ITA NO. 2680/LB OF 1992-93, DECIDED ON 15TH DECEMBER, 1994. VS ITA NO. 2680/LB OF 1992-93, DECIDED ON 15TH DECEMBER, 1994., 1995 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 677 (1994)

(a) Income-tax---

----Addition---Assessee a company earning its income from running textile mills manufacturing only cotton yarn---Yield account---Adjustment of waste-- Assessee had not produced account books before the I.T.O. on the ground of fire in his office---Quantitative data, however, was furnished by assessee and yield was declared---Income Tax Officer in view of past history of the assessee did not accept the yield so declared by the assessee and low G.P. rate and adopted the yield of cotton yarn @ 85% of the cotton consumed and made addition---Validity---Contention of the assessee was that by adopting the yield of cotton, Income Tax Officer had not allowed any adjustment in respect of waste but had simply indicated in the assessment order that yield of cotton yarn was being adopted @ 85% of the cotton consumed without discussing the percentage of hard waste, soft waste or invisible waste and if the treatment of the I.T.O. was accepted that will result in absurdity inasmuch as total cotton consumed will be more than 10%---Held, in making addition on account of low yield of cotton yarn and on account of low G.P. rate simultaneously the Income Tax Officer had made double addition which was not legal---Income Tax Officer, while making addition in yield account should have allowed adjustment in respect of invisible waste---Method of addition on account of G.P. rate and low yield outlined.

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

----S. 23(1)(vii)---Interest---Borrowed capital for the purposes of business or profession---Entitlement of assessee to claim deduction of interest paid-- Conditions to be satisfied by assessee enumerated---Income Tax Officer while accepting the fact that assessee had paid interest to the Bank cannot disallow the interest only on the ground that assessee had made advances to sister concern for which no evidence was furnished by the I.T.O. and in earlier years no such disallowance was made.

In the present case the I.T.O. had not disputed the payment of interest to the Bank by the assessee. The I.T.O. had disallowed the interest only on the ground that assessee had made advances to sister concerns for which no evidence was furnished by the I.T.O. Assessee would be entitled to claim allowance under this provision if it was satisfied that---

(1) assessee had borrowed capital;

(2) such borrowed capital was for the purpose of business and the interest had been paid on such borrowed capital.

In the earlier years no such disallowance was made by the I.T.O. Considering these facts the disallowance made by the I.T.O. under the head was not justified and it was deleted accordingly.

CIT v. Pakistan Industrial Engineering Agency, 1992 PTD 954 fol.

1991 PTD 53 (Trib.);1986 SCMR 968 and 1957 PTD 147 ref.

(c) Income Tax Appellate Tribunal Procedure Rules, 1981---

-----R.24---Production of additional evidence---Initial depreciation---Triple shift allowance---Income Tax Officer, in his assessment order had categorically stated that assessee had installed new machinery but disallowed the initial depreciation though allowed normal depreciation on the entire new machinery and also disallowed the triple shift allowance---Held, there was sufficient cause, in circumstances, to allow the assessee to produce fresh evidence on the point of initial depreciation---Appellate Tribunal accordingly set aside the assessment on the issue of initial depreciation and triple shift allowance and remitted the case back to the I.T.O. to examine initial depreciation afresh on the entire machinery after allowing the assessee adequate opportunity to present its case.

1987 PTD (Trib.) 256; 1987 PTD 262; 1992 PTD 393 and 1992 PTD Note 248 at p.267 ref.

Abrar Hussain Naqvi for Appellant.

Mrs. Sabiha Mujahid, D.R. for Respondent.

Date of hearing: 4th December, 1994.

ORDER

MUHAMMAD MUSHTAQ (ACCOUNTANT MEMBER).--This appeal has been filed on behalf of M/s. Zafar Textile Mills (Private) Limited (hereinafter also referred to as the assessee) challenging the order of learned CIT (A) Zone-1, Faisalabad vide A.O. No.874 dated 6-10-1992.

