JUDGMENT [The judgment of the Court was delivered by Saad Saood Jan, J.]- This reference is by an assessee under Section 66(1) of the Income Tax Act. It has formulated three questions for the decision of this Court. These are:-
(1) Whether on facts and in the circumstances of the case the Tribunal was right in maintaining the rejection of book version of the assessee without having found any fauit or flaw with the books of account or method of accounting employed by the assessee and whether the recourse to the first proviso to Section 13 of the Income-tax Act has been rightly made?
(2) Whether on facts and in the circumstances of the case there was any material on the basis of which it was open to the Appellate Tribunal to enhance the assessee yield by 85% and thus uphold the additions of Rs. 2,84,394?
(3) Whether on facts and in the circumstances of the case the Appellate Tribunal was right in holding that a sum of Rs. 98,715 remitted by the assessee through normal banking channel by way of commission to non-resident foreign agents for service performed abroad in relation to sale was not admissible deduction on account of the assessee failure to deduct tax under the provision of Section 10 (4) (bb) of the Income-tax Act, 1922 and for want of formal agreement?
During the course of hearing, learned counsel appearing for the assessee confined his address to the first two questions only. We, therefore, presume that it is no longer interested in the third question.
2. Questions Nos. 1 and 2 are inter-connected. They relate to yarn production account of the assessee for the assessm ent year 1967-68. It may be stated that the assessee is a public limited company engaged in the manufacture of yarn and cloth. For the year in question it furnished the following statement with regard to its yarn production account Yarn produced Wastage visible Wastage invisible Cotton consumed 1,59,77,372 Lbs.
1,32,92,509 or 83.19% 25,36,317 or 15.88% 1,41,456 or 93% The Income-tax Officer thought that the yield of yarn produced was lower than the yield of the other Mills of good standing. He also noticed that the percentage of yarn produced in the immediately preceding previous year was 84.04% whereas in the year under consideration it stood at 83.19%. In the circumstances he called upon the assessee to give its reason for the short fall in production. The assessee preferred the following explanation:- Average count of Yarn, this year is at 21$ as against 23.2$ in the preceding year. The coarser counts usually reflect higher percentage of waste because they are generally produced with lower grade Of cotton. In the case of fine count good quality of cotton is used and its waste being superior one is refused in the manufacture of coarser counts. Consumption of Roller Ginned Cotton is more this year than last year. This year, it is 73% as against 69% in the preceding year. Roller Ginned Cotton contains the elements of short fibres which results in waste in processing of yarn.
Mixture of cotton used is also claimed an important factor. If poor mixture is used in manufacture of fine counts the percentage of waste is said to be higher. The percentage of low grade cotton
(LSS) consumed is said to be 48%.
The Income-tax Officer did not regard this explanation as satisfactory. He also found that though the cotton had been purchased in measures of bales and maunds yet it has been supplied to the blow rooms in Lbs. As there was no standard rate of conversion of maunds and bales into Lbs. He could not verify the exact quantity of cotton used for manufacturing yarn. Consequently he rejected the declared version of production. He then prepared his own estimate of production of yarnat the rate of 84.08% of the total cotton declared to have been consumed. It may be mentioned again that this rate was the same which the assessee himself had declared in the immediately previous year. Accordingly he worked out the total production at 1,34,27,387 Lbs. Which was 1,34,784 lbs. more than the declared version. He estimated the value of the additional yarn at Rs. 2,84,394 at the rate of Rs. 2.11 per Lb. and added this amount to the income of the assessee.
3. The assessee being dissatisfied with the treatment meted out to his case went in appeal before the Income-tax Appellate Tribunal. The learned Tribunal upheld the order of the Income-tax Officer.
4. it was contended by learned counsel for the assessee that he had produced all his principal books before the Income-tax Officer. These books included the cash book, ledger books general, sales-deed book, purchase register, stock register and production register. The Income-tax Officer had not specifically stated that these books were defective or unreliable. In the circumstances he was not competent to reject the declared version of production and start making his own estimates of the same on entirely untenable premises. In support of his contention the learned counsel relied upon Haroon Textile Mills Ltd. v. Commissioner of Income-tax [(1966) 14 Taxation 167] and S. M. Yousaf v. Commissioner of Income-tax [1974 PTD 45] and Sultan Textile Mills Ltd. v.
Commissioner of Income-tax [1974 PTD 878.]
