Assessment on neighbours' profits upheld where assessee had chance to explain low gross profits.

Where the assessee's accounts did not inspire confidence, gross profits could be assessed under Section 23(3) of the Income-tax Act, 1922 on material other than the assessee's own books, including profits shown by neighbouring shop-keepers. The use of outside material was permissible, but only if the assessee was given a fair opportunity to meet it. On the stated facts, the assessee had been asked to explain the low profits, advanced an explanation, and that explanation was considered and rejected. The assessment was therefore treated as lawful, and the objection based on denial of opportunity failed.

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Issues: Whether the assessment of gross profits under Section 23(3) of the Income-tax Act, 1922, based on the profits shown by neighbouring shop-keepers, was lawful, and whether the assessee was denied a fair opportunity to rebut the adverse material.

Analysis: The Income-tax Officer was entitled, where the accounts did not inspire confidence, to make an assessment under Section 23(3) on the basis of material other than the assessee's own books. Even where such outside material is used, the assessee must be given an opportunity to meet it. On the facts, the assessee had been called upon to explain the low profits and had in fact advanced an explanation, which was considered and rejected. The record therefore did not show that the material drawn from neighbouring shop-keepers' profits had been used behind the assessee's back or without opportunity to answer it.

Conclusion: The assessment under Section 23(3) on the basis of the profits of the neighbouring shop-keepers was held to be lawful and the assessee's objection on want of opportunity failed.

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