MUHAMMAD AFZAL LONE, J.-This Reference Application has been directly made by the assessee under section 66 (1) of the Income-tax Act for the opinion of the High Court, on the following questions of law, said to have arisen from the order dated 14-11-1972 passed by the Multan Bench of the Income-tax Appellate Tribunal :
(1) Whether the Income-tax Appellate Tribunal Multan was justified in law to rely on the cases behind the back of the applicant without confronting the applicant with the gist of the matter proposed to be used against the applicant ?
(2) Whether the Income-tax Appellate Tribunal Multan could pass an order in appeal without considering the material placed by the applicant at the direction of the said Tribunal?
(3) Whether the order of the said Tribunal is vitiated because of the facts stated in Q. 1 and Q. 2.
(4) Whether the Income-tax Appellate Tribunal was justified to uphold the net rate of profit applied by the Income-tax Officer?
(5) Whether the expenses of Rs. 15,125 could be held to be covered by rate?
(6) Whether depreciation allowance of Rs. 5;354 which could only be allowed from profit was not to be allowed after the profit from business has been determined?
2. The petitioner firm which worked as Building and Roads Contractors, during the assessment year 1970-71 declared receipts at Rs. 2,88,421 and after deducting expenses to the tune of Rs. 15,125 on account of salaries. Enlistment fee, super-tax and entertainment and Rs. 5,354 as depreciation, computed the income by applying rate of 121 % and worked out the net income as Rs. 15,572. The Income-tax Officer `B' Circle, Multan vide his order dated 27-2-1971 rejected the books of accounts and on the basis of net profit rate of 15 % assessed the net income at Rs. 41,187. While making this assessm ent he held that the expenses and depreciation claimed by the petitioner were covered by net profit rate applied by him.
3. In appeal filed by the assessee, before the Tribunal, application of net profit rate of 15 % was challenged and it was contended that the income should have been assessed by applying gross profit rate and after allowing the expenses and the depreciation. The Tribunal declined to accept the petitioner's contention and relying on its two earlier decisions relating to the Buildings and Roads Contractors, wherein 15 % net profit rate was applied, upheld the assessment made by the Income-tax Officer.
4. In support of the first two questions Mr. Javaid Hashmi, on behalf of the petitioner has argued that it was incumbent on the Tribunal to have disclosed to the petitioner, the substance of the material based against him and give him an opportunity to meet it, but he was not confronted with the gist of the two cases referred to in the Tribunal's order. It is also submitted that the petitioner, at the instance of the Tribunal, along with his letter dated 15-11-1972, sent a list of other comparable cases, wherein the same assessing Officer, who dealt with the petitioner's case, for the assessment year under reference, applied 15 % gross profit rate and computed the income after allowing the admissible expenses and the depreciation but the impugned order was passed without considering this material and therefore, stood vitiated. The third question is consequential depending on the answer to the first two questions. As regards the 4th and 6th questions, it was urged upon us that after the rejection of the account version the Income-tax Officer has adopted a wrong method of computation of income inasmuch as the application of net profit rate without allowing the statutory allowances contemplated by section 10
(2) of the Act, invalidates the assessment. The learned counsel' strenuously argued that the provisions of section 10 of the Act are mandatory. And further pleaded that apart from the statutory allowances, the petitioner was also entitled to other over head expenses incurred by him. In any case, the argument proceeded, the application of net income rate is meant for assessee with higher receipt bracket and does not operate justly and fairly in the case of lower receipt income groups. In support of his various submissions the learned counsel relied on a judgment of the Income-tax Appellate Tribunal reported as (1961) 4 Taxation 106 and so also on Commissioner of Income-tax v. Laxminarain Badlmdas ((1937) 5 1 T R 170), Sun Insurance Office v. Clerk (1912) A C 443), Allahabad Glass Works v. Commissioner of Income-tax ((1961) 42 1 T. R 439), Seth Nathu Ram, Munna Lal v. Commissioner of Income-tax ( (1954)'15 I T R 216). Noor Mohammad Mohammad Saeed v. Commissioner of Income Tax, Lahore ((1976) 33 Taxation 243) and Commissioner of Income-tax, C. P. & Behar v. S. M. Chitnavis (AIR 1932 P C 178). It may be stated that in last case the deduction of bad debt as an admissible allowance has been dealt with, which has no relevancy to this tax Reference. In Noor Mohammad,. Mohammad Saeed's case, the Tribunal's order was set aside on account of non-consideration of material evidence. The precedents mentions at Serial Nos. 2 to 5 have been discussed in the aforesaid report of the Tribunal's order, which will be referred to in the later part of this judgment.
