HAIDFR ALI PIRZADA, J.-The assessee has filed this application under section 66(1) of the Income- tax Act, 1922, for our opinion on the following questions of law said to have arisen from the order dated 20-11-1973 of the Tribunal.
(1) ---Whether in the facts and circumstances of the case the Tribunal was right in upholding the rejection of book results and computation of profits under the first proviso of section 13 of the Income-tax Act?
(2) Whether these was any evidence or material on the record to entitle the Income-tax Officer to reject the book results and make the computation under the first proviso to section 13 by estimating the sales and applying a flat rate of gross profit?
(3) Whether in the facts and circumstances of the case the Tribunal was right in holding that "even if one transaction was found to be of a suspicious nature, the account version became unacceptable?
(4) Whether in the facts and circumstances of the case the unverifiability of a small proportion of cash sale could, in law be a ground f c rejecting the book results particularly when the rates at which sales were made to such allegedly unverifiable parties were the same as the rates at which sales were made to verifiable parties?
(5) Whether in the facts and circumstances of the case there was any material or evidence on the record in support of estimating the sale at Rs. 19,00,000 and applying a rate of gross profit of 20% thereon or whether the estimate of sale and the rate of gross profit applied by the Tribunal is arbitrary, unsupported by evidence?"
2. The applicant is a private limited company engaged in the manufacture of various kinds of paints and varnishes at Karachi. For the assessment year 1970-71, the accounting period being from 1-1-1969 to 31-12-1969, the assessee filed a return showing loss of Rs. 96,767. The applicant's account books disclosed total sale of Rs. 18,42,288 on which a gross profit of Rs. 1,88.778 was declared which worked out to 10.2%. The Income-tax Officer noted that he rate of gross profits showing in the year was lower than the rates shown in the immediately preceding year add was even lower than the prior to the preceding years which are as follows:- "1968-6918.3% 1969-7025.6%
3. The Income-tax Officer required the applicant to explain the reasons for the lower gross profits.
The applicant submitted the following explana--tion .
"(1) Excess amount spent on purchase of bonus vouchers,
(2) Export rebate receivable in the year was received in 1970,
(3) Increase in price of raw materials,
(4) Octroi and freight paid on finished goods due to imposition of Excise Duty on retail price from July 1969,
(5) Increase in cost of metal containers due to imposition of excise duty, and
(6) Extra discount paid to the agents as compared to the preceding yes.
4. The Income-tax Officer, however, observed that the reasons at serial Nos. 1, 3, 4 and 5 were of general nature and since have effected all paint manufacturers equally. He further observed that cases of other paint manufacturers have been examined and it is found that almost all of them have shown the gross profit rate of about over 25 % for the year under consideration. He served a notice on the applicant stating his intention to reject the book version and. Apply a gross profit rate of 25 % on estimated sales. The applicant submitted a letter disputing this treatment. The full addresses of six parties were provided in the attached statement. The Income-tax Officer issued letters to those six parties which were returned with remarks "not traceable" from the postal authorities. The Income-tax Officer also issued letters to other parties out of them only one acknowledged the letter. The parties did not send any reply. On this basis the Income--tax Officer drew the inference that it is safe to assume that the bulk of assessee's sale is unverifiable. He found no other defect in the books of accounts maintained by the assessee. Accordingly the book results were rejected and sales were estimated at Rs. 20,00,000 on which a gross profit rate of 25 % was adopted.
5. The assessee preferred an appeal before the Tribunal. The Tribunal reduced the estimate of sales from Rs. 20,00,000 to Rs. 19,00,000 and the profit rate of 20% by order dated 20-11-1973.
6. Mr. Ali Athar, learned counsel appearing for the assessee has raised the following contentions:-
(i) That there was no evidence or material on record to entitle the Income-tax Officer to reject the book results and make the computation under the first proviso to section 13 of the Act.
(ii) That the principle of natural justice was violated as the Income-tax Officer and the Appellate Tribunal relied upon the other manufactures of Karachi without disclosing the names of those paint manufacturers.
(iii) That the Income-tax Officer and the Tribunal had allegedly drawn an adverse inference against the assessee from non-availability of the customers of the assessee.
(iv) That the Income-tax Officer and the Tribunal have rejected the documents including account books filed by the assessee arbitrarily and without assigning any cogent valid reasons.
7. Before dealing with the points raised, on behalf of the assessee, we would consider as to what are the limitations on this Court from interfering with the findings of fact recorded by the Tribunal. It has been 'held by the superior Courts, that the Court would be entitled to intervenche if it appears that the fact finding authority acted without any evidence which cannot reasonably be entertained or the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination reached.
8. Keeping in view of the legal position which has been explained in the decisions of superior Courts we now proceed to consider the con--tentions which have been raised on behalf of the applicant.
