I.T.A. NO.90/LB OF 1990-91, DECIDED ON 15TH SEPTEMBER, 1990. VS I.T.A. NO.90/LB OF 1990-91, DECIDED ON 15TH SEPTEMBER, 1990.
1991 P T D (Trib.) 468
[Income-tax Appellate Tribunal Pakistan]
Before Mian Abdul Khaliq, Judicial Member and Inam Ellahi Sheikh, Accountant
Member
I.T.A. No.90/LB of 1990-91, decided on 15/09/1990.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 32---Rejection of accounts and book result of assessee---Assessee, a contractor failed to establish the bifurcation of the receipts of the work of earth filling (a major work done by him) and road construction---Trading expenses of assessee were also not verifiable---Income-tax Officer, held, was justified in circumstances of the case in discarding the book version and applying the G.P. rate of 17.5% instead of 14% as declared by assessee.
I.T.A. 3466/LB of 1986-87; I.T.A. 4518 of 1977-78 and I.T.A. 1762/LB of 1981-82 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 13---Provisions of S.13(l)(a) of the Ordinance are fairly distinguishable from S. 13(1)(e)---Expenses incurred under the head "bills payable" and "suppliers" would not fall within the ambit of sum found to be credited in the books of accounts meriting addition under S. 13(l)(a)---Such being expenditure incurred in connection with business any addition on account of unverifiability of expenses could be made under S.13(l)(c) with the prior approval of I.A.C.---Cash .creditor as envisaged in S. 13(1)(a) being a lender of money could be found to be non-genuine and in such a situation the assessing officer could hold the amount to be the assessee's own money meriting addition under S. 13(1)(a),
Expenses incurred under the head "bills payable" and "suppliers" did not fall within the ambit of sum found to be credited in the books of accounts meriting addition under section 13(1)(a); rather it being expenditure incurred in connection with business any addition on account of unverifiability of expenses could have been made under section 13(1)(e) of the Ordinance. The cash creditor as envisaged in clause (a) of section 13(l) is a lender of money who can be found to be non-genuine. In the situation, the assessing officer can hold the amount to be the assssee's own money meriting addition under section 13(l)(a). In case the assessee's books of accounts established that any expenditure was in the form of "bills payable" or "suppliers", no addition on this score could be made under section 13(1)(a) of the Ordinance. The assessee's case was of incurring of actual expenditure and any addition on that account would have been made under section 13(1)(e) of the Ordinance with the prior approval of the I.A.C: Provisions of section 13(1)(a) are fairly distinguishable from section 13(l)(e) and legislature fully empowered the I.T.O. for making additions under section 13(l)(a) in case creditor was not genuine. For any addition under section 13(l)(e) on account of unverifiability or inadequacy of expenditure, the legislature restricted the I.T.O's. power providing prior approval of the I.A.C. In the instant case, the amount being of expenditure, addition could have been made under section 13(l)(e) with the prior approval of the I.A.C. The I.T.O. did not obtain the required mandatory approval and as such it cannot be a simple ease of misquoting the provision under which addition was mace. As the addition fell under section 13(l)(e), the I.T.O. could not make the same without prior approval of the I.A.C.
Both the departmental officers erred in making and maintaining the addition under section 13(l)(a). The addition was unwarranted as it could have been made under section 13(1)(e) with the prior approval of the I.A.C. In these circumstances addition made by the departmental officers under section 13(l)(a) of the Ordinance was ordered to be deleted.
I.T.A. 3466/LB of 1986-87; I.T.A. 4518 of 1977-78 and I.T.A. 1762/LB of 1981-82 ref.
Rana M. Anwar Khan, C.A. for Appellant.
Aftab Iqbal Lone, D.R. for Respondent.
Date of hearing: 2nd September, 1990.
ORDER
MIAN ABDUL KHALIQ (JUDICIAL MEMBER).---For the charge year 1988-89, the assessee a registered firm, derived income from road construction business.' In this year the assessee firm undertook up-gradation of Lahore-Sheikhupura Road. The I.T.O. discarded the assessee's declared G.P rate of 14% on recorded receipts at Rs.1,60,84,910 due to unverifiability of expenses appearing on the debit side of the trading account. In response to the I.T:O.'s notice issued under section 62 of the Income Tax Ordinance, 1979 (hereinafter referred to as the Ordinance) dated 16-11-1989, the assessee explained that work executed in this year being of up-gradation of road, major element therein was earth work wherein lesser margin of profit was available.
The assessee having failed to bifurcate the receipts of earth filling and road construction, the I.T.O. discarded 'the assessee's version. In the light of results of parallel cases of contractors G.P. rate of 17.5% was applied to the declared receipts making thereby an addition of Rs.5,55,815 in the trading account.
2. On perusal of the assessee firm's balance-sheet as on 31-12-1987, the I.T.O. noticed that "bills payable" and "suppliers" amounting to Rs.8,64,700 and Rs.11,05,300 were shown. The assessee filed details of "suppliers" and "schedule of the bills payable" with names and complete addresses of the parties. In the notice issued under section 62 of the Ordinance on 11-11-1989; the I.T.O. directed the appellant to furnish documentaly evidence in support of claim of "bills payable" and "suppliers'". In reply thereto on 16-11-1989 the assessee replied that payments of payable bills were actually made to the assessee replied that payments of payable bills were actually made to the parties whose complete addresses have already been furnished. The appellant further stated that due to lapse of period of two years the parties were not willing to co-operate for appearance as most of them were not assessees. The appellant asserted that complete names and addresses having been furnished, the parties may be summoned if needed for verification.
