Law:

Section:

Section 145, read with section 143 of the Income-tax Act, 1961 [Corresponding to section 13, read with section 23 of the Indian Income-tax Act, 1922] - Method of accounting - Estimation of profits - Assessment years 1945-46 and 1946-47 - Whether in case to which proviso to section 13 of 1922 Act applies, Income-tax Officer is bound to disclose in his order basis and manner of computation of income, gains or profits and to disclose data on which he arrives at result - Held, yes - Whether if assessee fails to satisfy Income-tax Officer as to correctness of percentage of profits returned by him, it is open to Income-tax Officer to take higher percentage consistent with state of trade in locality or with any special circumstances of assessee which warrant higher rate of profits - Held, yes FACTS The assessee, a Hindu undivided family, was carrying on business in cloth and yarn. The method of accounting employed by the assessee was such that, income, profits and gains could not be properly deduced therefrom. The ITO accordingly applied the proviso to section 13 of the 1922 Act and determined the profits for the assessment years 1941-42 and onwards under this proviso. The Income-tax Officer had not informed the assessee how he was going to compute the assessee's income from his business. The Tribunal concluded that once an assessee's books of accounts are rejected, the best that the ITO can do is to make a reasonable estimate, having regard to all the circumstances of the case. On reference: HELD The proviso to section 13 of the 1922 Act does not entitle the Income-tax Officer to have a leap in the dark but requires him to compute the income 'upon such basis and in such manner as the Income-tax Officer may determine.' He has therefore to find out 'the basis and the manner of computation'. The assessment is under section 23(3) of the 1922 Act after hearing such evidence as the assessee may produce and such other evidence as the Income-tax Officer may require on specified points. The Income-tax Officer may use material not placed before him by the assessee; but in such a case natural justice demands that he should give the assessee an opportunity of showing, if he can,…

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