I.T.AS. NOS.7183/LB, 7184/LB OF 1996, 2015/LB TO 2017/LB OF 1997, DECIDED ON 17TH MARCH, 1598. VS I.T.AS. NOS.7183/LB, 7184/LB OF 1996, 2015/LB TO 2017/LB OF 1997, DECIDED ON 17TH MARCH, 1598.
1998 P T D (Trib.) 2106
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Judicial Member and Inam Ellahi Sheikh, Accountant Member
I.T.As. Nos.7183/LB, 7184/LB of 1996, 2015/LB to 2017/LB of 1997, decided on 17/03/1598.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.32(3)---Rejection of accounts---Validity---Method of accountancy-- Assessee is entitled to adopt any method of accounting and Assessing Officer is bound to form his opinion on the basis of material available in the account books and cannot reject the same unless he feels that the method employed is defective and actual profit and gains cannot be deduced therefrom.
1994 PTD 174 and 1994 SCMR 229 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.32(3)---Rejection of accounts ---Validity---Assessee, engaged in manufacturing and trading of acrylic yarn and sugar---Assessee had maintained complete excise record and had details of qualitative and quantitative production and usage of raw material, wastage etc.-- Maintenance of stock register, in qualitative was not necessary for acceptance of accounts.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.32(3)---Rejection of accounts---Validity---Assessment has to be made on the basis of facts of each year and every assessment year is independent-- Rejection of accounts on the basis of history of case was not justified as there was no res judicata in income-tax proceedings.
PLD 1992 SC 562 and 1974 PTD 123 ref.
(d) Income Tax Ordinance (XXXI of 1979)---
----S.32(3)---Rejection of accounts ---Validity---Assessee-company had presented a properly audited accounts---Assessing Officer, could not simply discard the accounts without assigning any sound reasons.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.32(3)---Rejection of accounts ---Validity---Assessee-company had produced the audit certificate from Chartered Accountant---Such certificate was not to be thrown away and accounts rejected in a summary manner.
1998 PTD (Trib.) 860 rel.
(f) Income Tax Ordinance (XXXI of 1979)-
----S.32(3)---Rejection of accounts---No defect was found in the accounts of the assessee, the debit side was completely verifiable---In the absence of any specific objection on the accounts and disregard to S.32-A, Income Tax Ordinance, 1979 accounts of assessee could not be rejected.
(g) Income-tax---
----Gratuity---Add back---Validity---Amount of gratuity cannot be brought to tax even if the provision for the same has been made.
Zia H. Rizvi and Mian Ashiq Hussain for Appellant.
Ahmad Kamal, D.R. for Respondent.
Date of hearing: 7th March, 1998.
ORDER
KHAWAJA FAROOQ SAEED, (JUDICIAL MEMBER). ---These assessee appeals call for our indulgence mainly on rejection of accounts in all the years. The estimate of sales, partial relief by the first appellate authority and application of G. P.Qa 12 % in the earlier two years and 11% in the later three years is also being contested. Additions in4'P & L are also being challenged.
The assessee is a Public Limited Company (unquoted) engaged in manufacturing and trading of acrylic yarn and sugar. For the assessment year 1991-92 declared results of the assessee are as follows:--
| Sales | 4,89,88,800 |
| Gross profit | 50,46,913 |
| G.P. Rate | 10.30% |
Sugar Account.
| Sales | 15,50,80,560 |
| Gross profit | 10,84,631 |
| G.P. Rate | 0.69% |
The assessing officer observed that there was improvement in sales but decrease in G.P. rate on sale of acrylic yarn. He also observed that purchase of raw material was 100 % from imports and verifiable but at the same time he considered the other manufacturing expenses including repair and maintenance and accessories, wages and salary to be unverifiable. He also observed that the sales hate been made on cash and the same were totally unverifiable. No instance of unverifiability was, however, mentioned in the order but it has been said that the same have been confronted to the assessee vide notice under section 62 dated 23-6-1994. In production account the learned ITO found that the wastage for the year was 4.14 % as against the preceding year of 4.175 % which reflected improvement in the yield. He further said that the excise record has also been shown to him in term of RG1 and RG3 but he still considered the accounts to be unverifiable and rejected .the same.
In spinning account the assessing officer has observed that all the receipts were from limited companies and verifiable. Total receipts and account version therefrom have been accepted by him. The observation as given by the assessing officer in respect of sugar account are that the sales were on cash and not verifiable. Here again the sales were estimated by him and G.P. was applied. However, treatment in respect thereto was disapproved by the first appellate authority who has directed for acceptance of the accounts of the assessee in the head of sugar sale also.
