(a) Income Tax Ordinance (XXXI of 1979)---

----S. 13(1)(c)---Deemed income---If the assessee has any amount which is not indicated in the account books it is covered under S.13(1)(c) of the Income Tax Ordinance, 1979.

1991 P T D (Trib.) 802 distinguished.

(b) Income Tax Ordinance (XXXI of 1979)---

----S. 13 [as amended by Finance Act (VII of 199f)]---Deemed income-- Addition---Condition of obtaining two approvals from IA.C. has been dispensed with.

(c) Income Tax Ordinance (XXXI of 1979)---

----S. 13---Addition---Concept of intangibles---Credit for intangible addition can be claimed by the assessee for addition made in the trading account in the earlier years or additions made in the same year provided that assessee can prove that the additions were made in the trading account and not in profit and loss account and that the amount was available with the assessee and had not been expended---Additions on account of unexplained credit over and above the addition in trading account should be made if the income which represents unexplained credit, can be attributed to the income for undisclosed sources.

The concept of intangibles is essentially linked with cash credits shown by assessee in account books. The rationale behind giving credit for intangible additions is that once an amount has been taxed in the hands of the assessee it cannot be taxed a second time. Intangible addition is real income of the assessee. The addition can be made by the assessing Authorities on account of unproved cash credit or some of the provisions under section 13 of the Income Tax Ordinance, 1979 over and above the addition in trading account, or the assessing Authorities can give credit for intangible addition while making additions under section 13 depending on the facts of each year.

Credit for intangible addition can be claimed by the assessee for additions made in the trading account in the earlier years or additions made in the same year, provided the assessee can prove--

(i) that the additions were made in the trading account and not in P & L Account;

(ii) that the amount was available with the assessee and had not been expended.

Additions on account of unexplained credit over and above the additions in trading account should be made if the income from undisclosed credit can be attributed to the income from undisclosed sources.

1991 PTD (Trib.) 802; I.T.As. Nos.3249 to 3251/KB of 1991-92; 1968 PTD (Trib.) 146; Kale Khan Muhammad Hanif v. CIT = (1963) 8 Tax 363 (S.C. Ind.) and CIT, Dacca v. Aluminium Agency, Dacca 1968 PTD 442 ref.

(d) Income Tax Ordinance (XXXI of 1979)---

----S. 13(1)(c)---Additions---Assessing Officer made addition under S.13(1)(c) of the Income Tax Ordinance, 1979 on account of discrepancies in the cash book in the very first month of accounting year in which assessee incurred expenses for which cash available was not disclosed in account books-- Effect---Held, there was hardly any possibility in the very first month of the accounting year to earn income to the extent of credit claimed to defray expenses incurred by the assessee in the very first month of accounting year, hence credit for addition made by the I.T.O. in trading account could not be given to the assessee which made addition under S.13(1)(c) of the Ordinance.

Muhammad Saeed Ch. and Muhammad Shahid Abbas for Appellant.

Mian Javed-ur-Rehman, D.R. for Respondent.

Date of hearing: 20th December, 1993.

ORDER

MUHAMMAD MUSHTAQ (ACCOUNTANT MEMBER): --This appeal has been filed on behalf of M/s. Pak Punjab Bricks Company, hereinafter also referred to as the assessee, challenging the order of the learned C.I.T.(A), Lahore, vide A.O. No.324/C-15, dated 24-6-1992. The brief facts relating to this appeal are as under:

