P L D 1967 Karachi 561 (PLP)

WAHIDUDDIN , J.--This is a reference under section 66(1) of the Income-tax Act 1922. The Income-tax Appellate Tribunal by order dated 9th August 1962 has referred the following question of law for the consideration of this Court :- "Whether the Tribunal having found that "in business of this kind no manufacturing account can be maintained giving proper quantitative reconciliation" and not having found any, other defects in the accounts maintained could in law apply the proviso to section 13 of the Income-tax Act and resort to estimate the sale and rate of Gross Profits ? The dispute between the parties refers to the assessment year 1954-55 corresponding to the account period ended on 31st December, 1953. The applicants manufacture plastic goods and the period under consideration is the fourth year of their business. In the first year 59 % gross profit was applied on estimated sale and during the charge years 1952-53 and 53-54 on the estimated sale of finish goods and raw materials 40 % and 15 % gross were respectively applied.

2. For the assessment year under consideration the applicant disclosed sales of Rs. 1,08,818-8-6 of finished goods and of Rs. 11,449 of raw material and an over all gross profit of 25.5 % thereon. The Income-tax Officer discarded these results on the ground that in earlier years the applicants were assessed at 40 % gross profits. He further found that other manufacturers of plastic goods have shown profits at 50%. In addition to this he also took into consideration the fact that the manufacturer of plastic goods had made declaration of excess income which in some cases ha4 raised the profits to 60%. According to the conclusion reached by the Income-tax Officer all the sales were not vouched and the cash memos did not mention the name and other particulars of the purchasers. He therefore rejected the book result by order dated 7th June 1955 and estimated the total sale of finished goods at Rs. 2,00,000, and raw materials at Rs. 20,000 and applied 60 % gross profit on the former and 40 % on the latter.

3. In appeal the appellate Assistant Commissioner by order dated 31st August, 1959 upheld the rejection of the book result and maintained the estimate of sales, but reduced the gross profits rate to 55% in the case of finished goods and 33-1/3 % on the raw materials. The Income-tax Appellate Tribunal on further appeal by order dated 11th May, 1961 found that the Income- tax Officer's order appeared to have been written in a careless manner because about 75 % of the sale were credit sales. The rest of 25 % had been made to certain persons whose addresses in many cases could be traced as they were well-known parties and there were a few persons where the addresses were not known. It came to the conclusion that this ground for rejection of the account books cannot be given much importance. The learned Tribunal further observed as under :- "The real fact in this case is that there are no stock registers maintained showing manufacturing account. We think that in a business of this kind no manufacturing account can be maintained giving proper quantitative reconciliation. It is clear that the profit rate of the business is to be determined on the basis of estimate." They further observed as under :- "We think that the records of this assessee would offer the best guide for the estimate. It appears that in the assessment for 1953-54 the turnover was estimated at 25 % over the disclosed figure so far as the manufactured goods are concerned. In view of that the turnover would be something like Rs. 1,35,000 but we consider the estimate as made by the Sales-tax Officer for the accounting year which is not coterminus should be taken as the estimate of turnover. This means the turnover should be taken at Rs. 1,40,

000. The Appellate Assistant Commissioner reduced the estimate of gross profit by 5 %. His predecessor determined the gross profit at 40 % in making the assessment for 1953-54. As the business, according to the view we have taken, improved to some extent it would be fair .to apply gross profit rate of 50 per cent. This means gross profit should be taken at Rs. 70,000 in place of Rs. 1,20,000 as taken by the Income-tax Officer. As to the estimate of sales of raw materials at Rs. 20,000 the estimate may stand but there is no reason that the gross profit should be shot up to 40 per cent. against 15 per cent. of the earlier, year. We are of the opinion that same profit rate should be taken, namely 15 per cent. on the turnover of Rs. 20,000." It will thus be noticed that the Tribunal found that it was impossible to maintain manufacturing account giving quantitative reconciliation. They further held that no importance could be attached to absence of addresses in some cash memos and did not take into consideration the profit rates in similar cases which varied from 22 % to 80%. They however came to the conclusion that in the case under the consideration the profit rate of the business should be determined on the basis of estimate. After taking into consideration the past conduct of the applicants, they reduced the gross profit in the case of finished goods from 55 % to 50 % and of raw materials to 15%.

