I. MAHMUD, J.-The following question of law has been referred to the High Court under section 66 (1) of the Income-tax Act, 1922 on the applica--tion of the Commissioner of income-tax, Karachi
(West) : - "Whether on the facts and in the circumstances of the case the Income---tax authorities were justified in applying the proviso to section 13 of the Income-tax Act, 1922?"
2. The assessee, a registered firm carried on business as dealer in hardware, tools and workshop equipment. For the assessm ent year 1964-65, the assessee returned a total turnover of sales amounting to Rs. 5,22,715 and disclosed a profit of Rs. 1,01,878 giving a gross profit rate of 19.5 %, as against 15 % in the preceding year. The Income-tax Officer rejected the book version on the ground that retail sales which were supported mostly by cash memos, could not be verified without names of customers and also that in the absence of stock register, detail quantitative analysis was not forthcoming. Accordingly, he determined the assessee's income under the proviso to section 13 of the Income-tax Act, by adopting a gross profit rate of 220% and estimated the sales at Rs. 5,32,000.
The assessee appealed to the Appellate Assistant Commissioner of Income-tax. Karachi but the appeal was dismissed and the order of the Income-tax Officer was affirmed. The assessee therefore filed an appeal before the Income-tax Appellate Tribunal Pakistan, Lahqre Camp, Karachi which allowed the appeal holding that unlike in the case of a wholesale business, in a retail trade, one ought not to insist on recordial of the names of customers in the cash memos and further that the absence of a stock register would not entail rejection of accounts except when the profit rate shown by the assessee was ridiculously low. It held that the rate of 19.5 % shown by the assessee could not be said to be ridiculously low as compared with the rate applied in the earlier year and, in fact, the assessee had shown an improvement in turnover and gross profit rate. Therefore the Tribunal held that the Income-tax Officer was not justified in invoking the proviso to section 13 of the Income---tax Act and that the declared results would have been accepted.
3. The Department applied for a reference and the question above reproduced has been referred to the High Court for its opinion.
4. The proviso to section 13 of the Income-tax Act, 1922 reads as under :- "13. Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee Provided 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 there form, than the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine."
5. The main question is whether the profits and gains of the business could not have been properly deduced from the method of accounting regularly employed by the assessee and whether the Income-tax Officer was justified in resorting to the proviso to section 13 on the rounds only that (1)
(1960) 28 1 T R 579 The assessee failed to maintain stock register and (2)sales were not verifiable in the absence of any mention of the names of customers in the cash memos. Mr. Mansoor Ahmed Khan, learned counsel for the Com--missioner contended that the absence of a stock register was fatal because, otherwise, the quantum of sales could not be verified nor purchases could be compared with the sales and therefore the Income-tax Officer rightly held that profits could not properly be deduced. Learned counsel referred to S. N. Namasivayam Chettlar v. Commissioner of Income-tax, Madras (1) in which the Indian Supreme Court observed that the keeping of a stock register was of great importance because that was a means of verifying the assessee's accounts and making a quantitatively. But as rightly pointed out by Mr. Iqbal Naim Pasha, learned counsel for the assessee, in that case, there was other material coupled in addition to the absence of a stock register, which justified rejection of the account books, such as for example there was no cash memos for sales of about Rs. 3,00,000, the cash credits were unexplained and the gross profit was very low. The learned counsel for the Commissioner also referred to Nasir Industries, Karachi v.
Com--missioner, Income-tax South Zone, West, Karachi (1967 PTD 205) in which the High Court of West Pakistan held that in the absence of manufacturing account, quantitative reconciliation was not possible and although the accounts were regularly maintained by the assessee, profits therefrom could not be properly deduced and resort to the proviso to section 13 of the Income-tax Act was justified. That case appears to be distinguishable as it related to a manu--facturing business in plastic goods where, no doubt, the absence of a manu--facturing account is fatal. Mr. Pasha also tried to distinguish this case of the ground that there was other material for rejecting the accounts. We are inclined to agree that the absence of a stock register alone did not' necessarily justify rejection of accounts in the absence of other defects.
6. With regard to the cash sales not being verifiable in the absence of names of customers, Mr. Mansoor Ahmed Khan rightly did not press this ground for justifying the Income-tax Officer invoking the proviso to section 13. The Appellate Tribunal also did not accept this ground for rejecting the accounts. The business of the assessee was retail and, as observed by this High Court in Messrs S. M. Yousaf & Bros. v. The Commissioner of Income tax East, Karachi (1974 PTD 45) that unless the proportion of unverified cash sales was substantial, which has not been shown in the present case, it would no ordinarily be proper to reject outright the results of the books of account with regard to them.
7. Mr. Iqbal Naim Pasha submitted that as the assessee dealt in enumerable small items of hardware and tools, it was not feasible nor practicable in the line of business in which the assessee was engaged, to maintain a regular stock register. In the latter years, the accounts were accepted in the absence of a stock register. It was also not shown that other persons engaged in the same business were maintaining stock registers and there was nothing to rebut the appellant's statement. In this connection he relied on the judgment of this High Court in Star Rolling Mills v.
Commissioner of Income-tax (1974 PTD 200), Mr. Pasha submitted that the Income-tax Officer could have verified the correctness of the accounts with little effort in the absence of the stock register on the basis of inventories of closing stock produced by the assessee. The gross profit rate of 19.5 % shown by the assessee was also not so ridiculously low as compared with the general rate applied in the earlier year and, in fact, there was an improvement over the previous yea C both in respect of turnover and the gross profit rate and that the Income-to Officer acted arbitrarily in resorting to the proviso to section 13. We are inclined to agree with this submission of Mr. Pasha.
8. For the foregoing reasons, we would answer the question in the negative. In our opinion the Income-tax Officer was not justified in applying the proviso to section 13 of the Income-tax Act, 1922. There will be no order as to costs.