P L D 1979 Karachi 102 (PLP)

Question No. 2.‑Whether in view of the facts and circumstances of the case, the tribunal was justified under the Income‑tax Law in holding that sales were not made to these parties whose particulars were given on the cash memos. in due course of business merely because these parties who made the purchases on cash basis were not contactable at the time of assessment of the assessee, though they may be holding valid licences under section 8 of Sales Tax Act from the Department in the relevant year? Question No. 3.‑Whether in view of the facts and circumstances of the case, the tribunal was justified on the ground of non‑maintenance of a gate register as if it was a contravention of any of the provision of Income‑tax Law?

6. It was submitted by Mr. Haider Ali Pirzada, learned counsel appearing for the assessee that Ghee is an excisable article and is therefore subject to inspection by the excise authorities in the factory. He stated that the assess" had a daily production register showing how much Ghee was produced and how much left in stock. This register used to be initialed by the Excise Inspector. Learned counsel referred us to section 8 of the Sales Tax Act as it stood before its substitution by the Finance Ordinance, 1972, according to which every manufacturer or purchaser or exporter was required to take out an annual licence from the Government. It was submitted that sales of cottonseed oil were made to licence holders and therefore could not be rejected. Accordingly it was contended on behalf of the assessee, that the

1. T. O. proceeded on the basis of no evidence that the goods were consumed by the assessee. Learned counsel argued that these were cash transactions and hence it was not necessary to maintain details of addresses, etc. of the purchasers.

7. Mr. Pirzada supported his submissions with several decisions. He first referred us to R. B. Jassaram Fatehchand v. C. I. T. ((1974) 29 Taxation 161) where it was held by the Bombay High Court that in case of cash transactions where delivery of goods is taken against cash payment, it is hardly necessary for the seller to bother about the names and addresses of the purchasers. The Court held the view that account books of an assessee cannot therefore be rejected and the assessment made under the proviso to section 13 of the Income Tax, merely on the ground that addresses of the purchasers are not mentioned in the case of cash transactions.

8. The next case relied upon by the learned counsel is reported as S. M. Yousuf & Bros. v. C. I. T. ((1974) 29 Taxation 120) In this case the High Court of Sind & Baluchistan did not agree with the rejection of the book results of the assessee, when the Assessing Officer or the Appellate Tribunal had failed to determine the proposition of the unverifiable and un-vouched cash sales to the total cash sales.

9. The next case cited was the case of Arumugawami Nadar v. C. I. T. ((1961) 42 I T R 237) which related to an assessee engaged in the business of manual manufacture of Matches. The Income‑tax Officer brought to assessment the sums of Rs. 12,000 and Rs. 15,000 respectively for two assessment years, as income escaping assessment on the ground that the consumption of chlorate for the manufacture of matches was excessive. It was held by the High Court that in view of the difficulties obtaining in the manual manufacture of matches noticed by the Appellate Tribunal itself, the maintenance of daily mixture account could not possibly help in the correlation of the issues of chlorate with the manufacture of matches. The absence of daily mixture account, the maintenance of which was not at any earlier time insisted upon by the Department, did not lead to the conclusion that the book results of the assessee were not reliable.

10. Mr. Mansoor Ahmad Khan, learned counsel appearing for the Department vehemently opposed the applications made by the assessee He contended that questions Nos. 1 and 2 are substantially the same. As there are several account and the questions framed did not refer to any particular account, the questions as framed are incapable of being answered. He submitted that the questions were also ambiguous. As to question No. 3, learned counsel submitted that the same is not relevant to the adverse part of the Appellate Tribunal's orders inasmuch as the question of gate passes, etc. related to the cottonseed oil account on which no finding was recorded by the Tribunal and the matter was referred back to the Assessing Officer. Consequently learned counsel contended that the question did not arise from the order of the Tribunal. Learned counsel for the Department also relied on several reported decisions which will be discussed presently.

