[The judgment of the Court was delivered by Abdul Hayee Kureshi, J.]-As common and linked questions of law and fact arise in the above four cases (I. T. Cs. 36, 37, 38 and 39 of 1971) we propose to dispose of the same by this single judgment.
2. Four separate applications under section 66 of the Income Tax Act have been filed by Messrs Imperial Paint and Varnish Works, hereinafter referred to as "the assessee" referring the following four questions for answer by this Court:- "(i) Whether in the facts and circumstances of the case the Income Tax Officer and the Tribunal were legally justified in rejecting the book results and computing the appellant's income under the first proviso to Section 13 of the Income Tax Act?
(ii) Whether in the facts and circumstances of the case the Tribunal's order rejecting the appellant's book results estimating the sale and applying a flat rate of 30% on the estimated sale is not arbitrary and in disregard to the evidence produced?
(iii) Whether in the facts and circumstances of the case the Tribunal was right in and applying the same rate of gross profit for assessm ent year 1965-66 as he applied for the preceding year?
(iv) Whether in the facts and circumstances of the case the Tribunal's order confirming the application of gross profit rate of 30% on estimated sale confirming the estimate of sale is based on any material or evidence or is this order contradictory to The evidence on record and hence illegal?"
The questions in each one of the four cases are identical except with a difference in relation to the assessm ent year. The assessm ent years in respect of the four cases seriatim are 1965-66 to 1968- 69.
3. We have heard Mr. Ali Athar, Advocate for the assessee and Mr. Mansoor Ahmed Khan, Advocate for the Income Tax Department, hereinafter referred to as "the Department".
4. The brief facts are that the assessee is a partnership concern engaged in manufacture of paints and varnishes. They maintain ther accounts as annual accounts ending on 31st March of each year.
5. For the assessm ent year 1965-66 the assessee disclosed gross sale of Rs. 28,60,944 showing gross profit of Rs. 4,03,633, viz. 14%. In the recast accounts gross sales were shown at Rs. 33,97,205 and gross profit at Rs. 9,08,082 showing gross profit percentage of 267%. For the assessment years 1966-67, 1967-68 and 1968-69 similar accounts were shown disclosing almost equal gross profit percentage. It is not necessary to reproduce the figures for the remaining three years because that is not germane to the decision of this case but suffice it to say that for the assessment years 1967- 68 and 1968-69 the gross profit percentage was shown as Rs. 26.55 and Rs. 25.70, respectively. The income was assessed by the Income Tax Officer, Training Centre, Karachi, who came to the conclusion that the assessee had maintained ther books on the same pattern as in the earlier years in respect of the income of which years the profits had been assessed at 30%. It seems the Income Tax Officer took notice of the absence of a document which he had chosen to call "Manufacturing Register''. Tn view of absence of this document the Income Tax Officer came to the conclusion that it was not possible to corelate the consumption of raw materials with the finished goods. On such premises the book version was rejected and sales were estimated for the four assessm ent years at Rs. 34,00,000; Rs. 32,02,000; Rs. 34,65,000; and Rs. 44,25,000 for the four respective years commencing 1965-66 and ending 1968-69. The assessment was made in accordance with the best judgment rule.
6. Mr. Ali Athar, the learned Advocate for the assessee has contended that the accounts submitted were correct, full and provide a data from which the incomes, profits and gains could not be deduced. He contended that the assessment had been made by aid of first proviso to Section 13 of the Income Tax Act (hereinafter referred to as "the Act") but the Income Tax Officer had not recorded a clear finding in terms of first proviso to Section 13 of the Act. He has additionally contended that "Manufacturing Register" is not a requirement of the mode of accounting but the record produced by the assessee before the Income Tax Officer was sufficient to prove the quantity of raw materials and finished goods. In short, Mr. Ali Athar has contended that Income Tax Officer had rejected the book results without sufficient cause. Mr. Mansoor Ahmad Khan, the learned Advocate for the Department has contended to the contrary and submitted that although "Manufacturing Register" is not a requirement of the Act or the Rules yet this word should be understood to mean a record relating to purchase and consumption of raw material and production and sale of finished goods. He has further contended that on the data available before the Income Tax Officer he was completely justified in rejecting the book version and making the assessm ent in accordance with the best judgment rule. He has also pointed out that even in the earlier years assessm ent was made on same basis and the assessee had not challenged such action of the Income Tax Officer.
7. The Income Tax Officer came to a clear finding that in absence of Manufacturing Register, which was essential for a manufacturing concern it was not possible to correlate the consumption of raw material with the finishing goods. It seems it was stated by the assessee before the Income Tax Officer that increase in Sales Tax, increment in wages, loss in rebate of import duty and such other indirect burdens had reduced the assessee's gross profit. The Income Tax Officer came to the conclusion that burdens of this nature are always passed on by the manufacturers to the consumers in the ultimate analysis by increase in price. Appeals in each one of these cases were filed before the Tribunal and without any favourable results. In order to understand the progress of reasoning employed by the Appellate Tribunal for upholding the rejection of book version by the Income Tax Officer it would be profitable to reproduce paragraph 2 from the order of the Tribunal relating to assessm ent years 1967-68 and 1968-69. It reads as under: "2. In the assessee's appeals, the first common objection concerns the rejection of books on account and the estimates of sales and the gross profit rate for the two assessment years under consideration. The appellant Registered Firm engaged in the sale of paint and varnishes. For the assessm ent years 1965-66 and 1966-67 the appellant disclosed sales at Rs. 28,60,944 and Rs.
