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TMI Blog1973 (2) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------------------------------------------------------------------------------------------------- 31-7-1956 31-7-1957 31-7-1958 ------------------------------------------------------------------------------------------------------------------------------------------------- Income or loss Rs. 54,691 (loss) Rs. 4,054 (income) Rs. 1,31,673 (loss), Turnover Rs. 14,65,318 Rs. 16,66,038 Rs. 3,63,475 Gross profit rate 7.6% 9.3% loss. Waste on cotton 23.8% 25.1% 28.2% Production of 20's 5.7oz. 4.72oz. 3.57oz. yarn per lb. 26.s 3.18,, 3.12,, 3.17,, ------------------------------------------------------------------------------------------------------------------------------------------------- In the course of assessment proceedings the Income-tax Officer felt that the waste claimed was excessive and that the standard of production was below normal. As the assessee had not maintained any record to show that the weight of cotton issued, quantity consumed, the processed stock, etc., which would enable proper verification of the waste at every stage of the manufacture, it was called upon to explain the excessive wastage and the extent of wastage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58-59 31-7-1957 99,993 1,93,986 1959-60 31-7-1958 24,555 46,163 ------------------------------------------------------------------------------------------------------------------------------------------------- The Income-tax Officer, therefore, added the said sums towards overall under-production of yarn. He, however, felt separate addition on account of excess wastage, was not called for. The assessee went on appeal before the Appellate Assistant Commissioner who reduced the additions to Rs. 17,318, Rs. 1, 13,826 and Rs. 35,835 for the assessment years 1957-58, 1958-59 and 1959-60, respectively. The assessee, thereafter, appealed to the Tribunal. Before the Tribunal it was contended for the assessee that the Income-tax Officer has not given any specific finding based on any material that there was inflation of wastage or under-statement of yarn production, that he has not specifically rejected the accounts of the assessee, that there is no warrant for making an estimate in the years in question merely on the ground that estimates were made in the previous years and that, in any event, the estimates made by the Income-tax Officer were quite unreal and excessive. The Tribunal, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 23(3) ignoring the accounts of the assessee. The submission is that the assessee's books of account should normally be accepted except in cases covered by the proviso to section 13 and that even in proceedings under section 23(3), the Income-tax Officer cannot make an assessment ignoring the book results, unless he gives a specific finding that the account books are not reliable and invokes the proviso to section 13. It is, therefore, necessary to consider the relative scope of the proviso to section 13 and section 23. Section 13 runs as follows : " Income, profits and gains shall be computed for the purpose of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee : Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. " Section 23(1) states that if the Income-tax Officer is satisfied that the return submitted by the assessee under section 22 is cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the accounts either wholly or partly can be inferred from the fact that the assessment is not based entirely on the return and the book results. The next contention of the assessee is that the power of the Income-tax Officer to assess under section 23(3) should be delimited with reference to section 13, that the Income-tax Officer should normally make an assessment in accordance with the books of accounts of the assessee except in cases governed by the proviso to that section, and that he cannot reject the return and the book results and estimate the income without invoking the proviso to section 13, while making an assessment under section 23(3). Reliance is placed on the following cases : In R. B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income-tax an addition, of Rs. 1,00,000 had been made to the income returned by the assessee, a textile mill, by the Income-tax Officer on the ground that the excessive dead loss of cotton indicated suppression of production figures. That addition was restricted to Rs. 50,000 by the Tribunal. Even this addition was challenged by the assessee before the High Court on the ground that the proviso to section 13 cannot be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceeded to make an addition to the book turnover, applying the proviso to section 13. It was contended that the non-production of the stock account was not such a defect as to entitle the income-tax authorities to reject the assessee's books and to apply the proviso to section 13. The Supreme Court expressed the view that the keeping of a stock register was of great importance because that was the means of verifying the assessee's accounts by having a " quantitative tally ", that if after taking into account all the materials including the want of a stock register, it was found that from the method of accounting the correct profits of the business were not deducible, the operation of the proviso to section 13 would be attracted, that the Income-tax Officer, even if he accepted