1990 PLP (Trib (PTD)

INAM ELAHI SHEIKH (ACCOUNTANT MEMBER).‑‑This departmental appeal, directed against a registered firm deriving income from cotton ginning business arises out of an order recorded by the learned C.I.T.(A), Multan dated 8‑3‑89 on the following grounds:‑‑ (1) Yield of cotton lint declared by the assessee considered low as compared to other cases NTN. 04‑02-0804502, 04‑01‑0800740 and assessee also failed to substantiate the same. Accordingly addition @ 7 chttks 2 tolas per maund was made. The worthy C.I.T. (A) has deleted' the same without any material evidence and logic. (2) In trading account assessee had shown purchases of cotton 6,877,588 kg. Where according the stock report (pledging statement) provided by the bank. Assessee purchased and pledged 7,012,700 kg. of cotton with bank authorities. Even after opportunity A.R. failed to explain the difference. So addition under section 13(1)(c) made with the prior approval of I.A.C. The worthy C.I.T.(A) relying on different cases has deleted the addition with the view that mere declaration of stock to bank does not prove physical existence of such stock. But the fact is that bank verifies the stock physically, does not pay even single penny if it is less than the declared D.P. Further it is in the custody of bank authorities and released on payments only. Question is if on the declaration one bank will pay some thing. the obvious reply is no. So declaration means existence which is itself a concrete evidence. Thus view of the learned C.I.T. is incorrect, against the facts and norms of business."

2. The facts giving rise to this appeal may be summarised in the following manner: Yields Account.

3. The assessing officer made an addition of Rs.952,183 in this account on the basis of the following results in ginning section:‑‑ Declared Adorned Seers Chtks Tolas Seers Chtks Tolas

1. Lint 13 4 3 13 12 --

2. Cotton Seeds 25 9 2 25 4 --

3. Shortage 1 2 0 1 0 --

4. The average purchase rate of Rs.190 per maund declared by the purchaser was found reasonable and accepted. The assessing officer adopted the above yield of reconsidering two parallel cases wherein the lint yield or 14 seers 12 chttks and 13 srs.9 chttks. had been declared and also the assessing officer could not obtain any evidence to his satisfaction to support the declaration. The sales rate of cotton lint and cotton seed were found reasonable. The operating cost was declared at Rs.1,428,499 with average rate of Rs.102.01 per bale for 14,003 bales of production declared by the assessee. After considering the details of this expenditure and some other parallel cases an addition [` Rs.3 per bale was made in this account.

5. Stock Account. The assessee declared purchases of kapas at 68,77,588 kgs in the statement filed with the return. However, the assessing officer obtained the pledge statement from the Bank and found that the assessee had declared 70,12,700 kgs of cotton to the Bank to obtain CF limit of Rs. six million from Muslim Commercial Bank Limited. Thus the assessing officer was of the view that the assessee had suppressed 1,35,112 kgs of cotton stock valuing Rs.6,87,

610. Warranting an addition under section 13(1)(c) of the Income Tax Ordinance (hereinafter called the Ordinance). A show‑cause notice was issued in reply to which the assessee took the plea that the discrepancy had arisen due to improper accounting and was not factual. The assessee also filed a copy of an order by the Tribunal in I.T.A. No. 601‑A and .1741‑A of 1972‑73 in support of its contention. The explanation was, however, dismissed by the assessing officer in view of the following observations of an Indian High Court in the case of Coimbator Spinning and Weaving Mills v. C.I.T. 95 I.T.R. 375. "Even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub‑standard morality on the part of the assessee so as to enable them to go back on their own sworn statements given to the banks as to the stocks held any hypothecated by them to the banks."

6. After obtaining the approval of the IAC the assessing officer made an addition of Rs.687,610 under section 13(1)(c) on this account. Some add backs were also made in the P & L expenses. Thus the assessee's income was assessed at Rs.1,740,590 before W.W.F. as compared to Rs.100,860 declared.

7. The learned C.I.T.(A) after detailed examination of the case and considering the Tribunal's decision in I.T.A. No. 1338/LB of 1984‑85 and I.T.A. No. 3534/LB of 1984‑85 deleted the addition made on account of low yield. On the issue of addition made under section 13(1)(c) of the Ordinance on account of variance in stocks, the learned C.I.T.(A) made a detailed discussion of the facts and the arguments advanced by the assessee's A.R. The case‑law relied upon by the assessing officer 95 I.T.R. 375 (Supra) was also discussed and so was the case reported as 1987 P T D 262 relied upon by the assessee. The learned C.I.T.(A) also referred to some other cases decided by the first appellate authority, the Tribunal and the Superior Courts and came to the conclusion that the declaration excessive stocks to the bank not supported by any evidence was not sufficient by itself to justify the rejection of books of account. It was also held that mere declaration of stock to bank did not prove physical existence of such stock and that, unless there was a definite evidence to support the suppression of stock addition could not be made to the trading results. Thus the learned C.I.T.(A) deleted the addition made on this account. The addition on account of operating cost was upheld and so were the T & L expenses addbacks.

