S.C.R. BY COURT : In accordance with the Judgment of the majority Civil Appeal No. 322 of 1955 is dismissed The Commissio11er with costs and Civil Appeal No. 25 of 1955 is allowed
01 Income-tax, · h h · fi d be" d · h Madhya Pradesh wit costs, t e re erre question mg answere m t e and Bhopal negative. Sodr~· Devi RAGHUBAR MANDAL HARIHAR MAND AL v. THE STATE OF BIHAR
(BHAGWATI, S. K. DAS and J. L. KAPUR JJ.) Sales Tax-Assessee's accounts rejected as unreliable-Assess- ment made 011 guess without reference to evidence or material- V alidity-Bihar Sales Tax Act, 1944 (Bihar
Act VI of 1944), s. 10(2)(b)-Indian I11come-tax Act, 1922 (XI of 1922), s. 23(3). The appellant filed the necessary returns, as required by the provisions of the Bihar Sales Tax Act, 1944, and produced the account books. The Sales Tax Officer considered that the account books were not dependable and, after rejecting them as well as the returns, proceeded to estimate the gross turnover by adopting a figure by pure guess, without reference to any evidence
or material, and made the assessment under s. 10(2)(b) of the Act. Held, that under s. 10(2)(b) of the Bihar Sales Tax Act, 1944, a duty is imposed on the assessing authority to make the assessment after hearing such evidence as the assessee may produce and such other evidence as the assessing authority may require on specified points, and, in case the returns of the assessee and his books of account are rejected, the assessing authority must make an estimate, but this must be based on such evidence or material as the assessing authority has before him, including the assessee's circumstances, knowledge of previous returns and all other matters which the assessing authority thinks will assist him in arriving at a fair and proper estimate.
Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal, (1955) l.S.C.R. 941 and Income-tax Commissioner v. Badridas Ramrai Shop, Ako/a, (1937) L.R. 64 I.A. 102, relied on . CIVIL APPELLATE JURISDICTION : Civil Appeal No.
249 of 1954. Appeal by special leave from the judgment and order dated January 8, 1952, of the Patna High Court in Misc. Judicial Cases Nos. 13, 14, 15, 16, 17, 18 and 19 of 1949.
May22. [1958] Bhawam Lal and K. L. Mehta, for the appellants. RaghubarMandal L. K. Jha, B. K. P. Sinha and R. C. Parsad, for Hanh•~. Manda/ the respondent. TheStateofBihar 1957. May 22. The Judgment of the Court was
s. K. Das J. delivered by S. K. DAS J.-The appellant Messrs. Raghubar Manda! Harihar Manda!, hereinafter referred to as the assessee, is a firm of bullion dealers carrying on its business at Laheriasarai in the district of Dar-
bhanga in the State of Bihar. The assessee was assessed to sales tax for seven quarters ending Dec- ember 31, 1945, March 31, 1946, June 30, 1956, Sep- tember 30, 1946, December 31, 1946, March 31, 1947
and June 30, 1947, respectively. For three of the aforesaid quarters, namely those ending on Decem- ber 31, 1945, March 31, 1947 and June 30, 1947, the assessee failed to file the necessary returns as required
by the provisions of the Bihar Sales Tax Act, 1944 (hereinafter referred to as the Act), which was the Act in force during the material period; therefore, the assessee was assessed for those three quarters
under sub-s. (4) of s. 10 of the Act. For the remain- ing four quarters, the assessee did file returns. The Sales Tax Officer rejected those returns as also the books of account filed by the assessee for all the seven
quarters and assessed the assessee under cl. (b) of sub-s. (2) of s. 10 of the Act. The Sales Tax Officer passed separate orders assessing the tax for all the seven quarters simultaneously on October 9, 1947. He
assessed the tax on a taxable turnover of Rs. 2,94,000 for each of the five quarters ending December 31, 1945, March 31, 1946, September 30, 1946, December 31, 1946 and March 31, 1947; for the other two quarters
ending on June 30, 1946, and June 30, 1947, he assessed the tax on a taxable turnover of Rs. 3,92,000. The assessee then moved in appeal the Commissioner of Cpmmercial Taxes, Tirhut Division, but the Commis-
sioner dismissed the appeals by his order dated February 23, 1948. The Board of Revenue was then moved in revision but, by its order dated July 31, 1948, the Board refused to interfere. The Board expressed
