P L D 1967 Karachi 351 (PLP)

ABDUL KADIR SHAIKH, J.-By this application under section 66(2) of the Income-tax Act, the assessee applicant requests that the Income-.tax Appellate Tribunal may be- directed to refer the following questions of law for opinion of this Court: "(1) That notwithstanding the fact that the books of accounts were not accepted, there was enough data available for ascertain ing the stock after August, 1952, when O. G. L. was suspend, (2) Whether in the circumstances of the case, the assessment of profit on the imported goods at a higher rate was legally justified on the assumption that due to the suspension of the O. G. L. the Assessee was making profit, without taking into consideration the actual stock, left with him of the imported goods at the relevant time. (3) Whether in law the higher rate of profits earned, in isolated instances can be made the yard-stick for the assess ment at that rate. (4) Whether in law the verified accounts of a limited com pany can be rejected without calling upon the registered accountant who has verified the accounts to justify the discrepancies stated therein by the assessing authorities."

2. The facts of the case briefly stated are that the assessee- applicant is a private limited company dealing in textile goads. For the assessment year 1953-54, corresponding to accounting year ending on 31st of December, 1952, the assessee declared a gross profit of Rs. 44,630 on the basis of 5.1 per cent. on turn over of Rs. 8,73,571 of imported goods, and a further profit of Rs. 5,988 on the total sale of Rs. 8,49,647 of locally purchased goods. On examination of the books of account the Income -Tax Officer was of the opinion that the assessee had not maintained reliable stock data, etc. and accordingly he rejected the book version and determined the profits on an estimated sale of Rs. 9,25,OC0 for the imported goods, by applying a uniform rate of 10 per cent. gross profit. Likewise, the turn over of the locally purchased goods was enhanced to Rs. 11,00,000 and profits were worked out at 5 per cent. of this value.

3. On appeal the Assistant Commissioner (Appellate) modified the assessment so far as the locally purchased goods were concerned and applied a reduced rate of profit of 2.6 per cent. gross on turn over of Rs. 9,25,000, but he upheld the assessment in respect of the imported goods both as regards the estimated value and rate of profits applied thereto.

4. The assessee then took up the matter further before the Income-tax Appellate Tribunal but without any success. The Tribunal- upheld the actions of the subordinate officers for the reasons that may be stated by reproducing the relevant extract of the order. It reads: "The Departmental Representative has pointed out that the Income-tax Officer picked .out some items of sales and discovered a fairly high margin or profit from them; for instances: (1) the Japanese imported shirting. (imports Rs. 12,425), gross profit. 17.7% (2) Poland Print Chitz (imports Rs. 22,659) gross profit 15.9%. (3) Japan Muls (imports Rs. 63,255) gross profit 10.9 %. Besides the good margin of profit disclosed above, it is also stated that the O. G. L. was suspended in August, 1952 and the stockist in cloth and other commodities benefited by this change in the market conditions. The cash sales were made to Patharawalas of which no verification is possible. Thus the margin of profit disclosed for imported goods cannot be said to be correct. The assessee alleges to have suffered losses after restrictions on O. G. L. Even that be so, the assessing authorities have made a concession by reducing the gross profit rate 10% in order to cover the deficiency. We think that the rate of 10% gross applies on imported articles is reasonable and no modification of it is called for.

3. Coming to the rate of 2.6 %. applied by the Appellate Assistant Commissioner to estimated sales of Rs. 9,25,000 for locally purchased goods we think that the rate supplied is quite reasonable ; in one of the cases cited by the assessee itself a gross profit of 1.2 % was shown and 3 % applied by the Department. In another case no doubt a loss was shown and accepted but we do not know the details of the business as the record of the case is not before us. We think that the rate of profit adopted by the Appellate Assistant Commissioner is correct and no modification of it is called for." On the failure of the appeal, the assessee-applicant applied to the Appellate-Tribunal under section 66(1) of the Income-Tax Act to refer the above-mentioned questions for opinion of this- Court, but the Appellate Tribunal declined to do so on the ground that the reliability of accounts is purely a question of fact and since the grievance of the assessee as disclosed from the questions was that varying rates should have been adopted in respect of the; imported goods, mixed with those locally purchased, and this contention was not even raised before the assessing authorities or the Tribunal, the questions do not arise out of the Order of the 'Tribunal dismissing assessees' appeal. According to the Tribunal all the questions posed related to the findings of fact and no question of law for opinion of the High Court arose.

5. In support of the application the first contention raised by the learned counsel for the applicant was that the Tribunal committed a gross error of law in relying on three instances of sale of imported goods at higher profits, without giving an opportunity to the applicant to furnish explanation in. regard thereto. The second contention urged was that the Appellate Tribunal committed an error apparent on the face of the record by holding that the Income-tax Officer had correctly assessed the tax under section, 13 when in fact action taken was under section 23 of the Income-tax Act.

