BARRY BROTHERS VS COMMISSIONER OF INCOME-TAX
2001 P T D 2612
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
BARRY BROTHERS
versus
COMMISSIONER OF INCOME‑TAX
C. T. R. No. 1 of 1991, decided on 10/10/2000.
Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S.136 & 32‑‑‑Reference to High Court‑‑‑Method of accounting‑‑ Rejection of accounts‑ ‑‑Small part of unverifiable cash sales ‑‑‑Assessee's accounts were rejected on the ground that a part of cash sales representing 9.5 % , 20.9 % & 2.34 % of the total sales respectively for each year were unverifiable‑‑‑First Appellate Authority maintained the rejection of accounts which was confirmed by the Tribunal with partial relief in the form of reduction iii the sales‑‑‑Validity‑‑‑Unless the unverifiable portion of the cash sales was substantial and such proportion was sufficient to create doubts with regard to the genuineness of the assessee's account, these could not have been rejected outrightly‑‑‑Assessing Officer had not confronted the assessee' with the alleged incomplete addresses of the cash purchasers‑‑‑Estimation made after rejection of accounts was found to be on the higher side and no serious thought was given to the contention of the assessee that he was concerned more with the acceptance of the accounts rather than a decrease in the estimation of sales‑‑ ‑Assessee's case needed to be considered on the plane that in the earlier as well as in the subsequent years its declared results had been accepted‑‑‑Case of the revenue was not that the assessee had adopted a different method of accounting during the three years involved or that it was so different from the earlier and subsequent methods that profits and gains for purpose of various provisions of the Income Tax Ordinance, 1979 cowl not be computed therefrom‑‑‑Questions referred whether assessee's accounts could be rejected while only small part of sales were unverifiable and whether Tribunal was justified in maintaining rejection of accounts without discharge of burden of proof as per S.32 of the Income Tax Ordinance, 1979 were answered in the negative by the High Court in circumstances.
Seth Gurmukh Singh and another v. Commissioner of Income‑tax, Punjab (1944) 12 ITR 393; Dhakeswari Cotton Mills Ltd. v. Commissioner of Income‑tax, West Bengal (1954) 26 ITR 775; R.B. Jessaram Fatehchand v. Commissioner of Income‑tax, Bombay City‑II (1974) 29 Tax 161; Commissioner of Income‑tax (West Zone), Karachi v. Fateh Textile Mills Ltd. 1984 PTD 2 18; Messrs Karachi Textile Dyeing and Printing Works. Karachi v. The Commissioner of Income‑tax (Central), Karachi 1984 PTD 150: S.M. YOUSUF & Brothers v. Commissioner of Income‑tax 1974 PTD 45 and Pandit Brothers v. Commissioner of Income‑tax, Delhi (1954) 26 ITR 159 ref.
Ahmed Shulah Khan for Petitioner.
Muhammad Ilyas Khan for Respondent.
JUDGMENT
NASIM SIKANDAR, J.‑‑‑The Lahore 'Bench of the Income Tax Appellate Tribunal has framed the following question of law settled to have .arisen out of its order, dated 3‑6‑1986:‑‑‑
"Whether in the facts and circumstances of the case, the assessee's accounts could be rejected while only small part of sales were unverifiable?"
2. Earlier it appears that the assessee, registered firm engaged in purchase and sale of cotton and woollen cloth on whole sale basis, had requested the Tribunal to refer the following question of law for the opinion of this Court:‑‑‑
"Whether on the facts and the circumstances of f e case the Tribunal was justified in maintaining rejection of accounts without discharge of burden of proof in this regard as per section 32 of the Income Tax Ordinance, 1979?"
3. In the three years involved viz. 1979‑80, 1980‑81 and 1981‑82 the assessee declared sales respectively at Rs.37,848, Rs. 53,876 and Rs.1,35,287. The declared rate in the three years was 3.1%, 3.22% and 3.19%. The Assessing Officer after rejecting the returned version proceeded to estimate sales at Rs.4,00,000, Rs. 6,00,000 and Rs. 13,50,000 and to subject them to a rate of 6% each in three years. The learned First Appellate Authority CIT (Appeals) maintained the rejection of accounts as well as the applied rate and estimation of sales. The only relief in the year 1980‑81 being that the estimation of sales was reduced to Rs.5,75,000 as against the one made by the Assessing Officer at Rs.6,00,000. Before the learned Tribunal it was vehemently contended that in the three years involved credit sales at Rs.3,35,412, Rs.4,25,549 and Rs. 12,74,737 having been accepted there was no justification available with the Assessing Officer to reject the returned version only on the ground that part of the cash sales was unverifiable. It was explained that in the three years involved cash sales were made only to the tune of Rs.3,54,361, Rs. 1,12,527 and Rs.30,550 representing 9.5%. 20.9% and 2.34% of the total sales. It was also contended that ever cash sales were completed/properly vouched in as much though the addresses given were incomplete yet the assessee could have proved the transaction had the Assessing Officer required him to do so.
