1982 PLP 185 (PTD)

MUHAMMAD AKRAM, J.‑‑This will dispose of the above eight reference applications directly made in the High Court by the petitioner assessee under section 66 (1) of the Income‑tax Act, 1922 (as amended) relating to the assessment years 1960‑61 to 1967‑68.

2. The assessee Messrs Nazir & Company, Lyallpur is a registered firm and was working as a sub‑contractor to certain other firms. The assessment of the firm for the years 1960‑61 to 1965‑66 as originally made was set aside and the case remanded for a de novo assessment. In these circumstances on the 4th June, 1971 the Income‑tax Officer, Circle, Lyallpur, completed the re‑assessment against the petitioner separately for the years 1960‑61 to 1965‑66 and also made separate assessments for the two ensuing assessment years 1966‑67 and 1967‑

68. Dissatisfied with these orders the assessee filed separate appeals against them. They were disposed of by the Income‑tax Appellate Tribunal (Pakistan), Lahore by a single order dated the 17th of July, 1972, wherein the case of the assessee for each respec tive assessment year was examined and discussed.

3. In these circumstances the assessee filed the above reference applica tions in this Court against the Tribunal's order alleging that the following common questions of law have arisen out of the order passed by the Income tax Appellate Tribunal :‑ (1) Whether on the facts and in the circumstances of the case Appellate Tribunal was right in confirming the rejection of accounts ? (2) Whether the basis for the addition made by the Income‑tax Officer or the rate of profit applied by him was in accordance with the proviso to section 137 ? (3) Whether the order of the Income‑tax Appellate Tribunal is not vitiated by its ignoring to consider the facts mentioned in paras. 6 and 7 above ? (4) Whether a lump sum addition of Rs. 1,252 made for the alleged unvouched purchases, unverifiable wages, absence of job cards and want of quantitative details of Bajri and sand is legally sustainable ? The petitioner assessee, as already stated above, is registered firm and was engaged as a sub‑contractor of certain other firms mainly for the construc tion of foundations for towers transmission lines and other similar jobs. It shall be convenient to deal with the case of the assessee for each assessment year separately as under :‑

4. Assessment year 1960‑

61. During the corresponding relevant year firm carried on the business as a sub‑contractor of Messrs S. A. E. an Italian Firm, for construction of foundations for towers of the Lyallpur Sargodha‑Daud Khel 132 KV Transmission Lines. The assessee was engaged in excavation of foundations; mixing of sand and bajri and then pouring it into foundations. The bajri anal sand belonged to the assessee but the cement was supplied by the principals. The assessee was paid at the rate of Rs. 4.20 per c. ft. for the work entrusted to him. The trading account, of the assessee reflected gross profit of Rs. 19% which was held by the Income‑tax Officer to be rather low. He found that the 'purchases were almost all unvouched, and no job cards were maintained‑'and the payments of the wages were not properly verifiable. The quantitative account of the bajri and sand was also not available. For these reasons the Income‑tax Officer rejected the account version and applied a gross profit rate of Rs. 20% to the declared payments which were all verifiable. On appeal the tribunal affirmed the finding of the Income‑tax Officer in holding that all the purchases were not vouched, no job cards were kept and the quantitative record of bajri and sand consumed in the execution bf the work was not available. In these circumstances, in the opinion of the Tribunal, the Income‑tax Officer was justified in discarding the account version and raising the gross profit rate by 1% only, which was quite reasonable.

