MUHAMMAD A Mm BUTT, J.-This is an application by the assessee under subsection (i) of section 66 of the Income-tax .Act, 1922 invoking the jurisdiction of this Court to consider and decide the following questions of law said to arise out of the order of the Income-tax Appellate Tribunal :
(i) Whether the finding of Income-tax Authorities with regard to the status of Muhammad Jamshed stands vitiated, the orders being self-contradictory on the point ?
(ii) Was there any material before the Income-tax Authorities to hold an employee of the petitioner as proprietor of the business ?
(iii) Whether in the facts and circumstances of the case the Income-tax Authorities could reject the account version of the assessee ? Sad
(iv) Whether the Income-tax Authorities had found any basis in increasing 4 times the net income of the assessee ?
2. The brief facts of the case are that the assessee is an individual engaged in the business of purchase and sale of headgears and caps. For the assessment years 1971-72, a total income of Rs.
4,023 was declared. The Income-tax Officer found that the trading results declared were as under : Rs.
Wholesale52,032 Retail sale24,909 Total sales76,941 Gross profit11,526.75 Rate of Gross profit15.9% (overall).
The Income-tax Officer recorded the following findings in regard to the accounts maintained by the assessee :
(a) that no stock register had been maintained. Stock inventory filed had not been prepared 'quality-wise' or 'variety-wise' and as such could not be subjected to verification. He further stated that it could not be verified whether all the purchases had been accounted for in the sales or in the closing stock ;
(b) he found that purchases were partly unverifiable and cited illustrative examples of purchases which in his opinion were not verifiable as these were supported by 'Kateha Bills' only ;
(c) the retail sales were found to be totally unverifiable as no names and addresses of the purchasers were recorded in the cash memos. He also found that some of the sales made on wholesale basis were also not verifiable and cited instances where full addresses of the purchasers, had not been recorded in the cash memos. ;
(d) that the entries in the ledger in respect of Bank account from 1-4-.1970 were not available in the bank pass book ;
(e) that the assessee had shown the marriage expenses of her daughter as Rs. 3,000 only which in his opinion were too low. From this he inferred that the marriage, expenses had 'been incurred from profits kept outside the books of account.
The Income-tax Officer thus rejected the books ' of account and made the following estimate of sales and gross profit in substitution for the returned version :- Rs.
Estimated sales in the wholesale account60,000 Gross profit@15 %9,000 Estimated sales in the retail sales account60,000 Gross profit@ 20 %12,000 Total Gross Profit21,000 Less declared gross profit11,527 Addition in the trading account9,472 The Income-tax Officer further disallowed a sum of Rs. 2,200 claimed as salary paid to Sh.
Muhammad Jamshed on the alleged ground that this was paid to the proprietor and was as such inadmissible.
3. Against the assessm ent the assessee filed a direct appeal before the Income-tax Appellate Tribunal which was disposed of by its order dated 29-11-1972. The Tribunal found that the inventory had been furnished but recorded the finding that the wholesales were not entirely verifiable and that neither the entire retail business could be accepted nor the accounts of the wholesale business were reliable and held that the accounts were rightly rejected by the Income-tax Officer.
The Tribunal also maintained the estimate of sales and gross profit both in the wholesale and retail sale accounts.
In regard to the claim for deduction of the salary of Mr. Muhammad Jamshed the Tribunal observed :- "It is said that Sh. Muhammad Jamshed is not a proprietor and that he was managing the business even during the preceding year. The account offered for the said year does not disclose any such payment. As the assertion is contradicted and Sh. Muhammad Jamshed, if not the proprietor is a near relative. Want of proper account does not justify the acceptance of this expense. In the result the Tribunal dismissed the appeal."
4. The learned counsel for the petitioner has drawn our attention to the order of the Tribunal and the statement of facts filed with the reference application to contend that the first and second question, which we found to be rather obscure were in fact directed against the disallowance of R%, 2,200 paid by the assessee to Sh. Muhammad Jamshed. The Income-tax Officer hard disallowed this claim on the ground that Sh. Muhammad Jamsbed was the "proprietor" .Of the business. On appeal the Income-tax Appellate Tribunal rather than recording any definite finding, maintained the disallowance on the ground that .Sh. Muhammad Jamshed "if not the proprietor is a near relative"
5. We feel that the contention of the learned counsel for the petitioner in well founded. We would, therefore, proceed to consider whether, under the circumstances of the case, we are entitled to reframe the two questions in order to "re-settle and re-state the real issues" in order to remove the ambiguity.
6. In the case reported as Abdul Ghani & Company v. C. I. T. (PLD 1962 Kar. 635). Mr. Justice Anwarul Haq dealing with the obligations of the assessee in relation to the framing of questions of law in a reference application made the following observations at pages 663-44 : "17. 'It is the general practice for an assessee making an application under section 66 (1) to formulate the particular question or questions of laity which he wishes to be referred to the High Court. It is true that this practice has developed more as a rule of convenience than as a rule of law, but even if the assessee was under no legal obligation to state the precise question of law on which he desires a. References it will be his duty to indicate, as best as he can, the points which he wishes to agitate."
