Narasimham, J.
1. This is a reference under Section 66 (2), Income-tax Act, by the Income-tax Appellate Tribunal, Madras Bench, under the directions of this Court contained in its order dated 3-12-1948 in S.J.C. No. 10 of 1947.
2. The applicant Ganeshdas Kaluram is a yarn dealer of Cuttack town & he was assessed to income-tax for the year 1943-44 at the rate of 12 1/2 per cent gross profits by the Income-tax Officer though in the petitioner's accounts submitted to the Income-tax authorities he disclosed a profit of 7 1/2 per cent only. In rejecting the petitioner's accounts as regards his profits the Income-tax officer was mainly influenced by the following factors:
1. The petitioner kept a mixed account for all varieties of yarn which rendered proper check impossible.
2. He sold rupees two lakhs worth of goods for cash to unnamed persons thereby exposing himself to the suspicion that controlled prices were shown in the books whereas higher prices were charged from customers & the excess was pocketed by the assessee without being included in the profits.
3. The neighbouring shopkeepers who were also dealing with the same kind of goods showed a profit of 15 Per cent for the period in question.
An appeal to the Appellate Assistant Commissioner of Income-tax was unsuccessful and then the petitioner preferred a second appeal to the Appellate Tribunal which made some slight modifications in his favour which are not material for the purposes of this reference. The petitioner thereupon applied to the Tribunal for stating a case which was rejected. Then a writ of mandamus was issued by this High Court and the Tribunal submitted the following questions of law as directed by the Court:
1. whether under the facts and circumstances of the case relating to the yarn accounts of the assessee it was legal to apply the proviso to Section 13.
2. If it be held that the proviso to Section 13 is inapplicable, whether the assessment under Section 23(3) on the basis of the profits of the neighbouring shop keepers is legal.
3. Neither the Income-tax officer nor the Appellate Assistant Commissioner nor even the Tribunal in its first order under Section 33 expressly stated that the Income-tax officer applied the proviso to Section 13 while estimating the gross profits of the petitioner. In para 6 of the order under Section 66(2) passed by the Tribunal on 17-10-46 the application of the proviso to Section 13 was indicated. It was because of this indication in that para, that the Court directed the issue of a writ of mandamus regarding the construction of the proviso to Section 13 on which there is a sharp conflict of judicial authorities in India. The petitoner's method of accouning is mercantile and there seems to be no doubt either about the method or about the deduction of the profits of his business from the method so employed. Therefore if a narrow construction be put on the expression 'method of accounting' specified in the proviso to Section 13 as has been done by some High Courts it would appear that that proviso has no application to the present case. The Income-tax officer did not reject the petitioner's accounts in toto but only rejected those portions of it which showed his gross profits. He accepted the remaining particulars and estimated the gross profits at 12 1/2 per cent on the basis of the profits shown by the neighbouring shopkeepers. A question therefore arises as to whether when there is no doubt about the method of accounting but the Income-tax officer has reasons to disbelieve a portion of the account to be false and fictitious he could legally apply the proviso to Section 13. In 'Gurmukh Singh v. Commr. of Income-tax, Lahore' AIR 1944 Lah 353 (2), the majority of Judges following Din Mohammad J. held that the proviso to Section 13 would apply. There is a complete discussion of the entire law on the subject including the views of the various High Courts and it is unnecessary to recapitulate them here. The minority of Judges, however, followed the view of Munir J. who held that the proviso to Section 13 would not apply if the Income-tax officer ignores the accounts submitted by the assessee on the ground that they contained false entries.
4. In this case, however, we consider that any discussion about the relative merits of the majority view and the minority view in the aforesaid case is of mere academic interest. Even according to Munir J. if the proviso to Section 13 is inapplicable the Income-tax officer has ample powers under Section 23(3) to make assessment not only on the basis of the figures supplied by the assessee but on other materials that might have come to his knowledge. Munir J. has relied on 'Subbayya v. Commr. of Income-tax, Madras' AIR 1939 Mad 371, in support of his view. Thus even those authorities who doubt the legality of applying the proviso to Section 13 to cases of this type seem to have no doubt that in such circumstances Section 23(3) alone would empower the Income-tax officer to assess the petitioner. In the present case as already pointed out the Income-tax officer has not quoted the particular section of the Income-tax Act which he applied and it seems to be unnecessary for us to discuss elaborately whether the expression 'method of accounting' contained in the proviso to Section 13 should be given a narrow or liberal interpretation.
5. As regards Section 23(3) it seems now well settled that it is open to the Income-tax officer to take into account other materials that may come to his knowledge apart from the accounts submitted by the assessee. Doubtless, principles of natural justice require that the assessee should be given an opportunity to rebut any inference that may be drawn against him from such other materials and though for that purpose the Income-tax officer is not bound to disclose the actual source of information he should indicate to the assessee that he intended to use the additional material against him and give him an opportunity to have his say regarding it: 'Jadunandain Sahu v. Commr. : of Income-tax, B. & O.' : [1948]16ITR175(Patna) , and AIR 1939 Mad 371 Mr. Mohanty urged that though the Income-tax officer relied on the profits shown by the neighbouring shopkeepers he did not give the assessee an opportunity of rebutting, any inference that may be drawn from such shop keepers' accounts. We called for a report from the Income-tax officer as to hiw far this allegation was true. From the letter of the Income-tax officer (No. 9/44-15/1672 dated 8-9-1949) it however appears that Mr. Mohanty was informed by the Income-tax officer on 2-10-1943 to explain the low profits. At that time Mr. Mohanty himself was the pleader for the neighbouring shopkeepers. He on behalf of the present assessee did not file any petition explaining the low profits. But it appears from the order of the Income-tax officer dated 25-11-43 that some explanation was offered (presumably at the time of argument) for the low profits shown by the assessee, the explanation being that half of his goods had been purchased from local dealers. The same explanation, namely, purchase from local dealers was advanced before the Tribunal also to show the low profits of the assessee as compared to the high profits shown, by the neighbouring shopkeepers. Thus, there seems to be no doubt that the petitioner was given an opportunity to rebut the inference arising: against him from the high profits shown by the neighbouring shopkeepers and he did put forward an explanation which was however rejected by the lower Courts. The petitioner cannot make out a question of law on the ground that he has been prejudiced by the use of some information behind his back.
6. We would therefore answer the two questions referred to us by the Tribunal as follows:
1. It is not necessary to decide this question in the present case and we would reserve our opinion,
2. There was no illegality in the assessment of the petitioner under Section 23(3) on the basis of the profits of the neighbouring shopkeepers,
7. The reference is disposed of accordingly andthe petitioner is directed to pay five gold mohursas cost to the Standing Counsel.
Ray, C.J.
8. I agree.