(a) Income-tax---

----Estimate of income---Assessing Officer had not confronted the assessee with his intention to estimate the receipts of assessee---Assessing Officer, held, was not justified in estimating the receipts of assessee in circumstances---Assessing Officer was directed to accept the declared receipts by the assessee.

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

----S.32(3)--Estimate of income ---Addition---Assessee though had declared miscellaneous income but was unable to show any evidence in that behalf-- Addition under the head "miscellaneous income" was maintained in circumstances.

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

----S.13---Loan---Deemed income---If the Assessing Officer was of the view that the loan obtained by assessee was result of collusive arrangement, he could invoke provisions of S.13 of the Income Tax Ordinance, 1979.

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

----S. 12(18)---Negotiable Instruments Act (XXVI of 1881), Ss.5, 6, 85-A & 124---C.B.R. Circular No.3 of 1992---Deposit-at-call---Meanings---Deemed income---Loan received by assessee by deposit-at-call ---Nature---Deposit-at -call fulfils the requirements of S.12(18), Income Tax Ordinance, 1979-- Loan received by assessee through deposit-at-call was not liable to be added under S.12(18) of the Ordinance.

The deposit-at-call is a receipt showing deposit of certain amount in the bank and at the same time the bank binds itself to pay the amount of deposit-at-call to the depositor whose name is shown in the document. Deposit-at-call contains the name of the person who has deposited the amount in the bank. Thus, by means of deposit-at-call the transaction is made through normal banking channel whereby the drawer and payee are identifiable as it shows the name of person who has deposited the amount and further the name of person who is entitled to receive the amount shown in the document. It is in the nature of an instrument in writing containing an unconditional order for payment to certain person whose name is shown in the document at call. The expressions "at call" and "on demand" serve the same purpose and, therefore, the document falls within the purview of bill of exchange as defined in section 5 of the Negotiable Instruments Act, 1881. As this particular bill of exchange is drawn on bank and is payable at call, therefore, it is deemed to be a cheque as defined in section 6 of the Negotiable Instruments Act, 1881. At the same time as the order to pay money is drawn by bank and is payable by the bank, therefore, it is a draft as defined in section 85-A of the Negotiable Instruments Act, 1881. According to section 124 of the Negotiable Instruments Act, 1881, "where a cheque bears a cross its face and addition of the name of a banker, either with of without the words "not negotiable", that addition shall be deemed crossing and the cheque shall be deemed to be crossed specially, and to be crossed to that banker". The provisions of Chapter XV of the Negotiable Instruments Act which contains provisions to the crossing of cheques is applicable to any draft as defined in section 85-A as if the draft were a cheque, the deposit-at- call would be deemed to be a cross cheque.

The deposit-at-call is actually in the nature of a draft, as before the issuance of deposit-at-call the drawer deposits in cash with the bank and thereafter document is issued as is the requirement in the case of a draft. The deposit-at-call fulfils the requirement of section 12(18) of the Income Tax Ordinance, 1979, as in fact it is a cross cheque drawn on a bank. Department, therefore, was not justified in holding that the loan received by the assessee through deposit-at-call was liable to be added under section 12(18) of the Income Tax Ordinance, 1979 as deemed income. The addition, therefore, stood deleted.

Dictionary of Banking and Finance by Derrick G. Hanson, 1985 Edn. quoted.

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

----S. 13(1)(aa)---Unexplained investment---Deemed income---If the Assessing Officer has not doubted the source of the amount, no addition can be made under S.13(1)(aa), Income Tax Ordinance, 1979.

(f) Income-tax---

----Addition---Addition without confronting the assessee is not maintainable.

Ch. Anwarul Haq for Appellant

Abdul Rauf, D.R. for Respondent

Date of hearing: 11th December, 1997

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---The above appeal at the instance of assessee is directed against the order dated 1-9-1997 by the learned C.I.T.(A) Zone-1, Faisalabad in I.T.A. No.564 relating to the assessment year 1994-95.