9. It is an admitted position that there was absolutely no material either before the income-tax Officer or before the Income-tax Appellate Tribunal to show that the rate at which the goods were sold to those six parties are not the same at which the goods have been sold to verifiable parties. It was contended that the retail sale price of all the items produced by the applicant were fixed and excise duty was paid on those prices.
10. The Income-tax Officer has not reached any finding about the quality of goods sold to the alieged unverifiable parties with the rate of sale sail also the names of verifiable parties to whom also same goods were sold at the same rates. He bas simply observed in his order as follows "By all canons of justice, the onus is on the assessee is to the prove the authenticity of his version.
He was given sufficient opportunity to prove that the sales made by him were to genuine parties at the rates actually showing the sales vouchers. As stated, he has failed to prove the genuineness of his sales."
11. The above observation made by the Income-tax Officer shows that he had no suspicion about the rate of sale. The applicant produced certificates from all those six parties confirming the sale and the rates which the Tribunal saw but did not keep on record.
12. The Income-tax Officer held that the sales have registered an increase of about 25 %, the gross profit rate has dropped down by more than 60 % even without taking the applicant's income into consideration. The Income-tax Officer observed as follows:- "The main burden of the assessee's explanation is that he had to sell his product at a much lower rate by giving extra discount to his customers so as to stay in competition with the bigger manufac--turers. In view of the unverifiable nature of these sales it was not possible to ascertain the correct amount of discount allowed by the assessee."
13. The above observation made by the Income-tax Officer shows that evidently he bad no suspicion about the extra discount allowed to the agents as compared to the preceding years. The Income-tax Officer merely rejected the same due to unverifiable nature of those sales. The Tribunal, however, without material before it has reached a finding that similarly, it was the responsibility of the applicant to establish that in this year, extra discount had been paid to the selling agents, as compared to previous years. It is significant to note that the Tribunal has not indicated as to how it was possible for the assessee to establish that extra discount had been paid to the selling agents. It is manifest that the finding of the Tribunal that the onus could not be deemed to have been discharged merely by staking entries in the books of account.
14. The real ground for applying the proviso to section 13 was the gross profits disclosed by the book results appeared low and compare unfavourably with those of others in the same line of business or of gross profits of preceding years were high. It is true that the gross profits disclosed by toe applicant's accounts were low. That by itself was no enough to reject the system of accounts maintained by the assessee. Low gross profits should certainly put the department on enquiry to verify if the entries in the accounts books were spurious or to verify if the system of accounts itself was defective which made it impossible to accept the books results as disclosed the true profits of the applicant. In other words, on the only ground that the grass profits were low and compared unfavourable with preceding years and with those of other manufactures, the system of accounting adopted by the applicant cannot be rejected. What the proviso to section 13 required is that the system of accounting adopted by the assessee is defective.
15. Now, the Income-tax Officer in not accepting the book results of the applicant proceeded mainly on the ground that in respect of 15 purch--asers who were contacted, only one has verified the assessee's amounting version. The applicant furnished full addresses of the purchasers; The Income-tax Officer issued letters to them and out of fifteen purchasers, six letter have been received back with the remarks "not traceable" from the postal authorities. As regards the known and verifiable parties, only Messrs Naveed Enterpriser, Lahore, have acknowledged the sales made by the applicant. The applicant placed six certificates issued by the pur--chasers before the Tribunal during the course of arguments and the Tribunal saw the certificates but did not keep on the record. It is contended by Mr. Ali Athar the learned counsel for the applicant that the Income- tax Officer did not summon the purchasers as provided by section 37 of the Act. The Income-tax Officer did not apprise the applicant about being no traceable some of the purchasers. No opportunity was given to the applicant for producing and/or making available their addresses to the Income-tax Officer. The applicant was condemned unheard. It appears the no explanation had been called for from the applicant in that connection. It was not found by him that there were other reasons for not accepting the `said sales, such as for instance the sale being at lower rates than that wet not compareable with the other verified sales which the applicant had mad during the relevant period. In those circumstances, the reasons given by the Income-tax Officer for rejecting the book results shown by the applicant account books cannot be accepted as good and sufficient. In our opinion therefore, the rejection of the results of the applicant's account books by the Income-tax Officer was not at all justified merely on tie ground that the of the sales is unverifiable and consequently, the finding is not acceptable. The Tribunal, it appears, has approached the matter on certain surmises and conjectures. The Tribunal observed that it would be repugnant to the ordinary standards of human behaviour, specially in these days, to say that, a manufacturer had spent more on producting an article but earned loss on its disposal. It further observed as follows:- "Similarly, in respect of other sales, made to persons in Karachi, Lahore and Rawalpindi, the contention put forth on behalf of the appellant, was that, some of the persons were, in fact, available and could be produced to corroborate the disclosed version. As has been observed above, some of the sales still remained unverifiable and even if one transaction was found to be of a suspicious nature the account version became unacceptable."
