MIAN ABDUL RAHIM & SONS Versus COMMISSIONER OF INCOME
ORDER
MUHAMMAD AKRAM, J.‑ ‑‑This Is a petition for reference made to this Court under section 66(1) of the Income‑tax Act, 1922 (as amended).
2. The petitioner‑assessee is a manufacturer of electric fans and motors. The assessee filed the return under the self -assessment scheme declaring an Income of Rs. 20,338 for the assessment year 1969‑70. But the Income‑tax, Officer, Gujrat rejected the return and proceeded to make the assessment against the petitioner under the normal law. He was of the opinion that the assessee's accounts were unreliable, and found that the margin of profit of 27.4 percent disclosed by the petitioner on the declared sales of Rs. 2,84,661 was too low as compared to the rate of 33‑1/3 per cent. applied in parallel cases. He observed that the assessee had in all utilized 8600 ball- bearings and this should be given an output of 4300 manufactur ed fans at the rate of two ball‑bearings used in a fan. But according to the assessee it had manufactured 2217 ceiling fans, 613 table fang, 12 pedestal fans and 204 electric motors in all. In this manner in the opinion of the Income‑tax Officer the assessee failed to account for 2083 fans out of the total estimated fans manufactured by it during the year. In this connection the Income‑tax Officer refused to accept the conten tion advanced by the assessee to the effect that there was a considerable short fall in the ball‑bearings due to wastage and losses In the process of manufacture. The Income‑tax Officer also observed that most of sales were unverifiable. Taking all these factors into consideration he made an addition of Rs. 2,65,000 representing the price of 2083 unaccounted fans at the rate of Rs. 5,49,661 and estimated the gross profits at Rs. 1,83,000. He made a further addition of Rs. 25,244 on account of the inflation in the opening stocks of ball‑bearings and the consequential suppression of the gross profits to this extent. The petitioner was dissatisfied with the order passed by the Income‑tax Officer and went up in appeal against it. The Appellate Assistant Commissioner in principle agreed with the order of rejection of the accounts of the assessee. He found that the rate of gross profit at 33‑1/3 % applied by the Income‑tax Officer was reasonable. He, however, reduced the estimated sales by Rs. 2,03.000 and also deleted Rs. 25,244 added on account of the inflation in the opening stocks. He further agreed with the Income‑tax Officer in finding that the sales of the raw material were fictitious.
3. The assessee then filed a second appeal against the order. This was disposed of by the Income‑tax Appellate Tribunal (Peshawar Bench), camp Rawalpindi on the 22nd of September 1971. The operative part of its order is reproduced, below :‑----
"We have considered the facts and the submissions made and maintain that the accounts were rejected on the grounds of non‑maintenance of a day‑to‑day manufacturing account and the un‑verifiability of all the sales. The wastage claim at 20 % is certainly excessive as compared to that of the preceding assess ment year shown at 10% only in spite of a return accepted under the self‑assessment scheme. The assessee has failed to explain even before us this excessive rate of wastage. We are not Impressed by the argument of the assesseee's import contents being so substantially poorer than those of the earlier year so as to result in such higher rate of wastage than that year. Considering the facts of the case, we think it would be fair to allow a wastage of ball‑bearings at 10 % only as in the preceding year. The Income‑tax Officer is, accordingly', directed to make addition for the unaccounted for sale of fans on the balance of 10 % claim of wastage to be disallowed. We consider a gross profit rate of 30% to be fair. This will replace the rate of profit adopted at 33‑1/3 %.
The Tribunal further rejected the objection of the assessee against the application of the gross profit rate of 33‑1/3 on the sale of raw material at Rs. 40,000, and agreed with the finding by the Appellate Assistant Commissioner, to the effect that the sale was entirely fictitious.
4. Hence this application by the petitioner made to the High Court for reference of the following questions of law said to arise out of the order of the Tribunal :‑
(1) Whether there was material authorizing the Income‑tax Tribunal to hold the sale of fans as unacounted for on the basis of excessive claims of shortage in respect of ball-bearings ?