8. The learned representatives of both the parties have been heard and the relevant orders perused. The learned D.R. argued that the assessee had pledged stocks with the bank in excess of the quantities declared to Income Tax Department and this clearly indicated chat the purchases had been suppressed. It was also stated that the department had made comparison of the purchases recorded in the books and the quantities declared to the bank on any of the basis and the same were not found to be in agreement. The learned counsel of the assessee on the other hand argued that the declaration made to the bank were not factual and they were mere estimates and that such estimates were inflated to avail the maximum credit facilities from the bank. It was explained by the learned A.R. of the assessee that the Government had fixed the purchase price of the variety of cotton‑ginned by the assessee at a certain amount as a support price whereas the assessee actually had to pay higher price to the suppliers of kapas. It was also explained that the State Bank had fixed the margin of 25 to 30% for such lending and the cost above the support price was not to be considered by the lending agency for the purpose of making advance. In other words, it was stated, if the assessee was buying kapas at Rs.240 per maund as against say, Rs.200 fixed by the Government he could not obtain finance in excess of ROW there against, thereby leaving a gap of Rs.80 per maund to be financed otherwise. It was argued that in order to fill this gap and in view of paucity of funds, the assessee had to inflate the quantities of purchases to enable it to make payments to the growers. It was also argued that even otherwise it was not possible to declare the actual quantities of purchases to the bank on day to day basis in view of the purchase procedure involved. It was further explained that the suppliers brought the kapas in big boras' containing quantities of kapas varying from 3 to 4 maunds and such boras were dumped on platform and could not be weighed immediately. At this stage it was also explained that the entire stocks of the assessee including kapas, kapas in the process of ginning and ginned cotton as well as the stores were pledged with the bank to secure the advances. In order to expedite the sanctioning of finance which were required to make the payments to the suppliers, it was further explained, the bank staff was provided with blank signed pledge statements and the said blank statements were filled by bank staff in round quantities without awaiting the actual. weight of quantities of kapas arrived in the factory. Thus it was argued by the learned A.R. of the assessee that the discrepancies between the factual purchases and those declared to bank was bound to arise, on two grounds, viz. firstly, because of the estimation in view of stock piles in heaps and secondly in view of the inflation of quantities to meet the shortfall of funds caused by restrictions imposed by the State Bank. The learned A.R. also argued that this inflation of the purchases and stocks was, in fact, a common practice in this trade and he produced a certificate from the Pakistan Cotton Ginners Association in support of this contention. With regard to the case relied upon by the assessing officer, i.e. 95 I.T.R. 357 (supra) it was alleged that the decision in that case had been made because of various defects in the record of the assessee in that case which were absent in the case of the assessee in the present appeal. The learned A.R. also drew our attention to another case decided by the Tribunal and reported as 1989 P T D

508. In that case also the assessee had inflated the quantities of stocks and an addition had been made by the I.T.O. for the reason that the books of accounts were defective and quantities of goods in stock on the closing date as intimated to the bank and those in the balance‑sheet differed, the latter being less than the former. The C.I.T.(A) in that case had deleted the addition but the Tribunal reversed that order and held that he was not justified in deleting that addition. The learned A.R. of the assessee distinguished the aforementioned decision of the Tribunal reported as 1989 P T.D 908 (supra) on three counts. Firstly it was argued that the sales in the case of the assessee in the afore cited case were not verifiable and also stock registered was admittedly not present. Also in that case the bank had maintained before the assessing officer that a physical stock check had been carried out regularly. The learned A.R. of the assessee argued that all these three conditions were not present in the case under appeal and, therefore, it was a distinguishable case. The learned counsel of the assessee also argued that the assessee was liable to pay cotton cess to the Provincial Government but the quantities of kapas purchased and purchases as such were subject to supervision by the Excise Department who collected the Government cess. The learned A.R. of the assessee stressed that the quantities on which such cess had been paid tallied with the quantities declared to the Income Tax Department. The learned A.R. of the assessee also alleged that the assessing officer ignored the finding of the Tribunal in I.T.A. No.601‑A and 4741‑A supra and gave no finding thereon. However, it was conceded by the learned A.R. of the assessee that the law had been changed in 1971 and the burden of proof had been shifted to the assessee, whereas it was previously on the assessing officer, to establish the concealment of income. It was submitted by the learned A.R. of the assessee that the assessment years involved in the appeals in I.T.A. Nos. 601‑A and 4741‑A supra were 1967‑68 and 1970‑

71. It was any how vehemently argued that the assessing officer was not justified in dismissing the case‑law summarily relied upon by the assessee. The learned A.R. of the assessee also submitted that the assessee was required to pay market committee fee Cal paisas 6 per maund of the kapas purchased which could have been examined in support of the purchases declared.

9. Most of the above submissions were in fact made before the learned C.I.T.(A) as well and the I.A.C. who appeared before us along with the learned D.R. was invited to give his comments on the observations of the learned C.I.T.(A). The worthy IA.C. did not agree with the observation recorded in the order of the learned C.I.T.(A) that hypothecation reports were tailored as per requirements. It was also disputed by the worthy I.A.C. that the inflation of the quantities to cover up shortfall in the verifiability of finances was caused due to difference between the support price of cotton fixed by the Government and the margin by the State Bank and that this was a common practice in this trade. The contention that the bank statements were signed by the ginners and filling in by the bank staff were also not found plausible by him. The worthy, IA.C., however, agreed with the finding of the learned C.I.T.(A) that no delivery of lint could be made unless it was authorised by the Bank and the ginners could not receive any payment directly from the Cotton Export Corporation who deposited the fund into the bank account with whom the stocks were pledged.

10. On the issue of low yield, the learned D.R. argued that the assessing officer had rightly made the addition on account of low yield as compared to other parallel cases cited by him. The learned A.R. of the assessee, however, pointed out that the assessing officer had mentioned the same N.T.N as that of the assessee as one of the cases, wherein a yield at 13 srs. 12 chattks had been declared for the same season while adopting the yield at 13 srs. 12 chttks. This objection of the learned A.R. appears to be correct as the two N.T.N. were not found to be different. It was also argued by the learned A.R. of the assessee that the assessing officer has not pointed out any defects in the books of account or in the process of production. The learned C.I.T.(A) also found that the assessing officer had not compared the parallel cases with the assessee on overall basis and he was not justified to compare the yield alone. The D.R. was unable to wriggle out of the Tribunal's decision in I.T.A. No. 1338/LB/1984‑85 and I.T.A. No. 3534/LB/1984‑85 (supra) on which the learned C.I.T.(A) has based his order.

