P L D 1969 Karachi 540 (PLP)

(a) Income‑tax Act (XI of 1922), S. 66(2)‑Question originally proposed before Tribunal raising contention that there was no material before Income‑tax Officer to disallow losses shown by assessee‑Questions proposed before High Court relating to entire amount of losses and disallowance of certain items‑Application for substitution of new question for original question‑Held, in circumstances, not entertainable under S. 66(2). (b) Income‑tax Act (XI of 1922), S. 66(1) read with Ss. 13, first proviso & 23(3)‑Difference between inaptitude of method of accounting and reliability of books of accounts‑Parties relying on first proviso to S. 13 and discussing it but, in fact, accounts of assessee found by Income‑tax Officer to be unreliable and Tribunal agreeing with his view‑Tribunal holding that "the increase in the expenses was not so disproportionate as to permit Income‑tax Officer to disallow losses"‑--Observation of the Tribunal that their decision hardly involved a question of law having reference to facts found in account books which were neither rejected nor held to be reliable‑‑Observation of Tribunal that no question of law involved, in circumstances of case‑Held, correct. The Law and Practice of Income‑tax by Sir Jamshedji B. Kanga and N. A. Palkhivala ref. S. A. Nusrat for the Income‑tax Department. P. D. Ramchandani for the Assessee. JUDGMENT QADEERUDDIN AHMED, J.‑--These four applications have been made with respect to one order of the Income‑tax Appellate Tribunal dated the 18th of August 1965, by which the Tribunal has declined to refer to this Court the question which was pro posed by the assessee as well as the question which was proposed by the Department.

2. The facts which form the background, according to Mr. P. D. Ramchandani, are that assessee is a firm of stevedores which in the course of its business used lighterage owned by itself, or hired. The lighterages owned by itself according to counsel were old; therefore, the expenditure on their maintenance was heavy.

3. Assessment with respect to three years' income, that is to say 1958‑59, 1959‑60 and 1960‑61, were made by the Income‑tax Officer. Mr. P. D. Ramchandani has taken by way of illustration the figures which relate to the assessment year 1958‑

59. In that year according to counsel the assessee showed a profit of Rs. 1,11,052 in respect of the business as stevedores but in respect of the lighterage section of that business, it showed a loss of Rs. 36,

823. The Income‑tax Officer did not altogether reject the accounts but found fault with their maintenance. The faults which he found are summarised by the Income‑tax Appellate Tribunal as follows:‑ "Payments to labour are on self made vouchers and they are also not made directly to the labour, food expenses are paid in lumps sums, hire of launches had fallen and had not increased as alleged and hire payments were also made in lump sums. No muster roll existed for the clerical staff and wages paid to the labour were on thumb‑impression which could not be verified." As a result of the above defects, the Income‑tax Officer disallowed the losses shown by the assessee under subsection (3) of section 23 of the Income‑tax Act, 1922. Thereafter, he held that the total amount of the receipts in the assessment year having been shown to be Rs. 77,384 it was fair to calculate that a profit of 10 percent was made on it by the assessee, and assessed Income tax on that basis.

4. The assessee went directly in appeal to the Income‑tax Appellate Tribunal against three orders of assessment relating to the three years mentioned above. The Income‑tax Appellate Tribunal partly accepted them holding that the loss shown by the assessee was rightly disallowed by the Income‑tax Officer, but "that the increase in the expenses was not so disproportionate as to permit the Income‑tax Officer to disallow the losses and over and above that (to) work out (in his own way) the profit also."

5. Both the parties were dissatisfied with the decision of the Tribunal therefore, submitted questions under section 66 (1) of the Income‑tax Act, 1922, for reference to this Court. The assessee proposed the following question. "Where there was any material on the record to warrant the disallowance of the amount of loss of Rs. 36,823 as done in this case when the loss was on account of overhead heavy expenses?" The Department proposed the following question: "Whether on the facts and the circumstances of the case and having subscribed to the finding and sections of the Income‑tax Officer in discarding the accounted version and ignoring loses, the Income‑tax Appellate Tribunal was justified in debarring the Income‑tax Officer from working out a profit in the Lighterage Account?" The Tribunal declined to refer them to this Court as mentioned above. It came to the conclusion that there was no question of absence of material for refusing the Income‑tax Officer to allow the losses which were claimed by the assessee because the flaws which were found in the account books of the assessee constituted that material. The Tribunal further found that the question proposed by the Department was not a question of law.

