I.T.AS. NOS.2972/LB OF 1.991-92, 1870/LB OF 1992-93, 171/LB, 170/1,13 AND 4476/1,13 OF 1993-94 VS I.T.AS. NOS.2972/LB OF 1.991-92, 1870/LB OF 1992-93, 171/LB, 170/1,13 AND 4476/1,13 OF 1993-94
1997 P T D (Trib.) 2239
[Income-tax Appellate Tribunal Pakistan]
Present: Muhammad Zaman Khan, Judicial Member and Iftikhar Ahmad Bajwa, Accountant Member
I.T.As. Nos.2972/LB of 1991-92, 1870/LB of 1992-93, 171/LB, 170/LB and 4476/LB-of 1993-94, decided on 05/10/1996.
Income Tax Ordinance (XXXI of 1979)---
----Ss. 13 & 22---Commission---Addition---Other income ---Assessee made purchase of skin and hides and received commission @ 2%---Later on trading results indicated increase in turn over but G.P. rate had decreased-- Explanation tendered by assessee showed that it- was-due to low rate of commission i.e., 2% to 1%---Explanation was turned down on ground of collusive agreement between principal and sister concerns (assessee) to avoid taxation---Additions were made in different accounts which were confirmed by C. I. T. (A)---Held, conduct of assessee, as evidenced by somersaults performed by principal concern, was rightly found to be unjustified and reduction of commission was collusive agreement to avoid taxation---No evidence was produced to justify declared income---Additions were confirmed in circumstances.
Zafar Ahmed, D.R. for Appellant.
Naeem Akhtar Shah, A.C.A. for Respondent
Date of hearing: 16th September, 1996.
ORDER
MUHAMMAD ZAMAN KHAN (JUDICIAL MEMBER).---Through this consolidated order, we propose to dispose of the captioned five appeals, which are between the same parties and in which the issues requiring determination are of identical nature. The relevant assessment years are 1990-91, 1991-92 and 1992-93. The assessee, a private limited company, had derived income during the charge years from dealing in skins and hides on commission basis as before. Cross appeals have been filed for the assessment year 1990-91. Two appeals have been filed by the assessee pertaining to the assessment year 1991-92, one against the order dated 31-8-1992 under section 62 and the other against the order dated 20-7-1993 (under section (62/132) passed by the same CIT(A). The fifth appeal, which pertains to the assessment year 1992-93 has also been filed by the assessee.
2. The brief facts of the matter are that the assessee had been making purchases of skins and hides for the Hilal Tanneries Limited and all the sales were made on cost at 2% commission received by the assessee. This position existed till the assessment year 1989-90. However, for the assessment year 1990-9,1, the trading results declared by the assessee indicated that though there was increase in turnover but G.P. rate had decreased when compared with the trading results of the preceding assessment year. The explanation tendered by the assessee in this behalf was that in the preceding year commission at the rate of 2 % was received by the assessee whereas during the assessment year 1990-91, the, assessee had received commission at the rate of 1 % . It was submitted that the assessee had charged commission at the rate of 2% upto 27-2-1990 and after the said date, the assessee had started charging commission at 1 % . Subsequently, the commission charged upto 27-2-1990 at the rate of 2% was charged at the rate of 1% and a reverse entry of Rs.610,918 was made on 30-6-1990. It was stated on behalf of the assessee that as the prices of raw hides and skins had increased tremendously, Hilal Tanneries Limited were facing difficulty in paying commission at their old rate of 2 % and thus under a mutual agreement they had started paying commission at 1 % to the assessee company. This contention of the assessee did not find favour with the Assessing Officer and thus he came to the conclusion that as Hilal Tanneries Limited were a sister concern of the assessee, the reduction of commission from 2 % to 1 % was a collusive arrangement just to avoid the proper incidence of taxation. As such the claim of the assessee was rejected and sales were subjected to charge of commission at the rate of 2% for the assessment year 1990-91 by the I.T.O. A similar treatment was meted out to the assessee in the assessment year 1991-92 at the hands of the, Assessing Officer. For the assessment year 1992-93, the assessee himself declared commission at the rate of 1.97 % but the said declaration of the assessee was also rejected and commission was adopted at 2 % as per history of the case.
