I.T.A. NO.5921/LB OF 1996, DECIDED ON 15TH JANUARY, 1998. VS I.T.A. NO.5921/LB OF 1996, DECIDED ON 15TH JANUARY, 1998., 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1217 (1998)

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

----S. 32-A---Furnishing of documents etc. by company---Provision of S.32-A, Income Tax Ordinance, 1979 would not be available if an Assessing Officer can establish that the report of the auditors as well as the accounts audited by them were clearly false.

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

----S. 80-D---Interpretation of S.80-D, Income Tax Ordinance, 1979-- Words "where no tax is payable or paid" in S.80-D, Income Tax Ordinance, 1979---Interpretation.

The words used in section 80-D, Income Tax Ordinance, 1979 "where no tax is payable or paid" clearly imply that an Assessing Officer shall first determine if the assessee is liable to pay tax. In that determination if he finds that no tax is payable or that the one payable is less than the said minimum tax prescribed in subsection (2), he will be, in the first case, require the assessee to pay 1 /2 % of the turnover and, in the second case an amount equal to the difference between the tax payable or paid at the amount calculated under clause (1) i.e. 1/2 % of the turnover. Obviously, the process by which an Assessing Officer will determine the liability of a person to tax and its computation is none else but to make of an assessment order under section 62 of the Income Tax Ordinance.

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

----S. 80-D---Applicability of provision of S.80-D, Income Tax Ordinance, 1979---Section 80-D will come into play only after tax liability of an assessee has been determined by way of the process called assessment.

1990 PTD 821 andI. T. A. No. 104/KB of 1984-85 ref.

PLD 1997 SC 582 = 1997 PTD 1555 analysed.

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

----S. 80-D---Contention was that assessee having declared loss was, at best, liable to minimum tax under S.80-D, Income Tax Ordinance, 1979, was neither warranted nor acceptable in law.

1990 PTD 821 and I. T. A. No. 104/KB of 1984-85 ref.

PLD 1997 SC 582 = 1997 PTD 1555 analysed.

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

----S. 80-D---Assessee had itself filed a return of total income under S.55 of the Income Tax Ordinance, 1979---Such assessee, held, could not be allowed to turn back and contend that minimum tax liability under S.80-D of the Ordinance was its whole liability to tax or that it was not liable to file a return.

1990 PTD 821 and I. T. A. No. 104/KB of 1984-85 ref.

PLD 1997 SC 582 = 1997 PTD 1555 analysed.

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

----S. 80-D---Assessing Officer computed income as against the declared loss and the income-tax computed on the basis of the income so determined being far more than the minimum tax liability, question of resort to S.80-D, or a direction to pay minimum tax only, did not arise at all.

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

----Ss. 32-A & 32---Scope, object, application and interpretation of Ss.32-A & 32 of the Income Tax Ordinance, 1979---Provisions as contained in S.32(1)(3) and those in S.32-A do not, in any way, affect or derogate from the jurisdiction conferred upon an Assessing Officer under S.62, Income Tax Ordinance, 1979---Audited accounts submitted by assessee cannot be accepted in their entirety or without any probe on the part of Assessing Officer---Except from the method of accounting no other presumption or sanctity is attached to the balance-sheet and profit and loss statement prepared by Chartered Accountants or by Cost and Management Accountants---Audited accounts contemplated in S.32-A, Income Tax Ordinance, 1979 are in the nature of declared version of an assessee of the state of affairs of its business and financial position prepared through a professional trained in the relevant branch of knowledge---Where no method of accounting is regularly employed, prescribed account is not maintained by the assessee or if the method employed is such that, in the opinion of the Assessing Officer the incomes, profits and gains cannot be properly deduced there from these shall be computed on such basis and in such manner as the Assessing Officer thinks fit---Protection given to the methods of accounting adopted by the assessee enumerated---Assessing Officer without touching the method of accounting is entitled to seek both oral as well as documentary evidence in support of the declared version and can also proceed to collect evidence from independent sources and in the last situation he will however confront the assessee with all the information or evidence so collected.

