1. ' SALEEM AKHTAR, J.---This judgment will dispose of both the appeals as questions of law and the facts involved are common with a difference of the assessment year. These appeals relate to assessm ent years 1971-72 and 1972-73. For the charge year 1971-72 the assessee declared total sales of Rs,16,60,766 with gross profits of Rs,4,30,066 at the rate of 26%. The respondent like previous years had not maintained separate manufacturing and trading accounts in respect of enamelled utensils and extruded aluminium products. It was explained that maintenance of separate manufacturing accounts was not feasible as certain expenses like fuel consumption and labour etc. Were commonly incurred and the same labour generally worked on both sections of production. In the past the accounts as maintained by the respondent which were similar to the assessm ents under consideration were accepted. However, during this assessment year the Income Tax Officer did not accept it and further noted that the trading results as compared with those of previous year 1971 there was a decline in sale of about Rs,3,00,000 while the gross profit had improved 1.5%. Similar comparison of the manufacturing expenses and the sales of the said two years revealed that there was a reduction in expenses to the extent of Rs,1,49,075 but the sales had dropped down by Rs,3,00,000. The Income Tax Officer concluded that the sale has not been properly recorded in the books of accounts. He further observed that the consumption of raw material was in terms of weight while the sales were either by numbers or by measurement. He further held that consumption and production could not be co-related and the percentage of wastage could not be worked out by the assessee. He estimated sale to Rs,17,50,000 and applied gross profit at the rate of 26% as disclosed by the assessee and therefore an addition of Rs,24,000 was made in the trading results.
2. ' In the charge year 1972-73 the assessee declared sales as Rs,21,58,624 and gross profit at 25.4%.
3. Taking into consideration the low G.P. Rate which according to the I.T.O. Worked out to 22.5% and other reasons as stated in the assessment order for the year 1971-72 the I.T.O. Rejected the book version, estimated the sales at Rs,22,50,000 and applied G.P. Of 26% thereby making an addition of Rs,39,891 in the trading account. The respondent filed appeal against these assessments which was allowed by the Appellate Assistant Commissioner with the direction to the Income Tax Officer to accept the book results as disclosed in both the years under consideration. The Department challenged this order before the Income Tax Appellate Tribunal .Which by a consolidated order, dated 30th July 1976 allowed the appeal and upheld the order of the Income Tax Officer. The respondent filed an application under section 66(1) of the Income-tax Act, 1922 hereinafter referred as the 'Act' to consider the following question: "Whether on the facts and in the circumstances of the case, the learned Appellate Tribunal was correct in holding that proviso to section 13 of the Income-tax Act was applicable.?"
4. ' This application was dismissed on the ground that the Tribunal's order did not give rise to any question of law. The respondent then filed an application under section 66(2) of the Act in the High Court which answered the question in the negative.
5. Leave was granted to consider the question whether "acceptance of accounts in early years does not give rise to any vested right as income tax proceedings for each assessment year is a separate unit and has to be judged in view of the special facts and circumstances of the year in question and the principles of estoppel and res judicata do not apply to these proceedings".
6. ' Mr. Sheikh Haider, the learned counsel for the Revenue contended that the acceptance of accounts during the preceding years cannot be a ground for accepting similar accounts in the subsequent year. The main emphasis was that assessment proceedings under the Income Tax Act during an assessm ent year cannot operate as res judicata and thus every assessment has to be fmalized on its own merits independent of the previous year's assessment. So far as the applicability of principle of res judicata in income-tax proceedings is concerned, it is well-settled as expounded in C.I.T., East Pakistan, Dacca v. Wahiduzzaman's case 1965 PTD 283 and CIT Central Zone Karachi v. Farrokh Chemical's case (1992) 65 Tax 239 (SC Pak.). This aspect of the case, therefore, should not detain us any further. The question is whether this principle can be applied to the facts and circumstances of the present case.
