax Officer to make the best judgment assessment, (3)that even if the books of accounts were rejected, the assessee should have been given an opportunity to rebut the proposed estimate of 9% based on comparable cases, (4)that at any rate there is no basis for the estimate of turnover at ₹ 10,50,000, and (5)that neither the Income-tax Officer nor the Appellate Assistant Commissioner was justified in computing the gross profits by certain items of deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing terms: 23. (2) If the Income-tax Officer is not satisfied without requiring the presence of the person who made the return or the production of evidence that a return made under section 22 is correct and complete, he shall serve on such person a notice requiring him, on a date to be therein specified, either to attend at the Income-tax Officer's office or to produce, or to cause to be there produced, any evidence on which such person may rely in support of the return. A notice under this provision, according to the learned advocate, is a condition precedent to the exercise of jurisdiction by the Income-tax Officer to make the best judgment assessment. In support of this, he has cited Rajmani Devi v. Commissioner of Income-tax [1937] 5 ITR 631 , wherein it was held that a notice under section 23(2) which merely calls upon the assessee to attend the Income-tax Officer's office and does not give him the choice of producing or causing to be produced any evidence on which the assessee may rely in support of the return was, therefore, irregular and invalid. In that case, the notice under section 23(2) only required the assessee to present himself, and scored out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h book, which forms the basic record for writing up the other records. The appellants have not produced all the relevant material to check up the correctness of their business transactions. Further, there is unaccounted for yield which forms part of the turnover of the appellant. Keeping in view all the circumstances of the case, I consider that the Income-tax Officer was right in estimating the turnover at ₹ 10,50,000 which is quite fair and reasonable. Coming to the rate of profit adopted by the Income-tax Officer, he has quoted a number of cases where the rate of profit is 9%. Therefore, in the peculiar circumstances of this case, where the full facts were not made known to the Income tax Officer, he was right in estimating the rate of profit at 9%. Coming to the computation of comparable rate of profit, I find that the appellant's contention is right. In similar cases in the recomputation, the lease amount paid and the management salaries were debited to the profit and loss account instead of to the trading account. Therefore, adjustment to this extent is necessary in the recomputation of the comparable profit. That means the comparable rate of profit computed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd its order was not sustainable in law. In Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income-tax [1954] 26 ITR 775 , 782; [1955] 1 SCR 941 their Lordships of the Supreme Court held that, in making an assessment under section 23(3) of the Income-tax Act, the Income-tax Officer is not fettered by technical rules of evidence and pleadings and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). In coming to this conclusion, their Lordships relied on the rule of law stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of Income-tax [1944] 12 ITR 393 as having been fairly and rightly stated. In the Supreme Court case, Mahajan CJ., at page 782, observed thus; In this case we are of the opinion that the Tribunal violated certain fundamental rules of justice in reaching its conclusions. Firstly, it did not disclose to the assessee what information had been supplied to it by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of profits in this business are two important elements which affect the assessment and, if these are fixed to the detriment of the assessee, he is entitled to know the basis and to be given an opportunity to rebut the same, both of which have not been done in this case. Consequently, the orders of the income-tax authorities can be said to be capricious and without any validity. We will now deal with the fifth contention, viz., that the method of computation of the gross profits by the Income-tax Officer as well as by the Appellate Assistant Commissioner was not in accordance with the accepted methods of accounting. It may be noticed that a sum of ₹ 45,748 was deducted on account of four items. Of these, one of the items, viz., ₹ 19,463, was on account of the lease of the mill. The other figures have not been given. But, we must assume that the aggregate sum of ₹ 45,748 consists of the four items, viz., mill samans, twine, mill contract and the factory salaries. The question raised before us is whether the Income-tax Officer as well as the Appellate Assistant Commissioner were justified in deducting this amount from the gross profits returned by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and loss account. These principles appear to exclude from the computation of gross profit any items which do not affect the cost of the goods sold. It is, perhaps, for this reason that the Appellate Assistant Commissioner deleted certain items from the items which the Income-tax Officer computed for deduction from the gross profit, such as the lease amount and certain establishment charges as claimed by the assessee. Mr. Ramachandra Rao states that the other items also should have been excluded. But it appears from the order of the Appellate Assistant Commissioner that the items which the assessee claimed have been allowed. The learned advocate for the department contends that the assessee did not take any objection before the Appellate Tribunal that the other items ought to have also been deleted from the gross profit. But Mr. Ramachandra Rao contends that his grounds of appeal covered this aspect of the matter also, and that the amounts in respect of the items which have been deleted from the gross profit returned by him are also shown in the profit and loss account, from which they have been computed. It is also contended that the computation of the gross profit must be in a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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