JUDGMENT
The assessee in all these cases is a firm consisting of two persons who carried on contract work of earth excavation, boulder splitting, road making, etc., for the Damodar Valley Corporation. In the accounting years corresponding to the assessment years 1951-52, 1952-53 and 1953-54 the assessee carried on work at a place called Telaya. In the last accounting year the assessee also carried on work at Panchait Dam. For the assessment year 1951-52 the Income-tax Officer wrote as follows :
“The above contract was for excavation of sites for Telaya Dam and Power House. The assessee has maintained one consolidated profit and loss account from the beginning of the work, i.e., from December, 1950, to March, 31, 1952. This account is for about 19 months. Net profits as per assessees books of account comes to Rs. 30,076. On the basis of receipts during 1950-51 and 1951-52, the assessee has filed returns for 1951-52 and 1952-53 assessment showing the income of Rs. 7,000 and Rs. 30,076 respectively. The assessee has received the following amounts in those two years :
Rs.
(1)
1950-51
93,995
(2)
1951-52
4,61,742
There has been no deduction for materials supplied by the D.V.C……..”
For the assessment year 1952-53 the Income-tax Officer observed as follows :
“The defects in account have been discussed at length in the assessment order 1951-52 and this need not be reiterated… On this the assessees net profit as discussed in the assessment order 1951-52 has been determined at Rs. 70,260.”
For the assessment year 1953-54, which concerned the work of both Telaya Dam and Panchait Dam, the Income-tax Officer stated as follows in the assessment order :
“During the present accounting year the assessee has executed contract works under the D.V.C. and has received gross bills for the works done as under :
Rs.
Telaya Dam
54,668
Panchait Dam
58,216
The work at Telaya Dam was finished on December 4, 1952…….
Therefore this year the assessee is liable to be assessed on the receipt of Rs. 54,668 only from the Telaya Dam.”
The result was that in all these cases the books of the assessee were rejected by the Income-tax Officer and the profits estimated under the proviso to section 13 of the Income-tax Act. The assessee then took the matter in appeal to the Appellate Assistant Commissioner but the appeal was dismissed by the Appellate Assistant Commissioner, who held that the proviso to section 13 of the Income-tax Act was properly applied to the case and that the rate of 15 percent. adopted by the Income-tax Officer was a reasonable rate. The matter was then taken before the Appellate Tribunal and the argument put forward by the assessee was that the proviso to section 13 of the Income-tax Act was wrongly applied to the case and the accounts of the assessee ought not to have been rejected by the Income-tax Officer and by the Appellate Assistant Commissioner. The argument was rejected by the Income-tax Appellate Tribunal and it was held by that Tribunal that the absence of the stock register ruled out the possibility of a true ascertainment of the profits of the assessee. The Tribunal held that the account books of the assessee could not be relied upon, and although a register of the work-in-progress was not necessary for the first accounting period, the proviso to section 13 of the Income-tax Act was correctly applied to all the assessment years.
At the instance of the assessee the High Court required the Income-tax Tribunal to make a statement of the case on the following question of law :
“Whether, on the facts and circumstances of this case, the proviso to section 13 has been validly applied ?”