5. The Department filed reply to the Reference Application and urged therein that the Tribunal's findings is based on appraisal of evidence and that no question of law has arisen out of the impugned order. The learned counsel for the Department controverted the contentions raised on behalf of the petitioner and submitted that the order was written by the Tribunal on the same date when the arguments were heard : that the petitioner referred to a case of G.
1. R. No. 218 for the applicability of 15 %, gross profit rate, with which the Tribunal did not agree and instead relied on two of its previous decisions for maintaining the assessment on 15 % net income basis. The learned counsel endeavoured to persuade us to presume that the material constituting the basis of the impugned order was subject-matter of the over all discussion, which took place, in the course of hearing of the appeal by the Tribunal. It was also pleaded that the Tribunal rightly took into consideration two of its previous decisions and that the petitioner should have shown to this Court as to how these cases are not parallel to the petitioner's case. He placed reliance on Superior Furniture Company v. Commissioner of Income-tax, Taxation ((1967)15 Taxation 56), but this precedent is of no help to the Revenue. The learned counsel also contended that the impugned order was passed on 14-11-1972, the non-consideration of the material sent to the Tribunal by the petitioner on 15-11-1972 therefore, could not be made a ground of attack on the impugned order.
The rejection of accounts not having been objected to by the petitioner, the learned counsel for the Department defended the estimated assessment on the flat rate.
6. It is apparent from the aforesaid narration of the facts that the impugned order dated 14-11-1972 was passed on the same date when the arguments were heard by the Tribunal. As to whether or not the two cases looked into by the Tribunal for arriving at the decision, were considered during the course of hearing of the appeal or that this material was utilized by the Tribunal behind the back of the assessee, is a controversial question of fact and there is nothing on the record to reach a positive finding that the gist of the two decisions, utilized by the Tribunal was not disclosed to the petitioner, On the other hand, there is preponderance of probability suggestive of the inference that the Tribunal could not have relied on the material objected to by the petitioner, without complying with the requirements of law. Indeed in the absence of any proof to the contrary, it is to be presumed, that the Tribunal was conscious of its obligation towards the assessee. In this view of the matter we are inclined to agree with the Department that question No. 1 does not arise out of the Tribunal's order.
7. Admittedly, the impugned order was passed by the Tribunal on 14-11-1972 and the list of comparable cases along with particulars thereof was sent to the Tribunal by the petitioner on 15-11- 1972. It has been pleaded that this material was provided at the instance of the Tribunal, but no such order has been placed on the file by the petitioner to substantiate that the material said to have been ignored while passing the impugned order, was really requisitioned by the Tribunal. In the absence of any such, evidence, it is difficult to concede that the list of parallel cases was sent by the petitioner at the behest of the Tribunal. There is some force in the submission of the learned counsel for the Revenue that the Tribunal cannot be blamed for non-consideration of the material received by it after the decision of the petitioner's appeal. In the circumstances of this case question No. 2 too cannot be said to have arisen from the Tribunal's order.
8. It has already been observed above that answer to question No. 3 is wholly contingent upon the determination of questions Nos. 1 and 2. As questions Nos. 1 and 2 have been held not arising out of the Tribunal's order, question No. 3 inescapably falls in the same wake and .Does not require adjudication.
9. As regards questions Nos. 4, 5 and 6 it appears to us that the petitioner did not assail the rejection of the accounts by the Departmental Authorities. After discarding the declared version, the Income-tax Officer had to proceed with the estimation of the income and make the assessm ent on such basis and in such manner as determined by him. We need not burden this judgment with the case, law on the subject that though the Income-tax Officer has wide powers in the matter, yet his estimation should not be arbitrary and he must determine some basis and manner for computation of the income of the assessee. In Rajput Metal Works v. Commissioner of income-tax (1) this Court declined to uphold the lump sum additions made by the Assessing Officer to the declared income after the rejection of the accounts and relying on the decision in unreported case of Messrs Pakistan Cycle Industrial Co-operative Society Ltd., Lahore v.