2. The assessee in this case is a registered firm earning its income from operation of brick-kiln. The assessee declared net income at Rs.76,500 and it was estimated by the ITO at Rs.300,187. During the course of examination of accounts books of the assessee the ITO discovered that the opening balance of cash as on 1-7-1990 was indicated by the assessee in the cash book at Rs.347,685. A perusal of the balance-sheet for the assessment year 1990-91 indicated that the cash balance with the assessee on 30-6-1990 was Rs.83,935. In other words the amount of cash in hand at Rs.83,935 as on 30-6-1990 was carried forward as Rs.347,685 on 1-7-1990. The ITO requested the assessee to furnish the explanation regarding the above discrepancy. The assessee vide its explanation, dated 7-1-1992 contended that it was in inadvertent mistake committed by the accountant of the assessee firm who actually indicated amount of capital of the firm at Rs.347,685 as opening cash balance, although actually the assessee had only cash balance of Rs.83,933 on 1-7-1990. The ITO .did not accept this explanation on the ground that not only the assessee had artificially increased the amount of cash balance as on 1-7-1990 but the assessee also had incurred the expenses to the extent of Rs.234,968 in the month of July, 1990, whereas the assessee had made sales only to the extent of Rs.26,850 in the month of July, 1990. Thus according to the ITO the assessee had incurred expenses to the extent of Rs.124,183 out of books and the assessee was owner of the money of Rs.124,183 not recorded in the books. The ITO worked out the above figure as under: --

According to the ITO the assessee had above amount from which expenses were made but this amount was not recorded in the accounts books. Thus the ITO made an addition of Rs.124,183 under section 13(1)(c) of the Income Tax Ordinance with the approval of the IAC to the Income estimated by the ITO Not only the above addition was made by the ITO but he also got conducted spot enquiries through his Inspector and found out that the capacity of the brick-kiln was actually 540,444 bricks per round. He adopted this capacity at four rounds of baking of bricks and keeping in view the above capacity estimated the sales at Rs.9,00,739 as against declared, sales of Rs.693,438. In this way the ITO made addition of Rs.92,604 in the Trading Account and above addition under section 13(1)(c) as mentioned above.

3. Aggrieved by this order the assessee went into first appeal. However, the learned CIT (A) confirmed the above two additions.

4. The assessee is still dissatisfied and has come up in appeal before us challenging the above two additions. As per grounds of appeal the assessee had made following contentions:

(1) That the ITO was not justified in making addition in the Trading Account to the extent of Rs.92,604.

(2) That the I T O was not justified in making addition under section 13(1)(c) at Rs.124,183.

(3) That while making addition under section 13(1)(c) the ITO did not fulfil the conditions which are necessary for making addition under section 13(1)(c).

(4) That the ITO has not obtained double approval before making addition under section 13(1)(c) as required under law.

The learned A.R. of the assessee Mr. Muhammad Saeed has assailed the order of the Authorities below on a number of grounds. The first ground taken by the learned A.R. of the assessee was that the addition made by the ITO at Rs.124,183 does not come in the purview of section 13(1)(c) of the Income Tax Ordinance, 1979 because this clause relates to investment made by the assessee whereas in this case no investment was made by the assessee. The dispute relates only to the discrepancy, which according to the ITO, occurred in cash. The A.R. of the assessee has also relied on a case re: 1991 PTD (Trib.) 802. The A.R. of the assessee has contended that in the reported case the ITO had made addition under section 13(1)(a) but actually the addition was not covered by the provision of section 13(1)(a), hence the addition made by the ITO was deleted by the Tribunal.

5. The second argument advanced by the A.R. of the assessee was that in this case before making addition under section .13(1)(c) the ITO has not fulfilled the statutory obligations inasmuch as no double approval has been obtained by the ITO before making addition under section 13(1)(c).

6. The third argument advanced by the learned counsel for the assessee was that actually the ITO misunderstood the entries in the cash book. The learned counsel contended that the amount of capital at Rs.347,685 was inadvertantly indicated as cash balance. According to the learned counsel for the assessee the ITO has made addition because according to him the assessee incurred expenses to the extent of Rs.264,965 in the month of July, 1990. The learned counsel continued that actually these expenses include purchases on credit basis for which cash disbursement is not required and this fact has not been taken into consideration by the ITO. The learned counsel for the assessee has also contended that the assessee also made sales in the month of July, 1990 to the extent of Rs.290,000 which have not been taken into consideration by the ITO.

7. The last argument made by the learned counsel in the above issue was that the ITO had also made an addition of Rs.92,650 in the Trading Account but the ITO has not given credit for this intangible addition and, in fact, the ITO has made the addition once in the Trading Account at Rs.92,604 and secondly addition under section 13(1)(c) at Rs.124,183 which was not justified.