2. The brief facts leading to this appeal are that assessee in this case is a Private Limited Company earning its income from running a Textile Mills, For the assessment year under consideration the assessee filed its Income Tax Return declaring net loss at Rs. 1,61,37,223. The assessing officer did not accept the declared trading results on account of various defects as indicated in the assessment order and completed the assessment at a loss of Rs.9,00,971. It is pertinent to mention here that during the assessment proceedings the assessee did not produce any accounts books or record before the ITO on the ground that the assessee's office caught fire and entire record was burnt. However, the ITO completed the assessment under section 62 of the Income Tax Ordinance and made additions under various heads alongwith the additions from profit and loss account expenses.

3. Aggrieved by this treatment the assessee preferred first appeal. The learned CIT (A) rejected the appeal of the assesses on almost all the issues agitated by the assessee except some relief in profit and loss account expenses.

4. The assessee still feels aggrieved and has preferred this second appeal before us. As per grounds of appeal a number of issues have been agitated but at the time of hearing of appeal the learned counsel of the assessee pressed only following issues:--

(1) Addition made by the ITO in yield account;

(2) Addition made: by the ITO on account of application of G.P. rate at 15.12%;

(3) Disallowance made by the ITO out of interest paid;

(4) Disallowance of initial depreciation and triple shift allowance.

The other grounds of appeal were not passed by the learned counsel of the assessee. Hence the assessee's appeal in respect of grounds of appeal other than indicated above stands rejected. The issues pressed and agitated by the learned counsel of the assessee are discussed as under.

5. Yield account.---As pointed out above the assessee in this case runs a Textile Unit manufacturing only cotton yarn. It is also pertinent to repeat that assessee did not produce accounts books before the ITO on the ground that entire record of the assessee was burnt as a result of fire in the office of the assessee. However, quantitative data was furnished by the assessee and the yield declared by the assessee as compared to the earlier year was as under:--

The ITO did not accept the yield declared by the assessee and adopted the yield of cotton yarn at 85% of the cotton consumed with the following observations:

"The production results declared by the assessee (reproduced above) have been considered and reply of the authorised representative as well. It is neither convincing nor acceptable to the department because it is not satisfactory. No evidence in support of this produced. No manufacturing record brought on record. Further, in assessment years 1986-87, 1987-88 and 1988-89 assessee had declared yield of cotton yarn as under

The production results for assessment years 1986-87 and 1987-88 were not accepted by the department and when contested in appeal, the learned CIT(A). Faisalabad, Zone, Faisalabad vide Appellate Orders Nos.569 and 570 dated 29-8-89 fixed the yield of cotton yarn at 85%. Likewise in assessment year 1989-89 the yield declared by the assessee was 82.06%. It was not accepted by the department and accordingly estimated at 85% and as addition of value of yarn 102122 KG amounting to Rs.35,79,376 was made."

6. The learned counsel for the assessee at the time of hearing did not object to the adoption of yield of yarn of cotton consumed at 85% but emphasised that by adopting, the yield of cotton yarn at 85% the ITO has not allowed adjustment in respect of waste. According to the learned counsel of the assessee the ITO has simply indicated in the assessment order that yield of cotton yarn is being adopted at 85% of the cotton consumed without discussing the percentage of hard waste, soft waste or invisible loss. According to the learned counsel of the assessee if treatment of the ITO is accepted it will result in absurdity inasmuch as total cotton consumed will be more than 100%. The learned counsel of the assessee illustrated this point as under:--

Thus, according to the learned counsel of the assessee total cotton consumed will be 102.96% instead of 100% which according to the learned counsel is not possible. The learned counsel of the assessee also pointed out that while calculating the yield the I.T.O. has not considered any allowance for invisible loss which is admissible at 1% and should be allowed by the I.T.O. to the assessee.

7. The learned D.R. supported the order of the I.T.O. and contended that by adopting the yield of cotton yarn at 85% in fact the I.T.O. has already considered the wastage in various hands.