8. We have given our anxious consideration to the facts of the case and the arguments advanced before us. We would first like to consider the facts of the case reported as 95 ITR 375 (supra) on which the assessing officer has based his reliance. The assessee in that case was also found to have declared different stocks of cotton to the bank as compared to the books of account. The declared G.P. was held to be extremely low. It was also found that some items of purchase of stores were not genuine and some of such stored purchases had been converted to some non‑business parties. It was also found that the purchases of cotton from one of the parties was inflated and also the wages paid to the workers were inflated. The stock register was found to unreliable. The assessee in that case however, took the same plea before the assessing officer that the figures submitted to the banks were inflated in order to get the higher loan facilities. "The I.T.O. was not, however, satisfied with the said explanation. He took it as indicating the extent to which the assessee would stoop to obtain an advantage". Thus an addition of Rs.500,000 was made towards the deficiency in gross profit so as to raise the same to 11%. The first appellate authority in that case upheld the rejection of book results. It was, however, held by that first appellate authority that "the above method of estimate would be, as in the past, to make an addition on specific defect instead of making an estimate for gross profit." It was, however, held by him that the stock declaration made to the bank may be taken to be true and correct. Thus he fixed the total addition at Rs.355,000 including Rs.230,000 on account of difference in stock. The Tribunal in that case reduced the addition under inflation of cotton stock to Rs.50,

000. The Tribunal also held that the stocks declared to the banks represented true stock positions and the position shown in the books of account could not be relied upon. The assessee took the plea before the learned High Court that the Tribunal should have noticed the practice followed in the business house of declaring the larger stocks purely for getting overdraft and loan facilities. The learned High Court passed the remarks relied upon by the assessing officer and already reproduced above in response to this plea. The assessee in that case also took the plea that the assessee was not a dealer in cotton and was only a manufacturer of yarn and cloth and that even if there was an excess in cotton that that should have resulted in production of such goods. The learned High Court, however, did not accept this contention as the suppression of sales of cotton could not be ruled out especially when the account books had been rejected. The other aspects of the case and the arguments were considered which are not relevant in the circumstances of this case and we need not go any further into such arguments. In the conclusion, however, the learned High Court held that "once the assessee's explanation has not been accepted by the Tribunal the resultant position is that there were excess stocks assessed as undisclosed in the books of accounts and that non‑disclosure was only with a view to suppress the income. Once the Tribunal finds that there were excess stock after rejecting the explanation of the assessee, the conclusion is inescapable that the excess stocks should have come from undisclosed sources. As already pointed out the finding of the Tribunal that there were excess stock cannot be interfered with by this Court, as it is exclusively a matter of the Tribunal to accept or reject the assessee's explanation on the facts and circumstances of this case. We, therefore, of the view that the Tribunal is justified in taking the view that the excess stocks should represent the income of the assessee from undisclosed sources".

9. We have tried to reproduce the significant and relevant portions of the order of the learned Madras High Court in the preceding paragraph and it appears that the learned Court refused to interfere with the order of the Tribunal as the rejection of the assessee's explanation was found to a question of fact and not of law. Unfortunately the facts and arguments on which the Indian Tribunal based its decision in the said case are not readily available,, either in the order of the learned Madras High Court or in any other reported case‑law. The assessing officer in the present appeal before us however, relied on the observations of the learned High Court in that case as already reproduced above and that too he has done without considering the full aspects of that case. Firstly in the case of 95 I.T.R. 375 the assessee was found to have meddled with the purchases of stores and also the cotton purchases from one specific supplier was held to be inflated as also the wages paid to the workers were held to be inflated in addition to the discrepancy found in the stocks recorded in the books and declared to the banks. Also it was held by the learned High Court in that case that the assessee could have sold the suppressed stocks of cotton which finding has not been given by the assessing officer in the present case. Another distinguishing feature is that in the present case the assessee's claim of ginning charges, in total and per bale, had been substantially accepted except for a disallowance of Rs.3 per bale in respect of declared quantity and number of bales produced. This aspect appears to be absent in the case of 95 I.T.R. 375 as the assessee in that case was a Textile Mill engaged in the business of spinning and weaving and not ginning. The point worth consideration here is that if the assessee had suppressed the purchases of kapas, what did he do with it. If the assessee had ginned the kapas in his own factory it had to be seen whether the expenditure in relation thereto is included in the expenditure declared by it or that had been suppressed as well. The sale rate declared by the assessee has been accepted in this case and it has been accepted by the department that goods could not have been removed from the premises of the assessee without the consent of the bank. Obviously such consent would not have been given by the bank without receiving the payment and keeping a record thereof. The department has not accepted the plea of the assessee that this was a common practice ,in this line of business to inflate the quantities of stock. As per the departmental contention, even if such practice was prevalent in the trade, the department was not bound to take judicial notice thereof and the Madras High Court ruling reported as 95 I.T.R. 375 has been cited in support of this contention. The learned Madras High Court has not given a clear finding on this issue as to whether this was a prevalent trade practice in this business or not. In any case the assessee in that case was a textile mill and not a ginning company. The assessee has, filed a certificate from the cotton ginners association which confirms its submission that this was a prevalent trade practice. The assessee has also stated in support of its contention that the department made similar additions in a number of cases after obtaining pledge statements from the banks and finding difference between the quantities pledged and those declared in the accounts. The worthy I.A.C. has, however, submitted that the department had not investigated the details of all the cases to detect such differences. However, this is fact that a number of appeals on the same issue, were heard together with this appeal under consideration for similar additions made by the department and deleted by the learned C.I.T.(A). Even if the department was not convinced that this was a prevalent practice of this trade, further inquiries should have been made before rejecting this contention. Coming to the other aspect, i.e. whether judicial notice should be taken of such immoral practice, we respectfully disagree with the observations of the learned Madras High Court in the aforementioned case. It has been held by the various appellate authorities that the tax has nothing to do with equity or morality. The department would not ignore income earned by a person from immoral or illegal sources while making an assessment. In the case of C.I.T. v. Piara Singh reported as 1986 P T D 26, the learned Supreme Court of India held as follows:‑‑ "In our judgment, the High Court is right. The Income‑tax authorities found that the assessee was carrying on the business of smuggling. They held, that he was, therefore, liable to income‑tax on income from that business. On the basis that such income was taxable, the question is whether the confiscation of the currency notes entitles the assessee to the deduction claimed. The currency notes carried by the assessee across the border constituted the means of acquiring gold in Pakistan, which gold he subsequently sold in India at a profit. The currency notes were necessary for acquiring the gold. The carriage of currency notes across the border was an essential part of the smuggling operation. If the activity of smuggling can be regarded as business, those who are carrying on that business must be deemed to be aware that a necessary incident involved in the business is detection by the Customs authorities and the consequent confiscation of the currency notes. It is an incident as predictable in the course of carrying on the activity as any other feature of it. Having regard to the nature of activity possible detection by the Customs authorities constitutes a normal feature integrated into all that is implied and involved in it. The confiscation of the currency notes is a loss occasioned in pursuing the business; it is a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It is a loss which springs directly from the carrying on of the business and i.e. incidental to it. Applying the principle laid down by this Court in Badridas v. C.I.T(1) deduction must be allowed." The afore cited judgment of the Honourable Supreme Court of India not only confirms that morality has nothing to do with the tax assessments but also that expenditure related to illegal business had to be allowed before arriving at net profit from business assessable. Thus, in our view the assessing officer was not justified to reject the assessee's explanation that it inflated the stocks in order to avail the higher amount of advances summarily, without considering the other explanations and the aspects of the case. The assessing officer could have made attempts to verify the submissions made by the assessee. Inquiries should have been conducted to find out if the kapas was received in bulk quantities and whether or not such quantities could be weighed immediately before intimation of such quantities to the bank. We have examined the pledge reports obtaining on the departmental record and we have found that they were made cut, invariably, for round quantities, such as 5,000 kgs. It appears to be illogical to imagine that the assessee was receiving quantities of 5,000 kgs. in each of the purchases reported to the bank. In a nut‑shell in our view the assessing officer relied upon a case 95 ITR 375 without examining the full facts of the case.

