1. MUHAMMAD ZAHOORUL HAQ, J. These are three connected References under section 66(1) of the Income-tax Act, 1922 for assessm ent years 1970-71, 1971-72 and 1972-73. The questions are referred as under: -
(1) "Whether on the facts and in the circumstances of the case them; was any evidence before the Tribunal or any justification for accepting the book version of the assessee without rebuttal of the specific finding of I.-T. O. And reasons to the contrary?
(2) Whether on the facts and in the circumstances of the case the Tribunal was justified in admitting additional ground of appeal for the assessment year 1970-71?
(3) Whether on the facts and in the circumstances of the case there was any evidence to the contrary before the Tribunal to justify its finding for setting aside the action of the Income-tax Officer in estimating the profits by application of the proviso to section 13 of the Income-tax Act although it was not found that the I: T. O. Had acted in an arbitrary or capricious manner in exercising discretion under the Proviso"?
2. The respondent is a Corporation manufacturing yarn and cloth. It has shown sales of Rs.
2. 1,08,53.864, Rs. 1,10,40,556 and Rs. 1,47,03,389 with gross profits of 21.5 %, 15.2 f and 14.5 % for the respective years above mentioned. The Income-tax Officer considered the gross profits to be too low and therefore, hg did not accept the figures of production and sales and estimated them. He estimated the sales at Rs. 1,10,00,000 1,12,00,00) and. Rs. 1,50,00,000 for three years and applied there to rates of 22.5 %, 21 % and 20 % as gross profits. He had taken into consideration the submissions made by the assessee in respect of low figures of yarn and cloth production which were that for the year 1970-71 there had been unrest in labour and the salary of labour had increased and the count of yarn consumed in the Mills was of coarser quality than the one which were used in the previous years therefor, the square yard production of the cloth was low and so also the yarn production was low. For the next year it was submitted that there bad been strike in the Mills and therefore, production had been affected. For the 3rd year it was submitted in view of the capacity tax the Mills had produced coarser cloth which had to be exported in large quantity at a low price and for the year 1971-72 it was also suggested that the sales had gone up to Rs. 48,00,000 and in view of changed circumstances extra costs on production including labour had to be incurred. The I.T. O. Did not accept those explanations entirely as correct, but they were accepted to the extent of being responsible for some fall in the gross profits.
3. The Appellate Tribunal found as a question of fact that the accounts had been maintained by the assesses as it had been maintained during the previous years and they were of the view that there was no justification to reject the results which had been obtained from the accounts which bad been maintained like the previous year. The Appellate Tribunal observed that the I.- T. O. Had thrown out tae accounts merely because either he had no time to go into the details or he was upset by the idea that the others have shown better results. The Appellate Tribunal noted that the explanation of the appellant assessee were not controverted by the Departmental Represen-- tative and they were of the opinion that but for the adverse circumstances explained the appellant---s working results were in no manner low nor the accounts suffered from the defects attributed to them by the Income-tax Officer. The Appellate Tribunal was of the view that the accounts of the assessee would not be thrown out in the fashion as the Income-tax Officer bad done, they referred (1961) 42 I T R 370 where it was observed that howsoever low the profits may be the accounts cannot be thrown out unless they suffer from material defects or do not enable the Income-tax Officer to compute the profits properly from those accounts.
4. An important observation made by the Tribunal in this respect was that the accounts of the respondents had been certified and the explanation had been accepted by the Income-tax Officer.
5. The order of the Income-taxi Officer was therefore set aside.
6. Mr. Waheed Farooqui the learned counsel for the applicant submitted that there was no justification for the Appellate Tribunal to interfere with the discretion and past judgment assessm ent of the Income-tax Officer. We do not agree with this submission. In fact the Appellate Tribunal has the same power in respect of the rejection or acceptance of the accounts as the Income--tax Officer has and it is open to the Appellate Tribunals to take a view of the accounts quite different from one which the I.-T. O. Has taken. In this respect a reference to section 33 (4)(f ) would be relevant. The same reads as under: - "(f) As respects any other matter, if the Appellate Tribunal is satisfied that an order which is the subject of appeal ought to be interfered with; it shall cancel or vary the order accordingly and shall issue such con--sequential directions as the case may require etc."