8. Both the parties had applied to this Court under sub. section (2) of section 66 of tile Income‑tax Act, 1922, for direction to the Income‑tax Appellate Tribunal to refer the questions to this Court. The assessee has after making three such applications, applied under subsection (2) of section 66 of the Income‑tax Act, 1922, on the 7th of February 1956, that the question which was proposed oar its behalf for reference to this Court be allowed to be reframed as follows: (1) Whether under Proviso to section 13 of the Act, the Income‑tax Officer was right in law in disallowing the entire amount of the loss of Rs. 36,823? (2) Whether in making the assessment, the Income‑tax Officer was right in disallowing the items of Rs. 26,x84‑4‑6 on account of repairs and Rs. 595 on account of depreciation, under sections 10 (2) (v) and (vi) being the items included in the total loss of Rs, 36,823?" Mr. P. D. Ramchandani, took the stand that the questions, which the assessee desires to be substituted for the one which it had proposed before the Income‑tax Appellate Tribunal, are intended merely to clarify the idea which is contained in the originally proposed question. But a comparison of the newly proposed questions with the former question makes it at once clear that this stand of Mr. P. D. Rarnehandani cannot be accepted. In the question which was proposed before the Income‑tax Appellate Tribunal, a contention was raised that there was no material whatsoever before the Income‑tax Officer to disallow the losses which were shown by the assessee. As against that the questions which have been proposed now relate to the entire amount of losses and disallowance of certain items. In this view, the application for substitution of the new questions for the original question is not enter section 66 (2) of the Income‑tax Act, under 1922.

7. Proceeding now to examine whether the questions originally proposed by the parties have been correctly disallowed by the Income‑tax Appellate Tribunal or not, we may mention that Mr. P. D. Ramchandani as well as Mr. S. A. Nusrat have concentrated their attention on the first proviso to section 13 of the Income‑tax Act, 1922, in support of their respective stands. The section and the first proviso are 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 opinion of the Income‑tax Officer, the income, profits and gains cannot properly be deducted therefrom, then the computation shall be made upon such basis and in such manner as the Income‑tax Officer may determine Provided further the Central Board of Revenue may in the case of any person or class of persons, require such 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 the assessee shall be computed on the basis of the books, accounts or records maintained accordingly." On the basis of the above provision of law, Mr. P. D. Ramchandani has argued that, the Income‑tax Officer did not altogether reject the accounts of the assessee. In fact he accepted the amount of the gross receipts shown by the assessee and that amount was the basis for assessing profits at the rate of 10 per cent. This according to counsel was done in pursuance of the first proviso to section 13 of the Income‑tax Act, 1922; therefore, he could not arbitrarily reject the losses without pointing out the items which were found by him to be unacceptable and giving reasons for rejecting them. Ire should have in this manner explained how the entire amount of losses shown by the assessee was wiped out. We find, however, that counsel's argument is of no consequence for the purpose of the question which was proposed by the assessee. Under that question it was necessary to show that there was no material whatsoever before the Income tax Officer for rejecting the losses shown by the assessee. It was from this point of view that the Income‑Tax Appellate Tribunal observed about the question as follows: "We wonder if in the face of all the material which the Income‑tax Officer did collect to disallow the loss and the Tribunal took full notice of that material the question posed arises from the Tribunal's order and application of the proviso to section 13 of the Income‑tax Act can be shut out."

8. Turning now to the question which was proposed by the Department, the point which is sought to be made is that the Income‑tax Appellate Tribunal was not justified in preventing the Income‑tax Officer from "working out" profits in the lighterage account. The reply of the Tribunal is that its inter ference was founded only on the basis of the facts that were on the record; therefore, their decision did not involve any question of law.