10. In the case of the order of the Tribunal reported as 1989 P T D 508, passed by a Full Bench, the learned A.R. of the assessee has pointed out the distinguishing features which has Already been mentioned‑above. We also find that the assessee in that case carried on the business of manufacture and sale of sewing machines and it was not the case of the assessee that this was a prevalent practice of that trade. Thus, we agree with the learned A.R. of the assessee that the decision of the Full Bench of the Tribunal reported as 1989 P T D 508 does not fall on all fours with the circumstances of this case.

11. The Tribunal's decision in I.TA. No.601‑A and 4741‑A of 1972‑73 has not been made available for our examination. However, the learned A.R. of the assessee has conceded that the provisions of law had since been changed. We, therefore, do not propose to go into discussion of such order of the Tribunal except for the observation that the assessing officer was not justified in dismissing the assessee's contention in that regard without discussing the same. The assessee's submissions that it was paying cotton cess to the Provincial Government on the basis of quantities purchased and that proper records were maintained in this regard also merited serious consideration especially in view of the fact that the duty was collected by the staff of Excise Department and they were present on the spot. This aspect has' also been totally ignored by the assessing officer. Similarly, we find that the assessing officer has ignored the assessee's contention that the purchases could have been verified by reference to market committee fee paid by him in respect of purchases of kapas.

12. We also find that the learned C.I.T.(A) has discussed a number of decisions of various appellate authorities while passing his order but the department has not produced any counter‑arguments to rebut the same. In view of the foregoing, we feel that the department has no case to invite our interference in the order of the learned C.I.T.(A). The learned C.I.T.(A) has written a well‑reasoned order and we cannot but agree with his finding that the mere declaration of quantities of stocks to the bank itself did not prove that it did; in fact, suppress the purchases. The assessing officer did not care to examine the other relevant records such as cotton cess record and the market committee fee payments. The assessing officer did not make any efforts to find out if this was a prevalent practice of the trade and summarily dismissed this contention holding the same immoral and inadmissible. The assessing officer has also not considered the allegedly suppressed quantities of kapas while discussing the operating cost. The assessing officer has also not stated any possible disposal of such suppressed quantities and the learned A.R. of the assessee has submitted that each and every bale ginned carries a lot number printed on the bales and there was no other customer except the Cotton Export Corporation and the Textile Mills. Thus, it appears that the chances of concealment or disposal of ginned cotton produced from the allegedly suppressed kapas are remote. As a result we are not inclined to accept the departmental appeal on this issue.