Section 32-A introduced in the Income Tax Ordinance, 1979 by way of Finance Ordinance, 1981 hardly appears to have added anything to the purpose stated in section 32(1) and (3) of the Ordinance. According to the new inserted section a private limited company with a certain paid-up capital is required to file/furnish a copy of balance-sheet and profits and gains alongwith an auditors' report as prescribed in Form 35-A of the Companies (General Provisions and Forms) Rules, 1985. The balance-sheet etc. so submitted should be signed by a person who is a Chartered Accountant or a Cost and Management Accountant as described in the relevant Statutes. Subsection (2) of section 32-A provides for eventuality if the directions given in sub-clause (1) is not carried out. It goes to state where a company has not complied with the requirements of subsection (1) its incomes, profits and gains shall be computed "upon such basis and in such manner as the Deputy Commissioner may determine". From the provisions as contained in section 32-A, one cannot find any intention of the Legislature to say that the audited accounts submitted shall be accepted in their entirety or without any probe on the part of the Assessing Officer. Earlier subsection (1) of section 32 states almost the same law by saying that incomes, profits and gains, for the purpose of sections 17, 19, 22, 27 and 30, shall be computed in accordance with the method of accounting regularly employed by the assessee. As in section 32-A here also an alternate is provided that where no method of accounting is regularly employed or if the method employed is such that, in the opinion of the Assessing Officer the incomes, profits and gains cannot be properly deduced there from these shall be computed on such basis and in such manner as the Deputy Commissioner thinks fit. In subsection (2) of section 32-A the use of words "such basis and such manner" are noteworthy. These words when read together with similar phrases used in section 32 guide to the conclusion that in case of the companies mentioned in section 32-A if the prescribed accounts are not maintained then their incomes, profits and gains shall be computed upon such basis and in such manner as the Assessing Officer may determine. It will be noted that method of maintenance of accounts is totally different from the computation of income or the basis on which such income is computed. No particular sanctity appears to have been given by law to the audited accounts except as a method of accounting where these have been regularly employed. The Income Tax Ordinance does not clothe the audited accounts with any presumption of truth except that where a particular mode of maintenance of accounts has consistently been followed by an assessee wherefrom incomes, profits and gains can be properly deduced, it shall be accepted only as a system of accounting and not as an irrebuttable evidence of income or loss indicated therein. The protection appears to have been given to the three commonly known methods of maintenance of accounts namely, cash, mercantile and hybrid. The reason for placing stress upon the consistency in the system is based upon the fact that change from one to another leads to a number of inaccuracies and incorrect, indication of state of financial position of an organization. To that extent where such a system is followed and the report of the auditor certifies that fact, the law protects an assessee from any kind of interference by an Assessing Officer. However, the actual contents of a balance-sheet, profit and loss account etc. are always open for the scrutiny of an Assessing Officer inasmuch as the balance-sheet and profit and loss account reports are prepared on the basis of the information provided by an assessee and the accountant or an auditor incorporates such information in the report without going into their legality or veracity. To see that an expense claimed is legal or is admissible, in the given situation, is not the job of an accountant. He is concerned only with the documentation or proof of the expense and on the basis of information and documents provided by an assessee, he certifies that the information provided had completely and correctly been incorporated in the accounts to the extent and in the manner it was available to them. For example, an accountant while preparing the accounts is not concerned nor is expected to say if any amount was hit by the provision of section 25(c) of the Income Tax Ordinance, it cannot rule upon if the claimed depreciation in respect of an asset is allowable in the facts and circumstances of the case. Also a Chartered or Cost and Management Accountant cannot be an authority to say that capital gain in certain situation is a taxable amount or that a specific nature of deduction is allowable to certain extent and, therefore, he will refuse to prepare the accounts in which such claim has been made in excess thereof. The provisions of sections 23 and 24 shall also lose their impact and there will be no way to enforce or to oversee their application if we are to accept a balance-sheet and profit and loss accounts prepared by an accountant as a gospel truth. 1f balance-sheet, profit and account statement prepared on the basis of the information provided by the assessee makes a claim which is either not in accordance with law or is patently wrong when seen in the perspective of other similar cases; for example a claim of 90% wastage by a cotton ginning factory, an Assessing Officer cannot shut his eyes and to allow the assessed" 'to escape with impunity beyond the smoke shield of audited accounts.

The assessee-company before us is a public limited company while the provisions of section 32-A are addressed only to private limited companies with certain extent of paid-up capital. The submission, of the learned counsel that in case of public limited companies this provision is applicable with more force inasmuch as in public companies the motive for manipulation of record is far less than in cases of private limited companies is also not correct in all cases. As observed earlier section 32(1) requires that incomes, profits and gains shall be computed for the purpose of sections 17, 19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee. This protection which has specifically been extended to private limited companies by way of section 32-A to the extent of method of accounting, may cover public limited companies as well. But that coverage and protection will be with reference to the provisions of sections 32(1) and 32(3). In that sense the addition of section 32-A is more in nature of a stress placed in cases of certain specific kinds of companies or assessees. Even in absence of such provision the value of audited accounts submitted by a private limited company would not have been any lesser nor the alternate given in section 32-A(2) was affected which was already there as subsection (3) of section 32 of the Ordinance.

Except for the method of accounting no other presumption or sanctity is attached to the balance-sheet and profit and loss statement prepared by Chartered Accountants or by Cost and Management Accountants. The Assessing Officer was accordingly competent to ask for the details and to require substantiation of the audited accounts. The audited accounts contemplated in section 32-A are in the nature of declared version of an assessee of the state of affairs of its business and financial position prepared through a professional trained in this branch of knowledge. An Assessing Officer without touching the method of accounting is entitled to seek both oral as well as documentary evidence in support of the declared version and can also proceed to collect evidence from independent sources. In the last situation he will, however, confront the assessee with all the information or evidence collected.

An accountant and the auditor is subject to certain specific rules of conduct enforced by law as well as their respective professional bodies. Their ethics certainly betray an interesting mixture of diverse duties and protection of interest of various groups. The clients, the third parties including investors and lenders, public at large and finally the law. This diversity in the nature of their job cannot be made a reason to make them both a Judge and a juror. The Income Tax Ordinance or any other legislation does not assign them any of the jobs, functions or duties of an Assessing Officer. The computation of a sum as an income is to be made by an Assessing Officer after, considering the declared version, the evidence provided or collected by it. His jurisdiction to do so and or to seek explanation from an assessee is amply provided in section 62 of the Ordinance. The provisions as contained in section 32(1) and (3) and those in section 32-A do not in any way affect or derogate from the jurisdiction entrusted upon him under section 62. The Assessing Officer, in the present case, has given in detail and, in fact, reproduced main notices issued to the assessee and their replies as well. A glance on these replies supports his view that the assessee avoided straight answers to a number of them. First Appellate Authority has also given a detailed account of attempts on the part of the assessee to avoid participation in the proceedings. Therefore, the prayer of the assessee to direct acceptance of the audited accounts without, their corroboration appears too optimistic and being not supported by any provision of law, it shall be rejected.

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

----Ss. 11 & 13---Total income---Deemed income---Expenses in profit and loss account---Disallowance---Addition---Principles---Disallowance in profit and loss account for lack of proper proof or inadmissibility in the light of relevant provision of law is not a deemed income as such but a correction or adjustment of account for tax purpose---Whole and part disallowance of a profit and loss account expense may partake of an element to deemed income only in result---Resort to the deeming provisions will only be made where a sum of money incoming or outgoing is not properly explained or an investment in property or in a valuable article remains at variance and unconnected with the sources declared to the Revenue---Deeming provisions in such cases come into play only in view of the fact that said sums, article or property was not explained keeping in view the previous current or even subsequent conduct of accounts and events.

Total income of an assessee shall include all income from whatever sources which is received or is deemed to be received or accrues or arises or is deemed to accrue or arise. The provisions of section 13 give various situations in which unexplained investment etc. is deemed to be the income of an assessee. An addition of the kind, therefore, is clearly covered by the provisions of section 11 to make it includable in total income in relation to the assessment in question where the stated conditions in section 13 are fully answered. The legislation can create presumption of fact and of law and can also treat a fact as existent on the proof or availability of another fact.

