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I.T.As. Nos. 390 to 392(PB) of 1980-81, decided on 7th March, 1987.

---S.13--Assessee, a manufacturer of M.S. bars, re-rolling job and doing business of sales of steel sheets etc.--Books of accounts were properly maintained by assessee; purchases and sales were fully vouched and verifiable; stock register was maintained properly and assessee's shown results were always accepted in the past--Non-maintenance of stage-wise production register by assessee, held, could not be a ground for rejecting trading account of assessee.

1986 PTD 84 fol

--S. 13--Assessee, a manufacturer of M.S. bars, re-rolling job an doing business of sales of steel sheets etc.--Books of accounts were properly maintained by assessee; purchase and sales were fully vouches and verifiable, stock register was maintained properly and assessee' shown results were always accepted in the past--Statement o consumption, wastage and production as per raw material register verify by Excise Inspector produced by assessee--Non-maintenance of day t day wastage record, held, could not be a ground for rejecting trading account of assessee.

1984 P T D 150 fol.

---S. 13--Assessee, a manufacturer of M.S. bars, re-rolling job and doing business of sale of steel sheets-- Assessee had maintained book: of accounts in the nature of cash book, ledger, stock register, day to day consumption and production register as prescribed by Central Excise and Land Customs Department, purchase vouchers and sale bills etc.- Such books of accounts were maintained on the same pattern on basis of which trading account of assessee was accepted by Department in respect of last years--Held, in the absence of any defect having been detected in the books there was no justification with the Income-tax Officer to have discarded trading account of the assessee.

1984 PTD 218; 1984 PTD 221 and 1984 PTD 225 fol;.

---S. 13--Assessee, a manufacturer of M.S. bars, re-rolling job and doing business of sale of steel sheets etc.--Books of accounts were properly maintained by assessee, purchase and sales were fully vouched and verifiable; stock register was maintained properly and assessee's shown results were always accepted in the past--Held, since the assessee had maintained a separate file for each labourer wherein his address and Social Security Card number was given, the wages paid could only be said as verifiable, I.T.O. was therefore, not justified to reject trading account of assessee on the ground that wages paid to the labourer were not open to verification.

---S. 13--Trading account of assessee on identical pattern of maintaining books of accounts having been accepted for previous years, there was, held, no justification to reject trading account of assessee without finding any defect with the books of account.

Maqbool Hussain Shah, D.R. for Appellant.

Iqbal Naeem Pasha for Respondent.

Date of hearing: 7th March, 1987.

These three departmental appeals are directed against the impugned order of learned Appellate Assistant Commissioner inconsequence of which he ordered acceptance of trading account of the assessee in respect of the charge years 1975-76, 1976-77 and 1977-78.

2. Brief facts giving rise to these appeals are that the assessee, a private limited company, derives income from the manufacture of M.S. Bars, re-rolling job, a sales of steel sheet, etc. It filled returns to disclose loss as under:-

3. The Income-Tax Officer after rejecting books of accounts computed loss of the assessee at Rs.1,37,203, Rs.1,25,565 and Rs.1,83,809 for the charge years 1975-76, 1976-77 and 1977-78 respectively. Loss so computed in respect of each year was contested in appeal before learned A.A.C. who by virtue of Appeals Nos. 104, 301 and 3058180, dated 28-7-1980 directed acceptance of the trading accounts relating to the charge years 1975-76, 1976-77 and 1977-78 in the following words:-

"The foregoing arguments of the A.R. of the appellant have a lot of force. It has been brought out in detail that books of accounts have been properly maintained. Purchase and sales are fully vouched and verifiable. Stock register has been maintained, excise record has been maintained properly and appellant's shown results have always been accepted in the past. In the circumstances, the shown results are accepted in all the years."

4. The Department having taken exception to the direction of learned A.A.C. ordering acceptance of trading accounts for all the years filed second appeals before the Tribunal. In this connection, the only objection of the department is that there was no justification that learned A.A.C. in ordering acceptance of trading account in respect of each year as the assessee had failed to explain decrease in the disclosed gross profit rate in relation to the charge year 1974-75 It was accordingly prayed that order of the Income-tax Officer may be restored in respect of each year.

5. Learned D.R. arguing on behalf of the department has first referred to the unverifiability of turnover worth Rs.5,03,294 mentioned in the assessment order for the charge year 1975-76 on the basis of which trading account for the year was not accepted by the I.T.O. This objection has been successfully met by learned counsel of the assessee who has shown us details of sales worth Rs.5,03,294. On going through these details, we have noticed that turnover apart from being verifiable was not on cash account but on credit basis. Therefore, objection of the Income-tax Officer that sales worth Rs.5,03,294 were not open to verification is rejected.