13. The other grievance of the department is regarding the acceptance of declared yield by the learned C.I.T.(A). The assessing officer has alleged that the assessee declared low yield as compared to other parallel cases. In other words the assessing officer has alleged that the assessee has made sales outside the books. Again we find that the assessing officer has not considered this aspect while passing his order on operating cost and sales. He has made addition in the operating cost as nominal amount of Rs.42,009 with reference to the declared production. We also find that the assessing officer has not pointed out any defect t in the sales declared by the assessee. It has already been observed by us that the chances of suppression of sales in this line of business are remote. In our view the learned C.I.T.(A) was justified in deleting this addition as the assessing officer failed to point out any specific defects in the books of accounts and the results . declared by him. Also we would like to point out the fact that the assessing officer mentioned the N.T.N. of the same assessee as a parallel case which shows the care, or lack thereof, taken by him while making the assessment. As a result the department appeal fails and the order of the learned C.I.T.(A) is upheld. AA. ZUBERI (ACCOUNTANT MEMBER).‑‑‑With all the respect for the opinion prepared by my noble and learned Brother, the Accountant Member (=Mr. Inam Elahi Sheikh), I must say that after having given the best attention 1 could to the reasons set forth in the proposed decision. I cannot bring myself to entertain the slightest doubt that the order by the learned Commissioner (Appeals) should he reversed as respects the controversy concerning the Stock Account. Without repeating the facts and circumstances which have been correctly and concisely narrated by my learned brother, I detail below my impressions and conclusions upon the arguments urged upon us by the contending parties,

15. Though credit is due to the admirable vociferously and usual vehemence with which the. Respondent's learned counsel Mr. Muhammad Naeem, F.CA, pleaded his case, I must observe. that the entire arguments were misdirected inasmuch as the case‑law cited by him related to addition to the trading results consequent upon rejection of the book version. Moreover, all the judgments/decisions of Indian jurisdiction relied upon by him, pertained to the periods prior to the introduction of the sections in the Indian Income Tax Act as are parallel to the provisions of section 13 of the Pakistan Income Tax Ordinance. It is pertinent to keep firmly fixed in mind the fact that in those cases the method of accounting was rejected primarily for furnishing inflated stock position to the Banks (to obtain the overdraft facility) as were at wide variance with the actual stock valuation for determining the trading results. This manipulation, the Courts held, was not of such consequence as to lead to the conclusion that the method of accounting was so improper, or so patently false, as rendered it incapable of disclosing true business profits. In my view, therefore, the reliance on the decisions of Indian jurisdiction was thoroughly misplaced and the arguments developed thereon misdirected.

16. Having focused my attention on the specific issues entailing adjudication in the present appeal, I would like to highlight and to emphasize:‑‑ The assessing officer did not revalue the quantity of stock but assigned value to stocks which though, not recorded in the books was disclosed to the banks. The addition by resort to section 13(l)(c) of the Income Tax Ordinance was made for "money or valuable article ....not recorded in the books of account nor shown in the wealth statement. No addition was made to the trading results by way of revaluation of closing stock or else corresponding effect‑were to be due in the opening stock of the succeeding year. For treatment (as above) the assessing officer gave a specific notice to the Appellant to show‑cause as to why the addition for deemed income be not made to which replies remained vague.

17. With these specific issues in mind 1 recall that the present appeals has a striking similarity of facts with a case which came up for determination before a Full Bench of this Tribunal at Karachi, decision whereon is reported as 1987 P T D (Trib.)

508. In that case also:‑‑ (i) quantities of stock‑in‑trade as recorded in the books of account were less than the quantities reported to the bank; (similar position as before us now); (ii) higher value was assigned in the documents filed with the bank in order to avail higher amount of bank credit; (similar position as before us now); (iii) business outside books of account was established by the assessing officer relying on information (signed and sworn by the assessee) as was furnished to the banks in which quantities varied from the quantities shown in the books of account (in the appeals before us addition under section 13 results in income under section 30 = "other sources")

18. The learned Members forming the Full Bench at Karachi unequivocally ruled that the assessing officer had not revalued the inventory but reached a logical conclusion that business was carried on outside the books of account hence the treatment by him was sustained. The Tribunal expressed the view that the assessing officer had made the addition on reasonable grounds and that the Commissioner (Appeals) gave relief without rebutting the points raised in a detailed assessment. Moreover, it was affirmed by the Tribunal that though the Income Tax Law permits an assessee to value its closing inventory at cost or market price, in a situation where the assessing officer detected (with the help of information collected from the Banks) that the assessee had declared much larger quantities of goods than were reflected by the accounts, the inference was inescapable that a parallel business, not appearing in the books of account presented before the assessing officer, stood betrayed from assessee's own sworn statements filed with the banks. In the opinion of the Tribunal it was established on record that the difference represented suppressed quantities of goods, hence the assessing officer was held to be justified in making the addition to the declared business profit even though no specific defects may have been detected in the books of account with respect to the entries recorded therein. The principle which this Tribunal spelled out was that in so far as transactions outside the books of account are concerned, the assessing officer had successfully established that, in addition to the transactions recorded in the books, the assessee carried on transactions which were not recorded in the books of account and positive evidence to this end was available in the shape of statements from the Bank duly signed and sworn by the assessee.

19. Reverting back to the appeal now before us, it is significant, when the assessing officer issued a specific notice, calling upon the Respondent to furnish the explanation, the reply remained vague and ambiguous nor any evidence worth the name was tendered to successfully rebut the Respondent's own bank statement with which they were duly confronted. If the arrangement is so widely accepted norm and a consistent practice having gained currency with the connivance of the Bank authorities, the onus was clearly on the Respondent to obtain a certificate (or. some similar evidence) from the bank acknowledging the departure from the Rules on commercial expediency (or whatever) with a view to accommodate their "valuable clients" by showing leniency in blindly accepting whatever quantity (or value) was ascribed to the stocks and inventory pledged for purpose of credit facility. No such evidence was tended eel. It is of utmost importance to remember the subtlety with which the assessing officer made the addition in respect of the unexplained capital invested in the quantities pledged with the bank over and above the quantities in respect of stocks recorded in the books of account. I am firmly of the view, accepting the story given out by the Respondent and to take a judicial note of an unethical practice (if it exists?) would be a mockery of law resulting in subversion of public, policy thus, patronizing and encouraging the unscrupulous tax‑payers and granting a licence to defraud the banks by declaring nor‑existing higher quantity of stocks, obtaining insurance for inflated values to realise fictional claims if loss by fire (or such like calamity) occurs, and at the same time to hoodwink the Revenue on the pica that the assessing officer was not correct in disregarding a so‑called "prevalent practice" though not legal, of obtaining higher financial facilities from the banks by inflating the quantities and values of .inventory. J may here refer to the decision of the Supreme Court of Pakistan in the case of Samina Shaukat Ayub Khan (1981) 43 TAX 18, wherein the learned Judges in their wisdom observed as under:‑‑ "It does not need much reasoning to see that 'if the source of income is ...not satisfactorily explained ...it is not possible to hold that the income was not from business or from the exercise of a profession or vocation or exempt; or that it was of casual and non‑recurring nature. All these factors and attributes can be ascertained only if the assessee places all the relevant facts before the Income Tax authority for otherwise the nature of the income and its source are clearly left in the realm of speculation. The stringent requirements spelt out in this clause can only be satisfied by the disclosure of all the relevant facts and not otherwise:

20. It may not be possible to easily overlook the fact that according to Respondent's own admission the stocks of cotton were "pledged" with the bank and not hypothecated, a situation where there was no scope for concealing the, real state of affairs from the bank nor to show a different quality/value of stocks than was actually available. Institute of Bankers in Pakistan, in their publication "Pakistan Bankers‑‑Operations and evaluations" explain that in the case of "pledge" the bank acquires possession of the goods to hold the same until repayment of the advance/credit facility with a right to sell the same in the event of default. On the other hand in "hypothecation" the possession of goods remains with the borrower and the goods are charged in favour of the bank by executing a letter of hypothecation which merely creates an equitable charge over the goods, hence the bank cannot sell the goods though it may bring a suit against the borrower. Again, "the Law & Practice of Banking" (7th Edition) by J. Milnes Holden describe "hypothecation" as a legal transaction whereby goods may be made available as security for a debt without transferring either the property or the possession to the lender. "Practice and Law of Banking" (11th Edition) by P.J.M. Fidler explain "hypothecation" as a transaction whereby goods may be made available as security for a debt without a transfer of either the property or the possession to the lender. It is thus, evident that in `hypothecation' stocks are never passed on to the lender hence the borrower is free at all times to utilize or to consume the stocks for his business purposes or to hypothecate only such quantity as may be necessary for the purposes of his borrowing. In contrast, in "pledge" the bank is in possession of actual stocks and entitled to retain the same till repayment or to sell the same in the event of default. It thus, passes imagination and erodes the very foundation of the arguments by the learned counsel of the Respondent, how, when the stocks were admittedly and definitely "pledged" it could be possible to declare an inflated quantity/value and for the bank to accept the same, the whole story appears so incredible as does not inspire even a waivering confidence.

21. To sum‑ up my conclusions are:‑‑ "The subtlety that in the Respondent's case (i) Books of accounts were not discarded, nor (ii) valuation altered for ascertaining the trading profits; but (iii) investment held in the shape of a stock, over and above the quantities recorded in the books of accounts, were deemed as income by resort to fiction of law created by section 13 of the Ordinance; clearly distinguishes the facts in appeal before us, from the decisions reported as (1953) 29 1TR 481 (SCI), (1966) 60 ITR 531, (1971) 93 Tax 49 and 1987 P T D 262 moreso when these decisions pertain to a state of law before the introduction of the deeming provisions as are contained in the Pakistan law. The principle enunciated in re: Coimbators S & W Co. Ltd. = (1974) 95 ITR 375 that once explanation is not found to be convincing the conclusion is inescapable that the excess value of stock came from an undisclosed source representing income, strongly support the case made out by the Appellant. The rejection by the assessing officer of the explanation offered (in response to notice under section 62) is unexceptionable because (first) no proof, documentary or otherwise, from the banks was tendered in its I acknowledgement, and (second) the unholly, the immoral and thoroughly vicious practice of inflating quantums and values for purposes of Bank record, even if it were true (though I don't believe it) can surely not be granted legal recognition and judicial cognizance for such a course would be against rules of prudence more so when the Respondent miserably failed to discharge the onus falling on them as per the view expressed by the Supreme Court of Pakistan in re: Samina Shaukat Ayub (ibid). Similar opinion was handed out by the highest judicial authority of Indian jurisdiction in (1965) 57 1TR 532 and (1969) 72 1TR 807 in a situation where. the Revenue established the applicability of taxing' provision (such as section 13 in the present case) and the tax‑payer failed' to controvert it. Last but not the least, a Full Bench of this Tribunal has adjudicated on' almost identical facts vide decision reported as 1981 P T D (Trib.)

508. This decision lends support to the view that the Commissioner (Appeals) is in error while the assessing officer acted reasonably. This verdict, to the ill‑luck of the Respondent is very much a constraint on us to reach a conclusion directly opposed to the one reached on an earlier occasion by another Bench of equal strength. Only when we strongly feel the need for a reconsideration of the case‑law as already exists, we may suggest that the matter be referred to a still larger Bench. I would prefer to refrain from a course as would be destructive to institutional integrity, a view for which I heavily rely on authorities reported as P L D 1981 Karachi 138 or P L D 1980 SC 283."

22. Taking the entire conspectus of the attending facts and circumstances, I feel no hesitation to HOLD: the appeal be allowed to SUCCEED, the order by the learned Commissioner (Appeals) VACATED and the treatment by the assessing officer RESTORED as respects the Stock Account. On the other issue concerning Yield Account, I have no difference of opinion with my learned Brother, the Accountant Member (=Mr. Inam Elahi Sheikh). After the signing of the above note, but before the issuance of the order, I happen to lay my hands of a decision of the Supreme Court of Pakistan in re: Moula Bux Corporation Ltd. = P L D 1990 SC 990, which supports the view expressed by me above.

23. ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).‑‑‑I have gone through the views expressed by my two learned brothers (Sh. Inam Elahi and Mr. AA. Zuberi, Accountant Members) who had differed on the one issue i.e. in regard to the addition made on account of discrepancy in the stocks shown by the assessee in the accounts books and the one declared with the bank. After going through the proposed orders I have not been able to persuade myself to agree with the views expressed by Mr. A.A. Zuberi, the Accountant Member. I am inclined to agree with the reasoning and conclusion arrived at by Sh. Inam Ellahi, the Accountant Member. My reasons for arriving at this conclusion are as under:‑‑

24. The facts of the case have already been given in detail by my two brothers and I need not reiterate. In nutshell the relevant facts may here be stated. In order to operate a Ginning Factory, of necessity every ginner has to have loan facility from a Bank. In order to obtain the facility of loan the assessee has to pledge/hypothecate its stocks of cotton and cotton lint with the bank against which the bank advances loans as and when needed to make payments to the sellers of kapas. It may further be noted that in a Ginning Factory the process of purchasing, ginning and selling of lint is a continuous process which starts from September and ends somewhere in April each year. It has also to be kept in mind that the pledging of stocks is not the only security with the Bank as there are other controllers on the finances of the ginner. The cotton lint is sold either to the Cotton Export Corporation or to the Textile Mills. But no sales can be affected by the Ginners without the consent of the Bank. Furthermore, all the payments from the purchasers are received through the Bank with whom the stocks are pledged. Thus, it would be seen that the Bank's loans are secure independent of the stocks pledged with it. In other words the pledging of stocks is by way of abundant caution and it is for this reason that the Banks do not seem to be very rigid in accurately weighing the kapas when received in a Ginning Factory in Banks. As has been argued before it is impossible for a Bank to keep the quantity of stocks upto date as the kapas continuously flows into the factory which is received in banks and is kept in heaps.

25. It is in this background and procures that we have to examine the explanation of the assessee in regard to the discrepancy of the stocks shown in the books of accounts and declared to the Bank in order to avail the loan facility. I am not going to repeat the arguments which arc very ably advanced by Sh. Inam Ellahi, the Accountant Member. Mr. A.A. Zuberi, the learned Accountant Member in his dissenting note has mainly based his order upon the two cases namely; Coimbators S & W Co. Ltd. v. C.I.T. reported as (1974) 95 ITR 375 and Tribunal's decision reported as 1989 P T D

508. The learned Accountant Member (Sh. Inam Ellahi) has successfully distinguished both these cases. I may also here add that so far as Coimbator's case is concerned the Accountant Member (Mr. Zuberi) has ignored the distinguishing features mentioned by Sh. Inam Ellahi. Mr. Zuberi has also ignored the observations of Sh. Inam Ellahi based on case‑law that morality or either has nothing to do with the tax laws, Nobody can be taxed merely on account of his conduct which might be immoral and conversely nobody can escape from being taxed merely on account of immoral business. Thus the observations made in Coimbators case, with utmost respect to the learned Judges, is inapt in tax laws. The conclusion arrived at by the learned Commissioner of Income‑tax and maintained by the Accountant Member, Sh. Inam Ellahi, that mere discrepancy between the stocks shown in the books of accounts and the stocks shown to the Bank is not sufficient to make an addition unless there is some independent evidence or material which could prove suppression of purchases on the part of the assessee. Supposing a boaster writes to a friend that he owned certain properties which in fact he does not and supposing this information comes into the possession of the assessing officer, can such an addition be made merely on the admission of the assessee? If an assessing officer makes such an addition, no Curt of law would maintain such an addition as it is not necessary that the admission made by the assessee was in fact true. In such an instance the assessee cannot be punishes for his immoral conduct of telling a lie. In order to make any addition on fiction of law as under section 13(1)(c), it has to be independently proved that the assessee had purchased certain items which had not been shown in the books of accounts. A declaration or an admission before a third party can at best be considered as an information on the basis of which the I.T.O. is empowered to start investigation and to find out as to whether that information is correct or not. The learned Accountant Member, Sh. Inam Ellahi is absolutely correct in saying that the l assessing officer has failed in his duty to make any investigation. He confined; himself to the information received from the Bank and ignored the explanation of the assessee altogether and made the addition solely relying on the observations made in Coimbators case. He did not even bother to verify the plea taken by the assessee. The assessee had taken specific pleas:‑‑ . (1) That there was a trade practice of showing valuations higher than the actual one. (2) That the valuations shown to the Bank were purely on estimate basis which is supported by the round figures in the declaration of stocks in the Bank. (3) That the cotton fee paid to the Excise Department and the market fee paid to the Market Committee could prove that the assessee's purchases were as had been shown in the accounts books. (4) That the purchasing of kapas was a continuous process and their statements given to the Bank were merely on estimate basis. The assessing officer straightaway rejected the assessee's explanation without any enquiry and without any verification. A certificate from the Cotton Ginning Association has been placed on our record which has supported the assessee's explanation being correct.

