P L D 1976 Lahore 223 (PLP)

MUHAMMAD AKRAM, J.-This is a reference application directly made to the High Court under section 66(1) of the Income-tax Act, 1922 relating to the assessment year 1969-70.

2. Briefly, the relevant facts are that Messrs Rajput Metal Works Ltd., Gujranwala (hereinafter called the assessee) is a private limited company. It is doing business of manufacture of non-ferrous metal sheets, strips, metal wares, utensils etc. at Gujranwala since 1960-61. From the assessment year 1966-67 the company also started the business of manufacture of pipes in the name of Messrs Pak Pipe industries and for the assessment year 1969-70 the assessee started manufacturing M. S. Rounds in the name of Messrs Asian Steel Re-Rolling Mills. In respect of the assessment year 1969-70 the declared version of the assessee relating to its old established business of the manufacture of non-ferrous metal sheets, strips, metalware untensils etc. in the name of Messrs Rajput Metal Works Ltd., was accepted by the Income-tax Officer. But he rejected the trading accounts relating to the business done under the names of the Pak Pipe Industries and the Asian Steel Re.Rolling Mills. In completing the assessment he inter alia made an addition of Rs. 37,500 in the account of Pak Pipe Industries yielding a gross profit of 20 % against 16.3 % declared and another addition of Rs. 24,000 in the account of the Asian Steel Re-Rolling Mills raising the declared gross profit rate from 10.2 % to 15 %. The assessee was not satisfied with this treatment and went up in appeal against the order. On the 3rd of December 1970 the Appellate Assistant Commissioner of Income-tax, A-Range, Rawalpindi in accepting the appeal deleted these two additions. Dissatisfied, the Income-tax Officer went up in appeal (I. T. A. No. 1728 of 1970-71) against the order. On the 24th of May 1971 the Income-tax Appellate Tribunal, Peshawar Bench, Peshawar, partly accepted the appeal, vacated the order passed by the Appellate Assistant Commissioner and upheld tire additions to the extent of Rs. 30,000 in the account of Messrs Pak Pipe Industries and Rs. 15,000 in the account of the Asian Steel Re-Rolling Mills.

4. In these circumstances the assessee has moved this application under section 66(1) directly in the High Court referring the following questions of law said to arise out of the appellate order passed by the Tribunal for its opinion "(1) Whether on facts and in the circumstances of the case the order of the Appellate Tribunal adding Rs. 30,000 in the Pak Pipe Industries and Rs. 15,000 in Asian Steel Re-Rolling Mills is violative of the first proviso to section 13 of the Income-tax Act, 1922, for want of `computation' of income on any `basis' ? (2) Whether on facts and in the circumstances of the case the Tribunal having not given a clear finding as to the applicability of the 1st proviso to section 13 the Tribunal was right in invoking the 1st proviso to section 13 and making the additions it did in the trading accounts ? (3) Whether on facts and in the circumstances of the case the learned Tribunal was right in holding that notwithstanding the finding of the learned A. A. C. that the true profits of the business (which the Income-tax Officer contemplate to arrive at) in Pak Pipe Industries were reflected by the accounts of the assessee the learned I. T. O. was entitled to make the additions in the Trading account? (4) Whether on facts and in the circumstances of the case the demurrage of Rs. 9,916 was properly, debitable to trading account (being not in the nature of a penalty) and whether the order of the learned Tribunal in relation to Asian Steel Re-Rolling Mills has been vitiated for its having proceeded in incorrect assumption and relied Inter alia on irrelevant and inconsequential circumstances."

5. We have heard the learned counsel for the parties appearing before us in this reference. The Income-tax Officer observed that gross profit rate declared at 16.3 % from the Pak Pipe industries was too low in this specialised line especially when as in this case the entire M. S. Strips consumed in the manufacture were imported on licences. The manufacturing wastage shown at 5 % was quite excessive. There was no authentic record showing daily consumption of M. S. Strips and manufactured pipes. The manufacturing register was not properly maintained and the entries in it do not admit of verification. There was no stock or consumption account of various stores and chemicals rendering this account unverifiable. Some of the purchases were also unvouched. There was marked disparity between the consumption of zinc vis-a-vis the pipes manufactured. In conclusion the Income-tax Officer held that the accounts' as produced were not. verifiable and the profit rate declared was too low. Having regard to these facts and the past history of the case (after considering the M. L. R 32 declaration) the Income-tax Officer, therefore, made a lump sum addition of Rs. 37,500 to the declared income, resulting in the application of gross profit rate of about 20 % from this source. The Income-tax Officer observed that the Asian Steel Re-Rolling Mills was a new project set up by the assessee for the manufacture and sale of M. S. Rounds from imported billet. The trading account disclosed a gross profit of Rs. 51,402 on a turn-over of Rs. 5,00,440 yielding an average profit rate of 10.2 % which was not considered to be up to the mark. The assessee explained that most of its sales were made to the customers of Lahore from which lesser rates were charged than the prevalent market rates, allow for freight and octroi charges from Gujranwala to Lahore to enable them to compete in the Lahore market. The purchases also included demurrage paid at Rs. 9,916 on L. C. No. 160 due to the reason that the assessee did not take delivery of goods from Custom authorities in time. In the opinion of the Income-tax Officer the demurrage thus paid was a sort of penalty for not lifting the goods in time and was not admissible as a business deduction. Against consumption of 351 tons of billet the assessee produced M. S. Rounds weighing 331 tons, giving an average wastage of 5.5 %. Sales were entirely on cash basis and were partially unverifiable. Fuel consumed was not supported by stock or consumption accounts. Other manufacturing expenses of Rs. 4,855 claimed in the trading account as cutting charges of billet and bundling charges of M. S. Rounds were mostly supported by internal vouchers which were not verifiable. In conclusion the Income-tax Officer made an addition of Rs. 24,000 thus raising the gross profit to 15 % against 10.2 % declared from this business.

