1982 (PLP)

M. T. SIDDIQUI (PRESIDENT),‑These departmental appeals are directed against the order of the Appellate Assistant Commissioner, A‑Range, Lahore, dated 16‑1‑1970, the first appeal relates to the assessment proper for the charge year 1964‑65, whereas the other appeal arises out of the imposition of penalty under section 46(I) in respect of the same assessment year.

2. We will first take up the appeal relating to the assessment proper. The relevant facts are, these. The assessee, an individual, deals in electric fans, cycles, sewing machines, etc. on hire‑purchase basis. He also derives income from the purchase and sale of plots. In respect of the latter business no accounts were produced on the plea that none had been maintained. It may, however, be noted that this is the first year of assessment and in the return filed by the assessee he declared an income of Rs. 3,

828. As for the account relating to hire‑purchase business the assessee declared sales of Rs. 1,70,375 with gross profit rate of 14.6 %. The Income‑tax Officer noted that the assessee had charged 1/3rd or 1/4th of the sale price at the time of delivery of the goods and he received the balance amount in eleven equal monthly instalments. The disclosed profit rate was in his opinion low and or. a comparison of the purchase and sale prices of a few items which are quoted in the assessment order, he reached the conclusion that a much higher profit margin was available to the assessee. The declared results were not therefore accepted and he estimated the sales at Rs. 2,50,000 and applied thereto rate of 32j% for working out the gross profit. In appeal it was urged before the Appellate Assistant Commissioner that the inference sought to be drawn by the Income‑tax Officer from the 4nstances cited by him in the assessment order was misplaced as he had not accounted for the discount which was allowed by the assessee at the time of payment of the instalment. The evidence adduced in that behalf by the assessee's counsel before the Appellate Assistant Commissioner showed that discount had been allowed in respect of all the items mentioned by the Income‑tax Officer as a result of which the margin of profit available to the assessee was appreciably reduced. He further found that the Income‑tax Officer had failed to list any defects in the accounts and accordingly directed that the declared results be accepted.

3. The Department feels aggrieved by this finding of the Appellate Assistant Commissioner and the learned Departmental Representative con tended that the instances given by the Income‑tax Officer clearly showed that the margin of profit disclosed by the assessee was not the real margin of profit available to him, the moreso, as the business was conducted on hire‑purchase basis in which comparatively a higher margin of profit is normally earned. However, Appellate Assistant Commissioner has squarely met the objection of the Income‑tax Officer by making a categorical observation about the discount allowed by the assessee at the time of payment of instalments and the Departmental Representative was not in a position to controvert it. It is also a common ground that the Income‑tax Officer has not pointed out any defects in the accounts. He has neither attacked the purchases nor the sales from which the only inference that can be drawn is that they were all found to be property vouched and verifiable. In fact the nature of business is such that neither the purchases nor the sales would in the normal course be un verifiable. There being no defects in the accounts and the Income‑tax Officer's objection having been fully met the Appellate Assistant Commissioner rightly accepted the declared results and we find no ground for interfering with his order.

4. The next objection passed before us concerns the addition of Rs. 2,694 made by the Income‑tax Officer out of establishment expense which has been deleted by the Appellate Assistant Commissioner. The assessee claimed expenses of Rs. 12,894 on account of salaries paid to his employees, such as, clerks, accountant, etc. He also maintained a salary register, but the Income‑tax Officer made an add‑back of Rs. 5,694 for the reason that such a huge establishment was not required to conduct a business of this magnitude. He also relied on a report of the Inspector who has made spot inquiries and found that the number of employees was less than that shown by the assessee. This add‑back was also impugned before the Appellate Assistant Commissioner and it was contended by the learned counsel for the assessee that the contents of the enquiry report of the Inspector were not intimated to the assessee and without confronting him with the material gathered by the Inspector no adverse inference could be draw against him. The salaries paid were further contended to be fully voucher and verifiable. The appellate Assistant Commissioner on a perusal of the record came across several reports submitted by the Inspector. but in non of them it was stated that only those employees were working as had been mentioned by the Income‑tax Officer. He thus concluded that the addition made by the Income‑tax Officer was wholly unwarranted as the premises on which he had proceeded was factually incorrect. The finding of the Appellate Assistant Commissioner is unexceptionable apart from the factually incurred premises on which the Income‑tax Officer proceeded, it is for an assessee manage his business affairs in such manner as he thinks best and not for the assessing officer to dictate to him in this matter.