8. We have carefully considered the facts and arguments advanced from both the sides. We are inclined to accept the contention of the- assessee as far as adjustment of waste is concerned. In this case yield of cotton yarn has been adopted in the past at 85% and it has also not objected to by the learned counsel of the assessee. However, the contention made by the learned counsel of the assessee that if only yield of cotton yarn is considered then it will result in absurdity is correct. Accordingly we direct that the yield of cotton yarn should be adopted at 85%, invisible waste should be allowed at 1% as in other parallel cases. Balance adjustment should be made in soft waste because hard waste declared by the assessee at 1.99% seems to be quite reasonable. The I.T.O. is directed to calculate the addition on the following basis:

The addition should be calculated accordingly.

9. G.P. rate.---The assessee declared the trading results as under:--

The I.T.O. issued a show-cause notice to the assessee indicating that G.P. rate declared by the assessee was low and the assessee should explain as to why same G.P. rate may not be applied as in last year. The assessee furnished explanation as under:--

"In the case of spinning units gross profit is not applied. It can vary from year to year and even from month to month. It is strange that your goodself wants to apply G.P. rate in the case of spinning unit. Gross profit depends on purchase rate of raw material and other manufacturing trading expenses and sale rate of yarn. In spinning units like ginning we have to see whether production of yarn is up to the mark as compared with other units of the same type, our unit is an old unit with old machinery and was even declared a sick unit by H.U. Baig Committee. In view of this fact production results even cannot be compared with modern units."

The ITO did not accept the explanation of the assessee and applied G.P. rate at 15.12% on the ground that in the assessment year 1988-89 the assessee had itself declared G.P. rate at 15.12% and that assessee had made addition of new plant machinery to the extent of Rs.2,91,55,131 in the year under consideration and that cotton lint was purchased by the assessee from the areas where better quality of cotton was available. The ITO also observed that entire sales of the assessee are unverifiable. With these observations the ITO applied a G.P. rate at 15.12% to the assessee's declared sales of Rs.11,87,93,555 and thus made an addition of Rs.45,08,941.

10. The learned CIT(A) confirmed the G.P. rate applied by the ITO at 15.12%. The learned counsel of the assessee objected to the application of G.P. rate on the following grounds:--

(1)That in cases of Textile Mills, Cotton Ginning Units, Oil Mills G.P. rate is not applied but addition if any is made on account of low yield or on the basis of unsatisfactory production results declared by the assessee.

(2)That in the assessment year 1988-89 no G.P. rate was applied in this case.

(3)That ITO has made addition on one hand on account of low yield but on the other the ITO has also made addition on the basis of G.P. rate which is double addition.

According to the learned counsel of the assessee by making addition on the basis of low yield at Rs.43,07,379 G.P. rate evolved is 14.5% and by applying G.P. rate at 15.12% there will only be a difference of Rs.73,000. Hence application of G.P. rate in this case was unwarranted.

11. The learned D.R. on the other hand defended the orders of the authorities below and contended that addition in this case was made on account of unverifiable sales and unverifiable nature of debit side of the trading-cum-manufacturing account whereas addition on account of low yield was made because of unsatisfactory production results.

12. We have carefully considered the arguments advanced from both the sides. We agree with the arguments of the learned counsel of the assessee inasmuch as in making addition on account of low yield of cotton yarn and simultaneously on account of low G.P, rate the ITO has made double addition in this case which is not desirable. On the other hand we also noted that in this case G.P. rate was applied on the basis of past history of the case. Similarly yiled was adopted by the ITO on the basis of past history of this case. The desirable approach will be that double addition should not be made in this case or any other case. We, therefore, direct that the same G.P. rate be applied as done by the ITO. However, the addition on account of G.P. rate and low yield should be made in the following manner

12-A. We have also directed that while making addition in yield account adjustment should be given to the assessee in respect of invisible waste. If this is done then addition in yield account will further decrease to that extent and balance addition can be made by the ITO on account of G.P. rate applied at 15.12%. In this way double addition made by the ITO. will be deleted.