8. As far as Trading Account addition is concerned the learned counsel has contended that the Inspector has incorrectly reported the capacity of the brick-kiln at 500,444 bricks whereas actually capacity was of 500,000 bricks. The learned counsel contended that the ITO has adopted 4 rounds of baking of brick-kiln in the year under consideration whereas actually three rounds of baking are adopted in such cases.

9. The learned D.R. countered the arguments of the learned counsel of the assessee on the ground that assessee had admitted before the ITO that it had shown opening balance of cash in hand at Rs.347,685 by mistake but now the A.R. of the assessee has taken entirely different stand by saying that the assessee had also made credit purchases and had also made sales to the extent of Rs.290,000 in the month of July, 1990. The learned Departmental Representative pointed out that actually the assessee purposely inflated opening balance of cash and incurred expenses to the extend of Rs.264,965 out of the above cash. The learned D.R. also pointed out that the objection raised by the A.R. of the assessee regarding double approval was not correct because the ITO had obtained double approval in this case. As far as Trading Accounts addition was concerned the D.R. contended it was justified in view of spot enquiries made by the ITO through the Inspector.

10. We have carefully considered the facts of the case and arguments advanced by both sides. We are afraid that we cannot agree with the arguments of the learned counsel for the assessee that the addition made by the ITO is not covered by section 13(1)(c) for the following reasons: ---

"(1) The A.R. of the assessee has contended that the addition made by the ITO at Rs. 1,24,183 does not come under the preview of section 13(1)(c) because the above clause relates to the investment only. The above clause is reproduced as under:

(c) the assessee is found in respect of any income year to be the owner of any money or valuable article which is not recorded in the books of account, if any maintained by him (or is not) shown by him in any wealth statement furnished under section 58 in respect of that year'."

11. From perusal of the above clause it is quite clear that if the assessee has any amount which is not indicated in the account books it is also covered under section 13(1)(c) of the Income Tax Ordinance, 1979. A perusal of the assessment order indicates that the ITO has not made addition on account of opening balance of cash, but the ITO has made addition on the ground that the assessee had incurred expenses to the extent of Rs.234,968 in the month of July, 1990. The assessee had only cash available at Rs.83,935 as opening cash balance plus sales made in the month of July to the extent of Rs.26,850. The balance expenses were incurred out of money not disclosed in the account books. The learned D.R. of the assessee has also referred to the case re: 1991 PTD (Trib.) 802 but the facts of the reported case are not identical to the instant case, hence the ITO was justified in making the addition as above. The second argument advanced by the learned counsel for the assessee was that the ITO while making the addition had not obtained double approval of the IAC before making the addition but this argument is also not acceptable because, in fact, the ITO had obtained two approvals before making additions, secondly by virtue of amendment made in section 13 of Finance Ordinance, 1992, the condition of two approvals has been dispensed with.

12. The third argument of the A.R. of the assessee was that while making the addition the ITO has not taken into consideration the fact that the assessee made purchases on credit basis and the ITO has also not taken into consideration the sales made by the assessee at RS.290,000 but for this no evidence was produced before the ITO or before the CIT(A).

13. The learned counsel for the assessee has also contended that in this case the ITO has not relied on the accounts books but surprisingly he has made addition under section 13(1)(c) on the basis of entries in cash book, hence the addition made by the ITO is not tenable. This contention of the A.R. of the assessee is also not acceptable because the ITO has not relied on the accounts books because of the above discrepancies. For rejecting the accounts books the ITO had to find out some defects in the accounts books which he did and pointed out the discrepancies in the cash book. The learned A.R. of the assessee has also argued that the learned CIT (A) has accepted the assessee's contention regarding Profit and Loss Account but surprisingly he has not accepted the contention of the assessee regarding addition in the Trading Account, which according to the learned counsel for the assessee is contradictory. The learned CIT (A) has nowhere in his appellate order observed that P&L expenses claimed by the assessee are correct: He has allowed P&L expenses as claimed by the assessee on the ground that since in this case sales have been enhanced the expenses claimed should be allowed.