In Gurmukh Singh v. C. I. T. (AIR 1944 Lah. 353) the Lahore High Court observed that it was open to the High Court in the exercise of the advisory jurisdiction to reframe the question in order to re- settle or re-state the real issues arising for determination in a case before it.
7. We feel satisfied that question of disallowance of salary of Rs. 2,200 paid to Sh. Muhammad Jamshed was not only specifically raised before the Tribunal but was also considered and decided by it and the intention of the assessee in framing the first two questions was to challenge the determination in this behalf.
Under the circumstances we feel that we would be justified in changing the form of the question without changing the substance of the questions framed by the assessee in this behalf.
Accordingly, we frame the following consolidated question in substitution for questions Nos. 1 and 2 framed by the assessee "Whether on facts and in the circumstances of the case it was open to the Appellate Tribunal to disallow the claim of salary of Rs. 2,200 paid to Sh. Muhammad Jamshed on the ground that 'if not the proprietor he is a near relative' and whether the determination of the Tribunal is not vitiated as being vague, indefinite and self contradictory?"
8. The learned counsel for the assessee maintains that the Tribunal has not properly applied its mind to the facts of this case as the business was earlier carried on by Sh. Noor Muhammad. After his death his widow Mst. Iqbal Begum the present petitioner, started the business and entrusted Sh.
Muhammad Jamshed with the responsibility for managing the affairs. The lady herself filed the return on which the assessm ent has been completed.
9. According to the learned counsel, even during the year immediately preceding Mr. Muhammad Jamshed was managing the affairs and a deduction for a like amount of salary was claimed as part of the establishment expenses of Rs. 3,539.25 which was allowed. He relied on the copy of the Trading Account and claimed that no part of the salary had been disallowed in the assessment order for 1970-71, copy whereof has also been placed on record.
10. The Tribunal appears to have fallen in error in assuming facts which were not even alleged by the Income-tax Officer. The reference to non-payment of any salary in the year corresponding to assessm ent year 1970-71 is likewise not based upon any finding recorded in the course of that assessm ent and has been emphatically denied. The Tribunal seems to have overlooked the facts and circumstances under which the lady was carrying on business. Where, as in the present case, the assessee is a widow who cannot look after the business by herself she has got to employ some person in whom she can repose confidence: It is only natural that a person who is related to her would be preferred as against a stranger: Unless the Income-tax Officer contends that Sh.
Muhammad Jamshed was not entrusted with the responsibilities of management of the affairs of the business on her behalf, or that no remuneration was in point of fact paid, there would be no justification to disallow his salary. , As the things stand the Income-tax officer has himself assigned to the assessee the status as that of an `individual'. He also states in the assessment order that the assessee had incurred some expenses on the marriage of "her daughter". Under the circumstances there was no material before the Tribunal on the basis of which it was open to it to come to the conclusion that the sum of Rs. 2,200 paid to Sh. Muhammad Jamshed was paid to the "proprietor".
We have no doubt that in deciding the question of admissibility of the assessee's claim the Tribunal did not go into the question as to who the assessee was. The disallowance of the salary on the ground that Sh. Muhammad Jamshed if not the proprietor is a near relative is, in our opinion unwarranted. We would, therefore, answer the questions Nos. 1 and 2, refrained as above, in the negative.
11. This brings us to the third question, viz. "whether on facts and in the circumstances of the case the Income-tax Authorities could reject the book version of the assessee".
12. The learned counsel states that the non-maintenance of stock register does not justify the rejection of book version. In this behalf he relies on the case reported as Star Rolling Mills v.
Commissioner of Income-tax (1974 PTD 200). In that case the assessee had furnished quantitative statement of purchases and sales but had failed to maintain a day-to-day manufacturing or stock register. The High Court upon consideration of the peculiar facts of the case recorded the opinion that if in the preceding years the assessing authorities had accepted the method of accounting adopted by the assessee and had found that it was possible to deduce and determine the rate of profit of the assessee therefrom, there was no valid reason for them, in respect of the charge year in question, to reject the assessee's method of accounting or to hold that it was not possible to deduce therefrom the assessee's rate of profit.
13. In the present case on the other hand the assessee has not furnished any quantitative tally wherefrom the assessing authorities could possibly verify that the entire quantity of goods purchased had either been sold or accounted for in the closing stock. Even the stock inventory furnished did not furnish quality-wise details. We, therefore, hold that the ratio in Star Rolling Mills v.
C. I. T. Is not applicable to the instant case.
14. It is true that inventory basis is one of the recognised modes of preparation of final accounts but the inventory should be a complete and faithful record of the opening and closing stocks in hand which should be susceptible to audit check. Where, as in the present case, caps of various qualities varying widely in their prices are purchased and sold, the absence of quality-wise details of opening and closing will make it well nigh impossible for the Income-tax Officer to check the veracity of the accounted version. The position is still more aggravated if the purchases as well as sales, which we shall separately deal with are also found to be unverifiable.
