P L D 1968 Karachi 858 (PLP)

QADEERUDDIN AHMED, J.‑‑These application‑, have been made under subsection (2) of section 66 of tile Income‑tax Act, 1922 to obtain directions from this Court to tile Income- tax Appellate Tribunal, Karachi Bench for stating the case and referring the questions which are set out in paragraph 15 of Application No. 201, and in paragraph 13 of Application No.

202. Tile two sets of questions arc as follows: "Questions in Application No. 201: (1) Whether in the facts and circumstances of the case application of flat rate of gross profit at 5 ";, on the total turnover by the Tribunal is not arbitrary and penal. (2) The Tribunal having examined all the cases of the cotton dealers during the period in question and having round that in no case more than 2 % to 3% gross Profit was earned, was not the application of a rate of gross profit 'at 5 ,%, in tile applicants' case contradictory to the evidence on record, not supported by any evidence or material and hence perverse ? (3) Whether in the facts and circumstances of the case, the Tribunal's finding that the comparative rates of purchase it the Open Market were much higher than the purchase rate from the Cotton Board and that the export rate had stabilised, is not in complete disregard of the evidence and material oil record ? (4) Whether in the facts and circumstances of the case, the Tribunal's finding that the applicants had taken greater advantage of the lower prices on which the cotton was available from the Cotton Board and that `tile dealings elf others were not as intensive as that of the applicants' bayed on any evidence or material ?" "Questions in Application No. 202 (1) The Tribunal having examined all the cases of the Cotton Dealers during the period in question and having found that in no case more than 2 % to 3% Gross Profit was earned, was not the application of a rate of Gross Profit at 5% in the applicants' case; contradictory to the evidence on record, not supported by any material and hence perverse ? (2) Whether in the facts and circumstances of the case, the Tribunal's finding that the comparative rates of purchases in the open market were much higher than the purchase rate from the Cotton Board and that the Export Rate had established, is not incomplete disregard of the evidence and material on record ? (3) Whether in the facts and circumstances of the case, the Tribunal' finding that the applicants have taken greater advantage of the lower prices on which the cotton was available from the Cotton Board and that the 'dealings of others were not as intensive as that of the applicants' based on any evidence or material ? (4) Whether in the facts and circumstances of the case, Assessment by the Income‑tax Officer at a lump sum figure of Rs. 25,00,000 as net income without indicating any basis, material or evidence for arriving at this figure valid in law and a `Best judgment assessment ? (5) Whether in the facts and circumstances of the case, there was any material on the record to show that for arriving at tile figure of' Rs. 25,00,000 the income‑tax Officer had made any estimate of' sale and applied any rate of Gross Profit ''" The first three questions are common.

2. The facts which form the background, as stated by the Income‑tax Appellate Tribunal, Karachi Bench, are that tile respondent was doing business in the two years to which the above‑mentioned assessments relate and was dealing in cotton as well as in some other goods on its own account as well as jointly with others. A notice was served on it under subsection (2) of section 22 of the Income‑tax Act, 1922‑ in respect of the Assessment Year 1953‑54, in response to which it submitted a return disclosing an income of Rs. 20,

383. There after, the respondent paid no heed to notices sent under sub section (4) of section 22, with the result that final assessment was made under subsection (4) of section 23 determining the income to be Rs. 19,60,488 at the flat rate of 10 per cent. Gross Profit on the turnover of Rs. 1,26,64,

418. The amount of the turnover was disclosed by the assessee itself and was accepted by the Department. The assessee went in appeal which was dismissed on the 13th January 1958.