7. ' Mr. Iqbal Naeem Pasha, the learned counsel for the respondent contended that the question of applicability of the principle of res judicata does not arise and the only question to be considered is whether the past history of the assessee can be taken into consideration and further that the method of maintaining the books of accounts cannot be rejected merely because in view of the Income Tax Officer there are certain defects in it. The learned counsel further contended that the assessee had been applying the same method of accounting in the past which was applied during these two years under consideration and as during the past the Assessing Officer did not find any defect or any difficulty in deducing profits and gains from it, it cannot be believed that in these assessm ent years, the profits and gains cannot be deduced. The question requires interpretation of section 13 of the Act which reads as follows: "13. 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: ' 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, then the computation shall be made upon such basis and in such manner as the Income Tax Officer may determine: ' Provided further that the Central Board of Revenue may, in the case of any person, or class of persons, require such person or class of persons to maintain accounts or prescribe the method of accounting to be employed by such person or class of persons, or the manner in which payments or commercial transactions should be made or recorded, and in such an event, the income, profits and gains of assessee shall be computed on the basis of the books, accounts or records maintained accordingly;"
8. The language of section 13 is simple and unambiguous. It applies to incomes, profits and gains accruing from business profession or income from any other source. It gives a choice to the assessee to maintain his accounts in any manner or by adopting any method with the limitation that such method should be so that income, profits and gains can be deduced from it. If an assessee adopts a method of accounting from which income, profits and gains can be deduced, the Assessing Officer has no option but to accept it. The proviso to section 13 empowers the Assessing Officer to compute income, profits and gains were either no method of accounting has regularly been employed or the method employed is such that in the opinion of the Assessing Officer the income, gains and profits cannot be properly deduced. The opinion is to be formed by the Income Tax Officer on the basis of the material available in the account books and on such facts which may justify such a conclusion and also establish that it is not possible to deduce correctly the income, profits and gains from the accounts books maintained according to the method employed by the assessee. However, such an opinion should not be whimsical or based on erroneous or mala fide grounds. The learned counsel for the respondent has referred to Star Re- rolling Mills v. Commissioner of Income Tax 1974 PTD 200, The Printer Combined Mercantile, Nazimabad v. Commissioner of Income Tax (West), Karachi 1984 PTD 276, Nasir Industries Karachi v.
9. Commissioner of Income Tax (South) Zone West Pakistan 15 Taxation 84, and Indus Textile Mills v.
10. Commissioner of Income Tax 1989 PTD 567. In the last judgment referred above, I had considered various judgments of our Court and observed as follows: "The criteria therefore, laid down is that if from the properly kept accounts it is not possible to deduce the profit and income of the assessee from it, the Assessing Officer can reject the same.
11. However, the Assessing Officer should not insist nor base his finding on the non-maintenance of record of such particulars and data which possibly cannot be maintained in a particular trade or business. It may be noted that the applicants had maintained all the records as required by the Excise Duty Laws. In this view of the matter as the stage wise production and stage wise record could not be produced which was not possible to prepare in the manner required by the Assessing Officer he was not justified in rejecting the accounts of the applicant."
12. Another aspect of the case is that while interpreting section 13 accounts must be distinguished from method of accounting. There may be a regular method of accounting and yet for defects the accounts may be rejected but it does not lead to automatic rejection of the system and method of accounting employed by an assessee. Occasion may also arise where although the profit shown in the accounts is not true or correct the Assessing Officer can deduce correct figures from the accounts. If the account books are found to be false and manipulated with a view to suppress the income and profit and the same cannot be deduced correctly the Assessing Officer can reject the accounts.
