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1985 SLD 149 Equiv. Citation: 1985 SCMR 786 = (1985)51 TAX 181 = =

Civil Appeals Nos. 181 and 182 of 1972, decided on 13th February, 1985. Date of
hearing: 30th January, 1985

(On appeal from the Order dated 12-1-1972 of Lahore High Court, Lahore, in
P.T.R.248 and P.T.R. 249 of 1971 respectively.)

SUPREME COURT OF PAKISTAN

Present: Aslam Riaz Hussain, Muhammad Afzal Zullah and Mian Burhanuddin
Khan, JJ

Muhammad Amin Butt, Advocate Supreme Court and Rana Maqbool Ahmad Qadri,
Advocate-on-Record for Appellant. Ch. Fazal-e-Hussain, Advocate-on-Record and
Muhammad Ishaq, Advocate Supreme Court for Respondent

Messrs PAK COMPANY, SARGODHA‑‑Appellant

vs
THE COMMISSIONER OF INCOME‑TAX, RAWALPINDI ZONE‑‑Respondent

Law: Income Tax Act (XI of 1922)

Sections: 13, 22(4), 23(4)
Law: Constitution of Pakistan, 1973
Sections: 185(3)

JUDGMENT

MUHAMMAD AFZAL ZULLAH, J.‑‑These two appeals through special leave of this Court are
directed against judgment dated 12‑1‑1972 of the Lahore High Court; whereby two
petitions filed by the appellant firm under section 66(2) of the Income‑tax Act, 1922, were
dismissed in limine.

The appellant firm had submitted Income‑tax Return for assessment year 1965‑66. It was
not yet finalised when the Income‑tax Inspector visited its premises in January, 1970 and
found the "dasti books" (Parallel Books, of accounts as distinguished from Regular Books of
accounts) for the calendar year 1970. He made inquiry with regard to similar books for the
calendar year 1969. The answer rendered by the firm then was that although there were
some such books maintained for the calendar year 1969, after making use thereof by
carrying the last entries there from to the opening entries of such books for 1970, the
1969 books had been destroyed. The Income‑tax Officer did not accept the explanation
and when the occasion came for determining the income for the assessment year 1965‑66
.(in February, 1970) he issued notices for the production of the Dasti Books‑.assumed to
have been maintained for earlier years. No such books were produced by the appellant
firm. He then made an assessment under section 23(4) of the Income‑tax Act treating it as
a case of default/failure by the assessee to produce the "dasti books". The Income‑tax
Officer had assumed that the appellant did maintain the said books for calendar year
ending on 31st December, 1964 as well, which was admittedly relevant for the assessment
year 1965‑66. The appellant's plea was that the said books were not then (in 1964)

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maintained by them and thus were unable to produce them. The Income‑tax Officer
disbelieved the position taken by the appellant firm regarding the maintenance of "dasti
books" for the calendar year 1964 and consequently not only made the so‑called penal
assessment on "best judgment" under section 23(4) of the Act but also under the same
provision read with section 26‑A of the Act imposed the penalty of refusal to renew the
registration of the firm.

The appellant challenged the assessment as well as the refusal to register, in higher
forums but without any success. Ultimately the matter having been brought before the
High Court under section 66(2) of the Income‑tax Act, the orders of the Income‑tax Officer
were maintained. In these circumstances and background leave to appeal wasi granted to
examine the argument that the presumption raised against the appellant to the effect that
it was in possession of the "dasti books" relating to calendar year 1964, in January, 1970,
was based on no evidence and that the "best judgment" assessment under section 23(4)
of the Act and the consequential refusal to renew the registrations of the firm under the
Act, were illegal.

