P L D 1957 (W (PLP)

WAHIDUDDIN, J.

This judgment will dispose of two applications of the assessee under section 66, sub-clause 2 Income Tax Act, arising out of the order of the Income-tax Appellate Tribunal, Bombay Branch, dated 9th May 1947, refusing to state the case and to refer the alleged question of law for the determination of this Court. The petitioners were whole-sale dealers during the pre paration days, in Indian and foreign piece goods. They were carrying on the business in partnership at Bombay, Karachi, Delhi, Amritsar, Shikarpur and Sukkur under differ ent names and had only 9 shops. The business at the head office shop was carried on under the name of P. Dwarkadas at Karachi. The partnership consisted of 11 members and in all the shops partners were the same. They were assessed at Karachi. For brevity's sake, it may be mentioned that there were 3 shops at Karachi, one shop at Bombay one at Shikarpur, one at Delhi, one at Amritsar and two at Sukkur. In all these shops, the assessees were maintaining accounts on mercantile system. The profits of all the shops were computed separately, then continued and divided out in the head office book between the partners. They produced before the Income-tax Officer closed accounts for the accounting period and year commencing from 12th July 1940 to 2nd July 1941, the assessment year being 1942-43. The Income-tax Officer by order dated 14th February 1945, accepted the result shown in tile accounts for Bombay shop, but refused to do so, so far as the other shops were concerned, on the ground that the relevant purchase and sale journals have not been produced. According to the Income-tax Officer, the trans actions concluded by the assessees could not be checked and therefore the income was estimated by applying the flat rate of 10 per cent. The matter went up in appeal before the Assistant Appel late Commissioner. The assessee however produced several documents including the sale and stock journals for verifying the average margin of profit. The matter was remanded, and as a result of further examination the accounts of Shikarpur Branch, P. Dwarkadas, Karachi and Dwarkadas Naraindas Karachi, was accepted by order of the Appellate Assistant Commissioner dated 28th September 1945. The accounts of the remaining five shops were rejected, but the income was assessed at reduced flat rates in respect of some of the shops. The matter was further taken to the Income-tax Appellate Tribunal by order dated 13th September 1946. The Tribunal agreed with the findings of the Income-tax Officer and Assistant Appellate Commissioner about the rejection of the accounts of the remaining 5 shops and also in respect the assessment made on the basis of the flat rate. The flat rates applied to Delhi and Sukkur shops were however further reduced. On the basis of this order the applicants were assessed both for Income-tax and Excess Profit Tax. The assessees being dissatisfied with the final order of the Income-tax Appellate Tribunal, applied to the Tribunal to state a case for the opinion of the High Court. By order dated 9th May 1947, the Income-tax Appellate Tribunal rejected the two applications, one known as I T A 286 of 1946-47 and the other E P T A 284 of ' 1946-47. The said order is reproduced below :- "By these two applications one under the Indian Income tax Act and the other under the: Excess Profits Tax Act; the assessee requires the Tribunal to refer as many as seven common questions of law which are said to arise out of the Tribunals orders in R A A No.' 51 (Sind) of 1945-46 and 14 (1) E P T A A No. 14 (Sind) of 1945-46. The assessment year is 1942-43. The year of account and the chargeable accounting period is the same viz. 12th July 1940 .to. 2nd July 1940. The assessee deals in cloth and piece goods both imported and manufactur ed in India. He has in all nine shops in British India. The profits as disclosed by the books of account of four out of these nine shops were accepted by the Appellate Assistant Commissioner. The profits as so `disclosed of the remaining five shops were not accepted `because the assessee was not able td prove the accuracy of the opening and closing stocks and the profits disclosed were too low considering the market conditions: In other words, the method of accounting regularly employed by the assessee was such that in the opinion of the Appellate Assistant Commissioner the profits of the five shops could not properly be deduced therefrom. The Tribunal having held that proviso to section 13 applies, estimated the income of the assessee from the five shops. That was the only pint for determination in those appeals. The question whether the method of accounting regularly employed by the assessee is such that profits can be properly deduced therefrom is a question of fact. In these circum stances, we refuse to draw a statement of the case, and dismiss the applications". The assessee thereupon filed the two applications under consideration under section 66 (2) of the Income-tax Act, praying that the Income-tax Appellate Tribunal be directed to state the case and to refer to the High Court the following common questions of law arising from their order dated 13th September 1946 in the said Income-tax and Excess Profit Tax Appeals :- (1) Whether in the circumstances of the case, the proviso to section 13 of the Income Tax Act is applicable even though the assessee firm had kept regular, complete, closed and adjusted accounts, working out therein income, profits and gains in accordance with the mercantile method of accounting. If the answer to the above question be in the affir mative :- (2) Whether there was any evidence to support the finding that the figures of opening and closing stocks at the two shops at Sukkur and the shops at Delhi, Amritsar and the Head Offices shop at Karachi were not correctly entered in the account books. If the answer to both the above questions (1) and (2) above be in the affirmative. (3) Whether there was any evidence to support the finding of fact that the assessee firm earned gross profit at 19 10 on sales made by the Karachi Head Office shop and not at 6.6010 as disclosed by the closed, completed and adjusted accounts ; (4) Whether there was any evidence to support the findings of fact that the assessee firm earned gross profit at 6 % on the sales made by the shop at Delhi in the name of Pokerdas Menghraj and not at 3.1% as disclosed by the closed, completed and adjusted accounts ; (5) Whether there was any evidence to support the findings of fact that the assessee firm earned gross profit at 7010 on sales made by the shop at Amritsar in the name of Pokerdas Menghraj and not at 2.80/0 as disclosed by the closed, completed and adjusted accounts ; (6) Whether there was any evidence to support the findings of fact that the assessee firm earned profit at 8 /0 on sales made by the shop at Sukkur in the name of Pokardas Menghram and not at 30/0 as disclosed by the closed, completed and adjusted accounts ; (7) Whether there was any evidence to support the findings of fact that the assessee firm earned gross profit at 8 10 on sales made by the shop at Sukkur in the name of Dwarkadas Naraindas and not at 4.65010 as disclosed by the closed, completed and adjusted accounts". The contention of the petitioners throughout was that they keep closed, completed and adjusted accounts and the profits were computed in accordance with the mercantile system. The accounts thus kept was always accepted in the past and there being no difference whatsoever in the system of keeping the account for the year under consideration it was incumbent on the Income-tax Officer under section 13 Income Tax Act to accept the said method. According to them even under the proviso to section 13 the Income-tax authorities were not entitled to apply flat rates as it could not be said that that method was such that profits could not be properly deduced. It was asserted that the mercantile method in all the standard works of accountancy and auditing was the best and most accurate method of computing profits. In this method neither the purchase folios nor the stock books are required to be kept and therefore the Income-tax authorities were not justified in rejecting the account books. It was further urged that there was no material or evidence on record on the basis of which the flat rates have been applied. According to the petitioners all these questions involve question of law and the Income-tax Appellate Tribunal was not justified in refusing to state the case and referring these questions to the High Court for deter mination. We have carefully considered the arguments advanced by the learned counsel for the petitioners section 13 of the Income Tax Act reads as follows :- "

13. Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee: Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax officer may determine." According to the proviso of this section "if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine". This proviso applies to all methods of'~ accounting. The mercantile system is as much subject to the' investigation and scrutiny of Income-tax Office as any other method. In the present case, the Income-tax authorities including the Income-tax Appellate Tribunal, came to the conclusion that the method of accounting regularly employed by the assessee was such that profits could not be deduced therefrom and for this reason their accounts were rejected. This finding was based on several considerations including the fact that in the first instance the applicants produced the purchase journals of Bombay shop only and it was later on that they produced similar journals in respect of three other shops, but failed to produce journals for those shops where the margin of profit was shown very low. It cannot be doubted that these findings are based on sufficient materially and are purely questions of fact. The contention of the learned counsel for the applicant that there existed no material on record to arrive at such a finding is not well founded. The Income-tax Appellate Tribunal in the circumstances of the case was clearly justified to uphold the right of the Income-tax authorities to make assessment of the income under the proviso of section 13 of the Income-tax Act. The only other question that remains for consideration is whether the question relating to the power of the Tribunal to reject the accounts in the circumstances of the case and apply the flat rate is a question of law. The contention of the learned counsel for the petitioners that the flat rates applied by the Tribunal ought to have been based on some material and not in an arbitrary manner is also without force. The learned counsel for the applicant cited a number of authorities to support this contention. A perusal of these authorities, however, shows that the facts in these cases were entirely different than those in the case under consideration. In Dhirajlal Girdharilal v. Commissioner of Income-tax Bombay (A I R 1955 S C 271) it was laid down that if the Court of fact bases its decision partly on evidence and partly on conjectures, surmises and suspicion then in such a situation clearly an issue of law arises. To a similar effect are the observations made in 1951 Mad. L J 571 (1951) (1) Mad. L J