2. Heard Mr. Ch. Anwarul Haq, Advocate for the appellant and Mr. Abdul Rauf, representative for the department.

3. The appellant is a private limited company deriving income from dyeing, bleaching and printing of cloth. The first objection raised on behalf of the appellant is to the estimate of processing receipts adopted at Rs.3,01,96,585. A perusal of the assessment order shows that processing receipts were declared at Rs.2,87,75,570. The assessing officer noted various defects in the books of accounts which were confronted to the assessee through notice under section 62, dated 29th of January, 1996. The assessing officer ultimately rejected the declared processing receipts and estimated the same at 4-25 times of the consumption of Sui gas. The learned C.I.T.(A) maintained the treatment. The learned counsel for the appellant has contested the rejection of declared receipts. The sole objection is that the assessing officer in his letter dated 24-5-1997 confronted as follows:

"I also intend to reject your declared version and to estimate your income by estimating total receipt at 4 times of the Sui gas consumed and by applying an appropriate G. P. rate."

4. The submission of learned counsel for the appellant is that after intimating his intention to estimate the receipts at 4 times of the consumption of Sui gas, the assessing officer was not justified in estimating the same at 4-25 times of the consumption of Sui gas. He has further submitted that the assessee has already declared processing receipts at 4-05 times of the consumption of gas which is in consonance with the declared processing receipts in the assessment year 1993-94. The learned D.R. has conceded that the assessing officer never confronted the appellant with his intention to estimate the receipts at 4-25 times of the consumption of Sui gas. In the above circumstances it is held that the assessing officer was not justified in estimating the processing receipts at 4-25 times of the consumption of Sui gas. The declared receipts are already higher than the receipts sought to be estimated by the assessing officer, therefore, the assessing officer is directed to accept the declared receipts.

5. The second objection raised on behalf of appellant is to the addition of Rs.1,25,000 under the head miscellaneous income. The assessing officer observed in the assessment order that the appellant has not declared miscellaneous income from sale of waste/scrap of empty drums, empty bags of dyes and chemicals, lubricant containers etc. The appellant was confronted on this issue but no reason was furnished in this behalf. He, therefore, estimated the miscellaneous income at Rs.1,25,000. The learned counsel for the appellant submitted that the miscellaneous income was declared but he is not able to show any evidence in this behalf. In these circumstances the addition under the head miscellaneous income is hereby maintained.

6. The next objection raised on behalf of the appellant is to the addition made under section 12(18) at Rs.39,42,720. The facts as contained in the assessment order are, that the assessing officer on scrutiny of ledger account of different persons/directors found that the amount of Rs.43,60,540 was received by the appellant company as loan. The details are contained in the assessment order. The assessing officer further observed that since the loan was received in cash and not through cross cheque, the total amount of Rs.43,60,540 was taxable under section 12(18) of the Income Tax Ordinance, 1979. The appellant company was confronted with the above facts and it was submitted on behalf of appellant that amounts were received through D.A.C. (Deposit-at-call) made out by the creditor in the name of the appellant company and the amounts were deposited in the appellant's bank account: Necessary documents were also attached. It was contended on behalf of appellant that the sum of Rs.41,60,540 was received from banking channel and not in cash as incorrectly alleged in the notice. It was further urged that D.A.C. is in the nature of pay order and demand draft which is legally recognized form or type of negotiable instrument. It was further stated that the sum of Rs.2,00,000 was not hit by section 12(18) as having been received from two persons at Rs.1,00,000 each. Reliance was placed on C.B.R. Circular No.3 of 1992 which contains that the provisions of section 12(18) are not to be invoked in respect of genuine lo, ns received by way of not only crossed cheque but also through pay order, demand draft, telegraphic transfers etc. through the banking channels. It was further submitted that the basic purpose of section 12(18) has spelled out in Circular No.3 of 1992 was to check fictitious loans and the preclude back-dated loans. The assessing officer held that the explanation was not satisfactory. He formed opinion that the provision contained in section 12(18) stresses that loan must be received through a cross cheque. The D.A.C. is not a cross cheque hence cannot be accepted as equivalent to cross cheque. The assessing officer ultimately held that a sum of Rs.4,17,820 was received by the appellant company through loans which were less than Rs.1,00,000 and the balance amount of Rs.39,42,720 was not received through cross cheque, therefore, a sum of Rs.39,42,720 was added under section 12(18) of the Income-tax Ordinance, 1979 as deemed income of the assessee. The appellant preferred first appeal reiterating the contentions raised before assessing officer. The learned C.I.T.(A) did not accept the submission and held that the identity of creditors was not open to verification and that it was a collusive arrangement. The learned C.I.T. (A) further observed that, "admittedly loans were received through the appellant's bank account in the shape of call deposit accounts. The creditors firstly deposited cash, turning into C.D.As. and then these call deposits were enclosed through appellants account. The whole manipulation as done on two different dates, in utter uniformity of pattern and design Most of the creditors are in collusive relationship with the appellant and in this manipulative arrangement." With these observations the addition was maintained. The appellant being still dissatisfied has assailed the addition before us. Mr. Anwarul Haq, Advocate, learned counsel for the appellant has submitted that the finding of learned C.I.T.(A) is contradictory in terms and is violative of the view taken by the C.B.R. He has contended that the learned C.I.T.(A) has admitted that the loans were received through the appellant's bank account in the shape of call deposit accounts and still he has applied the provision contained in section 12(18) of the Income Tax Ordinance, 1979 in flagrant violation of the view taken by the C.B.R. itself. Mr. Anwarul Haq has drawn our attention to C.B.R. Circular No.3 of 1992 which reads as follows:

"It has been brought to the notice of the Board that genuine loans shown to have been received from identifiable person through the banking channels are being deemed to be the income of the assessees under subsection (18) of section 12 of the Income Tax Ordinance, 1979, merely on the ground that the amount of such loans has not been received through crossed bank cheques.

2 .The matter has been considered in the Board. Since the basic purpose of the aforesaid provision of law is to be check fictitious loans and to preclude back-dated introduction of creditors in the books of accounts, assessing officers should not invoke the provisions of section 12(18) in respect of genuine loans received by way of crossed cheques, pay orders, demand drafts or telegraphic transfer etc. through the banking channels.

3.In any case, where the nature and source of the amount of money is not satisfactorily explained, addition to the income of the assessee can still be made under section 13, notwithstanding the claim that any loan was received through crossed bank cheque, pay order, demand draft, telegraphic transfer or any other instrument. "

6. Mr. Anwarul Haq has submitted that in spite of clear instructions from the C.B.R. that the provisions contained in subsection (18) of section 12 should not be invoked merely on the ground that the amount of such loans have not been received through crossed bank cheques, the learned two officers below have resorted to the deeming provision contained in section 12(18). He has further submitted that the pay orders, demand drafts and telegraphic transfers fulfil the purpose of cross-cheques and are of the same nature, therefore, C.B.R. directed to accept all such genuine loans received through banking channels but still the learned two officers below, have taken the contrary view. Mr. Anwarul Haq has vehemently assailed the finding of learned C.I.T.(A) to the effect that most of the creditors are to collusive relationship with the appellant in the manipulative arrangement. He has submitted that the observation is beyond the scope of provisions contained in section 12(18), as while applying section 12(18) the only point which is to be seen is if the loan received, fulfils the purpose of subsection (18) of section 12 or not. He has submitted that the learned C.I.T. (A) has ignored the instructions contained in Para. 3 of C.B.R. Circular No.3 of 1992 as well as the proviso to section 12(18). Before proceeding further we would like to observe that we are persuaded to agree with the submission of Mr. Anwarul Haq that the observations made by the learned C.I.T. (A) is outside the scope of provisions contained in section 12(18) and if the assessing officer was of the view that the loan was result of collusive arrangement he could have invoked the provisions contained in section 13 of the Income Tax Ordinance, 1979. Since the assessing officer has not invoked the provisions contained in section 13 of the Income Tax Ordinance, therefore, we would not like to dilate on this issue in detail. Reverting td the contention raised by Mr. Anwarul Haq he has submitted that the D.A.C. is in the nature of cross cheque. Explaining the procedure in the case of D.A.C. Mr. Anwarul Haq has submitted that the deposit-at-call is recognized mode of payment and D.A.C. is a negotiable instruments and legally speaking it is a draft under the Negotiable Instrument Act. He has submitted that in the case of D.A.C. the payment is insured to the payee as D.A.C. is issued after the amount is deposited with the bank by the creditor and it is with the endorsement on its face not transferable. He has further submitted that the bank certificates were produced to the effect that deposit-at-call were issued in the name of appellant company on the instructions of creditors whose name is shown in the deposit-at-call. In support of his contention that deposit-at-call' is a cross cheque he has drawn our attention to the various provisions contained in the 'Negotiable Instruments Act, 1881. According to section 5 of the Negotiable Instruments Act, a bill of exchange, "is an instrument in writing containing an unconditional order, sent by the maker, directing a certain person to pay on demand". The cheque is defined in section 6 of the said Act, as, "a bill of exchange drawn on a specific banker and not expressed to be payable otherwise than on demand." The draft is defined in section 85-A of the Negotiable Instruments Act to mean, "an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on demand." He has further submitted that the draft as defined in section 85-A of the "Negotiable Instrument Act, 1881 is equivalent to the cheque payable to order in accordance with section 85(1) of the Negotiable Instruments Act. Mr. Anwarul Haq has further submitted that the term" pay order" is not defined in the Negotiable Instruments Act because the term has been coined recently. In fact pay order and draft is similar in nature with the difference that when the bank orders to pay money in the same town or city it is called in the banking terminology as pay order, while if the order to pay is in another town or city it is called as draft or demand draft. He has further submitted that the provisions contained in Chapter XV of the Negotiable Instruments Act (Section 122-A to section 131-C) dealing with the crossing of cheques is applicable to the draft as defined in section 85-A, as if the draft were a cheque, and the deposit-at -call being in the nature of draft it would be deemed in law that we deposit-at- call is a cross cheque and consequently any loan received through deposit-at -call shall fall outside the deeming provision contained in section 12(18) of the Income Tax Ordinance, 1979.

