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

----Ss. 62 & 65---Additional assessment---Re-opening of assessment-- Validity--- Information had been received by the Assessing Officer and prior approval of the I.A.C. had been obtained---Requirement for re-opening of assessment, held, were fulfilled.

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

----S.155---Assessment order---Validity---Wrong citation of law---Effect-- Held, notwithstanding the wrong citation of provision of law, all other requirements of law had been compiled with and no prejudice having been caused to the assessee, no adverse inference could be drawn and the assessment order in circumstances would not be vitiated.

(c) Administration of justice---

---- Court to help only such person who comes with clean hands.

(d) Income-tax---

----Assessee an industrial concern---Past history---Parallel cases--Principles- When the parallel case was available then past history was of no help particularly when the circumstances were not the same, inasmuch as, the machinery which had been acquired in the period relevant to the assessment year under consideration was not available in the earlier years.

(e) Income-tax---

----"Trading"---Connotation---Trading is a wider term and is not confined to the purchasing and selling only.

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

----S.23(1)(vii)---Deduction---Interest---Borrowed capital---Interest being a trading liability, deduction could be made while computing income from business or profession in respect of any interest paid in respect of capital borrowed for purpose of business or profession.

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

----S.25(c), proviso---Deduction---Interest---Where a trading liability referred to S.25(c) of the Income Tax Ordinance, 1979 is paid in subsequent year the amount so paid shall be deducted in computing the income in respect of that year and by virtue of proviso to said S.25 if the liability on account of interest is not paid within the period specified in S.25(c), addition is made--Whenever the assessee discharges liability on account of interest same is deducted in the computation of income in the year of payment.

(b) Income-tax---

----Addition---Deletion---Assessing Officer had made disallowance without considering the fact that expenses claimed were much lower as compared to the earlier years as allowed by the department---Addition was justifiably ordered to be deleted by the Appellate Forum.

Muhammad Sarfraz, F.C.A. for Appellant (in I.T.As. Nos.6/LB to 9/LB of 1986-87, 136/LB and 137/LB of 1987-88).

Shahid Bashir, D.R. for Respondent (in I.T.As..Nos.6/LB to 9/LB of 1986-87, 136/LB and 137/LB of 1987-88).

Shahid Bashir, D.R. for Appellant (in I.T.As. Nos.164/LB of 1986-87, 80/LB and 7027/LB of 1992-93).

Muhammad Sarfraz, F.C.A. for Respondent (in I.T.As. Nos. 164/LB of 1986-87, 80/LB and 7027/LB of 1992-93).

Date of hearing: 23rd July, 1997.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---All the above appeals have been heard together. However, we will decide appeal for each assessment year separately.

ASSESSMENT YEAR 1982-83:

2. I. T. A. No. 6/KB of 1986-87 arising out of order under section 62/65 is directed against the order, dated 30-4-1986 by the learned CIT(A-1), Lahore. The first objection is to the reopening of assessment. The learned counsel for the appellant has conceded that the information was received by assessing officer. It is also conceded that prior approval of I.A.C. was obtained and as such both the requirements for reopening of assessment were fulfilled. The objection is, therefore, overruled and the reopening of assessment is maintained. The second objection is that the learned CIT(A) was not justified in merely reducing the addition and not deleting the entire addition of Rs.2,08,675. The learned counsel for the appellant has stated that originally the addition was made by the assessing officer at Rs.2,08,675 but the learned CIT(A) directed that the calculations may be revised by proportionally increasing the profits declared and assessed in respect of those units only which consume Sui-gas. The understatement of consumption in respect whereof was admitted. The learned counsel for the appellant is not able to advance any reason for deletion of entire addition in view of the fact that the understatement of the consumption of gas is admitted. The objection is, therefore, overruled and the appeal stands dismissed.

3. ITA No.7/1986-87 arising out of order under section 111, is also directed against the order, dated 30-4-:986. The appeal is consequential in nature and the learned CIT(A) has already directed for reducing the quantum of penalty after giving appeal effect in respect of the addition in trading account as the appeal against order under section 62/65 stands dismissed therefore, no interference is required The appeal at the instance of assessee stands dismissed accordingly.

4. ITA No.137/1987-88 is directed against the order, dated 23-6-1987 by the learned CIT(A), Zone-1, Lahore. In this appeal the revised penalty order in consequence of appeal effect to the first appellate order, dated 30-4-1986 is assailed. As the issue relating to penalty already stands decided against the assessee in ITA No.7/LB/1986-87 the learned counsel for the appellant has not pressed this appeal. The appeal stands dismissed accordingly.

