Income Tax Ordinance (XXXI of 1979)---

----Ss: 59(1), (3) & 65(1)(c)---Self-Assessment Scheme (1987-1988), para.4(4)(b)---Additional assessment---Assessing Officer, while completing the assessment under S. 59(1), Income Tax Ordinance, 1979 made disallowance by way of adjustment under S. 59(3) of the Ordinance---Validity---Held, while purporting to exercise power under S. 59(3) of the Ordinance, Assessing Officer travelled beyond the scope of S. 59(3) of the Ordinance and the Self-Assessment Scheme---Assessing Officer, in circumstances, ought to have completed the assessment under S.59(1) and subsequently could re-open the assessment under S.65(1) of the, Ordinance to make the additional assessment.

Mahfoozur Rehman Pasha, D.R. for Appellant.

Salman Pasha for Respondent.

Date of hearing 30th November, 1995.

ORDER

This appeal at the instance of department is directed against the order dated 2-5-1988 by the learned C.I.T.(A), Zone-1, Karachi in I.T.A. No.CIT/Z-1/659/88 relating to the assessment year 1987-88.

2. The sole objection raised on behalf of the department is that the learned C.I.T. (A) was not justified to direct the assessing officer not to make adjustment under section 59(3) while making assessment under section 59(1).

3. Heard Mr. Mehfoozur Rehman Pasha, learned representative for the department and Mr. Salman Pasha, Advocate for the respondent.

4. Briefly stated the relevant facts are that the assessing officer completed the assessment under section 59(1) under self-assessment scheme. While completing assessment under section 59(1) the assessing officer made A disallowance of Rs.10,09,698 by way of adjustment under section 59(3) in the following manner:--

(1) Disallowance of interest expenses on borrowed capital not utilised for business. --During the assessment year under consideration the assessee had incurred interest expenses amounting to Rs.91,81,330 on borrowed capital. Perusal of the balance-sheet as on 31-12-1986 showed that the assessee had also advanced interest free loans amounts to its sister concerns as well as directors the details of which is given as under: --

Vide this office letter dated 24-11-1987 the assessee was specifically requested to explain as to why interest expenses proportionate to the interest free amounts advanced to sister concerns and directors should not be disallowed. M/s. Sharif & Co. Advocates vide Serial No.7 of their letter No.A/142 (87-88) dated 20-12-1987 stated that the amounts in question were trade advances and therefore, interest expenses could not be disallowed. However, perusal of the ledger accounts of sister concerns furnished by the assessee showed that these were simple advances and did not involve any amount which was of trade nature. No business have been transacted amongst the sister concerns. Therefore, the assessee was again confronted on this issue vide this office letter dated 30-1-1988. M/s. Sharif & Co., Advocates vide their letter No. Nil dated 2-2-1988 stated that the major advances were made to M/s. Atlas Rubber and Plastic Industries Limited and Simpson Wires Limited. The entire amount was stated to be purely for prospective business which shall capitalise in the succeeding assessment years. In other words, the counsel for the assessee had admitted that these advances were not of trading nature for the assessment year under consideration. It was further stated that the advances were made out of funds available with the assessee and not from the capital borrowed from the banks. This plea is also not correct because last year the amount of short terms and long terms borrowings was to the tune of Rs.4,50,23,140, whereas this year the figure of loan has shot up to Rs.7,04,67,450. Moreover, the assessee has no accumulated amount which could generate the source out of which advances claim to have been made. In this circumstance both the pleas taken by the counsel for the assessee (a) advances being of trade nature and (b) that the advances were made out of funds available with the assessee-company; are not acceptable/tenable. Therefore, the plea taken by the assessee is not tenable under the law. Therefore, interest expenses proportionate to the advances to sister concerns and Directors of the company are being disallowed in accordance with law. Proportionate disallowance is worked out as under: --

5. The assessee assailed the addition before the learned C.I.T. (A) contending that the 1.T.0. while making assessment under section 59 could make adjustments as are covered by 'the provisions of subsection (3 ) of section 59. It was contended that the disallowance of proportionate interest is not covered by the provisions of section 59(3) because the interest as such was not legally inadmissible expense. The question if the capital was or was not borrowed for the purpose of business or profession is a moot point and outside the ambit of, sub-clause (4) of clause (b) of para. 4 of the Self-Assessment Scheme for the assessment year 1987-88. It was pleaded that instead of making the impugned addition under section 59(3) the assessing officer should have finalized the assessment under section 59(1) and could have later proceeded on under section 65(1)(c) to make addition. The contention was accepted by the learned C.I.T. (A) and it was held by him that the adjustment made was outside the purview of adjustment envisaged under section 59(3) of the Income Tax Ordinance, 1979.

6. The department is aggrieved with the above finding. The learned D.R. is not able to show that the adjustment made by the assessing officer fell within the purview of subsection (3) of section 59. The learned counsel for the respondent has submitted that if such detailed enquiry and probe is allowed to be made in the self-assessment scheme then the entire self-assessment scheme shall become meaningless. We are persuaded to agree with the submission of learned counsel for the respondent. In fact the assessing officer has dealt with the issue as if he was completing the assessment under section 62 or of 63 the Income Tax Ordinance, 1979 and not under section 59(1). We are of the considered opinion that while purporting to exercise power under section 59(3) the assessing officer travelled beyond the scope of section 59(3) and the self-assessment scheme. In these circumstances the learned C.I.T. (A) rightly held that the assessing officer ought to have completed the assessment under section 59(1) and subsequently could reopen the assessment under section 65(1)(c) to make the additional assessment. We do not find any reason to interfere with the impugned finding of learned C.I.T.(A) which is hereby maintained.

7. The appeal at the instance of department stands dismissed accordingly.

M.B.A./204/T Appeal dismissed.