4. In support of the reference Mr. Ali Athar has contended that on the basis of the finding of the Tribunal regarding the impossibility of maintaining manufacturing account the Tribunal was not justified in either estimating the sales or in applying a flat rate of gross profit at double the rate shown by the account books. The learned counsel vehemently argued that the Income- tax Tribunal had not doubted the genuiness of the account books of the applicants and, therefore, proviso to section 13 of the Income-tax Act, which is in the following terms, was not applicable to the fasts of the present case. "

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 deducted therefrom, then the compu tation 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 the assessee shall be computed on the basis of the books, accounts, or records maintained accordingly. Ex : The expression "method of accounting", as used in this section, includes the language or script employed or to be employed, by an assessee for the purposes of maintaining his accounts." In our opinion the contention of the learned counsel has no force because even if the Department comes to the conclusion that an assessee has employed a proper method of accounting regularly it is open to the Income-tax Officer to take resort to the proviso if the method is such that the true profits cannot be correctly determined therefrom. Thus even if the assessee has regularly employed a method of accounting it can be discarded under the proviso if the method does not show the correct profit of the year. This aspect of the question was considered by the Judicial Committee in Commissioner of Income-tax, Bombay v. Sarangpur Cotton Manufacturing Co. Ltd., Ahmadabad (AIR 1938 P C 1). In this connection their Lordships observed as under "Section 13 relates to a method of accounting regularly employed by the assessee for his own purposes and does not relate to a method of making up the statutory return for assessment to income-tax. The Income-tax Officer is not prima facie entitled to accept under section 13 the profits shown by the accounts, where there is a method of accounting regularly employed by the assessee. It is the duty of the Income-tax Officer, where there is such a method of accounting, to consider whether the income, profits and gains can properly be deduced therefrom, and to proceed according to his judgment on this question He is not right in computing for the purpose of section 10 income, profits and gains in accordance with the method of accounting regularly employed by the assessee when that method in fact does not show the true income, profits and gains." It is in this light that the remarks of the Income-tax Appellate Tribunal are to be interpreted. The learned Income-tax Appellate Tribunal remarked that "in a business of this kind no manu facturing account can be maintained giving proper quantitative reconciliation. It is clear that the profit rate of the business is to be determined on the basis of estimate". It is quite clear from these remarks that the Income-tax Tribunal was clearly of the opinion that in the absence of manufacturing accounts giving quantitative reconciliation, the accounts though regularly maintained by the assessee profits therefrom could not be properly deduced. It was for this reason that they resorted to the provisions of the first proviso to section 13 of the Income-tax Act. In our opinion, on this finding it, was open to the Income tax Appellate Tribunal to have resort to the proviso to section 13 of the Income-tax Act. In addition to this the learned Income -tax Appellate Tribunal also considered the past conduct of the applicant's company. It is not disputed that the plastic manufacturing business is flourishing rapidly. The applicants having themselves declared more profit in the past years it was open to the Department to hold that on the account books of the applicant's company it was not' possible to arrive at correct result about the gross profit made by the applicant company in the relevant assessment year. This aspect of the question was also considered in two Indian decisions. In S. N. Namasivayam Chettiar v. Commissioner of Income-tax, Madras (38 I T R (1960) 579) it was held by the S C of India that even in cases where the assessee has regularly employed a method of accounting the Income-tax Officer can resort to the proviso if the method is such that the true profits cannot be correctly determined therefrom. In Punjab Trading Co. Ltd. v. Commissioner of Income-tax, Simla (53 I T R (1964) 335) the same view was expressed. It seems to us also that the contention of the learned counsel that once .the Income-tax Authorities come to the conclusion that the assessee's method of accounting had been regularly employed the book result should prevail is not correct- interpretation of the proviso to section

13. The mere fact that an assessee provides a plausible set of regularly kept accounts cannot make the Income-tax Officer. powerless to do anything about the profits shown therein. It is open in such cases also to the Income-tax Officer, if he comes to the conclusion, that it is not possible to deduce correctly the income, profits and gains from them to assess the assessee according to his judgment.

5. On the view that we have taken of the matter we would answer the question in the affirmative. The applicants will bear the costs of these proceedings. S. Q. Reference answered in the affirmative.