ASSESSMENT YEAR: 1983-84:

5. ITA No.8/LB/1986-87, ITA No.9/LB/1986-87 and ITA No.136/LB/1987-88 at the instance of assessee raise the same objections as in the appeals relating to the assessment year 1982-83. The issues, facts and circumstances as well as the arguments being same all the three appeals stand dismissed for the similar reasons as assigned while deciding appeal for the assessment year 1982-83.

ASSESSMENT YEAR 1976-77:

6. In ITA No.164/LB/1986-87 relating to the assessment year 1976-77 at the instance of department the sole objection has been raised to the deletion of addition of Rs.46,000. A perusal of the first appellate order shows that a contention was raised that the CDCs in the sum of Rs.46,000 were issued in the name of company's Managing Director and the addition, if any, on this account could be considered in the personal assessment of the Managing Director and not in the hands of appellant company. The learned CIT(A) accepted the contention and deleted the addition in the hands of company with the observation that the ITO will be at liberty to take action in the personal case of Chaudhary Manzoor Elahi, Managing Director. In the above facts and circumstances the learned D.R. is not able to find any fault in the appreciation of facts or the impugned direction. The impugned direction of learned CIT(A), is therefore, maintained and the appeal stands dismissed accordingly.

ASSESSMENT YEAR 1988-89:

7. In ITA No.80/LB/1992-93 relating to the assessment year 1988-89 at the instance of department the first objection has been raised to the deletion of addition by the learned CIT(A) at Rs.43,15,922 made under section 13(1)(b) of the Income Tax Ordinance, 1979 on account of unexplained investment. A perusal of the assessment order shows that during the course of assessment proceedings the assessing officer found an entry representing imports of polyester and viscose yarn worth Rs.43,15,922. In Ledger Folio No. III (account; art silk yarn import) the following entries were found:

In the Cash Book following entries were made on page 102:

8. The assessing officer observed that the amount was shown as expenditure incurred on imports. He further observed that a complaint was earlier received alleging that the appellant had obtained import licences of silk yarn in Vie names of non-existing persons. The assessing officer, therefore, examined the books in the light of complaints received earlier. The assessee was required to furnish the details and documents of the imports. The bills of entries were produced from which it transpired that yarn was imported and cleared from customs during the period 19-8-1987 to 29-11-1987 against L.C No. 15703 and 15704. The assessing officer took pains in examining the books, confronting the assessee and making in depth probe which is evident from the findings contained in the assessment order which is reproduced below:

"On the basis of the above, the assessee was required to furnish the document of its imports. Consequently it furnished the bills of entries which transpired that the yarn was imported and cleared from customs during the period 19-8-1987 to 29-11-19$7 against L.C Nos. 15703 and 15704. Major transactions are as under:---

The above amounts add up to Rs.42,28,288 and the balance of Rs.87,634 represents incidental expenses. These details show that the imports of yarn worth Rs.43,15,922 were effected during the period 19-8-1987 to 29-11-1987 but the scrutiny of the books of accounts produced by the assessee do not reflect the availability of funds for investment in these imports on the relevant/corresponding dates. These imports have been recorded much later in the books of account (cash book, page 102) i.e., on 3rd April, 1988 by showing receipts of Rs.47,47,514 from Mr. Muhammad Farooq, Karachi and recording expenses of Rs.43,15,922 on imports from 3-4-1988 to 5-4-1988 (cash, book page 102). However, as mentioned earlier this amount was not available with the assessee on the relevant dates of actual imports and thus the entries made in April, 1988 in the books of accounts have no relevancy in the context of the investment made in the import of yarn. In view of these discrepancies the assessee was confronted through notice under section 62 bearing No. 1700122, date 12-7-1989 as under:---

"You have shown imports of Polyester and Viscose under L.C. No.15704 and 15703. Total import value of the goods work out to Rs.43,15,922 LCs were operated and imported goods received and cleared during the period 19-8-1987 to 29-11-1987. During this entire period no investment towards imports is reflected in the books of accounts. You may therefore, explain the sources of investment of Rs.43,15,922 failing which the amount shall be treated as your income from undisclosed sources in terms of section 13 of the Income Tax Ordinance, 1979. "

Since the assessee did not explain the sources of investment in the import of yarn, on one pretext or another, as per its letters, dated 22-7-1989, 5-8-1989 and 26-8-1989, it was again required through notice under section 62/13 issued vide No.45, dated 2-9-1989 to explain the sources of investment in the import of yarn. In response the assessee vide its letter No. Nil, dated 9-9-1989 contended as under:---

