1986 PLP 84 (PTD)

MUHAMMAD ZAHOORUL HAQ, J.‑The applicant Star Vacuum Flask Manufacturing Company has made these two applications under section 66 (2) in respect of the assessment years 1970‑71 and 1971‑72 having felt aggrieved against the orders passed by the Income‑tax Officer in respect of the original assessment and the Income‑tax Appellate Tribunal on 21‑6‑74 whereby the two appeals were dismissed. The following four questions have been framed by the applicant for the purposes of our answer. There has been no effort on the part of the Commissioner of Income‑tax for any change in the framing of the questions. "(a) "Whether there is any material or evidence on record to establish that the wastage of 27‑63 % in Glass Shells arising out of production was excessive and unreasonable." (b) "Whether in the facts and circumstances of the case the Applicant Company is required by law to maintain a stage‑wise consumption record when in the nature of raw material and goods manufactured it is not practically possible to maintain such a Production Register." (c) "Whether in the fact and circumstances of the case the Income -tax Officer was entitled and authorised to reject and throw away the day‑to‑day maintained accounts and the Tribunal was correct in confirming the rejection of accounts". (d) "Whether in the facts and circumstances of the case the Tribunal was justified in substituting a rate of 10% instead of 15%, without stating any basis of 10 %".

2. The relevant facts are that the applicants are manufacturers of Vacuum Flask. They had been manufacturing the same since 1966 they were exempt from tax for the period upto the assessment year of 1969‑

70. However, the returns had been filed and the accounts had been accepted without any apparent scrutiny because of the exemption from tax. For the year 1970‑71 the applicant had disclosed sales of Rs. 15,06,937 and showed a gross profit rate of 7.3 % while for the year 1971‑72 the sales of Rs. 15,15,005 and a gross profit of 1.2 % were shown. The Income‑tax Officer did not accept the rate of gross profit 'on the ground that in the previous year 23 % of gross profit had been shown. He also asked for quantitative details of the opening stock, purchases, consumption, production, sales, wastage and closing stock but the same could not be furnished on the ground that the number of items dealt with by the assessee were numerous. In. the second order of assessment the I. T. O. has noted that the assessee has failed to maintain day‑to‑day stage‑wise production register and hence there is no co‑relation between consumption and the production. The applicant had given explanation of the full in the rate of gross profit on account of imposition of excise duty, increase in wages, salary and cost of raw materials and packing charges but the same was not considered to he on sound footing. He did not rely on the consolidated statement of consumption and production for the whole year submitted by the assessee. He considered that the percentage of wastage of 20% claim in the first year and 27% claim in the next year was very high in that line of business. Ho looked into a parallel case where gross profit of about 11 % had been declared for the same period. He therefore, did not accept the accounts version of the applicant and fixed a gross profit rate of 15%.

3. The applicant‑assessee then moved two separate appeals before the Income‑tax Appellate Tribunal both of which were dismissed by the same order as mentioned above.

4. The Tribunal was of the view that the disclosed reserves were definitely not satisfactory even in the circumstances stated by the applicant mainly on the ground that the Income‑tax Officer's contention regarding the absence of co‑relation between consumption and production was not rebutted by the applicant. The tribunal further affirmed that the wastage in glass shells for 1970‑71 may be reasonable but for the year 1971‑71 was rather excessive. The wastage of tin containers for the year 1970‑71 was also considered to be higher than for the year 1971‑72 and these defects therefore, militated against the acceptance of accounts version. The tribunal however, in view of the comparable case the facts of which the appellant could not distinguish, reduced the rate of profit to 10% for the year 1970‑71 against the rate shown by the assessee of 7.3 %. For the second year they directed that the adjustment for the excessive wastage in the glass shells should be at 20 % only while rate of profit should be reduced to 7.5 %.

