Income Tax Ordinance (XXXI of 1979)---

----S.65---Re-opening -of assessment ---Justification---Assessee returned income which was accepted under Self-Assessment Scheme---Subsequent information revealed that bonus and cash incentive received by the assessee was not shown in the statements of account---Explanation given by the assessee on show-cause notice was that the cash incentive and bonus was included in sales and purchases shown in the statements of accounts-- Validity---Bonus and cash incentive was not the routine daily transaction i.e. purchase and sale---Addition made by the department was not interfered with by the Tribunal in circumstances.

Amjad Malik, D.R. for Appellant.

Abdul Tahir, A. R. for Respondent.

Date of hearing: 18th November, 1997.

ORDER

These three Departmental appeals for the assessment years 1990-91, 1991-92 and 1992-93 are directed against a combined order for all the three years of learned Appellate Assistant Commissioner of Income Tax dated 1-11-1994.

2. Heard Mr. Amjad Malik, the learned D.R. and Mr. Abdul Tahir, the learned A.R. of the assessee.

3. Briefly the facts leading to the filing of these appeals are that assessments for the assessment years 1990-91 and 1991-92 in the case of the respondent, who is individual and conducting business of shoes on whole sale basis, were finalised under the Self-Assessment Scheme. Later, information was received from Bata Pakistan Limited that bonus and cash incentive had been paid by the respondent. However, as this information had not been declared, as was evident from the Statement of Accounts filed by the respondent, assessments for both the year were re-opened under section 65 of the Ordinance. For the assessment year 1992-93, the return of income was filed under the Self-Assessment Scheme, which had not been processed upto the receipt of information from M/s. Bata Pakistan Limited. This return was, therefore, set apart for detailed scrutiny after issuance of show-cause notice to the respondent. The assessing officer provided sufficient opportunity through issuance of show-cause notice and notices under section 62 for submission of his explanation for not declaring bonus and cash incentive given to the assessee by M/s. Bata Pakistan Limited. The respondent submitted different replies at different times explaining his position. The assessee's replies were not consistent. The assessing officer concluded that the attitude of the assessee was evasive and that whatever was submitted to explain the shortcomings pointed out was contradictory and unreliable. The conclusions drawn by the I.T.O. are recorded at page-4 of the assessment order on the basis of which he rejected the explanations submitted by the respondent and estimated and determined the income by adding cash incentive and bonus received under section 13 of the Income Tax Ordinance to the income already assessed under S.A.S. Further, 1/3rd of the expense claimed in the P&L account were also added back for being unverifiable. The assessee went in appeal and the learned AAC deleted the additions made under section 13 for the reason apart from others that the same was not confronted to the assessee as is required under this section of the Ordinance. As regards addition made out of P&L account expenses, the learned AAC observed that it is not sustainable and, therefore, set it aside with the direction to the I.T.O. to examine different heads of the profit and loss account and disallow the expenses, which are justifiable in law and in accordance with the past history. The Department did not accept the decision given by the learned AAC and, therefore, these appeals.

4. The learned D.R. submitted that the learned AAC has wrongly concluded that sh6w-cause notice for addition under section 13 was not issued. The cash incentive and bonus received by the Assessee but not declared in the statement of accounts was duly confronted. The assessee was asked to show cause why these undeclared receipts should not be taxed in his hands. It was submitted that the ITO has not mentioned in the subject that it is a notice issued under section 13. However, from the show cause notice itself and its contents it is quite clear and sufficiently evident that this is a notice under section 13. Mere difference in form and manner would have no effect on the proceedings in hand and it cannot vitiate the legal proceedings and the subsequent addition made under section 13. Justifying the addition made the learned D.R. submitted that first show-cause notice was issued by the ITO on 24-5-1993 for explaining the discrepancies of not declaring bonus and cash incentive. In his reply dated 7-6-1993 the respondent submitted that M.S. Bata Pakistan Ltd. takes back the stock from the clients within 28 days of the purchase and not afterwards, due to which we have to sell declared stock at lower prices. "It was further submitted by the respondent "that after every three months and six months and year, M/s. Bata Pakistan Ltd. itself gives on `sale at 30% to 40% lesser prices, due to which we also have to decrease our prices. "The third point submitted in the explanation by the respondent was "that during the year under consideration, my GP had decreased due to abovementioned reasons and that" I have included the amount of commission etc. in the sales." The explanation submitted by the respondent was found to be satisfactory. Proceedings under section 65 were, therefore, initiated. In reply to notice issued under section 62, the assessee, apart from other things, submitted that" the assessee passes on 3 % to 5 commission to the retailers". The ITO concluded that the replies submitted by the respondent so for were evasive and not to the point. The explanation most relevant to the concealed bonus and cash incentive was that commission received was passed on to the retailers. The learned D.R. submitted that the conclusion drawn by the ITO was correct from the reason that commission is paid on the normal purchases made by the assessee from Bata Pakistan Limited. Bonus and cash incentive is -paid on the basis of performance of Distributors of Bata. This is over and above the commission. It wag submitted that M/s. Bata Pakistan Ltd. in its Letter No. 123, dated 23-9-1993 informed the ITO that besides the commission, 2% cash incentive and bonus is also given to the Distributor which is its income. It was pleaded by the learned D.R. that 'in view of the clear cut statement of M/s. Bata Pakistan Ltd. concealment stands established and the ITO rightly charged it to tax. It was further submitted that the latest information received from Bata Pakistan Ltd. quoted above, was communicated to the assessee for explaining his position. On 31-10-1993, the A.R. of the assessee attended the office of the ITO and submitted that:

