Rejection of unreliable accounts can justify an estimated profit assessment based on past records if the estimate is not arbitrary.

Where an assessee's accounts are found unreliable, the taxing authority may reject them and compute income on a reasonable and honest estimate under the proviso to section 13 of the Indian Income-tax Act, 1922. Past assessment history and earlier returns may be relied on as relevant material for that estimate, and there is no rule prohibiting use of the same profit percentage as in a preceding year if the figure is not arbitrary. Applying that principle, the estimate of profit from the country spirit business was upheld and the assessee's challenge failed.

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Issues: Whether the rejection of the assessee's accounts and the restoration of the Income-tax Officer's estimate of profit from the country spirit business at the same percentage as in the preceding year were justified.

Analysis: The accounts produced by the assessee were found unreliable and not capable of yielding true profits. In such a situation, the proviso to section 13 of the Indian Income-tax Act, 1922 empowered the Income-tax Officer to compute income upon such basis and in such manner as he thought fit. Past assessment history and previous returns of the assessee were relevant material for making an honest estimate, and there was no rule of law that prohibited the adoption of the same percentage of profit as in the earlier year, provided the estimate was not arbitrary and was based on some material.

Conclusion: The estimate of profit was validly made and the question referred was answered in the affirmative, against the assessee and in favour of the Revenue.

Final Conclusion: The assessment based on estimated profits from the country liquor business was upheld and the Tribunal's order restoring the Income-tax Officer's estimate was affirmed.

Ratio Decidendi: Where accounts are rejected as unreliable, the taxing authority may determine income on the basis of a reasonable and honest estimate, including reliance on past assessment records, so long as the estimate is supported by some material and is not purely arbitrary.

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