3. With respect to the Assessment Year 1954‑55 also notice was given to the respondent under subsection (2) of section 22 of the Act. It was not complied with, with the result that no material was placed by the respondent before the Income‑tax Department. In this year also, assessment was made under subsection (4) of section 23 of the Act. 'The income was deter mined to be Rs. 25 lacs, but no basis was disclosed for doing so. The respondent went in appeal and expressed its grievance at this non‑disclosure. The Appellate Assistant Commissioner held on the basis of the decision in Krishna Kumar v. Commissioner of Income‑tax (5 I T C 295) that the omission did not invalidate the order of the Income‑tax Commissioner, but relying on a later decision in the case of Commissioner of Income‑tar v. Khemchandra Ramdas (1940 I T R 159) he held that, since appeal is provided from the year 1939 against an order made under subsection (4) of section 23 of the Act, it is highly desirable that the basis of the order should be disclosed so that higher authorities may know the ground on which the assessment was based. He, therefore ordered the Income‑tax Officer to report tile basis of his estimate, who replied in writing as follows :‑

"In spite of my best efforts, the assessee did not produce hook of accounts. His credits in National Bank of India alone amount to Rs. 2,07,55,

424. As books were not produced, the exact credits in all the bank, could not, be ascertained. As such it' sales are estimated at Rs. 2,70,00,000 Gross Profit at 10% will be Rs. 27,00,000 and after allowing estimated expenditure of Rs. 2,00.000 the net income should be Rs. 25,00,000 which I am sure will find corroboration in the assessee's books. I therefore, still insist that books should be produced at the appellate stage. Even at this stage, I am, prepared lo accept the assessee s books version." 'The respondent did not supply any data, but submitted a list of the case, of other cotton dealers with a request that reference may he made to them for determining the percentage of profit. The Appellate Assistant Commissioner did apparently do so and thereafter dismissed the appeal by his order dated the 30th of April 1959.

4. The respondent then preferred Second Appeals to the income‑tax Appellate Tribunal from both the lint‑appellate orders. 'They were herd together because: "the grounds of appeal and the facts of the case for the two charge years were almost identical," and have been disposed of by a common order dated the 18th February L

963. The appeals have been partially allowed inasmuch as the Appellate Tribunal has reduced the gross profit rate from 10 to 5 per cent. This has provided relief to the respondent by 50 per cent. in respect of both years. Three common grounds were urged before it. which have been summarised in the order as follows :‑ "The grounds of appeal common for both the years are: (1) regarding the jurisdiction of the Income‑tax Officer, Special Circle and 'P' Circle, Karachi to complete the assess ments in this case ; (2) regarding the best judgment assessment made under section 23 (4) which is assailed as erroneous, and finally (3) regarding the estimates of the income adopted." All the three contentions have been rejected by the Tribunal. Thereafter it has considered and disposed of five objections to the allegedly arbitrary nature of the estimates made by the Income‑tax Officer under subsection (4) of section 23 a the Act. It has given relief to the respondent as mentioned above by reducing the rate of profit from 10 to 5 per cent. This reduction is the result of the discussion, in paragraph 6 of the Tribunal order, of the first objection of the respondent.

5. The respondent was not satisfied with the Tribunal' view and applied under subsection (1) of section 66 of the income‑tax Act, 1922 for getting tire two sets of questions reproduced above, to be referred to this Court. The applications were rejected by the Tribunal, vile its order dated the All of November 1963 ; therefore, the respondent has made these two applications under subsection (2) of section 66 of the Act for getting directions from this Court to the Tribunal to refer the questions.

6. Mr. Ali Athar has addressed us in support of the applications with his characteristic brevity and directness. He stated at the outset that his submissions would be restricted to the criticism of paragraph 6 of the Tribunal's order. In other words, his criticism was limited to the rate of 5 per cent. which has been applied by the Tribunal file basis of his criticism, he said, was drat there was no evidence on the record to support it, and that such an assessment could nor be made under subsection (4) of section 23 of the Act. That subsection runs as follows: "If any person fails to make the return required by any notice given under subsection (2) of section 22 and has not made a return or a revised return under subsection (3) of the same section or fails to comply with all the terms of a notice issued under subsection (4) of the same section or, having made a return, fails to comply with all the terms of a notice issued under substation (2) of this section, the Income‑tax Officer shall make the assessment to the best of his judgment and determine the sum payable by the assessee on the basis of such assessment and, in the case of a firm, may refuse to register it or may cancel, its registration if it is already registered Provided that the registration of a firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income‑tax Officer to the firm intimating his intention to cancel its registration." The key words in the above provision are: . "shall make the assessment to the best of his judgment."

