1995 P T D 752
[Karachi High Court]
Before Mamoon Kazi and Mrs. Majida Razvi, JJ
LAL MUHAMMAD ABDUL SATTAR & CO.
Versus
COMMISSIONER OF INCOME-TAX
Income Tax Reference No. 35 of 1987, decided on 21/02/1995.
(a) Income-tax---
----Rejection of accounts---Income Tax Officer has to form an opinion upon tangible material, which should not be subjective.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 136---Reference---Question of law---Finding of fact---Rejection of accounts without any evidence and on the basis of conjectures and presumptions is a question of law for a finding of fact can also be challenged on the ground that there is no evidence to support such finding of fact or that the fording is based on conjectures, presumptions and irrelevant material-- Where the finding of the Tribunal clearly appeared to be based on surmises, conjectures and irrelevant material while the evidence brought on record by the assessee was completely overlooked, finding of the Tribunal involved question of law.
Star Rolling Mills v. C.I.T. 1974 PTD 200; M/s. Dhanrajmal Manumal & Sons v. CIT 1985 PTD 33; Bean H.M. Inspector of Taxes v. Doncaster Amlgamated Coiling Ltd. (1946) 27 TC 296; Industrial Management Limited,
Karachi v. CIT (1978) 38 Tax 5; M/s. Sultan Textile Mills Limited v. CIT 1990 PTD 241 and Mrs. Yasmeen Lari v. Registrar, Income-tax Appellate Tribunal 1990 PTD 967 ref.
(c) Income-tax Act (XI of 1922)---
----S.10(2-A)---Addition---Assessee, engaged in running a cotton 'ginning factory--- Income-tax Officer ,made the addition on the ground that assessee had sufficient funds and Phutti was also available in abundance but enough purchases were not made by the assessee---Validity---Evidence led by assessee before the Income-tax Officer consisted of regular books of account and purchases supported by Qabalas and actual vouchers of payments to the sellers as well as the detailed explanation of the assessee---Tribunal had deleted additions of similar nature in earlier years---Held, assessee being a business concern, knew the fluctuations in the market and could decide when to make purchases---Income-tax Officer having not alleged that there was no voucher showing purchase of goods and had not brought any comparable evidence to justify the addition, Tribunal was not right in upholding the addition as such.
(d) Income-tax Act (XI of 1922)---
----S.10(2-A)---Addition---Assessee, engaged in running a cotton ginning factory--- Ginning and pressing expenses ---Assessee, in a way had proved the expenses incurred by him in ginning and pressing account---Accounts were found to be verifiable by the Appellate Assistant Commissioner in appeal---Income-tax Officer had failed to show basis or ground to disprove or falsify the accounts---Tribunal was not justified in restoring the addition made by the Income-tax Officer in the ginning and pressing expenses account.
(e) Income-tax Act (XI of 1922)---
----S. 10(2-A)---Addition---Computation of profits and gains of a company under S.10(2-A) of the Income-tax Act, 1922---Condition precedent---Certain .amount appeared in the name of another concern as a credit balance coming from the past year and the amount was added by the Income-tax Officer as being a trading liability but nowhere such trading liability had been claimed or allowed in the assessment of any preceding years---Held, in order to make a sum computable as profits or gain of a company under S.10(2-A) of the Income-tax Act, 1922, such amount should have been first allowed to be deducted in any year as loss, expenditure or trading liability which was not done in the case---Income-tax Appellate Tribunal, therefore, was not justified in upholding the addition.
In order to make a sum computable as profits or gains of a company under section 10(2-A) of the Income-tax Act, 1922 such amount should have been first allowed to be deducted in any year as loss, expenditure or trading liability under section 10(2-A) and the assessee in any subsequent year had received, either in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or had obtained some benefit in respect of such trading liability by way of remission or cessation thereof.
In the present case, the amount of Rs.3,05,776 appearing in the name of another assessee was a credit balance coming from the past years. This amount had been added by the ITO as being a trading liability. But nowhere such trading liability had been claimed or allowed in the assessment of any preceding year as envisaged in law.
The Tribunal examined the accounts and accepted the alternative plea of the assessee by adding Rs.2,29,795 which was a three years' old loan. This it self showed that the Tribunal found the addition made by the I.T.O. as not justified.