"Your honour have directed to explain the source of investment of Rs.43,15,922 import of yarn through L.Cs. Nos.15703 and 15704 during the period from 19-8-1987 to 22-11-1987 in this respect we submit that the yarn was imported by Mr. Muhammad Farooq on the basis of irrevocable power of attorney, dated 8-9-1987 as per photo copy enclosed. This power of attorney is duly witnessed by the Notary Public. According to this irrevocable general power of attorney, the entire investment was to be made by Mr. Muhammad Farooq and in support of this fact para. 6 of this power of attorney is reproduced below:

' To obtain loan from any bank or banks against pledge of hypothecation of the goods and to sign all documents that may be required by the Bank/Banks in this respect'. "

For purposes of verification the assessee was required vide order -sheet entry, dated 9-9-1989 to furnish the original power of attorney executed with Mr. Muhammad Farooq of Karachi. However, the assessee vide its letter, dated 14-9-1989 sought one week's adjournment which was allowed but the same was not produced on the said date or at any subsequent stage in spite of numerous opportunities. Under the circumstances the assessee was required through notice under section 62/13 bearing No.61, dated 23-9-1989 to produce Mr. Muhammad Farooq before the Panel, to verify the assessee's contention as stated above. However, this was also not complied although sufficient opportunities were further provided through notices under section 62, dated 30-9-1989 and 26-10-1989 as well as order -sheet entry, dated 20-11-1989. The assessee was finally requested vide Letter No.284, dated 23-12-1989 to furnish the address of Mr. Muhammad Farooq so that he could be summoned. In response the assessee vide its Letter No.4133, dated 30-12-1989 communicated the address as under:---

Mr. Muhammad Farooq c/o Ahmed A. Daya & Company Private Limited, 58-59-A, Latif Cloth Market, Lakshami Das Street, P.O. Box No.5813, Karachi.

Summons under section 148 of the Income Tax Ordinance, 1979, were accordingly issued to Mr. Muhammad Farooq through Registered A.D. vide No.320, dated 2-1-1990 on the above address. M/s. Ahmed A. Daya & Company Limited, Karachi vide its Letter No.054/146/90, dated 13-1-1990 addressed directly to M/s. CeBee Industries Limited, 75-Ravi Road, Lahore a copy of which was endorsed to this Panel, forwarded the summons to the assessee with the following remarks:

"We do Rot- have any employee by the name of Mr. Muhammad Farooq. We therefore, believe there is some mistake. "

As a result, the assessee was confronted about the above facts through notice under section 62, dated 18-1-1990. The assessee in its reply No.Nil, dated 27-1-1990 contended that M/s. Ahmed A. Daya & Company Limited, had tried to explain the position as on 13-1-1990 and not for the period ending 30-6-1988. The assessee also suggested that the Panel should have examined the books of account of M/s. Ahmed A. Daya & Company Limited. Karachi for this purpose. It has further been suggested that since Mr. Muhammad Farooq was operating bank account with Middle East Bank, Karachi, a photo copy of account opening form and the name and address of the person witnessing should have been requisitioned. The contention of the assessee has been considered and has not been found satisfactory for the following reasons:---

(1)The assessee itself supplied the Karachi address of Mr. Muhammad Farooq and the said person should have been contactable at the said address. The assessee was fully aware that this address was being obtained for purposes of examining/verification and therefore, the onus was on it to furnish the correct and latest address of the said person, instead of requiring the department to ascertain his whereabouts.

(2)The proposal of the assessee to examine the books of accounts of M/s. Ahmed A. Daya & Company Ltd., Karachi, for the period ending 30-6-1988 is neither realistic nor relevant for the simple reason that even if this so-called person was employed by M/s. Ahmed A. Daya & Company Ltd., Karachi during the accounting year 1988, the examination of its books would not serve any purpose because the crucial issue is to examine him and to record his statement for purposes of verifying the contention of the assessee.

(3)The proposal to obtain copy of account opening form and the name and address of the person witnessing him is also not relevant, because it does not serve the purpose of verification of the imports attributed to Mr. Muhammad Farooq.

It is pertinent to note that a person who is not contactable and his whereabouts are not known was appointed as an Attorney by the assessee and statedly made huge investment in the import of yarn.