3. Besides the above, some disallowance were also made by the respective Assessing Officers in all the three years under review out of P&L accounts, particularly, under the head "salaries". Similarly, under the head "Other Income" enhancement was also made in the assessment years 1991-92 and 1992-93.
4.Feeling aggrieved by the assessment orders, the assessee had filed first appeals in all the three years under consideration.
5. In the assessment year 1990-91, the first appellate authority vide its order dated 12-10-1991 has found that the contention of the assessee that w.e.f. 27-2-1990 the assessee company had received commission at the rate of 1 % was justified and thus the same was accepted. Accordingly, the assessee was granted a relief of Rs.472,520. Regarding the add-back made under the head 'salaries" an amount of Rs.55,500 paid to a Director as bonus and gratuity was deleted out of the addition of Rs.214,014 made by the Assessing Officer. The remaining addition and the other add-backs were, however, maintained and confirmed by the CIT(A).
6. In the assessment year 1991-92, the then CIT(A) vide his order dated 31-8-1992 has confirmed the rate of commission adopted at 2%, the addition of 'other income" at Rs.100,000 against the declared receipts of Rs.87,318 and disallowances made out of P&L account. He has, however, deleted the addition of Rs.9,000 made on account of Director's bonus whereas the addition made under the head "Honorarium" of M/s. Yaqoob and Hafeez has been confirmed by him. Regarding the salaries of watch man, gardener, workers and the difference of Rs.90,192, the addition made were since set aside by-the CIT(A) for fresh decision. The remaining add-backs were found reasonable and confirmed except for motor car disallowance, which was reduced to Rs.10,000, Re-assessment was made in the light of order dated 31-8-1992 (ibid) and the additions originally made were kept intact by the Assessing Officer and the same have also been confirmed by the CIT(A) vide his order dated 20-7-1993.
7. In the assessment year 1992-93, CIT(A) vide his order dated 20-7-1993 (ibid) has upheld the commission at the rate of 2% and also confirmed the addition of Rs.100,000 under the head other income" and the disallowances under the head "Salaries". However, the disallowances under the head "gratuity" amounting to Rs.186,981 and bonus of Rs.28,515 have been deleted by the CIT(A).
8. It is, therefore, manifest by now that in all the three years under review, the assessee feels aggrieved of the adoption of commission at the rate of 2%, partly (1-7-1989) to (26-2-1990) in the assessment year 1990-91 and wholly in the assessment years 1991-92 and 1992-93. On the contrary, the Department has alleged that in the-assessment year 1990-91 there was no justification for the CIT(A) in accepting the contention of the assessee with regard to charging of commission at the rate of 1 % w.e.f. 27-2-1990. Besides, the assessee company has also assailed the orders passed by the first appellate authorities in confirming the other additions, as explained above.