26. So far as the case 1989 P T D 508 relied upon by the learned Accountant Member, Mr. A.A. Zuberi, is concerned, that is distinguishable and its distinguishing features have already been elaborated by Sh. Inam Ellahi, the Accountant Member. In that case there was a discrepancy in the balance‑sheet and the stocks shown to the Bank but the explanation given by the assessee was firstly that there was no discrepancy and secondly that the discrepancy could be reconciled but it was not substantiated by the assessee. As a matter of fact there was merely an explanation that there was no discrepancy. The Tribunal gave one week's time to the counsel of the assessee but still he could not substantiate his plea before the Tribunal. Secondly no stock register was maintained by the assessee in that case. In that case the Tribunal did not straightaway rejected the assessee's explanation nor did it give any finding to this effect on principle that higher valuation of the stocks shown by the assessee to the Bank in order to obtain loan facility should always be taken as unexplained Income without even examining the explanation of the assessee. The Tribunal at page 509 of the report observed as under:‑‑ "In the course of hearing he was confined with the nature of discrepancy in the, quantities of stock disclosed to the bank and to the department. When he was asked to explain this discrepancy with the help of accounts, initially he maintained that there was no discrepancy. He stated that the I.T.O. was unable to appreciate various entries in the Balance‑sheet. When he was asked to point out the relevant entries in the Balance‑Sheet he was unable to establish` his point. Ultimately he admitted some discrepancy. However, considering the importance of the matter and legal implications involved therein he was allowed a week's time to present his case with the help of books of accounts. He was also asked to show whether the material, on which he wants to rely before us, was produced before the I.T.O. At the time of next hearing books of accounts were not produced. His only argument at the time of next hearing was that in a similar case this Tribunal has already held vide I.T.A. No.1330/KB of 1982‑83 decided on 28‑7‑1988 that the I.T.O. cannot assign a higher value to the stock." It is evident from the above quotation that in that case the assessee was not able to substantiate his explanation. He only relied upon a Tribunal's decision, which being distinguishable, was not followed by the Tribunal. Consequently, the Tribunal observed in para.4 of the report as under:‑‑ "As a matter of fact he (A.R.) failed to substantiate his arguments though a week's time was given. Under these circumstances we are left with no alternative but to hold that the I.T.O. had correctly arrived at the conclusion that books of accounts are defective." Another distinguishing feature in that case was that no stock register was maintained by that assessee and the Tribunal came to the case burden that he had carried on certain transactions outside the books of accounts and which were not recorded in the books of accounts and for this reason it was held that the assessee had suppressed certain quantity of goods and therefore, the addition was maintained.

27. It is evident that in the present case the assessee had not only given i explanation but has also substantiated it. For instance the assessee's plea was that the statements given to the Bank were on estimate basis. This is supported by the fact that the Bank statement contained round figures and the I.T.O. has failed to give any comment on this aspect. This supports the assessee's plea that the figures with the Bank were on estimate basis while the figures in the accounts books were actual. Similarly the assessee's explanation was that the figures of stocks of cotton given in the accounts books of the assessee tallied with the figures of purchases calculated on the basis of cotton fee paid to the Excise Authorities and cotton fee paid to the Market Committee. No verification having been made the assessee's plea has to be accepted. Another point which goes in favour of the assessee an(l to which the learned Accountant Member, Mr. AA. Zuberi has not touched though has been elaborate by Sh. Inam Ellahi, was in record to the disposal of the ailing suppressed purchases of cotton. This was a manufacturing course. Assuming that the assessee had purchased kapas outside the books of accounts then there could be two possibilities. Either it had sold the Kapas which is not even the allegation of the department or the assessee had ginned the Kapas and said the lint. The I.T.O. had himself accepted the sales of lint. The declared yield has been accepted by the C.I.T.(A) which has been confirmed by Sh. Inam Fllahi the Accountant Member and Mr. A.A. Zuberi has concurred with him on this point. The said lint as well as the yield have been accepted. This means both the production results and sales have been accepted. Thus question arises where the suppressed purchase of kapas had gone. It makes the assessment order as contradictory. If the production results are accepted, the sale of lint is accepted and the sale rate is accepted how any addition can be made in the purchase account particularly when the purchase rate has also been accepted. No defects in the accounts books have been found any addition on account of suppressed purchases in the circumstances would be illogical.

28. The reasoning of Mr. A.A. Zuberi, the Accountant Member, that the assessee had failed to produce the Bank certificate that such a practice existed is too much to be expected from an assessee. There are certain strict bank rules which had to be observed and might have been relaxed in such cases. How a Bank can admit such a relaxation which, though factual but cannot be admitted in writing. This practice, as stated before, is evident from the circumstantial evidence, as invariably the value of the cotton in the Bank statements is in round figures.

29. The last point which I would like to make is that the addition has been made under section 13(1)(c) of the Income‑tax Ordinance. Such an addition can be made only by making strict compliance with the procedure laid down in that section. It may be pertinent to note that strict compliance is necessary because an, addition can also entail a penalty and criminal prosecution of the assessee. It is correct, as has been mentioned by Mr. A.A. Zuberi that burden of proof in such a case is on the assessee because of the introduction of section 13 as initial presumption has been given, by fiction of law, against the assessee. However, the assessee has not to‑'prove' anything. What he has to do is to `explain.' A distinction must be kept in mind between the `proving' of a point and giving an explanation. If such a discrepancy as envisaged by section 13 is discovered by the assessing officer, he has to ask for the explanation of the assessee in regard to the nature and source of investment etc. If the assessee offers no explanation or if the explanation given by the assessee is not satisfactory only then the addition can be made. In the present case the assessee had given an explanation and the assessing officer had rejected it without verifying the correctness or otherwise of the explanation. Thus, the assessing officer, without any verification, was not in a position to say that the assessee's explanation was not satisfactory and on the basis of such a finding he could not make any addition under section 13(1)(c). Secondly, the assessing officer has asked for the explanation of the assessee in regard to the nature of the expenditure. He had not asked to explanation in regard to the `source' of such an expenditure for the alleged suppression of purchase of kapas. Without such a notice, this addition is even otherwise illegal as is held by the Tribunal in its Full Bench decision reported as 1989 P T D (Trib.) 150.

30. Thus agreeing with the conclusion arrived at by the learned Accountant Member, Sh. Inam Ellahi, I uphold the order of the learned CIT(A) and dismiss the departmental appeal. ORDER OF THE BENCH

31. As per majority decision the appeal filed by the department hereby fails. M.BA./917/T Appeal failed.