7. On the other hand, the learned D.R. has supported the findings of the learned two officers below.

8. We have carefully considered the contentions raised on behalf of learned representatives for the parties and have perused the provisions of law referred to by Mr. Anwarul Haq and the material available on record. We have already reproduced some of the provisions of law while narrating the contentions raised on behalf of the learned counsel for the appellant. In order to appreciate the contentions raised before us we would further like to reproduce provision contained in section 131-A of the Negotiable Instruments Act, 1981 as well as one of the deposit-at-call so that the nature of the document may be determined.Section 12 (18) is also reproduced hereunder:

"131-A. Application of Chapter to drafts.--- The provisions of this Chapter shall apply to any draft, as defined in section 85-A, as if the draft were a cheque. "

Gole Cloth Allied Bank

Faisalabad (0239)

DEPOSIT-AT-CALL

No.391967Dated 28th June. 1994.

Received from--- --- --- --- --- --- --- --- --- --- - --- --- --- --- -- --- --- --- --- -- -- -- --- -- --- --- -- --- --- --- -- --- --- --- ----Rupees ---- --- -- --- --- --- --- - - -- --- --- --- --- --- --- ---

--- --- --- the sum of as a Deposit repayable at call.

For Allied Bank of Pakistan Ltd.

Rs.4,22,035OfficerManager

When payment is required, this receipt must be returned to the Bank duly discharged by the Depository under the words "Received Payment".

Section 12(18): Income Tax Ordinance, 1979

"Where any sum, or the aggregate of sums, claimed, or shown, to have been received as loan by an assessee during any income year commencing on or after the first day of July, 1987, from any person, not being a banking company, or a financial institution notified by the Central Board of Revenue for this purpose, otherwise than by a crossed cheque drawn on a bank, exceeds one hundred thousand rupees, the same sum or the aggregate of sums shall be deemed to be the income of the assessee for the said income year chargeable to tax under this Ordinance:

Provided that, where the said loan is claimed, or shown, by way of the explanation, referred to in subsection (1) of section 13, in a case to which the first proviso to the said subsection applied, the income under subsection shall relate to the assessment year referred to in the said proviso. "

