I.T.AS. NOS.2320/LB TO 2322/LB OF 1996, 437/LB OF 1992-93, 2539/LB, 2540/LB AND 2537/LB OF 1996 VS I.T.AS. NOS.2320/LB TO 2322/LB OF 1996, 437/LB OF 1992-93, 2539/LB, 2540/LB AND 2537/LB OF 1996, 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 773 (1997)

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

----S. 22---Income from business ---Addition---Assessee deriving income from manufacturing and sale of yarn and declared yield results and rate of sale which were not accepted by Assessing Officer being low---Assessing Officer assessed same at higher figure ---C.I.T.(A) keeping in view the better result declared by assessee gave some relief---Validity---Held, sale rates adopted by Assessing Officer were without any basis as he thought it fit to increase the sale rates by about Rs.7 per kg. in each year---Such treatment was followed in the year 1994-95 also when the average sale rate was pitched at Rs.130 per kg. on the assumption that declared rate was Rs.122.77 per kg.---Sale rate as per accounts for assessment year 1994-95 came to Rs.141.92 per kg and this addition in trading account for assessment year 1994-95 was modified by C.I.T.(A) who found the declared sale rate of Rs.141.92 as quite reasonable---Assessing Officer had adopted the sale rates without making any effort to find out the market position-- Arbitrary increase in the sale rates was found untenable in circumstances.

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

----S. 50(4-A)---Finance Act, 1995, S.24---Non-deduction of tax at source-- Brokerage---Effect---Claim of brokerage was disallowed to the assessee on ground of non-deduction of the tax at source under S.50(4-A) of the Ordinance---Held, deduction on account of brokerage on which tax had not been deducted under S.50(4-A) was made inadmissible by virtue of substitution of cl. (c) in S.24 vide Finance Act, 1995---This provision being not retrospective was held not to be applicable to assessment for 1994-95---Disallowance being not warranted by law was deleted.

Yousaf Ali Ch., I.T.P. for Appellant (in I.T.As. Nos.2320/LB to 2322/LB of 1996).

Mian Qasim Ali, D.R. for Respondent (in I.T.As. Nos.2320/LB to 2322/LB of 1996).

Mian Qasim Ali, D.R. for Appellant (in I.T.As. Nos.437/LB of 1992-93, 2539/LB, 2540/LB and 2537/LB of 1996).

Yousaf Ali Ch., I.T.P. for Respondent (in I.T.As. Nos.437/LB of 1992-93, 2539/LB, 2540/LB and 2537/LB of 1996).

Date of hearing: 20th May, 1997.

ORDER.

IFTIKHAR AHMAD BAJWA (ACCOUNTANT MEMBER).---In the case of a Private Limited Company deriving income from manufacturing and sale of Acrylic and Woollen Yarn, cross-appeals have been filed in respect of assessment years 1992-93, 1993-94 and 1994-95 while CIT (Appeal's) order in respect of assessment year 1991-92 is also being challenged by the Department.

2. In the Departmental appeals relief allowed by the CIT(A) has been called in question while assessee is not satisfied with the relief allowed in the first appeals.

3. For assessment year 1991-92, CIT (Appeal's) finding regarding the yield is being disputed by the Department. The declared production results reflected a yield of 94 % which according to the ITO was low as per history of the case and not in line with other parallel cases. The ITO adopted the yield at 98.5 % . In the course of assessment proceedings assessee had pointed out that in the last assessment yield adopted as 98.5 % had been reduced in appeal to 95 % . The ITO considered this contention to be without any force as the Department had preferred second appeal against the said order. Though the Departmental Representative, who appeared without any records, was unable to throw any light on the fate of second appeal in respect of the preceding year, the CIT(A) while disposing of the appeals in respect of assessment years 1992-93 to 1994-95 vide his order, dated 29-2-1996, had remarked that for assessment year 1990-91 second appeal against adoption of yield at the rate of 95 % had been withdrawn by the Department in pursuance of an order of the Settlement Commission. It was also pointed out by assessee's Authorized Representative that in subsequent years also yield at the rate of 95 % had been adopted. Under the circumstances, Departmental objection on the point of yield in assessment year 1991-92 must be rejected.