28,19,766 and the gross profit declared thereon worked out to approximately 14% and 15.5% respectively. After recasting the trading accounts, the sales were shown at Rs. 33,97,203 and Rs.
31,99,670 and then the gross profits rate worked out to approximately 26.70% for both the years. For defective accounts, as in the past the Income Tax Officer rejected the book version of gross profit rate, founded off the sales figures to Rs. 34,00,000 and Rs. 32,02,000 and applied a gross profit rate of 30% thereon relying on the past history of the case. It appears that for the assessment years 1962-63, 1963-64 and 1964-65, the gross profit rate of 30% was applied and confirmed in appeals and as such it finally stands established at 30%. The defects in the accounts admittedly having not been removed even for the years under consideration, the appellant has no case for our interference with the application of the gross profit rate as estimated by the Income Tax Officer."
It seems the argument of the assessee justifying lesser profits on the ground of increase in the sales tax, Wages and loss in rebate of import duty was not pressed before the Tribunal. We say so because order of the Tribunal is silent on such aspect of the case.
8. The question that arises in this case is whether the Income Tax Officer acted rightly in rejecting the book version. In that context Section 13 and the first proviso appended to the said section is relevant and the same reads as follows: "Section 13. Method of account.-Income, profits and gains shall be computed, for the purposes of Sections 25(x) 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 produced therefrom, then the computation shall be made upon such basis and in such manner as the Income Tax Officer may determine".
On a reading of the above provision of law it is clear to us that the Department can reject the book version if one out of the two circumstances, namely-
(i) no method of accounting has been regularly employed, or
(ii) if the method of accounting employed is such that the income, profit, and gain cannot properly be deduced therefrom, is established, In such context the Privy Council in the case of Sarang- pur Cotton Manufacturing Company [(1938)6 ITR 36] laid down the following principles: "Their Lordships desired to add that the view of the Assistant Commissioner that Income Tax Officer is prima facie entitled to accept the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee, is not a correct view. It is duty of the Income Tax Officer, where there is such a method of accounting to consider whether income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question."
Mr. Athar has invited our attention to a case from High Court of Punjab namely Pandit Bros v.
Commissioner of Income Tax, Delhi ([1954) 26 ITR 159], In that case the assessee was a shopkeeper and was maintaining regular accounts of his purchase and sales. The Income Tax Officer did not state in his order that the method employed by the assessee was such that in his opinion "the income, profits and gains could not properly be deduced therefrom." It was held that there being absence of definite finding the case did not fall within the proviso to Section 13. The learned Judge went on to state that even if such findings were to be deduced from his (Income Tax Officer) order it could not be stated that there was any material before him which was sufficient to enable him to come to such a finding. This case from Punjab High Court was referred to by the Supreme Court of India in the case of S. N. Namasi Vayam Cheitier v. Commissioner of Income Tax, Madras [(1960)38 ITR 579] The Supreme Court of India at page 588 of the report recorded that the finding in the case of Pandit Bros, was that regular accounts had been maintained and on the other hand there was no finding by the Income Tax Officer that from the books that had been produced, income could not be properly deduced. The Supreme Court of India in that context stated the point as follows:- "It is for the Income Tax authorities to consider the material which is placed before them and, if, atter taking into account in any case the absence of a stock register coupled with other materials they are of the opinion that correct profits and gains cannot be deduced, then they would be justified in applying the proviso to Section 13".
The point as to interpretation of Section 13 of the Act also arose before the Lahore High Court in the case of Messrs The International Body Builders v. Commissioner of Income Tax, Lahore [{1971) PTD 513]. A Division Bench consisting of Anwar-ul-Haq, J. (as he then was) and Sardar Mohammad Iqbal, J. book note of the proviso to Section 13 ol the Act and held that in cases when the income, profits and gains of an assessee could not be properly deduced from the books of account proviso to Section 13 would be applicable and the Income Tax Officer is in such matter the sole Judge. A Division Bench of the same High Court consisting of Mohammad Akram and Gul Muhammad Khan, JJ. considered the incidence and effect of proviso to Section 13 in the case of Rajput Metal Works Ltd. v. Commissioner of Income Tax, Rawalpindi [1976) 33 Taxation 1. The principles governing the application of the proviso to Section 13 have been succinctly stated in the following words: '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 up an such basis and such manner as the Income Tax Officer may determine. It is, therefore, clear from this proviso that at;er the Income Tax Officer 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 up an such "basis" and in such manner as he may "determine". The determination and computation of the income must be made an a basis evolved by the Income Tax Officer. His judgment mi st be based on reason. He cannot just take a leap in dark and indulge in a pure guess by making arbitrary, capricious and 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 his true income, profits and gains, as far as possible under the circumstances of the case".