5. It is not disputed by the assessee that the percentage of production of yarn in relation to the consumption of cotton in the assessment year under consideration was lower than what was shown by it in the immediatly preceding previous years. This fact by itself was sufficient for the Income- tax Officer to be somewhat careful while scrutinizing the production itself of the assessee.
He was, therefore, justified in calling for an explanation from the assessee about the short fall. The assessee did offer an explanation but the Income-tax Officer did not regard it as satisfactory. The question whether the explanation was satisfactory or not was one for the Income-tax Officer to decide for not only he had the requisite experience in assessing the quality of such explanations but that he also had information about the performances of similarly placed textile mills before him, Now, once the Income-tax Officer was not satisfied with the accuracy of the declared version it was not necessary for him to point out any specific defects or flaws in the books produced by the assessee. There is no basis for the proposition that unless the Income-tax Officer can find any defects or flaws in the account books he must accept them as they are even though the circumstantial) evidence may suggest that some of the entries therein are inaccurate or unreliable. The authorities cited by the learned counsel do not lay down any proposition to the contrary. In Haroon Textile Mills Ltd. v. Commissioner of Income-tax, the only point for consideration was if the question whether there was material before the Tribunal justifying rejection of book results and addition of certain amount to the declared income, was one of law or not and for that reason referable to the High Court under Section 66 of the Income-tax Act. It did not deal with the proposition canvassed by the learned counsel for the assessee that unless the books produced by the assessee were found to be defective the Income-tax Officer had perforce to accept the declared version even though it appeared to be in accurate or unreliable. In S. M. Yousaf v.
Commissioner of Income-tax the question before the High Court was if there was any material before the Assessing Officer to reject the declared version and it was found as a matter of fact that the account books had been rejected merely on suspicion and guess work. This authority has no bearing on the case before us.
On the other hand in Sultan Textile Mills Ltd. v. Commissioner of Income-tax, there are certain observations which go against the proposition canvassed by the learned counsel. In this case Qadeer-ud-Din Ahmad, C. J. observed: "A glance at the main provision of the section will show that the Income-tax Officer has to accept the method of accounting employed by an assessee if it is regularly kept. The first proviso, however, indicates that it can be rejected if in spite of its regular employment, the Income-tax Officer comes to the conclusion that the profits and gains cannot be properly deduced from it. In this case, the Income-tax Officer as well as the Income-tax Appellate Tribunal have come to the conclusion that without the Spinning Master's reports and the Gate Pass Register profits and gains could not be properly deduced. It is no answer to this view of the Income-tax Officer and the Income-tax Appellate Tribunal that they have not found fault with the Account Book which were submitted by applicant. If this argument were accepted then it would be enough for an assessee to neatly maintain a single exercise book and argue that since nobody can find fauit with this exercise book, nobody has a right to say that profits and gains cannot be properly deduced."
Similarly in Miss Assia v. Income-tax Appellate Tribunal [PLD 1979 SC 949] the Supreme Court ruled: - "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 accounts 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 re: Baghat Halvai). In this connection in Ganga Ram Balmolcand v. Commissioner of Income-tax, Punjab 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 injudicial. In matters like these a very wide discretion vests in the Income-tax Authorities in view of the exigencies of the case, and the control exercisable on them is very meagre. What alone has to be seen in such cases is whether the discretion has been judicially exercised and if it is once found to be so exercised, no Court can interfere with the order. In this connection their Lordships of the Privy Council in Commissioner of Income-tax, United and Central Provinces v. Badridas Ramrai Shops, Akola, have held that the Assessing Officer must make what he honestly believes to be an honest estimate of the proper figure of assessment, and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee circumstances, and his own knowledge of previous returns by an assessment of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess work. In that sense too the assessm ent must necessarily be arbitrary."
We should, therefore, think that after the Income-tax Officer had. found that declared version of the production was unreliable he was competent to reject it even though he did not point out any defect or fauit in the books produced by the assessee and that he was justified in taking resort to the first proviso to Section 13 of the Income-tax Act for making a reasonably accurate estimate of the production. The basis which evolved in making his estimate has already been explained and we do not find that it! was not reasonable.
7. For the reasons stated above we decide questions NoS. 1 and 2 in the affirmative and against the assessee. We return no answer to question No. 3 for the reasons already stated. The assessee shall also pay the costs of this reference.