7. Counsel has relied on Muhammad Yousuf v. Commissioner of Income‑tax (P L D 1960 Dacca 298) and contended that a 'best‑judgment' assessment does not confer more freedom on the Income‑tax Department than section 13 of the Act. The proviso to the latter section authorises the Income‑tax Officer as follows: "the computation shall be made upon such basis and in such manner as the Income‑tax Officer may determine." These words, according to counsel, confer a wider power on the Income‑tax Department than the words: "shall make the assessment to the best of his judgment." which occur in subsection (4) of section 23 of the Act. Yet, even under section 13 of the Income‑tax Act, an Income‑tax Officer cannot proceed arbitrarily or capriciously and is bound to "give some cogent reasons for his own conclusions and the estimate of income made by the Income‑tax Officer must approximately be near the truth". An Income‑tax Officer, according to counsel, "is not entitled to make a pure guess and make an assessment without referring to any evidence or material at all".

8. Additionally counsel referred to the case of Kit‑pal Singh v. Commissioner of Income‑tax, Punjab ((1937) 5 I T R 62) and relying oil the observations which appear at page 64 of the report, contended that since there was no evidence before the Tribunal in support of the flat rate of 5 per cent profit, the Tribunal's decision should be considered to suffer from a legal defect because this is not a case in which the quality or sufficiency of evidence is disputed but one in which the contention is that there is no supporting evidence at all. The question whether there is evidence to support a finding of fact is a question of law, and can be raised in a reference under subsection (2) of section 66 of the Act. In this view of the matter, counsel argued, the Tribunal's refusal to refer the two sets of questions to this Court on the ground that they are questions of fact is erroneous.

9. Lastly relying on Gunda Subbuyyu v. Commissioner of Income‑tax, Madras ((1939) 7 I T R 21), counsel has contended that the principles which govern an assessment made under subsection (4) of section 23 and that made under subsection (3) of section 23 arc the same. "The only difference between an assessment under subsection (3), in a case like the one mentioned to the reference, and as assessment under subsection (4) is that the Act contemplates a more summary method when the Income‑tax Officer is acting under subsection (4) and this is by reason of deliberate default of the assessee". The `more summary method' contemplated in subsection (4), according to counsel, cannot affect the principles of assessment for it merely makes it the process less elaborate. The method of assessment therefore, should be the same as laid down in subsection (3), which is as follows :‑-- "(3) On the day specified in the notice issued under sub section (2), or as soon afterwards as may be the Income‑tax Officer; after hearing such evidence as such person may produce and such other evidence as the Income‑tax Officer may require, on specified point shall, by an order to waiting, assess the total income of the assessee, nd determine the sum payable by him on the basis of such assessment " Counsel emphasized the words ''such other evidence as the Income‑tax Officer may require" and argued that it is the duty of the officer to investigate and collect the necessary evidence rather than act in assumptions and conjectures. As counsel has relied oil the above mentioned judgment of tile Madras High Court and has made no attempt to compare the provisions of and the circumstances contemplated in subsections (3) and (4) of section 23 of the Act, we may point out that judgment was given a long time before orders made under subsection (4) of section 23 became appealable. At that time there was and could be no question of comparing the two subsections before the Court. We, therefore, attach no great importance to this part of counsel's argument and proceed to examine the two arguments set out by us in paragraphs 7 and 8 above.