6. We find no force in either of the contentions raised by the learned counsel. The Income-tax Officer rejected the book version of the assessee for several reasons. In the order passed by him he has pointed out several discrepancies, e.g. quantitative tally of the goods did not exist in the account books; cash sales of Japan Mulls No. 8181 were not represented either by existence fn the opining stock or purchases; Japan shirting 2003 and Japan print shirting in the opening stock and the purchase register exceeded the number of cloth sold and the balance was not shown in the closing stock; yardage of colour net (sic) sold exceeded the figure shown in the opening stock; that purchases and sales were made for cash and mostly to. Patharwallas from whim no verification was possible, etc. etc. For these reasons the Income -tax Officer was of the opinion that the assessee had suppressed the figures of purchases and the sales of the goods in his books. These findings were confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. It is obvious that in these proceedings these findings of fact cannot be disturbed. On such a state of accounts in the books of the Assessee no fault can be found with the assessing authorities to compute the taxes on any basis and in such manner as deemed fit and proper. 'In determining the flat-rate of profit at 10 per cent gross on the sale so estimated, the Appellate Tribunal relied on three instances of sales made by the assessee himself. In these three instances the assessee had sold the imported goods at a gross profit of 17.7 per cent., 15.9 per cent and 10.9 per cent, The Income-tax Officer was of the opinion that after the suspension of the Open General Licence sometime in the middle of August, 1952, substantial rise in the price of the imported goods had occurred. On his own showing the total sales made by the Assessee during the accounting year upto August, 1952 worked out to Rs. 8,18,000 and for the rest of the period ending 31st December 1952 to Rs. 9,25,

