' NASIR ASLAM ZAHID, J. - This judgment will dispose of I. T. R. No, 526/72 and I. T. R. No, '710/72 as the facts and points of law involved in both these cases are the same. The applicant in both the cases is Messrs M. E J. Hazari and Sons. I. T. R. No, 526/72 relates to assessment years 1963-64, 1964-65 and 1965-66, whereas I. T. R. No 710/72 relates to assessment year 1966-67. The question referred to us in I. T. R. No, 526/ 72 for our opinion is as follows :- "Whether in the facts and circumstances of the case the Tribunal was justified in law to uphold the rejection of the book results and computation of the assessee under the first provision to section 13 of the Income-tax Act ?"
' In I. T. C. No, 710/72 three questions have been raised including the aforesaid question referred to us in I. T. R. No, 526/72. However, Mr. Ali Athar, learned counsel for the applicants, stated that he was only pressing for a decision on the above question and he was not pressing the other two questions raised in I. T. C. No, 710/72.
2. From the consolidated order dated 9th February, 1971 of the Income-tax Appellate Tribunal Karachi Bench (Karachi) it is apparent that the accounts of the applicants/assessee were rejected by the Departrtt on two grounds namely that no daily stock register for dealings in the goods was maintained and lowness of the rates of gross profit disclosed at about 12% as against the rates shown at about 15% to 17% in the preceding three years, for which no good and satisfactory explanation was offered. We have heard the arguments of Mr. Ali Athar, learned counsel for the applicants, and Mr. Nasarullah Awan, who has appeared for the Department. It has been contended by the learned counsel for the assessee that two grounds mentioned in the order of the Department were not sufficient under the law for rejection of the accounts submitted by the assessee. Section 13 of the Income-tax Act 1922 provides that the income, profits and gains shall be computed, for the purposes of sections 10 and 12 in accordance with the method of accounting regularly employed by the assessee. The first proviso to section 13 under which action was taken by the Department in rejecting the accounts submitted by the assessee is as follows : "Provided that if no method of accounting has been regularly employed or if the method employed is such that in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, than the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine."
' It was contended by the learned counsel for the assessee that lowness of profit during the year under assessm ent as compared to the previous years is not a ground for rejection of accounts submitted by the assessee if a proper method of accounting has been regularly employed by the assessee and further the non-maintenance of a daily stock register is also not a ground in law for rejection of accounts. On the other hand it was argued by Mr. Nasarullah Awan, learned counsel for the Department that non-maintenance of a daily stock register was a sufficient reason in law for rejection of the accounts submitted by the assessee and computation of the assessee under the first proviso to section 13 of the Income-tax Act, 1922.
3. The applicants have been carrying on business of dealings in paints, varnishes and other goods and according to the order of the Appellate Assistant Commissioner, 87% or more of their sales in the years in question were made to wholesalers and the balance of the sales that is 13% or less were made to retailers. According to the learned counsel for the Department there was no dispute about the sales to the wholesalers but the main dispute was about the sales to the retailers which were practically all made against cash and as no daily stock register was maintained, the cash sales made to retailers were not verifiable. Learned counsel for the assessee relied upon the case of Attaullah Khan v. Commissioner of Income-tax (1), wherein it was held that mere failure of the assessee to furnish daily stock register showing purchase and consumption of raw material was not a ground for rejection of accounts and that before any conclusion could be arrived at that the gross profit disclosed by the assessee was too low the conclusion of the Income-tax Authorities must be based on sufficient material. Reliance was also placed on a decision of the Privy Council in the case of Commissioner of Income-tax Bombay V. Sarangpur Cotton Manufacturing Company Limited (2). In this judgment, the Privy Council observed that section 13 of the Income-tax Act related to a method of accounting regularly employed by the assessee for his own purposes and does not relate to a method of making up the statutory returns for assessment to income-tax and that the said section clearly makes such a method of accounting a compulsory basis of computation, unless, in the opinion of the Income-tax Officer, the income profits and gains cannot properly be deduced therefrom. Reference was also made to a decision of the Indian High Court of Punjab in the case of Pandit Brothers v. Commissioner of Income-tax (3). In this judgment it was held that in all cases which fall under section 13 of the Income-tax Act, 1922, there must be material before the Income-tax Officer to lead him to the conclusion that the method employed is defective or that the case requires consideration and a new computation must be made. In that case, the assessee who was carrying on business filed a return but the Income-tax Officer added a certain sum to the profits as given by the assessee on the ground that profit disclosed by the assessee was low and there was no daily stock register. The assessee maintained regular accounts of his purchase and sales and the Income-tax Officer did not say that the method employed by the assessee was such that in his opinion the income, profits and gains could not be properly deduced therefrom. In these circumstances it was held that there was no definite finding by the Income-tax Officer that the case fell within the proviso to section 13. It Was further observed that the profits appeared to the Income-tax Officer to be insufficient and the fact that no stock register was maintained by the assessee were not materials upon which such a finding could by given but these were circumstances which might provoke an enquiry.
4.In this case according to the Income-tax Tribunal all the purchases made by assessee during the years in question are properly vouched. As observed earlier, there is no dispute about the sales made by the assessee to the wholesalers. Further it is also apparent from the order of the Appellate Assistant Commissioner that about 87% of the total sales were made to the wholesalers and the cash sales to the retailers were 13% or even less. The only reasons given for rejection of the accounts are non--maintenance of daily stock register and decrease in the rate of profits as compared to previous years. It is not the complaint of the Department that proper books of account {{FOOT NOTE}}
(1) PLD 1968 Dacca 881 (2) (1938) 6 I T R 36 (3) (1954) 26 I T R 159 {{FOOT NOTE}} have not been maintained by the assessee. On a question from the Court, learned counsel for the Department stated that there is no legal requirement for maintenance of a daily stock register by an assessee carrying on business of the nature that was being carried on by the applicants during the years in question. In these circumstances we are of the view that there was no material before the Income-tax Officer on the basis of which he could reject the accounts of the applicants and compute the income under the first proviso to section 13. If on the basis of the aforesaid two circumstances, decrease in the rate of profit and non-maintenance of a daily stock register, a doubt had been raised about correctness of the accounts, the Income-tax Officer should have made a further enquiry to discover material on the basis of which he could have given a finding that the accounts did not disclose the true income, profits and gains of the assessee for the years in question. In the facts and circumstances of this case on merely recording that the profit had decreased and the daily stock register was not maintained, the accounts submitted by the assessee could not be rejected and the income computed under the first proviso to section 13 of the Income-tax Act. We answer the question in the negative as in our opinion the Income-tax Tribunal was not justified in law to uphold the rejection of the books results and computation of the assessee under the first proviso to section 13 of the Income-tax Act, 1922 for the years in question.
' There will be no order as to costs.