5. Mr. Muhammad Nasim, counsel for the applicant, has submitted that the applicant has been maintaining all their accounts to a regular manner in the double entry system and there was no defect evidently pointed out in the various accounts books of the applicant by either the I.‑T. O. or the tribunal. He further submitted that the production of the applicant was also over seen by the Excise & Taxation Authorities for the purposes of excise tax and registers prescribed by them are also maintained by the applicant. He submitted that the Income‑tax Officer as well as the appellate tribunal had asked for something impossible in insisting upon tire quantitative details of every one of the items which in fact was an insistence upon the maintaining of day‑to‑day stage‑wise production register in respect of every one of the items of glass; containers, covers and the rest and that the main basis of rejection of the accounts is the non -supply of these day‑to‑day stage‑wise production registers without finding really any fault with the accounts of the applicant.

6. Mr. Salahuddin for the department had tried to show that for year 1971‑72 the income‑tax officer had pointed out a discrepancy in the metal containers consumed and the finished products. He, therefore, sub mitted that the accounts were not reliable. Mr. Nasim's reply to the same was that the said discrepancy had been reconciled by the applicant and therefore the appellate tribunal had not dealt with that discrepancy and had mainly relied upon the absence of co‑relation between consumption and production.

7. The submission of the applicant's counsel appears to be justified because if the applicants have not been able to reconcile in the figures of production of containers and of the finished products then obviously such a discrepancy would have been emphasised by the tribunal and their silence on this aspect shows that the said discrepancy was either not considered material by them or that the same had been explained by the applicant.

8. Mr. Nasim has submitted that in the presence of a regular method of accounting employed by the applicants it was not open to the I. T. O or the Tribunal to reject the version of accounts merely on the basis that a low rate of gross profit had been declared for the years or that the wastage shown at 20% and 27 % was excessive. The counsel has empha sised that the Tribunal has considered the wastage of 20 % for 1970‑71 as correct percentage of wastage but they have not given any reason as to why the percentage of 27% shown by the applicants for this year was not considered reasonable by the tribunal particularly when the applicants had been showing a wastage of 25 % to 34% in the previous years. Mr. Salahuddin's reply was that since in the previous years the income of the company was exempt from tax, therefore, the Income‑tax Officer had not scrutinised their accounts and hence those assessments or figures or accounts can hardly be considered relevant for the purposes of the present two years. This submission of the counsel for the respondent does appear to be convincing because if the Income‑tax Officer has not seriously scrutinised the accounts of the previous years then they cannot be bound with the results of the same and it cannot be argued that the income‑tax authori ties have nut challenged the accounts or the figures of the previous years.

9. What is, however, important to us in this case is that it has not been held by either the income‑tax authorities or the appellate tribunal that the applicant has not maintained the regular books of accounts. But the income‑tax authorities anti the tribunal both have rejected the accounts version on the same basis that the co‑relation between the consumption and production has not been established in the accounts submitted by the appli cants. This co‑relationship between consumption and production was sought to be established by examining the quantitative details of opening stock, purchases, production, sales, wastage and closing stock in the first year which the applicant was not able to supply on the basis that the number of items dealt with by the assessee are numerous. The applicant had however, supplied some quantitative details such as of glass shells of 209 N. M. and 209 W. M. which showed a percentage of 20% in wastage but it was considered very high wastage by the income tax authorities. On the other hand, the appellate tribunal has accepted the 20% wastage in the glass shells as reasonable for the year 1970‑71 and once the percentage of the wastage in glass shells for 1970‑71 was considered to be reasonable by the tribunal there was hardly any justification for rejecting the account version of the applicant in respect of the said year because the main consideration on the basis of which the I .T. O. had proceeded to reject the version of these accounts was that the wastage of 20% was high and that the same had not been reconciled by the quantitative details as required by him and hence he reached the conclusion that the co‑relation between con sumption and production had not been established.

10. The I. T. O. had relied upon a parallel case in which in the identical year 11 % gross profit had been shown. The tribunal also relied upon the same but a parallel case can be relied upon only after the account version is properly rejected. If the books of accounts are properly maintain ed and the authorities are not able to point out any defect to the books of accounts then it is incumbent upon them to accept the version of the accounts books. They cannot reject the books version merely because in a parallel case some other company has shown a gross profit rate of 11 %. Applicant's counsel had submitted that full particulars in respect of the parallel case had not been disclosed to him but Mr. Salahuddin's reply was that the observations that the tribunal bad made in that respect was that the appellant had not been able to distinguish between his case and the parallel case. However, that may be, the question is really whether the accounts books of the applicant could be disregarded in spite of no defects having been shown in the same and merely on the basis that stage‑wise day‑to‑day production record had not been maintained.