4. For assessment years 1992-93 and 1993-94 assessee had disclosed yield at the rate of 94.6 % and 93.7 % and average sale rate of yarn at Rs.128.80 and Rs.137.20 per kg. The ITO adopted the yield at the rate of 98.5 % for each year and average sale rate of yarn at Rs.135 and Rs.145 per kg. for assessment years 1992-93 and 1993-94 respectively. The CIT(A) reduced the yield to 95 % for each year while the average sale rate of yarn was fixed at Rs.132 per kg. and Rs.142 per kg. for assessment years 1992-93 and 1993-94 respectively. Assessee is objecting to the average sale rate fixed by the CIT(A) while the Department is questioning the reduction in yield as well as the sale rates.

5. Departmental objection in respect of yield is without any merit. Like earlier year adoption of yield @ 98.5 % was unsustainable and the yield @ 95 % being consistent with the past history was quite in order. So far as sale rates are concerned, the ITO had adopted the aforementioned sale rates after observing that the declared sales were not fully verifiable. Apparently, no effort was made by the ITO to find out if the declared sale rate was lower than the prevailing sale rates arid the average sale rate declared in other cases of the same trade. Nor did he bother to find out whether the sales made to unverifiable parties were recorded at rates lower than the rates in the case of verifiable parties which could justify the assumption regarding the sale rate. The C.I.T(A) disposed of assessee's objection in the following words:---

"The A.R. of the appellant has contended that the assessing officer is not justified to adopt sale rate of yarn as per above schedule. It is stated that the assessing officer has not placed any material facts on record while enhancing sale rate to such a high extent., It is claimed that the assessee's declared rate per kg is much better as compared to last adopted rate and prevailing market rate. The learned assessing officer has not given any convincing reasons or basis for enhancing the sale rate. It is claimed that the sale rates declared by the assessee are among highest rates in the market and the assessing officer had adopted the different sale rates without quoting any parallel cases. Keeping in view the better rates declared by the assessee and arguments put-forth by the A.R., it is directed that to meet the ends of justice the rate should be adopted at Rs.132 for 1992-93 assessment year and Rs.142 for 1993-94 assessment year."

6. Both parties are agitating against the aforementioned treatment. Assessee's objection appears to have some force. The sale rates adopted by the ITO were without any basis. Apparently, the ITO thought it fit to increase the declared sale rate by about Rs.7 per kg in each year. This treatment was followed in assessment year 1994-95 also when the average sale rate was pitched at Rs.130 per kg. on the assumption that declared rate was Rs.122.77 per kg. Actually, sale rate as per accounts for assessment year 1994-95 came to Rs.141.92 per kg. and thus, addition in the trading account for assessment year 1994-95 was modified by the CIT(A), who found the declared sale rate of Rs.141.92 as quite reasonable. It is also evident that the ITO had adopted the sale rates without making any effort to find out the market position. The arbitrary increase in the sale rate was, therefore, untenable.

7. However, the fact remains that part of the sales were unverifiable and the declared sale rate had not been accepted even in assessments for assessment years 1990-91 and 1991-92. Considering the history and circumstances of the case and taking into account the sale rate adopted for assessment year 1991-92 (Rs.119 per kg.) as well as 1994-95 (Rs.141.92 per kg.), the average sale rate for assessment years 1992-93 and 1993-94 cart reasonably be pitched at Rs.130 per kg. and Rs.140 per kg. The assessments would be modified accordingly.

