I. T. A. NO. 1055/KB OF 3996-97 VS I. T. A. NO. 1055/KB OF 3996-97
1997 P T D (Trib.) 1408
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqi, Chairman and
S.M. Sibtain, Accountant Member
I.T.A. No. 1055/KB of 1996-97, decided on 21/03/1997.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.32---Rejection of accounts---Addition---Assessee, engaged in hotel business--- Assessing Officer objecting to the declared room revenue on the grounds that increase of 7.22 % over the revenue of preceding year was not commensurate with the increase in rate, number of rooms and occupancy; that complete addresses of guests were not recorded on bills rendering the revenue unverifiable; that Central Excise Records were not reliable on account of their staff being not posted at the hotels and the book version had been discarded in the preceding year as well---Explanation by the assessee was found to be unsatisfactory by the Assessing Officer and increase in room revenue was estimated @ 20 % above the declared room revenue in the preceding year---Held, Assessing Officer had rejected the account on the basis of whim and surmises without recording any specific defect---Assessing Officer had discarded the explanation offered with supporting evidence that all names and addresses were properly recorded in the arrival register and also on the invoices issued to the parties---Room sales were fully verifiable and cross-checking could be done from the Arrival and Departure Register maintained at the front office by the receptionists---Assessing Officer or the Appellate Authority were not in a position to rebut the explanation and reasoning advanced by the assessee---Addition was ordered to be deleted by the Tribunal in circumstances.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.32---Rejection of accounts---When justified---Conditions .
Neither only the unverifiability of part of the sales nor the allegation of unverifiability of the purchases would justify the rejection of book version unless it is established that either the assessee has failed to furnish the names and addresses of the vendors or the vendors named are not found on the given addresses and the assessee is unable to produce them or such vendors deny the transactions. However, in case of such denial by any vendor the assessee is entitled to cross-examine him. Further, any opinion expressed about inflation of expenses or suppression of sales in relation to cost and revenue ratio, which is not based either on a recognised formula or proved from the errors of omission and commission deliberately committed in recording the sales and purchases does not warrant the rejection of book version under section 32 of the Income Tax Ordinance. If the declared sales and margin of profit are either similar or better than the declared of assessed sales and margin of profit in the preceding year or years or if there is a decline in sales or margin of profit but it is for valid reasons, the rejection of book version is not warranted merely for partial unverifiability of sales on adverse opinions based on whims and surmises.
C.I.T., Companies 11, Karachi v. Krudd Sons Ltd. 1991 SCMR 229 = 1994 PTD 174 applied.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.32---Rejection of accounts---Payment of salaries to staff was not allowed by the Assessing Officer---Evidence of payment of salaries to staff through Bank was not called for by the Assessing Officer specifically for verification---Disallowance was, therefore, uncalled for and thus not sustainable in circumstances.
(d) Income-tax---
----Capital or revenue expenditure---Expenditure on china glass and silver ware, linen and uniform in case of an assessee engaged in hotel business-- Disallowance---Validity.
Merely because in the opinion of Assessing Officer most of expenditure claimed is of a capital nature disallowance of a single Rupee is uncalled for. It could at best be capitalised according to the system of accounting followed by the assessee. Replacement of china and silverware, linen and uniforms in hotel business has always been allowed as revenue expenditure and therefore, of claim is unwarranted.
(e) Income-tax---
----Add back---Add back on advertisement and publicity---No finding by Assessing Officer was available on record, that the claim of the assessee was unvouched or unverifiable---Add back was, ordered to be delete by the Tribunal.
Iqbal Naeem Pasha for Appellant.
Inayatullah Kashani, D. R. for Respondent.
Date of hearing: 18th January, 1997.
ORDER
The appellant has taken objections, in this appeal, to the order of the learned CIT(A) for upholding of:
(1)Rejection of book version.
(2) Addition of Rs.18,981,524 made to the income of the appellant by estimating room-rent-receipts at Rs.178,309,426 as against declared room-rent-receipts of Rs.159,327,902.
(3)Estimate of quantum of sales of "Food and Beverages" at Rs.327,615,668 against the sales declared by the appellant at Rs.172,002,511 thereby making an addition of Rs.155,613,157 to the declared sales of "Food and Beverages".
(4)Addition of Rs.5,175,492 made on account of alleged unverifiability of purchases of perishable kitchen consumables at Lahore for Rs.4,560,492 and at Karachi for Rs.615,000.
(5)Addition of Rs.9,613,861 under the head "salary wages and benefits".
(6)Addition of Rs.1,732,265 under section 12(13) of Income Tax Ordinance, 1979.
