IN THE HIGH COURT OF JUDICATURE AT PATNA TAX No.24 of 1996 DOCTOR SMT.RANGILA SINHA Versus THE COMMISSIONER OF INCOME TAX ----------- For the petitioner : Mr.D.V.Pathy, Advocate For the respondents : Mr. Harshwardhan Prasad, Senior Standing Counsel Ms. Archana Sinha, Advocate Mr. S.K.Sharan, Advocate Mr. Rishi Raj Sinha, Advocate ------- P R E S E N T Hon'ble the Chief Justice & Hon'ble Mr. Justice C.K. Prasad ------- Dated, the Ist September, 2008 This is an application under Section 256 (2) of the Income Tax Act, 1961. 2. The controversy relates to the assessment year 1991-92. At the relevant time, the assessee was Associate Professor in S.K.Medical College, Muzaffarpur. She is said to be running an institute of Maternal delivery Health Care Education and Research at Juran Chapra, Muzaffarpur. Her return of income for the assessment year 1991-92 was selected for scrutiny. The assessee was called upon to produce books of account for verification which she did. She appeared through the advocate before the assessing officer. The assessing officer after scrutiny the books of account formed an opinion that the books of account were not maintained by her in - 2 - accord with known system of accounting. He, accordingly, rejected the books of account and then proceeded to determine her income on the estimated basis. The assessing officer estimated her income from profession at Rs. 5,72,000/- . He allowed the claim of expenses in full as claimer to the extent of Rs.5, 36,420/-. Her income from other sources were also added and total income of Rs. 1,35,670/- was found vide assessment order dated 14.02.1992. The assessing officer ordered for initiation of penalty proceeding against her and interest under Sections 234A, 234B and 234 C of the Income Tax Act, 1961 was also levied. 3. The assessee carried the assessment order in appeal before the Commissioner of Income-Tax. The appellate authority dismissed the appeal vide his order dated 22nd September, 1992. 4. The concurrent orders passed by the assessing officer and the appellate authority were challenged by the assessee in second appeal before the Income Tax Appellate Tribunal which by their order dated 15th December, 1995, dismissed the appeal. 5. The assessee made an application under 256(1) of the Income Tax Act to the Income Tax Appellate Tribunal for making reference to this court on the questions of law arising from the order of the Tribunal dated 15th December, 1995. 6. The Tribunal rejected the said application on 10th April, 1996. 7. The assessee has now made an application before this - 3 - court under Section 256(2) of the Income Tax Act, 1961 for a direction to the Income Tax Appellate Tribunal to refer the following substantial questions of law which in the opinion of the assessee arise from the order of Income Tax Appellate Tribunal: 1. Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the provisions as contemplated in sub-clause (1) of Section 145 of the Income Tax Act were applicable in the instant case? 2. Whether on the facts and in the circumstances of the case the Tribunal was correct in law in holding that the provisions as contemplated in sub-clause (1) of Section 145 of the Income Tax Act, 1961 were applicable in the instant case notwithstanding the fact that no discrepancies or defects were found by the authorities below in the books of accounts maintained by the applicant in the regular course of profession ? 3. Whether the Tribunal was correct in law in upholding the rejection of books of accounts without a finding as to the existence of defects in the books of accounts maintained by the applicant in the regular course of profession? 4. Whether the books of accounts regularly maintained by the applicant can be summarily rejected by making resort to the provisions as contemplated in sub-clause (1) of Section 145 of the Act without a finding as to the existence of a defect therein? 8. The counsel for the assessee submitted before us that the defects pointed out by the assessing officer in the books of account, as a matter of fact, are no defects justifying rejection of the books of account. He would submit that merely because at the closing balance of each day, upon withdrawal of cash balance, it was shown „Nil‟ at the end of the each day, it did not render account books not maintained in accord with the known system of accounting and it cannot be said that from the books of account, it was not possible - 4 - to deduce the income of assessee. In this regard, he relied upon the then existing Section 145 of the Income Tax Act, 1961. 9. We may immediately refer to Section 145 of the Income Tax Act,1961 which was then existing. It reads thus: „145. Method of accounting – (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with the method of accounting regularly employed by the assessee : Provided that in any case where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Assessing Officer may determine : Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee : Provided also that nothing contained in this sub- section shall preclude an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year. (2) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in Section 144.