S.C.R. the view that the finding of the Sales Tax Officer and the Commissioner that the books of account maintained Raghubar Manda! by the assessee were not dependable was a finding of Harihar Manda/ fact which could not be interfered with in revision; T11e Sta~ of Biha,. therefore the assessing officer was bound to assess to
the best of his judgment. The Board was then moved s. K. Das 1· under s. 21 of the Act to refer certain questions of law to the High Court of Patna which, the assessee contended, arose out of its order. By its order dated
DeceJDber 10, 1948, the Board rejected the applications for making a reference to the High Court on the same ground, namely, that no question of law was involved and the assessment orders were concluded by a
concurrent finding of fact. The assessee then moved the High. Court and by its order dated April 27, 1949, passed in Miscellaneous Judicial Cases Nos. 13 to 19 of 1949, the High Court directed the Board of Revenue
to state a case on the following question : "Whether the Sales Tax Officer is entitled under section 10(2)(b) of the Act to make an assessment on any figures of gross turnover without giving any basis
to justify the adoption of that figure ?" The Board of Revenue then stated a case, and the High Court disposed of the reference by answering the question in the affirmative by its judgment and order
dated January 8, 1952. The assessee then moved this Court and obtained special leave to ,appeal from the said judgment and order of the High Court . The main contention of the assessee is that the High
Court has not correctly answered the question of law referred to it. Before we proceed to consider this contention of the assessee, it is necessary to clear the ground by delimiting the precise scope of the question
referred to the High Court. It is well settled that the jurisdiction of the High Court in the matter of income- tax references is an advisory jurisdiction and under the Income-tax Act the decision of the Tribunal on
facts is final, unless it can be successfully assailed on the ground that there was no evidence for the conclu- sion on facts recorded by the Tribunal or the conclu- sion was such as no reasonable body of per~ons could
have arrived at. It is also well settled that the duty [1958] of the High Court is to start with the statement of the Raghubar Ma11dat case as the final statement of the facts and to answer Harihar Manda/ the question of law with reference to that statement. The s1a1~·of Bihar The provisions of the Indian Income-tax Act are in pari materia with the provisions of the Act under our
s. K. DasJ. consideration, the main scheme of the relevant pro- visions of the two Acts being similar in nature, though the wording of the provisions is not exactly the same. Under s. 21 of the Act, the High Court exercises a
similar advisory jurisdiction, and under sub-s. (3) of that section, the High Court may require the Board of Revenue to state a case and refer it to the High Court, when the High Court is satisfied that the refusal of the
Board to make a reference to the High Court under sub-s. (2) is not justified. Under sub-s. (5) of s. 21 the High Court hears the reference and decides the question of Jaw referred to it, giving in a judgment the
grounds of its decision. In the case under our consi- deration, the question which was referred to the High Court related to the assessments made under s. I 0(2)(b) of the Act; in other words, the question related to
those four quarters only for which the assessments were made under s. 10(2)(b). The question did not relate to the three quarters for which the assessee had filed no returns and assessments were made under
s. 10(4) of the Act. At one place in its judgment, the High Court referred to a slight inaccuracy in the question framed, but it did not reframe the question so as to widen its scope and include the three quarters
for which assessments were made under s. 10(4) of the Act. The question, as it stood and as it was answered by the High Court, did not relate to the propriety or legality of the assessments made under s. 10( 4) of the
Act. We must, therefore, make it clear at the very outset that the question relates to those four quarters only for which assessments were made under s. 10(2)(b) of the Act, and the answer given to the question will
govern those four quarters only. Having thus indicated the precise scope of the question referred to the High Court, we proceed now to consider the main contention of the assessee.