(7)Disallowances as under:
| (1) Out of china Linen & Glassware | Rs.1,623,318 |
| (2) Out of Printing & Stationery | Rs.1,703,463 |
| (3) Out of other expenses | Rs.13,638,342 |
| (4) Out of Initial & Normal Depreciation | Rs.1,000,000 |
| (5) Out of Telephone, Telex & Telefax | Rs.535,117 |
| (6) Out of Travelling Expenses. | Rs.1,526,727 |
| (7) Out of Doubtful Debts. | Rs.1,539,923 |
| (8) Out of Advertisement, Publicity Exp. | Rs.3,006,411 |
| (9) Out of Excess Perquisites. | Rs.2,813,076. |
The quantum of disallowances confirmed besides being unjustified is excessive and exorbitant.
(8)Addition of Rs.15,506,357 representing 50% of the claim under the head "Repairs and Maintenance" disallowed on the ground that the expenses claimed "were of a capital nature".
(9)That without prejudice to the foregoing, not directing the learned Deputy Commissioner of Income Tax to allow requisite allowance of Depreciation on Rs.15,506,353.
(10)Confirming disallowance of Rs.542,751 out of "Off Shop Expenses"which represented 20% of the "Cost of Sale of Liquor amounting to Rs.2,713,755 on which gross profit of Rs.4,497,855 had been declared.
2. We have heard Mr. Iqbal Naeem Pasha, the learned counsel of the appellant, and Mr. Inayatullah Kashani, the learned D.R. assisted by the Assessing Officer (the author of the impugned order) Mr. Muhammad Muzaffar Khan Lashari.
| | Asstt. Year1992-93 | Asstt. Year1993-94 | Increase |
| Rooms | 148,591,188 | 159,327,902 | 10,736,714 |
| Food & Beverage | 145,174,764 | 172,002,511 | 26,827,747 |
| Other Department | 20,318,384 | 26,666,567 | 6,348,183 |
| Off Shop | Nil, | 7,211,610 | 7,211,610 |
| Total | 314,084,336 | 365,208,590 | 51,124,254 |
| Less: | | | |
| Allowance & Commission to Agents | 918,738 | 73,992 | |
| | 313,165,598 | 365,134,598 | |
| Less: | | | |
| Cost of sales | 176,367,695 | 199,335,532 | |
| Gross Profit | 136.797,903 | 165.799,066 | |
| G.P. Rate | 43.68% | 45.41% | |
| | | | | | |
4. The learned D.C.I.T. has recognised the improvements in operating results but he has allegedly found some defects in the appellant's accounts warranting the additions made by him that are impugned in the instant appeal. Regarding the alleged defects in the book version Mr. Iqbal Naeem Pasha has submitted, at the outset, that the manner and mode of assessment proceedings conducted by the learned assessing officer is the same as adopted by him in the immediately preceding year. Mr. Pasha in this regard has submitted a copy of the order under section 138 of the Income Tax Ordinance recorded by the learned CIT, Companies-I, Karachi on a Revision Petition against the assessment order for 1992-93 wherein considering the observations of the learned D.C.I.T. in the order sheet entries the learned C.I.T. (Revision) has observed that the learned assessing officer has neither observed the well-settled principles nor observed the normally desired practice of either raising specific queries through the day to day order sheet entries and seeking explanations on those brief points or confronting the assessee through notice under section 62 with shortcomings or inadequacies noted in the accounts alongwith the assessing officer's basis for any adverse inferences and consequent proposed action. He, therefore, has found the conclusions of the assessing officer unsustainable. Mr. Pasha has submitted that the order of the learned assessing officer impugned in the instant appeal is based on proceedings conducted in a more whimsical manner.
5. Room Revenue.
Regarding the first objection taken by the appellant against addition of Rs.18,981,524 to the declared room revenue of Rs.159',327,902 the reasons recorded by the learned D.C.I.T. are that firstly, the increase @7.22 % over the revenue of preceding year is not commensurate with the increase in rate, number of rooms and occupancy percentage. Secondly, complete addresses of guests are not recorded on bills rendering the revenue unverifiable. Thirdly, the Central Excise Records are not reliable because their staff is not posted at the hotels and the book results have been discarded in the preceding year as well. The explanation offered by the appellant has been found unsatisfactory and increase in room revenue has been estimated @20% above the declared room revenue of Rs.148,591,188 in preceding year.