9. We have heard the learned authorised representatives of both the parties at length and have also gone through the orders, which have been passed in this case on different intervals by the Departmental Officers. We record our findings in the following manner:---
10. Commission: It appears to be an admitted fact that upto the Assessment Year 1989-90, the assessee has been receiving commission from Hilal Tanneries Limited at the rate of 2%. The issue of reduction in commission had arisen for the first time during the assessment proceedings for the assessment year 1990-91. It is also an admitted fact that Hilal Tanneries Limited and the assessee company were sister concerns. The books of accounts of the assessee also indicated that the assessee had been charging commission at the rate of 2% at least upto 27-2-1990, meaning thereby that the agreement between the Principal and the assessee for the payment of commission at the rate of 2 % was also implemented at the beginning of the assessment year 1990-91. It appears that on 26-2-1990 for the first time in writing it was pointed out by the Hilal Tanneries to the assessee that they shall pay commission on purchases made by the assessee on the account of Hilal Tanneries Limited at l % from 1-3-1990 due to the increase in the prices of raw hides. However, on 20-6-90 Hilal Tanneries informed the assessee that as per resolution passed by the Board of Directors in their meeting held on 21-5-1990 reduction from commission of 2% to 1 % should start from 1-7-1989, though statedly the assessee had previously agreed to charge 1 % commission from 1-3-1990. It was in these circumstances that entries were made in the ledger account wherein at the end of the year, the commission charged was reversed at the rate of 1 % and reverse entry, as stated above, was made. Be that as it may, it has been consistently found by all the Assessing Officers and the First Appellate Authorities (except partly for the assessment year 1990-91) that sales were to be subjected to charge of commission at the rate of Mo. As indicated above, the reduction in the rate of commission was allegedly made due to excessiveness of costs involved because of escalating rates of hides and skins in the market. It has been very pertinently observed by the CIT(A) in his order dated 31-8-1991 ibid that the most relevant question in order to test the bona fides for the alleged reduction in commission was as to what was the rate of commission on procurement of hides and skins in the market and whether the general rate of such commission had actually declined in the market in so far as other independent businesses were concerned. However, no evidence whatsoever in this regard was ever placed before the Assessing Officers by the assessee to prove the genuineness of its claim. The assessee also lead any evidence to show that there was any agreement between the Principal and the assessee company regarding the reduction in the rate of commission conditional to the happenings of certain events in future. Again in the assessment year 1992-93, the assessee company itself declared the rate of commission at 1.97%, which fact negated and falsified the contention of the assessee that the assessee was under an obligation to get commission at the rate of 1%. In the above state of affairs, the conduct of the assessee, at the instance of the somersaults which the Hilal Tanneries have been performing was rightly found to be unjustified by the Departmental Officers and the act of reduction of commission from 2% to 1 % was held to be a collusive arrangement just to avoid the proper incidence of taxation by the assessee. What to talk of the reduction in the rate of commission to be effective after the so-called agreement between the Principal and the assessee company, the assessee did not even hesitate to surrender a sizeable amount obviously without any rhyme and reason and proceeded to make a reverse entry pertaining to the period from 1-7-1989 to 26-2-1990 when the assessee had been charging commission, as per their own showings at the rate of 2 % . Such acts amount to changing the entire complexion of transactions, which have already attained finality and thus also offend the rule of prudent conduct. The plea of the assessee could be established by producing the record of the Hilal Tanneries Limited before the Assessing Officers at the instance of the assessee but the assessee did not take any steps to do the same. An idea had also struck our mind to call for the record of Hilal Tanneries Limited, in order to sift grain from chaff, but then, the same was given up by us to dispense even handed justice to both the parties and in order to avoid the impression and 'accusation that in so doing we may not be dubbed with the imputation of playing the role of the assessee or holding brief for them, who in their turn, as indicated above, had never bothered or attempted to make such a request either before the forums below or before us by making any meaningful oral or written prayer, probably realizing the futility of the same. We are, therefore, of the considered view that the adoption of commission 2 % (not pressed at the Bar in the assessment year 1992-93 before us) as ordered by the Assessing Officers in all the three years under review being in line with history of the case was fair and reasonable and the same was correctly upheld by the respective First Appellate Authorities in the assessment years 1991-92 and 1992-93. In these circumstances, CIT(A) was not justified to accept the contention of the assessee while dealing with the appeal for the assessment year 1990-91 that the assessee had received commission at 1 % w.e.f. 27-2-1990 or for that matter granting partial relief to the assessee in the said behalf though originally he did not accept the plea of the assessee for so far as the question of reversal entry covering the period from 1-7-1989 to 26-2-1990 was concerned. In this way, this order of the CIT(A) also becomes contradictory and mutually destructive. As a sequal to all this, the order passed by the CIT(A) dated 12-10-1991 pertaining to the assessment year 1990-91 to the extent of granting relief to the assessee from 27-2-1990 to 30-6-1990 is vacated and the appeal of the Department filed in this behalf is accepted. The appeal filed by the assessee for adoption of the rate of commission at 1 % in all the three years under review being devoid of any merit are, therefore, bound to fail. The point of the rate of commission accordingly stands determined as above.
