JUDGEMENT: SYED HAIDER ALI PIRZADA, J.-1. The assessee-Company, Messrs Pakistan Oil Mills Limited in the year ending August 31, 1968, relevant to assessment year 1969-70 disclosed gross profit rate of 3.8% on sales aggregating to Rs. 18,78,415 in the "Crushing Section". During the preceding year the assessee had shown output of oil and Khal at 13.8% and 84% respectively. The output of wastage in the preceding year was 2.4% as against 3% for the assessment year under consideration. The Income Tax Officer considered that, the yield of oil shown by the assessee-Company was on the low side and, therefore, called upon the assessee-Comp- any to explain reasons for lowness in the yield of oil. The explanation of the assessee-Company was that the main reason for the difference in the output is due to the crushing of cotton seed of various places, if the cotton seeds is from superior soil area of Nawab Shah and Shahdadpur District the output of oil will be more and if they are from inferior soil area of Tharparkar and Hyderabad District and Tando Adam the output of oil will be less. In the year 1969-70 was crushed 99,780 Mds. Of cotton seed out of which only, 15,150 MdS. Were from Nawab Shah and Shahdadpur District, which is about 15% of the total production while rest cotton seeds are from inferior quality area, therefore, the yield of oil was 12%. The assessee disclosed G.P. Of 3.8% on total turnover of Rs. 18,78,415 during the assessment year 1969-70 as against the G.P. Of 4.2% on turnover of Rs. 16,61,809 of the preceding year. The other reason given by the assessee-Company was that it was due to the increase in the price of cotton seeds, increase in price of crude oil and mobile oil and increase in labour wages. The Income-tax Officer applied the proviso to section 13 of Income-tax Act, 1922 and after rejecting the accounts of the assessee- Company, determined the yield at 15.6%, thereby adding Rs. 13,8,600 to the income disclosed by the assessee-Company.
2. The assessee-Company, not being satisfied with the order passed by the Income-tax Officer, filed an appeal before the Income-tax Appellate Tribunal. The Tribunal found that there was no defect in the accounts for the succeeding year and as such the disclosed results were accepted.
As regards the assessm ent for the year 1969-70 was concerned the Tribunal held that, the variations in the yields had not been satisfactorily explained although it had been stressed that the accounts had been properly maintained yet in the absence of any satisfactory explanation for the variations pointed out by the Income-tax Officer, the Tribunal upheld the rejection of the account version but directed the Income Tax Officer that the additions should be made to the trading results in such a manner that the profits should not exceed 4%.
3. It is clear from the finding of the Appellate Tribunal that the only ground on which the Appellate Tribunal held that the proviso to section 13 of the Act would apply to the case was that the variations of .Yields were not satisfactorily explained.
4. The assessee being aggrieved against the order dated 25-2-1974 has filed directed reference to this Court and has sought our opinion to the following question said to have arisen;-- "Whether on the facts and in the circumstances of the case the Tribunal was entitled to confirm rejection of book results in "Crushing Section"?
5. Mr. Iqbal Naeem Pasha the learned counsel for the assessee has contended that the gross profit rate of 3.8% as disclosed by the assessee has also not been considered to be "Low" as the Tribunal has accepted the book results for the assessment year 1970-71 disclosing gross profit rate of 3.7%. It is further contended that no assessment under the proviso to section 13 could be sustained if the I.T.O, or the appellate authority in cases of appeal had not considered and recorded a finding against the assessee as to whether he had been regularly employing a method of accounting or whether his income, profits, and gains could properly be determined and the Income-tax Officer's decision on those matters was not to be a subjective or arbitrary decision but a judicial decision and could not be accepted if there was no material to support his finding. Thus neither low gross profits nor variations of yields was material on the strength of which a finding under the proviso to section 13 could be based and an assessment thereunder could be made. We are of the view that when the assessee has a method of accounting and he had been regularly employing it, it was for the department to consider whether there were, sufficient material for rejecting that method of accounting and computing the profits on other basis and not for the assessee to prove that his method of accounting ought not to be rejected. In the instant case the Income-tax Officer only doubted the correctness of the accounts on the ground that the variations in production are of .Were nature and there cannot be, by any stretch of imagination, a steep fall in production, the quality and quantity of raw material remaining the same. In our opinion, the Income-tax Authorities, in this case were not justified in applying the proviso to section 13 of the Act.