60. The learned counsel has laid much stress on the authority reported in A I R 1955 Pb.

42. In this case, section 13 Income Tax Act has been discussed at great length but the facts under consideration are different and this authority is distinguishable. In that case it was admitted that the assessee had maintained regular accounts of his purchase and sales and these accounts were accepted as correct. Only the stock register was missing. The Income-tax Officer however did not hold that the absence of stock register was such a serious defect in the method of accounting that the profits and losses could not be deduced. All he said was that the profits appeared to be somewhat low and there was no stock register. Then the Income-tax Officer did not adopt any bails for the increase. In the language of the learned judges" he merely took what has been described by the Privy Council as a leap in the dark' in adding the two items of Rs. 5,000 and Rs. 7,000. "On these facts it was held that there was no material before the Income-tax Officer which would enable him to come to such a finding as to attract the provisions of proviso to section

13. It was further held that in increasing the taxable income he did not adopt any method or basis. It can thus be seen that the decisions in the above-mentioned case is based on a different footing and cannot in any way be applied to the facts of the present case. Mr. A. Aziz, counsel for the Department, on the other hand, has urged that the Income-tax Officer in this case rejected the assessee's books, the principle of flat rate thereby became applicable, and the amount of such rate is entirely in the discretion of the Income-tax authorities. He has contended that the Income-tax authorities have exercised their discretion in a proper manner and were justified in refusing to refer this matter to the High Court for opinion. He has placed reliance on Feroz Shah v. Income-tax Commissioner Punjab and N.-W. F. Province, Lahore (A I R 1933 P C 198), Ganesh Lall & Sons v. Commr. of Income-tax (1938 I T R 390) and Ram Chandra Tolba Teli v. Commr. of Income-tax C. P. & U. P. (1939 I T R 151). The principle of law deduced from these authorities is that if the principle of applying flat rate is not objected to, its reasonableness cannot be made a subject matter of reference to the High Court. In A I R (1933) P C 198, their Lordships of the Privy Council observed "with regard to the flat rate of 23JO/o their Lordships are in agreement with the judgment of the High Court on that Head. The principle of assessment at flat rate not being contested its amount must be for the Income-tax Officer to determine". In Messrs. Sir William Robers Timber Co. Ltd. v. Commissioner of Income-tax Punjab and N.-W. F. P. Lahore (P L D 1951 Lah,312) the learned judge of the Lahore High Court refused to ask the Income-tax Appellate Tribunal to state the case of similar nature and observed : "the question relating to the Tribunal's power to reject the accounts in the circumstances of the case and apply a flat rate of profits is not a question of law which the Tribunal should be directed to estate". We are bound by the observations of their Lordshhips of the Privy Council and are also in respectful agreement with the view taken in the Lahore case. These observations are a complete answer to the contention raised before us. In the case under consideration the flat rate applied for the different shops ranged from 6% to 10%. These rates cannot be considered to be unreasonable or arbitrary. On a careful consideration of the facts and the authorities cited by the parties, we are satisfied that the Income-tax Appellate Tribunal was clearly justified in upholding the discretion of the Income-tax Officer to reject the books of accounts and to apply the flat rate. The amount of such rate was entirely in the discretion of the Income-tax authorities. The flat rate applied in the present case is reasonable and not arbitrary. Even if the high rate of profits had been applied that by itself would not warrant the High Court in directing the Tribunal to state a case. For the reasons given above, we are of the opinion that no question of law arises out of the said order of the Tribunal, and the two applications are dismissed with costs. A. H. Applications dismissed.