12-B. The next issue agitated by the learned counsel of the assessee is disallowance of interest. ITO disallowed an amount of Rs.8,35,637 with the following observations:-.-

"In the balance-sheet filed for the year ending 30-9-1988, assessee had shown a sum of Rs.46,42,427 as receivable from the associate undertakings and others. Assessee 'was confronted on this point through specific notice (No. and date mentioned above) to intimate the date of advancing the above amount and also intimate whether any interest has been charged on this advance, if not, what are the reasons and as to why the interest paid on this amount to the financial institutions approximately Rs.8,35,637 may not be disallowed because of the reason that the amount was not wholly and necessarily invested in the business.

In response to the above, the learned authorised representative vide para.10 of his reply dated 28-6-1992 (furnished on 29-6-1992) stated:

"That as regards amount receivable from associate undertakings and others amounting to Rs.46,42,427 it is not an advance. Nature of these amounts is that of trading which is part of our business activity. Detail of these amounts is being verified. In view of above proposed addition of Rs.835,637 is not justified and uncalled for."

The reply of authorised representative has been contemplated. The contention of authorised representative is not supported by any evidence. Further, he has not given the name of associate undertakings to whom with trading was done. Further, no detail filed (observation recorded on the margin of reply). In these circumstances when assessee has failed to establish any trading connection with the associate undertakings and others, the above amount is treated as an advance, therefore, the interest paid to financial institutions is disallowed because the above amount was not invested in the business."

13. The learned CIT(A) confirmed the above addition with the following observations:

"The appellant declared outstanding balance of Rs.46,42,427 receivable from associate undertakings. The ITO called upon the appellant to explain why the proportionate Bank interest may not be disallowed. The appellant failed to substantiate his version; even the particulars of the said associate undertakings were not furnished. In the absence of relevant details, the ITO disallowed the proportionate interest, which is reasonable and is confirmed."

14. The learned counsel of the assessee has vehemently contested this addition on the ground that ITO has made addition on the basis of assumption that the assessee had advanced this amount to associate concerns which is not correct. The ITO has not provided any evidence on the basis of which this assumption can be considered to be correct. The learned counsel of the assessee explained that in fact this amount represents balance on account of trading. The learned counsel of the assessee contended that assessee sold its cotton yarn through M/s. Zafar Textile Traders vide agreement, dated 1-7-1986 and M/s. Zafar Textile Traders were given commission. According to learned counsel of the assessee during the year under consideration commission paid to M/s. Zafar Textile Traders was at Rs.1,39,55,999 and the balance of Rs.46,42,427 is on account of dealing of the assessee with M/s. Zafar Textile Traders. This balance was on account of routine trading transactions of the assessee with M/s. Zafar Textile Traders. The learned counsel of the assessee contended that office of the Zafar Textile Traders was situated adjacent to the office of the assessee and when assessee's office got fire the record of M/s. Zafar Textile Traders was also burnt. According to the learned counsel of the assessee in the earlier years also there was balance outstanding towards M/s. Zafar Textile Traders but no addition was made on this account and similarly in subsequent years also no addition was made.

15. The learned counsel of the assessee contended that assumption of the ITO that assessee had advanced any amount to M/s. Zafar Textile Traders is not factually correct. However, if for the sake of arguments assumption of the ITO is taken to be correct even then no addition could be made under this head. Learned counsel of the assessee in this connection relied on following reported cases:-- .

(i) 1991 PTD 53 (Trib.); (ii) 1986 SCMR 968; (iii) 1957 PTD 147.

According to the learned counsel of the assessee the higher Courts have laid down a criteria for allowing the interest on borrowed capital:

(1) Capital is borrowed for the business purpose.

(2)That the amount of interest had been paid by the assessee.

Learned counsel of the assessee pointed out that ITO has not disputed the payment of interest which is quite genuine. Hence there was no justification for making any disallowance on account of interest as done by the ITO.

16. The learned D.R. on the other hand supported the orders of the authorities below and contended that since the assessee had not furnished any evidence regarding the amount receivable the ITO was justified in making disallowance on proportionate interest.