11. "Other income. "---The declared income under this head in the assessment years 1991-92 and 1992-93 was not accepted by the Assessing Officer. When the assessee company was called upon to produce details thereof they are stated to have shown their inability in this behalf. This income relates to the sale of hides and skins cuttings. As no evidence was produced in this regard, the declared income was discarded. Considering the huge turnover of the assessee, the income shown from the cutting was found low and thus an addition of Rs.100,000 was made by the Assessing Officer in the assessment year 1991-92. A similar situation existed in the assessment year 1992-93 and thus, the Assessing Officer, considering the history of the case, added back an amount of Rs.100,000 in this year as well. These additions have been duly confirmed by the First Appellate Authority. According to the assessee, there was no justification for the CIT(A) to do so and the additions in any case were also excessive. We however, do not find any force in the submission made on behalf of the assessee because the additions in both the years have been made considering the huge turnover or the assessee, after the disclosed results were found un detailed. Apart from this learned A.R. has not been able to point out any thing substantial to effectively refute the decision of the Assessing Officer and the First Appellate Authority delivered in the said behalf, the prayer made by the learned A.R. of the assessee for deleting/reducing the additions is, therefore, declined.
12. Disallowances and additions out of P&L account:
It may be stated at the outset that learned A.R., of the assessee did not press the disallowances made out of P&L account in the assessment year 1991-92 (as stated in para. No.3 of grounds of appeal filed in the Tribunal against the order dated 31-8-1992 of the CIT(A), pertaining to the order under section 62 and as such as per his submission made at the gar, the relevant add-backs are confirmed. The additions of the amounts disallowed on account of "salaries"; however, have been seriously agitated in all the three years, by the assessee. It is manifest from the assessment order pertaining to the assessment year 1990-91 that this claim of the assessee was found discrepant and unreliable for various reasons such as non-business expenses and the claim being also factually incorrect. The Assessing Officer, therefore, restricted the claim of the assessee as per last year's claim as the turnover was found to be almost the same in both the years. The first Appellate Authority, however, Rs.55,500 and this addition was deleted conceding the payment of bonus and gratuity to the Director as alleged by the assessee. Similar additions as made in the assessment year 1990-91, were also repeated to the assessment year 1991-92 by the Assessing Officer but the first Appellate Authority after granting some relief to the assessee confirmed C the disallowances of "salaries" allegedly paid td the watchman, gardener and workers as held by the CIT(A) in the appeal pertaining to the assessment year 1990-91 that these claims were non-business expenses. In the assessment year 1992-93, the add-backs of amounts of gratuity and bonus were deleted by the first appellate authority but the remaining disallowances as in the previous years being reasonable were confirmed.
13. Learned A.R. of the assessee has not been able to convince us that the salaries paid to the watchman, gardener and workers related to the business activities and thus the consistent observations made by the Departmental Officers that the expenses claimed in this regard being non business expenses were inadmissible, have remained totally unrebutted. In these circumstances, the plea raised on behalf of the assessee that the relevant disallowances were unjustified has remained entirely unsubstantiated and thus the additions made in this regard in all the three years under review as confirmed by the First Appellate Authorities are upheld.
14. On account of what has been held above, we are constrained to dismiss the captioned four appeals filed by the assessee. However, the appeal instituted by the department pertaining to the assessment year 1990-91 stands accepted.
M.B.A./302/Trib. Order accordingly.