6. Learned Departmental Representative has 'next invited our attention to the non-maintenance of stage-wise production register and has stained that in its absence trading account of the assessee was rightly rejected by the I.T.O. Even this ground of appeal for rejecting trading account of the assessee has not found favour with us, as in our opinion, it is not possible to maintained such a register. In arriving at this conclusion, we have relied on 1986 PTD 84. In this case, Karachi High Court while giving its decision in the case of M/s. Star Vacuum Bottle Manufacturing Company Limited v Commissioner of Income-tax held as under:-

"We are further of the view that the account cannot be rejected merely on account of the non-maintenance of the stage-wise 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-assessee for the year 1971-72 was in any case unjustified."

7. Learned Departmental Representative has also stated that on account of non-maintenance of day to day wastage record, the I.T.O. had rightly rejected trading account of the assessee. Even this objection is not valid as learned counsel of the assessee has shown us a statement of consumption, wastage and production as per raw material register verified by the Inspector, Central Excise and Land Customs. Therefore, it is not possible for us to sustain this objection, which led the I.T.O. to reject trading account of the assessee. In support of this conclusion observation of the Karachi High Court in a case reported as 1984 P T D 150 is set out below:-

"An opinion was formed by the Assessing Officer that record maintained according to Excise Regulation did not satisfy requirement of income-tax. This cannot be the basis for rejection of accounts unless for cogent and convincing reasons the Assessing Officer comes to a definite finding that from such accounts proper gains and profits could not be reduced. Mere non-maintenance of day to day production and consumption register by itself, is no ground for rejection of account version."

8. Learned Departmental Representative arguing further has invited our attention to the fact that disclosed gross profit rate of 5.03% did not compare favourably with gross profit rate of 9.64% shown by the assessee for the charge year 1974-75 and therefore, on this basis trading account of the assessee was rightly discarded by the I.T.O. Even this objection has not been approved by us as the assessee had maintained books of accounts in the nature of cash book, ledger, stock register, day to day consumption and production register as prescribed by the Central Excise and Land Customs Department, purchases vouchers and sales bills, etc. These books of account were maintained on the same pattern on the basis of which trading account of the assessee was accepted by the I.T.O. in respect of the charge year 1974-76. Therefore, in the absence of any defect having been detected in these books there was no justification with the I.T.O. to have discarded trading account of the assessee. In this connection, it is desirable to refer here to 1984 PTD 218, wherein Karachi High Court made the following observation:-

"In fact the finding of the I.T.O. was merely based on gross profits of comparable cases without giving any specific details of the same and thus it was an arbitrary decision. We further find that the provision under section 13 has given discretion to make an estimate after rejecting the accounts. But after the I.T.O. had observed that the accounts had been maintained on the same lines as discussed in the orders of the early years and all necessary details had been obtained and examined, then he was not justified in rejecting the result of such accounts merely because rate of gross profit had gone down and in spite of the fact that a reasonable explanation for the same had been offered by the assessee. Discretion, in rejecting the accounts was not exercised on a correct manner."

9. In this case even a comparable case was not cited in aid for rejecting trading account of the assessee. Instead, the I.T.O. relied on the gross profit rate for the charge year 1974-75 for rejecting trading account of the assessee. This reason has not been accepted by us in the absence of defects in the books of accounts. Secondly, books of accounts had been maintained on the same pattern as for the charge year 1974-75, in respect of which trading account of the assessee was accepted. Therefore, trading account of the assessee for the charge year 1975-76 could not be discarded. This principle was further elaborated in 1984 P T D 221 wherein the Karachi High Court held as under:-

"In the present case before us there was no such finding by the I.T.O. that the method of accounting for the relevant years was not the same as employed by the respondents assessee during the previous years and in view of this failure of finding on the part of the I.T.O. the Appellate Tribunal was justified in entertaining the question of law that the account could not be rejected by the I.T.O."

10. The above principle was repeated in another case reported as 1984 P T D 225, in this case Karachi High Court vide para 18 observed as under:-

"Mr. Iqbal Naeem Pasha has also referred to the case of Muhammad Textile Mills Ltd. v Commissioner of Income-tax (East), Karachi (1), which was decided by a Division Bench of this Court. It was held in this case that if the assessee had employed a regular method of accounting and the accounts were maintained regularly, 'the I.T.O. was not entitled to reject the book results without finding any flaw, defect, or discrepancy."

11. Learned Departmental Representative has next referred to the fact that since wages paid to the labourers were not open to verification, the I.T.O. had no other alternative but to reject the trading account of the assessee. Even this objection for which there is no evidence on the record should not have led the I.T.O. to reject trading account of the assessee. On the other hand, since the assessee had maintained separate file for each labourer wherein his address and social security card number was given, the wages paid could only be said as verifiable.

12. Before closing, it is desirable to mention here that trading account of the assessee on identical pattern of maintaining books of accounts was accepted for the charge years 1978-79 to 1981-82 and there was thus no justification to reject its trading account for the charge year 1975-76 without finding any defects with the books of account. Therefore, we have no hesitation in upholding order of learned AAC ordering acceptance of trading account for the charge year 1975-76. This finding mutatis mutandis is equally applicable for the charge years 1976-77 and 1977-78.

13. In consequence of the above discussion departmental appeals being devoid of any merit are hereby dismissed.

M.B.A./379/T Appeals dismissed.

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