1994 PLP 713 (PTD)

M. MAHBOOB AHMAD, C.J.

The following question said to have arisen out of the order of the learned Income Tax Appellate Tribunal, dated 30th July, 1979, has been referred to this Court under section 137 of the Income Tax Ordinance, 1979 for answer: "Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in accepting the book profit of the assessee company in the presence of a clear and unrebutted finding in the order of assessment that the manufacturing expenses of the assessee company were not fully verifiable?"

2. The respondent, which is engaged in manufacture and sale of paints filed returns of income for assessment years 1975-76 and 1976-77. The Income Tax Officer, Coys Circle-V, Lahore, after rejecting the declared version calculated gross profit at the rate of 22.5% instead of 20.2% and 19.9% for the two years respectively, on the sales made by the petitioner vide his order, dated 22nd June, 1977. However, on appeal by the assessee, the increase in the rate of gross profit was set aside by the Income Tax Appellate Tribunal, which was of the view that the Income Tax Officer having accepted the declared sale should have applied the declared rate of profit.

3. Mr. Muhammad Ilyas Khan, learned counsel for the petitioner has argued that the Income Tax Officer, having found that the accounts maintained by the respondent were defective and. deficient, was justified in applying the rate of gross profit at 22.5%. It was pointed out by the learned counsel that as in the previous years the representative of the respondent had itself agreed to be assessed at the said rate.

4. The learned counsel appearing on behalf of the respondent, has, on the other hand, contended that as the respondent was maintaining correct account and was paying excise duty, the rate of profit could not be enhanced.

5. We do not see any merit in the contention raised on behalf of the respondent. The Income Tax Officer while rejecting the accounts of the respondent had observed in his order that the assessee's position of accounts remains the same as in the past, i.e.:

(1) No separate manufacturing accounts have been maintained. (2) There is day-to-day production record. (3) Only a stock register of manufactured goods has been obtained. (4) Manufacturing expenses are not fully verifiable. Under the circumstances reliance cannot be placed on the declared version of the assessee. It is thus evident that the rejection of account was based on valid reasons. Surprisingly, while setting aside the order of the Income Tax Officer, the learned Tribunal observed that there was nothing in the order to show that the accounts. were not in order.

6. It was also observed by the learned Tribunal that when the sales, as declared were being accepted by the Income Tax Officer, he should have also accepted the rate of profit. In our view, the approach of the learned Income Tax Appellate Tribunal is wholly fallacious. Rate of profit is relatable more to the expenses incurred on the manufacture of goods and their sale price rather than on the volume of the sales. Even if the sales as declared had been accepted, still the Income Tax Officer could justifiably hold that the profits made by the respondent were higher than those declared especially when the expenses were not verifiable. The payment of excise duty has hardly any relevance for determination of the dispute. Reliance of the learned counsel for the respondent on Karachi Textile Dyeing and Printing Works, Karachi v. Commissioner of Income Tax (Central), Karachi 1984 PTD 150 (H.C. Kar.), is wholly inapt for in that case the accounts were found to be accurate and correct.

7. It is of significance to notice that in the previous assessment year viz. 1974-75, the authorized representative of respondent had himself agreed to enhancement of the rate of profit from the declared version to 22.5%. The approach of the Income Tax Officer in adopting the same rate of profit after having rejected the account, could not, therefore, be termed as erroneous and his order should not have been interfered with by the Income Tax Appellate Tribunal. For the reasons aforesaid, the answer to the question referred to us is in negative that on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was not right in accepting the book profit of the Assessee Company in the presence of a clear and unrebutted finding in the order of assessment that the manufacturing expenses of the assessee company were not fully verifiable. M.BA./C-37/L Order accordingly.