8. Our findings, on the above issue are as under. A perusal of the deposit-at-call shows that it contains a recital to the effect that a certain amount has been received from a certain person on account of another certain person which has been deposited and is repayable at call. It further contains instruction that, "when payment is required, this receipt must be returned to the bank duly discharged by the depositor under the words "received payment". It means that the deposit-at-call is a receipt showing deposit of certain amount in the bank and at the same time the bank binds itself to pay the amount of deposit-at-call to the depositor whose name is shown in the document. It further contains the name of the person who has deposited the amount in the bank on behalf of appellant in this case. Thus, by means of deposit-at-call the transaction is made through normal banking channel whereby the drawer and payee are identifiable as it shows the name of person who has deposited the amount and further the name of person who is entitled to receive the amount shown in the document. It is in the nature of an instrument in writing containing an unconditional order for payment to certain person whose name is shown in the document-at-call. We are of the opinion that the expression "at call" and "on demand" serve the same purpose and, therefore, the document falls within the purview of bill of exchange as defined in section 5 of the Negotiable Instruments Act 1881. As this particular bill of exchange is drawn on bank and is 'payable-at-call, therefore, it is deemed to be a cheque as, defined in section 6 of the Negotiable Instruments Act, 1881. At the same time as the order to pay money is drawn by Allied Bank and is payable by the Allied Bank of Pakistan, therefore, it is a draft as defined in section 85-A of the Negotiable Instruments Act, 1881. According to section 124 of the Negotiable Instruments Act, 1881, "where a cheque bears across its face and addition of the name of a banker, either with or without the words "not negotiable," that addition shall be deemed crossing and the cheque shall be deemed to be crossed specially, and to be crossed to that banker." As already observed the provisions of Chapter XV of the Negotiable Instruments Act which contains provision to the crossing of cheques is applicable to any draft as defined in section 85-A as if the draft were a cheque, the deposit-at-call would be deemed to be a cross cheque. We are fortified in our views that deposit-at- call is a draft, from the meaning of term draft in the Dictionary of Banking and Finance by Derrick G Hanson (1985 Edition) as follows:

"Bills of exchange on demand, or after sight or after date are called drafts, because they are drawn by one person on another. Cheques are sometimes called drafts. But the word is used principally when referring to a banker's own draft, or instrument drawn upon another banker or upon one of his own branches."

9. In the same dictionary the terms banker's draft is explained as, "person who wishes to remit money to someone in another place may, if he does not send his own cheque, obtain from his banker a draft on demand payable to the person which is to be paid the money. It is further stated with reference to the law in U.K. that "the banker's draft may be effectively crossed in any of the ways mentioned in section 76 of the bills of exchange Act." It is further stated that where a customer applies for a banker's draft an authority to debit his account should accompany the application, unless a cheque accompanies it. Considering the above citations we are persuaded to agree with the submission of Ch. Anwarul Haq that the deposit-at-call is actually in the nature of a draft, as before the issuance of deposit-at-call the drawer deposits in cash with the bank and thereafter, document is issues as is the requirement in the case of a draft.

10. For the foregoing reasons we are of the considered opinion that the deposit-at-call fulfils the requirement of section 12(18) of the Income Tax Ordinance, 1979 as in fact it is a cross cheque drawn on a bank. It is therefore, held that the learned two officers below were not justified in holding that the loan received by the appellant company at Rs.39,42,720 was liable to be added under section 12(18) of the Income Tax Ordinance, 1979 as, deemed income. The addition, therefore, stands deleted.

11. The appellant has further objected to the addition made under section 13(1)(aa) at Rs.20,00,000 Mr. Anwarul Haq has drawn our attention to the finding of assessing officer contained in the assessment order which reads as follows:

"Addition under section 13(1)(aa)