Learned counsel has taken us through the relevant provisions section 13, 22(4), 23(3) and
23(4) of the Income‑tax Act, 1922 as amended up to the relevant time. They read as
follows:

"13. Method of Accounting. ‑‑Income, profits and gains shall be computed, or the purposes
of sections 10 and 12, in accordance with the method of accounting regularly employed by
the assessee:

Provided that, if no method of accounting has been regularly employed, or if the method
employed is such that, in the opinion of the Income‑tax Officer, the income, profits and
gains cannot properly be deducted there from, then the computation shall be made upon
such basis and in such manner as the Income‑tax Officer may determine:

Provided further that the Central Board of Revenue may, in the case of any person, or class
of persons, require such person or class of persons to maintain accounts, or prescribe the
method of accounting to be employed by such person or class of persons, or the manner in
which payments or commercial transactions should be made or recorded, and in such an
event, the income, profits and gains of the assessee shall be computed on the basis of the
books, accounts, or records maintained accordingly;

Explanation.‑‑The expression "method of accounting", as used in this section, includes the

language or script employed, or to be employed, by an assessee for the purposes of
maintaining his accounts.

"22. Return of income ... ...

(2) ...... ...

(3) ...

(4) The Income‑tax Officer may serve on any person who has made a return under
subsection (1) or upon whom a notice has been served under subsection (2) a notice
requiring him, on a date to be therein specified, to produce, or cause to be produced, such

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accounts or documents including accounts or documents relating to any period prior or
subsequent to the previous year as the Income‑tax Officer may require:

Provided that the Income‑tax Officer shall not require the production of any accounts
relating to a period more than three years prior to the previous year.

"23. Assessment. (1)......

(2) ……..

(3) On the day specified in the notice issued under subsection (2), or as soon afterwards
as may be, the Income‑tax Officer after hearing such evidence as such person may
produce and such other evidence as the Income‑tax Officer may require, on specified
points, shall, by an order in writing, assess the total income of the assessee, and
determine the sum payable by him on the basis of such assessment.

(4) If any person fails to make the return required by any notice given under subsection
(2) of section 22 and has not made a return or a revised return under subsection (3) of
the same section, or fails to comply with all the terms of a notice issued under subsection
(4) or subsection (4A) of the same section or, having made a return, fails to comply with
all the terms of a notice under subsection (2) of this section, the Income‑tax Officer shall
make the assessment to the best of his judgment and determine the sum payable by the
assessee on the basis of such assessment and, in the case of a firm, may refuse to register
it or may cancel its registration if it is already registered:

Provided that the registration of a firm shall not be cancelled until fourteen days have
elapsed from the issue of a notice by the Income‑tax Officer to the firm intimating his
intention to cancel its registration."

Learned counsel took us through the reasoning and findings by the Income‑tax Authorities.
We have also perused the discussion on the disputed questions in the impugned judgment
by the High Court.

Although the learned counsel, to start with, tried to project the appellant's case as pleaded
before the Income‑tax Officer that no "dasti books" were maintained for the calendar year
1964, he during the arguments gave up this position as according to him the appellant
while denying the allegation was no more interested in challenging the course adopted by
the Income‑tax Officer for making the assessment as it is on his "best judgment". The
concession is further justified for the reason that the learned counsel appearing for the
appellant before the Income‑tax Appellate Tribunal has also made the following
concession:

"As a matter of fact, while arguing the application the learned counsel conceded that Dasti
Day Books were being maintained from year to year, but that the Dasti Day Book for the
Assessment Year 1965‑66 had not been preserved till the day when the assessee was
called upon to produce it in the month of February, 1970."

Even if we were to ignore this concession on facts, due to the disclaimer made by the
learned counsel for the appellant in the grounds of the petition in the High Court, it will not
be possible to hold after going through the relevant record that there was no evidence to

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show that the appellant maintained such books for the calendar year 1964. That factual
aspect has thus been settled. The controversy for further examination therefore is now
confined only to two questions raised by the learned counsel for the appellant:‑

One, The fact that the appellant had maintained the Dasti Day Book for the calendar year
1964 was not by itself the proof of the fact that it was available with the appellant in 1970
when the firm was called upon to produce the same. On this point there being no direct
evidence, learned counsel argued the presumption raised against the appellant was
without any material and thus unlawful. He relied in this behalf on House of Lords'
judgment in Edwards (H.M. Inspector of Taxes) v. Bairstow & Harrison (36 Tax Cases 207).