5. Assessment year 1961‑62.‑In respect of the relevant year the assessee continued to work as a sub‑contractor of Messrs S. A. E., an Italian firm, and performed the same work on Lyallpur‑Sargodha line as well as Kot Fazil‑Lahore section of Lyallpur‑Lahore line. In respect of Lahore‑Sargodha line the payments were received at Rs. 4.20 per c. ft. while for the Kot Fazil‑Lahore section the contract rate agreed was at Rs. 5.30 per c: ft. In respect of this year, after making proper adjustments, the Income tax Officer found that the declared profit rate came to 15.7 %. He, therefore, served a notice on the assessee to explain the reason for the decline in the margin of profit. After taking into consideration the explanation submitted by the assessee in this behalf the Income‑tax Officer completed the assessment for this year as well on the estimated gross profit rate of 20 % on the receipts. He found the accounts of the assessee to be defective inasmuch as the purchases were unvouched and the payments made to the workers were not fully verifiable. He noticed that during this year payments were made by the principal to the assessee for a part of the work at higher rates. On appeal the Tribunal upheld the assessment made by the Income‑tax Officer for the year in question. He held that the contention that the payments were made to the labourers on Kot Fazil line at higher rates than on Lyallpur‑Sargodha line was not substantiated. The appellant had to incur extra expenses on the carriage of bajri and sand for this work, but the increase expLalned on that score was, in his opinion, offset by the enhanced rate at which the contract was awarded to the assessee. In these circumstances the Tribunal held that the gross profit rate of 20 % applied against the assessee was in conformity with its past history.

6. Assessment years 1962‑63.‑During the relavant year in question the assessee had also done work for the Imperial Electric Company. It was engaged as a sub‑contractor for the excavation of foundations and back- filing on threes different lines at the rates charged as under :‑ Multan‑Jalalpur‑Pirwala Rs. 4.80 per c. ft. Muzaffarabad‑Kot Adu‑Multan Rs. 4.60 per c. ft. Dera Din Panah to Atheran Hazar Rs. 5.00 per c. ft. After proper adjustment of the expenses in the accounts produced by the assessee the Income‑tax Officer found that disclosed profit rate of the firm came to Rs. 12.5 % was very low. He, therefore, served a notice under section 23 (3) for the explanation of the assessee in this behalf. But the Income‑tax Officer found the explanation to be unsatisfactory and applied the gross profit rate of 20 % on the declared payments. But on appeal the Tribunal reduced the gross profit rate for the year to 18 % with following observations :‑ "There is no denying the fact that the appellant's work was spread over three lines and stretched over a vast area. Moreover, the rates at which new contracts were secured in this year were less favourable which clearly indicates that the appellant had to compete with other contractors. The disclosed gross profit rate of the appellant is also lower than that of the preceding years and although this does not clinch the issue it coupled with other relevant facts discussed above goes to show that lower margin of profit was available to the appellant in this year. Vie would accordingly reduce the gross profit rate for this year to 18%.

7. Assessment year 1963‑64.‑In the period under review the assessee worked as a sub‑contractor for Messrs S. A. E. and I. E. C. at the rates varying from Rs. 4.60 per c. ft. to Rs. 5.50 per c. ft. In respect of this year again the Income‑tax Officer applied a gross profit rate of 20% to the declared receipts. He observed that the rates at which the contracts were secured on the various lines were higher than those in the past for the year 1960‑

61. But the disclosed profit rate of 8.4 % was much low. He, therefore, issued a notice to the assessee for its explanation for this decline in the margin of profit. But the Income‑tax Officer was not satisfied with the explanation and finalized the assessment at the gross profit rate of 20% against the assessee. On appeal the Tribunal observed that in respect of the preceding assessment year 1962‑63 they had already reduced the consideration on the whole were not much different. The tribunal, therefore, found ample jurisdiction for reducing the gross profit rate to 18%.

8. Assessment year 1964-65.‑In this year as well the assessee was engaged as a sub‑contractor on a number of transmission lines at rates varying from Rs. 5.50 per c. ft. to Rs. 6.25 per c. ft. The assessee disclosed an overall gross profit rate of Rs. 7.3 % only. But in the opinion of the Income‑tax Officer thin was ridiculously low. He observed that the accounts produced by the assessee were defective in material aspects as in the earlier years. He, therefore, discarded the declared version and applied a gross profit rate of 20% on the total payments received by the assessee. But on appeal the tribunal as in the immediately preceding year in partly accepting the appeal reduced the gross profit rate to 18 % only.

