FAKHRUDDIF H. SHAIKH. J. -These three direct references under section 66(1) of the Income-tax Act, 1922 thereinafter referred to as the said Act) have been filed by the same party and have arisen out of the sate order of the Income-tax Appellate Tribunal, hence they are being decided by this judgment.
2. In I. T. R. No. 72 of 1973 following questions have been referred to this Court for opinion: - "(i) Whether on the facts and in the circumstances of the case the proviso to section 13 of the Income-tax Act could be invoked and book results rejected in cotton ginning business at Chiniot?
(ii) Whether there was any material' on record for the basis adopted by the learned Tribunal for computing the income of the applicant from `Oil Milling Business at Lyallpur---? iii) Whether there was any material before the Tribunal to uphold and confirm rejection of book results, estimate of sales and gross profit rate in regard to 'Oil Milling Business' and not to set aside the assessm ent order for fresh investigation?
(iv) Whether there was any material before the Tribunal to uphold and confirm disallowance of Railway Freight and cotton expenses in 'Oil Milling Business' at Lyallpur and not to set aside the assessm ent order for fresh investigation in regard to the said Issues?"
Question No. (ii) was not pressed as it is covered by Q. No. (i). The cast relates to assessment year 1965-66.
3. In I. T. R. No. 73 of 1973 which relates to assessment year 1966-67, following questions have been referred to this Court for opinion: - "(i) Whether there was any material on record for the basis adopted by the learned Tribunal for computing the income of the applicant from 'Oil Milling Business at Lyallpur?---
(ii) Whether there was any material before the Tribunal to uphold and confirm rejection of the book results, estimate of sales and gross profit rate in regard to 'Oil Milling Business' and not to set aside the assessm ent order for fresh investigation ?"
Question No. (ii) was not pressed as I t is covered by Q. No. (1).
4. In I. T. R. No. 39 of 1973 which relates to assessment year 1967-68 the following questions have been raised: -- "(i) Whether there was any material on record for the basis adopted by the learned Tribunal for computing the income of the applicant from 'Cotton Ginning Business at Chiniot'?
(ii) Whether there was any material before the Tribunal to uphold and confirm rejection of book results, estimate of sales and gross profit rate in regard to 'Cotton Ginning Business' and not to set aside the assessm ent order for fresh investigation?
(iii) Whether there was any material on record for the basis adopted by the learned Tribunal in computing the income of the applicant from 'Oil Milling Business at Lyallpur'?
(iv) Whether there was any material before the Tribunal to uphold and confirm rejection of book results, estimate of sales and gross profit rate in regard to 'Oil Milling Business' and not to set aside the Order for fresh investigation"?
In the last mentioned case only Questions Nos. (ii) and (iv) have been pressed. Questions Nos. (i) and (iii) are already covered by Questions Nos. (ii) and (iv). Hence they have not been pressed.
5. The facts of the case are that the applicant is a private limited company having its head office at Karachi and branches at Chiniot, Lyallpur and Joharabad. In Lyallpur the company is carrying on 'Oil Milling Business' whereas at Chiniot it is carrying on ''Cotton Ginning Business'. We are not concerned with the company's business at Joharabad as the income from that business is not subject-matter of any of these references.
6. During the assessm ent year 1965-66 the applicant disclosed gross profit at the rate of 9% on sales aggregating Rs. 24,58,742 in 'Cotton Ginning Business' at Chiniot. The learned Income-tax Officer did not accept the above profit rate and made an addition of Rs. 10,1.00 to the trading result disclosed by the applicant. In respect of 'Oil Milting Business' at Lyallpur for the same year the applicant disclosed gross profit at the rate of 10 % on the sales aggregating Rs. 27,12,408. The Income-tax Officer by his order dated 9-6-1970 rejected the trading results and estimated the sales @ Rs. 27,50,000 and employed gross profit rate of 15 % thereon, as was done by' him during the assessm ent year 1964-65 and further disallowed railway freight and cotton expenses amounting to Rs. 80,206 and Rs. 14,340, respectively.