10. The argument, which has been recapitulated in paragraph 7 above, is founded on the judgment of a Division Bench of the Dacca High Court Muhammad Yousuf v. Com missioner of Income‑tax. In that case, the Income‑tax Department, while "dealing with the matter under section 23(3) of the Income‑tax Act", had applied the principle of law embodied in section 13 of the Act. Their Lordships approved of the method, but pointed out that the section did not authorise the Income‑tax Officer to proceed "arbitrarily or capriciously". It is impossible not to agree with this pronouncement, but this is not the entire view that has been expressed by their Lordships. Proceeding further they have expressed their agreement with the view expressed in A I R 1931 Lah. 432 and observed as follows: "It has been laid down (in that case) that once' it is established that no manner of accounting has been regularly employed in that the method employed is such that in the opinion of the Income‑tax Officer, the income, profits and gains cannot properly be deduced therefrom, the proviso to section 13, comes into operation and the Income‑tax Officer is the sole arbiter of the basis on which and the manner in which he can be the computer. In certain state of facts the law enjoins that the law of computation shall be made upon sonic other basis and in some other method, and both the factors being entirely within the jurisdiction of the Income‑tax Officer, the adoption of the particular basis and a certain method cannot give rise to a question of law." Further on: "It is true that where the accounts kept by the assessee arc kept in Such a Form that the income, gains and profits could not be deduced therefrom, the proviso to section 13, is applicable and the Income‑tax Officer is bound to make a computation on such basis and in such manner as he might determine, and the High Court has no authority over him . . . . . . . ." The above observations indicate the difference between arbitrary or capricious action and an action contemplated by section 13 of the Act. They have drawn a further distinction by snaking the following, observation :‑-- The question is whether the Income-Tax Officer committed any mistake in applying the standard and whether the standard adopted would lead to a fair justice is a question of law which justifies a reference to the High Court. In the case before us the standard applied by the Department is that the income be computed on the basis of a flat rate of the profit. This is the principle and the standard. What actually that rate may be is not a question of law. In this case, counsel for the applicant has not questioned the correctness of the action of the Department in computing the income at a flat rate, but has questioned the quantity or amount of the rate. Mr. S. A. Nusrat appearing on behalf of the Department has, therefore, rightly asserted that where the principle of assessment at a flat rate is not contested its amount must be for the Income-tax Officer to determine. In support of this view, he has relied on I. R. & C. C. Co. v. Income‑tax Commissioner (A I R 1937 P C 189). The same view was taken by the Allahabad High Court under section 13 of the Act in Ganeshi Lal & Sons v. Commissioner of Income -tax ((1938) 6 I T R 390). The same view was taken by the High Court of Allahabad in In re : Krishna & Co. ((1939) 7 I T R 513).

11. The argument set out in paragraph 8 above is basically erroneous, because this is not a case in which it can be said that there was no evidence before the Income‑tax Officer at all. Even according to counsel for the applicant, there was evidence for applying the flat rate of 2% to 3 %. While examining the justification of the application of 10% rate, which was applied by the Department, the Tribunal has set out the process by which this was done. It has observed as follows :‑

