(a) Income Tax Ordinance (XXXI of 1979)---

----S.34---Loss---Set off ---Assessee returned loss and claimed set off-- Assessing Officer, rejecting version of assessee framed assessment at nil income---First Appellate Authority confirmed same on the ground that company having done no business, expenses, if any, were to be capitalized for there was no income against which that could be set off---Framing of nil income could not be approved---Since Assessing Officer had not raised any objection against said expenses and their nature or verifiability, the losses returned were directed to be accepted by Tribunal.

(b) Income Tax Ordinance (XXXI of 1979)---

----S.13(1)(b)---Unexplained investment---Deemed income ---Addition-- Assessee entered into agreement to purchase property---Deal could not be get through for technical reasons---In order to recover advance made, assessee agreed to purchase another property from the same party but to meet the required funds, assessee got involved a Finance Corporation---Assessing Officer found consideration of property to have been under-stated and estimated same at higher price and brought the difference under tax---First Appellate Authority confirmed the same---Validity---Held, that where Finance Corporation was involved an over-statement rather than an under statement was a general rule ---Assessee was, no doubt, a beneficial owner and not a legal owner, therefore, assessee did not need to attempt under statement of the price nor Assessing Officer had been able to bring home the exercise of such attempt on the part of assessee---Addition was not sustainable in circumstances.

(c) Income Tax Ordinance (XXXI of 1979)---

----S.13(1)(d)---Unexplained investment---Deemed income ---Addition-- Assessee availed credit facility from Banks and pledged movable stocks at exaggerated value which was contrary to the entries in the balance-sheet-- Addition ---Tribunal disapproved such practice of the assessee and upheld action of Authorities and sustained the addition.

(d) Income tax Ordinance (XXXI of 1979)---

----S.30 & 2(11)---Income from other source- -Solitary transaction--Adventure in the nature of trade---Burden of proof---Heavy burden lay upon Assessing Authority to establish that solitary transaction in question was adventure in the nature of trade.

C.I.T. v. Maula Bukhsh Corporation Limited PLD 1990 SC 990 = 1990 PTD 821 ref.

Miss Ayesha Qazi for Appellant.

Qaiser M. Yahya, D.R. for Respondent.

Date of hearing: 15th August, 1995.

ORDER

NASIM SIKANDAR (JUDICIAL MEMBER).---In these five further appeals for the assessment years 1986-87 to 1990-91 three orders of the first appellate authority respectively recorded on 5-2-1989, 15-12-1991 and 1-6-1994 are assailed. The assessee in these cases is a Limited Company and is engaged in execution of construction and other civil contracts.

2. Assessment year; 1986-87 and 1987-88:

In these years the assessee returned net loss at Rs.1,54,861 and Rs.2,78,867. No business was statedly done during this period. Therefore, the assessing officer rejected the declared version and framed assessments at nil income in both of the years. Learned first appellate authority confirmed the action on the ground that the company having done no business the expenses if any were to be capitalized because there was no income against which it could be set off. These findings have grieved the assessee.

3. Learned counsel for the assessee contends that the reasons assigned by the authorities below were legally not sustainable inasmuch as the assessee remained in contention. In support of the submission a number of documents have been produced indicating request of the assessee and its efforts for enlistment as Contractor with various official agencies. Learned D.R. has not been able to support the impugned order recorded in this regard. Mere reason that the assessee could not obtain a contract during the period under preview did not justify the disallowances made in these years. The expenses or similar claims could very well be adjusted or set off against future incomes. The assessment year 1986-87 was the first year of commencement of business as the company was incorporated on 9-4-1985. The assessee company immediately after its incorporation applied for enlistment as an approved contractor with various agencies and in fact succeeded in doing so with some of them. However, the quotation of rates that it made could not win it any contract during this period. Therefore, it cannot be said that the company was a mere paper exercise or that it was not engaged in any kind of business. The framing of nil income by the assessing officer in both of these years therefore, could not be approved. Since the assessing officer has not raised any objection against the expenses, their nature or verifiability, the losses returned in both of the years are therefore, directed to be accepted.

Assessment year 1988-89:

4. The assessee returned a loss at Rs.2,89,541. Contract receipts were declared at Rs.3,50,000 which were accepted by the assessing officer. However, net income was assessed at a sum of Rs.35,93,923 which included two additions. The first addition was made at Rs. 10,00,000 under section 13(1)(d) of the Ordinance while the second at Rs.24,89,981 was made under section 13(1)(b) of the Ordinance.

