1983 PTD 63 (PLP)

(b) One another main reason for fall in G. P. is higher purchase price of Art Silk Yarn. Our clients have worked out the price of 11.04 per Lb. as against 11.71 during this year. Hence there was increase of 67 paisas per Lb. of Art Silk consumed. We may add here that dur ing this year our client consumed 44,750%. 1/4 Lbs. of Art Silk Yarn resulting in increase in cost of Rs. 31,183." The above explanation offered by the applicant was rejected by the Income -tax Officer on the grounds that: (i) : even if the adjustment in the trading account of applicant is allowed to the extent of reduced income from dyeing and twisting process and the increase in the prices of raw material, the percentage of gross profit during the year 1964-65 will still be less than the profit shown in the previous year ; (ii) that no stage-wise production account was maintain ed by the applicant and therefore it was not possible to correlate compensation of raw material with the finished goods and (iii) that the wages cannot be correlated with the production. The Income-tax Officer accordingly added a sum of Rs. 1,25,000 to the declared gross profit to raise the percentage (,gross profit. On appeal the Assistant Income-tax Commissioner confirmed the order of Income-tax Officer for the same reasons as were given by tea income-tax Officer. On further appeal before the Income-tax Tribunal, the tribunal also confirmed the order for the following reasons :- "We have heard the parties. The propriety of the rejection of the accounts has not been called into question. The sole issue that, there fore, remains for determination is the reasonableness of the addition made in the facts and circumstances of the case. Mr. Faruq Ali, F.C.A. appearing on behalf of the assessee has stressed that the assessee's lower rate of profit in the year was owing to the fact that the manu facturing business was carried on only for seven months of the year as against full 12 months of the earlier year. We do not, however, find much merit in this argument in view of the fact that the assessee had undeniably sold the manufactured goods through its branches during the year. It may be that the goods sold in the year were mostly its own manufactured stocks of the earlier years. At no stage did the assessee furnish separate trading account for the manufactured goods and others, if any. It is neither the assessee's case before us that the sale price was decreased or the cost of production increased in the year. In this view of the matter, we are not convinced of the reasons for fall in the rate of gross profit in comparison to the rates accepted and disclosed in the earlier years. The assessee's past history shows that in the, assessment year 1961-62 the rate of gross profit was shown at 21.9 % in the year 1962-63 it was 22.7 % and in 1963-64 it was 21.3 % against which the rates adopted, as a result of appeal, were respectively 23.6 % and 22.5 % in the years. In this background, we do not find that the addition of Rs. 1,25,000 for the year under considera tion raising the rate of gross profit to about 20% was anyhow excessive or unreasonable. We accordingly maintain the addition and reject the assessee's appeal as well." The applicant in these, circumstances has approached this Court under sec tion 66 (l) of the Income-tax Act for decision of the following question which According to him has arisen in the circumstances of the case and need decision of this court :- (1) "Whether in the facts and circumstances of the case the Tribunal was justified in upholding the addition of Rs. 1,25,000 trade by the Income Tax officer by rejecting the book results under the proviso to section. 13 of the Income-tax Act"? (2) Whether the Tribunal's order upholding the addition of Rs. 1,25,000 is based on any material or evidence or is arbitrary and based on mere surmises and conjectures ? (3) Whether in the facts and circumstances of the case the Tribunal's order upholding the addition of Rs. 1,25,000 is contradictory to the evidence on record ?" At the hearing of the above reference the learned counsel for the parties agreed that out of the 3 questions mentioned above, only question No. 1 needs determination and accordingly questions Nos. 2 and 3 were not pressed. We have heard M/s. Ali Athar and Nasrullah Awan, the learned counsel for the applicant and the respondent in this case. In our view the answer to question No. 1 must be returned in the negative. The Tribunal in its order has proceeded on the basis that the propriety of rejection of the accounts were not challenged by the assessee before it and, therefore, the sole issue before the Tribunal was the reason ableness of the addition made in the facts and circumstances of the case y the Income-tax Officer. This approach of the Tribunal does not seem to be correct as the entire addition of Rs. 1,25,000 to the gross profit was challenged by the applicant/assessee in the appeal before the Assistant Income-tax commissioner as well as the Tribunal which necessarily involved questioning of propriety of rejection of accounts. In the memo. of reference the. applicant has specifically pleaded in paragraph 12 thereof as follows :- "The applicant submits that the applicant had challenged the entire addition of Rs. 1,25,000 in the appeals which clearly meant that they had challenged the propriety of the rejection of accounts." In their reply the respondent has admitted paras. 