QADEERUDDIN AHMED, C. J.--This is an application under subsection (2) of section 66 of the Income-tax Act, 1922 to obtain a direction of this Court to the Income-tax Appellate Tribunal that it should refer the following two questions : (1)Whether in the circumstances of the case, there was any material to hold that the production, as shown, was low; and whether any addition in this account was justified?
(2)Whether there was any material on record to hold that the sale rates of yarn and cloth as disclosed were incorrect?
The Income-tax Appellate Tribunal has declined to refer the above questions to this Court on the ground that they are questions of fact and not of law.
2. The facts which form the background of this application are that the applicant is a manufacturer of yarn and cloth and formerly used to be assesed to tax mostly with reference to the production of yarn. But during the relevant assessment year it has manufactured cloth and yarn during the entire period. The assessm ent year to which the present application relates is 1957-58. The applicant submitted its income-tax returns showing a net loss of Rs, 2,06,172 but the Account Books of the applicant were not accepted in terms of the first proviso to section 13 of the Income-tax Act, 1922 and the applicant was assessed to income-tax on an income of Rs, 26,03,558. The Income-tax Officer found that the yield of yarn was 85% as against 80.84 shown by the applicant. He also found that there was an under statement by Rs, 1,80,000 in the accounts of the assessee in respect of the sale of cloth and yarn. The applicant went in direct appeal to the Income-tax Appellate Tribunal which has partly accepted it and found that the yield of yarn from the cotton which was consumed was 83% and not 85 % and has drawn the following conclusion :- "The difference should be worked out and necessary reduction allowed in the addition made by the Income-tax Officer on this score."
The Tribunal also held that the under statement found in the return of the assessee with respect to the sale of cloth and yarn was to the extent of Rs, 10,00,000 and not Rs, 18,00,000.
3. The applicant was not satisfied with the above decision and framed seven questions to be referred to this Court in terms of subsection (2) of section 66 of the Income-tax Act, 1922. They were as follows :-- (1)Whether the assessee having maintained regular day to day record of consumption of cotton and yield of yarn in a form prescribed by the Central Excise Department and regularly checked and signed by an Excise Officer permanently posted in the Mills premises for that purpose and no defect having been found in those records, and having 'regard' to the other facts and circumstances of the case, was the Tribunal entitled to hold that yield of yarn at 80.84% was low?
(2)Whether there was any evidence on the record to prove that the yield of yarn at 80.84% was abnormally low?
(3)Whether in the facts and circumstances of the case the Tribunal was entitled to require the assessee to prove the existence and identity of the purchasers and on the assessee's failure to do so, to apply proviso to section 13 of the Income-tax Act, 1922, and then estimate the sale and the profits?
(4)Has not the Tribunal misconstrued the evidence relating to Messrs Imperial Cloth House, Peshawar, and was the Tribunal entitled to take into consideration the oral statement of a partner of Imperial Cloth House, Peshawar "made" behind the back of the assessee and without furnishing the assessee any opportunity to cross-examine him?
(5)Whether in the facts and circumstances of the case, the Tribunal was entitled to reject the sale rates of yarn and cloth as disclosed by regularly issued vouchers and regularly maintained account books on the ground that the "Daily Business" of Lyalipur reported higher rates?
(6)Whether the Tribunal having found "that the businessmen generally overvalue the stocks when intimating the price to the Banks for the limited purpose of availing credit facilities" were entitled to rely upon the rates intimated to the Banks for rejecting the sale rates disclosed by the assessee's accounts and vouchers?
(7) Whether in the facts and circumstances of the case, the Tribunal's order upholding the additions to the extent of Rs, 10,00,000 in the sale of yarn and cloth was based on any evidence or material or was it based merely on suspicion, surmises and conjectures?
Later on counsel for the applicant recast them and reduced their number to the two questions mentioned on the first page of this judgment.
4. The Income-tax Appellate Tribunal has, after hearing the parties, come to the conclusion that the first question is a question of fact. So also the second question is a question of fact. Moreover, the second question does not arise from the order of the Tribunal.