A disallowance in profit and loss account for lack of proper proof or inadmissibility in the light of relevant provisions is not a deemed income as such but a correction or adjustment of account for tax purpose. In other words where a claim in this head is made, an assessee declares to have actually expended it and its curtailment means that amount disallowed remained available with the assessee and was not so expended. A whole and part disallowance of a profit and loss account expense may. Partake of an element of deemed income only in result. The law, however, does not take into account a remote cause of action nor a remote result. In the present case, for example, a donation of Rs.2,75,000 was disallowed on the ground that it was not admissible. The assessee may have had actually expended this amount for good humanitarian reasons but the law does not recognize it as a valid deduction or a legal charge on profit and loss account.. Therefore, this amount by legal presumption remained a part of purse of the assessee. It will be seen that claims of expenses are out of real income and it is for that reason that in certain conditions the law provides for their surrender or retrieval when in subsequent years the amount claimed was either received back or otherwise became available to the assessee. Instances of such cases are given in section 25 of the Income Tax Ordinance. In that sense allowance of an expense is a concession which the law permits while computing income of an assessee and requires making it good whenever the concession allowed becomes available to the assessee. Computation of income for the purpose of income-tax is different from its being an accounting proposition. In income tax certain deductions are allowed even when no actual expense is incurred and at the same time some actual expenses are not allowable. The law having exhaustively provided for both nothing remains to guess. However, a disallowance results when either an expense is not established in full or a part and secondly, when it is found inadmissible. In the first case, law presumes that only that much of the amount was expended which was proved and allowed while the rejected part remained available with the assessee. In the second case, law presumes that the gross profit representing inadmissible amount remained with the assessee and was never expended. No necessity in both situations arises to "deem" that part of gross profit as income by resort to any deeming provision including section 11 of the Ordinance. Resort to the deeming provisions will only be made where a sum of money incoming or outgoing is not properly explained or an investment in property or to a valuable article remains at variance and unconnected with the sources declared to the Revenue There deeming provisions come into play only in view of the fact that the aforesaid sum of money, article or property was not explained keeping in view the previous, current or even subsequent conduct of accounts and events.

(i) Income-tax---

----Audited accounts ---Estimate of income by Assessing Officer---Addition-- Principles.

Although an Assessing Officer has wide powers, to make assessments yet his estimates must be based upon facts and circumstances of the case as borne out from record and not on the basis of his whims and desires. After rejection of returned version an Assessing Officer should evolve reasonable basis for making the assessment and that basis of estimate should also be disclosed to the assessee.

It is invariable for an assessee to prove the authenticity of returned version yet it is equally established that after rejecting them an Assessing Officer is required to evolve proper basis to substantiate its own estimate of the turnover, sales or income achieved by an assessee during a specific period of business activity. In absence of such basis, the substitution of returned version will amount to replacing one guess with another and. therefore, will hardly stand upon at a better footing.

If the conditions given in Article 76 of Qanun-e-Shahadat (10 of 1984) were satisfied, the assessee could have been required to prove the audited accounts by secondary evidence. In case the assessee had still defaulted, the Assessing Officer could himself direct the Auditors and Accountants who prepared the accounts to support them from the information and record submitted to them by the assessee or their own notes prepared on the basis of such information. He could even admit oral evidence.

Dawood Corporation v. CIT 1989 PTD 177 and Messrs Magna Industries v. CIT, Rawalpindi 1980 PTD 35 ref.

(i) Income-tax---

----Addition---Excess stock hypothecated with Bank---In absence of proper confirmation of the hypothecation report prepared by the Bankers, Assessing Officer could not accept the same or to make same basis for the addition-- Making of addition without proper confrontation had resulted in a prejudice to the rights and interest of the assessee, for assessee will have to be confronted with the material in the possession of the Assessing Officer before drawing an adverse inference against him.

In the case of addition on account of excess stock, again, learned counsel for the assessee appears right in pointing out that in absence of proper confrontation of the hypothecation report prepared by the Banker the Assessing Officer could not accept the same or to make it basis for the impugned addition. The making of addition without proper confrontation has caused prejudice to the rights and interest of the assessee. An assessee will have to be confronted with the material in the possession of the Assessing Off-peer before drawing an adverse inference against him.

The acceptance of report of the Banker, without confronting the assessee cannot be said to have formed proper basis for making the addition.

I.T.A. No. 104/KB of 1984-85; PLD 1997 SC 582 = 1997 PTD 1555; CIT, Rawalpindi v. Haji Maula Bukhsh Corporation Limited PLD 1990 SC 990 = 1990 PTD 821; Dawood Corporation v. CIT 1989 PTD 177; 1980 PTD 35 and Gurmukh Singh v. CIT (1944) 12 ITR 393 ref.

Latif Ahmad Qureshi for Appellant.

Ahmad Kamal, D.R. for Respondent.

Date of hearing: 29th November, 1997.

ORDER

NASIM SIKANDAR, (JUDICIAL MEMBER).---The appellant in this further appeal for the assessment year 1992-93 is a Public Limited Company and is engaged in manufacture import, export, purchase, sale and dealing in every kind of iron and steel goods, ferrous and non-ferrous metal of all descriptions as well as manufacture of all kinds of implements. For the assessment years under review total loss at Rs.9,82,85,868 was returned. It included brought forward losses and unabsorbed depreciation to the tune of Rs.8,44,20,449. The return was duly accompanied with audited accounts such as trading, profit and loss, balance-sheet, schedule of fixed assets and notes to final accounts etc. In reply to the notice serves upon it for production of books of accounts it was submitted that for security reasons the demanded record was transferred/shifted to the residence of some of the Directors and was finally lost as it perished during a demolishing operation carried out in respect of the building in which it was lodged. According to the assessment order "some details, however, such as quantitative details of production account were furnished".

