Reasonable profit estimation under income-tax law upheld where average rate best approximated true profits on total turnover.

Under the proviso to Section 13 of the Income-tax Act, 1922, the taxing authority may estimate profits by any reasonable method that seeks the truest approximation to actual income. The choice of method is open to judicial scrutiny only if it is wrong in principle or ignores relevant material. On the facts, the authorities compared two approaches: separating ascertainable sales from unascertainable sales, or applying an average rate to total turnover. As the result would be the same and the average-rate method better reflected the business position, no relevant evidence was ignored and the assessment method was neither arbitrary nor capricious. The Tribunal's assessment was therefore upheld and the reference answered in favour of the Revenue.

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Issues: Whether, in making an assessment under the proviso to Section 13 of the Income-tax Act, 1922, the income-tax authorities were entitled to adopt an average flat rate on the assessee's total sales instead of separately estimating the profits on the sales that were directly ascertainable from the books and the balance of the sales.

Analysis: The proviso to Section 13 confers a discretion to compute profits on such basis and in such manner as may be determined, but that discretion must be exercised reasonably and with the object of arriving at profits and gains which approximate as nearly as possible to the truth. The adopted method is open to judicial scrutiny if it is shown to be a wrong method or one that ignores relevant material. On the facts found, the authorities had before them two possible methods: either to separate the ascertainable sales from the unascertainable sales, or to apply an average rate to the whole turnover. The record showed that the result would be the same in either case, and the Tribunal considered that an average rate better reflected the overall business position. No relevant material evidence was ignored, and the method adopted was not arbitrary or capricious.

Conclusion: The reference was answered in favour of the Revenue. The Tribunal's method of assessment was upheld.

Ratio Decidendi: Under the proviso to Section 13 of the Income-tax Act, 1922, the taxing authority may adopt any reasonable method of estimation that best approximates the true profits, and that choice will not be interfered with unless it is shown to be wrong or to ignore relevant material.

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