From the above discussion it is obvious that the transactions recorded in the books of account in April, 1988, are not genuine. This fact is further proved because at the initial stages the entire investment on the import of yarn under LCs Nos. 15703 and 15704 was stated to have been financed by Mr. Muhammad Farooq. However, when the assessee was required to substantiate the same by way of production of original Power of Attorney and also to produce Mr. Muhammad Farooq in person vide order-sheet entry, dated 20-11-1989, the assessee in its letter No.Nil, dated 30-11-1989 changed its stance and intimated that the total investment of Rs.43,15,922 in the import of yarn against the said LCs was met from the following sources:,

(1)Amount invested by Ch. Manzoor Elahi, Chief Executive from his own cash in hand Rs.8,35,917.

The examination of the books of accounts produced by the assessee do not record this entry anywhere. Although the Wealth Statement of Ch. Manzoor Elahi for the period ending 30-6-1987 and 30-6-1988 show availability of cash of Rs.9,10,000 and Rs.6,00,000 respectively, but this does not prove that the said cash was utilized for purposes of investment in the import of yam in the absence of any corresponding entry in the books of accounts of the assessee. It may be mentioned at this stage that the assessee is a Limited Company and its books of accounts are independent. If any of the directors had advanced any amount the same should have been recorded in his personal ledger account maintained in the books of account of the assessee. But as mentioned above, no such entry has been made anywhere in the said books of account.

Moreover the possibility of collusive arrangement cannot be ruled out because of the close intimacy and common interests of the assessee-company and the Chief Executive. This source, is thus, rejected being not satisfactorily proved from books of account of the assessee.

(2)Temporary advance from M/s Decora Carpet Industries Ltd., Lahore Rs.10,00,000.

The books of accounts of this creditor were summoned under section 148 of the Income Tax Ordinance, 1979. Their examination reveals the following defects:

(i)These do not appear to have been written in the regular course of business and cannot said to be the same set of books as produced by the creditor before the Department during the course of its own assessment proceedings.

(ii)The company had no funds or cash of its own. In order to generate cash at the given date, it introduced a purchaser namely Mian Naeem-ur-Rehman.

(iii)Page 10 of its cash book shows introduction of the following cash amounts in the name of Mian Naeem-ur-Rehman:

The same amount is shown to have been paid to Ch. Manzoor Elahi on 24-10-1987 through four entries in the cash book as under:

M/s. Decora Carpets Ltd. in its statement recorded vide order-sheet entry, dated 27-3-1990 informed that Mian Naeem-ur-Rehman paid the said amount for purchase of carpets because he wanted to start carpet business. However, the business could not be started and therefore, the amount was returned to him on 19-12-1987 through four cash vouchers of the following amounts:

Mian Naeem-ur-Rehman also did not have enough sources. He allegedly took a loan of Rs.6,50,000 from his father Mian Fazal Haq for financing the advance to the assessee. Affidavit of Mian Naeem-ur-Rehman as well as his father have been furnished. This source is also not satisfactorily explained and thus, rejected for the following reasons:

(a)Mian Naeem-ur-Rehman admittedly conducted no business with the assessee either prior to October, 1987 or subsequent to the return of the advance in Mid-December, 1987. He thus, had no business relations with the assessee which could justify the advance of such huge amount.

(b)Mian Naeem-ur-Rehman in his affidavit, dated 4-4-1990 stated that "he dropped the idea of carpet business due to poor profitability and ultimately received back the amount in middle-December, 1987". This is not convincing because he has failed to explain as how he was able to determine poor profitability without even selling a single carpet. He has also not spelled out as to whether he acquired any sale point for his so-called proposed business.

(c) The cash book of the assessee shows that two separate amounts of Rs.3,50,000 and Rs.2,00,000 were received on the same date i.e., 22-10-1987. However, no reason has been given, which necessitated these two separate entries on the same date for the same purpose.

(d)There are four separate entries, dated 24-10-1987 totalling Rs.10,00,000 in the cash book of the creditor pertaining to payment made to Ch. Manzoor Elahi. This is illogical, because if the creditor was in possession of' lumpsum cash amount of Rs.10,00,000 the same could have been recorded through a single entry.

(e)To give appearance of genuine entries the amount of Rs.10,00,000 is shown to have been returned to Mian Naeem-ur-Rehman through four separate cash vouchers of the same date i.e., 19-12-1987. Return of the said amount through four entries/vouchers of the same date, when sufficient cash was allegedly available in the books of accounts of M/s. Decora Carpets Ltd.

(f)The amount of Rs.10,00,000 attributed to Mian Naeem-ur-Rehman for purchase of carpets from M/s. Decora Carpet Industries Ltd. Is not genuine in view of assessee's quantum of business during the year under consideration or in the preceding years.

For the foregoing reasons, this source is not satisfactorily explained and is a made-up story to justify availability of funds: Hence, it is rejected.

