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Judgment
Jagadisan, J.—This is a reference under the Indian Income Tax Act. The question referred is as follows :
Whether the inference of the Tribunal that the Income Tax Officer had exercised his discretion lawfully in applying the proviso to section 23(4) to
reject the assessees renewal application u/s 26A is legal ?
We heard the reference before and called for a further statement off the case from the Tribunal by our order dated November 5, 1962. The
Tribunal has submitted the statement called for and the matter has now been placed before us for disposal. Learned counsel on both sides, the
department as well as the assessees, have addressed arguments in the light of the subsequent statement of the Tribunal. The facts leading up to the
reference have been fully set out in our prior order and need not be repeated.
The question raised is whether the Tribunal acted rightly in conformity with law in refusing registration to the assessee-firm. The Income Tax
Officer refused registration because the assessees were in default in complying with the terms of the notice u/s 22(4) calling for documents and
account books relating to the assessees business. Taking the view that the assessees failed to comply with the statutory notice u/s 22(4), the
Income Tax Officer passed a ""best judgment"" assessment permissible u/s 23(4). On this followed the order of the Income Tax Officer refusing
registration applied for by the assessees. The Appellant Assistant Commissioner, before whom the assessees complained that the case was not one
for a best judgment assessment and that in any event registration ought not to have been refused, agreed with the assessees and held that really the
assessment of the officer was one u/s 23(3), and that therefore there was no scope for refusing registration which would be permissible only if
section 23(4) were to apply. The Appellate Assistant Commissioner went further and held that the estimated income of Rs. 1,50,000 made by the
officer was not warranted. He reduced the estimate to Rs. 75,000. He also directed registration of the firm. On appeal by the department the
Tribunal restored the order of the Income Tax Officer fully. In other words, the Tribunal held that the officers estimate of the income was correct
and that his refusal to register was also proper.
The assessment of the income of the assessees as Rs. 1,50,000 by the Income Tax Officer, which has now been confirmed by the Tribunal, has
become final and we are not called upon to say whether the Tribunal was right in interfering with the estimate of the Appellate Assistant
Commissioner. It is no doubt implicit in the order of the Tribunal confirming the assessment made by the Income Tax Officer u/s 23(4) of the Act
that there has been a default on the part of the assessees in the matter of complying with the terms of the notice u/s 22(4). But now the question is
whether the Tribunal was right in upholding the order of the Income Tax Officer refusing registration.
Learned counsel for the department contends that it is not open to the assessees to submit at this stage before us that there has been no default
on their part in complying with section 22(4) notice, as that question must be deemed to have been set at rest by the very act of the assessees in
allowing the Tribunals order regarding the quantum of assessment to stand. The argument is that there cannot be two conflicting views on the same
facts : (1) that the assessees were in default and that therefore were assessed properly on the best judgment basis; and (2) that the assessees were
not in default and that therefore refusal of registration of the firm would not be proper. Whatever may be the position when the Tribunal considers
the propriety of refusal to register in which case we have no doubt that the Tribunal would be inclined to take only one consistent view in the matter
we do not think that we should in any way be precluded from considering the question whether there was in fact a default on the part of the
assessees to attract the penalty of non-registration quite independent of the implications that may be attributed to the best judgment assessment.
The assessee has a right under the Act to claim the benefit of registration under certain conditions laid down by the Act. If those conditions are
present he would be entitled to registration. That right should not be taken away merely because he suffers an assessment on the best judgment
basis u/s 23(4) of the Act. The assessee does not forfeit the right of registration quite automatically as a consequence of such defaults which throw
the doors open to an estimate assessment. In fact the power of the Income Tax Officer to refuse registration consequent upon the default of the
assessee in the matter of non-production of documents called for or non-furnishing of the necessary materials for the assessment is contained in
section 23(4). That sub-sections reads :
(4) If any person fails to make the return required by any notice given under sub-section (2) of section 22 and has not made a return or a
revised return under sub-section (3) of the same section or fails to comply with all the terms of a notice issued under sub-section (4) of the same
section or, having made a return, fails to comply with all the terms of a notice issued under sub-section (2) of this section, the Income Tax Officer
shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the
case of a firm, may refuse to register it or may cancel its registration if it is already registered.
