SYED HAIDER ALI PIRZADA, J- These, four Income Tax References involve common question of fact and law. They arise out of orders of assessment of the Income Tax Officer but these references relate to different periods of assessme nt. This common judgment of ours will, therefore, dispose of all the four references. It will be sufficient if we refer to one reference only.
2. The application has been made by the assessee under section 136(2) of the Income Tax Ordinance, 1979 (hereinafter referred to as 'the Ordinance') requiring the Income Tax Appellate Tribunal to refer the following question of law to this Court for answer:- "Whether in the facts and circumstances of the case , the learned Appellate Tribunal was legally justified in rejection of declared expert profit results on the ground of non-maintenance of record pertaining to supply of cloth and consequent receipt of ready made garments."
3. The brief and material facts are that the assessee is a private limited company and is engaged in the business of construction, import and export of garments and carpets. During the assessment year 1974-75 in respect of export account the company declared sales of Rs.121,570/- and gross profit of Rs.15,303/-. The rate of gross profit works out to 12.5%. The Income Tax Officer accepted the declared export sales of Rs. 121,570/- but did not accept the declared result and applied a gross profit rate of 25% on the declared export sales which resulted in an addition of Rs. 15,090/- in the declared gross profit of export sales. The assessee took an appeal to the Commissioner of Income Tax (Appeals) who refused to interfere with the order passed by the Income Tax Officer. The assessee then preferred an appeal to the Income Tax Appellate Tribunal. The Tribunal rejected the appeal and maintained the rejection of trading result and confirmed. The order passed by the officers below.
4. Being aggrieved by the order of the Tribunal, the assessee filed an application before the Tribunal to refer the above question to this court for answer but the Tribunal observed: "...In these circumstances, obviously the profit could not be worked out from the record of the assessee and therefore the accounts of the assessee have rightly been as stated above, the assessee deals in specialized items and is a manufacturer and, therefore, G.P. Rate of 25% has rightly been applied which is maintained.
5. It held that it is purely a question of fact which has been decided by the Tribunal on the basis of facts presented before it.
6. In that view, the Tribunal refused to make the reference as prayed for by the assessee.
7. Appearing for the assessee, Mr. Rahan Hassan Naqvi has strenuously urged that the Income Tax Authorities have misdirected themselves that there is no material on the record for rejection the trading results of export trading account, that there is no material on the record for the rejecting the trading results of export trading account, that the rejection of account due to nonmaintenance of stock register was not justified because the assessee did not maintain any establishment for the manufacturing of garments and the work was done on job basis, could not reasonably lead to the conclusion that there is no co- relation between the consumed and readymade garments manufactured, that the material on the record is not legally sufficient to sustain the gross profit rate of 25% on the declared export sales which result in an addition of Rs. 15,090/- in the declared gross profit of export sales.
8. Mr. Naqvi contended that the account have been maintained on the same pattern as in the earlier assessm ent year.
9. Mr. Nasrullah Awan has, on the other hand, contended that the income tax is an annual charge and, therefore, tax has to be determined each year on the income assessed annually.
10. We have given our thoughtful consideration to the submissions made by the learned counsel for the parties and have gone through the entire record accompanying the statement of the case.
11. It appears that the aforesaid rejection of book version and application of gross profit rate of 25% on the declared export sales which resulted in an addition of Rs. 15,090/- was made by the Income Tax Officer and affirmed by the Commissioner of Income Tax (Appeals) and Income Tax Appellate Tribunal mainly on the grounds that day to day consumption and production account has not been kept which means that there is no co-relation between the cloth consumed and the readymade garments manufactured. Similarly full addresses of the persons from whom purchases have been made, has not been supplied.
12. We would like at the very outset to observe that mere nonmaintenance of consumption and production account or non-supply of full addresses of the persons from whom purchases have been made which are the sheet anchors of the orders of the Income Tax Authorities and that of the Appellate Tribunal could not be taken as indicative of suppression of the production and export of garments.
13. We observe that the fact that the yield disclosed by the books of accounts does not satisfactorily compare with the yield as estimated by the assessing authority for the previous year is no ground for rejecting the accounts of an assessee as the yield would vary from year to year to a large extent depending on several factors and the yield obtained in one year would not furnish any guidance for estimating the yield and subsequent year.
14. We are inclined to hold that in the absence of any omission, irregularity or other defect in the method of maintaining the accounts or positive evidence to show that the accounts cannot be rejected.
15. The purchasers from whom the purchases were made could also have been easily verified by the Income Tax Officer by sending for the former and examining them. Without doing so, it was not just and proper for the Income Tax Officer to have treated them as fictitious and thus to have abstained from relying on them.
16. Mr. Awan contended that the acceptance of accounts during the preceding years cannot be a ground for accepting similar accounts in the subsequent year. The applicability of principle of res judicata in income tax proceedings is concerned, it is well settled as expounded in Wahid-uz- Zaman's case reported in 1965 PTD 283 and PLD 1965 S.C. And Faruq Chemical's case reported in 1991 SGMR 523.
17. In Indus Textile Mills Ltd v. Commissioner of Income-Tax (1989 PTD 567) a Division Bench of this court had considered various judgments and observed as follows:- ...The criteria therefore, laid down is that if from the properly kept account it is not possible to deduce the profit and income of the assessee from it, the assessing officer can reject the same.
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 stagewise production and stagewise 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,"
Mr. Naqvi drew our attention to unreported decision of the Hon'ble Supreme Court in the case of Civil Appeals Nos. 83-K/89 and 84-K/89 CIT v. M/S Krud Sons Ltd decided on 20.12.1992. Their Lordships interpreted the section 13 of the repealed Act. It was held: "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 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 where either no method of accounting has regularly been employed or the method employed in such, that in the opinion of the Assessing Officer the income, gains and profits cannot be properly deduced. The opinions 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 account 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."
It was further observed : "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."
18. The assessee had produced all his books of accounts before the Income Tax Officer which had been duly examined by him. The only two defects found by the Income Tax Officer for rejecting the books profits were that day to day consumption and production account had not been kept. From non-keeping the consumption and production account, he drew the inference that there is no co- relation between the consumed and the readymade garments manufactured. The other defect found by him is that the full addresses of the persons from whom purchases have been made, have not been supplied. No finding has been recorded by either of the authorities below as to the unacceptability of the method and irregularity of the account kept by the assessee.
19. It is well settled that in the absence of such a finding recorded by the authorities, the books results cannot ignored or brushed aside.
20. For the foregoing reasons, we are of the opinion that in the facts and circumstances of the case, the finding of the Tribunal upholding the rejection of the book result cannot be sustained. The above question is, therefore, answered in the negative. However, in the facts and circumstances of the case, the parties are left to bear their own costs.
21. Let the copy of this judgment be transmitted to the Registrar, Income Tax Appellate Tribunal, Karachi.