7. During the assessm ent year 1966-67 the applicant disclosed gross profit of 2 % on sales aggregating RS. 47,31,600 from his 'Oil Milling Business' at Lyallpur. The Income-tax Officer by his order dated 30-6-1970 rejected the above trading result as disclosed by the account books of the applicant and estimated the sales at Rs. 48,00,000 and employed gross profit rate of 15% thereon as was done by him during the immediately two preceding assessment years.
8. During the assessm ent year 1967-68 the applicant disclosed gross loss on sales aggregating Rs.
13,14,897 in 'Cotton Ginning Business' at Chiniot. The learned Income-tax Officer by his order dated 22nd June, 1972 rejected the trading results as disclosed by the applicant and estimated the sales of Rs. 14,00,000 and employed gross profit rate of 15 % thereon. During the same assessment year the applicant disclosed gross profit of 2 % on sales aggregating Rs. 53,17,323 in 'Oil Milling Business' at Lyallpur. The learned income-tax Officer by his order of the same date i.e. 22-6-1970 rejected the book results as disclosed by the applicant and estimated the sale at Rs. 54,00,000 and employed gross profit rate of 15 % thereon as was done by him during the immediately three preceding assessm ent years.
9. All the above three orders of the Income-tax Officer relating to the three assessment years i.e. 1965-66, 1966-67 and 1967-68 were challenged before the Income-tax Appellate Tribunal in appeal. The learned Tribunal decided all the three orders by one judgment dated 24-10-1972. The learned Tribunal accepted the findings of the Income-tax Officer and rejected all the three appeals. Hence the three references as stated in paragraph No. 1 above.
10. It has been argued by Mr. Iqbal Naeem Pasha learned counsel for the applicant that the Income-tax Officer and the learned Tribunal have erred in rejecting the versions of the account books of the applicants and fixing arbitrarily the amounts of aggregate sales and the rates of profit. He has filed certified copies of two orders of the Tribunal in I. T. A. No. 1666 K. B. 1972-73 pertaining to assessm ent year 1968-69 and I. T. A. No. 1262/ 1960-61 pertaining to assessment year 1959.60, In the first case which related to 'Oil Milling Business' the Tribunal had employed gross profit rate of 1%. In the second case which related to 'Cotton Ginning Business', the assesses has shown low profit rate which wag not accepted by the Income-tax Officer who had rejected the trading results of the account books. In appeal the Tribunal act aside the order of the Income-tax Officer, accepted the appeal holding that there was no justification for rejecting the results shown by the assessee and making any addition on account of excess or shortage. The rate or profit as disclosed by the account books of the assessee were, therefore, accepted.
11. The applicants have also filed copy of the order of the appellate Tribunal passed in respect of assessm ent year 1964-65 about the income of this very applicant Le. Messrs Saleem War and Bros.
It was held by the Tribunal in their order dated 22-2-1971 that there was no ground for the Income- tax Officer to reject the trading results as disclosed by the applicant's account books. The gross profit rate of 15 % employed by the Income-tax Officer was also rejected and the Income-tax Officer was directed to re-assess the appellant in Lyallpur Oil Milling Business' by examining parallel cases cited by the applicant. It was further held that the Bardana expenses and Railway Freights which were disallowed by the Income-tax Officer were liable to be deleted.
12. So far as the income of the assesses for the year 1%5-66 (which is subject-matter of I.-T. C. No. 72/1973) is concerned, it has been shown at Rs. 24,58,074 and a gross profit of Rs. 35,725. After adjusting 'Kapas' expenses amounting to Rs. 13,636 wrongly debited to P&L account, the gross profit has been shown as Rs. 22,089 which works act to 0.9 %. Thus an excess of cotton to the extent of 1,655 maunds has been shown, but the cotton- seeds shortage of 118 maunds has been shown. The income-tax Officer was not satisfied with the book results disclosed as above by the assesses in respect of the 'Cotton Ginning Business' and rejected the same with the following observations "The assesses has not been able to reconcile this excess and the shortage. It seems that the accounts maintained by the assesses are defective as a result of which full control cannot be exercised on the purchases and sales and consumption of various materials."
