LENO ROZARIO VS GHULAM MUHAMMAD DOSSUL
1996 P T D (Trib.) 821
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Saleem Shad Qureshi, Judicial Member and Iftikhar Ahmad Bajwa, Accountant Member
I.T.A s. Nos. 84/LB and 85/LB of 1988-89, 2918/LB to 2921/LB of 1991-92 and 1654/LB of 1992-93, decided on 01/09/1994.
(a) Income tax
---Best judgment assessment---Estimate of sale ---Justification---Assessee, a caret manufacturer---Sales were being accepted all along and position of accounts during relevant assessment year was the same as in the earlier years-- Assessing Authorities then were not justified in estimating the sale of the said gars without specifying the defects in accounts or pointing out any, distinguishing features in the relevant years---Findings of the First Appellate Authority being based on hypothetical assumptions, income Tax Appellate Tribunal ordered the acceptance of assessee' s declared sales in circumstances.
(b) Income Tax Ordinance (XXXI of 1979)
----S. 63---Best judgment assessment---Past history of the case---Value---Past history of the case though is a reliable criteria of judging the reasonableness of the declared results for the purpose of assessment yet the relevant factors affecting business conditions in each year cannot be ignored.
ITA No. 6217/LB of 1986-87 ref.
(c) Income tax---
---- Declared rate of profit---Reasonableness---Determination---Question of increase in the cost of sales without corresponding increase in the rate of sales required a proper examination for judging the reasonableness of the declared rate of profit---Rate declared and applied in other parallel cases, at the same time, could not be totally ignored merely on account of a single assessment in the case which having no revenue effect had not been appealed against by the appellant.
(d) Income tax---
---- Addition---Assessee having failed to substantiate the expenses claimed under various heads, the additions as maintained by the First Appellate Authority could not be termed as excessive and unjustified.
Fayyaz Ahmad Ch. and Azhar Iqbal, FCA for Appellant. Shahid Zafar, D.R. for Respondent.
Date of hearing: 1st September, 1994.
ORDER
Appellant a private limited company deriving income from manufacture and sale of carpets is contesting the orders of the Revenue Authorities relating to assessment years 1985-86 to 1991-92. For assessment year 1986-87, only add-backs in P&L account are contested while for assessment years 1985-86 and 1987-88 to 1991-92 objections have been raised against additions in trading as well as P&L accounts.
2. The position of trading accounts in the years under appeal as compared with the immediately preceding year i.e. 1984-85 was as under:--
| Assessment Year | Sales | | G. P. rate | | Additions |
| | Declared | Estimated | Declared | Applied | |
| | | | | | |
| 1984-85 | 11975795 | 1105795 | 28.66 % | 30 % | Rs.160110 |
| 1985-86 | 20742519 | 20742519 | 16.53 % | 30 % | 2793372 |
| 1986-87 | 24344134 | 24344134 | 30.08 % | 30.08 % | Nil |
| 1987-88 | 25188590 | 26700000 | 29.56% | 30% | 565311 |
| 1988-89 | 29094718 | 31000000 | 22.10% | 30% | 2868632 |
| 1989-90 | 27179236 | 30000000 | 20.72 % | 30 % | 3367974 |
| 1990-91 | 35595504 | 39000000 | 22.57% | 30% | 3665065 |
| 1991-92 | 400043612 | 41000000 | 23.47% | 30% | 3901836 |
3. The trading accounts for assessment years 1985-86 and 1987-88 to 1991-92 were rejected for various defects detailed in the respective assessment orders. Appellant's A.R. disputed the findings of the assessing authorities claiming that though records maintained by the appellant had been rejected without adequate justification. Rejection of declared sales and estimate of the same for assessment years 1987-88 to 1991-92 was also challenged as unjustified. Likewise application of constant G.P. rate of 30% in the above assessments was claimed to be in complete disregard of the variable factors in each year. The additions as shown above were challenged as highly excessive and out of proportion to the minor defects detected in the accounts.
4. For assessment year 1985-86 which is the first year in appeal, the declared sales were submitted to be verifiable as in the preceding year. About the G.P. Rate i.e. 16.03% as against 28.65% in the preceding year, the ITO Observed as under:--
"In the earlier assessment year the declared sales were accepted being verifiable and the G.P. Rate 13% was applied. The comparison of the results of the two years would reveal that there is improvement in the sales as compared-to the last year, but fall in the G. P. Rate before depreciation. The G.P. shown is also low in line with the business shown by the assessee. "
'The ITO went on to point out that trading account expenses including purchases of raw-material, furnace oil, stores, spares etc. as well as manufacturing expenses were not fully verifiable nor any day to day account of consumption of raw material had been maintained. He also observed that stock account and production account had not been maintained. On the basis of these defects he applied G.P. Rate 30% as in the preceding year which resulted in addition of 27,93,372 in the trading account.