9 to 12 of the reference as correct. Similarly the Tribunal in its order did not accept the contention of applicant that during the assessment year under review hey had carried on the dyeing, twisting and finishing work only for seven months as against the previous year when the applicant carried on these activities for full 12 months and, therefore, there was fall in the rate of profit for the assessment year under review. The reasons which persuaded the Tribunal to reject the contention of applicant was that the applicant sold manufactured goods through its branches for the year and, therefore, it may be that the goods sold in the Year were mostly its own manufactured stocks of the earlier years. This finding of the Tribunal is purely conjectural as neither the Income-tax officer nor the Assistant Appellate Commissioner disbelieved the statement of applicant in this behalf, It also does not appear to be the case of department at any stage of the proceedings that the applicant during the assessment year under review carried on the activities of dyeing, twisting and finishing for the fill year. In the memo. of reference the applicant has pleaded in para. 6 the reason for the fall of rate of gross profit during 1964-65 as the less recovery of dyeing, twisting and finishing charges (Rs. 44,109) as against the previous year (Rs. 1,27,230) and this is admitted by the department in their reply. The other reason given by the Tribunal for rejecting the contention of applicant against addition of Rs. 1.25,000 was that the applicant had at no stage furnish.. ed separate trading account for the manufactured goods and other if any. The applicant has produced certified copies of these accounts for the year 1964-65 with this reference which were filed before the Income-tax Officer which are not denied. The applicant has also alleged in para. 3 of their memo. of reference that they always used to submit separate trading account of all their branches and head office and this allegation is admitted by the department in its reply. It is not disputed before tie that the addition of Rs. 1,25,000 was made by the Income-tax Officer under the 1st proviso to section 13 of Income-tax Act. Section 13 of the Act reads as follows :- "Section 13.-Income, profits and gains shall be computed, for the purposes 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 As such that, in the opinion of the Income-Tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation as shall be made upon such basis and in such manner as the Income-tax Officer may determine:" A bare reading of the above provision of law shows that income, profits and gains are to be computed for the purposes of section 10 and 12 of the Act to accordance with the method of accounting regularly employed by the assessee. The 1st proviso to section 13 however authorises the Income-tax Officer to make computation on such basis and in such manner as he may determines in cases where assessee has not employed any regular method of accounting or the method of accounting employed is such 'that the profits and gains cannot be properly deduced therefrom. In the case before us the admitted position on record is that the applicant were assessed to income -tax for several years before the assessment year 1944-65 and the method of accounting employed by them was not objected to by the department on any ground. It is also not the case that for the assessment year 1964-65, the applicant bad used the method of accounting which was different from the previous years. The learned counsel for the applicant has sufficiently demonstrated that in the manufacturing process of Silk fabrics from silk yarn there is only one stage of weaving yarn into cloth and, therefore, no question of maintaining stage-wise production account arises in this. The Department in its reply has also not disputed this aspect but has only urged that this Con tention was not raised at the time of assessment. In view of the above position we are of the view that the addition of Rs. 1,25,000 to the gross profit disclosed by the applicant for the year 1964-65 under section 13 of the Act was not justified in the circumstances of the case. We accordingly answer question No. 1 referred to us in the negative. Reference answered in the negative.