1985 PLP (Trib (PTD)

ABRAR HUSSAIN NAQVI (MEMBER).‑‑ While respectfully agreeing with the reasons and conclusion arrived at by my learned brother, the Accountant Member, in the proposed judgment, I may add a few words in support of the conclusion.

2. Section 32 of the Income‑tax Ordinance which is the corresponding provision to section 13 of the Repealed Income‑tax Act, 1922, clearly lays down that income, profits and gains for purposes of sections 17, 19, 22, 27, and 30 are to be completed in accordance with the method of accounting regularly employed by the assessee. Subsection (3) of this section empower the I . T . 0 to compute the income from profits and gains on such basis and in such manner as he may think fit only where no method of accountancy is regularly employed or by employing such method the income, profits and gains cannot be properly deduced or if an assessee fails to maintain the accounts as prescribed by the C.B.R. under subsection (2).

3. As noted above subsection (1) makes it obligatory on the assessing officer to compute the income in accordance with the method of accounting regularly employed by the assessee unless he could show that the case of the assessee comes within the exception provided by subsection (3). Now the method of accounting must be distinguished from the accounts which are false or fabricated. There can be: (1) Acceptable method of accounting but unacceptable accounts. (2) Both the method of accounting and the accounts being unacceptable. (3) Where there is no method of accounting regularly employed.

4. Where a regular method of accounting has been employed by the assessee but the accounts are partly incorrect or incomplete, it could not be said that the method of accounting of the assessee is such from which the income of the assessee cannot be deduced. In such a case subsection (3) of section 32 cannot be employed in aid. This point has been subject of discussion in the leading case of Seth Gurmukh Singh v. Commissioner of Income‑tax Punjab reported as (1944) 12 I T R Page

393. At page 442 of the report Justice Muhammad Munir observed: "Section 13 is not relevant to a case where evidence, be it books of account or other evidence documentary or oral is rejected by the I.T.O. on the ground that it is false. Books of account may, however, be true as to the transactions recorded therein but they may have been kept in such a manner that it is not possible to deduce there from the true income, profit and gains of the assessee, which are directed by section 10 & 12 to be computed in a certain manner. It is here that section 13 begins to operate. If the assessee has employed a regular method of accounting and the true income for the previous year can be computed according to that method, the section makes it obligatory on the I . T .O. to compute the income in accordance with the method employed by the assessee".

5. The Privy Council also dealt with the nature and scope of section 13 of the repealed Income‑tax Act in Commissioner of Income‑tax Bombay v. Sarangpur Cotton Manufacturing Co. Ltd. reported as (1938) 6 ITR

36. Lord Thankerton observed in the judgment as under: "Their Lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes ...and does not relate to a method of making up the statutory returns for the assessment to income‑tax. Secondly, the section clearly makes such a method of accounting a compulsory basis of computation, unless in the opinion of the Income‑tax Officer, the income, profits and gains cannot properly be deduced there from".

6. It makes abundantly clear that rejection of accounts does not always mean that the method of accounting is such from which the income cannot be deduced. Again the rejection of accounts does not necessarily mean that the assessee's accounts are either false or fabricated. The books of account of an assessee could be said to be false or fabricated when there is some material or evidence with the assessing officer to hold this opinion. For instance, if the assessing officer discovers certain purchases or sales not recorded in the books of account or recorded incorrectly it can be said that the books of accounts are false or fabricated. In case where the assessing officer only says that either the purchases or sales are not verifiable that only means that the assessing officer is not in a position to accept the entries because he cannot verify them. In such a case the entries can be correct or incorrect but are not acceptable to the assessing officer. In such case it cannot be said that the accounts of the assessee, though reject able are either false or fabricated. Again the assessing officer while making an assessment may compute the income of the assessee in accordance with the method of accounting regularly employed by the assessee but may adopt his own gross profit by accepting some of the entries in the books of account while rejecting others. In Seth Gurmukh Singh's case at page 427 it was observed: "Even where the books are held to be false, there is nothing to prevent the Income‑tax Officer from using and acting on any admission that they might contain. For instance, Income‑tax Officer may accept the figure of sales and estimate the profits without accepting the trading account as a whole or he may accept the expenditure and on this basis estimate the sales. While proceeding in this manner the Income‑tax Officer is not acting under the proviso to section 13 but on general rules of reasoning and independently of section".

7. Therefore, the learned C.I.T contention that in the present case the assessing officer was entitled to change the method of accounting by converting C.I.F. sales into F.O.B. sales under the proviso to section 13 of the repealed Income‑tax Act or under section 32 of the Income‑tax Ordinance, has no force. The Income‑tax Officer in the present case has only doubted some of the entries in the books of account. For instance, he has stated that manufacturing account is not maintained. The purchases are not properly verifiable and wages paid to Karigars are also not verifiable. However, the assessing officer has not doubted the sales, which have been accepted as declared being all verifiable. The assessing officer has nowhere said that the assessee's method of accounting is such from which the profits and gains of the assessee could not be deduced. On the contrary the assessing officer has deduced the G.P. of the assessee on the basis of the sales declared by the assessee by applying a reasonable profit rate. What the assessing officer has done in this case is, that he has changed a fact into fiction. Admittedly the assessee had made exports on C.I.F. basis about the assessing officer has converted them into F.O.B. sales which is not the Act. The assessing officer has no such powers either under subsection (3) of section 32 or under section 62 of the Income‑tax Ordinance.

8. What the assessing officer in this case has done is that he deducted the expenses on account of parcel, postal, shipping charges, Railway freight, Air freight and insurance, from the sales and then adopted the note sales and applied a G.P. rate in order to work out the G.P. of the assessee. This method: apart from being against the principle of accountancy also leads to another legal complication. Under First Schedule Part‑IV paragraph A(2) export rebate is admissible to an exporter on the basis of sales‑proceeds of the goods. The relevant provision is reproduced as under: (A) Notwithstanding anything contained in this Schedule: (1) ........................... (2) where the total income of an assessee includes any profits and gains derived from export of goods manufactured in Pakistan" (a) Income‑tax and super tax, if any payable in respect of such profits and gains shall, subject to the other provisions of this clause, be reduced by an amount equal to fifty‑five per cent. of the amount of income‑tax and super‑tax, if any attributable to the sales‑proceeds of such goods.

9. From the reading of the above provisions, it is clear that if the sale figure is reduced, as has been done in this case by the assessing officer the export rebate allowable to the assessee is bound to be affected adversely which the assessing officer is not entitled to do.

10. For the foregoing I am in agreement with the, proposed judgment of my learned brother, the Accountant Member. M. B. A. Order accordingly.