Income Tax Ordinance (XXXI of 1979)---

----S.65---Additions---Disallowance of expenses---Principles to be followed by assessee for supplying complete details of expenses and by Income Tax Officer for making additions--Complete details"---Meaning---Requisition of "complete details" by Income Tax Officer---Logic behind---Onus to verify genuineness of complete details of expenses submitted by assessee was on the Income Tax Officer---Where assessee had not filed details of expenses with complete addresses alongwith vouchers, Income Tax Officer was justified to make the additions---When complete details were filed by the assessee and Income tax Officer without carrying out any verification added part of the expenses, such action of Income Tax Officer was unjustified---Where the details of expenses were not filed and the Income Tax Officer also did not call for it and made additions on the basis of past history, such action of the Income Tax Officer was justified.

Khalifa Salahuddin for Appellant.

A.K. Nomani, D.R. and Ch. Nazir Ahmed, D.R. for Respondent.

Date of hearing: 29th June, 1991.

ORDER

MANZOOR-UL-HAQUE (ACCOUNTANT MEMBER).--These two appeals have been filed against the order of the learned C.I.T. (A-2) Karachi in which add backs made from P & L are contested.

2. Mr. Khalifa Salahuddin, the learned counsel for the appellant has vehemently argued that in spite of furnishing of full details the assessing officers have made disallowances by using stock phrases, without confronting the appellant with any instance of un-verifiability and without making any attempt for verification. Mr. Khalifa Salahuddin has taken us through the assessment orders which show that the only reason assigned for making disallowance is that promotional and other expenses are not fully verifiable and contain element of personal nature. Same observations have been made by the learned C.I.T (A) while confirming the disallowance. Mr. Khalifa Salahuddin has submitted that the disallowances have been made against all the principles of natural justice, in a mechanical manner and without giving appellant an opportunity of being heard. He has, therefore, submitted that the disallowances are not justified which may be deleted.

3. The learned departmental representative has supported the two officers below.

4. We have very carefully examined the contention of the learned representatives. Briefly stated the facts of the case are that during the assessment years 1988-89 and 1989-90 the assessee learned curtain expenses its the profit and loss account and the Income Tax Officer made routine add backs out of the expenses for both the years. The assessee, however, agitated the disallowances under the following two heads during 1988-89 and 1989-90:

???????????

1989-90?????????????????????????????????????????????? Claimed??????????????????????????????????? Disallowed

(a) Promotional expenses????????????????????? 245,870?????????????????????????????????? 49,174 20%

(b) Office staff travelling expenses.??????? 743,241?????????????????????????????????? 148,648 20%

For the assessment year 1988-89 the expenses claimed under the head promotional expenses were partly disallowed for the following reasons:--

"These expenses were incurred on Annual Sale Conferences and on advertisement and publicity as well as for field staff incentives part of the expenses incurred on parties held and payments made to various staff etc. are not verifiable 20% of the expenses are, therefore disallowed 46,555."

As regards staff travelling the following observation was made:--

?It has been noticed that a sizeable portion of the expenses is supported with internal vouchers which remained unverifiable. The expenses also contain element of personal nature, 20% of flit expenses are disallowed for want of details and for person element ....120,546."

In appeal the learned C.I.T.(A) confirmed both the additions for reasons mentioned by the Income Tax Officer. During assessment year 1989-90 the same expenses were disallowed with the following narration:--

"Out of promotional expenses claimed at Rs.245, 870 20% disallowed to cover un-vouched and unverifiable items 46,174."

For the add back made from staff travelling the following narration was given:--

"Out of office staff travelling claimed at 743,247 disallowed 20% for want of details and personal element 148,648."

In appeal the additions were confirmed with the following words:--

Promotional expenses:--

"It was stated by the learned authorised representative that the expenses were verifiable and all the payments on the account are through cheques and not on cash basis. The details, however, were not submitted" .......

Regarding staff travelling the learned C.I.T.(A) observed:--

"It was noticed that fairly large portions of the expenses were supported by internal vouchers and remained unverifiable. The personal nature of the expenses could not be ruled out "

Aggrieved by this order appeal has been filed before this Tribunal against add backs made under the heads promotional expenses and staff travelling expenses in both the years.

Example of details filed in response to. Income Tax Officer's requisition are given as under:--

Field Staff Travelling expenses 1988-89(claimed RS 602 732).

Under the sale promotion expenses for the year 1988-89 an amount of Rs.1,42,768 (out of total claim of Rs.2,32,774) has been debited to P&L expense, without details as under:--

"Hotel Jabees

?Potohar Rawalpindi

Hospital donation

Annual Meeting

Expenses i.e. prizes etc.

The balance distributed amongst field staff without quoting N.T.N. details such expenses for 1989-90 was, however, not available on record.

Field Staff Travelling, Expenses 1989-90 Claimed Rs.7 43 242

National Tax Number is given only in two cases out of a long list of a payees.

Mr. K. Salahuddin, the learned counsel when asked to produce the details, relied upon the evidence filed before the Income Tax Officer produced the same statement (partly reproduced above) which the names and the amount paid to the parties without addresses or vouchers or evidence of payment made through cheque or cash. From the of the records what we find is that the Income Tax Office had called for die details of the expenses of P & L account and in response to that requisition these "details" were filed.