"Three comparative cases were cited before us to show that the rate of profit in such dealings did not exceed 1 %. In the face of these cases a rate of 10%, gross applied naturally appear ed to us to be excessive and arbitrary. The Departmental Representative on the other hand quoted before us the case where rates were found to be as high as 25 %. These were definitely puzzling circumstances and we had to undertake a scrutiny of all these and other similar cases available to us in great details. It appears to us that the cases cited by Mr. Ali Athar were comparable with the appellant's case only to some extent. Exactly similar was the case with the cases quoted by the Departmental Representative. We, therefore, scrutinised all possible evidence and circumstances of the cases as regards the nature of the business, the turnovers and the accounting periods. It is a well‑known fact that in cotton business special ly during the assessment year 1953‑54 there were wide fluctua tions in the margin of profit. These were due to the fact of purchases having been made in favourable or unfavour able circumstances, the advantages of "Support Scheme" taken by some of the cotton dealers and finally sales in the export markets after 31‑8‑1952 when the "Support Scheme" of the Government was abolished." The above observations are important, particularly because the reply submitted on behalf of the applicant was not that there was no evidence in support of them but that the applicant could not make the profit attributed to it, because "all its transactions were through the cotton Board and all its earnings were definitely limited to the earnings of commission or certain savings on account of freight, clearing charges, etc." The Tribunal held the assessee by its word and called upon it to prove the above assertion. The result is stated as follows; "In spite of our repeated requests to prove this assertion, the appellant was not able to bring an iota of evidence to show that all its dealings were of the nature contended. On the contrary the assessing officer as well as the Appellate Assistant Commissioner found from the details of the appellant's transac tions with the Cotton Board (Procured by the Income‑tax Officer before the assessment in question) that whereas the "Support Scheme" continued only up to 31‑8‑1952 the majority of the appellant's transactions took place after 31‑8‑1952 when there was no Support Scheme, i.e. when the market was allowed to take its normal course. It was contended by the Departmental Representative that the appellant's case was distinguishable from other cases inasmuch as during this period of free trade the appellant purchased cotton from the Cotton Board but exported the same to the Foreign countries after this "Support Scheme" had ended, at the prevailing market rate. It appears that the comparative rates of purchases in the open market were much higher than the purchases rates from the Cotton Board and as the export rates had stabilised a dealer who could possibly purchase cotton from the Cotton Board at a lower price, was definitely to earn better profits." The above reasoning leaves no doubt that there were good grounds for distinguishing the case of the applicant from the cases of other dealers. This in other words means that there was full justification for computing the income of the applicant at the rate other than the rates applied to the other dealers.

12. Here in fact lurks the real point of the argument advanced on behalf of the applicant. The feeling, on which counsel for the applicant played, was that flat rate could be applied and distinc tion could be drawn between the case of the applicant and the other cases, but what was the reason for reducing the rate from 10% to 5 %, and not to 3% or 3 % or 4%. Here, according to him, entered arbitrariness and capriciousness. Counsel has, there fore, repeatedly criticised the following observations of the Tribunal; "As we have already stated the appellant has all along failed to substantiate its own case, the Department too has not been able to cite before us a single case of any other cotton dealer having the same advantage. We cannot believe that the appellant was the only business concern to purchase the entire cotton in possession of the Cotton Board." Counsel said: if neither the case of the applicant nor that of the Department was established, then it cannot be said that there was evidence for applying the rate of 5%. The middle course was adopted arbitrarily. The answer to this criticism is contained in the Tribunal's order as follows :‑

"It appears that the appellant being a shrewed business man had taken greater advantage of the lower prices on which the cotton was available from the Cotton Board. The dealings of others with the Cotton Board were not as intensive as that of the appellant . . . . . We cannot believe that the appellant could have earned a profit of more than 5 % in any case . . . . . ." Counsel agreed with the Tribunal that the applicant could not make profit at a higher rate than 5 %, but criticised the Tribunal for holding that it could or did make a profit of 5 %. For this view, according to counsel, there is no evidence on the record.

13. Counsel tried to convince us that since there was no evidence in support of 5 % rate, the view of the Tribunal was legally untenable; but what counsel forgot while advancing this argument is that an unfavourable distinction between the applicant's dealings and those of other cotton dealers had been found to exist. This distinction was brought by the Tribunal to the notice of counsel for the assessee to which his answer was not that there was no evidence in support of the conclusion but, on the contrary, that "all its transactions were through the Cotton Board and all its earnings were definitely limited to the earning of commission or certain other savings." The Tribunal, therefore, demanded the proof of this stand, and the applicant failed to substantiate it. It is a naive and inconsistent plea of the applicant now that, according to it, there is no evidence in support of a particular rate.