6. The learned counsel for the appellant has submitted that the learned DCIT has discarded the explanation offered with supporting evidence that all names and addresses are properly recorded in the arrival register and also on the invoices issued to the parties. Room sales are fully verifiable and cross, checking can be done from the Arrival and Departure Registers maintained at the Front Office by the Receptionists. When a person comes for reservation of the room at the Front Office, he is requested to fill a form, which contains details of his name and his residential address, from which an invoice is opened giving full name and address on the same. Upon departure, the person is asked to check his bill and sign and after that he makes payment to the Front Office Cashier, who either issues a full receipt or if it is on company account, the bill is passed on the Accounts Department for posting in the City Ledgers. He has further submitted that the learned DCIT has rejected the room revenue account on the basis of whims and surmises without recording any specific defect. The references to room rates, occupancy percentage and the number of rooms are totally bald because no figures have been recorded to substantiate the allegation. Regarding, the assessment for the immediately preceding year Mr. Pasha submits that the order rejecting the book version for alleged non-production of books and vouchers has been set aside by the learned CIT(R) and no reassessment has been made till the date of hearing. Prior to assessment year 1992-93 the book version has always been accepted since 1980-81. He submits that taking into consideration the improvement in revenue, fall in the costs of operation and the fact that the learned DCIT has recorded no specific finding that any room revenue has been suppressed totally or partially, the learned CIT(A) has no justification to uphold the arbitrary addition of Rs. 18,981,524.
7. Mr. Pasha continues to submit that the learned CIT(A) has no basis to hold that it is admitted that names and addresses are not recorded on vouchers when in fact even the learned DCIT has not recorded any such finding in the impugned order. The only observation recorded by the learned DCIT in this regard is that complete addresses are not recorded on the bills issued to the guests and it has been duly explained that complete addresses of guests are recorded in the Hotel Registers because failure to do so is a security hazard. Regarding the observations of the learned CIT (A) about non-production of Arrival and Departure Registers before the learned DCIT, Mr. Pasha submits that the learned DCIT has not recorded any such default.
8. The learned D.R. is supporting the impugned orders but neither he nor the learned assessing officer is in a position to rebut the foregoing submission of Mr. Pasha.
9. We find on the foregoing facts that there is no basis for the learned CIT(A) to uphold the rejection of room revenue account and the consequent addition made by the DCIT which is totally arbitrary. Accordingly, the addition of Rs.18,981,524 stands deleted.
10.Food and Beverage (F&B) A/C.
Regarding the next objection, the facts, briefly, are that the appellant has declared F&B sales at Rs.172,002,511 against declared sales of Rs.145,174,764 in 1992-93 and the cost of sales at Rs.81,890,000. The learned DCIT has estimated the sales at four times the cost of sales to add a sum of Rs.172,002,511 to appellant's income. He has further disallowed the claims of Rs.4,560,492 and Rs.615,000 on account of cost of perishable kitchen consumables at Lahore and Karachi respectively because these are said to have been consumed without passing through the stock register. The learned DCIT has held that firstly, the increase in sales by 18.436 is not commensurate with the increase in sale rates and inflation; secondly, the sales are unverifiable and the Central Excise Department does not supervise it; thirdly, the purchases are mostly unverifiable which are made from open market other than regular suppliers and fourthly the cost of food and beverage served @ 47.61 % of sales is extremely high.
11. The appellant has explained before the learned DCIT that it is not the policy of any hotel in Pakistan to record names and addresses of the parties having lunch, dinner, tea etc., in the restaurants. However, sales are verifiable as cash memos. are issued on the spot irrespective of any amount and cash is received by the cashier and accounted for in the summary sheet for the day or night and religiously deposited in the bank, the next day.
When regular customers of the restaurant only sign the bill and settle the same periodically, then his name and address is recorded without fail and is available on file.. As for other food sales, that is Banquets, full names and addresses alongwith telephone numbers are available and are fully verifiable and are available on records.
12. Further, the sales are subjected to excise duty and as such are recorded in Excise Register from time to time and monthly returns of sales are filed and are also subjected to audit by the Excise Staff each month. Moreover, an Excise Inspector is deputed for physical inspection at any time during the day or night.
13. From the books of account and records of sales produced, and retained by the learned DCIT over a period of one in on the for examination not a single discrepancy is found or pointed out by him.
14. The cost of sales of Food and Beverages as appearing in the Profit and Loss Account is fully verifiable and in support of the same, the appellant has already filed comprehensive partywise, itemwise, and monthwise details of purchases and consumption alongwith complete stock records. Some of the entries of purchases have been cross verified with reference to Stock Register by the learned DCIT.
15. The appellant has also filed under covering letter, dated 25th May, 1996, complete details of food and beverages sales, restaurantwise (and: monthwise) for both the hotels giving break-up of food sales at the restaurants and for banquets.
16. Regarding the observation that certain purchases claimed to be taken into consumption directly, without going through the stock register, are a false claim, it is submitted that it has been fully explained and complete details of such purchases going directly into consumption are filed and each such entry has been verified by the learned DOT from the Suppliers Ledger, proving that these are genuine purchases, fully supported by bills cash memos of the suppliers.
17. It has also been submitted that there are certain items which are perishable and are, therefore, taken straight into consumption.
