[The judgment of the Court was delivered by M. S. H. Qureshi, J.]- Messrs Megna Industries Limited, Gujranwala, is a private limited company which came into existence on 1-1-1968 by conversion of a partnership. The business of the partnership of manufacture of sugar-mill machinery and spare parts was continued under, the Company. For its first accounting year ending on 31-12-1968, i.E. assessm ent year 1969-70, the Company filed accounts but the Income Tax Officer, upon discovery of certain defects and discrepancies as noted in his order rejected the Company's version of the account. He rejected the gross profit of Rs. 41,927, declared by the Company on a turn over of Rs.
2,22,043, yielding a GP rate of 19% which in his opinion was "obviously low" and taking into consideration the gross profit of Rs. 27,233, on a turn over of Rs. 1,43,697,00 yielding a GP rate of 19% for the preceding four months ending on 31-12-1967, made a round addition of Rs. 30,000, in the trading account. He also disallowed a sum of Rs. 3,000, i.E., Rs. 1,500 on account of conveyance allowance and Rs. 1,500 on account of entertainment allowance claimed for the Managing Director, for the reason that there was a separate provision of T. A. to be paid to the Managing-Director and that entertainment allowance had also been debited to the P & L account. The sum of Rs. 849 claimed as travelling allowance by the Managing Director was reduced by Rs. 300 for the reason that the expense was unvouched and unverifiable and the nature of the travels under taken not ascertainable. Another sum of Rs. 997, claimed by the assessee on account of packing material expenses was also disallowed for the reason that the expense was according to the practice of the assessee to be borne by the customers. The Income Tax Officer disallowed some other claims also as being inadmissible expenses. In appeal before the Tribunal, the addition of Rs. 30,000 was reduced to Rs. 20,000 but the disallowance of the three items as mentioned hereinbefore was maintained for the reason that the assessee's assertion was "found to be devoid of any merit as reasons for these disallowances could not be dislodged". The assessee thereupon moved the present application for the opinion of this Court on the following questions said to be of law and arising out of the Tribunal's order
(1) Whether the Tribunal was right in upholding the rejection of the applicant Company's account by the I. T. O. and whether this rejection was in the proper and legal exercise of jurisdiction of the I. T.
O. under the proviso to Section 13 of the Income Tax Act, in the face of the fact that the applicant's accounts were checked, audited and certified under the law to have been kept as required under Section 130 of the Companies Act, 1913, and to have disclosed a true and correct view of the Company's affairs?
(2) Whether on the facts and in the circumstances of the case there was material before the Tribunal on the basis of which it could properly uphold that there was suppression of sales by the applicant Company for which the lump sum addition to the extent of Rs. 20,000 to the Trading Account had been properly made by the Assessing I. T. O.?
(3) Whether the order of Tribunal in upholding the disallowances out of the following expenses was made legally after proper application of mind by the Tribunal: Rs.
(a) Out of the Director's remuneration... 3,000
(b) Out of Travelling expenses... 300
(c) Out of packing material expenses... 997
(4) Whether on the facts and in the circumstances of the case there was material before the Tribunal for upholding the disallowance out of Director's remuneration of Rs. 3,000, as having been properly and legally made by the Assessing I. T. O. and whether the said sum was an allowable expenditure under the law.
(5) Whether on the facts and in the circumstances of the case there was material before the Tribunal for upholding the disallowance of Rs. 997 of expenditure on packing material, and whether the said sum was an allowable expenditure under the law.
Question No. 1:
2. We do not see how question No. 1 can be said to be one of law arising from the Tribunal's order.
The question relates to the propriety of rejection of the Company's account. Section 13 of the Income Tax Act, which relates to method of accounting, lays down in its first proviso 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 deducted therefrom, then the computation shall be made upon such basis and in such manner as the Income Tax Officer may determine". The Income Tax Officer has in his order cited as many as six instances of defects and discrepancies in the assessee's account noted by him, which he made the basis for rejecting the Company's account. The presence of the defects and the discrepancies in the accounts pointed out by the Income Tax Officer had not been specifically challenged by the assessee in the memorandum of appeal nor had the same apparently been raised before the Tribunal because the Tribunal's order is silent on that aspect of the matter. If the defects did exist, then the Assessing Authority was competent to reject the account.
3. The provision of Section 13 gives certain latitude to the Assessing Officer by employing the words "in the opinion of the Income Tax Officer". The opinion of the Income Tax Officer has, therefore, to be given due weight unless it is shown that he acted in an arbitrary or capricious manner. If there is material on record to justify the exercise of the opinion formed by the Officer, the same cannot be questioned under Section 66 of the Act. In Miss Assia v. Income Tax Appellate Tribunal etc. PLD 1979 SC 949, it was observed that: "The Assessing Officer was not bound to rely on all the evidence produced by the assessee in case he was not satisfied about it. He was entitled to reject the account believed by him to be false and unreliable, although there may be no direct and definite evidence with him to prove their incorrectness. There is no rule of law compelling a Judge to accept evidence, even though it is uncontradicted, which he believes to be a pack of lies."