2. The assessing officer basing upon the audited accounts submitted before him served a detailed notice requiring the assessee to furnish price of the value of assets mortgaged, rate of interest, period and nature of loans, details of running finance and mark-up arrangement and other credit facilities, details of securities on the basis of which overdraft/loans were taken, the claimed deferred liabilities and their admissibility, details of trade creditors, accrued expenses and other liabilities, interest payable to trade debtors, evidence as to whether the valuation of stocks spares, stores and raw material was physically checked by the auditors, the details of trade deposits and their terms, re-payment of loans and advances. Also a pro forma was issued to obtain manufacturing and trading accounts details, the supporting documents with respect to administrative and selling expenses the financial charges incurred as also admissibility of initial deprecation claimed on machinery and plant etc. In case of brought forward losses the details thereof were requisitioned. The evidence to support the claimed donation of Rs.2,75,000 was also required.

3. In reply the A.R. of the assessee contended that all the required details had already been supplied to the predecessor of the assessing officer and that the books of accounts as well as the supporting documents remained in his possession for quite some time.

4. The assessing officer found the explanation to be factually contradictory as well as untenable at law. He remarked that receipt of books of accounts in the office of the assessing officer/his predecessor was not supported by any entry in the order sheet. Also that the contention was against the explanation earlier submitted by the assessee that the books of accounts had been lost in the said demolishing operation. Accordingly the assessing officer sought verification of stock pledged with National Bank of Pakistan WAPDA House Branch, Lahore. In their reply the bank authorities submitted that 13000 Metric Tons Stock of finished goods and raw material was pledged as on 31-12-92 which according to them valued at Rs.100(M). The assessing officer after rejecting the returned version again served upon the assessee a detailed notice requiring its explanation on the issues which in his opinion arose out of the audited accounts submitted by the assessee. The A.R. of the assessee responded on 29-5-95 repeating the assertion with regard to production of books of accounts and in fact their examination by the predecessor of the assessing officer. This time it was supported by a copy of the letter addressed to the Registrar, Joint Stock Companies informing him that due to the demolishing operation carried out by the L.D.A. all the records including account books had been destroyed. The authority of the assessing officer to again require the production of books was also challenged on the ground that these had already been examined by him. From various facts the A.R. of the assessee attempted to show that, the observations of the assessing officer earlier served upon the assessee itself indicated that the books of accounts had duly been seen and examined by him before serving the notice. With regard to pledging of 13000 Metric Tons Stock with the National Bank of Pakistan the contents of the notice were refuted. Further, it was submitted that the information provided by the bank could not be said to have pertained only to the period in question. The A.R. of the assessee also requested that in order to cross-check various details regarding stock etc. the assessing officer could seek information from various official agencies including the Central Excise Department. Other issues regarding consumption of electricity, provision for staff gratuity trading liabilities, consultancy expenses and sundry debts etc. were also taken up in the reply to negate the suspicion of the assessing officer as expressed in his notice.

5. He was, however, not impressed. After placing reliance upon reported judgment of the Supreme Court of Pakistan cited as 1990 PTD 821and order of this Tribunal dated 20-9-1990 in I.T.A. No.104/KB/1984/85 the assessing officer opined that in both of these cases suppression of stock was held as concealed income to be worked out on the basis of difference in quantity declared in the balance-sheet and to the bank for hypothecation. After usual proceeding the suppressed stock was estimated at 6594.054 Metric Tons and its value at a rate of Rs.11,000 per M. Ton at Rs.7,25,34,000. A sum of Rs.25,00,000 was brought to tax as profit from suppressed stock. The declared sales of Rs.45,29,98,811 were enhanced to Rs.60,00,00,000 and subjected to a rate of 10% as against the disclosed rate of 3.28%. While applying a rate of 10% the assessing officer observed that although addition made on this account was deleted by CIT(A) in the year 1988-89 yet the department was in second appeal and that the decision of the Tribunal had not yet been delivered. Accordingly in all a trading addition of Rs.5,13,17,076 was made by enhancing the sales and subjecting them to a rate of 10% as aforesaid. A number of profit and loss disallowances amounting to Rs.62,87,187 were also made. Lastly, financial expenses claimed at Rs.1,79,88,858 were curtailed by a sum of Rs.33,67,335 after finding them to be partly inadmissible in view of the fact that sum of Rs.1,49,34,768 was advanced by the assessee to its sister concerns namely Brothers Sugar Mills Limited, Chaudhry Sugar Mills Limited, Mehran Ramzan Textile Mills and Ramzan Sugar Mills Limited. After allowing the brought forward losses at RS.8,44,20,449 taxable income for 'the year was computed at Rs.3,43,82,396.6. Learned First Appellate Authority CIT(A), Multan (Camp at Lahore) by way of its order dated 18-2-1996 proceeded in absence of the assessee after holding that the A.R, of the assessee was not cooperating. He took up the grounds of appeal as arguments and rejected them after considering them in the light of the findings earlier recorded by the assessing officer. The claim of the assessee with regard to submission of the accounts books, their examination and retention in the office of the assessing officer for a long time was found illogical and unconvincing. With regard to the aforesaid additions made on account of suppressed stock as well as the profit from such stock the findings of assessing officer were repeated to maintain the treatment meted out to the assessee. Hence this further appeal.

