1. SALEEM AKHTAR, J.-The assessee has filed this application under section 66(I) of the Income-tax Act, raising the following questions:
(1) Whether to the facts and circumstances of the case there was any material or evidence to support the action of the Income-tax Officer in rejecting the book results particularly as he himself has found that books of accounts were properly maintained and the purchases were vouched and verifiable ?
(2) Whether in the facts and circumstances of the case the Tribunal was legally justified in upholding the addition of Rs. 35,000 out of medicine purchases even though as much as Rs. 37,862 represented machines purchased for patients and charged in the bills ?
(3) Whether in the facts and circumstances of the case the disallowance of Rs. 35,000 out of medicine purchases arbitrary and cap--ricious ?
2. The applicant is an individual deriving income from medical practice. He started his clinic in the name of Saeed Clinic in the middle of financial year 1966-67. The applicant had employed method of accounting whereby receipts were entered only when actual payment was received, but for purchases made either on behalf of the clinic or on behalf of the patients the amount used to be entered as and when purchases were made, whether actual payment was made or was not made.
3. 1n the accounting year ending 30th June, 1967 corresponding to the assessment year 1967-68 the applicant filed a return of income including the income of the clinic based on the method of account adopted by him. The Income-tax 09icer accepted the method of accounting and also the trading results of the clinic. For the accounting year ending 30-6-1968 assessment year 1968-69 the applicant filed his return or income on the basis of method of accounting adopted by him declaring the net income of Rs. 47,308 including the income of Saeed Clinic. The Income-tax Officer while assessing observed that the books of account have been properly maintained. Receipts, counterfoils and purchase vouchers were also pro--duced for examination: The receipts were accepted. He also observed that the purchases were vouched and verifiable. He, however, disallowed Rs. 20,000 out of the salary paid. He also held that medicine expense claimed this year as against Rs. 5,416 claimed for the earlier year was disproportionately high. He disallowed Rs.
4. 35,000 out of the total medicine purchased on the ground that the stock register was not maintained.
5. In his application the applicant has stated that the purchases of medi--cine were of two kinds, namely (i) purchases made for patients on the basis of prescription of the doctors and (i) purchases made for the use of the clinic such as cotton wool, gauze, iodine, either etc. For the first kind of purchases the purchase price id required from the patients and is included in their bills. If the amounts of the bills are received be--fore the end of accounting year they are duly entered therein and accounted for. If however, the amounts of the bills are not received 'before the end of the accounting year, they are accounted for when they are actually received. For the second kind of purchases no separate charge is made from the patients and it is provided as a part of the service rendered by the Clinic Out of total Purchase of medicines of Rs. 53,684, Rs. 22,293 represent purchases made for patients who had paid, their bills before the end of account year,Rs. 15,569 related to purchases made for patients to whom bill were issued but they had paid it during the accounting year and Rs. 15,242 were for the purchase of medicine made for the use of the clinic.
6. The applicant, filed an appeal before the Appellate Assistant Com--missioner, Income-tax, who reduced the disallowance from the salaries paid from Rs. 20,000 to Rs. 7,500. For the addition made on account of medicine purchases disallowance of Rs. 20,000 as against Rs. 35,000 was upheld.
7. The applicant and the respondent both filed appeals before the learned Tribunal, who by order dated 24th May, 1971 allowed the applicant's appeal only to the extent of deleting the additions made on account of salaries paid. The applicants plea with regard to disallowance of Rs. 20,000 out of the medicine purchases was not accepted and the appeal of the Department on this point was allowed thereby restoring the disallowance of Rs. 35,000.
8. The respondent filed his reply on 18th May, 1975 as follows :-- "The facts stated in the application are correct. No question of law arises out of the Tribunal order."
9. In view of this reply there is no dispute about the facts stated by the applicant in his application which have been stated above.
