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TMI Blog1935 (11) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... t the accounts had been manipulated. An opportunity was given to the assessee to explain certain matters. No explanation was, however, furnished, but a fresh return was submitted. The Income Tax Officer called upon the assessee to substantiate the new return. He also summoned the assessee, who did not, however, appear, nor did he produce any evidence. The Income Tax Officer came to the conclusion that the accounts were incomplete and unreliable. He estimated the income of the assessee from money-lending business to be ₹ 1,22,000. The estimate was based on calculating the net profits at the rate of 8 per cent. per annum on ₹ 15 lakhs, which was taken to have been invested by the assessee in his money-lending business. The order of the Income Tax Officer and his reasons in support of it appear from Appendix C. The assessee appealed to the Assistant Commissioner, who agreed with the Income Tax Officer in rejecting the assessee's account books as unreliable. He, however, estimated the amount invested by the assessee in money-lending business to be 11 lakhs only. The Assistant Commissioner based his estimate, partly at any rate, on certain 'enquiries,' of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, Appendix B, by which he had estimated that the assessee had invested 11 lakhs in his money-lending business. We think that the report may be accepted as an explanation of certain obscure portions of his order of assessment, which by itself does not clearly show the data on which he proceeded. The first question raises a point of some nicety and of not a little difficulty. In the present case the Assistant Commissioner based his assessment on the estimated amount of the assessee's investment in money-lending business, assumed to yield a profit of 8 per cent, per annum. The estimate itself is based on the amount of investment assumed in the year immediately preceding and the result of his enquiry at Basti. I use the word assumed deliberately, because in that year the assessment was one under Section 23(4) that is to say, a best judgment assessment, the assessee not having complied with a notice requiring him to submit a return. For the present year the assessee complied with the notice and furnished a return. Though the Income Tax Officer did not accept the return as correct, he made the assessment not under Section 23(4) but under Section 23(3). In my opinion the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under Section 22(4). In the present case, these conditions were ex hypothesi absent, and the Income Tax Officer did not proceed under Section 23(4). It follows that a case for assessment to the best of judgment of the Income Tax Officer did not exist. It seems to me that, where the Income Tax Officer acts under Section 23(3) the assessment must be based on 'evidence'. The obligation to hear evidence which may be produced by the assessee or may be called for by the Income Tax Officer himself is a clear index to the further obligation to determine the sum payable by the assessee on the basis of the evidence adduced in the case. Where the assessee himself does not produce any evidence, the Income Tax Officer cannot be at a loss to make the assessment, because the law has given him ample powers to call for evidence. Section 37 of the Act empowers him to enforce the attendance of any person and to examine him on oath or affirmation, compel the production of documents and to issue commission for the examination of witness. Where the assessee himself does not produce any evidence, comparatively slight evidence, coupled with the inference drawn from the conduct of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Officer was entitled to make in view of the assessee's conduct. The assessee's conduct this year, though open to objection otherwise is admittedly not such as to justify assessment of that kind. The Income Tax Officer should have based it on evidence as required by Section 23(3). It was open to the Income Tax Officer to have relied on the records of several past years which were in his possession. It is not disputed that the assessee was assessed for several years in the ordinary course, and not under Section 23(4); and if the Income Tax Officer had taken those assessments as a guide, it could not have been said that his assessment for the year in question was based on no evidence. The Commissioner contends in his remarks made in the statement of the case: 'The Assistant Commissioner's estimate of the investment is, however, based, not on the result of those inquiries, but on other data. These data were furnished by the assessment for the year 1928-29, the year immediately preceding the assessment year in dispute, in which the total investment was estimated by the Income Tax Officer of the time at 10 lakhs and the estimate was accepted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to that extent, the onus lies on the assessee. It could not be otherwise. The assessee alleges by his return that his assessable income is what is stated therein. But the Income Tax Officer denies that fact. The onus is undoubtedly on the assessee, if he maintains that his return is correct; but if the return is set aside and the Income Tax Officer puts forward an affirmative case that the assessee's income is more and gives a definite figure, the onus is on him to support his case. It cannot be said that the onus lies on the assessee not only to substantiate his return but also to disprove every allegation or assertion which the Income Tax Officer may choose to make. This is clear from Section 23(3) which makes it incumbent on the Income Tax Officer to make the assessment after hearing such evidence as such person may produce and such other evidence as the Income Tax Officer may require on specified points. That part of the section obviously means that the Income Tax Officer shall hear the evidence which the assessee may produce in support of his return, and that if the return or the evidence in support thereof is not accepted, the Income Tax Officer shall hear such