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Issues: (i) Whether a notice under section 22(4) of the Income-tax Act, 1922 could be issued after the commencement of an enquiry under section 23(3), and whether non-compliance could justify assessment under section 23(4). (ii) Whether an assessment to the best of judgment under section 23(4) confers arbitrary authority on the Income-tax Officer, or must be guided by judicial principles and fairness.
Issue (i): Whether a notice under section 22(4) of the Income-tax Act, 1922 could be issued after the commencement of an enquiry under section 23(3), and whether non-compliance could justify assessment under section 23(4).
Analysis: The statutory language of section 22(4) contained no restriction limiting the service of notice to the pre-return stage. The provision was held to operate at any stage of the proceedings, including after the return had been filed and even during an enquiry under section 23(3). The Court treated the drafting scheme as permitting the Income-tax Officer to call for accounts and documents whenever needed for assessment, and held that failure to comply with such notice attracted section 23(4).
Conclusion: The question was answered in the affirmative in favour of the Revenue.
Issue (ii): Whether an assessment to the best of judgment under section 23(4) confers arbitrary authority on the Income-tax Officer, or must be guided by judicial principles and fairness.
Analysis: The phrase "best of his judgment" was held not to authorise whim, caprice, or purely private opinion. Although the assessment under section 23(4) is not governed by strict rules of evidence and may involve some latitude, it must still be made reasonably and on a fair consideration of the materials available. The Court held that justice, equity and good conscience provide the governing standard, and that an arbitrary assessment would not satisfy the statutory requirement.
Conclusion: The Income-tax Officer was held not to possess arbitrary authority and was required to act according to the rules of justice, equity and good conscience.
Final Conclusion: The reference was answered by upholding the availability of section 22(4) even after the assessment enquiry had begun, while also limiting best judgment assessments to a reasonable and fair exercise of statutory discretion.
Ratio Decidendi: The power under section 22(4) of the Income-tax Act, 1922 is not confined to the pre-enquiry stage, and a best judgment assessment under section 23(4) must be exercised reasonably and not arbitrarily.
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