1974 (11) TMI 29 - HC - Income Tax

Rejection of book profit: tribunal's unverifiable-sales finding held arbitrary, book profits restored and costs awarded to assessee.

Rejection of book profits under the proviso to the accounting rule is permissible only where accounts are incorrect, no bona fide method of accounting is ... Rejection of the book profit - Whether, the finding given by the Tribunal that the sales made by the assessee during the relevant year were unverifiable is based on record or is an arbitrary finding ? - HELD THAT:- It is a case under the provisions of the proviso to sub section (1) of section 145. And it is well nigh settled that in any case where the accounts are correct and complete but the method employed is such that the income, profits and gains cannot properly be deduced therefrom, the Income-tax Officer is bound under this proviso to compute the income upon the basis and in a manner to be determined by himself. Under section 13 of the Indian Income-tax Act, 1922, the corresponding proviso applied with equal force both to the provisions under section 145(1) and under section 145(2) of the 1961 Act. But such is no longer the position. The case, proviso to section 13 of the 1922 Act, has now been made applicable and that too only partially to the provisions of sub-section (1) of section 145. No finding in the present case that any of the entries in the books of account was not correct, there is no finding that the assessee is not employing a method of accounting and there is no finding that such a method of accounting has been irregularly employed by the assessee. In the absence of any such finding, there being no reason germane to the unacceptability of the book results, it must be held that the Tribunal as well as the revenue authorities below had no materials before them, on the basis of which it could be said that the trading results were not verifiable and that, therefore, they should not be accepted, nor is it their case that the trading results could not be deducible from the entries of the books of account regularly employed. Answer both the questions in favour of the assessee and against the department and hold that on the facts and in the circumstances of the case the finding of the Tribunal upholding the rejection of the book profit shown by the assessee was vitiated by reason of its reliance upon suspicion, surmises as also irrelevant material. The finding given by the Tribunal that the sales made by the assessee during the relevant year were unverifiable is not based on the materials on record and is an arbitrary finding. The assessee will be entitled to the costs of this reference. Issues involved: The judgment involves the rejection of book profit shown by the assessee and the estimation of profit, as well as the verifiability of sales made by the assessee during the relevant year.Relevant Details:Rejection of Book Profit:The assessee, deriving income from the sale of country liquor, filed a return for the assessment year 1966-67 showing a total turnover of Rs. 12,90,678 and a net profit of Rs. 22,218. The Income-tax Officer rejected the book profits due to unverifiable sales, noting transactions in lump sums, and inadequate personal expenses. The Appellate Assistant Commissioner upheld this decision. The Tribunal dismissed the assessee's appeal, citing defects from the previous year. The Tribunal's rejection was based on suspicion and surmises rather than concrete evidence, as the sales were verifiable with complete data available. The Tribunal's reliance on previous year's defects was deemed erroneous as the current year's accounts were not found to have the same issues.Estimation of Profit:The Income-tax Officer estimated sales at Rs. 12,95,000 and assessed a flat rate of 2.5% on net profit of Rs. 29,875. The Tribunal's decision to uphold this estimation was found to be arbitrary and not based on the materials on record. The assessee's argument that sales were verifiable due to control by the excise department and fixed sale prices was not considered by the Tribunal. The rejection of book profits was not u/s 145(2) but u/s 145(1) of the Income-tax Act, and the method of accounting employed by the assessee was not found to be irregular.Conclusion:The High Court held in favor of the assessee, stating that the Tribunal's finding upholding the rejection of book profit was vitiated by reliance on suspicion and irrelevant material. The Tribunal's conclusion that the sales were unverifiable was deemed arbitrary and not supported by the evidence. The assessee was awarded costs for the reference.