5. The two other objections agitated in this appeal and pressed before us concern the add‑backs of Rs. 78,064 on account of initial investment of the assessee in the business and Rs. 1,07,100 on account of investment in the purchase and sale of plots. The balance‑sheet of the assessee showed initial investment of Rs. 78,064 and when asked to explain the source of this invest ment it was explained by him that it was out of the sale proceeds of inherited agricultural land, but the complete details of the transactions were not furnished in response to the notice issued by the Income‑tax Officer under section 23(3). He accordingly added‑back this amount as income from un disclosed source. For similar reasons an add‑back of Rs. 1,07,100 was made which amount the assessee had invested in the purchase of land. On appeal, the Appellate Assistant Commissioner set aside the order of the Income‑tax Officer on these points mainly for the reason that the time given in section 23(3) notice was too short in which it was not possible for the assessee to comply with it and furnish the relevant particulars. The Depart ment feels aggrieved by this finding of the Appellate Assistant Commissioner and the learned Departmental Representative argued that specific notice hav ing been issued to the assessee, the Income‑tax Officer was well within his rights in drawing an adverse inference for the assessee's failure to comply with the notice and furnish the relevant details. It, however; transpired from the record that section 23 (3) notice was served on the assessee in the evening of 21st June, 1939, and he was thereby required to furnish the necessary parti culars on the 23rd June, 1969. As rightly observed by the Appellate Assistant Commissioner the time was too short and it was not, therefore, possible for, the assessee to comply with the requisition. On this score alone the Appellate Assistant Commissioner's order setting aside the assessment on these two, points must be maintained.

6. A further objection agitated in this appeal concerns the computation of the profit on the sale of plots which has been calculated by the Income‑tax Officer at the rate of Rs. 1,000 per kanal. The main grievance of the assessee before the Appellate Assistant Commissioner was that the Income‑tax Officer had not disclosed any basis for the computation of profit and accepting that contention the Appellate Assistant Commissioner set aside the order with the direction that the profit be computed after giving the assessee an opportunity of representing his case. The Department feels aggrieved by this direction also but we find nothing wrong in it since the income‑tax Officer has not disclosed any basis for computing the profit at the rate of Rs. 1,000 per kanal for his failure to bring on record any material to support the computation of profit by him the estimate made by the Income tax Officer is just a bald estimate which has no warrant. in taw. The Appellate Assistant Commissioner has rightly set aside the order and we find no justification to interfere with the Name.

7. Lastly we take up the appeal arising out of the imposition of penalty under section 46(1). The Income‑tax Officer imposed a penalty of data, Since the assessment proper was mainly set aside by the Appellate Assistant Commissioner he also cancelled the penalty order. The learned Departmental Representative challenging the validity of the Appellate Assistant Commis sioner's order placed reliance on the judgment of the Dacca High Court in the case, reported as (1963) 7 Taxation 110, in which it has been held that the penalty imposed under section 46(l) is legally leviable even after the assessment is set aside in appeal by the Appellate Assistant Commissioner or by the Tribunal, the foundation of penalty being not exactly the existing demand but the default of payment of that tax. It was contended by the departmental Representative that the present case was on all fours with the Dacca case and the penalty should not have, therefore, been cancelled. On the other hand the High Court of West Pakistan, has in the case of Messrs Bawani Violin Textile Mills (1967 P T D 622), held that where an Income‑tax Officer's order' is set aside in appeal the default based on his order and all subsequent proceedings must be taken to. have been superseded. Learned Departmental Representative sought to distinguish this case contend ing that the facts of the case were different. That tray be so, but the clear pronouncement made by the High Court leaves no room for doubt that where assessment itself is set aside the order of the Income‑tax Officer merges in the appellate order and as a necessary corollary the penalty order cannot also be sustained. Since the Appellate Assistant. Commissioner has either accepted the disclosed results or set aside the order of the Income‑tax Officer on same points and we have upheld the findings of the Appellate Assistant Commis sioner his order cancelling the penalty must also be maintained.

8. Both the appeals fail and are dismissed. Appeals dismissed.