Income-tax---

----Rejection of account books---Where the account books are found to be unreliable or incomplete, the Income Tax Officer would be justified in rejecting the books and making assessment on the basis of a flat rate of profit applied to the turnover or gross receipts as shown by the books or to the turnover or gross receipts as estimated by him or on any other reasonable basis of estimate.

Although the Income Tax Officer has very wide powers and is not fettered by technical rules of evidence and pleadings, but there is no overriding restriction on his judgment and that is that he must act honestly on the material, however inadequate before him, and not vindictively, capriciously or arbitrarily. Where the account books are found to be unreliable or incomplete, the Income Tax Officer would be justified in rejecting the books and making an assessment on the basis of a flat rate of profit applied to the turnover or gross receipts as shown by the books or to the turnover or gross receipts as estimated by him or on any other reasonable basis of estimate.

A.R. Shami, I.T.P. for Appellant.

Nazir Ahmad Zia, A.C./D.R. for Respondent.

Date of hearing: 25th April, 1989.

ORDER

FAKHRUDDIN SIDDIQUI (MEMBER).---The impugned order, dated 24-11-1984, passed by the learned CIT (A), Rawalpindi (Headquarters at Faisalabad), has aggrieved both the parties for the charge year 1980-81 on the grounds of rejection of returned version and confirmed in appeal, over and above expenses and to set aside the assessment on basis of round addition made by the I.T.O. at the rate of Rs.22 net income per bale by the assessee and the round addition of Rs.30,000 against the addition of Rs.3,81,000 by both the parties at litigation.

2. Briefly recounted that the assessee, a registered firm, derived income from running a Cotton Ginning Factory, had declared income of Rs.9,478 duly accompanied by copies of P&L account and a balance-sheet. It was stated that total cotton purchased during the year was of Rs.87,00,487 yielding an average rate of Rs.180.24 per maund. Similarly the assessee showed purchases from commission agents at Rs.84,24,707 giving an average purchase rate of Rs.180:52 per maund. Rest of the cotton were purchased from various Beoparies for Rs.2,75,780.29 giving average purchase rate of Rs.172.36 per maund. Due to defects and discrepancies of accounts the assessee as required to explain his position but he did not furnish any plausible explanation about the excessive average purchase rate of Rs.180.52. The account version of the assessee was rejected and addition of Rs.3,81,00 was levied on score of inflated purchases. In the case of yield of cotton lint shown was too low even in view of the history of the assessee, hence, additions were made accordingly. The sale of lint was shown at Rs.71,68,167.90 to various textile mills and cotton corporation of Pakistan which were verifiable, hence, accepted. In the same manner serious defects were found in case of sale of cottonseed, therefore, certain additions were made in this account. The assessee firm had claimed a sum of Rs.206,103 on account of ginning expenses. Keeping in view the past history and other allied facts certain additions were also made in total income of the assessee. Concludingly, the Profit and Loss. Expenses were not fully verifiable, hence, after raising additions the total income of the assessee company was estimated at Rs.43,52,226 and finalized the assessment.

3. On appeal before the CIT(A), Zone Rawalpindi (Headquarters at Faialabad) the matter was agitated by the appellant/assessee and challenged -the reduction of the declared version of the assessee and the additions made thereto in various accounts. The learned first appellate authority considered each issue in detail and observed that the assessing officer found huge difference in purchase rates and in order to verify the crux of the matter, he issued notices to various parties but found that those parties did not exist at all and in order to suppress the profits inflated purchase rates of Kapas were shown. The matter was thoroughly discussed with counsel of the assessee and the first appellate authority was of the view that the plea of the appellate authority seemed to be correct, therefore, the addition made in Kapas account was restricted to Rs.30,000. Similarly, the ginning account was discussed by the first appellate authority which found that the assessing officer had adopted a novel method for determining the income of the appellant, hence, the assessment order was set aside for de novo decision. The penalty of Rs.3,237 under section 91(1) was imposed which in turn delated keeping in view the following judgments.

1. PLD 1976 Lah. 761; 1981 PTD (Trib.) 8; 1981 PTD (Trib.) 179 and PLD 1982 Kar. 679.

4. Since the assessment order was set aside by the first appellate authority, hence, both sides have come to this Tribunal, by these appeals. On the fixed date of final hearing, i.e. on 25-4-1989, Mr. Nazir Ahmad Zia AC/DR on behalf of the Department mainly contended that the learned CIT(A), had actually erred in restricting an addition of Rs.30,000.against the addition of Rs.81,000 under the head purchase of Kapas and he had not gone into the intricate nature of the assessee's business and the estimation as worked out by the assessing officer. Mr. A.R. Shami, ITP, on the other hand not 'only refuted the arguments advanced by the D.R. but also contended that the rejection of the declared version of the assessee was uncalled for which was subsequently wrongly confirmed by the first appellate authority. He also contended that the action of making additions in Kapas was arbitrary, improper and highly excessive. Besides, his arguments were against the observation made by the learned CIT(A), regarding the expenses over and a bone the purchase rate and he also objected to the order of setting aside the assessment order.

5. Although the Income Tax Officer has very wide powers and is not fettered by technical rules of evidence and pleadings, but there is no overriding restriction on his` judgment and that is that he must act honestly on the material, however inadequate before him, and not vindictively, capriciously or arbitrarily. It is also established law where the account books are found to be unreliable or incomplete, the Income Tax Officer would be justified in rejecting the books and making an assessment on the basis of a flat rate of profit applied to the turnover or gross receipts. as shown by the books or to the turnover or gross receipts as estimated by him or on any other reasonable basis of estimate. If his best judgment is estimated in appeal, the whole case shall need de novo consideration. In this instant appeal the learned CIT(A), had made certain observations, such as, "Considering all the facts of the case and in the light of the above discussion, the assessing Officer had proceeded to adopt a novel method for determining the income of the appellant. He has certainly proceeded in a slipshod manner to work out the addition on the basis of net profit rate per bale "available on page 5, paragraph No.2 in the impugned order passed by the learned CIT(A), thus, it is abundantly clear that ITO had not acted honestly nor based his best judgment on a foolproof manner.

6. The learned CIT(A), had, restricted the addition under the head of Purchase of Kapas to be Rs.30,000 against the additions made at Rs.3,81,000 without any convincing reasons, we therefore, feel no hesitation to set aside the impugned order and direct to reconsider the round addition of Rs.30,000 and the final decision made by the CIT(A) in regard to setting aside the assessment on the basis of round addition by the ITO at the rate of Rs.22 net income per bale is maintained, and the appeal in question finally decided accordingly.

M.BA./1623/T???????????????????????????????????????????????????????????????????????? ?????????? Appeal allowed.