the assessee's method of accounting, was not bound by the figure of profits shown in the accounts and that if he was of the opinion that the correct profits cannot be deduced in the absence of a stock register coupled with other books of account he would be justified in applying the proviso to section 13. In our view it is not possible to accept the contention of the learned counsel for the assessee that unl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the power to call for evidence in support of the return and investigate the same. As pointed out in Seth Gurmukh Singh v. Commissioner of Income-tax at page 421 : "The power to reject the books produced by the assessee in support of his return is implied in the Income-tax Officer's power to enquire into the total income of the assessee and does not need to be specifically conferred ...... When an assessee produces his books of account in support of his return, he produces them in an investigation under sub-section (3) of section 23, just as he may produce any other kind of evidence that he wishes, and the sub-section does not say how the Income-tax Officer should deal with the evidence. Now, entries in books of accounts may be quite true as to the transactions purporting to be recorded therein or they may be wholly false, fictitious and 'cooked up' for the purpose of assessment to income-tax. If the books are false, the Income-tax Officer may reject them as he may reject any other false evidence, oral or documentary, produced by the assessee. What consequences follow from the rejection of such books is not stated in the section just as it is not stated what result may follow from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine and they fail to represent truly his income, profits and gains. The majority, however, did not say that the Income-tax Officer while acting under section 23(3) cannot reject the books of account and make an assessment without invoking the proviso to section 13. On a proper interpretation of section 13 and section 23 the correct legal position appears to be this. If the account books are unreliable, false, incorrect or incomplete, the Income-tax Officer has the power to reject such account books, but that power is traceable to section 23(3) and not to the proviso to section 13. To make this position clear the legislature has now specifically provided such power in section 145(2) apart from the proviso to section 145(1) which corresponds to the proviso to section 13. After the enactment of section 145 of the new Act if the accounts are found to be incorrect and incomplete the case would fall under sub-section (2) of section 145 and not under the proviso to sub-section (1) of that section. There may be cases where the method of accounting regularly employed was acceptable to the Income-tax Officer as the proper method, but the entries in the books of account may be found to be fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of its past performance. Though there is no express finding that the books of account are not reliable, such a finding can be inferred from the assessment order itself. It is true, if the proviso to section 13 is invoked, a specific finding about the impropriety of the method of accounting or the unreliability of the books of account is necessary. But, according to the revenue the proviso to section 13 has not been invoked and only the power under section 23(3) has been exercised in this case. As we have already held that the Income-tax Officer need not resort to the proviso to section 13 for rejecting the books-of account as unreliable, it does not appear to be necessary that the Income-tax Officer should specifically give a finding that the account books are not reliable. If such a finding could be inferred from the facts set out in the assessment order, the estimate made in this case under section 23(3) could be sustained. We have to, therefore, answer the first question in the affirmative and against the assessee. Then we come to the second question. It is to be seen whether the material on record is sufficient to sustain the rejection of the book results as also the estim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition on the ground that the assessee has to failed maintain a daily mixture account in the absence of which correlation of the issues of chemicals for the production could not be established. On a reference to this court, it was held that the maintenance of a daily mixture account could not possibly help in the correlation of the issues of chlorate with the manufacture of matches, that the absence of daily mixture account, the maintenance of which was not at any earlier time insisted upon by the revenue, did not lead to the conclusion that the book results of the assessee were not reliable, that the accounts maintained by the assessee cannot be said to be incapable of reflecting the assessee's true income and that there was no scope for invoking the proviso to section 13. This decision is also relied on in support of the assessee's proposition that any addition to the book turnover can be made only by invoking the proviso to section 13 and not otherwise. However, we do not understand that decision as laying down such a proposition. As a matter of fact we find that the assessing authority in that case proceeded to make the addition by invoking the proviso to section 13 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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