8. For assessment year 1994-95 yield declared @ 95 % had been adopted by the ITO at 98.5 %. The average sale rate as per assessee's accounts came to Rs.141.92 per kg. The ITO adopted average sale rate of Rs.130 per kg. assuming that assessee had disclosed average sale rate of Rs.122.27 only. The declared yield as well as the average sale rates were held to be quite reasonable and thus, addition in trading account was deleted by the CIT(A). For the reasons mentioned in respect of earlier years, adoption of yield 0 98.5 % was unsustainable and CIT (A) had rightly directed acceptance of the yield @ 95 % which was consistent with\- the history of the case. So far as departmental objection regarding sale rate is concerned, less said the better. The ITO had proceeded to adopt the average sale rate of Rs.130 per kg. taking the declared sale rate of Rs.122.27 per kg. whereas the assessees itself had disclosed, sale rate at Rs.141.92 per kg. The CIT(A) had rightly directed acceptance of the declared sale rate. The Departmental objection in respect of trading account for assessment year 1994-95 is, therefore, rejected.

9. So far as P&L add-backs are concerned, the assessee had pointed out before the CIT(A) that during assessment year 1992-93 the assessing officer had not excluded the portion of disallowed expenses relating to sales subjected to tax under section 80-C of the Ordinance. Assessee's objection that disallowances should be prorated to the income charged to tax under section 80-C and other income was upheld. The DR was unable to rebut the finding of the first appellate authority.

10. The ITO had disallowed salaries claimed at Rs.96,000 and Rs.1,77,600 in assessment years 1992-93 and 1993-94 whereas the CIT(A) had reduced the additions to Rs.60,000 and Rs.1,00,000 respectively. The reduction in disallowance is contested by the Department while the assessee is challenging the disallowance as unjustified.

11. It was pointed out by assessee's Authorized Representative that claim of salaries under "selling expenses" was a result of change in sales policy but the expenditure having been incurred exclusively for business and being fully verifiable any disallowance was unjustified. It was contended that in the earlier as well as subsequent years the sales had been effected through a system of brokerage and, therefore, no salaries had been claimed in earlier as well as subsequent years in the "selling expenses". The expenditure recorded in the account-books is backed up by particulars of the individual employees. List of employees and copy of their I.D. Cards were produced on the date of hearing. It appears that the expenditure had been disallowed without verifying the actual position. The ITO is accordingly directed to re-examine this issue and resort to a disallowance only if the expenditure can be shown as unrelated to business.

12. For assessment years 1992-93 and 1993-94 Interest claimed at Rs.5,57,426 and Rs.3,28,345 was curtailed by Rs.1,31,097 and Rs.57,991 on the ground that part of the expenditure related to capital borrowed for works in progress and was not utilized in the business during the years under appeal. This assumption was shown to be misconceived. It was pointed out by the A.R., that the interest claimed related to bank loans of Rs.20,38,785 and Rs.15,43,905 in assessment years 1992-93 and 1993-94 respectively. These amounts had been shown in the balance-sheet under the head short term borrowing and had been utilized in running finance during the two years while the long term loans utilized in works in progress were shown to have been raised from the directors and were free of interest. The ITO had wrongly assumed that the interest expenditure claimed in the two years pertained to the total loans amounting to Rs.70,41,225 and Rs.2,01,99,631 in assessment years 1992-93 and 1993-94. The additions based on wrong assumptions were apparently untenable and are hereby deleted.

13. In assessment year 1994-95 Brokerage claimed at Rs. 7,49,931 had been disallowed on the ground of non-deductions of tax under section 50(4-A) payment of the commission as such being not in dispute. Deductions on account of brokerage or commission on which tax had nor been deducted under section 50(4-A) was made inadmissible by virtue of substitution of clause 'C' in section 24 Vide Finance Act, 1995. This provision was not retrospective and was not applicable to assessment year 1994-95. The disallowance was not warranted by law and is, therefore, deleted.

14. Departmental appeals in respect of assessment years 1991-92 to 1994-95 and assessee's appeals for assessment years 1992-93,1993-94 and 1994-95 are disposed of as above.

C.M.S./422/Trib. Appeal disposed of.