Law:

Section:

Section 145 of the Income-tax Act, 1961 [Corresponding to section 13 of the Indian Income-tax Act, 1922] - Method of accounting - Estimation of profits - Although sales and purchases of disposal goods by assessee were properly vouched, real profits could not be deduced therefrom correctly - Books of accounts were found unreliable and rejected - Tribunal referred to rate of profits earned in subsequent years, but, did not apply and made additions on abrupt theory that such additions would cover leakages that existed - Whether additions were made by Tribunal in judicial exercise of discretion under section 13 of 1922 Act - Held, no FACTS The assessee, a company, carried on business as a dealer in scrap iron and in other commodities purchased articles from the Disposal Directorate. The sales and purchases were properly vouched. In the books of the assessee, the gross profit for the relevant assessment year was shown less as against the overall gross profit for the immediate preceding year. The assessee was called in for an explanation. The assessee explained that if the scrap sales were deducted from the trading account the rate of gross profit earned on disposal goods would come to 13 per cent. The ITO rejected the explanation and made addition to the disclosed profits. On appeal, the AAC confirmed the order of the ITO. On second appeal, the Tribunal set aside the order of the AAC and added back 2 per cent more to the profits shown by assessee on the sale of disposal goods on the basis that it covered the leakages. On reference: HELD The Tribunal no doubt referred to the percentage of profit made by the assessee during the years 1955-56 to 1958-59. The Tribunal, however, did not proceed on the rates of profit for any of those years or on an average thereof. For what purpose the Tribunal referred to the rates of profit, earned by the assessee in subsequent years, namely, the years 1955-56 to 1958-59, did not amply appear. The Tribunal accepted the theory that, whenever the proportion of sales in lots was higher, the gross profit rate was lower. In the instant case, the Tribunal proceeded on the basis that the margin of profit in respect of such sales amounted to…

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