5. In case of first addition it is explained that the assessee entered into an agreement to purchase a property from a person namely Sh. Abdul Waheed. However, the deal could not be through for certain technical reasons. In order to recover the advance already paid to said Sh. Abdul Waheed the assessee agreed to purchase from him another property, a 10 Kanals plot meant for construction of a Hotel at Town Ship Civic Centre, Lahore. Since the assessee was not possessed with the required funds i.e. the total consideration of the plot at Rs.25,00,000 he involved M/s National Industrial Co-operative Finance Corporation. He made the payment of the remaining amount Rs.1 Million having already been paid by the assessee to the said Sh. Abdul Waheed and got the deed registered in their own favour. The assessee recorded in his books of accounts to have made an investment at Rs.27,21,716. The assessing officer found the total consideration of the plot at Rs.25,00,000 to have been grossly understated and therefore, estimated the total consideration at Rs.35,00,000 after considering the comparable cases from the locality. The difference between the investment and the one estimated by the assessing officer was brought to tax under the aforesaid provision of the Ordinance. It appears that subsequently M/s NICK in whose favour the registered sale deed was executed as a security for payment of advance incurred by the assessee while purchasing this property disposed of the same and made a payment of Rs.28,78,283 to the assessee as return on his investment of Rs.10,00,000. It may be repeated that the aforesaid property was purchased by the assessee for Rs.25,00,000 but transfer deed was executed in favour of the lender M/s. NICK who subsequently disposed it of at Rs.56,00,000. The assessee claimed the said amount o1 Rs.28,78,283 as capital gains in the year 1990-91 but the assessing officer disallowed the claim and added this amount towards its income in that year.

6. Learned counsel for the assessee states that in the first instance the assessee was not legal owner of the plot in question which was directly transferred in favour of M/s. NICK by the seller and therefore no question of under statement of actual price could arise at all. She also contends that as general rule in all those sales where defunct Co-operative Finance Corporations were involved over-statement of purchase price and not under statement was expected. It is also stated that the assessee did not stand to gain anything from the alleged understatement of purchase price inasmuch as it had only to recover his advance at Rs.1 Million which was paid to the owner directly. As to the comparable cases detailed in the body of the assessment order she complains that neither the assessee was properly confronted nor the facts stated in the body of the assessment order were ever brought to the notice of the assessee. Learned D.R. on the other hand supports the orders of the authorities below and also contends that the first appellate authority having set aside this addition the assessee had no basis for any grievance in this regard.

7. After hearing the parties we find a lot of force in the submissions made by the learned counsel for the assessee. Learned first Appellate Authority in a way avoided to record a definite finding. The submission that in cases where a Finance Corporation was involved an over statement rather than an under statement was a general rule definitely bears weight. It is also clear beyond any shadow of doubt that the assessee was a beneficial owner and is not a legal owner. The advance being already with the seller and the same deed having been registered in favour of the above said lender of the remaining part of consideration viz M/s. NICFC there was no reason for the assessee to attempt under statement of the price nor the assessing officer has e been able to bring home the exercise of such an attempt on the part of the assessee. The parallel cases on price cited in the body of the assessment order also 'are clearly distinguishable inasmuch as the plot in question was quite large in width and breadth and therefore its comparison with the price paid by purchaser for one or two Kanals plot was clearly inappropriate. The addition made in this respect therefore, cannot be sustained.

8. The other addition at Rs.24,89,981 under section 13(1)(b) of the Ordinance was made when the assessing officer found that the assessee had availed credit facility from two Banks and had also offered securities in the form of movable assets. The total price of movable assets as on 31-12-1987 as declared to the lender banks amounted to Rs.26,50,000 while the balance sheet of the assessee company showed tools and equipments worth only Rs.60,019. In reply to a notice the assessee contended that hypothecated Trucks, Tractors and Trollies, Suzuki Van and other material belonged to two sister concerns of the assessee company while Charade car KS-7999 belonged to the Chief Executive of the assessee company. The assessing officer found the statement to be incorrect as far the aforesaid movable assets pledged with the batiks were concerned except the Charade Car, which found to be belonging to the Chief Executive of the assessee company. The balance sheets of sister concerns did not indicate the kind of movable pledged with the aforesaid lender banks. On this, the assessee turned around and stated that these movable were in fact taken on rent and were pledged with the banks for availing credit facility. This again did not impress the assessing officer who proceeded to make the aforesaid addition.