000. The assessee had shown almost the same rate of profit on the imported goods during the period before and after the suspension of the Open General Licence. The Income-tax Officer did not accept this position and determined gross profits at the flat rate of 10 per cent on the turn over of Rs. 9,25,000 which was made after the suspension of the Open General Licence. He accepted the percentage of gross profits shown by the assessee for the period before the suspension of the Open General Licence. On these facts the second question sought to be referred fur opinion to this Court does not at all arise because the assessing authorities have determined flat rate of gross profit of 10 percent on the sale of the actual stock of the imported goods with the assessee for the period after the suspension of the Open General Licence upto the end of accounting year, and not the entire sales throughout the assessment year. The discretion of the Income-tax authorities in rejecting the book version of an assessee and applying the flat rate of profits cannot also be challenged on the facts found by them. It was held in the case of Pokardas Dwarkadas of Karachi v. Commissioner of Income-tax, Sind and Baluchistan (P L D 1957 Kar. 61) that the discretion of the Income-tax authorities in rejecting the book version of an assesses and applying a flat rate of profits would not warrant the High Court in directing the Tribunal to refer the case for its opinion under section 66(2) of the Income-tax Act: Similarly in the case of Ganga Ram Balmokand v. Commissioner of Income -tax, Punjab ((1937) 5 I T R 464) decided by the Lahore High Court, it was held: "Where the Income-tax authorities were not satisfied with the correctness or completeness of the assessees' accounts and, taking into consideration the state of affairs in general and the fact that the assessee had a large business and the profit shown by them was-abnormally low in comparison with that of other persons carrying on the same business in the locality, calculated the taxable income by applying fiat rate of 7 per cent, the action of applying a flat rate was justified and the burden was on the assessees to displace the estimate." In this case it was further held that while making an assessment under section 23(3) it was open to the Income-tax Officer to invoke the proviso to section 13 if after examining the accounts produced by the assessee under section 22(4) or after recording the evidence adduced by the assessee under section 23(2), he (Income-tax Officer) still remains unconvinced as to the reliability of the assessees' accounts, and considers that they do not serve as a safe guide in calculating the assessee's taxable income. In a latter case of Seth Gurmukh Singh v. Commissioner of Income-tax, Punjab ((1944) 12 I T R 393) the Lahore High Court however held that while proceeding under subsection (3) of section 23 the income-tax Officer is not bound to rely on such evidence produc ed by the assessee as he considers to be false, and if he proposes to make an estimate in disregard of the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate. He is not, debarred from relying on private sources of information which sources he may not disclose to the assessee at all. In case he proposes to use against the assessee the result of any private inquiries made by him, he must communicate to the assessee the substance of the information so proposed to be utilized to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it, if possible. In this case it was further held that it was not open to the High Court in a reference under section 66, to declare the finding of fact arrived at by the Income-tax authorities as altogether vitiated, if there is any admissible material to support the finding, quite apart from the result of the confidential inquiries made by him and not communicated to the assessee. We are in respectful agreement with these observations. Although it is open to the Income-tax Officer to reject the book version of an assessee if he is of the opinion that they do not reveal the true income, but if some other information or materials obtained from outside sources is to be utilised against the assessee for the purposes of assessment either under section 13 or 23(3) of the Income-tax Act, the assessee should be put in possession of the necessary particulars thereof and given an opportunity to meet the case made out against him. In the case of Commissioner of Income-tax v. Khemchand Ramdas (I L R 1940 Kar. 309) it was observed by the learned Judicial Commissioner that: "Though there is nothing in the Act which requires the Income-tax Officer to disclose to the assessee the material on which he proposes to act or to refer to it in his order, natural justice requires-and he should conduct the proceedings in accordance with natural justice-he should draw the assessee's attention to any such material and give him 'a reasonable opportunity to meet the case arising therefrom before making his order. Further, as an order under section 23(3) is appeal able, that order should contain with sufficient precision, the material on which the assessment is based, so that the appellate authority can form a just opinion of the fairness of the assessment. There can, however, be no question of the assessee being entitled to demand copies of confidential statements in, the possession of the Income-tax Officer or to demand that his informants should be called by the Income-tax Officer, so that they can be cross-examined by the assessee, and the Income-tax Officer is not a Court in the usual meaning of that word when he is holding an enquiry under section 23(3). Under section 37 of the Act he has merely certain powers of a Civil Court for the purposes of Chapter IV. Even in a case under subsection (4) of section 23, where the Income-tax Officer has unfettered powers and unlimited discretion, their Lordships of the Privy Council in a case repor ted as, `Commissioner of Income-tax v. Lakshminarayan Badridas' ((1937) I T R 170.) observed: `He (the Income-tax Officer) must not act dishonestly, or vindictively or- capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment . . . .. . and though there must necessarily be guess-work in the matter, it must be honest guess-work. Din Muhammad, J. in the case of Seth Gurmukh Singh v. Commissioner of Income-tax ((1944) 12 I T R 393) observed as follows:- "Under the law a sit stands, while proceeding under subsec tion (3) of section 23 the Income-tax Officer is bound to hear such evidence as the assessee may produce in support of his return and, if after hearing the evidence so produced, he still thinks that he is not satisfied on any particular point, he can require the assessee to produce further evidence on that point. To that extent he may be taken to proceed quasi-judicially, but quasi-judicial functions begin and end there. If not -satisfied with the character of the evidence produced by the assessee, he is not bound to lead evidence on his own account a view to rebutting it. He may gather information in any manner he likes and utilise it against the assessee, even if it does not in all respects satisfy the requirements of the Indian Evidence Act. The very nature of the proceedings conducted by him necessitates the use of such media for collecting information as be may not like to disclose to the assessee, and he is perfectly within his right if on enquiry by the assessee be refuses to disclose the source of his information. But if he makes up his mind to reject the evidence of the assessee on any grounds which appeal to him to be sufficient for that purpose, it is but fair and just that he should acquaint the- assessee with those grounds so as to enable, him to disabuse his mind, if possible, by explaining them away as baseless or untenable. It is, however, impossible to hold that if once the assessee under subsection (3) of section 23 leads evidence, whether reliable or unreliable or produces any document, whether genuine or fictitious, the Income-tax Officer must base his decision on that evidence unless he is in a position to bring on the record any definite evidence to the contrary." From these decisions the legal position appears to be well settled that the income-tax Officer is not bound .to rely on such evidence produced by the assessee as he considers to be false and he cart have recourse to section 13 of the Income-tax Act, even in those cases where he rejects the accounts produced by the assessee on the ground that they are not genuine. If he proposes to make an estimate in disregard of the evidence oral or documentary led by the assessee, he should in all fairness disclose to the assessee the material on which he is going to found that estimate. He is not, however, debarred from relying on private sources of information which sources he may not disclose to the assessee at all, but in case he proposes to use against the assessee the result of any private inquiry made by him, he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet, and should further give him ample opportunity to meet it, if possible. Keeping in view these considerations, the contention of the learned counsel for the applicant that the Tribunal should not have relied upon the three instances of sales of the imported goods while confirming the flat rate of 10 per cent of gross profits cannot be accepted because these three instances were taken from the account books of the assessee himself. The sales of these imported goods having been made by the assessee himself, he cannot complain ignorance thereof. There was therefore no viola tion of the principles of (sic) detailed above.

7. For these reasons we are of the opinion that the Appellate Tribunal rightly rejected the application of the assessee-applicant under section 66(1) of the Income-tax Act on the ground that the findings reached by it were based on the material as evidenced by the record itself. After rejecting the book version of the assessee the profits margin adopted was fair looking to the facts of the case and the prevailing trading conditions. The finding o the Tribunal regarding the reliability of accounts or otherwise is purely a question of fact and no question of law for opinion of this Court therefore arose out of the order of the Appellate Tribunal dismissing the assessee-applicant's appeal. The application is accordingly dismissed with costs. S. Q. Application dismissed.