6. The Appellate Assistant Commissioner of Income-tax on going through the record accepted the appeal of the assessee against the order and held that keeping everything into consideration the declared version must be held to be in order and must be accepted. He, therefore, ordered the deletion of the additions of Rs. 37,000 and Rs. 24,000 in two accounts in question. But on further appeal by the Income-tax Officer, the Income-tax Appellate Tribunal substantially reversed the order passed by the Appellate Assistant Commissioner and maintained the additions made by the Income-tax Officer up to the extent of Rs. 30,000 in the account of Pak Pipe Industries and Rs. 15,000 in the account of the Asian Steel Re-Rolling - Mills. In connection with the first mentioned account the Tribunal observed:- "After hearing arguments from both the parties and going through the record we fully agree with the learned Departmental Representative's point of view that the Appellate Assistant Commissioner failed to appreciate other reasons which played their predominant part in rejecting the accounts. The reason of the declaration under Martial Law Regulation No. 32 was not very material and the Appellate Assistant Commissioner's emphasis on it was too much and not relevant. But, however, we would like to appreciate to some extent the assessee's point of view that his main sales market for this class of business was at Lahore and he could not be treated at par with the local competitors. In view of these facts, we are of the view that it would meet the ends of justice if the Appellate Assistant Commissioner's order is vacated and the addition to the extent of Rs. 30,000 is maintained." Similarly with respect to the addition made in the Asian Steel Re-Rolling Mills account the Tribunal observed as follows: "Under this issue, the learned Departmental Representative submitted that main reason for rejecting the trading account and making the ad hoc addition of Rs. 24,000 were namely, the gross profit rate low, sales unverifiable, demurrage of Rs. 9,915 incorrectly charged to the Trading Account and waste percentage high, fuel consumption and stores consumption not supported with their relevant consumption accounts. The Income-tax Officer made the addition after keeping in view all these defects but the Appellate Assistant Commissioner deleted the entire addition with one penstroke simply for one reason that this is the first venture of its kind in Gujranwala and could not be compared with the well-established industries of Lahore. In view of this fact the Departmental Representative requested for restoration of the original order of the Income-tax Officer. Against this the learned counsel for the assessee reiterated all those arguments as advanced by the Appellate Assistant Commissioner in support of his action. After hearing the arguments for both the parties and going through the record, we agree with the Department's point of view that the Appellate Assistant Commissioner had not taken into account all the defects responsible in rejecting the account. However, we also take the note of the assessee's handicap on the sales market as be had to dispose its products at Lahore market. Moreover, this is the first year of assessment and the assessee deserves some leniency on this score as well. In view of these effects, it would meet the ends of justice if the Appellate Assistant Commissioner's order on this point is vacated and the addition is restricted to Rs. 15,000."

7. Before us at the hearing the learned counsel for the assessee made a half-hearted attempt to question the rejection of the two accounts by the Tribunal. In this connection the Income-tax Officer adduced cogent reasons for rejection of the account version and his order was substantially armed on further appeal by the Tribunal. In this respect the Tribunal restored the order passed by the income-tax Officer in the exercise of its own judgment based on proved facts and no question of law worth reference for opinion by the High Court arises out of that part of its order. Indeed the learned counsel for the petitioner did not eventually press before us the last two questions Nos. 3 and 4 formulated above. They were considered to have been dropped by the assessee.

8. Even question No. 2 as framed above is self-contradictory and is based on a misunderstanding of the order made by the Tribunal. It is evident that in rejecting the accounts and proceeding to make the impugned additions the Tribunal was conscious of the powers vested in the Income-tax Officer in completing the assessment under section 13 read with section 23(3 of the Act. The mere fact that the Tribunal did not expressly advert to these provisions cannot per se vitiate the appellate order passed by it. This being the case, question No. 2 does not properly arise out of the appellate order passed by the Tribunal.