18. It has been submitted before the DOT on the foregoing facts that the contention that this direct transfer into consumption is a "false" claim is preposterous. By no stretch of imagination can this be called false claim as this is a universal practice in all the hotels the world over to consume the perishable items directly on receipt of the same in stores.
19. The learned DCIT has, however, found the foregoing explanation unconvincing on six counts as recorded in the impugned order. Firstly, that unverifiability of sales is admitted by the A.R. of the assessee. Secondly, the unverifiability, of purchases has not been denied. Thirdly, the ratio of cost of sales to the selling price is high. Fourthly, that the book version has been rejected in the assessment year 1992-93 for similar reasons. Fifthly, that in the parallel cases assessed at NTN. 28-06-3268043 and 23-06-3362130 Sales of F&B have been estimated at six times of the cost of F&B claimed which has been upheld by the learned CIT(A). Sixthly, that even if the plea that purchase of perishable kitchen consumables is not routed to kitchen through stock account is accepted, no' reason has been given why claim of consumption of perishables is amounting to Rs.4,560,492 at Lahore as compared to claim of Rs.615,000 only at Karachi.
20. Assailing the foregoing reasons,, Mr. Pasha has submitted that the admission of the fact that Sales of F&B to outside customers visiting the hotel-restaurants are not verifiable does not mean that such sales are not properly accounted for. He submits that it is now well-settled that unless there is either a finding that there is an omission in recording particular sales or that the rates of recorded unverifiable sales are lower than the verifiable sales or that both these discrepancies are there or that there is an unexplained decline in declared sales, no adverse inference is justified merely on the ground that part of sales are unverifiable Moreso, when recording of complete particulars of the customers is against the normal practice of a particular trade. Mr. Pasha submits that no such finding is recorded by the learned DCIT.
21. Regarding the observation of the learned DCIT that unverifiability of purchases has not been denied, Mr. Pasha has submitted that a perusal of the explanations admittedly offered by the appellant before the learned DICT that are available on record, would adequately reveal the baselessness of the impugned observation. He has referred to several instances in the explanations (ibid) wherein it is repeatedly contended that all purchases are fully vouched and verifiable. He has further submitted that, on the contrary, the learned DOT has failed to identify even a single instance of unverifiable purchase. The adverse remarks about purchase and consumption of perishable items are also in general terms without identifying the instances.
22. Regarding the alleged high ratio of cost of F&B to sale of F&B, Mr. Pasha submits that the allegation is purely hypothetical. The learned DCIT, according to him, has no basis to hold that the ratio of 1:2.1 in the cost and sale price is high. Mr. Pasha has submitted before us the cost Pd selling price of 14 assorted items served in the hotel like soft drinks, tea, sandwiches, chicken, fish, mutton both Fried and Bar B.Q. showing that in certain items like soft drinks the ratio of cost to sale is 1:5 but in certain other items like chicken Tandori and chicken burger the ratio is not even 1:2. Moreover, Mr. Pasha submits that ratio of sale of high profit items in proportion to the sale of lower profit margin items is low. The average, therefore, come to the sale being a little over two items the cost of sales.
23. Regarding the reference to parallel cases made by the' learned DCIT in this regard (supra), Mr. Pasha has submitted that the Tribunal has heard the appeals in those cases as well and they too are aggrieved by similar orders.
24. Regarding the, adverse inference drawn from the fact that consumption of perishable kitchen consumables at Lahore is over seven times higher than at Karachi, Mr. Pasha has submitted that the learned DCIT has not called for any explanation on this issue during the - course of assessment proceedings 'and he is not justified to draw adverse 'inference behind the back of the appellant. However, he submits that demand of milk, yogurt, Lassi, fresh juices, vegetable dishes etc., is much higher in Lahore as compared to Karachi; hence the difference in consumption of perishable items.