further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was, in that case, borne out by the evidence, and the only question was one of quantum. Their Lordships approved of this view and held that the assessee should have adduced evidence to rebut the estimate. It seems to me that the case was one in which the initial onus resting on the Income Tax Officer (the return being ignored) was discharged, and a case existed for the assessee to rebut the estimate made by the Income Tax Officer. I think that the case quoted above does not support the contention put forward on behalf of the department. In the present case, if instead of 15 or 11 lakhs, the Income Tax Officer or the Assistant Commissioner had taken the assessee's income to be 50 lakhs he would have had no means of rebutting that assumption. In my opinion to countenance the rule contended for by the Commissioner will lead to highly undesirable results. For the reasons explained above, I answer the first question in the negative. The answer to the second question will, in a great measure, follow from that to the first. Section 13 merely provides for methods of accounting. It throws no light on the main question in the case as to whether the result of private enquiries made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e him to explain the omissions. The case was postponed to March 17, 1931 and at the same time the Income Tax Officer under Section 23(3) asked for evidence on specified points. No evidence was produced on this date nor was any explanation offered, but a fresh return was received through the post. On receipt of this return the Income Tax Officer issued a fresh notice on April 20, 1931 under Section 23(2) requiring the assessee to produce evidence in support of the revised return, and at the same time he issued a summons under Section 37 of the Income Tax Act for the personal attendance of the assessee. The date fixed for this purpose was April 30, 1931. On May 2, 1931 the assessee sent a letter that he had no evidence to produce beyond the account books which had already been produced before the Income Tax Officer, and as regards his personal attendance he requested that the case might be postponed to some date in June. The Income Tax Officer could not postpone the case to June but fixed May 13, 1931 for bearing. The assessee once again sent a petition by post repeating that he could not produce any other evidence except the accounts which were already in the possession of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. Concealments are discovered every year, and the books have to be rejected. In fact in the year 1928-29 after some concealments were discovered, he promised to my predecessor, as is apparent from his order, that he would in future produce the correct books. He has not fulfilled this promise. This year I have made detailed inquiries at Bakhera and the neighbouring places and also at Gorakhpur, the district in which the assessee has considerable investment. I am told that advances are made in the villages in the districts of Gorakhpur and Basti and they are never shown in the books produced before us. His total investment is, in my opinion, of about 15 lakhs. The rate of interest charged by the assessee of course varies with the particular investment. It sometimes is in the neighbourhood of 24 per cent. But at the same time there are loans, I am told, in which the rate of interest is so low as 6 per cent. I, therefore, think it to be fair if I take an income of ₹ 1,20,000 from money-lending.' It would thus appear that the estimate made by the Income Tax Officer was based on the fact that the estimate of the previous year by the former officer was 10 lakhs, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of about 10 lakhs. No exception was taken to this assessment by the assessee. A loan of ₹ 11,018-15-6, together with ₹ 716-9-3 on account of interest on ₹ 11,735 in round figures due from one Tribeni Ram Chhipi of Gorakpur was found missing from the books of the assessee. Some omissions and discrepancies were also found out as discussed by me in my appellate order of February 29, 1932. On account of these omissions I added 1 lakh to the investments of 10 lakhs as were estimated before, which was a good evidence. Thus I determined his total investments at 11 lakhs. The learned Commissioner is of the opinion that an estimate of 11 lakhs as the capital invested by the assessee is based on such evidence as the Assistant Commissioner was in law empowered to act upon. It has been argued before us by the assessee that there was no basis in law for the estimate made by the Assistant Commissioner. Various considerations arise in connection with the first question formulated by us. Under Section 3 of the Indian Evidence Act a Court includes all persons except arbitrators legally authorised to take evidence and in view of Section 37 of the Income Tax Act, Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of such an enquiry is not fettered by any limitations. It is, therefore, clear to my mind that the Indian Evidence Act with all its details does not apply in the case of an assessment under the Indian Income Tax Act, and a margin of approximation is undoubtedly left to the income tax authorities, specially when the assessee has been guilty of contumacy. In Commissioner of Income Tax, Bihar and Orissa v. Kameshwar Singh of Darbhanga their Lordships of the Privy Council quoted the following passage from the judgment of the learned Chief Justice of Patna: Learned counsel for the assessee has argued that the officer is not entitled to make a guess without evidence and I agree with the contention, but in this case the state of affairs in the previous years coupled with the fact that the assessee had a large mortgage loan business and must have enforced mortgages by sale on many occasions afford ample material for the assessment made. I would answer the question in the affirmative. and then their Lordships proceed and say that with this observation of the Chief Justice: the other Judges concurred and their Lordships agree adding only that if the assessee wished to displace ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch evidence as the Assistant Commissioner was