We must first read the relevant provisions of the statute S.C.R. under which the assessments were made. Sub-section (1) of s. 10 of the Act states that if the Commissioner is Raghubar Manda/ satisfied without requiring the presence of a registered Harihar Manda/ dealer or the production by him of any evidence 111es1a'!e'otBihar that the returns furnished in respect of any period are
s -ask .correct and complete, he shall assess the amount of · K. D tax due from the dealer on the basis of such returns. Clause (a) of sub-s. (2) states what the Commissioner -shall do, if he is not satisfied without requiring the
presence of a registered dealer who furnished the returns or production of evidence that the returns furnished in respect of any period are correct and .complete; the clause states that in that event the
Commissioner shall serve on the dealer a notice in the prescribed manner requiring him either to attend in person or to produce or cause to be produced any evidence on whieh such dealer may rely in support of
his returns. Then comes cl. (b) of sub-s. (2) which must be quoted in extenso: "(b) on the day specified in the notice or as soon afterwards as may be, the Commissioner, after hearing such evidence as the dealer may produce, and
such other evidence as the Commissioner may require on specified points, shall assess the amount of tax due from the dealer." These provisions are similar to the provisions containea
iris. 23 of the Indian Income-tax Act. Sub-section (1) of s. 10 of the Act corresponds to sub-s. (1) of s. 23 of the Indian Income-tax Act; clause (a) of sub-s. (2) of s. 10 of the Act corresponds to sub-s. (2) of s. 23 Qf the Indian Income-tax Act; and clause (b) of sub-s. (2) of
s. 10 of the Act corresponds to sub-s. (3) of s. 23 of the Indian Income-tax Act, though there are some verbal differences between the two provisions. Sub-section (3) of s. 23 of the Indian Income-tax Act requires the
Income-tax Officer to assess the total income of the assessee and determine the sum payable by him on the basis of such assessment, by "an order in writing"; but cl. (b) of sub-s. (2) of s. 10 of the Act requires the Commissioner to assess the amount of tax due from
the dealer and does not impose any liability as to "an order in writing". In spite of these differences, the [1958] two provisions are substantially the same and impose Raghuba1 Manda/ on the assessing authority a duty to assess the tax Harihar Manda/ after hearing such evidence as the dealer may produce r1zes1:ieo/Bihar and such other evidence as the assessing authority may require on specified points.
s. K. Das J. The point for our consideration is-can the assessing authority, purporting to act under s. J0(2)(b) of the Act, assess the amount of tax due from a dealer more or less arbitrarily or without basing the assessment on
any materials whatsoever? In the question referred to the High Court, the expression used is, "make an assessment on any figure of gross turnover without giving any basis to justify the adoption of that figure".
That expression is perhaps a little ambiguous, but read in the context of the statement of the case, the question can only mean this : can the assessing authority adopt a figure of gross turnover by pure guess and without
referring to any materials on which the figure is based? It is clear to us that, understood in that sense, the High Court has answered the question incorrectly. The High Court went into an elaborate consideration,
by way of comparison and contrast, of sub-s. (4) and cl. (b) of sub-s. (2) of s. JO of the Act. It is unneces- sary for us to make any pronouncement in this appeal with regard to the precise scope of sub-sl. (4) of s. JO of the Act, which corresponds more or less to sub-s. (4) of
s. 23 of the Indian Income-tax Act; nor is it neces- sary for us to decide if an asse&sment made under cl. (b) of sub-s. (2) of s. 10 of the Act, when the account books of the assessee are disbelieved, stands exactly
on the same footing as an assessment made under sub-s. (4) of s. 10 when the assessee has failed to furnish his returns. In some decisions relating to the corresponding provisions of the Indian Income-tax
Act, it has been. said that the difference between the two is one of degree only, the one being more summary than the other. These are questions which do not really fall for decision in the present appeal, which is
confined to interpreting the true nature and scope of cl. (b) of sub-s. (2) of s. JO of the Act. With regard to the corresponding provision in sub-s. (3) of s. 23 of the Indian Income-tax Act, there is a decision of this
S.C.R. Court which, in our opinion, answers the question before· us. The decision is that of Dhakeswari Cotton Raghubar .Manda! Mills Ltd. v .. Commissioner of Income Tax, West Hariha~.Mandat
Benga/(1). This Court observed : TheStateoJBihar "As regards the second contention, we are in s .. K. as . ·entire agreement with the learned Solicitor-General when he says that the Income-tax Officer is riot
fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear
that in making the assessment under sub-s. (3) of s. 23 ·Of the Act, the Income-tax· Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all.