We find that there has been lot of misgivings and misunderstandings in regard to add backs made from P & L account by the assessing officers. While we have always discarded cliches like being unverifiable" (without verification); and being personal in nature" (again without verification) used by the assessing officers in making add backs from the P & L account, we have however, very seldom moved into the background to ascertain what compels the Income Tax Officers to use such phrases. There are no two opinions about the fact that expenses claimed in the P & L account are more often than not highly exaggerated to reduce the quantum of income. Very seldom details of such expenses are filed alongwith the return. Needless to say that when expenses are claimed the onus is on the assessee to file the details and necessary evidence for the expenses incurred. When such details are not filed the Income Tax Officer has to call for the same alongwith supporting vouchers. Such requisitions are generally noted on the order-sheet of the miscellaneous cover and compliance is required within a reasonable period of time.

In response to such requisition, the assessee either files the details or ignores compliance. 1n latter case disallowances are made, what is considered reasonable on the basis of past history of the case. In case where details are filed, they are either--

(a) complete or

(b) incomplete

Complete details comprises of full addresses of the parties to whom payments,' are made alongwith supporting vouchers. In incomplete details only names are mentioned with the amount of payments made.

Where complete details with full addresses are available the onus is on the Income Tax Officer to verify the genuineness of the expenses. If he fails to do so, the assessee gets the benefit as it does not lie with the Income Tax Officer to write "unverifiable" or "personal nature" and slash the claim accordingly. But what happens when incomplete details are supplied should the I.T.O. slash the expenses according to the past history or to the extent of reasonableness or accept the expenses as claimed without proper evidence. For proper dispensation of justice; he cannot follow the latter alternative, but can reduce the expenses accordingly to the past history and where no past history is available he can reduce the expenses to a reasonable extent. The Tribunal being the highest judicial forum for disposal of issues based on facts cannot take the risk of ignoring what is available on record and deliver a judgment based on oral statements at the bar, we fail to understand from where do we get the ruinous notion that it is the bounden duty of the Income Tax Officer to keep on calling for the details until it is submitted in entirety by the tax payer.

A question still remains to be answered, as it has been the general practice in the Tribunal to set aside such add backs for proper verification after obtaining full details from the assessee notwithstanding the fact that in the first round the assessee failed to place all his cards before the Income Tax Officer. Allowing second round tantamount to prolonging the proceedings without any legal justification. In certain cases (as in the present case) the oral contention of the assessee that all expenses are verifiable is accepted. In a situation where details of expenses are not filed and the Income Tax Officer also does not call for it and makes the addition on the basis of past history I think he is perfectly justified in doing so. Alternatively, the additions can be set aside but in no case they can be deleted. Conversely, where complete details are filed and Income Tax Officer without carrying out any verification adds part of the expenses, this in my opinion is unjust and could be deleted.

Now let us examine the logic behind the requisition of complete details of expenses by the assessing officer. This is done for the following reasons:--

(a) to verify expenses which have been debited to the P & L account reducing thereby the margin of profit and

(b) to issue information slips to the Income Tax Officers in whose jurisdiction the recipients fall.

To summarise the above decision:

An add back from the profit and loss account made by an assessing officer can either be--

(a) upheld

(b) deleted

(c) reduced; or

(d) set aside; in appeal for reasons stated as under:--

(a) upheld where details are filed but on verification the expenses are found unverifiable or details not filed with complete addresses;

(b) deleted where complete details are filed but the assessing officer, without verification makes the add back;

(c) reduced where add backs are made without considering the nature or size of business or ignoring the past history. The past history can only be disturbed if the I.T.O. can successfully bring on record any fresh evidence in support of the addition.

(d) set aside: where details are available on record but the assessing officer, through an oversight, failed to take notice, or where the issue involved was not considered properly, or where the assessee was prevented by a sufficient cause to file the details on time (like his, absence from the country, illness etc.).

Needless to say that each item of P & L expenses is to be considered objectively and add backs should not be made arbitrarily it is also the moral duty of a tax-payer to claim only these expenses which are been incurred wholly and exclusively for the business. They should not therefore, unscrupulously copy out all possible heads of expenses from that books of Accountancy and fill in figures to reduce the margin of profit. They should not also insist for complete allowance of expenses under the head, such as, Miscellaneous expenses, General expenses, Entertainment expenses, Conveyance telephone expenses etc. for it is a well-known fact that it is very difficult to restrict such expenses wholly and exclusively for business without drawing the element of personal nature into it and that it is not possible to produce evidence in the shape of vouchers in support of such expulses. The assessing officer can judiciously disallow only part of such expenses poking to the turnover and the nature of assessee's business.

To our mind since details of expenses with complete addresses alongwith vouchers were not filed with the Income Tax Officer it is fair to uphold the addition made by the I.T.O. and confirmed in appeal by the C.I.T.(A). The appeals fail.

M.BA./1247/T. ?????????????????????????????????????????????????????????????????????????????????? Appeal dismissed.