Commissioner of Incometax, Lahore T. R. 59 of 1972 it has held "that after having discarded the accounts, an onerous responsibility devolves upon the income-tax Officer to make his own computation of the income, profits and gains of the assessee on such basis and in such manner as he may determine in accordance with the proviso to section 13 of the Act. In doing this, he must act judicially and his judgment must be based on reasons and not merely on whims and caprices."
10. The question which falls for consideration is that after the assessee was found not to have maintained his accounts faithfully, how far the applicability of 15 % net profit rate could be construed as a permissible basis to compute his income. Undeniably despite the Assessing Officer's seemingly unfettered powers in estimating the income of a defaulter assessee, his estimate is not expected to be wholly conjectural or mere guess work not reared on any evidence or material. In such like cases resting of the assessment on the average rate of profit made by other traders in the same line of business, has been held to be a legitimate basis for making the estimation. In Commissioner of Income-tax, Madras v. Abdul Aziz Sahib ((1937) 7 1 T R647), the assessee was manufacturer of cigars and beedis and his accounts were rejected by the Department. The Madras High Court upheld the computation of income on the basis of average rate of profit made by other manufacturers of cigars and beedis. Similarly in Gadiraddy Peda Narasimhalu Naidu & Sons v. Commissioner of Income-tax, Madras ((1937) 21 1 T R 70), the assessee's accounts in respect of retail sales were rejected and as against the declared version, the Income-tax Officer keeping in view the other comparable cases, made the assessment at 15 % profit on the turnover of the retail sales. While rejecting the assessee's objections to such a mode of assessm ent, the Court observed: "It must be remembered that the situation was the creation of the assessee's own as he did not maintain his accounts properly to reflect faithfully the profits which he had earned in the business.
The result was the Department had to reject the accounts and to arrive at the profits on the basis of an estimate, taking the comparable cases into consideration. The assessee cannot expect the Department to disclose not only the basis on which they proceeded to make the assessment but also to give further details regarding the comparable cases. If an investigation of that kind was permitted, there will be no end to the enquiry and the assessment could never be made. The assessee no doubt was entitled to get such of the information regarding the comparable cases as could possibly be disclosed by the Department with a view to appraise him of the basis on which the estimate was made. We do not think that he is entitled to detailed information regarding the business of those assessee whose profits were taken as the standard of comparison."
11. The petitioner's learned counsel, for questioning the legality of the assessment, has sought assistance from the above-mentioned judgment of the Tribunal reported as (1961) 4 Taxation 106 wherein it was held that application of net profit rate without allowing the statutory allowances under section 10 is illegal. This finding of the Tribunal is largely influenced by the judgment of Allahobad High Court in Allahabad Glass Works v. Commissioner of Income tax, U. P. And another ((1961) 42 1 T R 439) decision of the Nagpur High Court in Seth Nathuram Munnalal v. Commissioner of Income-tax ((1954) 25 1 T R 216). Ratio of both these judgments, for setting aside the assessment appears to be the failure of the Assessing Officers to allow the statutory business expenses and depreciation in contemplation of section 10 of the Act rather than the applicability of flat rate. We are inclined to hold that denial of statutory allowances enumerated in section 10 of the Act to which an assessee may be found entitled may invalidate the assessment, but it is difficult to sustain the view that in all cases applicability of flat rate or even net profit rate essentially robs away the legal efficacy of the assessm ent. The verdict may differ with the facts of each case. There is however, merit in the argument Is of the petitioner's learned counsel that the provisions of section 10 are mandatory. Obviously, therefore, if the petitioned, on the facts of his case qualified for the grant of overhead expenses and the depreciation claimed by him, the Tribunal's order in this respect does not satisfy requirements of law. No doubt the assessment order mentioned that 15 % net profit was inclusive of the expenses and depreciation claimed by the petitioner, but mere sweeping observation of the Assessing Officer, without passing a speaking order, in this respect is not the proper compliance with section 10 of the Act. In view of the facts and circumstances of the case, we are unable to uphold the applicability of net profit rate without allowing the depreciation and other expenses claimed by the assessee. Accordingly, we answer questions Nos. 4, 5 and 6 in favour of the petitioner. Because of the divided success of the parties, there is no order as to the costs.