JUDGMENT Collister, J.
1. This is a case which has been stated under Section 66(3), Income-tax Act. The assessee is a firm at Aligarh named Ganeshi Lal Chhappan Lal. The firm does sarrafa business and its main activity consists in buying ornaments and selling the gold and silver which is obtained from them. The firm melts the ornaments and converts them into gold and silver bars and these it sells in the market, some locally, but the bulk at Bombay. The bars are all tested at the Mint in Bombay and the quantity of dross is there imprinted on each bar; and thereafter the bars are sold in the market at a discount which corresponds with the percentage of dross as certified by the Mint. The assessee's account books are maintained according to the mercantile accountancy system. They are regularly kept, and up to the year 1934-35 tax was assessed upon their basis; but in that year the profits in gold transactions, as revealed by the books of the firm, were only 21/2 per cent, and this was not accepted as correct by the income-tax authorities, who applied the proviso to Section 13 of the Act and assessed the income of the firm in respect to these transactions upon a 5 per cent, basis. For the year 1935-36 the assessment year with which we are now concerned, it was found that the profits from transactions in gold were only 0.2 per cent, on a turnover of Rs. 5,56,411, and the Income-tax Officer, for reasons which he has given and which we shall discuss hereafter, again applied a flat rate under the proviso to Section 13. He applied a rate of 3 per cent, in respect to the sales at Bombay and 5 per, cent, in respect of local sales. He accepted the books of account as regards silver transactions.
2. There was an appeal to the Assistant Commissioner of Income-tax and he agreed with the Income-tax Officer that the profits of gold transactions, as shown in the books of the firm, were "ridiculously low" and were not acceptable; but he reduced the rate of profit from 3 to 21/2 in respect to the sales which were effected at Bombay. The assessee then applied to the Commissioner of Income-tax for review under Section 33 of the Act, and "in the alternative he requested that officer to refer certain questions of law to this Court under Section 66(2). The Commissioner declined to exercise his powers of review under Section 33 and also declined to state a case under Section 66(2). Thereafter, the assessee applied to this Court under Section 66(3) and a Bench of this Court, of which one of us was a member, by its order dated 1st September 1939 directed the Commissioner of Income-tax to state a case for the decision of this Court. The question or rather the questions of law, as formulated by the assessee and as now referred to this Court, are as follows:
Whether under the circumstances of this case the provisions of Section 13, Income-tax Act, at all come into play, and whether there was any legal evidence on the record to justify the order of the income-tax authorities in accepting the book pro-fits of one commodity and rejecting the same for transactions of the other commodity without giving notice.
3. The opinion of the Commissioner of Income-tax is that the two questions involved should be answered in affirmative. We shall first consider whether the proviso to Section 13 of the Act was in the circumstances applicable. Learned Counsel for the assessee contends that the income-tax officer erred in expressing the opinion that the profits of the firm were not deducible from its books; be says that if that officer had applied certain tests, the correctness of the profits as revealed in the books of account would have become manifest. We shall discuss at a later stage the tests which are suggested by the learned Counsel. Meanwhile, we propose to state the view which is taken by the Commissioner and to discuss the law on the subject. The Commissioner says:
The real point arising in this case, therefore, is whether the method of accounting employed in respect of the transactions in gold is such that the income, profits and gains can properly be deduced therefrom. As to this point, I respectfully submit that the words of the section itself show that it is for the Income-tax Officer, and the Income-tax Officer alone, to decide as a question of fact whether the method of accounting reflects the true profits. This position hag been repeatedly maintained by the High Courts in India. The only question of law involved is whether there were materials upon which the Income-tax Officer could find as a fact that the method of accounting employed for the gold transactions did not reflect the true profits.
4. He then referes to the case in Ganga Ram Balmokand v. Commissioner of Income-tax, Punjab ('37) 24 A.I.R. 1937 Lah. 721 and he goes on to say:
According to this decision the Income-tax Officer, was not bound to accept the profits disclosed by the books, but there was no onus on him to prove that those profits were not the real profits. On the other hand, the burden was on the petitioners to show that those profits were in fact the real profits. This burden was not discharged by the petitioners, as their accounts contained no details as to purchases to enable a check to be made of the purchases shown. There were therefore submit materials for the Income-tax Officer's finding of fact.
