1. SALEEM AKHTAR, J.-The applicant assessee has flied this application under section 66 (1) of Income-tax Act raising the following questions :-
(1) Whether in the facts and circumstances of the case the Tribunal was legally right in upholding the rejection of book results in respect of the business of manufacturing Art Silk Fabrics and the enhancement of sale and application of rate of gross profit at 25 %?
(2) Whether in the facts and circumstances of the case the rejection of book results and computation of income under the first proviso to section 13 of the Income-tax Act was supported by any material or evidence or is based merely on suspicion, surmises, and conjectures?
(3) Whether in the facts and circumstances of the case the application of 25 % as the rate of gross profit on estimated sale of Art Silk Fabrics is not arbitrary?
(4) Whether in the facts and circumstances of the case the Tribunal was entitled to rely upon the rate or gross profit allegedly shown by other manufacturers of Art Silk Fabrics without furnishing such details and particulars of those manufacturers as could have enabled the applicant to distinguish its case from those others?
2. Mr. Ali Athar has not pressed questions Nos.
1. And 3. After hearing the facts of the case we have reframed question No. 2 as follows :- Whether in the facts and circumstances of the case the rejection of book results and computation of income under the first proviso to section 13 of the Income-tax Act was supported by any material or evidence.
3. The applicant is a registered firm carrying on business of printing cloth and manufacture of art silk fabrics. For the assessm ent year 1968-69 the applicant disclosed a total turn over in printing account amounting to Rs. 10,21,887. In the silk manufacturing account the applicant showed a total turn over of Rs. 1,96,813 with gross profit of 5 %. As the questions raised relate to silk manufacturing account we will state only facts relating to this account. The Income-tax Officer was of the view that there was a fall in the rate of profit disclosed by the applicant and it had not maintained any details of manufacturing account and also details of day to day consumption of raw materials.
4. Consequently he rejected the book results and estimated the sale at Rs. 2,10,000 and applied a gross profit rate of 15%. In appeal the Appellate Assistant Commissioner confirmed the assessment order but reduced the estimate of sale to Rs. 2,00,000. The applicant then appealed before the Tribunal but order of the Appellate Assistant Commissioner was confirmed.
5. While rejecting the appeal of the applicant the learned Tribunal observed as follows :- "in this case admittedly no day to day manufacturing account or day to day production account was maintained in which case it becomes extremely difficult for the Income-tax Officer to verify the results disclosed. Merely to say that this being an excisable item and the accounts having been maintained in forms prescribed by the Excise Department, therefore, the result should be accepted cannot be tenable in view of the fact that as far as income-tax proceedings are concerned the satisfaction required by the law is that of the Income-tax Officer in accordance with the provisions of the Income-tax Act. - The Income--tax Officer cannot substitute the satisfactior of the Excise authorities which is entirely for different purpose, for his own satisfaction. In this view of the matter the manufacturing and production account as required for income-tax purpose was not admittedly maintained. The argument that merely because the excise authorities did not find any defects in the consumption and production account the account should be accepted automatically for income-tax purposes cannot be held to be tenable. As far as a production or a manufacturing activity is concerned the maintenance of day to day account of the consumption of raw materials and the production of finished goods is essential if the Income-tax Officer is to verify the results and be satisfied therefrom. In this case admittedly no day to day account of consumption of raw materials and production of finished goods were maintained. In the absence of such account and also in view of the gross profit disclosed by the assessee the Income-tax Officer was justified in rejecting the book results. It appears from the cases cited on behalf of the respondent that the gross profit of 5 % in art silk yarn is quite low in a manufacturing activity 'such as that of the assessee. Mr. Farid has cited parallel cases wherefrom it appears that gross profit at the rate of 22.5 % and 25 % was applied in a much higher turnover than that of the assessee. In this view of the matter we find no reason to interfere with the estimate of sales and the gross profit applied by the Income--tax Officer in the art silk manufacturing account and confirmed by the Appellate Assistant Commissioner."
6. The Tribunal seems to have agreed with Income-tax Officer because the applicant bad not maintained day to day manufacturing account or day to day production account and further that `the accounts were not maintained as required for income-tax purposes'.
7. Mr. Ali Athar the learned counsel for the applicant has contended that proper accounts of production and consumption as required by the Excise Regulations were maintained from which gains and profits could be deduced. It was further contended that the purchases of the applicant have not been doubted and, therefore, the book results disclosed by it can be verified.
8. The admitted position is that the applicant has been maintaining accounts regularly in the registers as prescribed by the Excise Rules which showed the production, manufacture and consumption. For this purpose the method of accounting adopted by the applicant was in the form prescribed by the Excise Rules. The Department has approached the problem from a completely different angle. The learned Tribunal observed that the manufacturing and production account was not maintained as required for income-tax purposes. The Department seems to be under the impression that some form for maintenance of accounts has been prescribed. This is not correct.
