Income Tax Ordinance (XXXI of 1979)---

----S.32(3)---Income-tax Officer had failed to mention reasons for not accepting the version declared by the assessee and he merely stated in the assessment order about defective nature and deficient material aspect of account, non-maintenance of proper stock register and that purchases and sales were partly verifiable and further absence of complete identifying particulars of the parties---Rejection of declared version made on merely method- of accounting employed by the assessee was not warranted under law---Duty of Income-tax Officer.

The assessee had admittedly maintained his accounts according to the method regularly employed by him and the profits and gains of the business could be properly computed from his account.

The Income Tax Officer cited three reasons for rejecting the assessee's accounts:

(i) Defective nature and deficient in material aspect;

(ii) Non-maintenance of proper stock register, and

(iii) Purchases and sales were partly verifiable and further absence of complete identifying particulars of the parties.

It was quite imperative on the Income-tax Officer to determine the income of the assessee according to his best judgment after taking into account all .relevant material which he had gathered. The Income-tax Officer had sufficiently failed to mention reasons for not accepting the version declared by the assessee and he mainly relied upon the defects mentioned in the assessment order which cannot be upheld at all. Apart there was no finding that there was material before the Income-tax Officer to lead him to the conclusion that a proper statement of income profit and gains could not be deduced from the material placed before him. All he said was that the sales appeared to be somewhat low and there was no proper stock register in the absence of which flow of opening stock and purchases towards the sales and closing stock was not put to be on any authentic cross check. In fact the Income-tax Officer is not expected to impose upon the assessee to adopt any particular trading method for accounting. Rejection made on merely method of accounting employed by the assessee was not warranted under the law.

The Income-tax officer had deliberately failed to make proper assessment.

Munir Ahmad Shaikh, D.R. for Appellant.

Rasheed Ahmad Shaikh for Respondent.

Date of hearing- 16th August, 1989.

ORDER

These two cross appeals are filed against the impugned order dated February 1, 1988 passed by the learned Commissioner of Income-tax (Appeals), Faisalabad pertaining to the assessment year 1986-87. The appellant /assessee challenged the impugned order on the grounds that the learned Commissioner of Income-tax (Appeals) was not justified to uphold the addition of Rs.10,38,517 and to declare the sales without any cogent reasons in spite of the fact that book version was upheld. Similarly, the learned First Appellate Authority justified to confirm all the add-backs out of the profit and loss account without any cogent reasons. The Department assailed the impugned order mainly on the ground that the learned Commissioner of Income-tax (Appeals) was not justified in reducing the G.P. rate from 6.25% to 5%.

2. Briefly recounted facts leading to the instant appeals are that the appellant/assessee, being a Private Limited Company, took over running business of a previous concern named and styled as Super Cloth House, Gole Cloth, Faisalabad vide sale agreement dated April 1, 1985. The assessee declared loss to the extent of Rs.98,630. Since, the assessee-company had filed return showing substantial loss for the year under review, therefore, the case fell outside the purview of the Self-Assessment Scheme and the assessment was framed under the normal law. The appellant/assessee deals in cloth on wholesale basis and the business period consisted of 9 months, commencing from April, 1985 to December 31, 1985. As per trading accounts it transpired that the assessee declared gross profit at Rs.1,21,114 on total sales of Rs.24,61,483 yielding a G.P. rate of 4.29% which was found low in this line of business. The notice was got served on the assessee and the reply made to the Income-tax Officer is reproduced below:---

'The Department has adopted G.P. rate @ 5% on cloth on wholesale basis in the parallel cases being assessed at the following NT Nos.:

1. 03-06-053-884

2. 03-06-0531556

Hence, the G.P. rate declared by the assessee company do not appear to be low in view of the above parallel cases.. (Underlining is mine).

Examination of books produced in support of the returned version revealed that these were defective in nature and deficient in material aspect, hence, did not inspire much confidence. Purchases and sales were only partly verifiable in absence of complete identifying particulars of the parties. The Income-tax Officer found that the assessee did not maintain proper stock register in absence of which flow of opening stock and purchases towards sales and closing stock could not be put to any authentic cross check. In view of this defective nature of books of accounts the declared version of the assessee was discarded by the Income-tax Officer and estimated sales at Rs.35,00,000 and applied G.P. rate at 6.25% o. The Income-tax Officer also made certain add? backs in profit and loss account and finally assessed net income for the charge year under reference at Rs.21,541.

3. The appellant/assessee felt seriously aggrieved and went up in first regular appeal before the learned Commissioner of Income-tax (Appeals) and challenged the impugned assessment on rejection of accounts, estimation of sales and application of G.P. rate, besides, additions made in profit and loss account. It is interesting to note that the learned First Appellate Authority vide his order under reference observed that "The assessing officer did not cite any parallel casein defence of application of GP, rate @ 6%. Account version of the appellant-company was discarded and its written explanation of 29 1 1987 was also brushed aside only on the grounds that the stand or plea of the appellant-company was devoid of any merits This approach of the Assessing Officer was not convincing" (Underlining is mine). The learned First Appellate Authority critically viewed the whole aspect and held that the book version of the appellant-company should be discarded on account of inherent weakness into them. The learned First Appellate Authority did not disturb the estimate of sales made at Rs.35,00,000 as against disclosed sales at Rs.24,61,483 and directed the assessing officer to apply G.P. rate at 5% instead of 6%. On the point of add-backs the learned First Appellate Authority observed that the appellant-company's case was totally weak because there was an element of unverifiability, unvouchedness and confirmed the add-backs and disposed of the appeal finally.