17. We have carefully considered the facts of the case. It will be relevant to reproduce the provisions of law regarding the allowance of interest expenses. The interest on borrowed capital is allowed to the assesee under clause (vii) of section 23(1) of the Income Tax Ordinance, 1979 which clause is reproduced as under:--

"Any interest paid in respect of capital borrowed for the purpose of business or profession."

The above clause does not indicate any further condition for allowing interest to the assessee except that assessee should have paid interest on capital borrowed for the purpose of business or profession. This question of allowing interest to the assessee came into consideration by Supreme Court of Pakistan in case reported as 1992 PTD 954 (CIT v. Pakistan Industrial Engineering Agency, Civil Appeals Nos. 17-K, 18-K and 19-K of 1989, decided on 9-12-1991). In this case their Lordships of Supreme Court of Pakistan observed as under:--

"The assessee would be entitled to claim allowance under this provision provided it satisfies that--

(i)he has borrowed capital;

(ii)such borrowed capital was for the purpose of business, profession or vocation, and

(iii)that interest has been paid on such borrowed capital. The borrowing of capital should be genuine and not merely a shame or illusory."

18. In the above case the facts were that the above Private Limited Company had taken a loan from two of his shareholders to the extent of Rs.1,50,000 each. The appellant in that case had been paying interest to the shareholders year after year. However, for the relevant year the ITO found that assessee had fixed deposits exceeding the loan in each of the year. The ITO could not believe that this could be a business loan on the ground that no prudent businessman would obtain a loan and pay interest at 9% when he was receiving from the Bank fol fixed deposit interest only at the rate of 4-1/2%. It was not the rate of interest which was the subject-matter of dispute but the very loan itself or the advisability of having the loan when it could be repaid as the creditors were shareholders. In the present case under appeal facts are more favourable to the assessee than in the above decided by Honourable Supreme Court of Pakistan. The ITO has not disputed the payment of interest to the Bank by the assessee. The ITO has disallowed the interest only on the ground that assessee had made advances to sister concerns for which no evidence was furnished by the ITO.

19. Considering the criteria laid down by the Honourable Supreme Court in the above case that assessee would be entitled to claim allowance under this provision if it satisfied that--

(1)assessee had borrowed capital;

(2)such borrowed capital was for the purpose of business and the interest has been paid on such borrowed capital.

It is also pertinent to mention here that in the earlier years no such disallowance was made by the ITO. Considering these facts we are of the view that the disallowance made by the ITO under this head was not justified and it is deleted accordingly.

20.The last issue agitated by the learned counsel for the assessee was in regard to the refusal of the ITO to allow initial depreciation and triple shift allowance to the assessee. The facts briefly are that during the year under consideration the assessee claimed that it had installed new machinery to the extent of Rs.2,91,55,131 and claimed initial depreciation on this amount alongwith the triple shift allowance. The ITO allowed initial depreciation on amount of Rs.1,82,07,593 to the extent of Rs.45,51,898 with the following observations:

"In order to entertain the initial depreciation allowance, assessee was required to give evidence that plant and machinery was new and not utilized previously so that initial depreciation @ 25% may be allowed on the W.D.V. of Rs.29,55,131. No evidence was furnished on the due date i.e. 15-6-1992. However, in response to another notice on 30-6-1992 assessee's authorised representative has furnished a few photo copies of bill of entries and L.Cs. etc. These evidences show that new plant and machinery worth Rs.1,82,07,593 was imported which went into operation during the year. The bills of erection etc. not provided, therefore, the claim is restricted to the above figure and computed as under:"

21. The learned counsel of the assessee on the very outset has admitted that observations of the assessing officer are correct. The assessee could not produce anv evidence in support of entire new machinery installed to the extent of Rs.2,91,55,13h The assessee only furnished bills of entries for verification in respect of imported machinery to the extent of Rs.1,82,07,593. The learned CIT(A) confirmed the treatment of the ITO given to the assessee. The learned counsel of the assessee whoever contended that there are sufficient reasons and grounds to consider the issue afresh. The learned counsel of the assessee also made an application for admitting fresh evidence on the following grounds:--

(1) That in this case office of the assessee got fire and the entire record of the assessee was burnt. The learned counsel contended that not only this the Managing Director of the assessee suffered a serious heart attack as a result of which he went abroad for treatment of the heart and he was advised not to move from the bed.