25. Mr. Iqbal Naeem Pasha has submitted that the learned CIT(A) is not justified in disregarding all the foregoing submissions and proceeding to hold again on mere whims and surmises that the assessing officer has discharged his onus to prove on record that the books produced were not worth consideration and that the details furnished and the books produced before him do not inspire confidence in returned version. Regarding his observation in respect of purchases and consumption of perishable kitchen consumables, Mr. Pasha has submitted that the learned CIT(A) never desired to examine any bills, cash memos, withholding tax statements etc., during the course of hearing otherwise the details of purchases of fresh milk, fruits, vegetables etc., alongwith the names and addresses of suppliers have been available on the records of assessment proceedings. He continues to submit that neither the learned DCIT has made any attempt to verify the claims nor to identify any unverified item. Instead, he has proceeded to question the method of and consumption that has been regular by employed by the and-accepted by the Department. He submits that this issue has been authoritatively resolved by the Supreme Court of Pakistan in the case reported as CIT, Companies II, Karachi v. Krudd Sons Ltd. 1994 SCMR 229 = 1994 PTD 174 wherein the facts briefly were:
"These appeals relate to assessment years 1971-72 and 1972-73. For the charge year 1971-72 the assessee declared total sales of Rs.16,60,766 with gross profit of Rs.4,30,066 at the rate of 26% . The respondent like previous years had not maintained separate manufacturing and trading accounts in respect of enamelled utensils and extruded? aluminium products. It was explained that maintenance of separate manufacturing accounts was not feasible as certain expenses like fuel consumption and labour etc. were commonly incurred and the same labour generally worked on both sections of production. In the pass the accounts as maintained by the respondent which were similar to the assessments under consideration were accepted. However, during this assessment year the Income Tax Officer did not accept it and further noted that the trading results as compared with those of previous year 1971 there was a decline in sale of about Rs.300,000 while the gross profit had improved 1.5%. Similar comparison of the manufacturing expenses and the sale of the said two years revealed that there was a reduction in expenses to the extent of Rs.1,49,075 but the sales had dropped down by Rs.3,00,000. The Income-tax Officer concluded that the sale has not been properly recorded in the books of accounts. He further observed that the consumption of raw material was in terms of weight while the sales were either by numbers or by measurement. He further held that consumption and production could not be correlated and the percentage of wastage could not be worked out by the assessee. He estimated sale to Rs.17,50,000 and applied gross profit at the rate of 26% as disclosed by the assessee and therefore, an addition of Rs.24,000 was made in the trading results.
In the charge year 1972-73 the assessee declared sales as Rs.21,58,624 and gross profit at 25.4%. Taking into consideration the low G.P. rate which according to the I.T.O., worked out to 22.5 % and other reasons as stated in the assessment order for the year 1971-72. The I.T.O. rejected the book version, estimated the sale at Rs.22,50,000 and applied G.P. rate of 26% thereby making an addition of Rs.39,891 in the trading account. The respondent filed appeal against these assessments which was allowed by the Appellate Assistant Commissioner with the direction to the Income tax Officer to accept the book results as disclosed in both the years under consideration. The Department challenged this order before the Income Tax Appellate Tribunal which by a consolidated order, dated 30th July, 1976 allowed the appeal and upheld the order of the Income-tax Officer. The respondent filed an application under section 66(1) of the Income-tax Act 1922 hereinafter referred as the 'Act' to consider the following question:
'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that proviso to section 13 of the Income Tax Act was applicable'.
This application was dismissed on the ground that the Tribunal's order did not give rise to any question of law. The respondent then filed an application under section 66(2) for opinion in the High Court which answered the question in the negative.
Leave was granted to consider the question whether ' acceptance of account in early years does not give rise to any vested right as income-tax proceedings for each assessment year is a separate unit and has to be judged in view of the special facts and circumstances of the year in question and the principles of estoppel and res judicata do not apply to these proceedings".
26 The honourable Supreme Court, on the basis of foregoing facts held:
"Another aspect of the case is that while interpreting section 13 accounts must be distinguished from method of accounting. There may be a regular method of accounting and yet for defects the accounts may be rejected but it does not lead to automatic rejection of the system and method of accounting employed by an assessee. Occasion may also arise where although the profit shown in the accounts is not true or correct the assessing officer can deduce correct figures from the accounts. If the account books are found to be false and manipulated with a view to suppress the income and profit and the some cannot be deduced correctly the Assessing Officer can reject the accounts.
The main reason for rejecting the method of accounting by the Assessing Officer and maintained by the Tribunal was' that the respondents were showing stocks by weight and production by measurement. Further, consideration which compelled them to reject was that separate manufacturing and trading accounts of enamelled utensils and extruded aluminium products were not maintained. For these it was concluded that the income, gains and profits could not be deduced from the accounts books. The past history of the respondent establishes that it had been maintaining its accounts in similar manner. The Assessing Authorities have been deducing income, gains and profits without any difficulty and have been assessing for many years. Nothing has been brought on record to controvert these facts and to show what defects have been detected in the method of accounting which made it impossible to deduce income, profits and gains.. Mere expression of opinion that such deduction cannot be made is not sufficient unless cogent reasons to support this conclusion are also stated. It has been pointed out that separate manufacturing and. trading accounts in respect of enamelled utensils and extruded aluminium products have not been maintained. The respondent has explained that maintenance of such accounts is not possible as common labour and energy are employed for their production. They have also stated that such practice is in vogue from the very beginning and accounts have been prepared in the same manner which were accepted. It was further stated that in the line of trade no one maintains, accounts in the manner required by the Department. In these circumstances the question is whether the Assessing Officer could form an opinion that income, profits and gains could not be deduced from the method of accounting adopted by the respondent. The history of the respondent case support its contention. If the Assessing Authority had not felt any difficulty in determining income, profits and gains on the basis of the accounting method maintained by the respondent how is it that in these two years they have been facing difficulty and invoking proviso to section 13. 'Furthermore, if in line of trade certain method of accounting has been adopted and accepted by the Assessing Officer without pointing out any difficulty in determining the income, profits and gains then if they want to resort to proviso to section 13, they must give cogent reasons and convincing grounds to justify their action.