4. At this stage both the parties, felt seriously aggrieved and came up in these further appeals before the Tribunal on the grounds referred to above in para. 1 of this order Mr. Rasheed Ahmad Sheikh, Advocate, argued the case on behalf of the appellant/assessee and strongly urged that the Income-tax Officer- had no occasion to assessee the sales at a huge amount of Rs.35,00,000 against the declared sales of Rs.24,61,783 and to reject the trading version of the assessee and applied G.P. rate at 6-1/2%. He mainly contended that the Income-tax Officer had actually authenticated the fact regarding establishment of the company's investment made by Director/shareholders in acquiring the shares of the company. Return was accompanied by audited copies of the trading account profit and loss account and schedule of fixed assets but the Income-tax Officer ridiculously objected the sales and made up at huge level against the facts and circumstances of the case. Mr. Munir Ahmad Shaikh, 'Departmental Representative had no record with him and could not argue the case properly.

5. I have gone through the present available record and heard both the parties at considerable length. In actual fact what made me to review the whole proceedings is the manner and method employed by the Income-tax Officer to assess the company. The learned First Appellate Authority critically remarked that the assessing officer did not parallel case nor his examination was convincing. It is still more lamenting that the Income-tax Officer had not gone through the relevant procedure in a haphazard manner.

The Income-tax Officer cited three reasons for rejecting the assessee's accounts:

(i) Defective nature and deficient in material aspect;

(ii) Non-maintenance of proper stock register, and

(iii) Purchases and sales were partly verifiable and further absence of complete identifying particulars of the parties.

He estimated the turnover at Rs.35,00,000 and gross profit at Rs.2,18,750 and applied G.P. rate at 6-1/4% which actually resulted in an addition of Rs.10,38,517 to the income returned by the assessee. This order was confirmed in appeal but reduced the G.P. rate to 5%. The assessee had admittedly maintained his accounts according to the method regularly employed by him and the profits and gains of the business could be properly computed from his account. The question whether in so determining the income, the assessee should be given notice of the said material and given an opportunity to meet them provided to the assessee or not. The Income-tax Officer only stated three above-referred grounds for rejecting the assessee's books of accounts which were subsequently confirmed by the learned First Appellate Authority but these grounds were not valid in accordance with Income-tax Ordinance, 1979 and the regular procedure applied by him to probe into the matter for assessment. According to the assessee, these were not valid grounds for rejecting the accounts and the books results which must have been accepted, so long as it was not established that there was any suppression in the turnover, or that any transaction had not come into the accounts. It was quite imperative on the Income-tax Officer to determine the income of the assessee according to his best judgment after taking into account all relevant material which he had gathered. The Income-tax Officer had sufficiently failed to mention reasons for not accepting the version declared by the assessee and he mainly relied upon the defects mentioned in the assessment order which cannot be upheld at all. Apart there was no finding that there was material before the Income-tax Officer to lead him to the conclusion that a proper statement of income, profit and gains could not be deduced from the material placed before him. All he said was that the sales appeared to be somewhat low and there was no proper stock register in the absence of which flow of opening stock and purchases towards the sales and closing stock was not put to on any authentic cross check. In fact the Income-?tax Officer is not expected to impose upon the assessee to adopt any particular' trading method for accounting. Rejection made on merely method of accounting employed by the assessee is not warranted under the law.

6. The defects noted in the impugned assessment and the method employed thereto to work out the income and gross profit of the appellant/assessee, when challenged before the learned First Appellate Authority was critically adjudicated upon and the learned First Appellate Authority rightly made strictures on the assessing officer. The learned First Appellate Authority was compelled to observe that when status of the appellant-company was of Private Limited Company and it was accomplishing business activities in wholesale dealing in cloth, such pattern of assessment should be adopted so that in future whenever normal assessment are being made

on it the justification should be rendered properly. It gave me much pleasure to satisfy the grounds of appeal taken by the assessee regarding rejection of trading version and estimation of sales made by the Income-tax Officer and confirmed by the First Appellate Authority was wrong but at the same time I am failed to understand that the learned First Appellate Authority had adjudicated upon the matter on the quantum, estimate of sales and G.P. rate but could not lay hands on the add-backs made in profit and loss account. The learned First Appellate Authority has deliberately failed to make cogent reasons for confirming the same. It is common parlance that when a business is carried out on a wholesale basis, then expenses must occur to fulfil the requirements of business. In the amiss of these circumstances, I am of the considered opinion that the Income-tax Officer had deliberately failed to make proper assessment. Further, the learned First Appellate Authority has also completely failed to meet with the objections raised by the counsel of the appellant/assessee. I, however, accept the declared version of the assessee regarding trading account. As far as the add-backs in profit and loss account are concerned, there is no reason to disbelieve that huge expenses shall have to be borne out by the appellant/assessee in order to maintain his business. On account of vehicle running and maintenance the claim of Rs.12,798 is accepted as against the Income Tax Officer disallowed only Rs.5,000. Similarly, depreciation claimed at Rs.12,795 is also accepted because of the reason that the Income-tax Officer added back for separate consideration but did not disclose the same in his impugned assessment order. On account of tourism expenses the assessee claimed expense at Rs.10,148 which were disallowed at Rs.4,000 by the Income-tax officer but without any reason. The same are allowed at Rs.8,000 and rest of the amount i.e. Rs.2,148 is added back in the profit and loss account.

7. For the, foregoing reasons and the law explained above, I do not feel any hesitation to dismiss the Departmental appeal and accept the appellant/assessee's appeal to the extent and manner as discussed above.

M.B.A./1718/T ?????????????????????????????????????????????????????????????????????????????????? Order accordingly.