The learned A.R. says that as a result, of the order of CIT(A) the assessee's accounts in respect of spinning as well as sale of sugar has been accepted by the subordinate officers while the issue regarding manufacturing of acrylic yarn and its sale is now impugned. In this head the declared sales of the assessee as mentioned above were estimated at Rs.5,00,00,000 by the ITO while the first appellate authority has reduced it to Rs.4,92,00;000. A plain reading of the orders of the subordinate officer gives the impression that apparently no specific error has been pointed out by learned assessing officer. The order of the learned D.C. is stereotype and is based upon general presumptions, surmises and observations. The result of the order of the first appellate authority is that estimate of the sales is only a round-of if compared to declared. The G. P. is 12% for two years and 11 % for the subsequent 3 years which gives a surprising picture in the absence of some supporting circumstances as no distinction has been pointed for applying different rates.
The A.R. of the assessee Mr. Muhammad Ashiq, while presenting above picture before us explained the difference between the method of accounting and veracity of accounts. He tried to make up his case through the distinction between the above two and said that neither the method of account was defective nor its veracity (falsity) has been established. He said that even the notice issued by the assessing officer does not indicate the defects in the accounts and that the instances he quoted in the order at page 2 regarding unverifiable sales have not been confronted to the assessee in the referred notice. He further argued that the ITO have mixed the method of accounts into veracity of accounts and have rejected the same in a summary manner. Relying upon Supreme Court case cited as 1994 PTD 174 also reported as 1994 -SCMR 229, he said that the assessee is empowered to adopt any method of account and the assessing officer is bound to form his opinion on the basis of material available in the accounts books and he can not reject the same unless he feels that the method employed is defective and actual profit and gains cannot be deduced therefrom.
He argued that the assessing officer can neither insist nor base his finding on the basis of non-maintenance of stock register as the same cannot be maintained in the impugned business. This way he has tried to repel the Assessing Officer's contention that true profits cannot be deduced in' the absence of stock register/production record. He added that the assessee having maintaining complete excise record even otherwise was having complete detail of qualitative and quantitative production and usage of raw material, wastage etc. Further relying upon 1986 SCMR 443 CIT v. Chaudhary Brothers, he said that maintenance of stock register is not necessary for acceptance of books. He further argued that the observation of the CIT(A) regarding confirmation of the rejection of accounts on the basis of history of rejection is also disapproved by the higher Courts and the most relevant judgment in his opinion is PLD 1992 SC 562 being in the case of CIT v. Pakistan Industrial Engineering Corporation, wherein the learned Supreme Court have held that there is no res judicata in income-tax proceedings. Every year is independent and the assessment should be made on the basis of facts of each year. He however, further relied on 1974 PTD 123 (sic) wherein at page 21-26 in the case of M/s. Zimpa (Pvt.) v. CIT the finding is again in favour of the assessee.
The A.R. of the assessee after rebutting at length each and every argument of the assessing officer as well as of learned CIT said that the assessing officer has still opted to reject the method which in his opinion is highly unjustified. He said there is no instance which could help him for the rejection of the accounts of the assessee.
Reverting back to facts he said that the accounts of the assessee have been accepted in respect of two heads. The sales estimated are only a tinkling of the declared, while the declared G.P. is higher than the other cases of the same line. All these facts he said are pointer of the credibility of the assessee. Moving ahead to assessment year 1992-93, he added that non- issuance of the notice under section 62 in a formal manner is fatal and relied upon PLD 1964 SC 536, 1971 SCMR 181 which we have gone through and have found that the same are not relevant with the facts of the case hence we ignore the same. Even otherwise the assessee has been confronted by the assessing officer through an order sheet entry which has been duly signed by his A.R. Without prejudice, however, we otherwise feel that the other arguments of the A.R. are stronger. and are squarely applicable for all the years impugned before us.
For 1993-94 the assessee had some other points to argue in addition to the mentioned earlier. It has been said that depreciation was charged by the assessee in manufacturing account which has been disallowed. He further added that if the account is to be recast, the G.P. rate shall still be better than the applied in other cases. It has further been argued that before making this addition the assessee has not been confronted. Similarly objections: referred by him for the assessment year 1993-94 at para. 3 of page 2 of his order which is as follows, has never been confronted to the assessee which alone makes the order to be unjustified. The objection however is as follows:
"In terms of production qualitative as well as quantitative details have been furnished 369000 KG (9223 bags) if yard has been spun for 1320805 units of power consumed. This gives yield rate of 3.57 units for 1 KG produced. For the immediate preceding year 510130 KG of yarn was produced for 1559512 units i.e. 3.05 units for each KG. "
Mr. Zia H. Rizvi, the other learned counsel said that he supports the arguments of Mr. Muhammad Ashiq, in full. He however, added that if at all for any reason the Tribunal is not convinced, the addition in sales as well as in G.P. could only be to the extent of unverifiability. He brought our attention towards the manufacturing accounts once again wherein he said 83 % pertains to imported raw material while electricity expenses as well as other expenses which also are strictly verifiable are 10.3 % . Which means there is no chance of unverifiability up to a portion of 93.3 % . If at all there is any discrepancy, it can at best be up to 6.7 % of the total. That also if the whole of the same is unverifiable which is not the case either. He argued that the Courts have not supported rejection of account where the unverifiable part of the accounts is not of substantial nature. He added that in the impugned case even the balance of 6.7 % is fully supported by relevant documents.