Held, in order to make a sum computable as profits or gains of a company under section 10(2A) of the Act, such amount should have been first allowed to be deducted in any year as loss, expenditure or trading liability.
CIT v. Jethabin Gokal 1983 PTD 30 ref.
Sirajul Haq Memon for Petitioner.
Shaikh Haider for Respondent.
Date of hearing: 11th January, 1995,
JUDGMENT
MRS. MAJIDA RAZVI, J.---The following questions have been referred under section 136(1) of the Income Tax Ordinance, 1979 for the decision of this Court:
(1) Whether on the facts and circumstances of the case the Appellate Tribunal was justified in upholding the addition of Rs.92,824 in purchase of Phutti?
(2) Whether on the facts and in the circumstances of the case the Tribunal was legally justified in restoring the addition of Rs. 2 lack made by the Income Tax Officer in the ginning and pressing expenses account?
(3) Whether on the facts and in the circumstances of the case the Appellate Tribunal was legally justified in upholding the addition of Rs.2,29,795 under section 10(2-A) of the repealed Income Tax Act?
The applicant in `this case is a firm engaged in running of a cotton ginning factory at Tando Allah Yar which was taken on lease from M/s. Almas Cotton Ginning and Pressing Factory. The Assessee filed their income tax return for the year of assessment 1976-77 for the accounting period ending 31-8-1975 under section 23(3) of the Income Tax Ordinance. In their return the business activities indicated a short-fall in the total sale of cotton and m over-all sale compared to the preceding year, which was explained by the Assessee.
The Income Tax Officer (ITO), did not find the explanation satisfactory because., according to him, "the average purchase rate declared was Rs.81.10 as against last year's purchase rate of Rs.104.16. The Assessee had sufficient funds. Phutti was also available in abundance and therefore purchase of lesser quantity of Phutti during the year was not understandable". He also found discrepancies in the Phutti Register as regard to actual arrival of Phutti and its entries m the Ginning Register. The ITO also noted that there was no closing stock of Phutti and that there were variations in the rates of purchase of Phutti even on the same day. Therefore, according to the ITO, the explanation furnished by the Assessee was self-contradictory and, as such, he found that production account was not correct and the crushing expenses claimed by the Assessees were inflated. The ITO, while making the assessment final, made an addition at the rate of 0.51 per cent. in the cost of Phutti, which came to a total amount of Rs.92,824. Regarding additions made to ginning and pressing Account, he added an amount of Rs.200,000. He further added an amount of Rs.3,05,776 to the Income Tax Returns filed by the Assessee.
An appeal was filed before Assistant Appellate Commissioner of income Tax, Hyderabad against the order of the ITO. The learned Appellate Assistant Commissioner upheld the additions made by the ITO in other heads except addition of lump sum amount in Ginning and Pressing Expenses (Manufacturing expenses) was disallowed. According to him, there was no basis for such addition as the details of expenses which were filed by the assessee were verifiable. He reduced the amount to Rs.36,000 as total unverifiable expenses.
The assessee, being aggrieved by the said order of the Assistant Appellate Commissioner, filed the appeal before the Income Tax Appellate Tribunal. The Department also filed an appeal against the reduction of the amount from Rs.200,000 to Rs.30,000: The learned Tribunal, while confirming the decision of the Assistant Appellate Commissioner on the point of addition of Rs.92,824 in Phutti Account and addition of Rs.3,05,776 under section 10(2-A) of the repealed Act of 1922, reversed the order in regard to manufacturing expenses observing that the learned Appellate Assistant Commissioner had erred in reducing the amount from Rs 200,000 to.Rs.30,000. He, therefore, restored the order of the ITO on this Head.
We have heard Mr. Sirajul Haq Memon, learned counsel for the Applicant and Mr. Shaikh Haider, learned counsel appearing for the Department.
Mr. Shaikh Haider strongly supported the order of the Tribunal, contending that the decision of the Tribunal was a decision purely on facts and did not involve any question of law and, consequently, the same cannot be referred to this Court under section 136 of the Income Tax Ordinance.
