I. MAHMUD. J. This is a reference by the Income-tax Appellate Tribunal (Karachi Bench). Karachi, under section 66(1) of the Income-tax Act, 1922 at instance -of the aeseesee, by its order dated 28- 2-1968 in R. As. Nos. 45 and 50 of 1967/68. Five questions have been referred to us, out of which, the first question has been decided in other proceedings while the second and the third questions are not pressed by the assessee, thus leaving only questions Nos.4 and 5 to be answered. These two quest'ons are s-
(4) Whether on the facts and in the circumstance of the case, provisions of section 23 (4) of the Income-tax Act were properly attracted in respect of the charge years 1959-60 and 1960-61 ?
(5) Whether in view of the system of accounting followed by the assesses-applicant the Tribunal was right in holding in respect of the assessment year 1959-60 that the sum of Re. 1-73-130 being payment on account of shattering In in Hyderabad Branch was properly included in the sales?"
2. At the relevant time. The assessee firm, Messrs Muatala R. C. C.. Pipes Works, Karachi carried on business as manufacturer of R. C. C., Pipes. It also undertook contracts for laying and joining of pipes, and for digging and filling of earth. It had its Head Office at Karachi and branches at Hyderabad, Quetta and Hasan Abdal. The method of accounting adopted by the assessee was mercantile.
3. The facts concerning the question No. 4 are that for the charge years 1959-t0 and 1960-61, the assessee furnished returns of income for the respective years declaring a total income Re. 2,76,575 and Re. 1,88,036 respectively. The Income-tax Officer, Karachi served a notice upon the aaseasea under section 22(4) of the Income-tax Act, 1922 (hereinafter referred to as "the Act" to produce account books and documents specified in the said notice, including original vouchers for purchase of raw materials and expenditure, catbon copies of Cash Memos. Duty Cards. Gate Pass Books, Original Cash Books for Karachi and .Hyderabad and copies of G. M. I. Returns of production submitted to the Directorate of Industry. The assessee's explanation was that some of the documents required to be produced were either misplaced or not traceable after so many years since theiv maintenance, while other accounts and documents which were required were not maintained by the assessee in its business. The Income-tax Officer did not accept thus explanation and held that the assessee bad deliberately supres--sed the account books and documents and failed to produce them. Therefore, he made the assessment to the beat of his judgment under section 23(4) of the Act and computed the total income of the Head Office and the Branches. The seeearee filed a direct appeal to the Income*tax Appellate Tribunal and its plea was that since the documents and accounts required to be produced were either not maintained or were not available, therefore, there was no case of failure to comply with the notice issued under section 22(4) of the Act, and that unless it was shown by the Department that the required accounts and documents were actually maintained, there was no ,justification for making the ex parte assessm ent. The Tribunal rejected this plea and held that considering the magnitude and the nature of the asjessee's business of manufacture of R. C. C. Pipes, certain crucial account books such as manufacturing, and production records and stock-book of purchase of raw materials, were necessary to be maintained and must have been maintained. And that the assessee's excuse for their non-production on the ground that the Managing Partner of the firm was illiterate person from the tribal area, was a pretext. Moreover, some of the required documents mentioned in the Income-tax Officer's notice were admittedly maintained by the aseeeeee, such as Duty Cards, Gate Pass Books, copies of returns of production submitted to the Government authoritlesl but even these were withheld on the ground that they were not traceable, which was also a poor excuse, in the absence of proof of actual loss, theft or destruction. In the circumstances, the Tribunal upheld the best judgment assessment made by the Income-tax Officer under section 23(4) of the Act. On the application of the assesses, the Appellate Tribunal has referred to the High Court the Question No. 4 above set out.
4. The facts concerning the question No. 5 are that the aFsessee had taken a contract for laying and joining of pipes for the Water Supply Department, Hyderabad. The assessee submitted a bill for Re. 1,73,130 as shuttering charges and received payment of the amount of the bill from the Water Supply Department. Later on, the Department informed the assessee, in the account year, that the amount bad been wrongly paid to the assesses and that it would be deducted from the pending and future running Uls. On receiving this intimation, the assesses reversed the entry of this amount by dibitin; the sales in the trading account and crediting it to the Water Supply Department Account. The Income tax Officer included this amount in gross sales as income, which increased appreciably the rate o! Gross Profit. The assessee filed an appeal to the Appellate Tribunal but it was rejected and the order of Income-tax Officer was upheld, on the &round that the method of accounting adopted by the asseesee being mercantile, the right to receive payment of the amount having accrued and, in fact, payment was actually received, the receipt was rightly brought to tax. At the instance of the aeseseee, this question has also been referred to the High Court.
