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Income-tax Case No. 46 of 1978, decided on 19thAugust, 1987.

----S. 13--Trading result of assessee could not be rejected merely on the basis of presumption unless a finding of fact was recorded that on verification of the account books some defects or discrepancies unexplainable were discovered--Where there were no basis before the Income-tax Appellate Tribunal for not accepting the trading result of assessee which was better than the previous years in terms of the volume of sale as well as in percentage of gross profit, increase in the gross profit by 1 % for the previous year on presumption was not justified.

New Snow White Dry Cleaner, Karachi v. Commissioner of Income-tax (East), Karachi (1984) 51 Tax 11 and Messrs Kruddsons Limited, S.I.T.E. v. Commissioner of Income-tax 'A' Zone, Karachi I.T.C. Nos. 18 and 27 of 1978 rel.

The Commissioner of Income-tax Pona v. Messrs Manna Ramji & Co. A I R 1973 SC 515; Messrs Ibrahim Sons v. Commissioner of Income-tax, Karachi (West), Karachi 1979 P T 1: Miss Assia v. Income-tax Appellate Tribunal, etc. PLD 1979 SC 949 and Raider Ali Rajab Ali & Co. v. Commissioner of Income Tax 1980 P T D 1 ref.

M. Iqbal Memon for Appellant.

Shaikh Haider for Respondent.

Date of hearing: 19th August, 1987.

.-- This is a direct reference under Section 66 (2) of the Income Tax Act, 1922, hereinafter referred to as the Act, for soliciting the opinion of this Court on the following question mentioned in the order dated 29-5-1978 (Annexure 'D') passed by the Income Tax Appellate Tribunal, declining the applicant's request to make a reference on the above question:

"Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified in applying the proviso to Section 13 of the Income-tax Act "

2. The brief facts leading to the filing of the above application are that during the Assessment Year 1973-74 (Accounting) commencing on 1-10-1971 and ending on 30-9-1972, the applicant company had disclosed sales of Rs.36,79,798 and gross profit of Rs.4,54,615, which worked out at 12% as against gross profit of 10.7 % of sales of Rs.26,79,197 disclosed by the applicant Company for the previous Assessment year 1972-73 and accepted by the learned Income Tax Appellate Tribunal by its order dated 21-11-1974 passed in I.T.A. No 2260 of 1972-73. However, the Income Tax Officer Companies Circle 13 Karachi by his order dated 23-7-1974 rejected the trading result and estimated sales at Rs.38,00,000 and applied thereon gross profit rate of 16%. The applicant Company filed an appeal (Appeal No.507 KC/A/74) against the above order which was allowed by the learned Appellate Assistant Commissioner of Income Tax 'A' Range, Karachi by his order dated 1-2-1975. Against the above order the Income Tax Officer filed an. appeal before the learned Income Tax Appellate Tribunal, which allowed the appeal and rejected the trading result -id estimated sales at Rs.37,00,000 and applied thereon gross profit rate of 13%. Thereafter, the applicant Company filed the aforesaid application under section 66 (1) of the Act for making reference on se above-quoted question which was declined by the aforesaid order fated 29-5-1978. The applicant Company has, therefore, filed the present direct reference.

3. In support of the above application Mr. Iqbal Naeem Pasha learned counsel for the applicant Company has vehemently urged that since no defect in the accounting system was pointed out by the learned Income Tax Tribunal, it could not have rejected the trading result on the basis of surmises and conjectures, particularly when for the previous year the same accounting system was accepted by the learned Income Tax Appellate Tribunal and the gross profit at the rate of 10.7% was accepted against the declared gross profit of 12% of the assessment year in question.

On the other hand 'Mr. Sheikh Haider, learned counsel for the respondent has urged that the learned Income Appellate Tribunal has recorded finding of fact to the effect that the applicant Company "got about four months of the post devaluation period for making substantial profit on the stock available to him on 12-5-1972. That the assessee must have benefited can be safely assumed. In these circumstances we would partially restore the order of the Income Tax Officer by directing the adoption of Gross Profit of 13% on sales estimated to achieve the desired shortfall in Gross Profit. In other words the sales should be estimated at Rs.37,00,000 and the addition made would be Rs.72,000 in place of Rs.1,53,400." , and, therefore, this Court in this application cannot interfere with the above finding of fact and in fact no question of law is involved.