5. As indicated earlier sales as well as G.P. Rate for assessment year 1986-87 were accepted. Thus in all assessments up to 1986-87 sales were considered to be verifiable and accepted but in assessment years 1987-88 to 1991-92 even the sales were not accepted and as against the declared G.P. Rate of 29.56 % , 22.10 % , 20.72 % , 22.57 % and 23.47 % . G. P. Rate of 30 was applied on various figures of estimated sales. This resulted in additions of Rs.5,65,311, Rs.28,68,632, Rs.33,67,974, .Rs.36,65,065 and Rs.29,01,836 in assessment years 1987-88 to 1991-92 respectively.
For assessment year 1987-88, the position of trading account was discussed as under:--
Scrutiny of the accounts revealed that purchases are mostly unvouched and unverifiable and this fact stands admitted by the assessee vide order-sheet entry dated 5-6-1990. Sales are also partly unverifiable and no stock register is maintained. Therefore, the declared trading results are rejected and sales as estimated are Rs.2,67,00,000 and GP Rate of 30% is applied as per history of the case."
For assessment years 1988-89 to 1991-92 the accounts were rejected with routine observations of unverifiability and unsatifactory rate of profit and G.P. Rate of 30% was applied on the aforementioned estimated sales.
7. It is evident from the record of assessments as summarized above that rejection of the declared sales and estimate thereof in assessment years 1987-88 to 1991-g2 was without adequate justification. The position of record during these years was the same as in the preceding year. The sales had been made through appointed dealers most of which were the same through whom the sales made in assessment years 1984-85, 1985-86 and 1986-87 had been found to be verifiable. No instances of unverifiable sales had been confronted to the appellant in the course of assessment proceedings. On the date of hearing records were produced to show that sales which passed through the Excise Authorities were made on uniform rates through the appointed dealers. Appellant's objections against estimate of sales for assessment years 1987-88 to 1990-91 were disposed of in C-IT(Appeal's) order dated 12-9-1991 in the following words:--
"Quantum of turn-over. estimated in all these years has also been looked into. After due consideration it is found that the same appears to be fully consistent with the installed manufacturing capacity of the company. As mentioned above the rejection of declared sales is fully justified in view of the lower ness of GP Rate and other defects and deficiencies in accounts including the fact that the part of the sales are on cash basis and not fully verifiable. Sales assessed are thus confirmed. "
The above observations are not supported by records. "The installed manufacturing capacity" had nowhere been specified in the assessment orders or in the orders of the First Appellate Authority. Even the D.R. was unable to explain as to how the declared sales for assessment years 1987-88 to 1990-91 which were higher than the figures disclosed for the earlier three years (which had been accepted) were not consistent with the installed capacity and as to how the figures adopted in these assessments brought the quantum of turnover in conformity with the manufacturing capacity. For assessment year 1991-92, the declared sales were highest ever shown by the appellant yet the same were enhanced by 2.39% and this was confirmed by the First Appellate Authority following his predecessor's orders in respect of assessment years 1987-88 to 1990-91.
8. Since the sales were being accepted all along and position of accounts during assessing years 1987-88 to 1991-92 was the same as in the earlier years, the assessing authorities were not justified in estimating the same for the aforementioned year without specifying the defects in accounts or pointing out any distinguishing features in these years. There was even lesser justification for the findings of the First Appellate Authorities which were based on hyphothetical assumptions. Under the circumstances, the declared sales for assessment years 1987-88 to 1991-92 must be accepted.