9. We have tried to understand as to whether the Tribunal‑'s reply is correct and looking at the first proviso which has been reproduced above, we feel that whereas the proviso concerns itself with the method of accounting and the manner of computa tion, the Income‑tax Officer as well as the Income‑tax Appellate Tribunal have dealt with the accounts from the point of view of their reliability. The criticism to the accounts of the as lessee made by the Income‑tax Officer and relied upon by the Income‑tax Appellate Tribunal which has been reproduced above, shows that defects have been found in the maintenance of accounts. For this reason, the Income‑tax Appellate Tribunal was thinking of the facts and figures which were on the record and which enabled it to observe that "the increase in the expenses was not so disproportionate as to permit the Income‑tax Officer to disallow the losses." In these circumstances, the question proposed by the Department criticising the Income‑tax Appellate Tribunal for debarring the Income‑tax Officer from working out profit is a contention which did not involve a question of law. From the point of view of the Income‑tax Appellate Tribunal, it had correctly done so because it was thinking of the material that was on the record and had drawn its conclusion from it that accrual of the profits was not neglected by the assessee.

10. But apart from the above point of view, we believe that the first proviso to section 13 of the Income‑tax Act, 1922, was in the minds of the parties as well as of the Income‑tax Appellate Tribunal and feel that for proper application of that provision, the minds of the parties as well as of the Tribunal should not have been directed towards the defects which were found in the manner of maintaining accounts but to the method of accounting and the manner of computation. It is possible that a perfectly good method be used by an assessee yet in keeping the books in) accordance with that method mistakes should have been made, errors committed or falsification taken place. There is a difference between the inaptitude of the method of accounting and in the reliability of the books of accounts. Mr. P. D: Ramchandani has drawn our attention to the following comments of Sir Jamshedji B. Kanga and N. A. Palkhivala on the first proviso to section 13 of the Income‑tax Act, 1922 in their book called "The Law and Practice of Income‑tax": "The accounts must be distinguished from the method of account. The section deals merely with the method of accounting. If the assessee's method of account is improper, i.e., such that the real profits cannot properly be deduced therefrom, the Income‑tax Officer must reject the method under the proviso, but he cannot merely on that ground reject the account books." Further: "If, however, the account books are unreliable, false or incorrect, or are incomplete, e.g. where entries .in respect of certain transactions are altogether omitted with a view of suppressing profits, the Income‑tax Officer has of course the power to reject such account books, but that power is not to be sought under the proviso to this section (3). Apart from this proviso, the Income‑tax Officer may reject such account books and make an assessment under section 23(3) on the income as estimated by himself." The above distinction leads to the conclusion that while the parties were relying on the first proviso to section 13 of the Income‑tax Act, 1922, and discussing it, yet in fact, the accounts or parts of them were found by the Income‑tax Officer to be unreliable and the Income‑tax Appellate Tribunal agreed with that view. The observations of the Income‑tax Appellate Tribunal to the effect that their decision hardly involve a question of law when they held that "the increase in the expenses was not so disproportionate as to permit the Income-tax Officer to disallow the losses" had reference to the facts found in the account books, which were neither rejected nor held to be unreliable. This way of thinking correctly led the Income‑tax Appellate Tribunal to snake the observation that no question of law ova‑ involved.

11. The above view falls squarely within the scope of section 23 of the Income‑tax Act, 1922 and not under the first proviso to section 13 of the Income‑tax Act, 1922. In this case we feel that references to the first proviso to section 13 of the Income‑tax Act, 193 5, have not been appropriately made by counsel for the parties, because there is no criticism of the method of accounting, no basis found for computing profits and no manner determined for doing so. All that has happened is the application of subsection (3) of section 23 of the Income‑tax Act, 1922.

12. We feel therefore, that the distinction which we have emphasised between the meaning and application of subsection (3) of section 23 and the first proviso to section 13 of the. Income‑tax Act, 1922 is valuable in these cases because it has made a vital difference in the approach to the problem.

13. As explained above, the questions proposed by the parties have been rightly disallowed by the Income‑tax Appellate Tribunal. We accordingly dismiss these cases with no order as to costs. S. Q. Application dismissed.