9. Parties on this issue have also been heard. Learned counsel for the assessee contends that it is a common practice in business that parties over state their stocks pledged or hypothecated with banks in order to avail higher credit limits. In support of her submission she has attempted to cite certain reported decisions as well. However, we will not allow any submission of the kind to prevail. Even if there was any such practice the Supreme Court of Pakistan in PLD 1990 SC 990 = 1990 PTD 821 in re: C.I.T. v. Maula Bukhsh Corporation Limited disapproved the same. In that case the assessee over-stated the stocks pledged with the bank and the assessing officer made addition of the value representing the stock which was over-stated. The Supreme Court upheld the action of the assessing officer. This being so, we cannot allow the assessee to approbate and reprobate noncan we favour such a practice. Even otherwise, the assessee miserably failed to account for the stock pledged with the banks. The assessee did not claim their ownership and also failed to show that these belonged to sister concerns. It last defence that the pledged stock was obtained on rent makes its position all the more precarious.

10. The assessing officer also burdened the assessee with a penalty at Rs.44,475 under section 91(1) of the Ordinance. Learned first appellate authority set aside the penalty on the ground that it had set aside both of the additions earlier made by the assessing officer. Since we have deleted one addition and confirm the other the assessing officer shall allow the assessee the benefit contemplated under section 4-A of section 91 of the Income Tax Ordinance.

11. The other grievance of the assessee against the additions in profit and loss account are, however, totally mis-placed. The assessing officer made these additions after finding the claimed expenses to be unverifiable and the assessee has not been able to challenge these findings. No case of interference in the trading account therefore, is made out.

Assessment year 1990-91:

12. In this year the assessee returned a loss at Rs.6,90,413 while the assessment was made at total income at Rs.22,69,510. Contract receipts declared at Rs.20,85,602were accepted but subjected to a rate of 20% as against the declared at 17.5%. Also certain additions out of profit and loss account expenses were ordered to reach the aforesaid amount. The total assessed income included the claimed capital gains at Rs.28,78,283.

13. As far the trading account is concerned we will readily agree with the submission made for the assessee that usually in similar cases a rate of 17.5 l is applied. The assessing officer while subjecting the declared receipts to a rate of 20% did not bring sufficient material on record nor he cited any parallel cases. Therefore, it is directed that a rate of 17.5 % shall be applied in the year under review. The additions out of profit and loss account were made due to un-verifiability of the expenses claimed. The insurance amount at Rs.13,537 was totally disallowed due to lack of proof. The assessee has not offered to demonstrate that these expenses including insurance were duly verifiable. Therefore, none of these additions call for airy interference.

14. In connection with the claimed capital gains learned counsel for the assessee repeats her submissions which were earlier made in the year 1988-89. She states that the assessee received by way of compensation or profit on his investment which was made at Rs.1 Million in the purchase of the plot earlier discussed. Further states that receipt in question being of casual and non-recurring nature no addition in this respect could have been made by the assessing officer.

15. The position of the plot as discussed above remains the same. The assessee made part of the payment while rest of the consideration was paid M/s. NICFC and the plot was transferred in their favour. As observed earlier subsequently M/s. NICFC disposed of that plot for a consideration of Rs.56,00,000 and paid the impugned amount to the assessee. The nature of this receipt being surplus having result from disposal of immovable property cannot be denied. We have gone through the terms and conditions of agreement between the assessee and Sh.Abdul Waheed as well as M/s. NICFC. The fact that the plot in question was ultimately transferred in favour of M/s. NICK on 1-12-1987 finds support from the record. The assessing officer made the addition keeping in view the nature of business of the assessee. However, the legal position in this respect is established that in cases of solitary transactions, a heavy burden lies upon the assessing officer to establish that the transaction in question was an adventure in the nature of trade. No attempt whatsoever was made by the Revenue to discharge the burden. It is also claimed that neither earlier to the transaction in question nor in the later years the assessee engaged itself in sale or purchase of similar kind of properties. The nature of business of the assessee is also not exactly what the assessing officer assumed. In most of the years under review the assessee obtained contracts from official or semi official agencies and no other business of any kind was undertaken. Therefore, the assessing officer was not justified in making the impugned addition nor the first appellate authority was justified in setting aside the same. The assessee has very rightly complained that all material being available on record no justification whatsoever existed for the first appellate authority to avoid a definite decision.

16. No other issue is pressed by the appellant.

17. In view of what has been said above the appeals for the assessment years 1986-87 and 1987-88 succeed in toto. In the year 1988-89, both the appeals succeed partly while in the year 1990-91 again the appeal succeeds to the extent of deletion of addition at Rs.38,78,283. Rest of the claim made in all these years shall stand refused.

C.M.S./372/Trib. Order accordingly.