15. Cash sales are a fact of life. There is no principle of accountancy or rule of law that an assessee must sell his goods either on credit basis or to verifiable parties only. The mere fact that a part of the sales were cash would not by itself be a ground for rejecting the book version. Where cash sales are found to be verifiable no question of drawing an adverse inference would, admittedly arise. When the cash sales are verifiable as well as unverifiable, it would be open to the Income-tax Officer to scrutinise the unverifiable sales by comparison with the rates charged for verifiable cash sales or credit sales as the case may be. Where the prices charged for cash sales are lower than the prices charged for credit sales or verifiable cash sales, the Income-tax Officer may legitimately draw the inference that the income, profits and gains have been minimised. It would still depend on the facts of each case whether or not the true profit can or cannot be properly deduced from the assessee's account. Where, however, the sales are made only on cash basis it is for the assessee to prove the bona fides of his sales price by producing additional evidence. e.g. Prevailing sale prices, indicated by quotations in trade journals market rates and even rates charged by local dealers of the locality on the relevant dates.
16. The learned counsel relies on the case reported as S. M. Yousaf & Brothers v. Commissioner of Income-tax (PLD 1974 Note 59 at p. 99=1974 PTD 45) for the proposition that the mere fact that stock register has not been maintained or some of the sales are cash would not by itself justify recourse to the proviso to section 13 of the Income-tax Act. The facts of that case were materially different from the present case. The assessee had maintained a proper stock register for the Mithadar business and the bulk of the sales were on credit basis. Court also took note of the fact that only 10% of the sales in that case were on credit basis.
17. Where, as in the present case, no such comparative data is available the possibility of profits being minimised cannot be ruled out. The absence of quality-wise quantitative data and the absence of quality-wise stock inventory would render the verification of the total quantum of the purchases) and the sales and margin of profit as wholly impossible.
18. Under such circumstances the Income-tax Authorities may justifiably state that the income profits and gains cannot properly be deducted from the accounts maintained by the assessee and produced in support of the accounted version.
19. In the context of the circumstances of this case as discussed above we feel the Income-tax Authorities and the Tribunal were justified in rejecting the book-version. We would, therefore, answer question No. 3 in the affirmative.
20. This brings us to the last question, viz. "whether the Income-tax Authorities had found any basis in increasing 4 times the net income of the assessee".
21. By this question the assessee wants the Court to declare as invalid the four-fold increase in the declared income without laying down the basis for it. The learned counsel relies on the judgment of this Court reported as Messrs Rajput Metal Works Limited v. The Commissioner of Income-tax (PLD 1976 Lah. 223). In that case Muhammad Akram, J. Delivering the judgment of the Court observed "The first proviso to section 13 of the Act expressly lays down that if no method of accounting has been regularly employed or if the method employed is such that in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. It is, therefore, clear from the proviso that after the Income-tax Offcer had rejected the account version for the reasons assigned by him, a further and much onerous duty was cast upon him to - make his "computation" of the income upon such "basis" and in such manner as he may "determine". The determination and the computation of the income must be made on a basis evolved by the Income-tax Officer. His judgment must be based on reason. He cannot just take a leap in dark and indulge in a pure guess by making arbitrary, capricious and an ad hoc addition without laying down the basis for it. He should endeavour to the best of his ability to ascertain the income, profits and gains of the assessee nearest to his true income, profits and gains as far as possible under the circumstances of the case."
On the facts of that case the action of the Income-tax Appellate Tribunal in making the lump sum additions of Rs. 20,000 and Rs. 15,000 in the two Trading Accounts of the assessee was disapproved.
We are in respectful agreement with the observation, made/by the learned Judges in Rajput Metal Works Limited v. C. I. T. (PLD 1976 Lah. 223) with regard to the method of "computation" of income on the "basis" envisaged by the proviso to section 13. We however feel that the facts, circumstances and questions arising for consideration in the two cases are clearly distinguishable.
22. However, we find that question No. 4 as framed in this case is misconceived as it does not "arise" out of the order of the Income-tax Appellate Tribunal. The "net income" in this case depends on the estimates of sales, the application of appropriate rate of gross profit and the admissibility of deductible expenses. All these estimates and deductions were separately contested before the Tribunal and the assessee's plea on all the counts failed. That being so the present question stands concluded by the findings conclusively recorded by the Appellate Tribunal in each account which have not been challenged by appropriate questions. It can hardly be disputed that the present question was neither "raised" nor agitated before the Tribunal nor "arises" out of its order and as such cannot form a proper subject-matter of reference under section 66 of the Income-tax Act, 192'..
23. In the result while questions Nos. 1 and 2, re-framed as above, are answered in the negative.
Question No. 3, is answered in the affirmative and question No. 4 is disposed of as misconceived.
24. Under the circumstances of the case there shall, however, be no order as to costs.