5. The Commissioner then relies upon the case in Badri Shah v. Commissioner of Income-tax, Punjab ('36) 23 A.I.R. 1936 Lah. 856. In that case also the assessee did business in bullion. The rate of profits as disclosed by their books for the year then in question was 0.19 per cent, which was held to be below the average expectation of profits from such transactions in gold. The income-tax authorities accordingly added a lump sum of Rs. 6000 as additional profits, and the High Court of Lahore, held that there was justification for rejecting, the accounts inasmuch as there were no vouchers or other material which would have enabled the authorities to verify the correctness of the accounts. The language of the proviso to Section 13 makes it clear that discretion is vested in the Income-tax Officer; but obviously it was not the intention of the Legislature that such discretion should be arbitrary. We may refer in this connexion to a decision of the Privy Council, Commissioner of Income-tax Bombay presidency and Aden v. Sarangpur Cotton Manufacturing Co. Ltd. Ahmedabed ('38) 25 A.I.R. 1938 P.C. 1. In that case the Assistant Commissioner had expressed the opinion that, the discretion which vested in the Income-tax Officer was absolute; but this view wag not endorsed by the Judicial Committee. The assessee had a regular method of accounting, and at p. 51 their Lordships say:
It is the duty of the Income-tax Officer, where there is such a method of accounting, to consider whether the income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question. It is clear that the Income-tax Officer acted on the same view as that expressed by the Assistant Commissioner, and did not perform the duty above stated.
6. In Pioneer Sports Ltd. Sialkot v. Commissioner of Income-tax ('34) 21 A.I.R. 1934 Lah. 876 a Bench of the Lahore High Court observed as follows:
It is true that it has frequently been held by this Court that the Income-tax Officer is the sole arbiter for determining under the proviso to Section 18 how the profits are to be computed. But it is a question of law, into which this Court is entitled to inquire, whether there is any evidence on which the Income-tax Officer could come to the decision that the method of accounting is such that the gains could not be computed except by the arbitrary method contemplated by the proviso. If there was no evidence to justify the Income-tax Officer's rejection of the method of accounting in this case, it is clear that the assessment should have been made under the first part of Section 13 and not under She proviso.
7. In that case a low rate of profits was revealed by the books of account and there was no stock register, nor had the company ever kept such a register. The Court held that there was no sufficient justification for invoking the proviso-to Section 13. This view was not altogether approved by another Bench of the same High Court in Ganga Ram Balmokand v. Commissioner of Income-tax, Punjab ('37) 24 A.I.R. 1937 Lah. 721 which is one of the cases referred to by the Commissioner. At page 478 Din Mohammad J., who delivered the judgment, says:
In Pioneer Sports Ltd. Sialkot v. Commissioner of Income-tax ('34) 21 A.I.R. 1934 Lah. 876, a Division Bench of this Court has held that the mere fact that a company shows a low rate of profit was no reason for the Income-tax Officer to reject the total profits nor was the absence of a stock register, which the company had admittedly never used before, and that the use of the proviso to Section 13 for the purpose of introducing an arbitrary manner of computing the profits was not justified in my view, this judgment proceeds on a wrong basis when it criticises adversely the reasons of the Income-tax Officer for rejecting the accounts. Whether the account-books are reliable or not is a question of fact to be determined solely by the Income-tax Officer, and when he gives reasons for doing so, which are not apparently capricious or in judicial, it is not possible to disturb his finding merely on the ground that the material in support of those reasons is meagre or insufficient.
8. It seems to us that what we have to consider is whether the Income-tax Officer exercised his judgment in arriving at the conclusion that the income, profits and gains were not properly deducible from the assessee's regularly kept books of accounts; if he did exercise his judgment and did not act arbitrarily, then having regard to the language of the proviso, his discretion cannot be interfered with. The first thing that the Income-tax Officer noticed was that the profits from the gold transactions were excessively low. This fact by itself of course would not necessarily prove anything, for there can be no assumption that a sarrafa business must show profits; but it would naturally put the Income-tax Officer upon inquiry as to the reason for the remarkable disparity between these profits and the profits from the transactions in silver. In this connexion he not unnaturally took account of the fact that in the previous year also when the gold profits were 21/2%, as disclosed by the books, a flat rate had been applied under the proviso and the assessee had submitted to it. There may of course have been various reasons why the assessee chose to submit to that assessment; but there are other considerations also which weighed heavily with the Income-tax Officer. In the assessee's books of account there are no details either as regards the nature of the ornaments purchased or as regards the persons from whom they were purchased, and therefore verification as regards the amount and price of gold purchased was impossible. In para. 11 of an affidavit which was sworn on 5th April 1937, the assessee stated:
The applicant emphatically asserts that the names of sellers and names of ornaments are never recorded by any dealer of this description in the whole of the province; and in the method of accounting employed by the petitioner such details were never recorded.