The D.R. however, said that the accounts have rightly been rejected. He said that for assessment year 1991-92 the ITO has mentioned five persons to whom the sales were not verifiable. For 1992-93 he said that the sales of the assessee decreased and the ITO found the debit side to be fully verifiable but the credit side in his opinion was not completely verifiable. For 1993-94 he said that the production does not commensurate with the electric consumption while the books even otherwise were defective for want of complete addresses of the parties to whom the sale of acrylic yarn was made. Similar defects he said have been pointed out by the assessing officer for 1994-95 & 1995-96.
The gist of the arguments of the A.R. is as follows:
(i) That the assessing officer has not pointed out any defect in the accounts of the assessee hence the rejection is illegal.
(ii) That the method of account adopted by the assessee has not been confronted to be incorrect hence its rejection is not warranted by law.
(iii) That day today stock register is not the necessity requirement for correct deduction of the profit specially when the assessee is maintaining excise record for day-to-day production etc.
(iv) That the debit side of the assessee being almost totally verifiable very little room was left for rejection of trading accounts.
(v) There was no lawful authority available with the assessing officer to reject the accounts covered under section 32(A) by treating the same at par with the one covered under section 32.
The gist of the arguments given brings us to the conclusion that the assessee had presented a properly audited accounts which the assessing officer should not have simply discarded without assigning any sound reason. It is established from record that except for the six names mentioned for the assessment year 1991-92 which were never confronted to the assessee, even if for argument sake, are considered unverifiable, the amounts of the same would come to Rs.299,980. The proportion of the same to the total sale of Rs.4,89,88,800 is just a peanut. Similar is the position in the subsequent years. The debit side of the accounts is predominantly verifiable. It therefore, was unfair on the part of the assessing officer to reject the accounts.
The assessee also have a case so for as application of section 32 is concerned. The Tribunal in a judgment registered as 1998 PTD (Trib.) 860 for the assessment year 1988-89 to 1991-92 dated 3-11-1997 held that the certificate issued by C.A. should not simply be thrown away and the accounts should not be rejected in a summary manner. The relevant observation is as follows:
"We find ourselves in agreement with the learned CIT(A). In the presence of properly audited accounts in accordance with the relevant provisions of law, the Department cannot be allowed the liberty to reject it without sound reasoning. No defects had been found in the books of accounts and various expenses were against the facts of the case. The purchases were admittedly verifiable. No charge has been levelled regarding inflated debt side of the trading account. The sales have been made through commission agents in whose hands the same had been accepted by the Department. With all these facts before the assessing officer there was no reason to restore to his own estimates blindly following the alleged past history of one year. It was unfair to ignore the Gadoon Amazai factor on the appellants' business in view of the heavy duties charge over the assessee as against free imports and production in Gadoon Amazai of the same products. Even otherwise, the law is very clear on the subject and the Department was to proceed under section 32-A of the Income Tax Ordinance wherever accounts had been audited by the Chartered Accountant duly certified in the prescribed pro forma.
The findings of the learned Tribunal is applicable on all fours in the present case. The facts and circumstances of the judgment now referred by us are similar to the impugned case. In view, therefore, there being no defect in the accounts of the assessee, the debit side being completely verifiable in the absence of any specific objection on the accounts and disregard to section 32(A), we are convinced that the accounts have not correctly been rejected. We also have the feeling that the treatment in keeping view the various aspects is incorrect even arithmetically. We, therefore, have no hesitation in directing for acceptance of the trading results for all the years.
We have gone through the assessee's claim regarding P & I. expenses. The add backs generally are reasonable and are as per history. However in the case of worker welfare and benefits and in packing material for 1991-92 the same is excessive. We delete the addition in w.w. benefit and reduce the add back in packing to Rs.25,000.
For 1992-93 the employees benefits has been confirmed at Rs.30,000 which in our opinion is not justified. The same is hereby deleted. The other add backs being reasonable are. not disturbed by us.
For 1993-94 the amount of gratuity has been added back. It was not to be brought to tax even if the same is a provision. We delete the same. In other heads confirmation by the first Appellate Authority is not disturbed being fully justified on the basis of history.
For 1994-95 and 1995-96 the add backs again are reasonable and we maintain the same.
As a result the assessee appeal succeeds in the manner and to the extent as mentioned above.
M.B.A./527/Trib.Order accordingly.