Mr. Sirajul Haq, learned counsel for the applicant, on the other hand has contended that there was plethora of case-law that accounts cannot be rejected and additions made on the basis of mere guesswork, presumptions and conjectures.
It may be pointed out that the ITO has to form an opinion upon tangible material which should not be subjective. Rejection of account without any evidence and on the basis of conjectures and presumptions is a question of law because a finding of fact can also be challenged on the ground that there is no evidence to support such finding of fact or that the finding is based on conjectures, presumptions and irrelevant material.
In the case of Star Rolling Mills v. CIT (1974 PTD (H.C. Kar.) 200), it was observed that:
"Although, the application of the second part of the proviso is made dependent solely ,on the opinion of the Assessing Officer that the method employed by the assessee is such that its income, profits and gains cannot properly be deducted therefrom, the proviso does not give any arbitrary unguided uncontrolled or naked power to the Assessing Officer "
An opinion on the basis whereof a statutory authority is entitled or empowered to take any action or initiate any legal proceeding, may be accurate or erroneous, but it must be an honest opinion or conviction, based on tangible material capable of sustaining such opinion, and not mala fide opinion or a colourable exercise of statutory power."
In the case of M/s. Dhanrajmal Manumal and Sons v. CIT (1985 PTD 33 (Kar. H.C.), it was observed as under:
"(i) In our view, this Court has always the jurisdiction to intervene if it appears that either the Tribunal has arrived at a finding based on no evidence or wherethe finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated. In a number of cases the Superior Courts have set out the principles upon which they will interfere with the findings of fact arrived at by Tribunal. We need not in this case travel beyond the scope of those principles. The Tribunal, in our view, has failed to take into account the relevant material on record in arriving at its findings."
In the case of Bean H.M. Inspector of Taxes v. Doncaster Amalgamated Colling Ltd. (1946) 27 TC 296) the House of Lords observed:
"Unless the Commissioners, having found the relevant facts and put to themselves the proper question, have produced to give right answer, they may be said, on this view, to have erred in point of law. If an inference from facts was not logically allowed with and followed from them then one must say that there is no evidence to support it. To come to a conclusion which there is no evidence to support is to make an error of law."
Similarly, in the case of industrial Management Limited, Karachi v. CTT (1978) 38 Tax 5 (Kar. H.C.) it was observed as under:
"Even in the case of finding of fact based on no evidence or on material which was irrelevant to the enquiry or where the decision is based on conjectures, surmises and suspicion, it is settled law that an issue of law arises and the finding of the Tribunal can be interfered with."
In the case of M/s. Sultan Textile Mills Limited v. CTT (1990 PTD 241), observations were made as under:
"Question whether there was any basis for applying 17-1/2% and 20-1/2% as the rate of profit on the estimated sales is a section of law."
In the case of Mrs. Yasmeen Lari v. Registrar, Income-tax Appellate Tribunal (1990 PTD 96'7) it was observed that:
"However, relevant to section 136, where findings of facts are based on conjectures or surmises or on material which has no evidential value, or partly so, in such manner that it is not possible to conclude which part resulted in the relevant finding, such finding has nor sanction in law and a question of law arises. This is so as the question whether there is any evidence to support a finding of fact is a question of law and can be raised on a reference. Even where, on proved or admitted facts, further deductions or conclusions of pure fact are drawn, it is always a question of law whether such proved or admitted facts provide due evidence for further conclusions of fact. Similarly, purport or construction of a document can only be a question of law. The Tribunal's misdirecting itself in arriving at a finding such as by overlooking or ignoring a crucial fact or document or affirming an assessment order in violation of the fundamental principles of justice would also vitiate its finding and give rise to question of law."
We are accordingly of the view that the questions refrained by the Tribunal are "questions of law". The finding of the Tribunal clearly appears to be based on surmises, conjectures and irrelevant material while the evidence brought on record by the assessee was completely overlooked.