6. The learned counsel for the department has contended that it is not open to this Court to go behind the finding given by the Income-tax Officer supported by the Income-tax Appellate Tribunal with regard to the applicability of the proviso to section 13 of the Act in the present case. The learned counsel for the department has relied upon the case of Commissioner of Income-tax v. s. Zoraster & Co. 1982 PTI 339 in which the Income-tax Officer disallowed a sum of Rs. 10,000 out of the expenditure of Rs. 85,650 incurred by the assessee in the renovation of the cinema building and capitalized the rest of the amount, on which depreciation was allowed under the heading "buildings" as in the opinion the expenses incurred by the assessee in respect of renovation of the cinema building was of the nature of the capital expenditure -The assessee preferred an appeal against the assessm ent order. The A.A.C. Held that the claim of the assessee was not unreasonable and so he allowed a deduction in respect of a sum of Rs. 17,124 representing 1 /5th of the expenditure incurred by the assessee on renovation. The revenue department filed appeals before the Income-tax Appellate Tribunal in respect of both the assessment years, challenging the correctness of the order passed by the A.A.C. The Appellate Tribunal while dismissing the appeal of the department,, held by its order, that the expenditure incurred by the assessee on account of repairs carried out for the upkeep of the picture house and that 1 /5th of such expenditure was rightly allowed by the A.A.C as claimed by the assessee. On these facts the High Court of Rajastan held that the preliminary facts found by the Tribunal and the factual inferences drawn by it were not open to review by the Court, as the question as to whether the expenditure incurred on renovation was spent on repairs or otherwise was essentially a question of fact. On the basis of this judgment, the learned counsel for the department has urged that it is not open to this Court to go behind the finding given by the Income-tax Officer supported the A.A.C. And the Appellate Tribunal with regard to the expenditure was incurred on account of repairs carried out for the upkeep of the picture house. The case is distinguishable as, in that case the A.A.C. And the Tribunal had recorded a finding that the expenditure was incurred on account of repairs carried out for the upkeep of the picture house.
7. The learned counsel for the department has also relied upon the case of Nazir & Co. v. C.I.T. 1982 P.T.D. 185 and case of Messrs Ibrahim Brothers v. C.I.T., Karachi 1979 P.T.D.
1. It was held in those cases that there was material to support the finding of the Tribunal and no question of law arose out of its orders, In cases involving applicability of the proviso to section 13 of the Income-tax Act, the question to be determined by the Income-tax Officer was a question of fact, namely, whether the income profits and gains could or could not be properly deduced from the method of accounting regularly adopted by the assessee. There was nothing special about this question of fact, and generally the only question of law that could possible arise was whether there was any material for the finding. On the basis of these judgements, the learned counsel'* has urged that it is not open to this Court to go behind the finding given by the Income-tax Officer supported by the Income-tax Appellate Tribunal with regard to the applicability of the proviso to section 13 of the Act in the present case. These cases are distinguishable, as, in these cases, the profits and gains could not be properly deduced from the method of accounting regularly adopted by the assessee. In the instant case, the yield shown by the assessees in the assessment year was slightly low and the method of accounting was the same as in the previous years which had not been objected to by the Income- tax authorities. Merely because the yield in, curshing section, was low was not sufficient ground for rejection of accounts.
8. Now section 13 of the old Act which corresponds to section 32 of the new Ordinance which compels the computation of the assessee's income on the basis of his accounts if regularly maintained, allows him the choice of their pattern provided the system selected properly reflects the income. It does not authorise their exclusion which is permissible only if they do not assist such computations merely for the reason that they do not conform to a particular pattern. Such is the effect of the enunciation made by the Privy Council in C.I.T, v. Sarangpur Cotton Manufacturing Company Ltd. AIR 1938 P.C. 1 which reads:- "Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes in this case for the purposes of the Company's business and does not relate to a method of making up the statutory return for assessment to Income-tax. Secondly, the 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. It may well be that, through the profit brought out in the accounts is not the true figure for income-tax purposes, the true figure can be accurately deduced therefrom"
9. So long as it is not possible to deduce the true income from the accounts, its computation could not be made in any other way, and so, the Privy Council proceeded to observe:- "The simplest case would be where it appears on the face of the accounts that a stated deduction has been made for the purpose of a reserve. But there may well be more complicated cases in which, nevertheless, it is possible to deduce the true profit from the accounts, and the judgment of the Income-tax Officer under the proviso must be properly exercised. It is misleading to describe this duty of the Income-tax Officer as a discretionary power".
10. The Income-tax Tribunal, which did not say that no method of accounting was regularly employed by the assessee, did not also find that the manner in which he maintained his accounts did not enable to proper determination of his income. It addressed itself that in the absence of any satisfactory explanation for the variations pointed out by the Income-tax Officer, it upheld the rejection of the account version but would direct that the addition should be made to the trading results, in a manner that the profits should not exceed 4% as the same were found satisfactory by the Income-tax Officer for the succeeding year.
11. We reiterate the views expressed by this Division Bench in the case of Messrs Coronet Paints & Chemicals Ltd., 1984 PTD 355. In this case the Income Tax authorities rejected book results on the ground that gross profits disclosed by the assessee was low. It was held that the above ground by itself was not enough to reject system of accounts maintained by the assessee.
12. So, our answer to the question before us, therefore, is that, the Income-tax Appellate Tribunal was in error in affirming the assessment made by the Income-tax Officer under the proviso to section 13 of the Income Tax Act, 1922.
13. It is quite apparent from the above discussion that our answer to the question is in the negative.
14. In the circumstances, no costs.