There must be something more than bare suspicion to support the assessment under s. 23(3)." In our view, the aforesaid observations clearly show that the High Court was in error in answering the
question in the affirmative. Firstly, the High Court treated the question referred to it as a pure question of fact; if that were so, then the High Court should have rejected the reference on the ground that it was
not competent to answer a question of fact. Then, the High Court proceeded to consider certain decisions relating to the interpretation of sub-ss. (3) and (4) of s. 23 of the Indian Income-tax Act, and held that
there was no difference between an assessment under sub-s. (3) and an assessment under sub-s. (4) of s. 23. The High Court applied the same analogy and on that footing held that there being no difference between an
assessment under cl. (b) of sub-s. (2) and an assessment under sub-s. (4) of s. 10 of the Act, the answer to the question must be in the affirmative. 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 A.ct. (1) [1955] • S.C.R. 941, 949· [1958] Learned counsel for the respondent has strongly
Ragt111bar Ma11dat urged two points in support of the answer which the Hari/ror M1111daI High Court gave. Firstly, he has contended that, on The s1a1ev~f Bilrar a proper reading of the assessment orders and the s K [) J
orders of the Commissioner, it would appear that the · · "' · · gross turnover for the quarters in question was based on certain materials; therefore, the argument of learned counsel is that it is n~t correct to say that the figure
of gross turnover was arbitrarily adopted or was adopted without reference to any evidence or any material at all. We have examined the assessment orders in question, which form part of the statement
of the case. It is clear to us that what the Sales Tax Officer and the Commissioner did was to hold, for certain reasons, that the returns made by the assessee and the books of account filed by it were incorrect and
undependable. It is not necessary to repeat those reasons, because we must accept the finding of fact arrived at by the assessing authorities that the returns and the books of account were not dependable. The
assessin~ authorities rightly pointed out that several transacllons were not entered in the books of account; and a surprise inspection made on July 15, 1947, dis- closed certain transactions with a Bombay firm known
as Messrs. Kishundas Lekhraj, which were not men- tioned in the books of account; and finally, the assessee .vas importing silver in the name of five confederates in order to suppress the details of the transactions etc.
The assessing authorities further pointed out that there was a discrepancy between the return filed for the quarter ending June 30, 1946, and the accounts filed in support of it; the return showed a gross turnover
of Rs. 2,28,370-12-0 while the accounts revealed a gross turnover of Rs. 1,48,204. All these we must accept as correct. Having rejected the returns and the books of account, the assessing authorities proceeded to esti-
mate the gross turnover. In so 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 June 30, 1946. S.C.R. The Sales Tax Officer said : "I reject the dealer's accounts and estimate a gross turnover of Rs. 4,00,000. Raghubar Manda· I allow a deduction at 2 % on the turnover and assess Jforihar Manda! him on Rs. 3,92,000 to pay sales tax of Rs. 6,125." For Tiie siat~of Bihcr the quarter ending on September 30, 1946, the Sales
Tax Officer said : "I reject his irregular account and s. K. Das 1· estimate a gross turnover of Rs. 3,00,000 for the quarter and assess him on Rs. 2,94,000 to pay tax of Rs. 4,593-12-0." These and similar orders do not show
that the assessment was made with reference to any evidence or material; on the contrary, they show that having rejected the books of account, the assessing authorities indulged in pure guess and made an assess-
ment without reference to any evidence or any material at all. This the assessing authorities were not entitled to do under cl. (b) of sub-s. (2) of s. 10 of the Act. Secondly, learned counsel for the respondent has
referred us to several decisions on which the High Court relied and has argued that on the basis of those decisions, it must be held that the answer given by the High Court to the question ref erred to it was a correct
answer. We propose to examine briefly some of those decisions, though, as we have stated earlier, the ques- tion is really answered by the· observations made by this Court in Dhakeswari Cotton Mills' case('). The
first decision is the Privy Council tlecision in Income- tax Commissioner v. Badridas Ramrai Shop, Akola(2). Lord Russell of Killowen in delivering the judgment of their Lordships made the following observations as
respects a "best of judgment" assessment within the meaning of s. 23 (4) of the Indian Income-tax Act : "The officer is to make an assessment to the best of his judgment against a person who is in default as
regards supplying information. He must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the
proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard-to the assessee's circumstances, and his own knowledge
of previous returns by, and assessments of, the assessee, (1) [1955] S.C.R. 941, 949. (2) (1937) 64 I.A. 102, 114·11s. [1958] and all other matters which he thinks will assist him
Ragh"ba;–Mandal in arriving at a fair and proper estimate : and though Harihar Manda) there must necessarily be guess-work in the matter, it TheSta'(;,ofBihar must be honest guess-work."
We find nothing in those observations which runs s. K. DasJ. counter to the observations made in Dhakeswari Cotton Mills' case('). No doubt it is true that when the returns and the books of account are rejected, the
assessing officer must make an estimate, and to that extent he must make a guess; but the estimate must be related to some evidence or material and it must be something more than mere suspicion. To use the words
of Lord Russell of Killowen again, "he must make what he honestly believes to be a fair estimate of the proper figure of assessment" and for this purpose he must take into consideration such materials as the
assessing officer has before him, including the assessees' circumstances, knowledge of previous returns and all other matters which the assessing officer thinks will assist him in arriving at a fair and proper estimate. In
the case under our consideration, the assessing officer did not do so, and that is where the grievance of the assessee arises. The next decision is Ganga Ram Balmokand v. Com- missioner of Income Tax, Pwijab(2).