11. It may be stated at the outset that the only additions which were the subject matter of the assessee's application under section 66(l) before the Appellate Tribunal, in regard to which questions were raised related to two accounts, namely, the cotton seed sales account and the cottonseed oil account. As already observed the Tribunal in its appellate orders did not finally decide the question of the acceptance or otherwise of the assessee's account in regard to sales of cottonseed oil as the question was referred back to the Assessing Officer for re-determination on the lines indicated by the Tribunal. The only remaining question therefore related to the add back for the two years in connection with the cotton seed sales account. Accordingly the contentions of the learned counsel for the assessee with reference to section 8 of the Sales Tax Act are not relevant to the present case. As a consequence question No. 3 framed by the assessee also does not arise, at this stage from the order of the Appellate Tribunal.

12. Now according to section 13 of the Income‑tax Act, 1922 the income, profits and gain shall be computed in accordance with the method of accounting regularly employed by the assessee. However, the first proviso to section 13 confers power upon the Assessing Officer, in case the method employed by the assessee is such, that in his opinion the income, profits and gain cannot properly be deduced therefrom, to compute the same upon such basis and in such manner as he may determine. The first question to consider is whether in the present case the Income‑tax Officer was justified in rejecting book results of the assessee in connection with the cottonseed sales account. In this connection while rejecting the sales the income Tax Officer discussed the sales of cottonseed and cotton seed oil together. Upon investigation he came to the conclusion that the sales were fictitious and the purchasers were not in existence for the following reasons: (i) Manufacturing licences had been obtained by the interested parties in bogus names and the exemption certificates were being sold in the market. The manufacturing licences fraudulently obtained were subsequently cancelled by the Department and the information was published in the papers. (ii) Consequent to notice issued to the assessee to furnish particulars of the alleged purchasers, a written reply was submitted by the assessee in which it was stated that the details maybe obtained from the Sales Tax Officer, who issued the licences and that the sales bad been effected in cash through brokers. However, the assessee admitted that no outward gate register was maintained, which contention was not acceptable. (iii) There was no evidence on record that the alleged goods said to have been sold left the factory premises. The brokers were unable to substantiate the existence of the parties and did not even remember the amount of commission received by them or the quantum of the transactions involved.

13. The Appellate Tribunal, on appeal agreed with the view taken by the Income‑tax Officer and maintained his findings with the following observations: "The assessee claimed to have sold the seed to some specified parties but when it was called upon to produce the said parties it miserably failed, so much so that not a trace to these parties could be had. From this failure to produce the assessee's purchasers the Assessing Officer concluded that the seeds in fact were consumed by the assessee itself. Even today not even an iota of evidence is forthcoming to prove the existence of these parties. One of these parties is named Ittehad Soap and Oil Manufacturer, Lyallpur and it is pertinent to notice that the assessee itself is running its business in Lyallpur. Such a big name of a concern land there should be no clus of it is hardly understandable. In these circumstances we have no alternative but to uphold the conclusion drawn by the Assessing Officer."

14. In Augustin C. Paul do Co. v. C. I. T. ((1967) 15 Taxation 94) the erstwhile West Pakistan High Court, Karachi Bench, held that the rejection of the books of account depends upon numerous circumstances and the reasons for doing so vary with each case. As the Income‑tax Appellate Tribunal had arrived at the conclusion that no reliable stock date and verification of the cash sales was available, the assessing authorities were right in rejecting the book versions and therefore this was a pure question of fact, which could not be raised under section 66(2) of the Income‑tax Act. In somewhat similar circumstances the same Bench in the case of Nasir Industries v. C. I. T. ((1967) 15 Taxation 84) expressed the view that even if the Department comes to the conclusion that an assessee had employed a proper method of accounting regularly it is open to the Income‑tax Officer to take resort to the proviso to section 13 if the method is such that the true profits cannot be correctly determined therefrom. 1.5. In Sultan Textile Mills Limited v. C. I. T. ((1970) 22 Taxation 163) where the book results of the assessee were rejected by the Tribunal for the reason that Spinning Master's reports and Gate Pass Register were not produced, it was held that the soundness of the view of the Departmental authorities is a question of fact and not a question of law referable under section 66(1) of the Income Tax Act. On the other hand a D. B. of the High Court of Sind & Baluchistan in Star Rolling Mills v. C. I. T. (1974 P T D 200) expressed the view that the power conferred on the Assessing Officer under the proviso to section 13 of the Income‑tax Act to reject the account, does not give an arbitrary, unguided, uncontrolled or naked power to him. In that case non‑maintenance of stock register was not considered a good or sufficient ground for invoking the power of assessment under the proviso to section 13 in view of the fact that it was not practicable to maintain in the line of the particular business of the assessee, a regular stock register or a manufacturing account.