(1) The assessee has passed on 5 % commission to the retailers.

(2) The assessee has received 3 % commission.

(3) The assessee has sold his product at a lower rate for the year under consideration.

5. The learned D.R. submitted that the contradictions in the explanation are obvious. How can the respondent pass on 5 % commission' to the retailers when he received only 3% commission for M.S. Bata Pakistan Limited. It was further submitted that how can the respondent sell goods at rates lower than those fixed by the company. No proof of selling goods at lower rates was statedly filed. It was further argued that if goods are sold at a lower rate the assessee only loses part of his commission. Bonus and cash incentive, which are dependent on the turnover are in any case received which the respondent in this case has not declared. The learned D.R. therefore, pleaded that the order of the ITO may be restored as the relief given by the learned AAC, in view of the above facts, was not justified. The learned A.R. of the respondent on the other hand submitted that the additions made under section 13 were different from what was confronted under section 62. It was, however, admitted that the addition made was less than what was confronted. It was further argued that specific notice under section 13 was not issued by the ITO. It was also argued that bonus and cash incentive received by the respondent are not direct income, which can be credited to P&L. It was submitted that the Hon'ble High Court Lahore in a cash reported as 1994 PTD 730 has held that bonus and cash incentive given by M/s. Bata Pakistan Ltd. is part of the trading activity of the assessee and is, therefore, to be credited to that account. It was further submitted that the case incentive and bonus received by the respondent were included in sales and purchases shown in the statement of accounts. The learned A.R. also relied on-other case law referred as (1994) Tax 33; 1995 PTD (Trib.) 624 and 1994 SCMR 223.

6. I have considered the submissions made both parties. As regards the requirement of specific show-cause notice under section.

7. Of which relief has been given by the learned AAC, I am of the opinion that the show-cause notice issued by the assessing officer and subsequent notice issued under section 62 in which proposed addition. was confronted to the assessee was sufficient as it fulfilled the requirement of confronting the assessee at has been laid down on section 13 of the Ordinance. Merely not mentioning in the subject-matter of the notice that it is a notice issued under section 13, in my opinion, would not vitiate the proceedings of charging to tax the income, which is held to be concealed. As regards the arguments of the learned A.R. that the addition made under section 13 is different, but less than what was, confronted, I am of the opinion that the respondent could justifiably object of the addition had been made more than what was proposed in the show-cause notice. The assessing officer and his IAC took a lenient view and made the addition of lesser amount under section 13 than the amount confronted. This action of the ITO has not prejudiced the interests of the assessee. It is infact a favorable action, which cannot be held to be arbitrary or illegal. As regards the plea that cash incentive and bonus cannot be treated as income creditable to the P&L account, I agree with this argument, which is based on the decision of the Hon'ble Court. However, the respondent assessee has already submitted his statement of accounts. The bonus and cash incentive received, by the respondent have riot been declared in the statement of accounts. If these receipts are credited to the trading account, the effect would be if increasing the gross profit by the amount of receipts under the heads bonus and cash incentive. As regards the submissions made by the respondent that cash incentive and bonus were included in the sales and purchases, I do not consider it to be reasonable and logical for acceptance. Receipt of bonus and cash incentive is not paid. as it is not dependent on the routine daily transactions. i.e. purchase and sales of goods manufactured by Bata Pakistan Ltd. These payments depend on the performance of the Distributor during the relevant period, which may after six month or a year. The Distributor is therefore, not likely to include these in his transactions as he may not receive them. The learned A.R. also could not explain as to why evasive and contradictory replies were submitted before the ITO while explaining the non-declaration of receipts under the heads bonus and cash incentive.

7. In view of the arguments of the learned D.R. the facts recorded and the reasons given above, I am of opinion that the learned AAC was not justified to grant relief to the assessee with regard to additions made under section 13 of the Ordinance. The order of the ITO in this regard is, therefore, vacated and that of restored for all the three assessment years.

8. As regard the add backs of 1/3rd of expenses claimed under the heads P&L account, I am of the opinion that the learned AAC was justified to set aside this addition, which action, is, therefore, upheld.

9. All the appeals are disposed of in the manner indicated as above.

M.B.A. /534/Trib. Appeals disposed of.