9. Assessment year 1965‑66.‑ During the relevant year the assessee worked for Messrs I. E. C. and Inter home Traders for the construction of foundations of towards for transmission lines. A new contract was also entered into with Messrs S. N. A. M. Limited for valve enclosures for gas pipeline. The work of foundations for the construction of transmission toweres on two different lines was done at Rs. 6.25 per c. ft. In the earlier years the assessee had to perform the duties of excavation, mixing of sand and bajri by hand and pouring the concrete into the foundation. In the period under review the reinforced cement concrete was to be poured mixed up by mixing machines and vibration. The nature of work this year was somewhat different than that performed by the assessee in the previous years. The overall gross profit rate disclosed was Rs. 14.25. But in the opinion of the Income tax Officer this was low. He observed that the account books were written at intervals, cash balances were not struck page‑wise arid the expenses of excavation were unvouched and unverifiable. The assessee maintained a bank account in Messrs Muslim Commercial Bank. Sukkur but the same remained uncorroborated in the books. He was not satisfied and, therefore, discarded the accounts produced by the assessee and finalised the assessment against the petitioner firm with the following obser vations : ‑ As stated earlier the contract of construction of foundations of tower of transmission lines was received at favourable rates, which fact is also established by the assessee's own accounted version because the G. P. rate disclosed by the assessee itself is almost double the one view the Gross Profit is worked out by applying a G. P. rate of 22.5%. on payment received on this account while on the balance a G. P. rate of 20 % is applied. The work was .mostly executed through machinery which reduced the cost of labour, and this also justifies the enhanced G. P. rate. On appeal the Tribunal found that these enhanced rates of contract were partly due to the additional obligations that the assessee was required to undertake in this year. Considering all the aspects of the matter the Tribunal reduced the rate to 20%. in respect of the payments received from I.. E. C. and Interhome Traders amounting to Rs. 8,64,

660. But the remaining payments received by the assessee were subjected to the gross profit rate of 18 % as in the preceding years.

10. Assessment year 1966‑67.‑In the relevant year under consideration the assessee firm worked as a sub‑contractor for no less than six different concerns. On reference to the books of account the Income‑tax Officer was of the opinion that the cash book was written at intervals specially for the Income‑tax purposes. The work was carried on various sections, but strangely enough no paid cash book for any section was maintained. The purchases of raw material as well as sand, bajri, gravel etc. were not supported by proper voutchers. No job card. for the work clone by the Karigars were maintained. As such the payment of wages could not be put to any authentic check. Otherwise too, all the payments made to the labourers were supported by thumb impressions and were not property verifiable. In his opinion the foundations. of towers this year were secured at favourable rates, highest in the assessee's history and so fir greater G. P. rate could be expected. But taking a lenient view and giving due credit to the assessee's contention that labour as well as raw material had been procured at higher rates, he applied a gross profit rate of 25 % on this part of the work while on the remaining work a G. P. rate of 20 % was levied as in the preceding years. On, appeal the Tribunal partly accepted the appeal of assessee for this year and reduced these gross profit rates with the following obser vations :‑ "The Income‑tax Officer has applied gross profit rate of 25 % as the rates at which contracts for construction of foundations for towers was obtained were the highest ever. Thus notwithstanding the additional obligations that the appellant had to discharge, the Income tax Officer was justified in applying a higher profit rate than that applied in the earlier years. In the immediately preceding year the Income tax Officer had in respect of these contracts applied rate of. 22.5 % which has however, been reduced by us to 20%. As a consequence of the reduction in the rate in that year it would be just and proper. to correspondingly reduce in this year the gross profit rate from 25 % to 22.5 % whereas in respect of the balance payments received from S. N. A. M. the rate is in conformity with the treatment meted out by us in the past reduced to 18 %.

