S.A. NUSRAT, J.-- These appeals by Messrs Mian Muhammad Sharif and Company, a firm registered under the Partnership Act of 1932 are directed against the judgment and order of the Lahore High Court dated 22-12-1975 in Income-tax References under section 66 (1) of the Income- tax Act, 1922 (Repealed). The learned High Court did not answer the question and was of the opinion that the references made to it were of academic interest only and dismissed both the references as infructuous. In respect of assessment year 1969-70 the following questions were referred;
(1) Whether the Tribunal was justified in confirming the assessment wherein expenses totalling Rs.1,29,850 and admissible under clauses (iv) (v) and (xvi) of sub-section (2) of section 10 of the Income-tax Act, 1922 had been disallowed out of the gross profit computed by the Income-tax Officer?
(2) Whether an assessm ent to income tax can lawfully be made in respect of income from business, profession and vocation chargeable under section 10 of the Income-tax Act, 1922 disregarding the mandatory deductions enumerated in various clauses of sub-section (2) of that section? In respect of assessm ent year 1970-71;
(1) Whether the Tribunal was justified in confirming the assessment wherein expenses totalling Rs.97,683 and admissible under clauses (iv) (v) and (xvi) of subsection
(2) of section 10 of Income-tax Act, 1922 had been disallowed out of the gross profit computed by the Income-tax Officer?
(2) Whether an assessm ent to income tax can lawfully be made in respect of income from business, profession and vocation chargeable under section 10 of Income-tax Act, 1922 disregarding the mandatory deductions enumerated in various clauses of sub-section (2) of that section ?
As far assessm ent year 1970-71 the same questions were referred to the High Court except that the figure in this year was Rs.96,683 instead of Rs.1,29,805 in the first question.
2. The facts of the case are simple. In both these references appellant firm Messrs Mian Muhammad Sharif and Company, Jhelum carried on construction work as contractors and closed their account for assessm ent year 1969-70 on 31-3-1969 and for assessment year 1970-71 on 31-3- 1970. In first assessm ent year i.e. 1969-70 the total income was reflected in the return of income at Rs.3,18,881 supported by a statement of account. This statement reflected total receipts at Rs.49,05,868 and gross profits at Rs.7,34,477 yielding a rate of 14.9% During the course of proceedings the appellant filed a revised statement of trading account and profit and loss account wherein expenses aggregating at Rs.1,29,805 earlier charged to trading account were taken out from there and instead were charged to profit and loss account. The break up of the expenses was as under;
(1) Repair of mixer machineRs.9,414
(2) Repair of water pump.Rs.1,189
(3) Repairs, token taxes and insurance expenses of trucks.Rs.1,19,203 Total:-Rs.1,29,806 The Income-tax Officer following the history of the case, which was all along a case of rejection of accounts and computation of total income under the proviso to section 13 of the Income-tax Act (Repealed), rejected the book result holding that the gross profit of 14.9$ was low simultaneously holding that the revised statement (recast) which had registered an increase in gross profit raising it to 17.62% was not in keeping with the system of accounts followed by the assessee when throughout in the past such expenses were charged to the trading account. The Income-tax Officer also gave his view that comparison between different years was possible only on the basis of identical situation and such expenses if they were treated as part of profit and loss account expenses in this year then comparison with earlier years on the said basis could not be done. He further observed that by charging the amount of Rs.1,29,806 the over-all percentage of expenses charged to profit and loss account resulted in a percentage of 11.12% to the total receipts whereas in the preceding two years i.e 1967-68 and 1968-69 it was only near about 8%. The Income-tax Officer accordingly compared the result of the trading account which was compiled in the same manner as that of the earlier two years. Exactly on the basis of past history gross profit of 18% was applied by him on declared receipts from construction work.
3. In assessm ent year 1970-71 the assessee had declared gross receipts of Rs.37,68,022 with gross profit of Rs.6,73,906 yielding a percentage of 17.9. The assessee, however, in respect of this year had, not charged the trading account with the expenses, under the head of maintenance expenses of machinery and vehicles used for execution of the contracts and carriage of materials aggregating Rs.97,683 and the same were debited to profit and loss account, as had been done in the immediate precedent year under appeal by revising the statement. In this year also the Income- tax Officer followed the history of the case where the expenses were declared to be a part of trading account and gross profit was declared. By this action, according to the Income-tax Officer, by calculating the gross profit through debit of such expenses to the trading account, recast gross profit rate came down to 12.25% which was considered to be low in building construction contracts executed by machinery. In this year also he rejected the accounts and resorted to the proviso to section 13 of the Repealed Act and applied a gross profit rate of 18% on declared receipts and after adding the short gross profit computed the total income.
