Income Tax Ordinance (XXXI of 1979)---

----Ss. 62 & 66-A---Powers of Inspecting Assistant Commissioner to revise assessment order passed under S.62, Income Tax Ordinance, 1979 by the Assessing Officer---Assessment order did not involve any error of law or facts---Inspecting Assistant Commissioner on basis of surmises and whims, directed the Assessing Officer to make a fresh assessment---Validity---Held. order of Inspecting Assistant Commissioner for framing of assessment afresh was not sustainable in circumstances.

1990 PTD (Trio.) 914 and 1987 PTD (Trio.) 583 ref.

A. S. Jafri, I.T.P. for Appellant.

Sikandar Aslam, D. R. for Respondent.

Date of hearing: 20th November, 1997.

ORDER

S. M. SIBTAIN (ACCOUNTANT MEMBERS). ---This appeal is instituted, at the instance of the assessee, against the order of the learned I.A.C., passed under section 66-A of the Income Tax Ordinance. Objections are taken to the impugned order precisely on the grounds that the assessment order passed by the learned D.C.I.T under section 62 of the Income Tax Ordinance and cancelled by the learned L A.C. with the directions for a fresh assessment, is not erroneous and the question of its being prejudicial to the interest of revenue does not arise.

2. We have heard the learned counsel of the appellant, Mr. A.S. Jafri and the learned representative of the Department, Mr. Sikandar Aslam.

3. The facts, briefly are that the appellant, an A.O.P., has declared total income of Rs.6,113,116 against gross octroi revenue of Rs.577,417,699 from the Metropolitan Corporation, Lahore. Gross profit is declared 0 5.4%, amounting to Rs.31,202,792 and overhead expenses are claimed at Rs.25,089,676. The documents and details obtained and examined by the learned DCIT, besides books, during the course of assessment proceedings under sections 61 and 62, are admittedly as under:

"(i)Trading and profit and loss Account.

(ii)Octroi agreement concluded with Lahore Metropolitan Corporation.

(iii)Bank statement in respect of Account Nos.0811+1728-4 maintained.

(iv)Evidence of monthly payments of Octroi instalments.

(v)Evidence of payment of salaries.

(vi)Account statement certificate issued by Taxation Officer, Metropolitan Corporation, Lahore showing therein complete details of receipts as per office record and expenses incurred by assessee for the period relevant to assessment year 1993-94.

(vii) photo copy of challans under section 50(7-A)."

Thus, the direct cost of declared gross Octroi revenue works out at Rs.546,214,907 which includes the bid money paid in monthly instalments, costs amounting to Rs.39,496,246 incurred by the MCL, on behalf of the appellant and recovered from the appellant as certified by the MCL, other direct costs incurred directly by the appellant and irrecoverable octroi booked against Government vehicles.

4. The learned DCIT has recorded in his order that after considering all the aspects of the case, the book version of the appellant is rejected for unverifiability of some of the trading expenses and majority of the P & L expenses. However, finding force in the submissions of the learned A.R. of the assessee 'that the nature of expenses in octroi contract is such that complete supporting evidence is difficult to be obtained, the learned DOT has determined appellant's total income at Rs.10,682, 1.85% of the declared gross octroi revenue, as estimated in the parallel case assessed vide NTN 08-03-1769233.

5. Subsequently, the learned IAC has inspected the assessment records and has noted the undermentioned, alleged, errors in the order of the learned D.C.I.T. (supra) which, according to him, render the order under section 62 prejudicial to the interest of revenue:

(1)Deduction of Rs.16,000,000 from the. declared gross octroi revenue, claimed by the assessee/appellant, on account of exemption on Government Transport is improved; hence inadmissible. Its allowance by the learned DOT is erroneous so far it is prejudicial to the interest of revenue.

(2)A claim of Rs.58,$48 in the trading A/C, on account of "refund to trader", not included in the certificate of LMC, hence liable to be disallowed, has not been disallowed.

(3)Printing expenditure of Rs.810,309 claimed in the Trading A/C is similarly uncertified by MCL and it is excessive as well in view of the claim of Rs.548;840 on the same contract in the immediately succeeding year.

(4)The claim of Rs.2,551,709 on account of petrol in the P & L A/C is uncalled for in the absence of .any vehicles owned by the assessee. 'Even otherwise it is highly excessive when compared to an amount of Rs.900,000 allowed in the assessment of 8 months contract in the subsequent year. It should not be more than Rs.500 per day.