5. We have heard Mr. Ali Athar and Mr. Mumtaz Hussain in support of the contentions of the applicant. Learned counsel have contended with respect to the first question that there was no material in the eye of law to support the view of the Income-tax Appellate Tribunal that the production as shown in the Account Books of the assessee was as low as has been found and that, therefore, the addition which has been made to the ratio of production by the Income-tax Appellate Tribunal is not justified. We may mention here that if the first question is looked at strictly as it has been worded, then no objection to the legal validity of any material is embodied in it. But counsel for the applicant have referred to Haroon Textile Mills Ltd , Karachi v. Commissioner, Income-tax South Zone, West Pakistan, Karachi in support of the proposition that the assence of the questions which are framed should be considered. In this case, counsel urged, the essence was1 that the material which was taken into consideration by the Income-tax Appellate Tribunal for rejecting the low figure of production was in the eye of law no material at all. Mr. Mumtaz Hussain has also referred in this connection to Edwards (Inspector of Taxes) v. Bairstow and another and drawn our attention to the observation of their Lordships of the House of Lords that forming an opinion without any evidence at all, or on a view of facts which could not reasonably be entertained raises questions of law with the result that an examination into the existence or non- existence of evidence and into the nationality of a view may be treated as questions of law. In this case, therefore, irrespective of the language of the first question, it should be open to the applicant to contend that the material which was taken into consideration by the Income-tax Appellate Tribunal was no material at all. The learned counsel conceded in logical sequence that if there was any material which was free from these flaws then there may arise questions regarding the soundness of judgment and adequacy of evidence but they will not be questions of law.
6. We have no reason to find fault with the above stand taken by counsel for the applicant and in this respect would like to point out that three main defects were found by the Income-tax Officer for not accepting the Account Books of the applicant. One of them was that the applicant did not maintain an account of the production of cloth from stage to stage. The stages which were found to be material were blowing, carding, drawing, roving, spinning and weaving. Secondly, the Income-tax Officer found that the Spinning Master's reports were not produced and thirdly that the Gate Passes showing the receipt and despatch of material were missing. The Income-tax Appellate Tribunal has not attached importance to the absence of the record of production of cloth from stage to stage but has considered the absence of the Spinning Master's report and of the Gate Pass register to be serious. The explanation of the applicant for not producing the Spinning Master's reports was that they were destroyed and the reason for not producing the Gate Pass register was that they were misplaced during the change of premises. Mr. Ali Athar took the stand that the absence of this part of the record did not amount to finding fault with Account Books which were produced therefore, it was not a sound manner of looking at the accounts of the applicant to emphasise that part of the Accounts which was not produced and find no fault with the Account Books which were produced. In order to appreciate this criticism of learned counsel, we may reproduce here section 13 of the Income-tax Act of 1922 :-- "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 therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine: Provided further that the Central Board of Revenue may, in the case of any person, or class of persons, require such person or class of persons to maintain accounts, or prescribe the method, of accounting to be employed by such person or class of persons or the manner in which payments or commercial transaction, should be made or recorded, and in such an event the incomes, profits and gains of the assessee shall be computed on the basis of the books, accounts or records maintained accordingly.
Explanation.--The expression "method of accounting", as used in this section, includes the language or script employed, or to be employed, by an assessee for the purpose of maintaining his accounts."
7. 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 properly2 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 Books which were submitted by the 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 fault with this exercise book, nobody has a right to say that profits and gains cannot be properly deduced. In fact the authenticity of a system of accounting consists in the maintenance of all the connected books and registers so that a self-contained soundness of that system may be evidenced from it. The absence of two important pieces of evidence made it unnecessary for the Appellate Tribunal to criticism the books of account which were produced. Thus in so far as this case is concerned, we have no doubt that the first part of the first question raises a question of fact and not of law and that the second part being a corollary of the first part is of no greater legal significance.