13. ' The main reason for rejecting the method of accounting by the Assessing Officer and maintained by the Tribunal was that the respondents were showing stocks by weight and production by measurement. Further consideration which compelled them to reject was that separate manufacturing and trading accounts of enameled utensils and extruded aluminum products were not maintained. For these reasons it was concluded that the income, gains and profits could not be deduced from the account books. The past history of the respondent establishes that it had been maintaining its accounts in similar manner. The Assessing Authorities have been deducing income, gains and profits without any difficulty and have been assessing for many years. Nothing has been brought on record to controvert these facts to show what defects have been detected in the method of accounting which made it impossible to deduce income, profits and gains. Mere expression of opinion that such deduction cannot be made is not sufficient unless cogent reasons to support this conclusion are also stated. It has been pointed out that separate manufacturing and trading accounts in respect of enamelled utensils and extruded aluminum products have not been maintained. The respondent has explained that maintenance of such accounts is possible as common labour and energy are employed for their production. They have also stated that such practice is in vogue from the very beginning and accounts have been prepared in the same manners which were accepted. It was further stated that in this line of trade no one maintains accounts in the manner required by the Department. In these circumstances the question is whether the Assessing Officer could form an opinion that income, profits and gains could not be deduced from the method of accounting adopted by the respondent. The history of the respondent's case supports its contention. If the Assessing Authority had not felt any difficulty in determining income, profits and gains on the basis of the accounting method maintained by the respondent how is it that in these two years they have been facing difficulty and invoking proviso to section 13. Furthermore, if in line of trade certain method of accounting has been adopted and accepted by the Assessing Officer without pointing out any difficulty in determining the income, profits and gains then if they want to resort to proviso to section 13, they must give cogent reasons and convincing grounds to justify their action. In Star Re-rolling Mills v. Commissioner of Income Tax 1974 PTD 200 in somewhat similar circumstances the stand of the assessee was that in the line of business which it was carrying on it was not practicable to maintain a regular stock register or manufacturing accounts. During the past years the assessee's method of accounting and the rate of profit given by it was accepted although no such stock register or manufacturing account was maintained. The learned Judges of the Division Bench observed that there was no material to controvert the averment made by the assessee and there was nothing to indicate either in the order of the Assessing Officer or the Tribunal that it was feasible and practicable in the line of business in which the assessee was engaged to mainain a regular stock register or manufacturing accounts, "or that other persons engaged in such business were maintaining such accounts and register". In such circumstances if on the basis of such accounts the Assessing Officer could deduce income, profits and gains in the past merely by change of opinion without any substantial material or cogent reasons the method of accounting cannot be rejected. In this regard reference can also be made to Pioneer Sports Limited v. Commissioner of Income Tax (1934) 2 ITR (Lah.) 305.
14. ' Mr. Sheikh Haider, the learned A.S.C. For the Department relies on Commissioner of Income Tax v.
15. Sarangpur Cotton Manufacturing Company Ltd., AIR 1938 Privy Council 1. In this case the the assessee was found to have been regularly adopting all along the method of accounting which it had followed in the past many years. For the year 1931-32 the Assessing Officer issued notice to the assessee under section 23(2) of the Act. The assessee claimed that the undervaluation of the closing stock of the assessee for the year 1929 disallowed by Rs,3,97,634 in the assessment year 1930-31 should be allowed as an addition in the opening stock of the current year 1930, and that the undervaluation of the closing stock of the company by Rs,359,366 should also be added in the closing stock of the company in the current assessment year. The Assessing Officer while rejecting these contentions accepted the profit shown in the accounts. As appeal against the assessment order by the assessee did not succeed, the High Court in reference answered in the negative following question: "Whether in the circumstances of the case the Income Tax Officer was entitled to compute the income, profits and gains of the assessee upon the basis of the printed copy of the profit and loss account sent with the letter of the assessces of 18th July 1931, without regard to any undervaluation of the stock which may have been or may be proved to have been made? "
16. ' The Privy Council observed that due to gross undervaluation of stock as shown in the accounts the Income Tax Officer could not reasonably have come to the conclusion that the profits shown in the profit and loss account was the true profit for income-tax purposes. The question was reframed and held that the method of accounting did not show the true income profits and gains and computation of income on the basis of accounts by I.T.O. Was wrong. While referring to section 13 it was observed: "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 action 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, though the profit brought out in the accounts is not the true figure for income-tax purposes, the true figure can be accurately deduced therefrom; ' Their Lordships desire to add that the view of the Assistant Commissioner that the Income Tax Officer is prima fade entitled to accept the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee, is not a correct view. It is the duty of the Income Tax Officer, where there is such a method of accounting, to consider whether income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question."
17. ' Mr. Sheikh Haider has relied on the first part of the second observation. There can be no cavil with these observations.
18. It is the duty of the Income Tax Officer to determine whether the assesse has adopted method of accounting from which income, profits and gains can properly be deduced. In this case the Assessing Officer did not proceed in the indicated manner although from the accounts laid and on its examination true income and profit could be deduced. This judgment is of no help to the appellant. There can be no cavil that a regular method of accounting in the past cannot be accepted as a matter of routine without examining it and if the Assessing Authority comes to the conclusion that it is defective and true income, profit and gain cannot be deduced from it then on the principle, stated above it can be rejected. In the present case the reasons given for rejecting the accounts are not proper, sufficient and valid.
19. ' We, therefore, dismiss the appeals with no order as to cost.