Rejecting defective books under income tax law where regular accounts fail to disclose true profits

The proviso to section 13 of the Indian Income-tax Act, 1922 permits the Income-tax Officer to reject book results and estimate income even where regular accounts are maintained, if the method or defects in the accounts prevent true profits from being properly deduced. On the stated facts, serious defects such as incomplete vouchers, unexplained sale-rate variations, absence of a stock register, and an unverifiable inventory basis justified the finding that the books did not reflect real profits. The Tribunal's factual finding was treated as final in reference proceedings because it was supported by evidence, and the proviso was therefore rightly applied.

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Issues: Whether the proviso to section 13 of the Indian Income-tax Act, 1922 could be invoked on the facts, where the assessee maintained books regularly but the accounts were found defective and incapable of yielding the true profits.

Analysis: The proviso empowers the Income-tax Officer to compute income on his own basis not only when no regular method of accounting is employed, but also when the method used, though regular, does not enable the true income, profits and gains to be properly deduced. The material relied upon by the taxing authorities showed serious defects: combined wholesale and retail trading accounts, incomplete vouchers, unexplained variations in sale rates, absence of a stock register, and an inventory basis that could not be verified. On those facts, the authorities were entitled to conclude that the books did not disclose the real profits. The High Court also noted that, in income-tax references, findings of fact reached by the Tribunal are final unless unsupported by evidence, and no such infirmity was shown here.

Conclusion: The proviso to section 13 was rightly invoked, and the question referred was answered in the affirmative.

Ratio Decidendi: Even where a regular method of accounting is followed, the Income-tax Officer may reject the book results and estimate profits under the proviso to section 13 if the accounts are so defective that true income cannot be properly deduced, and such a factual finding is not open to interference in reference unless it is unsupported by evidence or arbitrary.

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