Regular accounting method and undervalued closing stock require assessment under the proviso, not the general assessment provision.

Accounts regularly employed by the assessee fell within Section 13 of the Income-tax Act, 1922, because the books were maintained consistently on the mercantile system from earlier years. Where closing stock is undervalued so that true income cannot be properly deduced, the proviso to Section 13 applies and assessment must be made under that special power rather than under Section 23(3). Acceptance of the silver accounts did not compel acceptance of the gold accounts, because defects in one branch of the business could be examined independently. The assessment was therefore required to proceed under the accounting provision and its proviso, while the consistency argument failed.

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Issues: (i) Whether the assessee's accounts for the relevant year were governed by the regular accounting method under Section 13 of the Income-tax Act, 1922, so that income could be computed on that basis; (ii) whether, if the income could not properly be deduced from those accounts because of undervaluation of closing stock, the Income-tax Officer was bound to proceed under the proviso to Section 13 rather than under Section 23(3) of the Income-tax Act, 1922; (iii) whether acceptance of the silver accounts compelled acceptance of the gold accounts as well.

Issue (i): Whether the assessee's accounts for the relevant year were governed by the regular accounting method under Section 13 of the Income-tax Act, 1922, so that income could be computed on that basis.

Analysis: Section 13 requires income, profits and gains to be computed in accordance with the method of accounting regularly employed by the assessee. The accounts for the year in dispute were produced in continuation of the method adopted in the previous years, and the fact that the books were made up on the mercantile system was sufficient to attract Section 13. The real inquiry was not whether a standard accounting mode existed, but whether the assessee had regularly employed that method.

Conclusion: The accounts fell within Section 13, and the issue was answered in favour of the Revenue.

Issue (ii): Whether, if the income could not properly be deduced from those accounts because of undervaluation of closing stock, the Income-tax Officer was bound to proceed under the proviso to Section 13 rather than under Section 23(3) of the Income-tax Act, 1922.

Analysis: Where closing stock is undervalued so that true income cannot be deduced from the accounts, the proviso to Section 13 becomes operative and the officer must address the assessment under that provision. Section 23 concerns assessment on the return and does not displace the special rule governing computation from accounts. If the assessment was made under Section 23(3) instead of the proviso to Section 13, the authorities failed to apply the correct provision and the matter had to be dealt with under the proper statutory power.

Conclusion: The officer had to proceed under the proviso to Section 13, and not under Section 23(3); this was decided in favour of the Revenue.

Issue (iii): Whether acceptance of the silver accounts compelled acceptance of the gold accounts as well.

Analysis: The treatment of one branch of the business did not create any legal obligation to accept another branch of the accounts if defects existed in it. Separate defects in the gold accounts justified separate scrutiny, and no rule of consistency required automatic acceptance merely because the silver accounts were accepted with imperfections.

Conclusion: There was no such obligation, and this contention failed against the assessee.

Final Conclusion: The reference was answered so that the assessment had to be dealt with under the accounting provision and its proviso, and the assessee's challenge failed on the substantive issues decided.

Ratio Decidendi: When accounts are regularly employed but true income cannot be properly deduced from them due to defective valuation or similar infirmity, the taxing authority must act under the proviso governing computation from accounts and cannot substitute the general assessment provision.

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