Proviso to Section 13 allows treating book profits as unreliable where materials show they misstate true profits; differential treatment upheld.

The proviso to Section 13 was applied because material showed the assessee's gold accounting did not permit true profits to be deduced from regularly kept books: exceptionally low gold profit rates, lack of vouchers, unverifiable purchase particulars, and implausible market movements supported a factual finding that book profits were unreliable, and the tax authority's exercise of factual discretion was proper. Separately, notices had specifically questioned gold and silver profits and evidential differences justified accepting silver book profits while rejecting gold book profits without further notice; differential treatment was legally sustainable.

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Issues: (i) Whether the proviso to Section 13 of the Income-tax Act, 1922 was applicable to the assessee's gold transactions for the assessment year in question; (ii) Whether the income-tax authorities could accept the book profits of the assessee in respect of silver transactions while rejecting the book profits in respect of gold transactions without issuing further notice.

Issue (i): Applicability of the proviso to Section 13 to gold transactions.

Analysis: The question turns on whether the method of accounting employed for gold transactions allowed the income, profits and gains to be properly deduced from the regularly kept books. Material relied on includes the exceptionally low profit rate shown for gold as compared with silver, absence of detailed vouchers or particulars of purchases in the books preventing verification of gold content and prices, evidence about favourable market movement indicating that negligible recorded profits were implausible, and prior application of a flat rate under the proviso in an earlier year. These factors constituted material reasonably capable of supporting a factual finding that the books did not reflect true profits, and the tax authority's exercise of judgment in that finding was not arbitrary.

Conclusion: The proviso to Section 13 of the Income-tax Act, 1922 was properly applicable to the assessee's gold transactions.

Issue (ii): Whether separate treatment of silver and gold transactions without additional notice was permissible.

Analysis: Notices under Sections 22(4) and 23(2) of the Income-tax Act, 1922 specifically questioned profits from gold and silver transactions. Given those notices and the distinct evidential circumstances for each commodity (verified books for silver; lack of verifiable details for gold), there was no requirement to issue further or different notice before accepting silver book profits and rejecting gold book profits. The absence of a separate notice did not prejudicially affect the assessee.

Conclusion: The income-tax authorities were justified in accepting the book profits for silver while rejecting those for gold without issuing any additional notice.

Final Conclusion: The factual discretion vested in the income-tax authorities under the proviso to Section 13 of the Income-tax Act, 1922 was validly exercised on the materials before them, and the differential treatment of the two commodities was legally sustainable.

Ratio Decidendi: Where regularly kept accounts exist, the tax authority must consider whether true profits can be deduced therefrom, and if there is material reasonably capable of supporting a finding that the books do not reflect true profits, the authority may, in the exercise of its factual discretion under the proviso to Section 13 of the Income-tax Act, 1922, determine income by a different method.

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