On merits, in regard to question No. l, the ITO added Rs. 92,824 in Phutti Account as he was not satisfied with the explanation of the assessee. We have perused the order of the ITO and the decision of the learned Appellate Assistant Commissioner and of the Tribunal. The evidence led before the ITO consisted of regular books of account and purchases supported by Qabalas and actual vouchers of payments to be sellers as well as the detailed explanation of the assessee. We have also noted that in the earlier yearsimilar additions under reference were made but the same were deleted by the Tribunal itself. The remarks of the Income-tax Officer that the assessee had sufficient funds and Phutti was also available in abundance but enough purchases were not made by the assessee could not justify addition of 0.51 paisas per maund. The assessee being a business concern, knew the fluctuations in the market and could decide when to make purchases. There seems to be no allegation that there were no vouchers showing purchase of goods. The ITO himself has brought no comparable evidence to justify his action.
For the aforesaid reasons, the answer to this question is in negative.
The second question relates to the addition of Rs.200,000 which the ITO had made in ginning and pressing expenses. The Appellate Assistant Commissioner had given a definite finding on this count and accepted the explanation of the assessee that because of the devaluation of the Rupee in July, 1973, the cost price of all items like furnace oil, lubricants, bailing hoping and stores and other material had registered tremendous increase. He has also referred to the increase in factory staffs salaries. There were no allegation of vouchers being forged or manipulated. In a way, the assessee had proved the expenses incurred by him. In such circumstances, when there was no basis or ground to disprove or falsify the accounts, the ITO was not justified in adding a lump sum amount. The Appellate Assistant Commissioner after discussing in detail about the verifiable accounts, therefore, had validly reduced the sum to Rs.30,000. Accordingly, question No.2 is answered in negative.
The third question relates to the addition of Rs.2,29,795 under section 10(2-A) of the repealed Act of 1922.
The counsel contended that before any addition could be made under the said section, the precondition imposed was that trading liabilities should have been allowed as an expenditure/deduction in any previous year and, at least for three years such liability should have remained unadjusted. There is no such finding either by the ITO or by the Tribunal.
To appreciate the above contention, section 10(2A) may be reproduced as follows:
"10(2-A). Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and,---
(i) subsequently, during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure;
(ii) the assessee, during any previous year, has derived some benefit in respect of such trading liability; or
(iii) such trading liability or a portion thereof has not been paid within three years of the expiry of the previous year in which it was allowed, the amount received under clause (i) or the value of benefit obtained under clause (ii) or so much of the portion of a trading liability as has not been paid under clause (iii) shall be deemed to be the profit or gains of business, profession or vocation and to have accrued or arisen during the previous year referred to in clause (i) and clause (ii) or, as the case may be, during any previous year commencing after the expiry of the three years referred to in clause (iii), and the business, profession or vocation from the profits or gains of which such allowance or deduction was made shall, for the purposes of subsection (1) be deemed to be carried on by the assessee in the previous year in which such profits or gains are deemed to have accrued or arisen under this subsection:
`Provided that where a trading liability referred in clause (iii) or a portion thereof is paid in a sub-sequent year, a deduction of such amount as has been paid shall be made in computing the profits and gains under this section in respect of that year'.
A bare reading of the above provision will show that in order to make a sum computable as profits or gains of a company under section 10(2-A) of the Act, such amount should have been first allowed to be deducted in any year as loss, expenditure or trading liability under section 10(2-A) and the assessee in any subsequent year had received, either in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or had obtained some benefit in respect of such trading liability by way of remission or cessation thereof.
In the present case, the amount of Rs.305,776 appearing in the name of M/s. Almas Cotton Factory was a credit balance coming from the past years. This amount has been added by the ITO as being a trading liability. But nowhere we find that such trading liability had been claimed or allowed in the assessment of any preceding year as envisaged in law.
The learned counsel relied on the case of CIT v. Jethabin Gokal 1983 PTD 30, wherein a Division Bench of Peshawar High Court has held that "in order to make a sum computable of profits or gains of a company under section 10(2-A) of the Act, such amount should have been first allowed to be deducted in any year as loss, expenditure or trading liability.
In the present case, the Tribunal examined the accounts and accepted the alternative plea of the assessee by adding Rs. 229,795 which was a three years', old loan. This itself shows that the Tribunal found the addition made by the I.T.O. as not justified.
In the result, the answer to this question is in the negative.
The reference is disposed of accordingly. The parties are left to bear their own costs.
M.BA./L-78/KReference answered.