Accounting method unable to determine profits permits estimated assessment under the proviso to section 13

Where the regularly employed accounting method does not permit proper determination of income, profits and gains, the Income-tax Officer may invoke the proviso to section 13 of the Income-tax Act, 1922 and estimate profits on a different basis. The accounting here was found unreliable because raw materials were tracked by weight while finished goods were recorded in running feet, making reconciliation of production, sales and closing stock impossible. On that factual basis, the proviso was treated as properly applied and the reference was answered in favour of the Revenue.

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Issues: Whether, on the facts found, the Income-tax Officer was justified in invoking the proviso to section 13 of the Income-tax Act, 1922 and estimating the assessee's profits on a basis other than the method of accounting regularly employed.

Analysis: The method of accounting was found incapable of yielding a proper deduction of income, profits and gains because raw materials were accounted for by weight while finished goods were recorded in running feet, making reconciliation between production, sales, and closing stock impossible. Where the accounting method itself prevents proper determination of profits, the proviso authorises the Income-tax Officer to compute income upon such basis and in such manner as he determines.

Conclusion: The reference was answered in the affirmative; the proviso to section 13 was rightly applied, in favour of the Revenue.

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