7. Parties have been heard. Mr. Latif Qureshi, learned counsel for the assessee vehemently contends that the return filed in this case was to be processed under section 80-D of the Ordinance and not under section 62 of the Ordinance. According to the learned counsel where the provisions of section 80-D are attracted the rest of the provisions of the Ordinance stand excluded. Therefore, he maintains that the assessment framed under section 62 was clearly against law. To support his submissions he relies upon the observations of their lordships of the Supreme Court of Pakistan as contained in para. 45 of the reported judgment cited as PLD 1997 SC 582 = 1997 PTD 1555 re: M/s. Elahi Cotton Mills v. Federation of Pakistan. He admits that this objection is being taken up for the first time but stresses that its nature being legal it can be raised even before the highest forum. According to the learned counsel the ratio settled in the aforesaid judgment of the Supreme Court makes it vividly clear that even filing of the return for the assessees covered by the provisions of section 80-D of the Ordinance is not necessary. His next objection pertains to the taxability of the aforesaid additions made on account of suppressed stock and their profit by resort to the provisions of section 13 of the Income Tax Ordinance, 1979. According to the learned counsel the amounts added could neither be said to have been "received" or "deemed to have been received" by the assessee, in order to make them taxable as contemplated under section 11 of the Ordinance. The addition made in trading account by estimating sales and application of rate is also challenged on the ground that the estimation was devoid of any basis and that the applied ,rate was neither supported by any parallel case nor in fact such rate was ever applied by the Revenue in respect of any other assessee. It is stated that the assessee had a history of a rate of 2.5%. Also informs that in the year 1988-89 a rate of 10% was applied by the assessing officer as against the rate of 4.39% applied in the year 1989-90. However, learned CIT(A) reduced the same to 4.34%. Further informs that the reduction made in the rate by the CIT(A) was reversed by the ITAT and that order was suspended by their lordships of the Lahore High Court.

8. The next contention of the learned counsel for the assessee is based upon the provisions as contained in section 32-A of the Income Tax Ordinance. It is submitted that where an assessee submits audited accounts an assessing officer cannot hold that either no method of accountancy was regularly employed or that the one employed by the assessee was such that profit and gains could not be properly deduced there from. The contention is sought to be supported by an order of CIT(A), Zone-I, Lahore dated 16-1-96 in re: M/s. Ayesha Woollen Mills (Private) Limited. In the view of the learned counsel the provisions of section 32-A are rather applicable with more force with regard to public limited companies where chances of manipulation of record and accounts are much less as compared to similar chances in case of private limited companies. Learned counsel agrees that section 32-A would not be available if an Assessing Officer can establish that the report of the auditors as well as the accounts audited by them were clearly false. However, he stresses that before requiring an assessee to establish authenticity of accounts audited by a Chartered Accountant or a Cost and Management Accountant he must establish on record that these had not been prepared in a faithful manner or that there existed a visible difference between the, books of accounts maintained by an assessee and the report prepared by the said Accountants. It is alleged that in the presence and availability of audited accounts duly certified by Chartered Accountants along with their statutory report the assessing officer could not estimate the sales or to make the additions on the basis of alleged suppression of stock etc., On merits it is claimed that the report of the banker which was made basis of the addition was neither confronted to the assessee nor it could be taken as a foolproof evidence of the existence of the stock hypothecated with the bank. Further states that the assessee never prepared such a report and the assessing officer failed to confront the same nor in the assessment order he answered the objection of the assessee that hypothecation of stock and availing of credit being a continuous process it could not be linked with any cut off date or the end of the assessment year. Again it is stated that if at all there existed a difference between the stock disclosed in the books of accounts of the assessee and its banker's report the exact point of time at which the highest margin of the stock existed had to be brought home before making of an addition of. the kind. Learned counsel also contends that absence of proper confrontation of the alleged report of the banker in spite of a request made in this behalf has resulted into a serious prejudice to the assessee and, therefore, the addition made in this regard needs to be deleted out rightly. Further it is repeated that the assessing officer proceeded to assume the difference between the disclosed and hypothecated stock and then made a further assumption that the assessee must have earned a profit on the suppressed stock. According to the learned counsel this kind of assumption one after the other is not sustainable at law nor the assessing officer can be permitted to make assessment on the basis of mere presumptions, one leading to the other. The estimation of alleged suppressed stock and then an addition on the supposed profit having accrued to the assessee from such stock is described as totally whimsical. In case of profit and loss disallowances it is maintained that all of them were incurred for the purpose of business of the assessee and the disallowances having been based upon stock phrases were not at all justified. By way of an additional ground submitted on 13-10-1996 learned counsel contends that the additions made by resort to the provisions of section 13 ought to have been set off against the one made in the trading account.

9. Learned D.R. while resisting the arguments of the learned counsel for the assessee repeats the findings earlier recorded by the authorities below. It is stated that audited accounts could not be accepted on their face value and that provisions of section 32-A are not attracted in case of public limited companies. Also relies upon the reported judgment of the Supreme Court Pakistan in re: CIT, Rawalpindi v. Haji Maula Bukhsh Corporation Limited cited as PLD 1990 SC 990 = 1990 PTD 821 which was earlier cited by the assessing officer while making the addition on account of suppressed stock. Learned D.R. also states that the story of the assessee with regard to loss of record was totally unconvincing and therefore was rightly rejected. The raising of the aforesaid two legal objections based upon the provisions of section 80-D and section 32-A of the Ordinance for the first time are also resisted. According to the learned D.R. the assessing officer based his findings upon the report submitted by the banker of the assessee and therefore no exception to the same could be taken inasmuch as the bankers of the assessee was not supposed to make any kind of report against the interest of its client. The addition made on account of profit from the suppressed stock is also supported for similar reasons which earlier weighed with the authorities below.

10. We have considered the submissions made at the bar for the parties. The first claim of the assessee that its case was covered by the provisions of section 80-D of the Income Tax Ordinance and therefore, the assessment under section 62 could not be made is without any force. It is also a misconception that the ratio settled in re: Elahi Cotton Mills and others (supra) in any way supports the proposition that where no tax is paid or is found payable the assessing officer cannot frame an assessment under section 62 and instead can charge tax only to the extent of 1/2 % of the total turnover. The words used in the provision, "where no tax is payable or paid" clearly imply that an Assessing Officer shall first determine if the assessee is liable to pay tax. In that determination if he finds that no tax is payable or that the one payable is less than the said minimum tax prescribed in subsection (2), he will, in the first case, require the assessee to pay 1/2% of the turnover and, in the second case, an amount equal to the difference between the tax payable or paid at the amount calculated under clause (a) i.e. 1/2% of the turnover. Obviously, the process by which an Assessing Officer will determine the liability of a person to tax and its computation is none else but to make of an assessment order under section 62 of the Income Tax Ordinance. Therefore, learned counsel is not right to interpreting para. 45 of the said judgment in his own peculiar way. It will be noted that in the operative part of that judgment the answer to the proposition now being advance at the bar was expressly stated in the negative. In sub para. (iii) of para. 57 of the order their lordships held:

"Para. 57 (iii): That the provisions of sections 35 and other provisions of the Ordinance which are not in consistent with section 80-D continue to apply even to the cases covered by the latter provision as discussed herein above in para. 41."