(2) Whether on the facts and in the circumstances of the case and the material before it the Appellate Tribunal was justified in holding sales amounting to Rs. 40,000 as fictitious sales, and holding the application of gross profit rate 33‑1/3 thereon ?
5. We have heard the learned counsel for the petitioner. In this case the Income‑tax Officer rejected the self‑assessment return and proceeded to make the assessment against the petitioner under the ordinary law. Any objection against this course adopted by him was eventually dropped by the assessee at the hearing in appeal before the Appellate Assistant Commis sioner. The Income‑tax Officer rejected the assessee's version of the accounts. He was of the opinion that the gross profit rate of Rs. 27.4 % disclosed by the assessee on the declared sales of Rs. 2,84,661 was very low as compared to the rate applied in parallel cases at 33‑1/3%. The petitioner did not maintain any day‑to‑day details of the consumption of raw materials and the output of the finished products. The opening stocks were found to be over‑valued. A part of the local purchases were unverifiable. The declared sales were considered to be very low as compared to the capital investment. In the opinion of the Income‑tax Officer the consumption of raw materials and the production of the finished goods were suppressed by the assessee. The petitioner utilized 8600 ball- bearing during the year. This according to the Income‑tax Officer should give an estimated output of 4300 manufactured fans. But out of these the petitioner did not account for 2083 fans manufactured by it. The assessee explained that the shortage in the ball‑bearings was on account of their losses and wastage in the manufacturing process of the fans. But the percentage of this loss claimed at about 23 % was found to be higher than that allowed in the preceding assessment year at 10 % only. In this connection the Tribunal was not impressed with the contention advanced by the assessee to the effect that these imported ball‑bearing were substantially poorer in quality. In the circumstances the Tribunal allowed the wastage of ball‑bearings to the petitioner at 10 % only and reduced the gross profit rate on the estimated sale of the fans to 30 instead of 33‑1/3 % applied by the authorities below on the basis of other parallel cases. All these conclusions were based on evidence.
6. After hearing the learned counsel for the petitioner we are satisfied that the order of the Tribunal is concluded by these findings of fact aid no question of law at all arises from it. The claim of the assessee for the excessive shortage and wastage of the ball‑bearings in the manufacturing process of the fans for this year was disallowed by the Tribunal. The Income‑tax authorities were justified in inferring from the proved facts before them that the assessee has suppressed the number of the fans manufactured by it. The Tribunal allowed 10 % shortage and wastage of the ball bearing as in the preceding year. Therefore it cannot be successfully argued that before the Tribunal there was no basis for the conclusions forming the basis of question No.1 or that its order is arbitrary, perverse and capricious and was based on conjectures.
7. On examination of the cash memos the Income‑tax Officer observed that most the sales were of unverifiable nature and he even cited instances to this effect in his order. In this connection on appeal the Appellate Assistant Commissioner held that the Income‑tax Officer was quite justified fn viewing with suspicion the large cash sales made by the assessee to untraceable parties. On scrutiny he doubted the genuineness of the cash memo for the alleged sale of goods worth Rs. 40,000 on 1‑7‑1968 and observed that :‑
"This sale has been made to a unknown party. It 1s surpris ing that it includes 1000 ball‑bearings, an item which was in very short supply and which the assessee in his book has valued at Rs. 4 per piece. This alleged sales of Rs. 40,000 is unquestionably fictitious."
This inference was legitimately drawn by the Tribunal in the circumstances of the case from proved facts. We cannot, therefore, hold that under question No. 2 proposed above any issue of law at all arises out of the order passed by the Tribunal.