It is the duty of the Income-tax Officer to determine whether the assessee has adopted method of accounting from which income, profit and gains can properly be deduced. In this case the Assessing Officer did not proceed in the indicated manner although from the accounts laid and on its examination true income and profit could be deduced. There can be no cavil that a regular method of accounting in the past cannot be accepted as a matter of routine without examining it and if the Assessing Authority comes to the conclusion that it is defective and true income, profit and gain cannot be deduced from it then on the principle, stated above it can be rejected. In the present case the reasons given for rejecting the accounts are not proper, sufficient and valid. "
27. The learned CIT (A) submits Mr. Pasha, has also erred in applying the principle laid down in the judgment ' ibid' to the facts and circumstances of the case. He has failed to appreciate that the appellant has declared increase both in turnover as well as profit rate and there is no finding of the learned DCIT that any specific sale has been suppressed or recorded at a lower sum than actually received or that the source of any purchase that has been called for but not furnished or that the declared source is non-existent or -unverifiable or that the declared source has denied the genuineness of the recorded transaction or that the transaction has been recorded at the rate and figures higher than the actual rate and amount of transaction or that the quantities claimed to be served are more than the quantities actually served. Mr. Pasha submits that adverse opinions expressed in respect of appellant's accounts by the learned WIT, as submitted 'supra', are not formed on the basis of material available in the account books or on such facts that may justify such conclusions and also establish that it is not possible to deduce correctly the income, profits and gains from the account books maintained according to the method employed by the appellant. Thus, the learned WIT has failed to discharge his onus in accordance with the ratio of the decision 'ibid'.
28. When asked to show us any finding about unverifiability of sales or any discovery of any unrecorded sales, any admission by the appellant about unverifiability of purchases, any sound basis for the conclusion that ratio of cost to sales in F&B Account is high and any opportunity given to the appellant to explain the reason for consumption or perishable items at Lahore being seven times more than the consumption of such items at Karachi recorded in the impugned order or from the records of proceeding as required under the law to warrant rejection of the book version, both the learned D.R. as well as the learned author of the impugned assessment order have repeated that restaurant sales are admittedly partly unverifiable but they are unable to show any finding that there is any difference in the rates of such unverifiable sales and the other verifiable sales. They are also unable to show any finding that any known sales have been, suppressed. They are neither able to show that any allegation of unverifiability of purchases has not been denied by the appellant nor they have been able to show any specific instance of purchases recorded in the books that are found, on verification from vendors, to be inflated. They have not been able td establish on the basis of any conclusive finding that the cost of F&B claimed by the appellant against the declared sales of F&B is high and inflated nor they are able to point out any discrepancy in the copies of break up of quantities of ingredients and otherwise costs of 14, assorted items of F&B served in he Hotels, submitted by Mr. Pasha, before us. Further, they have conceded that no explanation for difference in the ratio of consumption of perishables at Lahore and Karachi has been specifically called for.
29. Considering the foregoing facts we find that neither only the unverifiability of part of the sales nor the allegation of unverifiability of the purchases would justify the rejection of book version unless it is established that either the assessee has failed to furnish the names and addresses of the vendors or the vendors named are not found on the given address and the assessee is unable to produce them or such vendors deny the transactions. However, in case of such denial by any vendor the assessee is entitled to cross-examine him. Further, any opinion expressed about inflation of expenses or suppression of sales in relation to cost and revenue ratio which is not based either on a recognised formula or proved from the errors of omission and commission deliberately committed in recording the sales and purchases does not warrant the rejection of book version under section 32 of the Income Tax Ordinance. If the declared sales and margin of profit are either similar or better than the declared or assessed sales and margin of profit in the preceding year or years or if there is a decline in sales or margin of profit but it is for valid reasons, the rejection of book version is not warranted merely for partial unverifiability of sales on adverse opinions based on whims and surmises.
30. We, accordingly, agree with the learned counsel of the appellant that the ratio of decision ' ibid' is squarely applicable to the facts of the instant case and that there is no finding in the impugned order to justify the upholding by the learned CIT(A) of the addition of Rs.172,002,511 by estimating sales of F&B at four items of the cost of sales claimed at Rs.81,890,000 and' to make further addition of Rs.4,560,492 and Rs.615,000 by disallowing the claim of purchases of perishable kitchen consumables at Lahore and Karachi respectively.
