1985 PLP 315 (PTD)

AJMAL MIAN, J.‑‑ By this common judgment we intend to dispose of the above two income‑tax direct references pertaining to the assess ment years 1972‑73 and 1971‑72, respectively made under section 66(1) of the Income Tax Act (hereinafter' referred to as the ‑Act), which raise the following two common questions: (i) Whether in the facts and circumstances .of the case the Tribunal was entitled to confirm the rejection of book results? (ii) Whether there was material before the Tribunal for estimating the receipts for the assessment year 1972‑73 at Rs.1,10,000? It may be observed that in I. T. C. No. 218 of 1‑974, which relates to the assessment year 1971‑72 in above question No. (ii) the amount mentioned is Rs.1,20,000 in place of Rs.1,10,000.

2. The relevant facts leading to the filing of the above references are that the applicant, who is carrying business of dry‑cleaning filed income tax returns disclosing Rs.94,931 and Rs. 85,811 as the receipts for the above two assessment years but the Income‑tax Officer did not accept the same and raised the receipts to Rs.1,50,000 for each of the above two assessment years on the ground that, (i) a new dry‑cleaning plant was installed in 1971‑72, (ii) the applicant did not furnish the details of the plant utilization based on meter reading of gas and electricity consumption converted into hours of running times etc., (iii) the details of day to day chemicals was not available, (iv) the record of daily inward and outward movement of clothes was also not available, and (v) sales were in cash and could not be verified. The applicant being aggrieved by the above orders filed I.T.A. Nos. 531 of 1972‑73 (for the assessment year 1971‑72) and 826 of 1972‑73 (for the assessment year 1972‑73), which were disposed of by a common order dated 13‑3‑1974 by the learned Income‑tax Appellate Tribunal reducing estimated receipt from Rs. 1,50,000 to 1,20,000 and Rs. 1,10,000 for the years 1971‑72 and 1972‑73, respectively. The applicant has therefore filed the above two direct references and has solicited the opinion of this court on the above two quoted questions.

3. In support of the above references Mr. Iqbal Qazi, learned counsel for the applicant, has urged that the Income‑tax authorities having not found any defect in the accounts produced by the applicant /assessee could not have resorted to proviso to section 13 of the Act on the basis of surmises and conjectures. On the other hand Messrs Waheed Farooqi and Nasrullah Awan appearing in the above two references for the respondent have contended that the orders of the Income‑tax Officer and the learned Income‑tax Appellate Tribunal are based on reasons which cannot be said to be not plausible.

4. In furtherance of the above submission Mr. Iqbal Qazi has cited the following cases: (i) Messrs S.M. Yousuf and Brothers v. The Commissioner of Income‑tax (East Karachi) 1974 P T D 45, in which a Division Bench of Erstwhile High Court of Sind and Baluchistan while construing the proviso to section 13 of the Act held that the result of books of accounts cannot be rejected on suspicion but the rejection should be based on something more than mere suspicion. In the above case some cash sales were found not to be verifiable by the Income‑tax Authorities and because of that the accounts version of the assessee was not accepted. The High Court held that the Tribunal was not justified to confirm the rejection of account books by the Income tax Officer. (ii) Star Rolling Mills v. Commissioner of Income‑tax, 1974 PTD

200. In the above case a Division Bench of the Erstwhile High Court of Sind & Baluchistan again while construing the proviso to section 13 of the Act held that the Assessing Authorities in the previous years having accepted method of accounting adopted by the assessee and having found it possible to deduce and determine rate of profit of the assessee cannot reject the same in the subsequent year. It was also held that non‑maintaining of the stock register, which the assessee never used to maintain was no ground to justify the assumption of the Income‑tax Officer that the profits could not be properly deduced from the return submitted. (iii) Vijaya Traders, v. Commissioner of Income‑tax, Mysore 1974 P T D Note 32, in which a Division Bench of the Mysore High Court held that the Appellate Tribunal was not justified in law in holding that the Income‑tax Officer could act on the proviso to section 13 of the Act or under proviso to section 145(1) of the Indian Act 1961 in spite of the fact that the accuracy of the accounts had not been doubted and the Appellate Tribunal did not find that the manner of accounting of the assessee was such which did not enable a proper determination of his income. (iv) Dhakeswari Cotton Mills Ltd. v. Commissioner of Income‑tax, West Bengal P L D 1956 S C (Ind.)

168. In the above case the Indian Supreme Court while construing subsection (3) of section 23 of the Act held that Income‑tax Officer is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as a evidence in a court of law. It was further held that it is also equally clear that in making the assessment under subsection (3) of section 23 of the Act the Income‑tax Officer is not entitled to make pure guess and make assessment without reference to any evidence or any material at all. (v) Messrs Coronet Paints & Chemicals Ltd., v. The Commissioner of Income tax (Central) Karachi 1984 P T D