11. Earlier in para. 41 it was discussed and finally found that in spite of the use of non obstente clause the other provisions of the Ordinance including section 35 were not ousted unless these were inconsistent to the provisions of section 80-D. The learned counsel for the assessee has not been able to point out any inconsistency between the provisions of section 62 and section 80-D of the Ordinance. Also, as earlier remarked we find that provisions of section 80-D come into play only after tax liability of an assessee had been determined by way of the process called assessment. We will, therefore, reject the objection as also the prayer that the assessee before us having declared loss at best it was liable to minimum tax under section 80-D. It will be noted that the assessee had itself filed a return of total income under section 55 of the Ordinance. Therefore, it could not be allowed to turn back and say that minimum tax liability under section 80-D was its whole liability to tax or that it was not liable to file a return. Their lordships in para. 45 of the aforesaid judgment had only observed that Where the provisions of section 80-D were attracted "payment at the rate of 1/2 % by them under section 80-D is the total discharge of their minimum tax liability. However, the assessees who earned more than of the above amount they remained liable to file Income Tax Returns or to get their assessment orders framed in terms of the provisions of the Ordinance". From these observations we have not been able to find anything in favour of the proposition of the assessee that instead of framing of an assessment the assessing officer ought to have made resort to section 80-D and to require it to make payment of minimum tax as total discharge of its liability. The Assessing Officer by way of the impugned assessment order computed income as against the declared loss and the income-tax computed on the basis of the income so determined being far more than the minimum tax liability the question of resort to section 80-D or a direction to pay minimum tax only did not arise at all.

12. The next contention of the learned counsel that the assessing officer ought to have accepted the audited accounts as such does not hold any force either. Section 32-A introduced in the Income Tax Ordinance by way of Finance Ordinance, 1981 hardly appears to have added anything to the purpose stated in section 32(1) and (3) of Ordinance. According to the newly-inserted section a private limited company with a certain paid-up capital is required to file/furnish a copy of balance-sheet and profits and gains along with an auditors' report as prescribed in Form 35-A of the Companies (General Provisions and Forms) Rules, 1985. The balance-sheet etc. so submitted should be signed by a person who is a Chartered Accountant or a Cost and Management Accountant as described in the relevant Statutes. Subsection (2) of section 32-A provides for eventuality if the directions given in sub-clause (1) is not carried out. It goes to state that where a company has not complied with the requirements of subsection (1) its incomes, profits and gains shall be computed "upon such basis and in such manner as the Deputy Commissioner may determine". From the provisions as contained in section 32-A we do not find any intention of the Legislature to say that the audited accounts submitted shall be accepted in their entirety or without any probe on the part of the Assessing Officer. Earlier subsection (1) of section 32 states almost the same law by saying that incomes, profits and gains, for the purpose of sections 17, 19, 22, 27 and 30 shall be computed in accordance with the method of accounting regularly employed by the assessee. As in section 32-A here also an alternate is provided that where no method of accounting is regularly employed or if the method employed is such that. in the opinion of the Assessing Officer the incomes, profits and gains cannot be properly deduced there from these shall be computed on such basis and in such manner as the Deputy Commissioner thinks fit. Both of these provisions when read together do not guide us to reach the conclusion, which the learned counsel for the assessee is perusing us to reach. In subsection (2) of section 32-A the use of words "such manner" are noteworthy. These words when read together with similar phrases used in section 32 guide us to the conclusion that in case of the companies mentioned in section 32-A if the prescribed accounts are not maintained then their incomes. Profits and gains shall be computed upon such basis and in such manner as the Assessing Officer may determined. It will be noted that method of maintenance of accounts is totally different from the computation of income or the basis on which such income is computed. No particular sanctity appears to have been given by law to the audited accounts except as a method of accounting where these have been regularly employed. The Income Tax Ordinance does not clothe the audited accounts with any presumption of truth except that where a particular mode of maintenance of accounts has consistently been followed by an assessee wherefrom incomes, profits and gains can be properly deduced it shall be accepted only as a system of accounting and not as an irrebuttable evidence of income or less indicated therein. The protection appears to have been given to the three commonly known methods of maintenance of accounts namely, cash, mercantile and hybrid. The reason for placing stress upon the consistency in the system is based upon the fact that change from one to another leads to a number of inaccuracies and incorrect, indication of state of financial position of an organization. To that extent where such a system is followed and the report of the auditor certifies that fact the law protects and assessee toany kind of interference by an Assessing Officer. However, the actual contents of a balance-sheet, profit and loss account etc. are always open for the security of an Assessing Officer inasmuch as the balance-sheet and profit and loss account reports are prepared on the basis of the information provided by an assessee and the accountant or an auditor incorporates such information in the report without going into their legality or veracity. To see that an expense claimed is legal or is admissible in the given situation is not the job of an accountant. He is concerned only with the documentation or proof of the expense and on the basis of information and documents provided by an assessee he certifies that the information provided had completely and correctly been incorporated in the accounts to the extent and in the manner it was available to them. If the proposition advanced by the learned counsel for the assessee is accepted it would amount to transfer part of the jurisdiction to make an assessment to the auditors and accountants. That is neither the intention of the aforesaid provisions nor any other provision of the Income Tax Ordinance supports it. Also it will amount to say that a number of provisions of the Ordinance shall be redundant and will be inapplicable in cases where an assessee has submitted the audited accounts. For example an accountant while preparing the accounts is not concerned nor is expected to say if any amount was hit by the provision of section 25(c) of the Income Tax Ordinance, it cannot rule upon if the claimed depreciation in respect of an asset is allowable in the facts and circumstances of the case. Also a Chartered or Cost and Management Accountant cannot be an authority to say that capital gain in certain situation is a taxable amount or that a specific nature of deduction is allowable to certain extent and, therefore, he will refuse to prepare the accounts in which such claim has been made in excess thereof. The provisions of sections 23 and 24 shall also lose their impact and there will be no way to enforce or to oversee their application if we are to accept a balance-sheet and profit and loss accounts prepared by an accountant as a gospel truth. If balance-sheet, profit and account statement prepared on the basis of the information provided by the assessee makes a claim which is either not in accordance with law or is patently wrong when seen in the perspective of other similar cases, for example a claim of 90% wastage by a cotton ginning factory, an assessing officer cannot shut his eyes and to allow the assessee to escape with impunity beyond the smoke shield of audited accounts.

