The Income Tax Officer must have material on which to base the assessment, and if the assessee fails to produce evidence, the officer must take steps to procure material for the assessment. The officer should disclose material to the assessee before making the order, and the computation of income, profits, and gains under Section 13 is based on the method of accounting regularly employed by the assessee.

Alfred Henry Lionel Leach, C.J.

1. In accordance with the direction of the Court given under Section 66(3) of the Indian Income Tax Act the Commissioner of Income Tax has referred the following question for the Courts decision:

When there is evidence on which the Income Tax Officer can base a finding that the assessees books are unreliable and consequently rejects them and the assessee fails to produce other evidence, can the Income Tax Officer assess under Section 23(3) of the Act to the best of his judgment?

The words to the best of his judgment are used only in Sub-section (4), which requires the Income Tax Officer to make the assessment to the best of his judgment when there has been a default of the nature contemplated by the sub-section. Sub-section (3) directs the Income Tax Officer to make the assessment after hearing such evidence as the assessee may produce and such other evidence as the Income Tax Officer may require him to produce on specified points. No direction is given to the Income Tax Officer when assessing under Sub-section (3) and the assessee fails to produce evidence or produces evidence which the Income Tax Officer considers unreliable or incomplete. The question is whether in such a case the Income Tax Officer should proceed to assess as he would do in a case falling under Sub-section (4).

2. The provisions of the two sub-sections have been frequently debat ed in the Courts, but it is not necessary for the purpose of deciding the question referred to enter upon a discussion of the reported cases. When assessing under either of the two subsections the Income Tax Officer must have material on which to base his assessment. An order of assessment made under Sub-section (3) is appealable, whereas an order made under Sub-section (4) is not, but this does not mean that the Income Tax Officer can make an assessment under Sub-section (4) capriciously. The assessment must be to the best of his judgment, and the word judgment itself implies consideration of something. Here it must be the consideration of facts relating to the income of the assessee. And the same principle applies when the Income Tax Officer is acting under Sub-section (3). Where in a case falling under that sub-section the assessee has failed to produce evidence on which the Income Tax Officer can make a proper assessment of the assessees income, the Income Tax Officer must himself take steps to procure material for the purpose if it is not already in his possession. He has power under Section 37 to call witnesses and he can make his own inquiries. When he has material on which he can assess, he must consider it and make an assessment to the best of his judgment. I use the word material advisedly because the Income Tax Officer is not confined to what would be evidence in a Court of law. The only difference between an assessment under Sub-section (3) in a case like the one mentioned in the reference and an assessment under Sub-section (4) is that the Act contemplates a more summary method when the Income Tax Officer is acting under Sub-section (4) and this is by reason of the deliberate default of the assessee.

3. The interpretation to be placed on Sub-section (3) is to be gathered from the judgment of the Privy Council in the case of Commissioner of Income Tax, Bihar and Orissa v. Maharajadhiraj of Darbhanga. In that case the assessee stated that he had an income of Rs. 4,364 from a certain source. The Income Tax Officer did not accept this figure, and passed an order assessing him on an income from this particular source of Rs. 1,04,364. In due course the Commissioner of Income Tax referred the following question to the Patna High Court for its decision:

Whether the assessing officer was right in making an estimate of Rs. 1,04,364 under this head as he has done?

4. The High Court answered this question in the affirmative

and Terrell, C.J., in the course of his judgment observed:

Learned Counsel for the assessee has argued that the officer is not e