9. The Income-tax Act does not provide any form or method for maintaining the accounts. The assessee is free to choose any method for maintaining accounts provided it is regularly maintained and from such accounts proper gains and profits can be deduced. If the accounts satisfy these ingredients the assessing officer can reject it only if he is able to point out the falsities, discrepancies and faults which may render such account untrue and from which proper profits and gains cannot be deduced In these circumstances the assessing officer can reject the accounts on the basis of definite finding to that effect and proceed to exercise his jurisdiction under the proviso to section 13.
10. The assessing officer had therefore, to examine the accounts of the applicant in the manner and in the method it bad prepared under the defects as pointed out above were found. No objection could possibly be taken to the method of accounting employed by the assessee. Mr: Ali Athar has argued that from the accounts maintained the consumption, manufacture and production could be properly ascertained particularly when no wastage had been claimed. The applicant maintained the following registers . And records:-
(1) Form R. C. I. (rule 53) which is daily production Stock Account offinished goods.
(2) Form R. B. 4 (rule 47) records despatch of goods for processing d. e. Dying, printing, named as Store Room Entry Book.
(3) A. R. I (rules 9, 52, 93 and I58)-Application for removal of Excis--able goods on payment of duty.
(4) Form Rte. T. T: 3-Monthly Statement of Excisable goods manufactured
(5) Form A R. 7 (rules 96-D and 96-DD)-Application for removal and receipt of excisable cotton yarn/cotton fabrics/fabrics of manmade fibres for the purpose of processing under bond.
(6) Stock register of yarn purchased locally quality-wise-also shows-production quality-wise and closing stock of yarn.
11. The learned Tribunal while agreeing with the Income-tax Officer has not pointed out how from the aforestated records the profits and gains could not be properly 'deduced. Before rejecting the accounts the Income-tax Odder should have pin-pointed the defects. Nothing has been done except an expression of opinion that the results disclosed cannot be verified. The purchases, opening stock, manufacturing expenses were neither attacked nor found to be inflated and under- estimated. No convincing reasons with concrete examples have been given by the Department to justify the rejection of accounts. An opinion was formed by the assessing officer that the records maintained according to Excise Regulation do not satisfy the requirement of Income-tax. This cannot be the basis for rejection of accounts unless for cogent and convincing reasons the Assessing Officer comes to a definite findings that from such accounts proper gains and profits cannot be deduced. Mere non-maintenance of day to day production and consumption register by itself is no ground for rejection of accounts version. The Income-tax officer can reject the account version for non-maintenance of aforestated-registers or stock register if after taking into account all the material including the absence of such register he comes to the conclusion that profits and gains cannot be properly ascertained. Reference can be made to (1 -38) 6 I T R 36, (1954) 26 1 T R 159, (1974) 30 Tax 27, 1974 PTD 200, (1979) 40 Tax 32, (1961) 42 3 T R 237, (1974) 95 I T R.
12. 401 and unreported judgment in Reference No. 28/60.
13. The Income-tax Authorities have not attempted to follow this principle at any stage. The significant aspect of the case is that after rejecting the account results as against the declared turn over of Rs.
14. 1,96,813 it was estimated at Rs.2,10,000 which was reduced by the Appellate Assistant Commissioner to Rs. 2,00,000. This increase though nominal is neither justified nor supported by any proper finding. If the account maintained was very defective and liable to be rejected then how is it that the estimated increase is so nominal. This clearly shows how cursorily the accounts were examined.
15. The applicants had maintained the amounts in similar manner during the preceding year and had shown losses which was accepted by the Income-tax Officer. For the relevant year the Department had relied on some cases of other art silk manufacturers and on that basis fixed the rate of profit at 25 %. These comparable cases were not brought to the notice of the applicant before) relying upon it. The nature of business, the machinery employed, the location-1 and all other factors governing the accounting results were neither considere3$, nor any opportunity was given to the applicant to examine and rebut then, Identical and comparable cases can be relied upon against the assesses only when all such materials are disclosed to him and proper and fair opportunity is given to rebut it. No party cars be condemned on basis of evidence or information adduced behind his back and without any notice to him. It is true that technicalities of Evidence Act cannot fetter the exercise of power of the Assessing authority but rule of justice demands that before any adverse order, penalty or liability is passed pr imposed upon a party he should be afforded full opportunity to meat the case and rebut the evidence used against him. Mr. A. W. Faruqui the learned counsel for the Department contended that the cases were available to the applicant and it could have been examined then. This is not sufficient to meet the demand of justice. Full, fair and proper, opportunity should have been afforded to the applicant to examine those cases and rebut them, 9f necessary.
16. As such opportunity was not afforded to that applicant on the basis of such comparable cases the rate of profit claimed by the applicant cannot be rejected.
17. For these reasons we answer Questions 2 and 4 in the negative.