Rejection of books and profit estimates remain discretionary unless arbitrariness or illegality is shown

Where an Income-tax Officer lawfully rejects books of account under Section 13 of the Income-tax Act, 1922, the adoption of a flat rate of profit and the valuation of individual items remain matters of discretion unless arbitrariness or illegality is shown. The court held that such estimations, including the pearl necklace valuation, did not by themselves raise a referable question of law. It also noted that the specific challenge to the 60 per cent rate had not been included in the application under Section 66(2). No question of law arose for reference, so the applications were not entertainable.

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Issues: Whether any question of law arose so as to justify a direction to the Commissioner to state a case on the rejection of the assessees' books, the adoption of a flat rate of profit, and the valuation of the pearl necklace.

Analysis: The assessees' books had been rejected under the discretion conferred by Section 13 of the Income-tax Act, 1922. Once that course was adopted, the estimate of profit on a flat-rate basis was a matter for the Income-tax Officer's judgment unless that discretion was shown to have been exercised illegally or arbitrarily. The same principle applied to the higher rate adopted for the pearl necklace: absent material showing arbitrariness, the valuation and profit estimate could not be converted into a referable question of law. The court also noted that the specific complaint about the 60 per cent rate had not in any event been included in the application under Section 66(2).

Conclusion: No question of law arose for reference, and the applications were not entertainable.

Final Conclusion: The refusal to direct a reference was upheld because the disputed estimates lay within administrative discretion and did not disclose any legal error.

Ratio Decidendi: Where the Income-tax Officer lawfully rejects the books of account under Section 13 of the Income-tax Act, 1922, the adoption of a flat rate of profit and the valuation of individual items are matters of discretion and do not raise a question of law unless arbitrariness or illegality is shown.

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