MUHAMMAD ZAHOORUL HAQ, J. -There are three connected References where the following two questions have been raised:
(1) "Whether on the facts and in the circumstances of the case there 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 them 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. Bad acted in an arbitrary or capricious manner in exercising discretion under the proviso ?"
2. The respondent was assessed for the years 1970-71, 1971-72 and 1972.73. The accounts of the respondent were not accepted by the Income tax Officer .Gin the grounds that there was lesser gross profits of 18.4% against 26.5% of the previous year. Explanation was called for from the respondents who gave a number of explanations. One of was that the Com--pany had purchased locally manufactured cloth for the purpose of processing to the extent of Rs. 78,01,583. While in the previous year they purchas--ed the cloth of only Rs. 58,27,184 for the purpose of processing and they claimed that there was lesser profit in the processing of the cloth than in the manufacturing of cloth. It was also claimed that for the year 1970-71, the period of business was of 9 months only. It was further claimed that on account of political disturbances, labour strikes and unrest, the wages and salary had been raised which resulted in higher cost of production. Lastly it was explained that the cost of cotton had increased from Rs. 90 per maund to Rs. 106 per maund. The Income-tax Officer rejected the accounts of respondents on the ground that loss provided En the parallel cases similarly situated was 22.5 % and, therefore, the rate of gross profit of the respon--dents did not appear to be convincing. He did not give the particulars of these parallel cases where the gross profit was shown to be maintained. Any important observation in the order of I.-T. O. Was that the Books of Account were kept on the same lines as discussed in the order of earlier years and that all necessary details had been obtained and examined. The I.-T. O. Observed that there was a shortfall to the production of cloth per pound of cotton. The respondent explained that the shortfall in the production of cloth was due to different quality of cotton used.
3. The respondent appealed to the Income-tax Tribunal and the Income--tax Appellate Tribunal allowed. It's appeal by a well-considered judgment. Tribunal observed that they were surprised on the action of Income-tax Officer in rejecting the account in such circumstances in an entirely summary manner and only with generalized observations. The appellate Tribunal took into consideration the reasons given by the I.-T.O. In respect of the rejection of account. The Tribunal noted the argument of the asses-see that Income-tax Officer had not given the details of the parallel cases where the gross profit was shown to be more than that of the respondent's Mills. The Tribunal observed that after deducting the margin of profits in respect of cloth purchased from outside, the margin of profit on the respondent's own manufactures for the 3 years under consideration stood at 23%, 24 % and 23 %, respectively. The Tribunal, therefore, observed that the margin of profit shown by the respondent on its own production o f cloth was better than that of the alleged comparable cases. The Tribunal also found that the accounts have been maintained in great detail and all the information was available to the Income-tax Officer. They observed that production result so far as yarn was concerned are complimentary and these had not been adversely commented upon by the Income-tax Officer. They also found that t proper explanations has been offered by the assessee where there was devia--tion in the production of cloth and the Income-tax Officer had beers able to rebut or find out a flaw with those explanations. They also accepted the respondent's contention that the higher consumption was due to increased cost of dyes, chemicals, spare parts, electricity and gas for the year 1972-73.
4. Mr. Shaikh Haider appearing for the applicant has not been able t show us any reason as to how the findings of the I. T. O. Were reasonable and in fact we find that the Tribunal was justified in accepting account boo version of the assessee.
5. Mr. Iqbal Naim Pasha had relied upon Rohen Cloth House v. Commissioner ref Income-tax 1983 PTD 63, where it was observed that even in a case where gross profits had come down to 21% from the previous 25.7% if the method of the accounting maintained by the assessee was the same as it the previous years which had been accepted earlier, the results of the assessee amounts should have been accepted.
6. We are in respectful agreement with this view. The accounts of the respondent for the previous years had been accepted and for the years in dispute the respondent had maintained the same type of accounts and had offered reasonable explanations for the fall in gross profits and there the accounts should have been accepted by the I.T. O. In ally case there cur enough material before the Tribunal for accepting the account books of the assessee as they had been mentioned on the same lines as the previous years.
7. In fact the finding of the I.-T. O. Was merely based on the gross profits of comparable cases without giving any specific details of the same and thus it was an arbitrary decision. We further find that the provision under section 13 has given a discretion to the I.- T. O. To make an estimate after rejecting the accounts. But after the I.- T. O. Had observed that the accounts had been maintained on the same lines as discussed in the orders of early years and all necessary details had been obtained an examined, then hit was not justified in rejecting the results of those account merely because rate of gross profit had gone clown and in spite of the fact that a reasonable explanation for the same had been offered by the assessee. Discretion in rejection the accounts was not exercised in a correct manner.
The answer in the above reference is, therefore, in the affirmative.