8. Mr. Ali Athar has invited our attention to a Judgment of the Madras High Court in the case C.
Arumuga Swami Nadar v. Commissioner of Income Tax, Madras [{1961) 42 ITR 237\. In that case the assessee was a Manufacturer of matches. The Appellate Tribunal while conceding that a uniform standard for chlorate consumption could not be adopted by reason of the very nature of ther trade proceeded to adopt a remitted consumption of 17 lbs. per 100 matches. The fallacy in the order became apparent on the fact of the order itself and for such reason the order of the Appellate Tribunal was disturbed. This case, however, is distinguishable from the present case because the "Manufacturing Register" which would show the consumption of raw material and the production of finished goods had not been produced by the assessee. Mr. Ali Athar has also referred to a Division Bench Judgment of Mr. Justice Inamullah and Mr. Justice Anwarul Haq in Civil Reference No. 28 of 1960, decided on 28-2-1962. In that case it was not the contention on behalf of the Department that the method of accounting was such that the income could not be deduced. The learned Judges stated that if the method of accounting is not regular or if the method employed is such that the Department cannot properly deduce or compute the income, the proviso to Section 13 would be attracted^ No doubt the answer was given in favour of the assessee but on the ground that the Department had acted arbitrarily and without regard to the provisions of the two conditions either of which may justify the application of proviso to Section 13 of the Act.
9. On a consideration of the above cases we are of the view that proviso to Section 13 of the Act would apply when no method of accounting has been regularly employed or the method employed does not reflect the correct income, profits and gains. On fulfilment of any of these two conditions the Department would be justified in rejecting the books version. In the present case a document which the Income Tax Officer has chosen to call "Manufacturing Register" had not been produced. No doubt the maintenance of a register bearing such name is not mandatory because under the second proviso to Section 13 of the Act A the Central Board of Revenue had not required the maintenance of such register. All the same the documents that a manufacturer has to maintain reflect the purchases of raw material and the production of finished goods as without such record the Department cannot co-relate consumption with production and as a consequence correct income, profits and gains could not be deduced. Mr. Ali Athar has, however, contended that the documents that were produced before the Income Tax Officer consisted of the following:
(i) Stock Register of raw materials imported;
(ii) Stock Register of locally purchased raw materials;
(iii) Daily diary of consumption of raw materials;
(iv) Form R.G. 1 Register Daily Stock Accounts of excisable goods; and
(v) Daily Production Report.
The assessee has placed a typed document on the file of each one of these cases purporting to show the documents that were placed before the Income Tax Officer. First of all this document is not signed by the assessee, although it is signed by the learned Advocate as a true copy of some other document. Nextly Mr. Athar was himself unable to vouchsafe if this document had in fact been placed before the Income Tax Officer for he stated that he had not appeared for the assessee at that stage. What is more that no grievance was made before the Appellate Tribunal that these documents (if these were produced before the Income Tax Officer) had been overlooked. The finding of the Income Tax Officer is that such documents as might correlate consumption and production were not placed before him and to such extent the Appellate Tribunal had also arrived at the same conclusion. We cannot place any reliance on these documents. Mr. Athar has next contended that since goods produced by the assessee were excisable goods and were liable to taxation at the factory gate it was not difficult for the Income Tax Officer to deduce the income by reference to such documents. There is nothing in the order of the Income Tax Officer or the Appellate Tribunal to show that these documents were produced but even on an assumption that these documents were produced we have no hesitation in stating that such documents (if at all those were produced) would only show the quantity of manufactured goods that left the factory premises though besides such goods more may still be available in the factory and that these documents would not show the quantity or raw materials.
8. On a consideration of the material placed before us we are of the view that the Income Tax Officer was correct in pressing in aid the proviso to Section 13 of the Act for rejecting the book version.
9. The next point that has been urged by Mr. Ali Athar is that the computation of profit at 30 per cent is arbitrary and not based on justice. The learned Advocate has not challenged the powers of the Income Tax Officer to make the assessment to the best of his judgment in order to determine the amount of profit or loss of the assessee. In order to escape the liability accruing from best judgment assessm ent it has to be shown that the Income Tax Officer has acted either dishonestly or vindictively or capriciously. If on the other hand the Income Tax Officer makes the assessment only believing the same to be a fair estimate, although the process would involve some amount of guess work, the assessm ent would not be assailable on that ground alone. In the present case the assessee had on re-computation disclosed profits at the rate of 26 or 27 per cent of the gross production. The Income Tax Officer raised the same to 30 per cent as a consequence of rejection of book version. Even in the earlier years the profit were assessed as the said rate. In any case the income Tax Officer was the best Judge in the matter and no fault could be found with assessment on that ground as according to us the precontact of profits that has been assessed is neither unreliable nor dishonest nor capricious.
12. In the result we answer the four questions as follows:-
(i) In the affirmative.
(ii) In the affirmative as the estimated sale is not arbitrary or in disregard of the evidence produced.
(iii) In the affirmative.
(iv) In the affirmative and the order is not contrary to the evidence on record.