9. There is no counter affidavit and therefore we must accept this assertion as correct. But the difficulty remains, and the circumstance that it is not customary to give details of ornaments purchased does not necessarily justify the practice. Moreover, it seems improbable that a sarraf would not keep a separate book or memorandum showing such details, if only to protect himself in the event of a police inquiry as regards ornaments which might still be in his hands and unmelted. Learned Counsel for the assessee has given us a translation of an extract from his client's account books and it shows, as learned Counsel rightly points put, the weight in tolas and mashas of the ornaments purchased each day and the rate per tola which the assessee paid. But in the absence of details as to the nature of the ornaments and who had owned them, no clue was available as to the amount of gold contained in each such article and no facility was offered for verification as to whether the price paid had or had not been overstated. The Income-tax Officer then went on to consider the state of the gold market. He says:
I have noted the market conditions and find that the price of gold rose from Rs. 31-2-0 in Pus to Rs. 32-2-0 in Magh and Rs. 34-7-0 in Phagun. In the months of Ohait and Baisakh there was a slight fall as the price ranged from Rs. 33-14-0 to 33-9-0. After this from Jeth onwards the market was steady at the higher rate of Rs. 34-4-0 till Sawan and rose to Rs. 35-1-0 in Asoj. In the last month of Kartik the price of gold was also no less than Rs. 34-10-0. It would thus appear that the market was quite favourable and the assessee must not have only a negligible profit as shown in the books.
10. The value of the opening stock was Rs. 9408. Purchases during the year amounted to Rs. 5,49,694. The extract from the assessee's rokar, to which we have already referred, shows that in the last six months of the year the sales amounted to Rupees 2,48,061-7-6, and learned Counsel for the assessee argues from this that a large proportion (actually less than half) of his purchases were made when gold was dear, and therefore he incurred a loss. Possibly the assessee did not invariably sell at a profit, but for the most part the market had an upward tendency, and it is hardly conceivable that in this favourable state of the market the assessee's profits would have been as low as 0.2%. We may mention here that the basis of the Assistant Commissioner's decision in appeal was that the price of the gold exported to Bombay was not known and that the market was favourable, which shows that he approved the two main grounds on which the Income-tax Officer founded his opinion.
11. Learned Counsel for the assessee contends that there are certain tests which the Income-tax Officer should have applied, but did not apply. One of these we have already mentioned and discussed; it is consideration of the fact that purchases amounting to Rs. 2,48,061 out of Rs. 5,49,694 were made in the second half of the year. We have already said what we have to say in respect to this matter. The other test that the learned Counsel says that the Income-tax Officer ought to have applied is this: The gold which the assessee sent to Bombay was found to contain 5 per cent, of dross and counsel pleads that the Income-tax Officer should have looked at the books of other sarrafs whose gold had 5 per cent, of dross and, if their profits were very low, there would be no ground for suspicion as regards the books of the assessee. For aught we know to the contrary, the Income-tax Officer may have looked at such books if any such were available he certainly mentions having looked at regular account books of other firms in respect to local sales. But even assuming that 5 per cent, of dross was found in the gold exported to Bombay by other sarrafs and that the Income-tax Officer did not examine such books in respect to sales at Bombay, the fact that the Income-tax Officer omitted to apply a particular test suggested by counsel will not render his opinion ineffective.
12. Having given the matter our best consideration, we have arrived at the conclusion that the Income-tax Officer did not act arbitrarily, but exercised his judgment, and that there was material before him which was reasonably capable of supporting the opinion which he formed. In this view of the case he was justified in not accepting the firm's books of account as disclosing the true income, gains and profits of the firm. As regards the second question, what we have to consider is whether the income-tax authorities were justified without giving notice to the assessee, in applying the proviso to the Section 13 in respect to transactions in gold while accepting the books of account in respect to transactions in silver. Notices were issued to the assessee under Section 22(4) and 23(2) of the Act and the assessee's munib was specifically questioned in respect to the profits from the gold and silver transactions. There was no obligation on the authorities to serve any other kind of notice upon the assessee and we do not see that he has been in any way prejudiced.
13. Our answer to the questions referred to us is as follows : (1) In the circumstances of this case the proviso to Section 13 of the Act came into operation. (2) There was no necessity for the income-tax authorities to issue a notice to the assessee before accepting the book profits in respect to transactions in silver and rejecting the same in respect to transactions in gold. A copy of this judgment under the seal of the Court and the signature of the Registrar will be sent to the Commissioner of Income-tax. The assessee will pay the costs of this reference. Counsel for the Department is entitled to a fee of Rs. 200.