7. The above provision makes it abundantly clear that the Appellate Tribunal is not bound by any restrictions in respect of its power for interfering with the orders of the I.-T. O. If it is satisfied that an order should be interfered with. It is quite right, as contended by Mr. Waheed Farooqui, that the satisfaction cannot be arbitrary and it is to be a reasonable satisfaction. But if the Appellate Tribunal assigns reasons for interfering with the order of the Income-tax Officer and those reasons are not capricious or arbitrary or fanciful then the Appellate Tribunal is fully justified in interfering with the orders of the Income-tax Officer. In the present cause we found that the Appellate Tribunal has assigned proper reasons for interfering with the or of the I.-T. O. In fact it was for the Tribunal to accept the explanation of the assessee. If the explanations were found to be reasonable then the same should have been accepted. The Tribunal was quite sight in its observa--tion that even the income-tax Officer had agreed with the respondents assessee that there was some justification to the-extent of one per ant fall in the gross profits on account of the reasons given by the respondents. When the I.-T. O. Had accepted that explanations given by the respondents were not completely untrue or false then in that case, there should have been some more explanation as to why those explanations were not accepted entirely particularly in view of the facts that the learned I.-T. O. Had not been able to find any defects in the accounts submitted by the assessee. In this respect the following quotation from tae order of I.-T. O. May be of some use :-- "Production of yarn and cloth has been checked from the books of accounts i.e. The production Register and also from month-wise state--ment sent to the Textile Commissioner. Report of Spinning and Weaving Masters were produced and examined--- The I.-T. O. Did not find any defects in these accounts otherwise he would have mentioned the same and, therefore, we would assume that the accounts were found to be correct.
8. In these circumstances the answer to question No. 1 should be in the affirmative.
9. In respect of question No. 2 we find that the question whether the accounts should not be thrown out was a question of law in view of the admitted position of accounts. Section 13 of Income-tax Act provides that income profits and train shall be computed for the purposes of sections 10 and 12 in accordance with the method of accounting regularly employed by the assessee. It is therefore, apparent that; if the I.-T. O. Wants to reject the accounts of an assessee then he has to- find as a question of fact that the method of accounting of the respondents' assessee in relevant year is not the same as regularly employed by the assessee during the previous year. In the present case before us there was no such finding by the I.-T. O. That the method of accounting for the relevant years was not the same as employed by the respondents' assessee during the previous years and in view of this failure of finding on the part of the I.-T. O. The Appellate Tribunal was justified in entertaining the question of law that the account could not be rejected by the I.-T. O.
10. Mr. Waheed Farooqui pointed out that the proviso to section 13 of the I.-T. Act, 1922 justified the rejection of accounts because it empowers the I.-T.O. To reject the account if he finds that the method employed is such that, in the opinion of the I.-T. O. The income, profits and gain cannot properly be deduced therefrom and then the I -T. O. Can compute the same to such manner as be may determine. Mr. Farooqui would have been quite right in his submission if the I.-T. O. Would have given reasons that it was not possible for hire to deduce the income, profits and gain from the accounts maintained. Merely reduction in gross profit for a particular year cannot justify the rejection of the accounts which have been regularly maintained and in which no defect has been found. We are, therefore, of the view that the Appellate Tribunal was justified to entertaining the additional legal ground for appeal for the year 1970-71 and therefore, this second question is also answered in the affirmative. The third question has also to be answered in the affirmative in view of the discussion in the earlier pars. Reference is invited in this respect to our judgment in I. T. A. Nos.
11. 218 t6 220 of 1973. C.I.T. v. Fateh Textile Mills decided by us, dated 16-11-1983.