11. Assessment year 1967‑68.‑In the relevant accounting year the assessee was engaged in the work on Rohri‑Dharki line at Rs. 9.00 per c. f. t. The work of laying concrets foundations was also done in Gujrat and Sargodha Districts and the charges were received at the rate of Rs. 6.88 per c. ft. as against Rs. 4.20 to Rs. 5.50 per c. ft. during 1960‑61 to 1964‑65 assessment years. Furthermore, substantial work was done for Messrs Geolstragivanja for construction of Tube‑well Houses and discharge Boxes, on a total receipts of Rs. 39.74,

576. The assessee disclosed gross profit at Rs. 3,10,983 giving a G. P. rate of 7.8 %, which was considered by the Income‑tax Officer to be ridiculously low. But on a proper adjustment of the entries in account the rate disclosed came to 9.2 %. The Income‑tax Officer did not find the accounts to be reliable in material aspects. In the circumstances of the case he applied a gross profit rate of 22.5 %. for a part of the work and 20 % on the rest of the work done by the assessee. On appeal the Tribunal partly accepted the appeal by reducing this rate with the following observations "The facts and circumstances of the year have been found by the Income‑tax Officer to be somewhat distinguishable from the immedia tely preceding year in view of the execution of more substantial work in. Gujrat and Sargodha districts at much lesser rates than the work on Rohri and Dharki line. Thus on the Income‑tax Officer's own reasoning a lower rate would be appropriate for this year as compared to the year 1966‑

67. Considering all these aspects of the matter it seems quite fair and reasonable to reduce the rate in respect of payment of I. E. C. to 20 % whereas the rate of 20 % applied by the Income tax Officer to the other payment of Rs. 14,40,858 is reduced to 18 %."

12. On an analysis of the respective assessment years the following chart will be helpful :‑‑ Assessment Year Receipts Gross Profit G.P. Declared G.P. applied G.P. Rate applied on appeal by Tribunal 1960-61 1,79,522 34,379 19% 22% 20% 1961-62 2,04,470 32,354 18% 20% 20% 1962-63 2,25,326 30,005 12.5% 20% 18% 1963-64 6,43,232 51,140 8.4% 20% 18% 1964-65 6,16,422 45,127 7.3% 20% 18% 1965-66 9,40,301 1,34,190 14.2% 22.5% on 864660 & 20% on 75641 20% on 864660 & 18 % on 75641 1966-67 19,25,372 3,17,727 16.3% 25 % on 771040 & 25 % on 1154332. 22.5% on 77140 & 11 % on 1152332 1967-68 32,09,679 2,95,386 9.2% 22.5% on 1768821 & 20 % on 1440858 20% on 768821 & 18 % on 1440858

13. In general the Income‑tax Authorities found that the accounts produced by the Assessee were not reliable and the book version could not be accepted. The Income‑tax Officer and the Tribunal both concurred in holding that the purchases were almost all unvouched. There were no job cards for the work done, payments for wages were supported only by thumb‑impressions and, as such, were not verifiable. A quantitative account of bajri and sand purchased and consumed was not available. However, the payments received by the assessee were fully vouched and supported by proper certificates. In this connection the learned counsel for the assessee urged that in reality petty items only were unvouched and the nature of business undertaken by the assessee was such that no job cards could be maintained as the labour was paid on daily wages basis. The learned counsel further maintained that whatever sand and bajri was purchased all was consumed and the rest was consumed in the next year. But according to the learned counsel the Income‑tax Officer as well as the Tribunal have failed to bear all these facts and circumstances in mind and rejected the account version on almost flimsy and irrelevant considerations. The learned counsel even contended that the Income‑tax Officer was not satisfied merely with the method of keeping these accounts but he did not reject the account books. In these circumstances according to the learned counsel, it was the duty of the Income‑tax Authorities to have relied on the account books with proper adjustments after a suitable enquiry into the matter. At any rate, in the opinion of the learned counsel, the gross profit rates applied against the assessee were based on no evidence and are conjectural.