‟ 10. In so far as the present case is concerned, the assessing officer noticed that the cash book maintained by the assessee did not show closing balance of cash of every day. What was revealed from the cash book was that the assessee would withdraw the cash balance thereby striking the cash - 5 - balance at Nil at the end of each day. It was also found that whenever there was necessity of cash balances in the books, the assessee would introduce the same from her own source; such source she failed to explain. The maintenance of account book was not found by the assessing officer to be in accord with the system of accounting. We deem it necessary to reproduce the observations made by the assessing officer in this regard: “However, on perusal of the Cash Book it was noticed that the assessee does not draw up a closing balance of cash every day but withdraws the cash balance thereby striking the cash balance at Nil at the end of each day. It was explained that the assessee withdraws the Cash balances in order to meet the professional and domestic obligations. It was also noticed that whenever there is a requirement of Cash for expenses, which have to be paid from the books, the assessee introduces cash from her own sources. Such a system of accounting is neither on mercantile basis nor on cash basis. The commercially accepted principle of accounting has not been persued in the instant case. It is evident that the assessee has maintained a Cash Book and a Ledger in respect of her professional receipts and expenses in which the income from salary does not find and defacto should not find any place. However, the system of withdrawing the cash balances every day and starting next day‟s professional receipt and accounting next day‟s professional expenses with fresh introduction of cash from her own sources is itself ambiguous and unintelligible. The system of accounting requires that the closing cash balances at the end of each day should be carried forward as opening balance of cash in the next day. The cash receipts of next day‟s profession are to be accounted and its expenses in cash are to be met out of the cash available in the books and so on. However, the books have not been maintained in the commercially accepted principles of accounting.” - 6 - 11. Seen, thus, it cannot be said that the good reasons were wanting in drawing an inference that the books of accounts were not regularly maintained by the assessee. 12. Having rejected the books of accounts, the only course available to the assessee was to determine the income of the assessee on the estimated basis and that is what he did. 13. The consideration of the matter by the assessing officer was found not legally flawed by the Commissioner of Income Tax in appeal as well as the Income Appellate Tribunal. The Tribunal in this regard considered the matter thus: “We have also gone through the xerox copy of the cash book maintained by the assessee and other relevant documents. We are also in arrangement with the A/C that the books of account maintained do not inspire confidence and credibility and nor cover the same do not appear to be maintained and kept as provided in the manner laid down by Rule 6F of the Income Tax Rules. When this is the State of affairs of the accounts, the Assessing officer cannot be said to be wrong that true profits/income from medical profession was not properly deducible. He is right and therefore, provisions of sec. 145 were correctly invoked and the income has to be estimated in fair and reasonable manner. We have carefully studied the exercise done by the Assessing officer to arrive at a reasonable figure of estimate of income from medical profession. We are of the opinion that he has taken very fair and conservative figures in respect of occupancy of rooms and beds in the clinic/nursing home run by the assessee. The figures working days as well as number of patients examined and operated upon also appear to be quite fair and reasonable. The receipts from each patients as well as charges in respect of room rent and bed occupancy as well as operations cannot be said to be excessive or on high side. The net income from the private practice has been taken at Rs.65,860/- for the whole year by allowing the entire expenditure of Rs.5,30,420/- as claimed by the assessee not single has been disallowed from out of entire expenditure. This - 7 - shows fairness on the part of the Assessing officer. The adoption of not estimate of income from medical profession at Rs.65,860/- for the whole year gives on average of Rs.5,500/- per month. Judging from any standard, we do not think that the estimate of income of a gynecologist in the financial year 1989-90 is arbitrary, high or excessive.” 14. In our considered view, the consideration of the matter by the Income Tax Appellate Tribunal is concluded on facts. It does not give rise to any question of law. In this view of the matter, the rejection of application under Section 256(1) by the Tribunal was not erroneous. We are satisfied that the application does not involve any question of law requiring the Tribunal to refer the matter to this court. 15. Application under Section 256(2) of the Income Tax Act, 1961 stands rejected. R.M. Lodha, CJ C.K. Prasad, J. Sunil