(5)Similarly -the claim of Rs.2,564,749 on account of "hire and maintenance of vehicles" is highly excessive and should not exceed Rs.500 per day.'

(6)Mess expenses of Rs.1,786,964 for 12 months, in this year against claim of Rs,842,915 under this head, in the eight months of subsequent year, are highly excessive.

(7)Similarly excessive travelling and Conveyance expenses of Rs.548,027 are charged in this year against Rs.160,110 in the subsequent year.

(8)Rent claim of Rs.205,071 in this year against claim of Rs.140,200 in the subsequent year, is allowed without ascertaining if tax is withheld thereon.

(9)Weighbridge repairs of Rs.322,234 are claimed against the claim of Rs.77,920 in the subsequent year.

(10) Electricity is claimed at Rs.264,622 without supporting evidence.

(11) Claim of Rs.14,294,166 on private staff salaries against a claim of Rs.4,813,518 in the subsequent year, is excessive.

(12) Naka Posts repairs are claimed at Rs.1,055,867 against nil claim in the subsequent year.

(13) Lease expenses, as per clause (7) of Agreement, are to be borne by the assessee. Stamp duty of about Rs.1,500,000 paid on lease execution has not been claimed.

5. The learned IAC, therefore, has issued a notice under section 66-A. Besides recording the errors (supra), he has mentioned in the notice (supra) that in the immediately subsequent year an AOP of 19 persons, including 14 persons of the instant AOP, has undertaken the same contract for 8 months against the instant contract of 12 months, and it is assessed vide NTN: 08-03-3929129 for assessment year .1994-95. It is further alleged that while the instant contract is obtained through negotiation, the subsequent contract is obtained by auction.

6.The notice and the subsequent reminders dated 8-1-1996 and 8-2-1996, allegedly, have remained un-complied with. The learned 1AC, therefore, has cancelled the assessment made under section 62 sand has directed the- learned DOT to make a fresh assessment keeping in view the observations of the JAC (supra).

7. Mr. A.S. Jafri, the learned counsel has assailed the impugned order both on factual as well as legal grounds. He has submitted at the outset that the allegations of the IAC (supra) are baseless, whimsical and hypothetical. He submits that the learned IAC has recorded no basis of his impugned observation that the instant contract is obtained through negotiation. Further, he has recorded no finding that there is nothing on record that the learned DOT has satisfied himself that the declared dross octroi revenue, booked as per books, includes the octroi of Rs.16,000,000 is receivable on Government transport but for exemption available thereon. Mr. Jafri has submitted that the instant year being the first year of execution of octroi contract for the appellant A.O., it has dutifully booked octroi revenue on each vehicle passing through octroi post irrespective if its chargeability; hence the deduction of Rs.16,000,00. However, it was neither allowed by the MCL as reduction from the bid money payable by the appellant, nor by the learned DCIT as deduction from the declared gross octroi revenue. The learned DCIT has estimated the net profit 0 Rs.1.85 % of the declared gross octroi revenue on the basis of parallel cases and has added Rs.4,569,111 to the declared income to cover the element of inadmissible and unverifiable claims of expenses. The only consideration given by the learned DCIT, after satisfying himself, by verifying from the books of account, that octroi revenue on Government vehicles has been booked without having received it in cash, is that he has not further enhanced it on the basis of estimate. Mr. Jafri has further cited cases of octroi contractors assessed vide NTN: 08-03-1774407, NTN 08-03-1773442, and NTN: 08-03-1769233 wherein the total income is assessed @ 1.75 %, 1.76 % and 1.85% of the gross octroi receipts respectively.

8. Regarding comparison done by the learned IAC if expenses, claimed in the instant year, under various heads supra, with the expenses claimed against the same octroi contract in the immediately succeeding year, the learned counsel's explanation is fourfold. Firstly the contract for the instant year, admittedly, covers a period of 12 months while in the succeeding year the period of contract is 8 months. Secondly, in the first year certain expenses are incurred, the tangible benefits whereof lasted in the succeeding year e.g. Naka-post repairs and weighbridge repairs. Thirdly excessive expenditures on printing, vehicle hire and petrol, messing, travelling, rent and staff salaries have been incurred in the first year to establish effective control systems which helped in reducing expenses under these heads in the subsequent year. Fourthly, the observations, generally, regarding all these claims and particularly regarding refund claim, stamp fee and electricity are purely hypothetical and baseless. He submits that all these aspects of the case have been duly considered and checked by the learned DCIT and have been satisfactorily explained to him during the course of assessment proceedings which the learned IAC has overlooked and has proceeded on presumptions.