11. Mr. Salahuddin had relied upon a case decided by a bench of this Court in 1980 reported in 41 Tax 51 where the observation had been mad that in the absence of manufacturing register or any other document reflecting the purchase of raw materials and production of finished good the profits could not be deducible from the same and, therefore, the best judgment assessment was justified.

12. We are in agreement with the‑ proposition laid down by bench of our Court to he cited case but the same is not at all applicable to the facts of this case because in the present case before us there is no grievance made by the it' come‑tax authorities that the purchase of raw material register or production register had not been maintained by the applicant but the main grievance is based upon in non supply of day to day and stage-wise production register which is entirely a different thing from the production register or the purchase register. We are of the view that the demand made for the stage‑wise day‑to‑day production register of every one of the items made by the income‑tax authorities was really asking for something which was akin to an improbability. There arc various stages of produc tion of different item and in those stages many illiterate supervisors involved and therefore if stage‑wise production register is insisted upon then it might be putting too great strain up on the assessee.

13. In the present case we find that quantitative details had been supplied in respect of some of the items but the same was no considered enough. 'The glass shells details had been supplied and the being the, main item for production of vacuum flask that should have be‑n treated as a representative item but its result was rejected merely on the arbitrary finding that it was showing a 20% wastage which was high but the tribunal did not consider the same as high and accepted the same as correct which clearly establishes that the wastage claimed at 20 % by applicant for 1970‑71 Was evidently justified and therefore their book version was correct.

14. We failed to understand as to why the tribunal rejected 27 wastage in the year 1971,‑72 as rather excessive. It appears to be arbitrary. Apart from an arbitrary opinion that it was excessive there was n other material for rejecting the wastage of 27 % at least in the order of tribunal. The tribunal has not even mentioned in respect of this wastage of 27 % for the year 1971‑72 that lessor wastage has been shown in the case relied upon by the department Therefore, rejection, of wastage of 27% for the year 1971‑72 to 20 % appears to be arbitrary and the Sam could not have been rejected without showing the defects in the account books of the applicant.

15. We have already held that the demand upon the stagewise pro duction register in respect of every item produced by a company is rather unreasonable. In any case, no such register is required to be maintained by the Income‑tax Act and if‑ the accounts books are otherwise reliable then they cannot be rejected merely because the day‑to‑day stagewise production register has not been produced.

16. Mr. Nasim had relied upon 1984 P T D 150 where it had been observed that Income‑tax Act does not require the maintenance of any particular type of accounts books and if the assessee is maintaining a particular method of accounts and profits and gains can be deduced there from then the accounts version cannot be rejected. It was further held in that case that mere non‑maintenance of day‑to‑day production register is no ground to reject the‑ accounts.

17. It would be relevant to refer to the provisions of section 13 of the Income‑tax Act which is to the following effect:‑ "

13. Method of accounting.‑Income, profits and gains shall be computed for the purpose 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: Provided further that the Central Board of Revenue may, in the case of any person, or class of persons, require such person or class of persons to maintain accounts, or prescribe the method of accounting to be employed by such person or class of persons, or the manner in which payments or commercial transactions should be made or re -added, and in such an event, the income, profits and gains of the assessee shall be computed on the basis of the books, accounts, or records maintained accordingly". Since the appellate Tribunal has not been able to point out any specific defect in the accounts maintained by the applicant and has not come to the conclusion that the profits and gains could not be deduced from the accounts books, therefore, it was bound to accept the book version of the applicant/assessee and it was not justified to rely upon a parallel case where the conditions of work may not be the same as in the case of the applicant. We are further of the view that the accounts cannot be rejected mere on account of the non‑maintenance of the stagewise day‑to‑day production register and that in the present case no material had been relied upon by the tribunal to show that the wastage as claimed by the applicant‑assessed for the year 1971‑72 was in any case unjustified. The result is that the answers to all the four questions submitted by the applicants has to be in the negative. M. Y. H. Questions answered in negative.