Two, That the operative action to be taken by the Income‑tax Off‑icer under section 23(4)
could be in two parts:

Firstly, to make assessment on the basis of "best judgment" on account of the mandate of
law ‑ he had no choice not to do so: and,

‑‑Secondly, to examine, in his discretion, whether the assessee should or should not be
denied the right to registration because while with regard to the first action the command
of law is couched in the word "shall", regarding the second the word used is "may".

In this case according to the learned counsel the Income‑tax Officer and all other higher
forums assumed that the second action was also to follow necessarily after the first action;
as if it was mandatory under the law. It being, as contended, in the nature of a punishing
provision had not only to be construed strictly but also had to be applied on the basis of
reasons to be recorded, by application of independent mind to all relevant factors in this
behalf, after the assessment of total income on 'best judgment'. No comment having been
made in this behalf by the Income‑Tax Authorities, it was further argued, the High Court
should have rendered an answer favourable to the appellant in so far as the question of
registration is concerned. Learned counsel has relied on: Commissioner of Income‑Tax,
North Zone Lahore v. Warris Silk Weaving & Knitting Mills, Gujranwala P L D "1973 Lah.
870 and J.M. Sheth v. Commissioner of Income‑tax, Madras 1964 (54) I.T.R. 293.

Learned counsel for the Income‑tax Department (respondent herein) has in reply, besides
relying on the concession made by the learned counsel for the appellant before the
Income‑tax Tribunal contended that the findings of fact reached by Income‑tax Authorities
regarding the maintenance and availability of the concerned books for the calendar year
1964 were based upon evidence consisting of established facts from which only necessary
conclusions have been drawn. According to him if it is held that the appellant did maintain
the "dasti books" for the calendar year 1964 up to 1970 it would be unimaginable to
assume that the Firm would have destroyed them before 1970 particularly when the
Income‑tax assessment had not been finalised for this entire period, till 1970. According to
him contrary to what the learned counsel .for the appellant assumed in this behalf (that it
will be injurious to the interest of the appellant to preserve such books as, when
discovered, they could be utilised against them by the Income‑tax Authorities) keeping in
view the common business sense, these books would have been preserved, though
clandestinely, so that if need arose for income tax purposes or other purposes including
dealings with other parties/ persons/partners they may be utilised. In any case according
to him it being a question of fact and proper inferences having been drawn in a lawful

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manner this Court would not ordinarily interfere with such a finding.

Regarding the question of law about application of mind and reasons to be recorded for
exercise of discretion on the question of registration learned counsel for the respondent
relied on the following reasoning of the High Court in the impugned judgment:

"The fact remains that section. 23(4) is penal in nature and gives consequences of
non‑compliance with the provisions of the earlier parts of the same section. If a provision
of law provides the sentence of imprisonment and gives the discretion to the Court to also
impose fine, it does not mean that the Court proceeding to impose both has to give
reasons separately for the imposition of the sentence of imprisonment and also separate
reasons for imposing fine. In this particular case, the petitioner had been informed of the
results that would follow in case he refused to comply with the notice. No grievance can,
therefore, be made out of the exercise of, what has been admittedly called, a discretion
against the petitioner."

The learned counsel for the appellant when addressing arguments on the question of it
being a case of "no evidence" contended that although the Evidence Act, was not
applicable to the proceedings under the Income‑tax Act, 1922, there is nothing to prevent
the Court from adopting the principles underlying provisions of the Evidence Act if
otherwise relevant. In fact the position adopted by him in this behalf gets some support
from the English case cited by him of Bairstow & Horrison already noticed. Otherwise too
evidence not Paving been defined in the Income‑Tax Act when an argument is raised that
the decision of a certain authority is based on "no evidence", the general accepted
principles in this behalf would have to be adopted.