14. Lastly the learned counsel for the assessee has contended that while making addition under section 13(l)(c) the ITO has not allowed credit for intangible addition made in the Trading Account. According to the learned counsel the ITO has made addition of Rs.92,604 in the Trading Account on account of enhancement of sales and application of G.P. rate at 25%. The learned counsel has argued that while making addition at Rs.124,183 under section 13(1)(c) of Income Tax Ordinance, 1979 the ITO should have given credit of Rs.92,604 added in the Trading. This requires detailed examination of the issues involved. Credit for intangible addition can be claimed by the assessee for additions made in the trading in the earlier years or additions made in the same year, provided the assessee can prove:

(i) that the additions were made in the Trading account and not in P & L account.

(ii) that the amount was available with the assessee and had not been expended.

(ITA No. 3249 to 3251/KB of 1991-92 (Assessment year 1989-90 and 1990-91), dated 20-1-1993.

The concept of intangibles is essentially linked with cash credits shown by assessee in account books. The rationale behind giving credit for intangible additions is that once an amount has been taxed in the hands of the assessee it cannot be taxed second time. There is a concensus of judicial opinion that intangible addition is real income of the assessee 1968 PTD (Trib.) 146. The addition can be made by the assessing Authorities on account of unproved cash credit or some of the provisions under section 13 of the Income Tax Ordinance, 1979 over and above the addition in trading account, or the assessing Authorities can give credit for intangible addition while making additions under section 13 depending on the facts of each year.

15.We are conscious of the fact that there is also a concensus of Judicial opinion that additions on account of unexplained credit over and above the addition in trading account should be made if the income which represents unexplained credit, can be attributed to the income from undisclosed sources (Re: Kale Khan Muhammad Hanif v. CIT = (1963) 8 Tax 363 (S.C. India) and CIT Dacca v. Aluminium Agency, Dacca 1968 PTD 442. After having the benefit of the above authoritative pronouncements we have to see whether in this case any part of undisclosed cash could be reasonably attributed to the addition in the trading account or whether the arguments advanced by the learned counsel of the assessee fit in the law laid down in above judicial pronouncements.

16. In this case the assessee's claim is not for allowing credit for intangible additions for the earlier years but the assessee contends that credit should be given for additions made in the trading account in the year under consideration. We have to see whether the amount added by the ITO in trading account by estimating sales and by applying a G.P. rate could be available to the assessee for claiming credit. A perusal of assessment order indicates that the ITO made addition under section 13(l)(c) of Income Tax Ordinance, 1979 on account of discrepancies in the cash book in the very first month of accounting year or in July, 1990, in which assessee incurred expenses for which cash available was not disclosed in account books. There is hardly any possibility in the very first month of the accounting year to earn income to the extent of credit claimed to defray expenses incurred by the assessee in the very first month of accounting year, hence credit for addition made by the ITO in trading account could not be given to the assessee while making addition under section 13(1)(c) of the income Tax Ordinance, 1979.

17. This leaves us to addition in the Trading Account. At the outset it is pertinent to point out that the learned counsel for the assessee has not contested the rejection of trading results. His only grievance relates to capacity of the brick-kiln adopted by the ITO at 540,444 bricks and the number of rounds adopted by the ITO. The learned counsel for the assessee has contended that the capacity of the brick-kiln is 500,000 bricks and in other parallel cases three rounds of baking of bricks per year are adopted.

18. As far as capacity of the brick-kiln is concerned this has been adopted by the ITO as per report of the Inspector who physically verified the capacity of the brick-kiln, hence the assessee's contention regarding capacity is not accepted.

19. As far as number of rounds of baking of bricks is concerned a perusal of the assessment order indicates that the ITO has adopted 4 rounds on the basis of general observations of the Inspector in his report who has failed to prove that actually the assessee baked four rounds of bricks in the year under consideration. In other parallel cases which we have come across, generally three rounds of baking of bricks are adopted, hence in this case also the income should be determined by the ITO by adopting 3 rounds of baking of bricks.

20. The appeal of the assessee is allowed in the manner and to the extent indicated above.

M.BA./32/T.T.

Order accordingly.