14. It is true that there is no proof to fix the figure of 5 exactly, but then the fault is of the applicant itself, who has persistently avoided to supply the material which was in its possession. The Tribunal has noted this fact in the following words; "We note with surprise that even before the Appellate Assis tant Commissioner the Income‑tax Officer was prepared to accept the book results of the appellant, if the books were produced for examination but even at that stage the same was not produced on the ground that they were misplaced. We can clearly see that whenever the books were produced before the Income‑tax Officer for his inspection something or the other, unpalatable, was discovered by him and the appellant‑ thought it advisable to withhold the books of account completely thereby leaving the Income‑tax Officer to grope in the darkness." The result of the applicant's action was that "best judgment assessment" had to be made under subsection (4) of section 23 of the Income‑tax Act. In such circumstances the Officer had to make the assessment to the best of his judgment. Such a judg ment must not be capricious or dishonest or vindictive, but it cannot in the very nature of things be a judgment fully support by evidence. The Income‑tax Officer has, for making such a judg ment, to take into consideration all matters which he thinks will assist him in arriving at a fair and proper estimate, but the net result is bound to be a matter of guess work. What is required is that "it must be honest guess work",‑See the Privy Council's) observations in Commissioner of Income‑tax v. Laxminarain Badridas ((1937) 5 I T R 70 at p. 180).

15. Counsel for the applicant laid emphasis on the fact that the rate was raised from 3% to 5 % and interpreted this increase to be penalization attributable to the displeasure of the Depart ment because the applicant had withheld its books of account and documents. This attitude is again difficult to appreciate. When a party deliberately withholds the relevant evidence, the presump tion is that if it was produced it would be against it‑See sec tion 114 of the Evidence Act. In this case it is legitimate to presume that the applicant withheld the account books and docu ments because it considered doing so to be more advantageous than the risk of allowing the Department to make an assessment on the basis of those books and documents. There is no penalisa tion or victimisation in this presumption. This presumption shows that the case of the applicant is worse, for this reason itself, apart from other reasons, than the cases of those assessees who had produced their books of account. How much worse? is a question which can be answered, in the circumstances of this case, only approximately; and the process or act of approximation is not a question of law.

16. The above discussion disposes of the questions which are common in both the applications. Additionally, counsel has con tended with reference to Application No. 202, that the assessment made by the Income‑tax Officer at a lump sum figure of Rs. 25,00,000 as net income without indicating any basis, material or evidence for arriving at this figure was arbitrary and capricious. It was not a "best judgment assessment" according to counsel, because the Income‑tax Officer had not applied his mind to the case. The Income‑tax Officers used to act in that arbitrary manner before the orders made under subsection (4) of section 23 of the Act became appealable in 1939. In Krishna Kumar v. Commissioner of Income‑tax the Income‑tax Officer had simply stated "busi ness‑Rs. 30,000", and this order was held to be a valid "best judgment assessment," but that approach to the problem cannot be sustained now and must be regarded to be arbitrary and capricious. The Income‑tax Officer had acted in an objectionable manner, according to the counsel, and when he was criticised in appeal before the Appellate Assistant Commissioner of Income -tax he produced an imaginary calculation which was not the basis of his assessment. In reply to our question counsel conced ed that the calculations which were set out by the Income‑tax Officer in response to the query made by the Appellate Assistant Commissioner could justify the assessment made by the Income- tax officer, provided the assessment was actually made on that basis but, according to counsel, the circumstances lead to the conclusion that the Income‑tax Officer made an arbitrary assess ment, and thereafter produced a plausible explanation as an after thought.

17. The above reasoning of counsel does not impress us, be cause the calculations disclosed by the Income‑tax Officer during the hearing of appeal fully support his assessment, and we find no reason to conclude that the assessment was made otherwise than on that basis.

18. Our overall conclusion, therefore, is that the two sets of questions set out above which are the subject of dispute are not questions of law, although an attempt has been made to give them a shape and look as if they were so. In this connection, eve respectfully recall the following apt observation of the Privy Council in the case of Laxminarain Badridas that:‑

"No question of law was involved; nor is it possible to turn a mere question of fact into a question of law by asking whether as a matter of law the officer came to a correct con clusion upon a matter of fact." The Income‑tax Appellate Tribunal has rightly declined to refer them to this Court. The applications are dismissed with costs. S. Q. Applications dismissed.