It was held therein that where the income-tax authorities were not satisfied with the correctness or completeness of the assessees' accounts and, taking into consideration the state of affairs in general and the fact that the assessees 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 of 7 per cent.,. the authorities were justified in applying such a fiat rate, and the burden was on the assessees
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 (1) (1955] 1 S.C.R. 941, 949. S.C.R. to base his estimate, but no hard and fast rule can be
laid down by the Court to define what sort of material Raghubar Mandal is required on which his estimate can be founded." Harihar Manda/ With that observation we generally agree. If, in this TheSta~·ofBihar case, the Sales Tax authorities had based their estimate
on some material before them, no objection could'have s. K.DasJ. been taken; but the question which was referred to the High Court and which arose out of the orders of assess- ment 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 adopt- tion of that figure. In answering that question in the affirmative, the High Court had 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 next decision is Gunda Subbayya v. Commis-
sioner of Income-tax, Madras( 1). This decision also does not help the respondent. It was held in that decision that thou~h 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 officer's . 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 Dhakeswari Cotton Mills' case(2). The decision of the Lahore High Court in Seth Gurmukh Singh v.
Commissioner of Income-tax, Punjab(3) was specifically approved by this Court in Dhakeswari Cotton Mills' case(2). 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 assessee as he considers to be. false; (2) if he proposes to make an estimate in disregard of
(l) (1939] 7 I.T.R. 21. (3) [1944] 12 l.T.R. 393. (2) (1955] I S.C.R. 941,949. M2SC/611-4 (1958] the evidence, oral or documentary, led by the assessee, Raghubar Manda/ he should in fairness disclose to the assessee the Harlhar MaPUial material on which he is going to found that estimate; The s101~·01 Bihar (3) he is not however debarred from relying on private sources of information, which sources he may not
s. K. Das J. 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 case he is expected to meet and should further give him 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 whithout reference to any material or evidence before him. The last decision to which we have been referred is
the decision in Malik Damsaz Khan v. Commissioner of Income-tax('). That again is a decision of the Privy Council. In that case, the validity of the assess- ment 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 was clearly competent for the Income-tax Officer in the circum-
stances of the present case. to accept the return as a valid return and proceed to assessment under section 23 (1) or 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, proceeded under section 23(3). Neither in the incompleteness of the return nor in the fact that in any
accompanying statement 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 appeal proceedings which the appellant himself initiated.'· (1) (1947] 15 I.T.R. 445· S.C.R. These observations do not help the respondent in any
way; nor do they lay down any rule contrary to the Raghllha-;Mandal rules laid down in Seth Gurmukh Singh's case(1). Horihor Mtmdal For these reasons we hold.that the High Court was TlitSta~·o/Bihar in error in answering the question referred to it. The
appeal is accordingly allowed and the judgment and s. K. Das J. order of the High Court are set aside. The answer to the question referred to the High Ceurt is in the negative. The appellant will be entitled to its costs
both in this Court and in the High Court. Appeal allowed . THE ORIENTAL INVESTMENT CO., LTD. v. THE COMMISSIONER OF INCOME-TAX, BOMBAY. (BHAGWATI, s. K. DAS, and J. L. KAPUR JJ.) Income-tax-Reference
to High Court-Questions of law- Investment companv-Dealer or lm·estor-Mi'xed question of law and fact-Legal effect of facts found, a question of law. The appellant company was incorporated as an investment
company which by its memorandum of association enabled it, inter alia, to deal in investments and properties. For the purposes of assessment to income-tax the appellant claimed, for the assess- ment year in question, to be treated as an investor and not as a dealer on the ground that it did not carry on any business in the purchase or sale of shares, securities or -properties. The Income- tax Appellate Tribunal held that according to. the company's memorandum of association and its own assertions made all along in the past, it should be. treated as a dealer in investments and properties and that its income arising from the sales of shares and properties should be taxed as business profits. The appellant's applications for a reference to the High Courts were rejected on the ground that no question of law arose out of the order of the Tribunal.
Held, that the question whether the appellant's business amounted to dealing in shares and properties or to investment, is a mixed question of law and fact and that the legal effect of the facts found by the Tribunal as a result of which the appellant could be treated as a dealer or an investor, is a que~tion of law. Accordingly, the order of the High Court was set aside and · the case remitted to the High Court for directing the Tribunal to state a case.
(1)(1944) 12 I.T.R. 393. May22