It is clear that failure to make a return or a revised return, or failure to comply with all the terms of the notice u/s 22(4) would necessarily attract
the Income Tax Officers jurisdiction to make an assessment to the best of his judgment. It might be said that defaulting assessees are visited with
the penalty of a best judgment assessment. But such a penalty only flows from the conduct of the assessee himself. In the face of a contumacious
default on the part of the assessee, the Income Tax Officer vested with the statutory duty of making assessment has no alternative but to proceed
to determine the assessment in as good a manner as possible, indulging of course in some guess-work within the limits of honesty. Refusal to
register, however, does not appear to be an inevitable statutory consequence resulting from the defaults enumerated in section 23(4). The use of
the words ""may refuse"" in section 23(4) would rather indicate that the Income Tax Officer has a discretion not to refuse registration or cancel
registration even in spite of the default of the assessees. Significantly, the statute uses the words ""shall make the assessment to the best of his
judgment"" in the first part of the section. If the words ""shall"" and ""may"" are found in two different limbs of the same section, there cannot be a better
legislative pointer to indicate that the first is obligatory and the second is discretionary. We have no doubt that the statute does not compel the
officer to deprive the assessee of the benefit of registration under the last part of section 23(4). In other words, it would be wrong to assume that
the defaults listed in section 23(4) of the Act would lead to a two-fold penal consequence : (1) a best judgment assessment, and (2) in the case of
firms, refusal to register or cancellation of the existing registration, if any. It is, therefore, incumbent upon the Income Tax Officer to consider the
question of registration on the ground that a different conclusion would be illogical or not self-consistent. What consideration should weigh with the
officer in the matter of his decision regarding registration cannot of course be laid down exhaustively or comprehensively. Suffice it to say that the
matter is purely one of discretion to be exercised by the officer and, therefore, he should exercise it not arbitrarily or capriciously but in a manner
consistent with judicial standards. This, in our opinion, is the true scope of section 23(4) of the Act.
We cannot help observing that in the instant case neither the Income Tax Officer nor the Appellate Tribunal seem to have had a correct
perspective of the question.
We shall now consider the question as to whether in fact the assessees were in default in the matter of compliance with the notice u/s 22(4) of
the Act. It is not disputed by the department that all the account books called for by the officer were produced by the assessees. The Tribunal
seems to think that the assessees were called upon to produce their rough day-books but that they defaulted to do so. The Tribunal observes in its
further statement as follows :
Though in the notice u/s 22(4) there is no specific reference to the rough day-book, the letter of the Income Tax Officer dated November 14,
1951, clarified the requirement. A rough day-book is one maintained in the regular course of business and the above-mentioned letter called upon
the assessee to produce genuine books of account maintained in the regular course of business. In our opinion the assessee failed to produce these
books.
The Tribunal is in error in stating that the letter of the officer dated November 14, 1951, called upon the assessees to produce the rough day-
books. There was no such direction in that letter. The learned counsel for the department is unable to sustain the view of the Tribunal that rough
day-books were called for, but not produced by the assessees. It is however contended on behalf of the department that the assessees who were
called upon to produce the stock book purchased a spurious stock book withholding the correct stock book which the assessees must be
presumed to have been maintaining. This inference is arrived at by a comparison of the stock book produced and the admitted sales books of the
assessees.
It is true that there is a lot of discrepancy between the stock position as disclosed in the assessees stock book and the sales accounts now
produced by them. It may be that even the assessees explanation for the discrepancies pointed out was not quite convincing. But the real question
is whether it can be said that the assessee must have been maintaining another set of account books and that they committed default in not
producing them in complying with the notice u/s 22(4) of the Act. The assessee cannot escape the consequence of non-production of books called
for by merely pretending that he has no books. If the evidence would justify the inference in any given case that the assessee must have been
maintaining account books, it would be open to the officer to treat him as defaulter if the books are not produced. But if there are no materials
from which the officer would reasonably infer that undisclosed account books exist, the non-production of such imaginary books would not of
course be a default as contemplated u/s 23(4) of the Act. There can be no presumption that the assessee is suppressing books and documents
called for but not produced. Mere non-production, without proof of the existence of things not produced, would not fall within the mischief of
section 23(4). In our opinion, there are no materials in the present case to warrant the inference that the assessees were maintaining or had in their
custody account books which they failed to produce before the Income Tax Officer when called upon to do so. The account books specified to be
produced were in fact made available by the assessees and it would be a mere guess unsupported by any evidence to say that there must have
been other books which the assessees deliberately refrained from producing. In our opinion, the Tribunal was not right in holding that there must
has been a suppression of accounts on the part of the assessees so as to justify the penalty of non-registration as contemplated u/s 23(4). We have
already pointed out that even if the assessees were to be treated as defaulters so as to attract assessment on the best judgment basis, it would yet
be a matter of discretion for the officer either to grant or refuse registration. This aspect of the matter was not considered at all either by the officer
or by the Tribunal. For the reasons stated above we are of opinion that the question must be answered in favour of the assessees. We, however,
make no order as to costs.
Question answered in favour of the assessee.