4. The Tribunal agreed that whatever addition in sales had been made it was done only in respect of cash sales. Finding these additions to be on the higher side, partial relief was allowed in the form of their reduction in the three years involved. Therefore, indirectly prayer for acceptance of accounts was refused.
5. The question as proposed by the assessee indicates it emphasises on the fact that even the cash sales could have been proved to the satisfaction of the Assessing Officer if he had properly confronted the assessee for that purpose. On the other hand, the Tribunal has re‑framed the question to give it a different colour. Although we can see the different directions of the two questions involved yet do not intend to re‑frame the question as referred by the Tribunal. However, we intend to keep in sight the question which was earlier proposed by the assessee.
6. The provisions of law with regard to method and maintenance of accounts as provided for in section 13 of the late Income‑tax Act, 1922 remains some what the same in the form of section 32 of the Income Tax Ordinance, 1979. The principle in both the enactments remains the same that income profits and gains shall be computed for the purpose of various sections of the Act in accordance with the method of accounting regularly employed by the assessee. The original proviso to section 13 and subsequent addition of another proviso by Ordinance No. XXIV of 1961 were properly reflected in the form of section 32 of the Income Tax Ordinance, 1979. These provisions were earlier considered in detail by a Full Bench of this Court in the famous case re: Seth Gurmukh Singh and another v. Commissioner of Income‑tax Punjab (1944) 12 ITR 393. The four members of the learned Bench agreed with the answers proposed by Din Muhammad, J. which were earlier framed and referred by him as member of the Division Bench to the Hon'ble Chief Justice for constitution of a larger Bench. Muhammad Munir, J. had reservations qua the answer to Question No.2 in the second set though he agreed that on the substance of the issue of interpretation of section 13 he had arrived at the same results as reached by his Lordship. Sale and Abdur Rehman, JJ. agreed with Din Muhammad, J that the I.T.O. could have recourse to the proviso to section 13 even in those cases where he rejected the accounts on the ground that they were not genuine and thus, failed to represent truly his income and profits. Muhammad Munir, J. observed, and Harries, C.J. agreed with him that if the books were false the I.T.O. could ignore them but the proviso to section of an assessment and the powers of I.T.O. were epitomized in the report in the following words:
"While proceeding under subsection (3) of section 23 the Income- tax Officer is not bound to rely on such evidence produced by the assessee as he considers to be false, (b) if he proposes to make an estimate in disregard of the evidence, oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to find that estimate, (c) He is not, however, debarred from relying on (private) sources of information, which sources he may not disclose to the assessed at all; (d) in case he proposes to use against the assessee the result of any (Private) inquiries made by him he must communicate to the assessee the substance of the information so proposed to be utilised to such an extent as to put the assessee in possession of full particulars of the case he is expected to meet and should further give him ample opportunity to meet it, if possible."
7. A five‑member Bench of the Supreme Court of India, a decade thereafter on October 29, 1954 in re: Dhakeswari Cotton Mills Ltd. v. Commissioner of Income‑tax West Bengal (1954) 26 ITR 775 adopted the ratio settled by this Court in the said case, that rule on the subject had rightly been stated by this Court in the said case. Their Lordships observed:‑‑‑
"In making an assessment under section 23(3) of the Indian Income Tax Act, the Income‑tax Officer is not fettered by technical rules of evidence and pleadings, and he is entitled to act on material which may not be accepted as evidence in a Court of law, but the income- tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment under section 23(3). The rule of law on this subject has been fairly and rightly stated by the Lahore High Court in the case of Seth Gurmukh Singh v. Commissioner of Income‑tax, Punjab (1944) 12 ITR 393. "
8. Learned counsel for the assessee has cited a number of judgments which are in fact a further elucidation of the view taken by this Court in the said case re: Seth Gurmukh Singh (Supra).