16. Finally the question whether the rejection of account is a question of law or fact came up for consideration before a D. B. of the Lahore High Court in a case reported as Rajput Metal Works Ltd. v. C.I. T. ((1976) 33 Taxation 1). In this case also the Income‑tax Officer had rejected the trading account of the assessee and had made an addition in the gross profits shown by the assessee in his books having failed to get redress from the Tribunal, the assessee moved the High Court under section 66 (1) to consider the question whether in the facts and circumstances of the case the order of the Appellate Tribunal adding to the profits was violative of the first proviso to section 13 of the Income‑tax Act. It was found that the Income‑tax Officer had adduced cogent reasons for rejection of the account version and his order was substantially affirmed on further appeal by the Tribunal. Since the Tribunal had affirmed the order of the Income‑tax Officer in the exercise of its own judgment based on proved facts, it was held by their Lordships that no question of law worth reference for opinion by the High Court arises out of that part of its order.

18. The above review of case law clearly indicates that the question whether the Departmental authorities were justified in rejecting the account of the assessee and invoking the powers of computation of the profits and gains on any other basis, is a question of law or fact depends upon the facts and circumstances of each individual case. No hard and fast rule can be laid down in this behalf. In the present case the Income‑tax Officer ha applied his mind to the question of sales and upon cogent reasons as mentioned in the forgoing part of this judgment, came to conclusion that sales were fictitious and that the purchasers were not established to be in existence. The whole question was once again re‑examined in appeal by the Appellate Tribunal which also assigned good reasons for maintaining the findings of the Assessing Officer. It cannot, therefore, be contended that the additions made by the Department were arbitrary, capricious or ad hoc. The Appellate Tribunal has observed that the Assessing Officer was right in rejecting the sales shown in the account on account of the failure of the assessee to produce the purchaser and the fact that no evidence was forthcoming to even prove their existence. If upon enquiry the Assessing Officer found the sales to be fictitious, he was apparently justified in invoking the proviso to section 13 in order to determine the true profits and gains on the basis that the stocks shown to have been sold and not shown to have gone out of the factory premises, were really utilized in the manufacture of Vegetable Ghee by the assessee. This can by no means be challenged as arbitrary exercise of power.

19. I find substance in the submission of the learned counsel for the Department that the first two questions framed by the assessee are vague and incapable of being answered. As far as the question No. 1 is concerned the substance seems to be to challenge the drawing of a presumption against the assessee from the fact that certain parties were not traceable at the time of assessment. The question does not indicate parties referred to. However, there is no question of the Tribunal having drawn a presumption against the assessee. The Tribunal has affirmed the findings of the Income‑tax Officer on the assessment of the materials on record. The first question therefore is not referable to this High Court both as it is vague, as well as being a pure question of fact.

20. As regards the second question, for the same reasons I am of the opinion that this question also does not raise a question of law. Merely because the sales were made to licence holders under the Sales Act, it did not deprive the Assessing Officer to determine the genuineness of such sales and upon enquiry he seems to have arrived at the conclusion that licences were obtained in fictitious names in order to evade the payment of tax under the provisions granting exemption. Essentially, therefore, even question No. 2 as framed is not a question of law. As to question No. 3 I have already held that this question does not arise from the order of the Tribunal.

21. In the result I agree with the Tribunal that none of the questions framed by the assessee raise a question of law referable to this Court under section 66(2) of the Income‑tax Act. Accordingly both applications are dismissed but in the circumstances of this case there will be no order as to costs.

1. MAHMUD, J.‑I agree. S. Q. Application dismissed.