Tax reference limits, fair use of undisclosed material, and rejection of false accounts in income assessment

In a tax reference under Section 66 of the Income-Tax Act, 1922, the High Court could restate the referred question accurately but could not enlarge the reference, and assumptions made at the mandamus stage did not bind the Commissioner. In assessment under Section 23(3), the Income-tax Officer could reject false or unreliable books, rely on other information, and apply the proviso to Section 13 where the accounts were incapable of yielding true income, provided the assessee was given a fair opportunity to meet the material used. A finding of fact was not vitiated merely because some material was confidential, if admissible evidence independently sustained the conclusion.

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Issues: (i) Whether, in a reference under Section 66 of the Income-Tax Act, 1922, the High Court could recast the question referred, and whether assumptions made at the mandamus stage bound the Commissioner or the Bench hearing the reference; (ii) whether, after rejecting false or unreliable accounts, the Income-tax Officer could disregard the assessee's evidence, rely on private information, and make the assessment on the basis permitted by Section 23(3) and the proviso to Section 13 of the Income-Tax Act, 1922; (iii) whether a finding of fact was wholly vitiated if it rested partly on admissible material and partly on confidential inquiries not fully disclosed to the assessee.

Issue (i): Whether, in a reference under Section 66 of the Income-Tax Act, 1922, the High Court could recast the question referred, and whether assumptions made at the mandamus stage bound the Commissioner or the Bench hearing the reference.

Analysis: The reference procedure was confined to the question of law originally indicated by the assessee and taken up by the Commissioner or the High Court under Section 66. The High Court could restate the question to express it accurately, but could not introduce a new question outside the reference. Assumptions made at the mandamus stage were not final and could be corrected by the Commissioner in the statement of the case. The Bench hearing the reference remained confined to the actual question arising on the stated case.

Conclusion: The High Court could recast the form of the question but could not enlarge the reference, and the Commissioner was not bound by mistaken factual assumptions made at the mandamus stage.

Issue (ii): Whether, after rejecting false or unreliable accounts, the Income-tax Officer could disregard the assessee's evidence, rely on private information, and make the assessment on the basis permitted by Section 23(3) and the proviso to Section 13 of the Income-Tax Act, 1922.

Analysis: The assessment under Section 23(3) was not a full judicial trial, though the Income-tax Officer had to act fairly and give the assessee an opportunity to meet the case against him. If the books or evidence produced by the assessee were false, the Officer was not bound to accept them. He could reject such material, use private sources of information, and, where the accounts were unreliable but capable of yielding the true income, apply the proviso to Section 13. If he proposed to rely on undisclosed material, natural justice required that the substance of the information be communicated sufficiently to enable rebuttal.

Conclusion: The Income-tax Officer was entitled to reject false evidence and rely on private information, and could use the proviso to Section 13 where the accounts were unreliable, while giving the assessee a fair opportunity to meet the material used.

Issue (iii): Whether a finding of fact was wholly vitiated if it rested partly on admissible material and partly on confidential inquiries not fully disclosed to the assessee.

Analysis: A finding was not automatically destroyed merely because one part of the material was objectionable. If the admissible material independently supported the conclusion, the finding could stand. Only where the inadmissible or undisclosed material formed the real foundation of the conclusion would the finding fail. The High Court, in a reference, could not reweigh the evidence as an appellate court of facts.

Conclusion: The finding was not wholly vitiated if there remained sufficient admissible material supporting it apart from the confidential inquiries.

Final Conclusion: The reference was answered mainly in favour of the revenue side, subject to the requirement that material relied on against the assessee be fairly communicated to the extent necessary for rebuttal; the dissent differed only on the scope of Section 13 in cases of false books.

Ratio Decidendi: In a tax reference, the High Court is confined to the actual question referred, an Income-tax Officer may reject false accounts and act on other material fairly disclosed to the assessee, and a finding is not invalidated merely because part of the material is confidential if the remaining admissible material independently sustains it.

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