Although what the income‑tax Officer relied upon for rendering a finding that the appellant
was in possession of the relevant books for the calendar year 1964, might not strictly
speaking fall within the definition of "evidence" as contained in section 3 of the Evidence
Act, it would definitely be covered by the definition of "proof"; which provides that "a fact
is said to be proved when, after considering the matters before it, the Court either believes
it to exist, or considers its existence so probable that a prudent man ought, under the
circumstances of the particular case, to act upon the supposition that it exists". The
Income tax Officer relying on the conduct of the appellant already noted, in the peculiar
circumstances of this case, adopted a course, which it is not possible to hold, could not at
all be adopted by a prudent man, as the one based on probabilities. Thus .even if the
Evidence Act would have been applicable, the findings against the appellant with regard
not only to the maintenance of the relevant books but also their availability in 1970, could
not be treated as unlawful or without any basis. It is however clarified that it will always
depend upon the circumstances of each case and essentially being a question of finding of
fact, this Court would ordinarily not interfere with such finding. particularly when, as in this
case, they have been upheld by the High Court. Thus this part of the controversy stands
concluded on the general basis namely that this Court would not interfere with the finding
of fact by the Income‑tax Officer with regard to the availability of the concerned books at
the relevant time.

The other question relates to the interpretation of section 23(4) regarding the action to be
taken by the Income‑tax Officer on such a finding. With respect. we do not agree with the
learned Judges of the High Court that all the aspects of the consequential action taken
under section 23(4) are to follow as punishment, The assessment by the income‑tax
Officer on "best judgment". has in any case to be fair as it should normally be. The

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selection of the word 'judgment' and that too 'best' is not without significance. The
Income‑tax Officer has to make a fair assessment under the said provision, through his
"best judgment", simply because the relevant material has not been produced by the
assessee. But he has no power to make the assessment as a penalty, at a higher amount
than what, in his best judgment, as a fair act it should be. Therefore this part of his power
is an ordinary power of assessment though in a somewhat different context and manner. It
is on account of this underlying rationale that the Income‑tax Officer has been bound down
by the provision itself to make the assessment in accordance with his "best" judgment. He
has no discretion in this behalf.

Before passing on to the next question it needs to be clarified that it is not every failure to
produce the demanded material that will entail the above consequence. Only wilful failure
is meant. For example cases of damage or loss by theft or otherwise as held in the case of
Warris Silk Weaving & Knitting Mills would not be covered by this provision.

'' It also needs to be emphasised that assessment on "best judgment" I under this
provision was never intended to be a retaliatory, vindictive. capricious or even arbitrary.
There is mass of case law on this point. It will however suffice to reproduce here its
summing up by V . V . Chitaley in the A I R Manual, 2nd Edition, Vol. VIII Point No.6(1)
under the head 'Best judgment' at page 407 as follows ‑

"6. Best judgment assessment‑‑Subsection (4).‑‑(1) Under S.23(4), the officer is to make
an assessment to the best of his judgment against a person who is in default as regards
supplying information. He must not act dishonestly, or vindictively or capriciously because
he must exercise judgment in the matter. He must make what he honestly believes to be a
fair estimate of the proper figure of assessment, and for this purpose, he must be able to
take into consideration local knowledge and repute in regard to the assessee's
circumstances, and his own knowledge of previous returns by and assessments of the
assessee, and all other matters which he thinks will assist him in arriving at a fair and
proper estimate; and though there must necessarily be` guess work in the matter, it must
be honest guess work."

It is further added that the so‑called "guess work" as already, explained cannot be
otherwise than that of a 'prudent man' and that too on the basis in cases where "evidence"
is not at all available, of necessary probabilities. The cases cited by the authors in this
behalf are: "1937 P C 133 (A I R V 24): 1 L R Nag. 191: 64 Ind. App. 102: 31 Sind L R
284:, 1957 Pat. 467 (A I R V 44 C 140): 36 Pat. 886: '955 Trav‑Co. 67(67) ((S) A I R V 42
C 26): I L R" Trav‑Co. 1022 1952 Pat. 235 (A I R V 39): 31 Pat. 246 (Case under S.10(4),
Bihar Sales Tax Act, 6 of 1944, which is analogous to S. 23(4), Income‑tax Act‑‑AIR 1937 P
C 133, Foll,) : 1926 Lah. 233 (A I R V 13): 1931 Lah. 87 AIR V 18) 12 Lah 129: 1933
Oudh 396 (A I R N' 20): 9 Luck 85. (An Income‑tax Officer does not possess absolute
arbitrary authority to assess at any figure he likes, and although he is not bound by strict
judicial principles, he should be guided by the rules of justice, equity and good
conscience.) (A I R 1934 Nag. 183) (A I R V 21): 31 Nag. L R 32 : 1938 Lah. 867 (A I R V
25) : 1 L R 1939 Lah. 47 : A I R 1940 Nag. 83 (A I R V 27): 1 L R 1941 Nag. 360."