Consequently the Income-tax Officer added Its. 10,000 in this account.
13. In respect of 'Lyallpur Oil Milling Business' also for the above year the book results as disclosed in paragraph ho. 6 above, were rejected by the Income-tax Officer with the following observations: - "No oil manufacturing account has been maintained by the assesses. There is no record of finished product on any particular date. Moreover, the closing balance shown in various accounts are not at all reliable e.g. In Cotton 124-F, the closing stock has been shown as 580 Mds. In the stock register whereas actually there was no balance in the stock. In Ac-134 account, the closing stock has been shown at 8 Bags while actually there was no balance. Similarly in LSS. The closing stock has been shown at 156 bags (234 Mds.) while at the time of physical stock-taking there was no balance. There is no evidence of day to day consumption of raw materials and production of oil and oil-- cakes."
He further held that in view of the above defects no reliance could be placed on the assessee's version of account books. He, therefore, estimated .The sales at Rs. 27,50,000 and applied gross profit rate of 15 % thereon.
14. So far as the took results shown bar the assesses in respect of the subsequent two assessment years i.e. 1966-67 and 1967-68 which are subject---matters of I.-T.C. No. 73/1973 and I.-T. C. No. 39/1973, respectively) are concerned the Income-tax Officer had rejected the same in pursuance of the first proviso section 13 of the said Act, for almost the sane reasons as the book results of the first year.
15. The learned Tribunal also agreed with the findings of the Income-tax Officer mainly for the reasons that the assesses did not maintain' stock-register, that purchases and sales were not verifiable and that the day to day production records fair the Oil Manufacturing were not forthcoming. The explanation submitted by the assesses for the excess and shortages was not found satisfactory. The assesses had also brought to the notice of the learned Tribunal- its previous order dated 22-2-1971 in respect of the assessment year 1964-65 for the same two mills whereby the order of the appellate Assistant Commissioner was set aside, the order of the Income- tax Officer estimating the gross sales at Rs. 19 lacs and the application of gross profit rate of 15% was not accepted and the case was remanded to tee Income-tax Officer for re-assessment of the income ; but the learned Tribunal did not consider the implications of the above judgment, although it related to the same party and to the income from the same two Mills i.e. 'Cotton Ginning Mill' at Chiniot and 'Oil Mills' at Lyallpur. It was also brought to the notice of the Tribunal that in the previous year i.e. 1964-65 the Tribunal had also ordered deletion of disallowance in respect of Bardana expenses and Railway Freights. This fact was also not taken into consideration by the learned Tribunal while passing the impugned order in respect of the three assessment years under consideration.
16. It has been argued on behalf of the applicant/assesses by Mr. Iqbal Naeem Pasha Advocate that the learned Tribunal misdirected itself in upholding the rejection of account versions and in confirming the addition etc. In the trading results made by the Income-tax Officer. It was urged that the assessee was not supposed to maintain day to day records of sales and purchases and that the stock-register had been properly maintained and the entire purchases were vouched and verifiable except some petty purchases. It was also argued that the learned Tribunal had ignored the explanations which were submitted in support of the shortages and excess as pointed out by the Income-tax Officer.
17. The learned counsel has referred to section 13 of the said Act and argued that as the assesses had employed regular method of accounting, hence the Income-tax Officer was not employed to reject the trading results and to arbitrarily estimate the amount of gross sales and the rate of profits. It would be advantageous to refer to the relevant provisions of section 13 of the Act which are as under: - "13. Method of accounting. -Income, profits and, gains steal computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assesses: Provided that, if no method of accounting has been regularly or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly deducted therefrom then the computation shall be made upon such basis and in such manner as the Income-tax Officer way determine."
