1988 PLP 332 (PTD)

HAIDER ALI PIRZADA, J.--This is a reference under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act). The question of law referred for the opinion of this Court are:-- (1) Whether, in facts and circumstances of the case, the Appellate Tribunal was justified in upholding the rejection of assessee's manufacturing-cum-trading account and confirming the addition of Rs.14,30,000? (2) Whether, the Appellate Tribunal was right in holding that even though no form contemplated under Section 13-A of the Income-tax Act had yet been prescribed still the assessee could furnish a certificate about valuation of stock to serve a substitute for the certificate required under subsection (2) of Section 13-A? (3) Whether the Income Tax Officer and the Income Tax Appellate Tribunal were right in holding that the valuation of stock was "uncertified" when the audited balance sheet showed the valuation of stock and the auditors had certified it. The facts of the case are as set out in the statement of the case. The applicant /assessee is registered as a public limited company under the Companies Act, 1913. The assessee is engaged in the manufacture of cotton yarn and cotton fabrics and makes on its annual account on 30th September each year. For the account year ending on 30th September, 1970 assessable in the assessment year 1971-72, the assessee filed its Return of Income showing net losses of Rs.3,30,970, after adjusting losses brought forward from earlier years. The net trading result of the assessee for assessment year 1970-71 amounted to Rs.4,09,

204. The Income-tax Officer observed that the production of yarn is not satisfactory for the simple reason that the assessee has himself worked out short-fall of 46,34,626 lbs. and Awan Committee Formula. The Income Tax Officer further observed that there are shortfalls in the yarn as well as in cloth and the assessee did not file certificate as required by section 13-A of the Act. The Income Tax Officer rejected the book result and proceeded to assess the assessee on the basis of the proviso to section 13 of the Act. Against the assessment order of the Income Tax Officer the assessee preferred an appeal to the Income Tax Appellate Tribunal. The Tribunal by its order dated 17-5-1976, dismissed the appeal of the assessee. At the instance of the assessee, the Appellant Tribunal stated a case for the opinion of this Court. Mr. Ali Athar, the learned counsel for the assessee has raised the following contentions:- (1) That in the absence of any finding of the Income-tax Authorities that the assessee has not maintained a regular account or employed a method of accounting which in the opinion of the I.T.O. was such that profits and gains could not be deduced there from, the I.T.O. could not reject the accounts and to fix the production on the basis of the formula contained in Awan Committee Report. (2) The Income-tax Appellate Tribunal had illegally drawn as inference against the assessee for non-production of certificate about valuation of stock. On the other hand Mr. Salahuddin has submitted that the production was not satisfactory for the simple reason that the assessee had itself worked out a shortfall of 46,34,626 lbs. as per Awan Committee Formula and the assessee did not file the certificate as required under section 13-A(2) of the Act. His submission is that 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 that the I.T.O. can compute the income upon such basis as he may determine. The proviso to section 13 of the Act provides 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 cannot be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. The words "in the opinion of the Income Tax Officer" in the A proviso to section 13 of the Act, in our view, do not confer a mere discretionary power, but in their context impose a statutory duty on the in Income Tax Officer, to examine in every case the method of accounting employed by the assessee, and (i) to see firstly whether or no it is regularly employed, and, (ii) secondly to determine whether the income, profits and gains of the assessee can properly be deduced therefrom. In instant case, both the Income Tax Officer as well as the Tribunal, after rejecting the assessee's book result have added Rs.14,30,

000. It is an admitted position that upto the year 1970-71 the assessee's manufacturing and trading result have always been accepted. It is also an admitted position that the assessee had maintained the accounts, in similar manner during the preceding years, which were accepted by the Income Tax Officer. The admitted position is that the assessee has been maintaining accounts regularly in the registers as prescribed by the Excise Rules, which showed the production, manufacture and consumption. For this purpose the method of accounting adopted by the assessee was in the form prescribed by the Excise Rules. The Income Tax Officer found that actual production of this yarn was more than the capacity fixed at 94, 36, 044 lbs. The I.T.O. found the purchases be duly vouched and verifiable. The Income Tax Officer observed that the actual production of the year in question was more than the capacity fixed for the purposes of Excise duty at 94,36,