8. Nevertheless before us the learned counsel for the petitioner has ventured to argue that an inference drawn from facts is necessarily a question of law. In this connection he has relied on certain observations of their Lordships of the Supreme Court in N. M. Khan and another v. The Chief Settlement and Rehabilitation Commissioner, Pakistan, Lahore (119905 SCMR158). In that case on revision the Settlement and Rehabilitation Commissioner had transferred the two bungalows bearing Nos. 45 and 47 Empress Road, Lahore to Mr. N. M. Khan as a single indivisible unit. The order was affirmed in second revision by the Chief Settlement Commissioner. But the two orders were quashed by the High Court under Article 98 of the Constitution of 1962 and the decision was affirmed on appeal by the Supreme Court. In that connection their Lordships of the Supreme Court observed that :‑----
"The circumstance that the houses' are situate close to each other and that they belong to the same owner, are the two facts which seem to have weighed with the Settlement and Rehabilitation Commissioner and the Chief Settlement Commissioner for the inference that one was an annexe to the other. This inference, by no means, follows from the established facts. It would indeed be surprising if house No. 47 which existed prior to the construction of house No. 45 could be annexe to it. If at all, house No. 45 might have been annexe to an older house but certainly not to house No. 45 from which it was separated by a nullah and a fencing. It would be flying in the face of facts, therefore, to treat the two houses as one unit, as the learned Settlement and Rehabilitation Commissioner and the Chief Settlement Commissioner appear to have done. They had no material before them for coming to this finding at all. Their conclusion was inferential from certain facts which cannot sustain that conclusion, in the circumstances of this case. The question whether an inference follows from certain facts or not is a question of law and on this question these two learned officers appear to have misdirected themselves, having regard to the ample material which led to the conclusion opposite to that which they adopted and which they seem to have by‑passed. They have failed to refer to that material which was pertinent and cogent enough to demolish the assumption of unity between houses 45 and 47."
In conclusion the Supreme Court in that case held that the view that prevailed with the Settlement Authorities having been Influenced by an erroneous deduction from facts which manifestly could not support such an inference, reduced their decision to an arbitrary and illegal exercise of power and threw it open to review in writ jurisdiction by the High Court. In that case their Lordships of the Supreme Court were satisfied that the two Settlement authorities had no material for holding that the two bungalows in question constituted one indivisible house and held that it would be flying in the face of facts to hold the two houses as one unit. In the opinion of the Supreme Court manifestly the inference drawn by the Settle ment authorities could not be supported by any evidence. It was in these circumstances that the Supreme Court observed that :‑
"The question whether an inference follows from certain facts or not is a question of law."
In our respectful opinion these remarks must be construed in the light of the facts found in that case. Otherwise they do not go to lay down any unqualified general statement of law.
9. On the other hand there is the case of Malik Muhammad Hayat Khan v. Subedas Yar Muhammad Khan (PLD1866SC612) in which their Lordships of the Supreme Court observed that when an inference is to be drawn as to a question of fact then whether the inference is drawn from oral evidence or from documents It is always a question of fact. These remarks must be construed as confined to the facts found in that case. In our respectful opinion the true test is that an inference of fact would be a question oil fact or law according as the point for determination is one of pure fact not dependent on the application of any principle of law or a mixed question of law and fact based on its application. Each case must be judged in the light of this test and the cases from the Supreme Court of Pakistan on the two extremes fully illustrate this proposition.
10. In this connection in Sree Meenakshi Mills Limited v. Commissioner of Income‑tax, Madras ((1957) 31 I T R 28), the Supreme Court of India observed that :‑--
"Where an ultimate finding on an issue is an inference to be drawn from the facts found, on the application of any principles of law, there is a mixed question of law and fact, and the Inference from the facts found is in such a case. a question of law. But where the final determination of the issue equally with the finding or ascertainment of the basic facts does not involve the application of any principle of law, an inference from the facts cannot be regarded as one of law. The proposition that an inference from the facts is one of law is therefore correct in its application to mixed questions of law and fact, but not to pure questions of fact. In the case of pure questions of fact an inference from the facts is as much a question of fact as the evidence of the facts."
Similarly in another case in Oriental Investment Co. Ltd. v. Commissioner of Income‑tax, Bombay ((1957) 32 I T R 664), the Supreme Court of India again held that an inference from facts would be a question of fact or a question of law according as the point for determination is one of pure fact or a mixed question of law and fact. A finding of fact without evidence to support ft or based on relevant and irrelevant matter is not unassail able.
11. For the foregoing reasons, we find that the impugned order passed by the Tribunal is concluded by findings of fact and no question of law arises therefrom. This petition is, therefore, incompetent and is dismissed in limine.
Petition dismissed.