The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised at the sweet will and pleasure of the concerned authorities.

G.C.Bharuka, J.

1. The present case arises out of an order passed by this court under Section 256(2) of the Income-tax Act, 1961, directing the Tribunal to refer the following question of law for its opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the addition of Rs. 30,146 in the trading account ?"

2. The assessee is a Hindu undivided family. It has a rice mill and carries on business of milling rice. The present case relates to the assessment year 1974-75. During this assessment year, the assessee disclosed a turnover of Rs. 16,50,076 and gross profit of Rs. 56,571. Since, according to the Income-tax Officer, certain expenses which ought to have been adjusted in the profit and loss account had been wrongly adjusted in the manufacturing/trading account, he readjusted the gross profit at Rs. 39,264. Further, according to the Income-tax Officer, the readjusted gross profit was too low and so, he called for an explanation from the assessee to explain the reasons for the same. According to the assessee, the main reason for the low gross profit was sales of rice effected to the Government as levy at statutorily fixed procurement prices which are much low as compared to market prices, thus causing huge losses. As per the accounts for the period under consideration, the assessee had sold 1,767 quintals 95 kgs of rice to the Government at the rate of Rs. 95/25 per quintal whereas the market price for the coarse variety of rice was in the average Rs. 175/16 per quintal. Thus, on every quintal of rice supplied in levy, the assessee had to incur loss of Rs. 79.91 causing a total loss of Rs. 1,42,719 on the supplies effected during the period. The explanation of the assessee did not find favour with the Income-tax Officer. He was of the view that the rice supplied to the Government under levy orders is always of the lowest quality and, therefore, it cannot result in losses as claimed. Therefore, he rejected the books of account and added a sum of Rs. 35,000 to the gross profit shown.

3. The assessee preferred an appeal to the Appellate Assistant Commissioner but could get a marginal relief of only Rs. 4,854. On further appeal to the Tribunal, the order of the Appellate Assistant Commissioner was sustained. According to the Tribunal, in the nature of the trade carried on by the assessee, adoption of the gross profit at 10% is reasonable and since the loss shown by the assessee in levy sale is not acceptable, the additions were rightly made for arriving at a reasonable rate of gross profit.

4. In the present case, this court has not been called upon to examine whether the books of account have been rightly rejected or not, But, even in cases where the Income-tax Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, still while resorting to a best judgment assessment for determining the income by estimate, it is obligatory on his part to disclose the basis for the same. At the same time, it is not permissible on the part of the assessing authority to act on mere suspicion, surmises and conjectures. If no legally acceptable basis could be traced out in the order making the best judgment assessment or determining the estimated income, then, in law, such determination of income cannot be sustained.

5. In the case of State of Orissa V/s. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC), while dealing with an assessment made under the Orissa Agricultural Income-tax Act, it has been held by the Supreme Court that (p. 691) :

"Apart from coming to the conclusion that the materials placed before him by the assessee were not reliable, the Assistant Collector has given no reasons for enhancing the assessment, His order does not disclose the basis on which he has enhanced the assessment. The mere fact that the material placed by the assessee before the assessing authorities is unreliable does not empower those authorities to make an