10. Mr. Aid Athar, the learned counsel for the applicant has not pres--sed Question No. 3. The learned counsel has contended that the only dispute is in respect of medicines purchased by the applicant amounting to Rs. 15,242. It was further contended that the Income-tax Officer had accepted the account books as proper and the purchases vouched and verifiable therefore the use of medicine worth Rs. 15,242 as specified above cannot be disputed, Mr. Ali Athar has further contended that these medi--cines worth Rs. 15,242 were used for clinic purposes and they are in--cluded in the overall charges of the clinic without specifically mention these medicines which include cotton, wool, gauze, iodine, either etc. According to the learned counsel it is not possible to maintain any register for showing their use as it is simply impossible. In this re--gard, the learned Tribunal has observed that the detect in accounts in the consumption and purchases of medicine were admitted before the Appellate Assistant Commissioner, who without recording any facts or circumstances mitigating these defects reduced the disallowance of Rs. 35,000 to Rs. 20,000. The learned Tribunal also observed that the claim was high and disproportionate to the claim that the claim was high and disproportionate to the claim made in the previous assessment year and in the absence of stock register or purchase register their consumption is unverifiable.
11. We have gone through the order of the Appellate Assistant Commissioner, but do not find that any such admission regarding defect in account has beta made by the applicant. In fact from his order it seems that the stand taken by the applicant was the same as before us. The main reason which has compelled the learned Tribunal to reject the claim of the applicant is the absence of stock register and purchase register.
12. Mr. Ali Athar, has contended that considering the nature of the consumption, it is not possible to maintain stock register or consumption register for such medicine. The learned counsel has referred to (1934) 2 I T R 305 where the Company never used to keep stock register and the refusal of the Income-tax Officer to accept account was not due to any error in the method of accounting, but because he considered the profit to be unreasonably low, it was held that the Income-tax Officer was not justified in making any assessment under the proviso to section 13 of the Income- tax Act. In the present case, the method of accounting employed by the applicant was accepted in the past year, and it has not been rejected even this year. The Income-tax Officer was satis--fied with the account except that the stock register and consumption register for medicine used in the clinic were not maintained. Out of the entire purchases of Rs. 53,684 the medicine worth Rs. 15,242 used in the clinic is the none of contention. Considering the nature of medicine and the manner it is used it may not be possible to maintain a consumption register. This has clearly been asserted in the statement of fact filed by the applicant and has been admitted by the respondent. In the face of this admitted position and as the purchases are verifiable it can be assumed that a record such of consumption could not possibly be maintained. In these circumstances when proper method of account has been employed by the applicant and the only defect pointed out is the register which cannot be maintained, can the Income-tax Officer disallow tae medicine expenses? Reference has been made to (1974)
30. Taxation 67 where the assesses was engaged in the business of manufacturing bars from iron scrap and billets. The method of accoun--ting adopted by the assessee was on the same line as in the preceding year which was accepted by the Department, but due to non-maintenance of stock register and a manufacturing account and abnormal decrease in rate of gross profit with reference to previous year's rate, the assessee's account was not accepted. It was held that there is nothing to indicate either in the order of the assessing officer or the Tribunal that it was feasi--ble and practicable in the line of business in which the assessee was en--gaged, to maintain a regular stock register, or a manufacturing account or that other person engaged in such business maintaining stock register and if in the past similar accounts were accepted there was no valid reason to hold that it was not possible to deduce therefore the assessee's rate of profit.
13. The principles of this case equally apply to the present case. The Tribunal or the Assessing Officer has not held that the method of account--ing though accepted for the previous year cannot be accepted for the sub--sequent year. It has not been pointed out in what manner the record of medicine used in the clinic could be maintained nor it has been stated that in other hospitals of similar nature record for consumption of medicine in clinic is maintained.
14. The learned counsel has also referred to (1954) 26 I T R 159 and (1982) 45 Taxation 140 where it was held that if the assesses had employed a regular method of accounting and the accounts were maintained regularly, the Income-tax Officer is not entitled to reject the book result without finding any flaw, fault or discrepancy in the accounts.
15. The assessee is at liberty to choose the method of accounting and so long the income, profits and gains can properly bb deduced therefrom, the income-tax Officer can hardly reject it. However if the method of accounting regularly employed does not correctly show the profits the Income-tax Officer can discard it. Before embarking upon assessment under the proviso to section 13 the Income-tax Officer has to give definite find--ing about the defects, deficiencies, irregularities and falsities in the accounts. Where proper and regular account book has been maintained which are not found to be incorrect merely because stock register has not beet main--tained it would not be sufficient to justify action under the proviso to section 13. Reference can be made to (1954) 16 I T R 159.
16. For these reasons we reply Questions Nos. 1 and 2 in the negative.