8. Turning now to the second question, we may mention that the Income-tax Officer has found that sales in the amount of Rs, 13,27,773 were made to parties who were not traceable. He also found that the prices which were shown in the Account Books of the applicant were lower than the prices which were published in a paper called "Daily Business" Lyallpur. Moreover, the rates which were shown by the applicant himself in its correspondence with its bankers for purposes of obtaining banking facility were higher than the rates which were shown in the books of accounts. Lastly, it was found that a kacha voucher was issued by the applicant containing a higher price than the price which was shown for the same transaction in the books of accounts. Mr. Ali Athar tried to meet the above faults found by the Income-tax Officer by saying that there were 15 parties to whom sales in the amount of Rs, 13,27,773 were shown to have been made but out of them the applicant was able to trace out four to whom sales in the amount of Rs, 2,85,877 were made. He said that the success of the applicant to the extent of finding out four purchasers should be accepted as satisfactory because it was found that these four parties had changed their trade names because of the demand made by the Martial Law Authorities that undisclosed profits be declared. He said that a presumption could be raised that the remaining eleven untraceable purchasers also belonged to the same category and that, therefore, their untraceability was not necessarily a result of their non-existence but a consequence of the change of their trade names which, according to him, had become a general practice at that time. This explanation of learned counsel is obviously incomplete and has neither been accepted by the Income-tax Officer nor by the Income-tax Appellate Tribunal. Mr. Abdul Haq's reply to this contention of Mr. Ali Athar was that the applicant had conceded before the Income-tax Officer that the names of some of the purchasers were fictitious.
9. With respect to the rates published in the Daily Business of Lyallpur, Mr. Ali Athar said that they were retail prices prevalent at Lyallpur and not factory prices of Sargodha. This criticism has been accepted by the Income-tax Appellate Tribunal with the reservation that the difference in the rates containing in the books of the applicant and those published in the Daily Business was so much that the explanation on which counsel relied could not explain it away. The Tribunal has observed as fo Ilows in this respect :- "It was urged before us that rates shown in the assessee's books are ex-Mill rates at Sargodha while the rates quoted in the "Daily Business" are retail rates prevalent at Lyallpur which included Sales- tax, Excise duty cartage, from Sargodha to Lyallpur, Octroi and wholesaler's and retailers profits. A certificate of the "Daily Business" testifying that the rates quoted in the newspapers are retail rates was produced before us in support of the assessee's contention. This certificate which is dated 22- 11-1961 had to be obtained after the assessment had been finalised as the assessee was never confronted with the rates relied upon by the Income-tax Officer. In order to bring out this point fully the retail price was worked out by adding to the price shown in assessee's books, the excise duty, sales tax etc. and it was found that there was still an appreciable gap between that price and the price quoted in the "Daily Business".
10.The stand which Mr. Ali Athar took to explain away the difference in the rates quoted by the assessee to its bankers and entered in the books of account is significant. Counsel said that the rates which were supplied to the bankers had an object behind them which was different from that with which the books were written; therefore the difference was inevitable. We have not been impressed by this explanation. The Income-tax Appellate Tribunal has found the discrepancy to be too high but has excused on a different ground. It has observed as follows :- "It would at any rate be too much to presume that the value put on the stocks by one seeking overdraft is ipso facto accepted by the bank there must be some co-relation between the rates declared and the market rates. The assessee in the instant case was, however, not confronted with the bank rates as should have been done."
11.Lastly, counsel referred to the kacha voucher and expressed the grievance that it was not shown to the applicant. Moreover, he referred to a letter which was written in that connection and said that the contents of that letter indicated that the kacha voucher did not contain the correct rates.
The Income-tax Appellate Tribunal has not accepted this explanation.
12.A perusal of the above discussion would show that the main object of counsel has been to criticise the adequacy of the material rather than to support his contention that there was no material at all.
13. In conclusion we find ourselves inclined to agree with the view of the Income-tax Appellate Tribunal that these c questions do not, in the circumstances of this case, raise question of law. We accordingly dismiss this application with costs. 1967 PTD 236 (1955) 28 I T R 579