31. Consequently, the three additions supra stand deleted.
32. Salaries and other benefits.
The next objection is taken to upholding of disallowance of Rs.9,613,861 @ 20% of the total claim of salaries amounting to Rs.48,069,307. Claims of salaries in three accounts as compared to preceding year are as under:
Assessment Year | 1993-94 | 1992-93 |
Cost of Sales and Services | Rs.28,327,801 | Rs.33,922,523 |
Selling Expenses | Rs.2,611,842 | Rs.4,062,391 |
| | Rs.48,063,307 | Rs.53,472,025 |
33. The learned DCIT has disallowed 20% of the total claim firstly, for being excessive in comparison to the claim in the preceding year, secondly for being unverifiable, thirdly for being unjustified for catering to a total room capacity of 386 both at Karachi and Lahore, fourthly for being admittedly irreconcilable with payments to EOBI and fifthly because the salary sheets of permanent employees do not bear their signature in acknowledgement of salaries received. When asked to explain the foregoing points the appellant has explained vide letter dated 25-6-1996 to which our attention is drawn by Mr. Pasha. We are reproducing the explanation hereunder for convenience of reference:
"As for your c6ntention that salaries and wages claimed are excessive and unverifiable, we have to state as under:---
The total salaries claimed during the year under assessment is as under:
| (i) Under Cost of Sales | Rs.28,327,801 |
| (ii) Under administration and General Expenses | Rs.17,129,664 |
| (iii)Under Selling Marketing | Rs.2,611,842 |
| Tota | l Rs.48,069,307 |
It will be appreciated and we are confident that our claim of salaries and wages, if compared with other hotels of same standards, will be found to be much lower than claimed by them.
As regards verifiability of the same, we give hereunder the breakdown of salaries and wages account:---
| (a) Head Officer | Rs. 8,047,106 |
| (b) Avari Towers, Karachi | Rs.13,864,468 |
| (c) Avari Lahore | Rs.26,157,733 |
| Total | Rs.48,069,307 |
In support of our claim, we are submitting herewith in original for your examination and return salary sheets and complete details giving names of staff of each establishment separately alongwith details of perquisites and allowances allowed. As required, we are also submitting herewith copies of returns filed with E.O.B.I., from month to month.
We would like to point out here that during the year under assessment, contribution to E.O.B.I., was restricted only on salaries up to Rs.1,500 per month and E. O. B. I., contribution was not to be paid on the employees drawing salaries over Rs.1,500. Therefore, the claim of salaries and wages cannot be correlated with the payment of E.O.B.I.".
34. Mr. lqbal Naeem Pasha submits that the only specific reason recorded for disallowance is that salary sheets of permanent employees do not bear their signatures in acknowledgement of receipts but the learned DCIT never desired to verify the salaries of permanent staff as the statement under section 139(1) was already with him. However, when proof of payment of such salaries through Bank was produced before the learned CIT(A) he refused to admit it with the observation that the evidence that was not produced at the assessment stage could not be admitted at the appellate stage. Mr. Pasha submits that on the foregoing submission the finding of the learned CIT(A) is factually misconstrued and legally misconceived.
35. Regarding the other observations of the DCIT 'supra' Mr. Pasha has submitted that these are based on mere whims and surmises as well as prima facie incorrect. He submits that the claim of salaries is Rs.5,417,318 less than the claim in 1992-93 while the revenues have increased. Further, he submits that the ratio of appellant's total salary bill to total revenue is 1:7.5 while in the case assessed at NTN:28-06-3362130 operating two hotels at Karachi and Islamabad the ratio is 1:4.6 and in the case at NTN:28-06-3362043 operating only one Hotel at Karachi the ratio is 1:8.6. Obviously the cost of managing one station has to be, comparatively, slightly low.
36. The learned D.R. is unable to repel the submissions of Mr. Pasha who has produced before us also the evidence of payment of salaries of the permanent staff through bank which was admittedly not called for by the DCIT specifically and not admitted by the learned CIT(A) unjustifiably. We find on the foregoing facts that the disallowance is uncalled for; hence unsustainable. The impugned order of the learned CIT(A), consequently, is vacated and the learned DCIT is directed to allow the total claim of salaries.
37. Addition under section 12(13).
Regarding the objection taken to addition of Rs.1,732,265 under section 12(13) of the Income Tax Ordinance against Rs.150,000 offered for addition by the appellant, we find that the learned CIT(A) has omitted to adjudicate upon this issue in his impugned order. By mutual consent of the learned representatives of the two parties the order of the learned DCIT is set aside on this issue with the direction to find out the total amount of un-adjustable deposits of tenants received by the appellant since income year 1980-81 and to ascertain the amount already added, as deemed income under section 12(13) since the assessment year 1981-82. The addition to be made under section 12(13) as deemed income in the assessment year 1993-94 will be 10% of the excess of the cumulative deposits as, on 31-12-1991 over the amount of cumulative deemed income assessed under section 12(13) since assessment year 1981-82 to assessment year 1992-93.