in law empowered to act upon, and my answer to the first question is in the affirmative. As regards the question I have already said, when discussing the first question, that the Revenue Officers have a large discretion to make private enquiries and from the very nature of the proceedings it is apparent that such enquiries are essential. It is, however, necessary that the principles of natural justice should not be violated and the assessee should be permitted to meet the case as revealed by the enquiries. In the present case opportunity after opportunity was given to the assessee and he was asked to produce his books and to attend in person. His representative on one occasion admitted that omissions had been made and asked for time to explain them. No explanation was ever offered and the Assistant Commissioner in his report dated December 20, 1933, says that he used the result of his enquiry in favour of the assessee by reducing the estimate of the Income Tax Officer. My answer to the second question, therefore, is that the Assistant Commissioner was authorised under Section 13 of the Income Tax Act and also otherwise to make privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the assessment and sent the case back with certain directions. A fresh notice was accordingly issued by the Income Tax Officer, who then became invested with the necessary powers, under Sec. tion 23(2) and the statement of the assessee was recorded. The account books produced by him were again examined and then a fresh notice under Section 23(3) was issued to him on March 16, 1931. The assessee submitted a revised return, but the Income Tax Officer was still not satisfied and issued a fresh notice under sub-section (2) for further information as well as for personal attendance. There were some adjournments of the hearing when another notice under sub-section (3) was issued on May 19, 1931, for further particulars on specific points. Ultimately on June 8, 1931, the Income Tax Officer made an assessment on the basis of a capital investment of 15 lakhs and calculating the income at the rate of 8 per cent. per annum fixed ₹ 1,20,000 as the income from the money-lending business. The learned Income Tax Officer found fault with the account-books produced by the assessee and considered them incomplete and unreliable and did not act upon them. In the course of his order he remarked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se for the High Court, but on a further application made to the High Court, a Bench of this Court by their order dated October 27, 1933, asked the Commissioner to state the case on the two points quoted at the outset. In compliance with this order the case has been stated by the Commissioner. The Bench in the course of their order had directed that in preparing the statement of the case, it should be clearly shown whether any, and if so, what enquiries were made by the Assistant Commissioner behind the back of the assessee, as his reference to enquiries was somewhat vague and in the context in which it occurred it gave the impression that he made enquiries behind the back of the assessee. The first question which has been argued before me at the bar is whether it would be proper to take into account the subsequent explanation furnished by the Assistant Commissioner as directed by this Court. The Assistant Commissioner in his explanation has said: I enquired from the people of Basti about the money-lending business of the assessee. They could not point out to me any big investments, rather they stated that his money-lending business was much like before. This led me to conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and incomplete, he has to serve notice under sub-section (2) of that section on the assessee specifying a date and calling upon him to attend at his office or produce any evidence on which he may rely in support of his return. From this stage the proceeding assumes the character of a judicial enquiry, although not conducted by a judicial officer. The Income Tax Officer has to make up his mind as to whether the return is incorrect and and should be relinquished and, if so, what should be the proper assessment. Under sub-section (3) of this section the Income Tax Officer has to hear such evidence as the assessee may produce and such other evidence as the Income Tax Officer may require on specific points; and he has then to assess the income and determine the sum payable by the assessee on such basis. Now Section 37 of the Act empowers the Income Tax Officer to enforce the attendance of persons and examine them on oath or affirmation, compel the production of documents and issue commissions for the examination of witnesses. All these are matters which have necessarily to be resorted to in the presence of and within the knowledge of the assessee. Sub-section (3) of Section 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation which the assessee has no opportunity to meet. It, therefore, seems to me that the enquiries made by the Income Tax Officer from the people of the district, after proceedings under Section 23(3) had started, of which no notice had been given to the assessee, were illegal and not authorised by sub-section (3). Similarly, the enquiries made by the Assistant Commissioner during the hearing of the appeal behind the back of the appellant were not justified by the provisions of sub-section (3) and the result of such private enquiries should not have been made the basis of any assessment. On the other hand, I see no objection in the Income Tax Officer or the Assistant Commissioner acting upon the assessment for the previous year if no better evidence is forthcoming. An Income Tax Officer, and for the matter of that, an Assistant Commissioner is not bound to accept either the correctness of the return or the genuineness and completeness of the account-books produced before him or the truth of the evidence produced by the assessee. If he has ground for believing that such evidence is untrustworthy, he can certainly reject it. Having rejected such evidence it is open to him to pursu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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