Case: Raghubar Mandal Harihar Mandal Vs. The State Of Bihar

Income Tax, 1937-5 ITR 464: (AIR 1937 Lah 721) (C). It was held therein that where the income-tax authorities were not satisfied with the correctness or completeness of the assessees account and, taking into consideration the state of affairs in general, and the fact that the assessee had a large business and the profit shown by them was abnormally low in comparison with that of other persons carrying on the same business in the locality, calculated the taxable income by applying a flat rate 7 per cent., the authorities were justified in applying such a flat rate and the burden was on the assessee to displace the estimate. There again, the estimate made was not a pure guess and was based on some materials which the Income-tax Officer had before him, Din Mohammad, J. who gave the leading judgment, observed: "It cannot be denied that there must be some material before the Income-tax Officer on which to base his estimate, but no hard and fast rule can be laid down by the Court to define what sort of material is required on which his estimate can be founded." With that observation we generally agree. If, in this case, the Sales Tax authorities had based their estimate on some material before them, no objection could have been taken; but the question which was referred to the High Court and which arose out of the orders of assessment, was whether it was open to the said authorities to make an assessment on a figure of gross turnover, without referring to any materials to justify the adoption of that figure. In answering that question in the Affirmative, the High Court has given a carte blanche to the sales Tax authorities and has, in our opinion, misdirected itself as to the true scope and effect of cl. (b) of sub-s. (2) of S. 10 of the Act.8. The next decision is Gunda Subbayya v. Commissioner of Income-Tax, Madras, 1939-7 I T R 21: (AIR 1939 Mad 371 ) (SB) (D). This decision also does not help the respondent. It was held in that decision that though there is nothing in the Indian Income-tax Act which imposes a duty on an Income-tax Officer, who makes an assessment under S. 23 (3), to disclose to the assessee the material on which he proposes to act, natural justice requires that he should draw the assessees attention to it and give him an opportunity to show that the officers information is wrong and he should also indicate in his order the material on which he has made his estimate. This decision is really against the respondent and does not lay down any rule which may be said to be inconsistent with the observations made by this Court in 1955-1 S C R 941: (S) AIR 1955 S C 65) (A).9. The decision of the Lahore High Court in Gurumukh Singh v. Commissioner of Income-tax, Lahore, 1944-12 I T R 393; (A I R 1944 Lah 353 (2) (FB) (E) was specifically approved by this Court in 1955-1 S C R 941: (S) A I R 1955 S C 65) (A). The rules laid down in that decision were these; (1) While proceeding under sub-S. (3) of S. 23 of the Income-tax Act, the Income Tax Officer is not bound to rely on such evidence produced by the evidence as he considers to be false; (2) if he proposes to make an estimate in disregard of the evidence oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate. (3) He is not however debarred from relying on private sources of information, which sources he may not disclose to the assessee at all; and (4) in case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the cases he is expected to meet and should further, give ample opportunity to meet it, if possible, The decision does not lay down that it is open to the Income-tax Officer to make an estimate on pure guess and without reference to any material or evidence before him.10. The last decision to which we have been referred is the decision in Damsaz Khan v. Commissioner of Income-tax, Punjab and NWFP, 1947-15 ITR 446: (A I R 1947 P C 176) (F). That again is a decision of the Privy Council. In that case, the validity of the assessment under S. 23 (3) of the Indian Income-tax Act was not challenged by the assessee and the appeal was directed solely to the amount of assessment. Their Lordships observed:"But it appears to them that it as clearly competent for the Income-tax Officer in the circumstances of the present case to accept the return as a valid return and proceed to assessment under Section 23 (1) form Section 23 (3) as the case might be. Since he was not satisfied that the return was correct and complete he could not proceed under Section 23 (1): he, therefore, as appeared upon the face of the assessment, proceed under S. 23(3). Neither in the incompleteness of the return nor in the fact that in an accompanying statements the appellant referred to his return as an estimate can their Lordships find any possible justification for the plea that the assessment was incompetent or that the Appellate Assistant Commissioner had no jurisdiction to entertain the proceedings which the appellant herself initiated."These observations do not help the respondent in any way; nor do they lay down any rule contrary to the rules laid down in 1944-12 I T R 393: (A I R 1944 Lah 353 (2) (E).11. For these reasons we hold that the High Court was in error in answering the question referred to it.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]In our view, the approach of the High Court to the question referred to it was erroneous and the answer given to the question by it solely on the basis of sub-s. (4) of S. 10 of the Act was vitiated by that wrong approach. It was not sub-s. (4) of S. 10 of the Act which the High Court had to consider; it had to consider the true scope and effect of cl. (b) of sub-s. (2) of S. 10 of the Act.All these we must accept as correct. Having rejected the returns and the books of account, the assessing authorities proceeded to estimate the grossso estimating the gross turnover, they did not refer to any materials at all. On the contrary, they indulged in a pure guess and adopted a figure without reference to any evidence or any material at all. Let us take, for example, the assessment order for the quarter ending 30th Junein this case, the Sales Tax authorities had based their estimate on some material before them, no objection could have been taken; but the question which was referred to the High Court and which arose out of the orders of assessment, was whether it was open to the said authorities to make an assessment on a figure of gross turnover, without referring to any materials to justify the adoption of that figure. In answering that question in the Affirmative, the High Court has given a carte blanche to the sales Tax authorities and has, in our opinion, misdirected itself as to the true scope and effect of cl. (b) of sub-s. (2) of S. 10 of the Act.The last decision to which we have been referred is the decision in Damsaz Khan v. Commissioner of Income-tax, Punjab and NWFP, 1947-15 ITR 446: (A I R 1947 P C 176) (F). That again is a decision of the Privy Council. In that case, the validity of the assessment under S. 23 (3) of the Indian Income-tax Act was not challenged by the assessee and the appeal was directed solely to the amount ofobservations do not help the respondent in any way; nor do they lay down any rule contrary to the rules laid down in 1944-12 I T R 393: (A I R 1944 Lah 353 (2) (E).11. For these reasons we hold that the High Court was in error in answering the question referred to it.