16. The Appellate Tribunal was strongly influenced by the fact the even one transaction was found of a suspicious nature the account version became unacceptable.
17. These in our view, are irrelevant considerations, and since the decision' of the Tribunal was based on these irrelevant considerations the answer on the question must be in favour of assessee.
18. According to Tribunal, although the entries in the account book of the applicant appeared to be alright ostensibly, the applicant could no merely rely on the said entries but had further to show that the transaction entered in the books were true and genuine. Since in the present case the Income-tax Officer dispatched letter to a number of customers, whose names anti addresses were supplied by the applicant only one out of 15 could be con--tacted; most of the remaining purchasers could not be traced. The Appellate Tribunal was strongly influenced by the fact that even one transac--tion was found of a suspicious nature, the account version become un- acceptable.
19. Now we will consider the point No. 2 that the principle of natural justice has been violated as the I. T. O. And the Tribunal relied upon the other manufacturers of Karachi without disclosing the mates of these manufacturers.
20. The Income-tax Officer and the Tribunal have placed reliance upon other paint manufacturers during the relevant period for the purpose o arriving at the findings that the gross profit rate was low. The names o the other paint manufacturers are not to be found either in the order o the Income-tax Officer or in the order of the Tribunal. The fact that the names of these paint manufacturers were not disclosed to the applicant at any stage is an admitted position. It has, therefore, been rightly contended on behalf of the assessee that the principle of natural justice has been violated insofar as reliance has been placed by the Income-tax Officer and the Tribunal on the gross profit rate of those manufacturers have been showed about 25% or above. Had the names of those manufacturers have been disclosed to the applicant, it would have been able to show the reasons for the high percent of gross rate. It is well-known that the quantity of paint manufacturers even manufactures in the same area is not constant but are variable according to availability of raw materials and other factors. In our opinion the applicant was as substantially prejudiced as the names of the paid manufacturers on whose gross profit rate was placed by the Income--tax Officer and the Tribunal were not disclosed to it. We, therefore, hold that the inference drawn by the income-tax Authorities about the low percentage of the applicant on the basis of somewhat high gross profit rat of other manufacturers or in the preceding years was not a valid inference as such it is not sustainable.
20. We now proceed to consider the point No. 3. As provided tinder the rules of the Central Excise Rules, 1944, every owner of the factory producing paints and varnish is required to maintain register of daily manufacture. The registers which were maintained by the assessee were to he verified and initialed by officers of the excise department. It appears from the order of the Income-tax Officer that the books of account were rejected simply on the ground that the bulk of the sales is unverifiable. The observation of the learned Tribunal in connection with the sales of the articles and extra payments of discounts had been quoted in earlier paragraphs. From this observation it appears that the Tribunal rejected books version because the sales and the extra discounts were not proved by the assessee. The Tribunal has treated the entries in the books of account as subsidiary. It is difficult to comprehend the reasoning of the learned Tribunal when actually the sales receipts and extra discount pay--ment to the agents could not be primary evidence of the fact of actual sales and fact of actual extra discount payments by the assessee-Company. Under the circumstances, if one wants to verify the sales to the customers and extra discount payments to the agents he should rely on the entries on the books of account and not on the vouchers. We are of the opinion that it was the duty of the Tribunal to examine each of the registers and accounts books furnished by the: assessee before rejecting them.
21. We now proceed to consider the point No. 4. In our opinion, the applicant's account books are to be accepted unless, on verification they disclosed any fault or defect, which cannot be reasonably and satisfactorily explained. All the other transactions were accept few unverifiable sales. The total sales alleged to be unverifiable came to only Rs. 44,328 against the total sales of Rs. 18,42,288. As to these transactions also the quantity of paints and varnish sold has not been disputed. The rate sat which those articles were sold were not such as would excite suspicion by reason of being lower than tire verifiable sales. The names of the customers are also entered in respect of the transaction. There are no circumstances disclosed in the case nor is there any evidence or material on record which would justify the rejection of the book results. Mr. Ali Athar relied on the case of Messrs S. M. Yousuf & Sons v. C. I. T. (East Karachi) 1974 PTD 45 it was held:-- "With regard to the expenses, the Tribunal held that only some of them were not vouched or verifiable. The findings of the Tribunal would show that the Tribunal in fact accepted the method of accounting employed by the assessee's books of accounts. But the Tribunal felt dissatisfied only with some of the cash which were not verifiable and some of the expenses which were either not vouched or not verifiable. But nowhere either in the order of assessing officer, or in the order of the Appellate Tribunal, it has been found as to what is the proportion of the unvouched and unverified cash sales to the total cash sales or the proportion of unvouched or unverified expenses to the total expenses incurred by the assessee in the purchase of wool from various sources and in processing the wool for the purpose that it may be properly marketed. Unless such proportion is substantial, that is such proportion as to create doubts with regard to the genuineness of the assessee's accounts, it may not ordinarily be proper to reject outright with results of the books of accounts with regard to unverified cash sales or unvouched or unverified cash expenses."