5. On the first Question, the submission of Mr. A.I Atbar learned Counsel for the assessee is that the making of a best judgment assessm ent under section 23(4) of the Act. Is in the nature of penalty and jurisdiction to make such ex Darts assessment arises only when there is a "failure" or a default on the part of the assessee to comply with "all the terms" of the notice issued to him by the Income-tax Officer under section 22 (4) of the Act. He contended that there was no such default on the part of the assesses. Because its case is that it had not been maintaining any manufacturing of production account and therefore, it was for the Department to show on some materials or evidence that the required accounts were in fact being maintained by the assessee and that their production was deliberately suppressed despite the notice. Mere non-production of certain documents or accounts demanded by the Incomo-tax Officer, without their being materials or evidence, for reasonably inferring their existence, does not raise a presumption that the assessee was deliberately suppressing them and withholding their production. Counsel is supported by the observations of the Madras High Court in J. M. Sheth v. Commissioner of Income-tax, Madras (l ), at p. 297 :_ "But the real question is whether it can be said that the assesses must have been maintaining another set of account boots and that they committed default in not producing them in complying with the notice under section 22 (4) of the Act. Tte assessee cannot escape the consequence of non-production of books called for by merely pretending that he has no books. If the evidence would juetily the inference in any given case that the assesses must have been main--taining account books, it would be open to the offcer to treat him as defaulter if the books are not produced. But if there are no materials from which the officer would reasonably infer that undi-- elosed account books exist, the non-production of such imaginary books would not of course be a default as contemplated under section 23(4) of the Act. There can be no presumption that the tssessee is suppres. Sing books and documents called for but not produced. Mere non-- production, without proof of the existence of things not produced, would not fall within the mischief of section 23(4)."
But we agree with the conclusion reached by the Appellate Tribunal that from the ciroumatances of the nature, size, magnitude and conduct of the sssessee, a strong reasonable inference may be justly drawn that the asses must have been maintaining some sort of manufacturing and productio account. The aseessee was carrying on an extensive business of manufacturing R. C. C.
Pipes and had branches in different cities in Pakistan. Therefor to suggest that it had not been maintaining any manufacturing or production account or stock registers of raw materials can hardly inspire confidence I the truth and credibility of the assesseo's explanation that no such accounts were being maintained in its business. It would be impossible for a maaufao turer to work out the cost of production without such accounts being m tained. It is admitted that the assexsee submitted production returns periodi. Cally to the Government Department on the prescribed forms. Which fact also is material evidence for inferring that production account was in fact being maintained. It was further admitted that certain documents such Duty Cards, Gate Pass Book, counterfoils of cheques and pay-in-all vouchers were admittedly maintained but they were not produced on the pretext that they were not traceable without proving how and when these documents disappeared from the offce of the assesses. As rightly submitted by Mr. Mansoor Ahmed Khan, learned counsel for the Department, the failur to produce these admittedly maintained boots, despite the notice to produ them, was, at least, a default though partial and clearly attracted the ju diction of the Income-tax Officer to mate the ex parse assessment tinder section 23(4). .
6. Our answer to question No. 4 is therefore, in the affrmative that on the facts and circumstances of the case, the provisions of section 23 (4) of the Income-tax Act, were properly attracted in respect of the charge years 1959-60 and 1960.61.
7. On the second question, the submission of Mr. All Athar was that no doubt, the asseaeee had adopted the mercantile system of accounting and therefore, the very accrual of a right to receive the payment would render
(1) (1965) 56 1 T R 293 the amount earned taxable. But his submission is that to soon as the Water Supply Department raised the dispute with regard to the amount already paid to the asseasee on the ground that it was paid to the ssse ssee by mistake, the asaessee could treat it as a business liability and was therefore entitled to reverse the entry. But, the payment in question had been received and the was no evidence on record to show that the claim of the Department w admitted by the assesses as a business liability in the year of account so to to mate it as an established business liability for which a debit could claimed. Having adopted a regular method of accounting the assesses cannot be allowed to change it or depart from it in respect of a particulat transaction and say that he was adopting a hybrid system of accounting.
8. We, therefore, answer the question No. 5 In the affirmative and hold that the sum of Re. 1,73,130 was properly included in the sales in respect of the assessment year 1959-60.
9. The reference is accordingly answered. The assessoo shall bear the coats of this reference.