4. The appellants challenged the orders of assessment passed by the Income-tax Officer, as aforesaid, filing two separate appeals which were heard together and dismissed by common order dated 9-6-1972 by the learned Income-tax Appellate Tribunal, Peshawar Bench, Peshawar. The learned Income-tax Appellate Tribunal upheld the treatment accorded by the Assessing Officer to the appellant and did not accept the plea advanced by the appellant that these expenses were admissible as part of profit and loss account and could not be taken to be covered by the application of the gross profit worked out by the Assessing Officer. The Tribunal also did not accept the contention that these expenses ranked for admission in view of the statutory provisions contained in sub-section (2) of section 10 of the Income-tax Act, 1922.
5. Aggrieved by the order of the Income-tax Appellate Tribunal, the appellants filed two reference applications in the Lahore High Court, as earlier mentioned, which were decided as per impugned judgment. After elaborate discussion of the facts and law, the learned High Court came to hold as under:- "It may be observed that in these references before us, the petitioner has not disputed the gross profit rate applied by the Income-tax Officer and affirmed in appeal by the Tribunal. The Scope of these two reference applications is merely confined to the expenses in question chargeable to the profit and loss account in accordance with clauses (iv), (v) and (xvi) of sub-section (2) of section 10 of the Act. Now as already discussed above, although the Income-tax Officer, in refusing to charge the expenses in question to the profit and loss account, did not act strictly in accordance with the letter of the law, yet this fallacy in the approach was inconsequential and did not result in any material change in the income brought to tax. This is because in the computation of the not profits and gains assessable to tax it is immaterial if the expenses in question are debited to the gross profit account or to profit and loss account. The not result in either case is the same."
The learned High Court, in the facts and circumstances of the case, in the final analysis came to the conclusion that the references were of academic interest only and dismissed the references as infructuous.
6. Leave to appeal was granted to examine the contentions that the learned Judges of the High Court had placed reliance exclusively on English case law and since the provisions of the two statutes, were not in pari materia the learned Judges had erred in following the English precedents.
Learned counsel had also submitted that the provisions of section 10 (2) (v) and 10 (2) (xvi) of the Act had been misread.
7. We heard the learned counsel for the parties and have also gone through the impugned judgment of the learned High Court as also the order of the Income-tax Appellate Tribunal.
8. The first question proceeds on the presupposition regarding the admissibility of the expenses amounting to Rs.1,29,806 under clauses (ix), (v) and (xvi) of sub-section (2) of section 10 of the Income-tax Act, 1922. As such the question itself was not properly framed. The Income-tax Appellate Tribunal had neither disallowed any such expenses under any of the clauses nor was it observed that these expenses could not rank for admission under the relevant clauses. There is also no dispute with regard to the true scope of section 13 and its proviso as the rejection of accounts was not challenged by the appellants. The assessee no doubt has the option to choose any method of accounting but is bound to show that he has followed the method regularly. The statute makes the method of accounting employed by the assessee as a basis for the purpose of computation of income, subject, however, to the exception where in the opinion of the Income-tax Officer the income profits and gains cannot properly be deduced therefrom. Hence the contingency where computation of true income profits or gains on the basis of the method employed by the assessee is not possible in the opinion of the Income-tax Officer or where no method of accounting has been regularly employed then the Assessing Officer is clothed with the statutory authority to compute the income upon such basis and in such manner as he may determine. Here the assessee's statement was filed along with the return which was later on revised without resulting in any change in the not profit of the business as well as the returned income and in subsequent year this new methodology was adopted when the return was filed deviating from past practice followed in several years as is clear from the factual position that by recasting the trading account the gross profit went up and registered a high percentage of gross profit on receipts. The Income-tax Officer having invoked the provisions of the proviso to section 13 computed the total income on the same basis and in the same manner as was done in the past several years keeping the past practice and systemcharging these expenses to the trading account in order to compare likes with likes. The question before us is not regarding the interpretation of rules of construction of final accounts under the Mercantile system. The final accounts consist of trading account, profit and loss account and appropriation account as well as balance sheet. The object of trading account is to ascertain the gross profit or gross loss for given period and through profit and loss account the not profit or loss for the same period is ascertained.