355. In the above case this Division Bench while dealing with the proviso to section 13 of the Act held that assessee's accounts books are to be accepted unless on verification such books disclose some fault or defect which could not be reasonably and satisfactorily explained. It may be pertinent to mention that in the above case the book results were not accepted as the Income‑tax Officer found that the sale to the extent of Rs.44,328 against the total sale of Rs. 18,42,288 was not verifiable. The Order of the Income‑tax Officer was maintained by the Income‑tax Tribunal with certain modification but this Division Bench held that the above ground was not sufficient to reject the book results without finding any fault and defect in the accounts. On the other hand Mr. Waheed Farooqi has referred to the case of Imperial Paint and Varnish Works v. Commissioner of Income‑tax (West) Karachi, 1979 P T D 473, in which a Division Bench of this Court while construing the proviso to section 13 of the Act held that in making the assessment under the proviso, some amount of guess work is justifiable. In the above case the facts were that the assessee had disclosed gross sale amounting to Rs.28,60,944 and gross profit Rs.4,03,633 for the assessment year 1965‑66 i.e. 14%. However, on recast of the accounts the assessee showed gross sale amounting to Rs.33,97,205 and gross profit of Rs.9,08,082 i.e. above 26.5%. The Income‑tax Officer while making assessment found that assessee had maintained three books on the same pattern as in the early year in respect of which the profits had been assessed at 30%. It was also concluded that the assessee had not maintained any manufacturing register, from which the consumption of raw material could be co-related with the production. In view of the above finding, he increased the gross sale' for the above assessment year to Rs.34,00,000, The High Court in the above background of the facts made the above observation and pointed out that assessee had on recompilation disclosed profit at the 'rate of 26% or 27% as compared to the original version of 14% and that previously the profit assessed was 30%. It was also observed that the assessee had not maintained the stock register.

5. The questions, therefore, in issue in the present references is, whether the above grounds given by the Income‑tax Officer and main tained by the learned Income‑tax Tribunal are sustainable in law to justify the rejection of the book results disclosed by the appli cant/assessee. In this regard, it would be pertinent to take up the above various grounds found favour with the Income‑tax authorities in seriatim. . (i) That a new dry‑cleaning plant was installed in 1971‑

72. This finding of the Income‑tax Tribunal seems to be contrary to the finding of the Income‑tax Officer recorded in the assessment order dated 15‑6‑1973 for the assessment year 1972‑73 in which it has been observed that the second brand new plant went into operation some three years ago. However, in the assessment order of the assessment year 1971‑72 it has been stated that the above new plant went into operation during the assessment year. Be that as it may, in the absence of any material to conclude that factually the applicant's output was more than, disclosed in the book results the simplicitor fact of installing a new plant does not justify the inference that the book results are not reliable. The applicant could not have proved in the negative except by producing the books of accounts. (ii) That the applicant did not furnish the details of the plant utilization based on meter reading of gas and electricity consumption converted into hours of running time. In this regard, it may be observed that the above reason is unjustifiable in the absence of a finding that there exists such a formula or mechanism, whereby the running hours of the plant can be co‑related with the consumption of gas and electricity and that would furnish the actual book results or in the absence of a finding that other dry‑cleaners have been furnishing the above data. (iii) That the applicant/assessee failed to furnish the details of day today chemicals consumption. In this connection, it may be stated that in the absence of a finding that the applicant was maintaining such a detail in the previous assessment years, the absence of such detail could not have furnished a ground to reject book results, particularly after having accepted the applicant's system of accounting in the previous assessment years. (iv) That the applicant/assessee had not maintained proper record of daily inward and outward movement of clothes. In this regard, it may be observed that Mr. Iqbal Qazi, learned counsel for the applicant has pointed out that the applicant was maintaining the receipt books for receiving clothes for dry‑cleaning which contained the particulars of the clothes, the amount charged, the name of the customers with their telephone numbers and addresses. It has therefore been contended that the required particulars were available on record. It will suffice to observe that it is not the case of the respondent department that the applicant was maintaining any separate register, and, therefore, the reasons recorded hereinabove in sub‑para. (iii) are equally applicable to the instant ground. (v) That the sales were in cash and could not be verified. In this behalf, it may be stated that neither the Income‑tax officer nor the learned Income‑tax Tribunal has recorded a finding that the other firms dealing in dry‑cleaning have been maintained any particular type of accounting system, which facilitates the verification of sales to the satisfaction of the Income‑tax Department. It may be observed that the applicant /assessee was maintaining the receipt books containing the particulars referred to hereinabove in sub‑para. (iv). On the basis of the above particulars the verification of amount of receipts was possible. In any case, the above ground was found not sufficient to reject the book results in the previous assessment years.

6. The rulings cited by Mr. Iqbal Qazi cited by him support his case. We are inclined to hold that the book results cannot be rejected merely on the basis of suspicion unless a of finding of fact is recorded that on verification the account books disclose some defect or discrepancy which cannot reasonably be explained. We are also inclined to hold that the Income‑tax Authorities once accept a particular method of accounting system adopted by an assessee and find it possible to determine profits on the basis of such accounting system, cannot reject the book results on the ground that the accounting system i defective in the absence of any glaring discrepancy. We are also of the view that the proviso to section 1K cannot be pressed into service without recording a finding that the accounts are defective and the determination of profits on their basis is not possible.

7. The rejection of the account books for the assessment years in question on the grounds referred to hereinabove by the Income‑tax Officer and by the learned Income‑tax was not warranted by law and the rejection is based on surmises and conjectures. We, therefore, answer the above questions in the negative. However, there will be no order as to costs. M. B. A. Reference answered in negative.