In support of the above submission Mr. Iqbal Naeem Pasha has referred to the following cases:

(i) New Snow White Dry Cleaners, Karachi v. Commissioner of Income Tax (East), Karachi (1984) 51 Tax 11 (H.C. Kar.), in which a Division Bench of this Court, to which one .of us Mr. Justice Ajm81 Mian) was a party has made the following observations:

"The rulings cited by Mr. Iqbal Qazi cited by him support his case. We are inclined to hold that the book results cannot be rejected merely on the basis of suspicion unless a finding of fact is recorded that on verification the account books disclose some defect or discrepancy, which cannot reasonably be explained. We are also inclined to hold that the Income Tax Authorities once accept a particular method of accounting system adopted by an assessee and find it possible to determine profits on the basis of such accounting system cannot reject the book results on the ground that the accounting system is defective in the absence of any glaring defect or discrepancy. We are also of the view that the proviso to section 13 cannot be pressed into service without recording a finding that the accounts are defective and the determination of profits on their basis is not possible."

(ii) The reported judgment dated 16-7-1987 given in I.T.C. No. 18 of 1978 and I.T.C. No.27 of 1978 (M/s. Kruddsons Limited, S.I.T.E. v. Commissioner of Income Tax 'A' Zone, Karachi, by a Division Bench of this Court in which a portion of the above-quoted para of the above-cited judgment was referred to in verbatim and the principle enunciated therein was reiterated.

On the other hand Mr. Shaikh Haider has relied upon the following cases:

(i) The Commissioner of Income Tax Poona v. M/s Manna Ramji & Co. (AIR 1973 Supreme Court, 515), in which it was held that Tribunal is the final fact-finding authority.

(ii) Messrs Ibrahim Sons v. Commissioner of Income Tax, Karachi (West), Karachi (1979 PTD 1). In the above case a Division Bench of this Court while construing first proviso of Section 13 read with Section 66 (1) of the Act, held 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 gain on any other basis, is a question of law or fact depends upon the facts and circumstances of each individual case and no hard and fast rule can be laid down in this behalf.

In the above case it was held by the High Court that the assessing authority was justified in invoking first proviso to Section 13 of the Act as finding of fact that the sales were fictitious was recorded.

(iii) Miss Assia v. Income Tax Appellate Tribunal, etc. PLD. 1979 SC 949, in which the Hon'ble Supreme Court dismissed the petition for leave against the judgment of a High Court and held that the Tribunal having examined at great length each and every submission advanced by the assessee and basing their conclusion on the material brought on record, Tribunal's finding does not give rise to a question of law and, therefore, the High Court's judgment dismissing the petitioner's application under section 66 (2) of the Act was proper.

(iv) Haider Ali Rajab Ali & Company v. Commissioner of Income Tax 1980 PTD 1. In the above case it was held by a Division Bench of the erstwhile High Court of Sind and Baluchistan that the High Court would not be justified to interfere with a finding of fact recorded by a Tribunal based on material before it.

We have quoted the relevant portion of the order in the submission made by Mr. Shaikh Haider which clearly manifests that the learned Income Tax Appellate Tribunal has not held that there was any defect in the accounting system maintained by the applicant Company or in the trading result shown. But the observations that the applicant Company must have been benefited during 4 months of post devaluation period on account of rise in the value of the stock is based on no material on record but is founded on presumption. The cases cited by Mr. Shaikh Raider in fact do not support the case of the respondent as the ratio decidendi of the above-cited cases is that if a Tribunal records of fact on material, it would be final but if it is based on no material or is contrary to material or finality can be attached on such finding of fact. The cases relied upon by Mr. Iqbal Naeem Pasha supports the case of the applicant Company. The book result of the applicant Company could not have been rejected merely on the basis of presumption unless a finding of fact would have been recorded that on verification of the account books some defects of discrepancies unexplainable were discovered.

We are, therefore, inclined to hold that there was no basis before the learned Income Tax Appellate Tribunal not to accept the trading result declared by the applicant Company which was better than the previous, year in terms of the volume of sale as well as in percentage of gross profit: The increase in the gross profit by about us from the previous year in fact negates the presumption raised by the Income tax Appellate Tribunal and prima facie accounts for the 4 months post devaluation period.

Our answer, therefore, to the above-quoted question is in the negative. However, there will be no order as to costs.

These are the reasons in pursuance of a short order of even date.

M.B.A. /104/ S-K Reference answered in negative.

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