Regarding the other action namely refusal to grant registration, which undoubtedly is a
penalty, the officer has been allowed discretion. The law does not provide that in every
case where the material asked for is not provided by the assessee firm as is visualised by
subsection (4) of section 23 it would necessarily be deprived of the registration. Had it

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been so the word "may" would not have been used. Therefore depending upon the
circumstances of each case it would still lie within the discretion of the officer even on
proof of the fact that the relevant material has been withheld by the assessee, to penalise
or not to penalise him in connection with the registration. No doubt the Indian case of J. M.
Sheth can support the appellant's plea on this point. But this Court has, in The
Commissioner of Income‑tax, Rawalpindi Zone v. Messrs Public Medical Hall, Lyallpur 1974
S C M R 107, confirmed this view of the provision under discussion.

In this case we agree with the learned counsel for the appellant that all the Income‑tax
Authorities, unfortunately, were under the impression that once a case is brought under
section 23 (4) for making assessment on "best judgment" it follows as a necessary
consequence that the assessee has to be refused the registration. The opinion of the High
Court to the effect that the entire action under section 23(4) is of penal character, as
analysed above is, with respect, not in accord with the language of the provision. The
action thereunder which is of penal character relates only to registration. The example
visualised by the High Court, is of a substantive sentence of imprisonment and a sentence
of fine and thus, is not applicable. On the contrary, the first action as held above not being
in the nature of punishment in true sense, the second action is the punitive measure. The
same being discretionary, independent application of mind for finding of guilty for this
punishment will be necessary. This action should be supported by some reason because
the Income‑tax Officer has to adopt one of the two options left open by law even in a case
of "best judgment" assessment‑‑to grant or withhold registration. When he decides to
adopt the option which deprives an assessee of his right regarding registration, application
of mind as a prudent man, depending upon the circumstances of each case, would require
some justification by way of reasons. It is also essential because the order being
appealable: it is necessary on general principles that the appellate forum should know the
reason for which the penalty has been imposed. In this case these requirements are
locking in so far as the order of the Income‑tax Officer is concerned. Same was the
position in M/s. Pub. Med. Hall's case.

It has been noted in the High Court judgment that the Income‑tax Officer while issuing
notice to the appellant for production of the 'dasti books' had also given a warning that if
the appellant failed to do so, the assessment shall be made in his "best judgment" and
further that he will also refuse the renewal of registration for all the years. Therefore it was
assumed by the High Court that the appellant being aware of the consequences of
withholding the books, should have then made a representation regarding registration
also. With respect, the course adopted by the Income‑tax Officer was illegal, it was not
permitted by law, as discussed above, to decide the question of registration without: first
noticing the reaction of the appellant to the notice; then making the assessment on "best
judgment"; on a conscious finding that the appellant had "failed" as interpreted earlier to
comply with the notice. It was thereafter that under the proviso to subsection (4) of
section 23 he was required not to refuse renewal of the registration without a fresh prior
fourteen days clear notice to the appellant intimating his tentative view regarding the
registration. The proviso is couched in very strong negative mandate. Due effect to it has
not been given by ‑the High Court. It can safely be held that a mandatory requirement of
law regarding notice about registration as contained in the proviso, was not followed by
the Income‑tax Officer in this case. The mention of this aspect in the ea Tier notice will not
remove the serious defect.

It has to be emphasised that it is only after the assessment has been made in the "best

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judgment" of the Income‑tax Officer; after complying with the requirements of law
regarding earlier stages, that the Income‑tax Officer would proceed to examine the
advisibility or otherwise of a totally independent action which alone is of penal character in
the real sense. He has been allowed wide discretion by ‑the law, depending upon the
circumstances of each case, not to question registration after the "best judgment"
assessment, because it is un-controvertible proposition that he has an option in the
matter. In what circumstances, despite "best judgment" assessment the Income‑tax Officer
would not exercise this discretion against the assessee, no hard and fast rule can be laid
down. The case of Messrs Public Medical Hall, Lyallpur already noticed can be cited as an
example where the failure under section 23(4) being the first one, was deemed as
sufficient justification for not taking any action under this section for cancellation of
registration.