9. So far as rate of profit is concerned, the G.P. Rate of 30% in assessment years 1985-86 and 1987-88 to 1991-92 was based on the assessment for assessment year 1984-85 against which no appeal had been filed. This action was also vehemently disputed by the appellant. It was pointed out that assessment year 1984-85 was the first year of the business when the maintenance of record had not been properly streamlined and application of G.P. Rate of 30% in the said assessment had merely resulted in addition of Rs.1,60,110. It was stated that consequence of this assessment was merely reduction of declared loss from Rs.1,34,89,557 to Rs.1,22,75,044. In view of the inconsequential impact of the said assessment it was not considered prudent to launch further litigation in the matter. It was argued t4at the assessing authorities were not justified in making a single, unimportant assessment as a basis for all subsequent assessments. According to the appellant quantum of unverifiable trading account expenses was of not such an extent as to justify additions of Rs.27,93,372, Rs.5,65,311, Rs.28,68,632, Rs.33,67,974, Rs.36,65,065 and Rs.29,01,836,in the aforementioned years. The A.R. further argued that the declared rate of profit in all these years was quite satisfactory and compared favourable with the parallel case of this trade. The variation in the rate of profit especially the significant decline in the rate of profit for assessment year 1985-86 was attributed to the prevailing market conditions which were claimed to have been totally ignored by the assessing authorities as well as First Appellate Authorities. Appellant's A.R. produced records to show that cost of sales had gone up subsequently during the year under consideration but since it was not matched by a corresponding increase in the rate of sales, the fall in the rate of profit was inevitable. The assessing officer has not adverted to these contentions at all while CIT(Appeals) had made -a reference to these contentions as under:
"For 1985-86 assessment year, it is stated that the learned ITO has commented that no stock register was maintained and day to day consumption of material is not available. It is claimed that the appellant is maintaining complete production record as well as stock record."
The CIT(Appeals) did not bother to rebut-the above contention but proceeded to confirm the G.P. Rate of 30% on the basis of earlier years assessments. The first appeal in respect of assessment years 1987-88 to 1990-91 was disposed of in a common order dated 12-9-1991 in which the question of G.P. Rate was discussed as under:--
"In the matter of application of GP Rate of 30% it follows from the discussion above that a GP Rate of 30% before depreciation is consistent with the past history of the case. As mentioned above the company itself in the past has declared GP Rate of 30% or GP Rate approaching 30%. Subsequently the deterioration in GP Rate has been attributed to adverse movements in the price of raw materials that the company was allegedly unable to offset by an increase price of the finished products by a suitable margin. However, this contention of the appellant is without any proof. Sufficient itemized data is not available with the appellant to establish that increase in prices of raw materials has been more than the increase in price of finished products. Under these circumstances application of GP Rate of 30% is fully in order. It has been held by the Superior Courts that the past history of the case is a better guide than reliance on so-called parallel cases. As mentioned above the history of the case is one of application of GP Rate of 30 % on the basis of declared GP Rate in a number of years at 30% or approaching 30% . Thus it would not be proper to reduce the GP Rate applied on the basis of treatment accorded in other cases."
10. The assumption that "history of the case is one of application of GP rate of 30% on the basis of declared GP rate in a number of years at 30% or approaching 30%" was clearly erroneous. Only once (i.e. in assessment year 1986-87) GP rate was shown to be 30% and in just one year G.P. Rate approaching 30 % (i.e. 28.6 % in assessment year 1984-85) had been declared. Obviously too much reliance has been placed on assessment for assessment year 1984-85 in the matter of application of rate of profit. No doubt past history of a case is a reliable criteria of judging the reasonableness of the declared results for the purposes of assessment yet the relevant factors affecting business conditions in each year cannot be ignored. So far as the fall in the rate of profit as a result of increase in the costs of sales is concerned, appellant's A.R. cited Tribunal's decision ITA No.6217/LB/1986-87, dated 20-9-1989. In the said case assessee' s declared G.P. Rate of 14.5% was not accepted and G.P. Rate of 25% was applied as had been applied in the said case in the earlier assessments but in first appeal ft rate of profit was reduced to 20% whereas in second appeal, the Tribunal vide its order mentioned above, directed the acceptance of the declared rate of profit. Appellant's contention that rate of profit disclosed by the appellant was not so low and was in fact quite reasonable in comparison with other cases appears to have been rejected by the lower authorities without adequate justification. The question of increase in the cost of sales without corresponding increase in the rate of sales requires a proper examination for judging the reasonableness of the declared rate of profit. At the same time, the rate declared and applied in other parallel cases cannot be totally ignored merely on account of single assessment i.e. for assessment year 1984-85 in this case which having no revenue effect had not been appealed against by the appellant. The five assessments are accordingly remanded back to the assessing authority for re examining the trading account with reference to the rate of profit.
11. P&L Add Backs in the years under appeal are also claimed to be excessive and unjustified. Since the appellant had failed to substantiate the expenses claimed under various heads, the additions as maintained by the First Appellate Authority cannot be termed as excessive and unjustified. The objection on this point fails.
12. The seven appeals succeed as indicated above.
M.B.A./170/TOrder accordingly,