INDUS TEXTILE MILLS LTD vs COMMISSIOENR OF INCOME-TAX

1. ' SALEEM AKHTAR, J.--The applicants are manufacturers of cotton yarn. During the assessment year 1971-72 the Assessing Officer made an addition of Rs,5,01,414 as the value of 177,178 lbs. Of yarn Rs,2.83 per lb. This addition was in consequence of the rejection of the book version by the Income Tax Officer who came to the conclusion that invisible wastage was inflated and production was suppressed. In appeal the Appellate Assistant Commissioner considered that the claim of invisible wastage was on the heavier side but he reduced the estimated quantity of the suppressed yarn production to 10,04,319 lbs. Therefore, the addition of Rs,501,417 was reduced to Rs,293,420. The Income Tax Officer and the Appellate Assistant Commissioner had noted that day to day wastage record was not maintained and that the value of the stocks had remained invisible. In appeal the Tribunal upheld the order of the Appellate Assistant Commissioner. The applicants filed an application under section 66 (1) of the Income Tax Act and the following question has been referred:- "Whether on the facts and in the circumstances of the case the learned Tribunal came to correct conclusion in upholding the action of the Assessing Officer in rejecting the books of accounts by pressing into service the provisions of section 13 and section 13-A of the Income Tax Act?"

2. ' The Income Tax Officer while examining the accounts of the applicants observed that there were discrepancies in the data about production of yarn. The applicants had shown visible wastage at 15%29 and invisible wastage at 2.84%. The Assessing Officer observed that the invisible wastage was on the high side. The applicants were served with notice under section 23 (3) of the Income Tax Act and were called upon to explain the invisible wastage and also furnish details of wastage in the blow room, carding section, drawing to ring section etc. They were also required to produce stagewise production record. The applicants replied that owing to expansion of the mill the old air- conditioner-cum-humidifier provided insufficient cover to the large area as such the atmospheric condition became adverse which affected the working of the mills and also resulted in increase of wastage due to concentrate dryness. The slightly higher invisible wastage was also due to trial production of the new spindles and storage of cotton in open yard without any shelter as requirements of cotton had increased due to installation of new unit. These reasons were treated as general in nature and were rejected. The applicants, however, furnished details of wastage in the blow room, carding section, drawing and ring and invisible waste was calculated at 2.84 %.

3. According to the Assessing Officer the invisible wastage in the last year was86%. The accounts were therefore, rejected. The undisputed facts are that during the past years the applicants had maintained accounts in the similar manner as in the present one and the same were accepted to be correct and assessm ents were accordingly made. In the present case the main ground for rejection of the accounts is that stagewise record of wastage has not been produced, nor any stagewise production register was prepared to show the production.

4. ' Mr. Iqbal Naeem Pasha the learned counsel for the applicants has contended that as no defect has been pointed out in the account books and further that as in the past account books as in the present one were maintained and accepted and that no stagewise wastage as desired by the Assessing Officer could possibly be prepared, the books of account could not have been rejected and resort to the provisions of sections 13 and 13-A was not legal. The learned counsel has referred to Messrs Karachi Textile Dyeing and Printing Works, Karachi v. The Commissioner of Income Tax (Central), Karachi 1984 P.T.D. 150, Dr. Col. Said Ahmed v.. The Commissioner of Income TAx (Central), Karachi 1984 PTD 182, Messrs Pakistan Oil Mills Ltd., Hyderabad v. The Commissioner of Income Tax (West), Karachi 1985 PTD 320, Messrs Paracha Textile Mills Ltd., Karachi v. The Commissioner of Income Tax Central, Karachi 1988 PTD 332 and Messrs Kruddsons Limited, S.I.T.E, Karachi v. Commissioner of Income Tax 'A' Zone, Karachi. In all these authorities, it has been held that where account has been maintained properly and accepted during the past, if account in similar manner is maintained then without pointing out to any defect, fault or incorrectness it should not be rejected. It has further been observed that where a particular sort of document is not possible to maintain merely in its absence the account cannot be rejected. Applying the principles of these judgments we find that the record o stagewise production and stagewise wastage had not been maintained in the past and such document according to the applicants are not possible to maintain in the line of trade they are engaged in.

5. ' Mrs. Rashida Patel the learned counsel for the Department has contended that invisible wastage has not been proved properly and as the wastage of the previous years has been much less than the one declared in the year under consideration, the Income Tax Officer was justified in rejecting it.

6. The reasons for higher invisible wastage were given by the applicants but they were rejected by a cursory remark that they are of general nature and no effort was made at any stage to examine it and also to hold that the explanation of the applicants were not correct or that even due to these reasons there could not have been such huge invisible wastage. The accounts can be rejected if there are substantial mistakes and discrepancies due to which it is not possible for the Assessing Authority to correctly and clearly determine the income of the assessee. The learned counsel for the Department has referred C.I.T. v. Harendra Kumar Sil 1983 PTD 87 a case from Supreme Court of Bangladesh, but it is completely distinguishable as the records produced before the I.T.O. Were not sufficient to prove the claim of the assessee. Reference has also been made to M/s. Nisar Industries's case PLD 1967 Kar. 561 where the assessee was manufacturer of plastic goods.

7. Although the accounts were regularly maintained, the manufacturing account giving quantitative reconciliation was not maintained by the assessee. Therefore, it was held that as the profit of assessee cannot be deduced from such account, the Income Tax Officer could resort to proviso to section 13 and make assessm ent according to his judgment. It was observed that "the mere fact that an assessee provides a plausible set of regularly kept accounts cannot make the Income-tax Officer powerless to do any thing about the profits shown therein. It is open in such cases also to the Income-tax Officer, if he comes to the conclusion, that it is not possible to deduce correctly the income, profits and gains from them to assess the assessee according to his judgment". The criteria therefore, laid down is that if from the properly kept account it is not possible to deduce the profit and income of the assessee from it, the assessing officer can reject the same. However, the Assessing Officer should not insist nor base his finding on the non-maintenance C of record of such particulars and data which possibly cannot be maintained in a particular trade or business. It may be noted that the applicants had maintained all the records as required by the Excise Duty Laws. In this view of the matter as the stagewise production and stagewise record could not be produced which was not possible to prepare in the manner required by the Assessing Officer he was not justified in rejecting the accounts of the applicant.

8. ' We therefore, answer the question in the negative.