18. Mr. Iqbal Naeem Pasha has also referred to the case of Muhammad Textile Mils Ltd v.
Commissioner of Income-tax (East) Karachi (1982) 45 Taxation 140, which was decided by a Division Bench of this Court. It was held in this case that if the assesses had employed a regular method of accounting and the accounts were maintained regularly, the Income-tax Oilier was not entitled to reject the book results without finding any Raw, defect or discrepancy in the accounts. It was further held that even in cases where the accounts or the methods employed were rejected as being such that true income could not deduced from it, the Income-tax Officer could not merely adopt a flat rate or make addition in the income arbitrarily and that he is required to base such additions on material or evidence of which due notice must be given to the assesses.
19. In a later ease of Roshan Cloth House v. Commissioner of Income-tax (East) Karachi 1983 PTD 63, it was held by this Court with reference to suction 13 of the Act as under: - "A barb reading of the above provision of law (section 13) shows that income, profits end gains are to be computed for the purposes of sections 10 and 12 of the Act In accordance with the method of accounting regularly employed by the assessee. The Ist proviso to section 13, however, authorises the Income-tax Officer to make computation on such basis and in such manner as he may determine in cases where assessee has not employed any regular method of accounting or the method of accounting employed is such that the profits and gains cannot be properly deduced therefrom. In the case before us the admitted position on record is that the applicants were assessed to income-tax for several years before the assessment year 1964-65 and the method of accounting employed by them was' not objected to by the department on any ground. It is also not the case that for the assessm ent year 1964-65, the applicant bad used the method of accounting which was different from the previous years."
In view of the above position it was held that the addition made arbitrarily in the gross profits for the assessm ent year under reference was not justified.
20. Reference has also been made to the case of Mian Ghulam Murtaza v. Commissioner of Income-tax, Lahore 1981 PTD 180, in which a Division Bench of the Lahore High Court held that in making assessm ent under the proviso to sec--tion 13 of the Act, the Income-tax Officer has to- act on some rational basis and cannot lay hand on irrelevant material.
21. In the light of the above observations made from time to time by the High Courts in respect of the proviso to section 13 of the Act, it is to be seen whether the Income-tax Authorities in the present cases have acted properly. Reference has already been made to the assessment order for the year 1964-65 and the order of the Tribunal in respect of the same year to which it was held that this very assessee had been employing regular method of accounting. It also transpires from the order pertaining to the preceding year that the gross profit rate of 15 % was arbitrary and not justified. It has not been held by the Income-tax Officer or the learned Tribunal in the impugned orders that the assessee had not been employing regular method of accounting during the assessm ent years under consideration. From the impugned orders it further transpires that no rational basis has been adopted either by the Income-tax Officer or by the learned Tribunal in fixing the amount of gross sales and employing profit rate of 15 %. Moreover expenses in respect of Bardana and Railway Freights which were deleted in the assessment year 1964-65 were disallowed during the assessm ent years under consideration without any cogent reasons. Even parallel cases cited by the assessee were not considered.
22. Mr. Nasrullah Awan learned counsel for the Department is unable to satisfy us as to how the Income-tax Officer and the Tribunal were justified in estimating the amount of sales and rate of gross profits arbitrarily. He has also been unable to show whether there was any rational basis for adopting the above method or whether the income-tax Officer was, under the circum--stances, empowered to take advantage of the proviso to section 13 of the Act. He has also been unable to explain as, to why the expenses in respect of Bardana and Railway Freight which were allowed during the assessm ent year 1964-65, were disallowed during the years under consideration.
For the above reasons we are unable to sustain the order of the learned Tribunal and consequently answer the questions referred to us in the following manner: - I. T. R. No. 72 of 1973 Q. No. (i)-In the negative.
Q. No. (ii)--Not pressed, as it is covered by Q. No. (iii).
Q. No. (iii)-In the negative.
Q. No. (iv)-In the negative.
I. T. R. No. 73 of 1973 Q. No. (i)-In the negative.
Q. No. (ii)--Not pressed as it is covered by Q. No. (i).
I. T. R. No. 39 of 1973 Q. No. (ii)--In the negative.
Q. No. (iv)-la the negative.