On behalf of the assessee the learned counsel contended that the income-tax authorities have wrongly applied the proviso to section 13 of the Income-tax Act to these case because there was no material upon which the account books of the assessee could be rejected and there is nothing to show that the method of accounting employed by the assessee was such that the correct income of the assessee could not be properly deduced. It was contended by the learned counsel on behalf of the assessee that seven appeals were heard simultaneously with regard to the work done by the assessee at Konar and Telaya Dams and the Tribunal had lost sight of the distinction between the work done at Konar Dam and the work done at Telaya Dam, because materials were supplied to the assessee for execution of the work at Konar Dam but not for the Telaya Dam. This point does not appear to have been taken before the Income-tax Tribunal at the time of the hearing of the appeals. The argument was, however, advanced before the Tribunal at the time when the application was made to the Tribunal under section 66(1) of the Income-tax Act for making a reference to the High Court. In rejecting this argument the Tribunal has observed that the order of the Income-tax Officer and Appellate Assistant Commissioner sufficiently indicate that materials were in fact supplied in the accounting year relevant to the assessment years 1951-52 and 1952-53. It was also observed the Tribunal that the defect in the accounts of the assessee was that no register for the work-in-progress was maintained for the year 1952-53 and 1953-54, and this alone, in the opinion of the Tribunal, was sufficient to reject the books of the assessee. The Tribunal which heard the appeals has also observed that the register for the work-in-progress may not have been necessary for the first two years in question, but the absence of the assessees stock books of the materials for the years 1951-52 and 1952-53 and the absence of a register for the work-in-progress for the assessment year 1953-54 were sufficient reasons for rejecting the books of account of the assessee and for the application of the proviso to section 13 of the Income-tax Act. In our opinion there is sufficient material in the present case which entitled the income-tax authorities to reject the account books of the assessee for the relevant accounting years and to apply the proviso to section 13 of the Income-tax Act.
The law on this point has been clearly set out by Lord Thankerton in Commissioner of Income-tax v. Sarangpur Cotton Manufacturing Co. Ltd. as follows :
“Their Lordships desire to add that the view of the Assistant Commissioner that the Income-tax Officer is prima facie entitled to accept the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee, is not a correct view. It is the duty of the Income-tax Officer, where there is such a method of accounting to consider whether income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question. It is clear that the Income-tax Officer acted on the same view as that expressed by the Assistant Commissioner, and did not perform the duty above stated. The case of Commissioner of Income-tax v. Ahmedabad New Cotton Mills Co. Ltd. is of no assistance on the present question.”
The principle has been applied by a Bench of this court in Sri Sukhdeodas Jalan v. Commissioner of Income-tax where it was pointed out that if the method of accounting adopted by the assessee did not reflect the true profits of the preceding year, the proviso to section 13 would apply and the income-tax authorities were entitled to proceed in accordance with that proviso and to compute the profits on such basis and in such manner as they may determine. The same view has been taken in a later decision of this court in D. D. Kapoor v. Commissioner of Income-tax, where the principle has been expressed in a similar manner. A similar view has been expressed by a Bench of the Nagpur High Court consisting of Sinha, C.J., and Hidayatullah, J., in Ghanshyamdas Permanand v. Commissioner of Income-tax, where it was pointed out that if there was any material upon which Income-tax Officer could say that the accounts made by the assessee were not properly maintained so as to enable the correct profits to be ascertained, then the application of the proviso to section 13 of the Income-tax Act was a question of fact and not a question of law. At page 82 of the report the learned judges stated as follows :
“In our judgment no question of law arises at all. The sufficiency of the accounts for this purpose is left by the proviso to the judgment of the officer, subject to appeals such as lie. The assessee has failed to satisfy the appellate authorities, and this court must, therefore, accept the decision rendered. As we have pointed out, there is foundation for the application of the proviso. Whether or not profits or loss could in the books as they stand, have been calculated is not for this court to decide. The officer concerned has expressed his inability and the appellate authorities have concurred with him. This concludes the matter, and no question of law arises. Indeed, the question as framed shows that the assessees contention is that there is no foundation for the action taken. The appropriate authorities have found the stock books to be defective, and we cannot say that that matter was not within their special and exclusive powers, in view of the provisions of the Act.”
Applying the principle of these authorities to the present case we hold the question of application of the proviso to section 13 of the Income-tax Act has not passed from the region of fact to the region of law because there was sufficient material upon which the income-tax authorities could reject the account books of the assessee and apply the proviso to section 13 of the Income-tax Act. We accordingly answer the question of law referred to the High Court by the Income-tax Appellate Tribunal in favour of the Income-tax Department and against the assessee. The assessee must pay the costs of this reference. There will be a consolidated hearing fee of Rs. 250 for all these three cases.
Reference answered accordingly.