22. The above observation made by a Division Bench of the Erst--while High Court of Sind-and Baluchistan, supports the contention which has been raised on behalf of the applicant that it may not ordinarily be' proper to reject outright the results of the books of account with regard to unverified cash sales or unvouched or unverified cash expenses.
23. On the other hand, Mr. Shaikh Haider the learned counsel for the department has urged that in the present case Tribunal examined at great length each and every submission advanced by the applicant and based their conclusion on the material brought on record. The findings of the Tribunal cannot give rise to question of law. He placed reliance in support of his arguments to a case of Ibrahim & Sons v. C. I. T. 1979 PTD 1.
24. The brief facts of the case are that the purchaser of cotton-seeds amounting to Rs. 25,65,207 in respect of 1,46,824 Maunds were shown from as many as 23 parties. The Income-tax Officer, however, came to the conclusion that verification could be made in respect of 8 parties and accordingly he concluded that purchasers were recorded in fictitious names to inflate the cost.
Ultimately, the Income-tax Reference was filed in this Court. A Bench of this Court held as follows:-- "In the present case the Income-tax Officer had applied his mind to the question of sales and upon cogent reasons as mentioned in the foregoing part of this judgment come to conclusion that sales were fictitious and that the purchasers were not established to be in existence. The whole question was once again re-examined in appeal by the Appellate Tribunal which also assigned good reasons for maintaining the findings of the assessing officer."
The case is distinguishable as there is no finding by the Income-tax Authorities in this case as to the non-existing of the parties and or the sales were fictitious.
25. Mr. Shaikh Haider has also cited case of Miss Asiya v. Income-tax Appellate Tribunal ere. PLD 1979 SC 949. The facts were that the petitioner-assessee had filed certificates allegedly issued by the producer showing receipts for her performance as an artist its some of the films. She did not produce the certificates in respect of all the films in which she appeared as an artist nor were they backed by contemporaneous agreements binding on the parties in the matter of due performance of these contracts. The Income-tax officer in his own judgment seas not finally satisfied with their authenticity. The Appellate Tribunal had examined at great length each and every submission advanced before them by the assessee and had based their own conclusion on the material brought on the record. The Hon'ble Supreme Court held as follows:-- "The assessing officer was not bound to rely on all the evidence pro--duced 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 unreli--able, 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 ref. Baghat Halwai) S. I. T. C.
48. In this connection in Ganga Ram Balamokand v. Commissioner 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 the assessee 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 Income-tax Authorities alone. If, therefore, it is once decided by them that the accounts are fictitious or unreliable, their findings cannot be disputed unless it is altogether capricious and injudicial.
From the above discussion we are convinced that the Income-tax Authorities in exercise of their judicious discretion have concurred in finding for very valid reasons assigned by them that the certificate in dispute produced by the assessee did not inspire confidence and could not be relied upon in determining the receipts of the assessee made during the two assessment years in question, the Assessing Officer bad made assessment to the best of his judgment in the light of material before him. The appellate order passed by the Appellate Tribunal is concluded by the finding of facts and does not give rise to any question of law worth reference to the High Court."
26. The above cases which were relied upon by learned counsel foe the department are not applicable to the facts of the present case as there is no finding of the Income-tax Officer or the Income-tax Appellate Tribunal, that the accounts are false and unreliable.
27. We find that the instance reference application was filed directly by the assessee in this Court under section 66 of the Act as amended by the Finance Ordinance, 1971, and the facts stated by the assessee in the "statement of facts" as stated in the application have not been controverted and did not submit in writing a reply to the application at least seven days before the date of hearing. In accordance with the averments made by the assessee in the "statement of facts" and as argued by the learned counsel that there was no material before the income-tax Appellate Tribunal to reject the account books and .It would be legitimate to assume that in the charge year under consideration the decision of the Tribunal is erroneous, based merely on suspicions, cojectures and unless such proposition is sub stantial that is such proportion as to create doubts with regard to the genuine ness of the assessee's accounts, it may not ordinarily be proper to reject out--right the result of the book of accounts with regard to unverified cash sale or unvouched or unverified cash expenses. In this view of the matter, the gross profit rate to be fixed at 20% cannot be sustained.
Our answers to the questions are, thus, in favour of the assessee---applicant. In the circumstances of the case the parties shall bear their own costs.