14. After hearing the petitioner, we find that in the considered opinion of the Income Tax Authorities except for the amounts received by the assessee which were properly vouched and only supported by the certificates, the rest of the accounts maintained by it were unreliable and could not form the basis of assessment. Admittedly the purchases were not fully vouched. The payments made to the labourers were supported by thumb impressions and according to the Income‑tax Authorities not properly verifiable. In this connection for instance in respect of the assessment year 1966‑67 the Income‑tax Officer has reproduced some of the instances of unverifiable entries of the purchases as under :‑ 14‑7‑65 Rs.25.74 Through Muhammad Rashid 10‑8‑65 Rs. 522.01 Ch. Timber Store Katcha Voucher. 10‑7‑65 Rs. 9.75 -do- 26‑7‑66 Rs. 50.00 Malik Faiz Muhammad 10‑6‑65 Rs. 300.00 Excavation charges. 12‑8‑65 Rs. 105.00 Nawab Khan 11‑5‑66 Rs. 36.01 Purchased on 8‑7‑

65. All through Muhammhd Rashid Rs. 33.41 purchased on 9‑7‑65 Rs. 12.71 Purchased on 10‑7‑65 It is said that the advance for purchases was issued Rs. 16‑99 Purchased on 11‑7‑65 Rs. 71.74 Purchased on12‑7‑65 only against chits which have not been produced. Rs. 27.99 Purchased on13‑7‑65 Rs. 19.18 Purchased on14‑7‑65 Rs. 36.14 Purchased on 15‑7‑65 No quantitative account of the bajri and sand purchased and consumedu was produced. The Income‑tax Officer and the Tribunal in their judgments were not satisfied with the evidence produced by the assessee and rejected' the same as unreliable. In the circumstances this Court in these proceedings cannot sit in appeal over their finding on .the point.

15. Indeed it goes without saying that the Income‑tax Officer has the power to reject unreliable or incomplete account books, either under the proviso to section 13 or section 13 (3) of the Income‑tax Act. In Ganga Ram Balmokand v. Commissioner of Income‑tax, Punjab (L L T 19 Lah. 10) the Court was not prepared to hold that any burden was imposed on the Income tax Authorities to prove by positive evidence that the accounts were unreliable or that the figure at which they assessed was the correct figure. In matters like these a very vide discretion is vested in the Income‑tax authorities in view of the exigencies of the case, and control exercisable on them was very meagre. What alone had to be seen in such cases was whether the discretion had been judicially exercised and if it was one found to be so exercised, no Court could interfere with the order. In other words a Court could not replace its own discretion for the discretion already exercised by a competent tribunal. In this connection the Court also observed that the proceedings before the Income‑tax Officer not being judicial proceedings in the sense in which that term was ordinarily used, all that was required of him was to proceed without bias and give sufficient opportunity to the assessee to place his case before him and to conduct himself in accordance with the rules of justice, equity and good conscience. This case was noticed with approval by a Full Bench in Gurrukh Singh v. Commissioner of Income‑tax, Lahore (A I R 1944 Lah. 353). In this connection in Chakeswari Cotton Mills Ltd. v. Commissioner of Income‑tux. West Bengal ((1954) 26 I T 775) the Supreme Court of India observed that: "in making an assessment under section 23 (3) of the Indian Income. tax Act, the Income‑tax Officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a court of law, but the Income tax Officer is not entitled to make a pure guess make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion."

16. In the instant case after rejecting the account version the Income. tax Officer proceeded to estimation of a suitable gross profit rate on the accounts received by the assessee. In this connection he was impressed by the circumstances that in respect of the first assessment year 1960‑61, according to the trading account the assessee's declared gross profit rate came to Rs.

19. This in his opinion was a bit low. In the circumstances, therefore, he' raised the gross profit rate by a bit and applied a flat rate of 20 % on the payments received by the assessee. The estimate was considered to be reasonable by the Tribunal on appeal. In these circumstances it cannot be successfully argued that this estimate was based on no evidence and is altogether conjectural. In respect of the subsequent years the assessment was based taking into account the past history and the Tribunal even allowed some relief wherever it was admissible in the exercise at its own judgment. But we cannot sit in appeal on this finding passed as it is on the material before the income‑tax Authorities.

17. For the foregoing reasons these reference applications are concluded by findings of fact recorded by the Income‑tax Authorities. In our opinion no question of law at all arises out of the order passed by the Tribunal. As such these reference applications are rejected in limine. Applications rejected.