9. The first proviso to section 13 of the Act expressly lays down 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. It is, therefore, clear from this proviso that after the Income-tax Officer had rejected the account version for the reasons assigned by him, a further and much onerous duty was cast upon him to make his "computation" of the income upon such "basis" and in such manner as he may "determine". The determination and the computation of the income must be made on a basis evolved by the Income-tax Officer. His judgment must be based on reason. He cannot just take a leap in dark and indulge in a pure guess by making arbitrary, capricious and an ad hoc addition without laying down the basis for it. He should endenvour to the best of his ability to ascertain the income, profits and gains of the assessee nearest to his true income, profits and gains as far as possible under the circumstances of the case. In Seth Nathuram Mannalal v. Commissioner of Income-tax C. P. & Berar ((1954) 25 1 T R 216), under similar provisions of the law it was held that if after rejecting the method of accounting employed by the assessee the Income-tax Officer were simply to add a particular amount to the income returned or to disallow a part f the business expenses properly incurred by the assessee, he would not be acting under the proviso to section 13, and that he must disclose the basis and the manner of computation and make his order a speaking order. Similarly in Jonnalagadda Yedukendala Rao v. Commissioner of Income-tax, Hyderabad ((1959) 36 1 T R 485), the results derived from the assessee's books were :ejected and his gross income was determined by the Income-tax Officer, and the Appellate Assistant Commissioner on appeal, by adding a lump sum to the amount disclosed by the accounts. On further appeal the Appellate Tribunal gave reasons for rejecting the accounts of the assessee and arrived at the gross income of Rs. 1,20,000 at the rate of Rs. 5,000 for 24 buses plied by the assessee, but did not disclose any basis on which it had fixed the amount. On reference the High Court held that the rate adopted by the Appellate Tribunal was fixed capriciously without any basis and that its order was not sustainable in law.

10. In the case of Pandit Bros. ' v. Commissioner of Income-tax ((1954) 26 1 T R 159), the Income-tax Officer did not adopt any such basis for the addition in accordance with the proviso to section 13 of the Act in making the computation and his order was set aside. In Dhakeshwari Cotton Mills Ltd. v. Commissioner of Income-tax ((1954) 26 I T R 775), the Supreme-Court of India generally observed that the Income-tax Officer in making his assessment under section 23(3) of the Indian Income-tax Act is not entitled to make a pure guess and make an assessment without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. In Jhandu Mal Tara Chand Rice Mills v. Commissioner of Income-tax, Patiala (1971 P T D 969), at p. 980 the Court held that under the proviso to sec tion 13 of the Act, once the Income-tax Officer comes to the conclusion that the income, profits and gains cannot properly be deduced from the method of accounting employed by the assessee, then he has to make the computation upon such basis anti in such manner as he may determine. It is, therefore, necessary for the Income-tax Officer to determine some basis and manner and then to compute the income, profits and gains in accordance therewith. Recently in an unreported case of Messrs Pakistan Cycle Industrial Cooperative Society Ltd., Lahore v. Commissioner of Income-tax, Lahore Zone, Lahore (T. R. No. 59 of 1972) a Division Bench of this Court of which one of us (Mohammad Akram, J.) was a member, has held that after having discarded the accounts, an onerous responsibility devolves upon the Income-tax Officer to make his own computation of the income, profits and gains of the assessee on such basis and in such manner as he may determine in accordance with the proviso to section 13 of the Act. In doing this, he must act judicially and his judgment must be based on reasons and not merely on whims and caprices.

11. In the instant case before us the Tribunal on further appeal adduced cogent reasons for rejecting the accounts and the declared version based on them, but has at the same time made an ad hoc addition of Rs. 30,000 in the Pak Pipe Industries Accounts, and Rs. 15,000 in the Asian Steel Re-Rolling Account. In this respect the Tribunal did not make the computation of the income of the assessee on any basis whatsoever. These additions appear to have been made arbitrarily and on no relevant considerations. The( Income-tax Officer relied on the past history of the case in making the addition to the Pak Pipe Industries Account. But the Tribunal singularly failed to even advert to it in making the addition to the extent of Rs. 20,000 in that account. It did not evolve any basis for the addition of Rs. 15,000 to the Steel Re-Rolling Account. In the circumstances we find that the additions thus made by the Tribunal cannot be sustained under the proviso to section 13 of the Act and the Tribunal is required to make a fresh computation in this behalf.

12. For the foregoing reasons we are of the opinion that on the facts and in the circumstances of this case the order of the Appellate Tribunal adding Rs. 30,000 to the Pak Pipe Industries Account and Rs. 15,000 to the Asian Steel Re-Rolling Mills Account cannot be sustained. These additions were made in contravention of the first proviso to section 13 of the Act. Our answer to the first question is; therefore, returned in the affirmative. We, therefore, return our answer to the last remaining question No. I before us accordingly. But there shall be no order as to costs in the circumstances of the case. S. Q. Reference answered.