014. The I.T.O. required the assessee to furnish an explanation with regard to the fall in arm as well as in cloth production and for its failure to file the certificate in term of section 13-A (2) of the Act. The assessee complied with the Income Tax Officer's demand and submitted an explanation vide its letter dated 25th May, 1974. The Income Tax Officer found the explanation of the assessee to be not convincing and according to him, the shortage in yarn and cloth production remained unexplained. With regard to assessee's explanation for non-filing of the certificate he made the following observation: "It is usual that the stocks shown in the balance sheet is either described to have been certified by the auditors or by the management but in the present case there is no such description given in the balance sheet. Whenever the stocks are physically checked up by the auditors this fact is specifically recorded at the bottom of the balance sheet or in the auditors report separately filed with the management. But in this case no such thing is available which means that stocks have not been physically checked up by the auditors. The requirement of section 13-A (2) is that a certificate from a Chartered Accountant stating that the value of the closing stock including work in progress, if any, is at such and such figure which he has arrived at after satisfying himself of the correctness of such value. This certificate must be accompanied with the Return of Income, non-compliance of which is a serious flaw and renders accounts of the assessee worthy of rejection." On appeal the learned Tribunal held as follows: "It may be added here that the objection of the assessee's counsel regarding the non-applicability of section 13-A (2) was repelled by the Tribunal and it held that: "the appellant could at least furnish any certificates about valuation of stock to serve as a substitute for the certificate required under subsection (2) of Section 13-A. This was not done and the endorsement of the Auditors on the Final Account is silent about stock valuation." We are of the view that the formula prescribed by the Awan Committee is not for universal application. It is only applicable when substantial defects are discovered in the books of accounts and the same are rejected and the assessing officer can resort to make estimate of production and while doing so he can justify his estimates with reference to the formula but not unless the books are discarded. In the case before us, the Income Tax Officer could not discover any defects in the books of accounts in spite of a thorough scrutiny conducted by him. The mere fact that there was a shortfall of 46,34,626 lbs. on the basis of Awan Committee Formula, and similarly there was a shortfall of 12,74,002, sq. yards as "per Awan Committee Formula" could not, therefore, be a valid ground for making an addition of Rs.14, 30, 000, The Income Tax Officer rejected the books only on the ground that there was a shortfall in the yarn and cloth on the basis of Awan Committee Formula. This shows that evidently he had no suspicion about proper valuation of stock. The Tribunal however without any material before it has reached a finding that low yield coupled with the unreliability of the quantity and value of closing stock added weight to the assessing officer's doubt about the authenticity of the recorded version. It is significant to note that the Tribunal has not indicated as to how the value of stock was unreliable. It is pertinent to note that the time of assessment, books of accounts like daily production register summary production register: waste daily register, gate-passes register, cotton receipts and issue register etc. were produced. The stock register was regularly maintained. It is pertinent to note that the two products yarn and cloth are excisable items for which the prescribed registers were maintained and were frequently checked by the Excise Department. It is manifest that the finding of the Tribunal that the production remained short for which no justifiable reason existed. Having disposed of the first contention, which has been raised on behalf of assessee, we now proceed. to consider the last question whether the valuation of stock was uncertified. It is advantageous to reproduce section 13-A of the Act, which reads as under: "13-A. (1) Every private company as defined in the Companies Act, 1913, whose paid-up capital on the last day of any previous year is rupees twenty lakhs or more shall furnish a copy of the balance sheet and profit and loss account duly certified by a person who is a chartered accountant within the meaning of the Chartered Accountants' Ordinance,1961 (or an industrial accountant within the meaning of the Cost and Industrial Accountants Act, 1966). (2) Every public company as defined in the Companies Act, 1913, and every private company referred to in subsection (1), shall with the return of income filed under section 22 for any previous year, furnish for that year a certificate, in the prescribed form, duly certified by the person who is a chartered accountant within the meaning of the Chartered Accountants' Ordinance, 1961, stating the value of the closing stock, including work in progress if any of the company after such person has satisfied himself of the correctness of such value (3) In any case where a company has not complied with the requirements of subsection (i) or subsection (2), the income, profits and gains shall be computed upon such basis and in such manner as the Income-tax Officer may determine. It is significant to notice that no certificate has been prescribed under the Act or the rules made thereunder. The assessee could file any certificate. The assessee contended before the Income Tax Officer and the Tribunal that in the absence of prescribed form, the audited balance sheet shows valuation of stock. The Chartered Accountant who audited the accounts of the assessee in his report made the following observation:-- "Such balance-sheet exhibits a true and correct view of the state of affairs of the company according to the best of our information and explanation given to us and as shown by the books of accounts." Thus the valuation of stock stood duly certified by Chartered Accountant. The certificate from the chartered accountant or industrial accountant stating that the value of the closing stock including work in progress, if any, is at such and such figure which has been arrived at after satisfying himself of the correctness of such value was not filed alongwith the return. This in itself would not constitute sufficient ground for the Income Tax Officer or the Tribunal to reject the book version and resort to the proviso to Section 13 of the Act'. But once the audited balance sheet shows valuation of stock L and statement of fact or the observations of the chartered accountant are there with reference to a particular object that section 13-A of Act contemplates, we find it difficult to accept the reasoning of I. T.O. and/or the Tribunal that they could not construe it as a certificate under section 13-A of the Act validly made. The I.T.O. as well as the Tribunal could reject the assessee's book version but income, profits and gains should have been computed upon such basis and in such manner as the Income-tax Officer may determine. In the result question is answered in the negative that is, against the Revenue and in favour of the assessee by a short order dated 16-9-1987. The above are the reasons for a short order dated 16-9-1987, which was passed on conclusion of the arguments. A copy of the judgment under the seal of the High Court and the signature of the Registrar shall be sent to the Income Tax Appellate -Tribunal, Karachi Bench, as required under Section 66(5) of the Act. M. B.A./P-42/K Question answered in negative.