The examination of the cash book produced by the assessee revealed that an amount of Rs.55,84,462.34 was available as cash on 26-6-1994 and on the same date i.e. 20-6-94 an amount of Rs.20,00,000 was deposited in the bank Account No.6470 maintained with Allied Bank Limited, Faisalabad as per entry in the cash book leaving the balance cash at Rs.35,84,462.34. However, as per bank statement in respect of bank Account No.6470 with Allied Bank Ltd. Gole Cloth, Faisalabad furnished by the assessee alongwith the details and documents furnished, this amount of Rs.20,00,000 has been credited in the account not as a cash deposit but as a deposit through transfer which clearly means that the cash of Rs.20,00,000 claimed to have been deposited in the bank Account No.6470 has not already been deposited. This clearly means that the amount of Rs.20,00,000 deposited in the bank Account No.6470 with Allied Bank Limited is a different amount and is not the amount alleged to have been deposited in cash, it, therefore, stands established that the amount of Rs.20,00,000 alleged to have been deposited in the bank has not actually been deposited and the assessee understated his income to the extent of Rs.20,00,000. Keeping in view all these facts, a show-cause notice under section 13(1) bearing No.0531275, dated 24-5-1997 has been issued confronting the assessee all the facts with the intention that said amount of Rs.20,00,000 will be added towards his income as concealed income. It was further requested to please intimate the nature and sources of the amount of Rs.20,00,000 In response to said notice, the A.R. of the assessee submitted written explanation which is reproduced as under:

(a)A sum of Rs.20,00,000 was withdrawn from cash in hand on 20-6-1994.

(b)The bank was requested to issue four pay-orders in the sum of Rs.20,00,000 against the cash paid. Copies of the pay-order are enclosed. It may be noted that all the four pay orders bear consecutive serial number and are dated 26-6-1994. It is, therefore, evident that the pay-orders were issued against cash at one and the same time. It clearly established that the cash paid was the amount withdrawn from cash in hand on 26-6-1994.

(c)That later on, on the same day, the said four pay-orders were surrendered to the bank for credit in company's Account. Copy of the Deposit slip is enclosed.

(d)That amount received by the bank through the four pay-orders was recorded as transfer entry on 26-6-1994.

It is evident from the facts as stated above and the documentary evidence as produced, that the credit entry for a sum of Rs.20,00,000 dated 26-6-1994 represents the same amount which was withdrawn from cash in hand on the same day All the facts and evidence produced is verifiable from the bank concerned .

There is no evidence on record for the unwarranted presumption that the credit entry somehow represents the untaxes money.

Reply of the assessee has duly been considered and found unsatisfactory. The assessee could not put-forth any plausible explanation to the notice under section 13(1) which is rejected on following grounds:

(1) When an amount of Rs.20,00.000 was available with the company then there was no need to first get orders issued and then deposit the same in the .bank.

(2)No such entry regarding issuance of pay order and then deposit of the same in the bank account is available in the books of account of the company which means the contention taken by the assessee is just distortion of facts.

(3)The assessee's contention that the pay orders were purchased by the company is also factually incorrect. These pay orders were purchased by three persons as clearly mentioned in the pay orders/issue slip. This clearly established that the amount were deposited by the said persons in the company's account and not by the company itself.

Hence the reply of the assessee was rejected. Therefore, the worthy Commissioner of Income/Wealth Tax Companies Zone, Faisalabad vide this office Letter No.815, dated 28-6-1997 has been requested that necessary approval to make addition of Rs.20,00,000 under section 13(l)(aa) of the Income Tax Ordinance, 1979 for the assessment year 1994-95 may kindly be accorded."

12. Mr. Anwarul Haq has pointed out that the assessing officer has not doubted the source of this amount and, therefore, no addition can be made under section 13(1)(aa). The learned D.R. has not disputed the above contention and, therefore, it is held that the addition is not sustainable in law and fact which is hereby deleted.

13. The last objection is to various disallowances in the profit and loss account. Mr. Anwarul Haq, learned counsel for the appellant has submitted that the additions in the profit and loss account were made without confronting the appellant as required under the law. He has drawn our attention to the finding by learned C.I.T.(A) that, "it is apparent from the assessment order that the appellant was never confronted or called upon to explain the shortcomings as pointed out by the assessing officer. In these circumstances, we are of the opinion that the additions without confronting the assessee are not sustainable and consequently stand set aside. The assessing officer .is directed to decide the issue relating to the expenses, claimed in the profit and loss account afresh after specifically confronting the appellant as required in the proviso to section 62 of the Income Tax Ordinance, 1919. The appeal is allowed as above.

M.B.A. /513/Trib. Appeal allowed.