(2)The learned counsel of the assessee pointed out that actually details for local machinery were available in the factory office but since the M.D. was seriously ill there was no one to present this evidence before the ITO. The learned counsel of the assessee contended that because of the circumstances beyond the control of the assessee necessary evidence could not be furnished before the ITO for purchase and installation of plant and machinery and it should be allowed to be produced now either before the ITAT or before the ITO concerned.

22. The learned counsel of the assessee also argued that ITAT has power to entertain fresh evidence if warranted by the facts of the case. The learned counsel of the assessee in this connection relied upon following reported cases:-

(i)1987 PTD (Trib.) 256.

(ii)1987 PTD 262.

(iii)1992 PTD 393.

(iv)1992 PTD Note 248 at p.267.

23. The learned D.R. on the other hand opposed the application for production of fresh evidence on the ground that there was no valid reason for admitting fresh evidence at this stage because if the M.D. was sick there were other Directors who could produce necessary evidence before the ITO. The learned D.R. also contended that assessee having the facility of expert tax advisor who could look after the interest of the assessee; fresh evidence should not be allowed to be entertained at this stage.

24. We have considered the facts of the case and arguments advanced from both the sides. It would be pertinent to examine the powers of the ITAT to entertain the fresh evidence. These are under Rule 24 of the ITAT Rules, 1981 which rule is reproduced below:--

"24.Production of additional evidence before the Tribunal.--No party to the appeal shall be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders, or for any other substantial cause or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points, specified by them or not specified, the Tribunal may allow or may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced."

25. In the assessment order the ITO has not disputed the contention of the assessee that the record has been burnt. In fact the assessing officer has admitted the loss of record due to fire. The relevant observations of the ITO are reproduced as under:--

"It may be true that due to fire accident which took place in the office of the company the record may have burnt but the onus is upon the assessee to provide evidence, documents, manufacturing record, quantitative data of production, quantitative data of purchase of cotton lint and other raw material consumed and books of account which may help to substantiate the declared version."

Thus, in this case record lying in the office was burnt due to fire and the M.D. of the assessee Company suffered a serious heart attack because of which he had to go abroad for treatment. But we are not allowing the assessee to produce fresh evidence because of the above reasons but on the contrary we are allowing the assessee to produce fresh evidence because of the observations of the ITO in the assessment order. The ITO has very categorically stated at page 13 of the assessment order that assessee has installed new machinery to the extent of Rs.2,91,55,131. These observations were made by the ITO while discussing the assessee's contention regarding low G,P. rate. These observations are reproduced as under:--

"Secondly, in the period under review, in addition to old machinery, new plant and machinery worth Rs.2,91,55,131 has been added. It went into operation during the year. The excuse of old plant and machinery is therefore lame and not convincing."

Not only these observations have been made by the ITO admitting that the assessee installed new machinery worth Rs.2,91,55,131, but as pointed out by the learned counsel of the assessee the ITO has not made any disallowance on account of lack of evidence in respect of normal depreciation. The ITO has allowed normal depreciation on the entire new machinery.

26. Because of these reasons we believe that there is sufficient cause to allow the assessee to produce fresh evidence on the point of initial depreciation. We accordingly set aside the assessment on this issue and remit the case back to the ITO to examine the initial depreciation afresh on the entire machinery after allowing the assessee adequate opportunity to present its case. As far as the triple shift allowance is concerned the facts are similar as in respect of initial depreciation. The ITO has not allowed triple shift allowance on the machinery on which initial depreciation was not allowed to the assessee. Since the facts are same, we remit the case back to the ITO and direct that assessee's claim of triple shift allowance should be considered alongwith initial depreciation afresh after allowing the assessee opportunity to prove its case.

27. The appeal of the assessee is allowed as above.

M.B.A./79/Tappeal allowed.