13. The assessee company before us is a public limited company while the provisions of section 32-A are addressed only to private limited companies with certain extent of paid-up capital. The submission of the learned counsel that in case of public limited companies this provision is applicable with more force inasmuch as in public companies the motive for manipulation of record is far less than in cases of private limited companies is also not correct in all cases. As observed earlier section 32(1) requires that incomes, profits and gains shall be computed for the purpose of sections 17,19, 22, 27 and 30 in accordance with the method of accounting regularly employed by the assessee. This protection which has specifically been extended to private limited companies by way of section 32-A to the extent of method of accounting may cover public limited companies as well. But that coverage and protection will be with reference to the provisions of sections 32(1) and 32(3). In that sense the addition of section 32-A is more in the nature of a stress placed in cases of certain specific kinds of companies or assessees. Even in absence of such provision, the value of audited accounts submitted by a private limited company would not have been any lesser nor the alternate given in section 32-A(2) was affected which was already there as subsection (3) of section 32 of the Ordinance.

14. Therefore, as said above except for the method of accounting no other presumption or sanctity is attached to the balance-sheet and profit and loss statement prepared by Chartered Accountants or by Cost and Management Accountants. The Assessing Officer was accordingly competent to ask for the aforesaid details and to require substantiation of the audited accounts. The audited accounts contemplated in section 32-A are in the nature of declared version of an assessee of the state of affairs of its business and financial position prepared through a professional trained in this branch of knowledge. An Assessing Officer without touching the method of accounting is entitled to seek both oral as well as documentary evidence in support of the declared version and can also proceed to collect evidence from independent sources. In the last situation he will, however, confront the assessee with all the information or evidence collected.

15. An accountant and the auditor is subject to certain specific rules of conduct enforced by law as well as their respective professional bodies. Their ethics certainly betray an interesting mixture of diverse duties and protection of interest of various groups. The clients, the third parties including investors and lenders, public at large and finally the law. This diversity in the nature of their job cannot be made a reason to make them both a Judge and a juror. The Income Tax Ordinance or any other legislation does not assign them any of the jobs, functions or duties of an Assessing Officer. The computation of a sum as an income is to be made by an assessing officer after, considering the declared version, the evidence provided or collected by it. His jurisdiction to do so and or to seek explanation from an assessee is amply provided in section 62 of the Ordinance. The provisions as contained in section 32(1) and (3) and those in section 32-1 do not in any way affect or derogate from the jurisdiction entrusted upon him under section 62. The Assessing Officer in this case has given in detail and in fact reproduced main notices issued to the assessee and their replies as well. A glance on these replies supports his view that the assessee avoided straight answers to a number of them. Learned First Appellate Authority has also given a detailed account of attempts on the part of the assessee to avoid participation in the proceedings. Therefore, the prayer of the learned counsel for the assessee to direct acceptance of the audited accounts without, their corroboration appears too optimistic and being not supported by any provision of law, it shall be rejected.

16. The third legal submission made with reference to the provisions of section 11 (scope of total income) is also not acceptable. Sub-clauses (i) and (ii) of subsection (1)(a) of section 11 clearly provide for such eventuality. It says that total income of an assessee shall include all income from whatever sources, which is received or is deemed to be received or accrues or arises or is deemed to accrue or arise. The provisions of section 13 give various situations in which unexplained investment etc. is deemed to be the income of an assessee. An addition of the kind before us, therefore, is clearly covered by the provisions of section 11 to make it includable in total income in relation to the assessment in question where the stated conditions in section 13 are fully answered. It goes without saying that the legislation can create presumptions of fact and of law and can also treat a fact as existent on the proof or availability of another fact. The second facet of this objection that in profit and loss account disallowances also the provisions of section 11 are inapplicable is misconceived. His contention mead's that when a claim in profit or loss account is disallowed wholly or in part, in his view it cannot be added back towards income without support from a statutory provision in the Ordinance to permit its addition to income. According to learned counsel such disallowance cannot be treated as deemed income inasmuch as it does not fulfil any of the conditions given in section 11 namely, an income received or deemed to be received or accused or deemed to accrue to the assessee.

17, A disallowance in profit and loss account for lack of proper proof or inadmissibility in the light of relevant provisions is not a deemed income as such but a correction or adjustment of account for tax purpose. In other words where a claim in this head is made an assessee declares to have tactually expended it and its curtailment means that amount disallowed remained available with the assessee and was not so expended. A whole and part disallowance of a profit and loss account expense may partake an element of deemed income only in result. The law, however, does not take into account a remote cause of action nor a remote result. In the case before us for example, a donation of Rs.2,75,000 was disallowed on the ground that it was not admissible, The assessee may have had actually expended this amount for good humanitarian reasons but the law does not recognize it as a valid deduction or a legal charge on profit and loss account. Therefore, this amount by legal presumption remained a part of purse of the assessee, It will be seen that claims of expenses are out of real income and it is for that reason that in certain condition the law provides for their surrender or retrieval when in subsequent years tile amount claimed was either received back or otherwise became available to the assessee. Instances of such cases are given in section 25 of the Income Tax Ordinance. In that sense allowance of an expense is a concession which the law permits while computing income of an assessee and requires making it good whenever the concession allowed becomes available to the assessee. It will further be noted that computation of income for the purpose of income-tax is different from its being an accounting proposition. In Income-tax certain deductions are allowed even when no actual expense is incurred and at the same time some actual expenses are not allowable. The law having exhaustively provided for both nothing remains to guess. However, as said above, a disallowance results when either an expense is not established in full or a part and secondly, when it is found inadmissible. In the first case, law presumes that only that much of the amount was expended which was proved and allowed while, the rejected part remained available with the assessee. In the second case, law presumes that the gross profit representing inadmissible amount remained with the assessee and was never expended. No necessity in both situations I arises to "deem" that part of gross profit as income by resort to any deeming provision including section 11 of the Ordinance. Resort to the deeming provisions will only be made where a sum of money incoming or outgoing is not properly explained or an investment in property or in a valuable article remains at variance and unconnected with the sources declared to the revenue. There deeming provisions come into play only in view of the fact that the aforesaid sum of money, article or property was not explained keeping in view the previous, current or even subsequent conduct of accounts and events. That situation being totally different in cases of profit and loss disallowances as explained above the objection is rejected.