9. In the first case re: R.B. Jessaram Fatehchand v. Commissioner of Income‑tax, Bombay City‑II (1974) 29 Tax 161 it was inter alia observed that in the case of cash transactions where delivery of goods is taken against cash payment it was not the assessee or the seller to bother about the particulars of the purchaser and, therefore, the accounts could not be rejected merely on that ground.
10. The regularity of maintenance of accounts in a particular manner and their impact was considered in re: Commissioner of Income Tax (West Zone) Karachi v. Fateh Textile Mills Ltd. 1994 PTD 218. In that case it was also observed that accounts regularly maintained in a particular manner could not be rejected in a summary manner or on the generalised statement like lowness of gross profit. The Karachi High Court in the other case reported as re: Messrs Karachi Textile Dyeing and Printing Works Karachi v. The Commissioner of Income‑tax (Central) Karachi 1984 PTD 150 re affirmed the rule in re: Seth Gurmukh Singh and another supra) that rule of justice demanded that before any adverse order was passed against a party he should be afforded full opportunity to meet the case and rebut evidence used against him even though it was true that technicalities of Evidence Act, 1872 did not fetter powers of an Assessing Officer. Earlier the Court had noted that assessee doing business of printing cloth and manufacturing of silk fabrics was regularly maintaining registers prescribed by Excise Rules showing production, manufacture and consumption. In the view of the learned Division Bench of the Court an opinion formed by the Assessing Officer that record maintained according to the Excise Regulations did not satisfy requirement of income tax could not be a basis for rejection of accounts unless for cogent end convincing reasons he came to definite finding that from such accounts proper gains and profit could not be deduced. The view of the Karachi High Court as exposed in re: S.M. Yousuf & Brothers v. Commissioner of Income‑tax 1974 PTD 45 was based upon a judgment of the Supreme Court of India in Re: Pand'i Brothers v. Commissioner of Income‑tax Delhi (1954) 26 ITR 159 wherein their Lordships observed that in all cases which fall under section 13 of the Indian Income‑tax Act, 1922 there must be material before the I.T.O. to lead him to the conclusion that the method employed is defective. The learned Division Bench of the Karachi High Court very aptly observed that in the kind of cases the proportion of unvouched and unverifiable cash sales to the total cash had to be seen before reaching a conclusion that accounts did not inspire confidence. In the view of their Lordships "Unless such proportion is substantial, that is such proportion as to create doubts with regard to the genuineness of the assessee's accounts, it may not ordinarily be proper to reject outright the results of the books of the accounts with regard to unverified cash sales or unverified cash expenses".
11. In the case in hand, as the trend of the question proposed by the assessee indicates the assessee had all along been stressing that even the small proportion of cash sales could be established had the Assessing Officer allowed him an opportunity to do so. It will be seen that the Assessing Officer did not make any inquiry outside the books of accounts as submitted by the assessee and proceeded to reject them for the defects pointed out therefrom. As earlier said the defects being that some of the cash sales were not properly verifiable. Therefore, irrespective of the claim of the assessee that these transactions were verifiable it is noted that the learned Tribunal found the amount of so‑called unverifiable cash sales to be small. From the order of the Tribunal and even while making the reference, the learned Tribunal has not further elaborated their concept of the proportion which could be taken to be large or small in the perspective of the other declared results. Therefore, while respectfully agreeing with the observation of our learned brothers in re: S.M. Yousaf & Brothers (Supra) we will conclude that unless the unverifiable portion of the cash sales was substantial and such proportion was sufficient to create doubts with regard to the genuineness of the assessee's account, these could not have been rejected outrightly. The Assessing Officer never confronted the assessee with the alleged incomplete address of the cash purchasers. Both the C.I.T. (Appeals) as well as the learned Tribunal found the estimation made after rejecting of the accounts to be on the higher side. None of them, it appears, gave a serious thought to the contention of the assessee that he was concerned more with the acceptance of the accounts rather than a decrease in the estimation of the sales. The case of the assessee also needed to be considered on the plane that in the earlier as well as in the subsequent years its declared results had been accepted. It has never been the case of the revenue that the assessee adopted a different method of accounting during the three years involved or that .it was so different from the earlier and subsequent method that profits and gains for the purpose of various provisions of the Ordinance could not be computed therefrom.
Therefore, our answer to the aforesaid questions in the negative.
The Registrar shall send a copy of this judgment under the seal of the Court and his signature to the concerned Bench of the Income‑tax Appellate Tribunal.
C.M.A./M.A.K./B‑37/LQuestions answered.