The learned Tribunal when dealing with this question made reference to the case of Messrs
Odeon Cinema, Lah. v. The Commissioner of Income‑tax, Lahore Zone P L D 1971 Lah:
632 in support of the view that there was no need for applying independent mind after the
"best judgment" assessment to the question of registration and that the latter can
straightaway follow the former as a necessary consequence. For the reasons already
stated the Lahore judgment, in so far as it goes against the afore‑expressed view in the
present discussion, with respect, has not laid correct law.

Coming to the present case the opinion of the learned Member: of the Appellate Tribunal
expressed in the order dated 13‑7‑1971 give: the true indication as to what the Income‑tax
Officer did after he found that it was a case for proceeding on his "best judgment". The)
observed as follows:

"It was held by the Lahore High Court in the case of Odeon Cinema v. Commissioner of
Income‑tax, Lahore P L D 1971 Lah, 632 that subsection (4) of section 23 of the
Income‑tax Ac provided two penalties for delinquent assessee the first was making on ex
parte best judgment assessment and the other was of refusing registration. Once the
Income‑tax Officer had made out a ground for proceeding ex parte, that was enough for
reusing registration, as well.

It is obvious that the Income‑tax Authorities did not follow the law correctly, in assuming
that the refusal regarding registration is follow as an effect of "proceeding ex parte"‑‑the
same being enough cause. With respect this view of law, as discussed earlier, was not
correct.

Before parting with this judgment it is necessary to mention that a distinction was sought
to be made between refusal to renew the registration and the cancellation of registration,
in so far as the application of proviso to subsection (4) of section 23 is concerned. It is not
denied that but for the "best judgment" assessment the refusal of renewal would not have
taken place. Not only this but it would also, have to be kept in mind that if. a firm is
already registered under the Income‑tax Act, the refusal to renew the same by virtue of an
action under the said provision, would in reality be a cancellation of registration unless
there is an independent ground for refusal to renew. If the cancellation of registration
mentioned in the proviso was to be construed so strictly as not to include the refusal to
renew the registration then the same would also be not included in the purview of the

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sub‑section where only "refusal to register" and "cancellation of registration" are
mentioned while refusal to renew is not mentioned. But it cannot be said that refusal to
renew the registration is not covered by the purview. Hence keeping in view the
phraseology used in the purview as also the proviso, when the action is being taken under
subsection (4) of section 23, the proviso 'shall have to be construed as applicable to a case
'cancellation of registration' as also the 'refusal to renew the registration'. The question of
'refusal to register' although it does not arise in the present case, may also have to be
construed accordingly.

In the light of the foregoing discussion on the controversies and related questions raised in
these two appeals the following answers are rendered to the questions framed before the
High Court:

Question: "Whether in the facts ‑and circumstances of the case there was any material
before the Income‑Tax Appellate Tribunal to hold that the Accounts Books requisitioned
through notice under section 22(4), dated 16th February, 1970, were in existence and;
therefore, available for production?"

Answer: Affirmative.

Question: "Whether in the facts and circumstances of the case there was any material or
evidence before the Income‑Tax Appellate Tribunal to hold that there was failure within the
terms of the notice under section 22(4), dated 16th February, 1970, so as to justify
assessment under section 23(4) of, the Income Tax Act, 1922.

Answer: Affirmative."

The result of the above answers would be that Civil Appeal No.182 of 1972 is dismissed
but there shall be no order as to costs.

Question: "Whether in the facts and circumstances of the case the Tribunal was entitled in
law to confirm the refusal of registration by the learned Income‑Tax Officer especially so
when no reasons have been recorded for the said exercise of discretion?"

Answer: Negative.

Civil Appeal No. 181 of 1972 in view of the negative answer is accordingly allowed. There
shall be no order as to costs.

Order accordingly

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