In respect of "Bills payable A/c", the assessee explained that the creditors received the payments two years ago and thereafter they were not under the appellant's control. Most of the bills payable were of the contract which stood completed two years ago. Majority of the creditors were not income tax assessees and as such they were not co-operating fog" appearance. The appellant further stated that on the given addresses the creditors may be summoned for verification.
The I.T.O. rejected the assessee's explanation stating that in response to the letters issued for verification of liabilities, no reply was received. The I.T.O. did not state in the order the names and addresses of the parties to whom letters were written. It was also not mentioned that how many letters were written. Only general observations were made in this behalf. The assessee's explanation was held to be a "bald document". The I.T.O. treated the sum of Rs.8,64,700 and sum of Rs.11,05,300 claimed under the head "bills payable" and "suppliers" respectively as to be the assessee's deemed income under section 13(1)(a) of the Ordinance. This addition was maintained in appeal by the learned C.I.T.(A-1V), Lahore, while discarding the assessee's plea regarding illegality of addition made under section 13 of the Ordinance for want of approval of the learned I.A.C. on the ground that the addition was made under section 13(1)(a) of the Ordinance wherein no such approval was required.
3. The first grievance of the assessee's AR was regarding excessiveness of the applied G.P. rate of 17.5%. It was contended that the nature of contract undertaken in this year being upgradation of road; major work was earth filling wherein lesser G.P. rate was being applied. This grievance is devoid of any merits as the assessee failed to establish the bifurcation of such receipts as well as 'verifiability of expenses claimed on the debit side of the trading account. The assessee's explanation regarding major work to be of earth filling was baseless due to lack of bifurcation. The departmental officers were fully justified in discarding the appellant's book version and applying G.P. rate of 17.5%. Applied G.P. rate is unquestionable as the Tribunal in the cases of contractors has maintained application of G.P. rate of 17.57o vide its decisions in I.T.A. Nos.3466/LB/1986 :87 dated 2-7-1987, I:TA. No.4518 of 1977-78 dated 31-7-1987, and I.TA. No.1762/LB/1981-82 dated 7-11-1987.
4. The next submission of the assessee's AR .was that the departmental officers erred in making addition of Rs.8,64;700 and Rs.11,05,300 on account of "bills payable" and "suppliers" under section 13(1)(a) of the Ordinance as both these amounts were in the form of expenses actually incurred. The case of the assessee's AR was that addition for unverifiability of expenses could not be equated with a sum found to be credited in the books of accounts for the purposes of making addition under section 13(1)(a) of the Ordinance; rather the same being expenditure incurred under the head "bills payable" and "suppliers" fell within the purview of section 13(1)(e) of the Ordinance wherein before making addition prior approval of the learned I.A.C. was mandatory one. The D.R. in his turn reiterated the arguments as given by the first appellate authority urging that addition being under section 13(1)(a) of the Ordinance, no approval of the learned I.A.C. was at all required.
5. After giving due consideration to the submissions of the representatives of the parties, it does not take us long to hold that expenses incurred under the head "bills payable" and "suppliers" did not fall within the ambit of sum found to be credited in the books of accounts meriting addition under section 13(1)(a); rather it being expenditure incurred in connection with business any addition on account of unverifiability of expenses could nave been made under section 13(1)(e) of the Ordinance. The cash creditor as envisaged in clause (a) of section 13(1) is a lender of money who can be found to be non-genuine. In the situation, the assessing officer can hold the amount to be the assessee's own money meriting addition under section 13(1)(a). In case the assessee's books of accounts establish that any expenditure was in the form of "bills payable" or "suppliers", no addition on this score could be made under section 13(1)(a) of the Ordinance. The assessee's case was of incurring of actual expenditure and any addition on that account could have been made under section 13(1)(e) of the Ordinance with the prior approval of the learned I.A.C. Provisions of section 13(1)(a) are fairly distinguishable from 13(1)(e) and legislature fully empowered 'the I.T.O. for making additions under section 13(1)(a) in case creditor was not genuine. For any addition under section 13(1)(c) on account of unverifiability or inadequacy of, expenditure, the legislature restricted the I.T.O's. power providing prior approval of the learned I.A.C. In the instant case, the amount being of expenditure, addition could have been made under section 13(1)(e) with the prior approval of the learned I.A.C. Admittedly the I.T.O. did not obtain the required mandatory approval and as such it cannot be a simple case of misquoting the provision under which addition is made. As the addition fell under, section 13(1)(e), the I.T.O. could not make the same without prior approval of the learned I.A.C.
6. As a result of the above discussion, we hold that both the departmental officers erred in making and maintaining the addition under section 13(1)(a). The addition is unwarranted as it could have been made under section 13(1)(e) with the prior approval of the learned IA.C. 1n these circumstances addition made by the departmental officers under section 13(1)(a) of the Ordinance is deleted. The assessee's appeal succeeds to that extent.
M.B.A./1146/T. Order accordingly.