38. China, glass and silverware, linen and uniforms.
Regarding the disallowance of Rs.1,623,318 @ 25% of Rs.6,493,270 on account of replacement cost of china, glass and silverware, linen and uniforms as against the claim of Rs.5,729,035 on this account in 1992-93 we are inclined to agree with Mr. Pasha that merely because in the opinion of learned DCIT most of the expenditure claimed is of a capital nature disallowance of a single Rupee is uncalled for. It could at best be capitalised. We further agree with him that according to the system of accounting followed by the appellant replacement cost of these items have always been allowed as revenue expenditure and, therefore, capitalisation of any portion of the claim is unwarranted. The learned D.R. is unable to repel the submissions of Mr. Pasha. Accordingly the addition is deleted.
39. Printing and stationery.
The next objection is taken to disallowance of Rs.1,703,463 @ 25% of the claim of Rs.6,813,852 under the head of Printing and Stationery as against a total claim of Rs.3,033,358 for the immediately preceding year: When asked to explain the reason for excessive claim the appellant has tried to justify the allow ability merely on account of verifiability of the claim and no explanation or evidence has been offered to prove that the entire claim is incidental to business. Since the learned DCIT too has not given sufficient opportunity to offer further explanation, we set aside the order on this point with the directions to decide the issue afresh after allowing the appellant proper opportunity to establish that the entire expenditure incurred is incidental to business failing which appropriate disallowance may be made for reasons to be recorded in the order.
40. Other expenses.
Regarding the objection taken to upholding of disallowance of Rs.13,638,342 a 50% of the claims of Rs.24,817,769 and Rs.2,458,918 on account of other expenses as part of the cost of Sales and other Services and as part of selling expenses respectively, the learned DCIT has noted that the appellant is failed to furnish complete details, complete particulars of contractual labour cost amounting to Rs.11,005,358 are not furnished and the fact that the expenditure claimed in wholly incidental to business is not proved.
41. Mr. Pasha on the other hand has submitted that complete particulars of contractual labour alongwith complete break-up and details of the claims have been furnished alongwith letters dated 25-5-1996.
The learned DCIT has not recorded any specific instance of incomplete particulars or missing detail. Further, he has submitted that the expenditures claimed under this head in 1992-93 were Rs.22,523,747 and Rs.3,568,214 respectively.
42. The learned D.R. has, however, submitted that it is evident from record that the details referred to by Mr. Pasha are incomplete and partly unverifiable too for want of complete particulars of the payees.
43. Considering the foregoing facts we find that the ends of justice will meet if the disallowance is restricted to Rs.36,850 only considering the slight excess in the ratio of claim to gross revenue in comparison to preceding year.
44. Telephone, telex and telefax, travelline.
Similarly we shall reduce the add backs out of Telephone, Telex and Telefax to 15 % of the claim of Telephone expenses only and Travelling expenses to 10% of the claim for being non-incidental to business.
45. Advertisement and publicity.
The add back out of advertisement and publicity is deleted because there is no finding that the claim is unvouched or unverifiable.
46. Depreciation, doubtful debts and excess perquisites.
The objections to disallowance out of initial and normal depreciation as well as doubtful debts and addition on account of excess perquisites are not pressed; hence objections dismissed as hot pressed.
47. Repairs and maintenance.
Similarly the disallowance of Rs.15,506,357 C 50% of the total claim on account of Repairs and Maintenance is made simply because in the opinion of the learned DCIT part of the expenditure incurred is in the nature of capital expenditure. There is no finding that any portion of the claim is unvouched or unverifiable or non incidental to business. The instances of expenditure recorded in the impugned order, that in the opinion of the learned DCIT are of a capital nature, are maintenance of Hotel Lawn, repairs of swimming pool and waterproofing of the roof of shopping plaza. We agree with Mr. Pasha that none of the claims relate to capital expenditure. Accordingly, the addition is deleted.
48. Off shop expenses.
Regarding the disallowance of Rs.542,751 out of cost of sales of liquor amounting to Rs.2,713,755, we find on perusal of the details of purchases and explanation of the assessee available on record that the learned DCIT has betrayed a total lack of understanding of accounts as well as the law. Complete details of the entire purchases of liquor amounting to Rs.2,933,258 and closing stock of Rs.219,503 are available on record alongwith a very lucid explanation. The addition is accordingly deleted.
49. The appeal is allowed to the extent and in the manner indicated supra.
M.B.A./345/Trib. Order accordingly.