The Income--tax Authorities were quite justified in computing the gross profit after recasting the revised prepared trading account of the assessee in the same manner and on the same pattern as was done by the appellants in the earlier years. It need not be emphasised that there could be no comparison between dis-similar things and only likes could be compared with the likes. The Income-tax Officer, as such considered the original statement of account for assessment year 1969-70 and ignored the revised statement of account; the same being on a different pattern as through this device of charging the expenses to profit and loss account in both the years the rate of gross profit resulted in a higher percentage increasing the percentage of expenses charged to profit and loss account with reference to the gross receipts; not profit remaining the same. As far these expenses under reference are concerned neither they were disbelieved nor any part of it was considered to be inadmissible under the relevant clauses mentioned in the question. On the contrary the Assessing officer computed the profits on the basis of past history ignoring the revised statement of accounts as it was in accordance with the past pattern. It may be observed at this juncture that it is not unusual to prepare one combined account headed as 'trading account' and 'profit and loss account' instead of preparing two accounts under the aforesaid two headings.
9. The objection advanced on behalf of the appellant regarding placing reliance by the High Court on English case-law is that the relevant provisions of the English Income-tax Act and the Income- tax Act of the Pakistan were not in pari materia and that the reliance on the English precedents was not correct. Here again instead of entering into the realm of controversy, suffice it to say that the learned High Court had rightly referred to such decisions in the context of the controversy involved in the case. The relevant observations of the learned High Court are reproduced hereunder:--- "This principle is of general application and not peculiar to the English Law only. Under sub-section
(1) of section 10 the tax is payable by an assessee in respect of the profits or gains properly so called and computed on ordinary commercial principles. Sub-section(2) of this section provides for computation of the taxable profits and gains of a business. In computing such profits and gains deductions are admissible for the different allowances enumerated in clauses (1) to (xviii) of sub- section(2) of this section. In particular, clause (iv) of this sub-section provides for deduction for expenses in respect of insurance against risk of damage or destruction of building, machinery, plant, furniture, stocks or stores, used for the purposes of the business. Similarly clause(v) allows for deductions in respect of current repairs to such buildings, machinery, plant or furniture. Also under clause (xvi) in computing the taxable profits and gains allowances are admissible for any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purposes of such business. "
The learned High Court, has, after discussing the changed methodology of the appellant further observed as under:- "In general the trading account is an account which contains in a summarised form all the transaction occurring throughout the trading period in commodities in which a trader is dealing and gives the gross trading results, it is prepared to determine the gross profit or gross loss of the trader. On the debit side of this account are entered the value of the pending stock of goods with which the business was started, the not purchases made during the year and direct expenses, if any. On the credit side of this account are the entries relating to the total sales made under the period less the value of return (not sales) and the value of closing stock of goods. The balance of the trading account which represents either gross profits or gross loss is transferred to profit and loss account. The profit and loss account is the account whereby a trader determines the not result of his business. It is the account which reveals the not profit or not loss of the trader. All the expenses directly connected with the buying of goods are entered in the trading account. It is credited with the sale proceeds of the goods. But the profit and loss account deals with the expenses indirectly connected with the goods."
10. Having considered the facts of the case we are satisfied that the finding of the learned High Court that it was implicit in the order of the Income-tax Officer, that according to the principles of book keeping the expenses amounting to Rs.1,29,805 were at first wrongly charged by the assessee to the trading account and these should have been properly debited to the profit and loss account, is unexceptionable. In the references before the High Court the appellant had not been disputed the gross profit rate applied by the Income-tax Officer and affirmed in appeal by the Tribunal. In the circumstances, the scope of the two reference applications, as rightly observed by the learned High Court, was merely confined to the expenses in question chargeable to profit and loss account and if there was a fallacy if any, in the approach of the Income-tax Officer the same was inconsequential and did not result in any material change in the income brought to tax. This was so because in the computation of the not profits and gains assessable to tax it is immaterial that the expenses in question are debited to the gross profit account or, to profit and loss account. The not result in either case had remained the same.
11. The upshot of the above discussion is that no exception can be taken to the findings of the learned High Court that the references before it were of academic interest only and called for no answer. The same were, therefore, rightly dismissed as infructuous. In the result the appeals are dismissed with no order as to cost.