18. On facts however learned counsel has some good points to make. It is stated and we will agree that while computing sales the contention qua less consumption of energy during the year under review was not properly appreciated. No other basis having been evolved to compute the sales their estimation was not in accordance with law or binding precedents. In re: Dawood Corporation v. CIT 1989 PTD 177 it was held that although an Assessing Officer had wide powers to make assessments yet his estimates must be based upon facts and circumstances of the case as borne out from record and not on the basis of his whims and desires. In another case M/s. Magna Industries v. CIT, Rawalpindi cited as 1980 PTD 35 their lordships of the Lahore High Court held that after rejection of returned version an Assessing Officer should evolve reasonable basis for making' the assessment and that basis of estimate should also be disclosed to the assessee. No such exercise appears to have happened in the case before us. The basis adopted for computation of sales do not appear to have properly been confronted to the assessee either.

19. In the case of addition on account of excess stock again learned counsel for the assessee appears right in pointing out that in absence of proper confrontation of the hypothecation report prepared by the Banker, the Assessing Officer could not accept the same or to make it basis for the impugned addition. He is, therefore, correct in saying that the making of addition without proper confrontation has resulted in a prejudice to the rights and interest of the assessee. In the famous case of Gurmukh Singh v. CIT cited as (1944) 12 ITR 393 the Lahore High Court observed that an assessee will have to be confronted with the material in the possession of the Assessing Officer before drawing an adverse inference against him. From the assessment order it does not appear that the hypothecation report received from the bank was ever confronted to the assessee. On the other hand we have noted that the reply of the assessee as reproduced in the assessment order rather indicates an express request that the report prepared by the Banker should be confronted so that it could make an objection if there was any incorrect or misleading information provided to the Assessing Officer. While we do not condone the unusual conduct of the assessee in avoiding proper replies to the notices and its deliberate default in appearance before the CIT(A) we are of the opinion that the Assessing Officer could adopt alternate modes of judging the declared version submitted in the form of audited accounts. We are conscious that it is invariably for an assessee to prove the authenticity of returned version yet it is equally established that after rejecting them an Assessing Officer is required to evolve proper basis to substantiate its own estimate of the turnover, sales or income achieved by an assessee during a specific period of business activity. In absence of such basis, the substitution of returned version will amount to replace one guess with another and, therefore, will hardly stand upon at a better footing. The assessee having failed to cooperate or even if the story of loss of books was accepted the Assessing Officer could go a step ahead and seek secondary evidence to accept or dislodge the income as declared in the audited accounts. It means that if the condition given in Article 76 of Qanun-e- Shahadat (10 of 1984) were satisfied, the assessee could have been required to prove the audited accounts by secondary evidence. In case the assessee had still defaulted, the Assessing Officer could himself direct the Auditors and Accountants who prepared the accounts to support them from the information and record submitted to them by the assessee or their own notes prepared on the basis of such information. He could even admit oral evidence. On the other hand, what actually happened was that part of the information supplied to the Assessing Officer in the form of quantitative details of production were not given due consideration while framing the assessment. The other contention of the assessee that whole of the purchases were made from only two sources namely the Pakistan Steel Mills and a sister concern of the assessee were also brushed aside as no attempt was made to verify the claim from these sources. An exercise of the kind would certainly have resulted in a better case for the Revenue. Likewise the acceptance of report of the Banker without confronting the assessee cannot be said to have formed proper basis for making the impugned addition. Accordingly, the resort to the ratio settled to CIT v. Haji Moula Bukhsh (supra) was not proper, In that case the difference in declared stock was properly established by juxtaposing the inventories of the assessee and its Banker. On the other hand, in the case, before us the hypothecation report or the list of the hypothecated stock prepared by the Banker was neither confronted to the assessee nor its contention with regard to the exact point of time when various stocks were pledged with the Bank over a period was dealt with and answered by the Assessing Officer.

20. In case of profit and loss account disallowances except the one under the head donation again we find force in the submissions that stock phrases were used and that exact nature and extent of alleged unverifiable expenses was never brought home.

21. Learned first Appellate Authority also ignored the aforesaid factors and rather consumed most of its energy in discussing the loss of books and the conduct of the assessee in avoiding appearance before it. Nothing appears from the impugned order which could be said to have been a contribution to the proceedings already conducted at the assessment stage. The assessment order was maintained by discussing the same reasons and the manner in which the Assessing Officer had proceeded to make it.

22. Therefore, in spite of our disapproval of the conduct of the assessee at the assessment as well as first appellate stage, we will deem it to be in the interest of justice and fair play that both the impugned as well as the assessment order are set aside in to. The matter shall be remanded to the Assessing Officer with the direction that he will confront the assessee with all information in its possession and shall allow it an opportunity to explain and rebut the same. Even if a prayer for introduction of secondary evidence is not made the Assessing Officer may like to consider the possibility by adopting that course in order to evolve proper basis to substitute his own estimate with the one returnee) through audited accounts and to clothe credibility to any addition to he made by resort to the deeming provisions.

23. This appeal shall, therefore, succeed only to the extent indicated above.

M.B.A./473/Trib. Order accordingly.