9. Assailing the impugned order on the legal plain the learned counsel has submitted that the learned IAC is not justified in relying upon the assessment of subsequent assessment year to consider that the order of the learned DCIT is erroneous in so far as it is prejudicial to revenue because ratio of expenses claimed in proportion to the gross octroi receipts, as compared to subsequent year, are excessive. He has placed reliance, in support of his foregoing submissions, upon the ratio of decision in the case reported as 1990 PTD (Trib.) 914 wherein the issue decided is whether jurisdiction under section 66-A can be invoked by relying upon facts or information acquired after the order, considered erroneous under section 66-A, has been passed by the DCIT. It is held that "relying upon material that was not available before the I.T.O.", for invoking jurisdiction under section 66-A, "appears to be factually and legally incorrect".

10. He has further submitted that in the case reported as 1987 PTD (Trib.) 583 where the learned IAC has considered acceptance of the G.P. declared at a rate lower than the rate applied in appellant's own case, in the past, to be erroneous in so far as it is prejudicial to the interest of revenue, the Tribunal has held:

"It is clear from the above that the meaning of the terms erroneous is not confined to error in laws only, but it includes error of fact as well. Nevertheless, in the instant case, the expression erroneous shall have to be examined in conjunction with the expression prejudicial to the interest of revenue, as used in section 66-A of the Ordinance. The section requires the Inspecting Assistant Commissioner to come to the conclusion that the order of the Income Tax Officer was erroneous and prejudicial to the interest of the revenue. It is not sufficient that an order is merely erroneous. It must be erroneous in so far it is prejudicial to the interest of revenue. Thus, it is not sufficient for an order in question to be prejudicial, it must also be erroneous. Thus, there should be a clear finding on the basis of material to support both the conditions. In the present case, order of the Income-tax Officer could be regarded as prejudicial to the interest of revenue but it is definitely not erroneous as it does not involve any error of law or facts. The only fault which the learned Inspecting Assistant Commissioner has found in the assessment is that the assessing officer did not apply the gross profit rate as applied in tile case of the assessee during the previous year.

It is true that the assessee has the history of application of gross profit rate of 20 %. But it may be pointed out although the past history is a relevant factor but it cannot always be taken as a sole criteria for rejection of accounts. It is clear from the impugned order that the learned Inspecting Assistant Commissioner himself admitted that since the average sale rates disclosed compare favourably with those of other such cases no adverse inference was drawn."

11. The learned counsel, therefore, has submitted that since, in the instant case, neither the return of income filed, by the expanded A.O.P., for the subsequent year nor the asessment made in respect thereto are available before the learned DCIT while passing the order for the instant year, reliance made by the learned IAC on documents supra for invoking jurisdiction under section 66-A'' is factually and legally incorrect. Similarly, he submits that observations made by the learned IAC (supra), regarding the genuineness or the reasonability of the quantum of expenses claimed by the appellant and imputing error to the judgment of the learned DCIT regarding the extent these are genuine and/or reasonable are based purely on whims and surmises. He further submits that, as submitted supra in Paragraphs 7 and 8, the learned IAC has no reasonable basis to consider the order, passed by the learned DCIT under section 62 by estimating net profit on the basis of parallel cases, to be erroneous and/or prejudicial to the interest of revenue.

12. The learned representative of the Department has supported the impugned order of the learned IAC but he is unable to show us how and why the learned IAC has considered the claim of deduction of Rs.16,000,000 on account of Government Transport as inadmissible and improved and the extent of expenses allowed by the learned DCIT to be unreasonable or excessive. The submission of the learned D.R. that the basis of considering the claim of Rs.16,000,000 is the document referred to by the learned IAC as "Account Statement Certificate of Ahmed Jan Enterprises Contractors Octroi Income, Metropolitan Corporation, Lahore for the year 1992-93," has been, already, successfully repelled by the learned counsel in Paragraph 7 (supra).. The learned D.R., further, is unable to repel the fact that the learned IAC has placed reliance on the so-called parallel case on NTN: 08-03-3929129, admittedly pertaining to subsequent year, which is neither factually nor legally justified.

13. Accordingly, we find that the impugned order of the learned IAC is neither sustainable in law nor on facts. Consequently the impugned order is hereby cancelled and the appeal is allowed.

M.B.A./5'32/Trib. Appeal allo