In Ganga Ram Balmokand v. Commissions of Income Tax, Punjab 1937 I T R 464, it was held that: "The law does not impose any burden on the Income Tax authority to prove by positive evidence that the accounts are unreliable or that the figure at which they assess is the correct figure. On the other hand, the question of the unreliability of accounts is a question of fact and primarily falls for the determination of the Income Tax Authorities alone. If, therefore, it is once decided by them that the accounts are fictitious or unreliable, their finding cannot be disturbed unless it is altogether capricious and in judicial."
Since the factual basis for the rejection of the accounts had not been specifically objected to or controverted before the Tribunal, the rejection of the account cannot be raised before us as a question of law arising out of the Tribunal's order.
4. Once the accounts have been rejected, then under Section 13 of the Act, a computation has to be made "upon such basis and in such manner as the Income Tax Officer may determine". Where the Assessing Officer discards the assessee's account-books, he has to evolve a reasonable basis for making the estimate and he has to disclose that basis. In Rajput Metal Works Ltd., Gujranwala v.
Commissioner of Income Tax, Rawalpindi (1976) 33 Taxation 1, it was held:- V "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 so employed is such that in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deducted therefrom, then the computation shall be upon such basis and in such manner as the Income Tax Officer may determine. It is, therefore, clear from this proviso that after 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 upon such "basis" and in such manner as he may "determine". The determination and the computation of the income must be made on the 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."
In this regard, an estimate based on past performance of the assessee is relevant. In fact, the assessee's own history is normally a more reliable guide than a parallel case for the purpose of the computation. In the instant case, the Income Tax Officer had taken into consideration the performance of the last four months of the preceding year, which had shown a turn-over of Rs.
1,43,697 as against the turnover for the whole year in question of Rs 2,22,043. The Income Tax Officer, therefore, had a basis for making the round addition of Rs. 30,000, which amount had, however, been reduced by the Tribunal to Rs. 20,900. We find no substance in the contention raised by learned counsel that the performance of the previous year was by another entity i.E. the partnership and not the assessee-Company and as such was not relevant, for we find that the business of the partnership had continued under the Company. Question No. 2 therefore cannot be said to be one of law arising from the Tribunal's order.
5. The remaining questions, i. e. questions 3, 4 and 5, were after hearing and with consent of the parties, merged into the following question: Question No. 3.-"Whether the order of the Tribunal in upholding the following disallowances was based on material before it and had been recorded after proper application of mind: Rs.
(a) Out of Director's remuneration. 3000
(b) Out of Travelling expenses. 300
(c) Out of packing material expenses. 997 The Director's remuneration for the year comprised conveyance allowance of Rs. 1,500 and entertainment allowance of Rs. 1,500. disallowance of which both had been upheld by the Tribunal.
The reason for the disallowance by the Assessing Officer was that separate payment of Rs. 849 had been made by way of T. A. to the Managing Director and that similarly Rs. 375 had been debited separately as expenses on account of entertainment. This appeared to the Assessing Officer to have been made "in order to reduce the incidence of taxation on the Company". The Tribunal was of the view that the reasons for the disallowance could not be dislodged. Apparently, the conveyance and the entertainment allowances formed part of the remuneration of the Director.
There is nothing to show that the travel and entertainment expenses separately charged were covered by these allowances. A travel allowance need not necessarily form part of conveyance allowance. Similarly, the expenses debitable to the Company on account of entertainment may not be covered by entertainment allowance paid as the ordinary remuneration of the Managing Director. We find that the Assessing Officer as also the Tribunal had not before them any appropriate basis for rejecting these allowances.
6. As regards item (b), we find that the amount of Rs. 300, out of travelling allowance of Rs. 849 had been disallowed for the reason that the expense incurred under the Head was "unvounchedandunverifiable". That being so, the matter was within the discretion of the Taxation Authorities and as such could not give rise to a question of law.
7. As regards item (c), it appears that according to the Assessee's own showing, it had been their practice that the expenses relating to packing material were borne out by the customers. Their explanation, however, was that the expenses claimed represented a difference between the actual expenses on account of packing and the charges made from the customers In view of the established practice, no such difference should have arisen. In any case, it was for the assessee to have furnished material to support their assertion. No such material appears to have been produced and in the circumstance, the Tribunal was right in holding that the reason for disallowance was not dislodged.
8. For the aforesaid reasons, we answer questions 1 and 2 in the affirmative. As regards question No. 3, we hold that the disallowance of Rs. 3000, out of the Director's remuneration was not legal, and as such this part of the question relating to item (a) is answered in the negative. The answer in regard to items (b) and (c) of this question is in the affirmative.
There shall be no order as to costs.