(3)Temporary advance from M/s. Punjab Sugar Mills Ltd., Lahore Rs.14,25,000

The creditor did not produce its books of account requisitioned through summons under section 148 of the Income Tax Ordinance, dated 24-12-1989, on one pretext or another. The Panel waited for 3 months for production of accounts but on the last date of compliance i.e., 25-3-1990 it informed vide its Letter No.PSML/90/243 of the same date that the books of accounts cannot be produced on the fixed date because the directors are presently not available". An adjournment was also sought as in the past. Since the said creditor had not complied with the summons under section 148 during the period of three months in spite of numerous opportunities, there was every reason to believe that its books were either not maintained or were being deliberately withheld. Had the entries been recorded in the books of accounts, the assessee should not have felt any hesitation in producing its books of accounts. This Mill is also being run by the same family group which is managing CeBee Industries Ltd. Since this amount also remained unverifiable, the assessee was duly confronted through notice under section 62/132 bearing No.8, dated 29-3-1990. The assessee in its reply No.Nil, dated 7-4-1990 stated that a copy of the F.I.R., lodged with Police Station, Gulberg has been furnished. The plea taken by the assessee is not satisfactory for the following reasons:

(i)The creditor had failed to produce it books of account in spite of numerous opportunities during a period of more than three months for no cogent reason.

(ii)The creditor in its Letter No.PSML/90/243, dated 25-3-1990 had specifically informed that the books of account cannot be produced due to non-availability of the directors and therefore, one month's further adjournment i.e., up to 25-4-1990 was sought. It is, therefore, surprising that the same set of books was sent to the Office of M/s. Sarwar Awan & Company C.A., but same could not be produced before the Panel.

(iii)It is obvious that when the assessee realised that the Department was insisting for production of books of accounts, it chose a convenient excuse that these had been stolen. M/s. Punjab Sugar Mills, Lahore is an associated company being managed by the same group and therefore, the story of books of account having been stolen could easily be made up to help the assessee to avoid cross-verification by the Panel. In the absence of verification, it is inferred that Rs.14,25,000 stated to have received from M/s. Punjab Sugar Mills, Lahore is an afterthought and is thus rejected.

(4)Amount generated as sale proceeds of imported yarn against L.C. No.15704 sold through Mr. Muhammad Farooq of Karachi Rs.10,55,799. The amount attributed to this source is also not satisfactory and thus, not acceptable for the following reasons:

(a)As pointed out earlier Mr. Muhammad Farooq has neither been produced, nor is traceable on the address furnished by the assessee. Thus, it cannot be verified.

(b)The import of yarn against LC No.15704 was effected against industrial licence for assessee"s own consumption and cannot be sold in the open market. The assessee was specifically confronted on this issue through notice under section 62, dated 8-1-1990. In response the assessee vide its Letter No.Nil, dated 17-1-1990 stated as under: ---

"With respect to the permission letter from Chief Controller of Imports and Exports, Islamabad to effect the sales of imported year at Karachi, we submit that in the month of November 1987, when the yarn was imported, its loading from Karachi to Lahore was very much risky specially when during this period three/four Railway Stations between Rohri and Nawab Shah, were totally smashed because of M.R.D. agitation against Martial Law Regime. Further the road traffic was also unsafe and the above company had no alternative except to dispose of the imported yarn at Karachi."

The explanation given by the assessee is not convincing because there is no instance of blockade of transport system. The assessee's observation that the road traffic was unsafe is simply presumptions. If the situation was so grave as being stated, the assessee could have covered its risk through insurance. This explanation is therefore, also not accepted being unsatisfactory.

It may be mentioned at this stage that when the assessee attributed the entire investment in the import of yarn to Mr. Muhammad Farooq. It was required to produce the said person, for verification. The assessee's finding no way out, came up with a strange explanation vide letter, dated 17-1-1990 stating that its A.R., informed the department about the investment made by Mr. Muhammad Farooq, without consulting it.

It was further stated that the investment was in fact made by the Chief Executive through the four sources discussed above. This contention of the assessee has been considered and cannot be accepted on legal and factual position as discussed under:

(1) Power of attorney, dated 12-1-1989 given by the assessee to M/s. A. Aziz Chaudhry & Company, C.As., Lahore filed alongwith the Income Tax Return for the assessment year 1988-89 includes as under:--

(a) Their explanation will be binding on me/us. In view of this clear authorisation the assessee cannot be allowed under the law to disown any explanation, given on its behalf by its authorised representative.

(b)The plea that the A.R. gave reply without consultation is irrelevant and not acceptable because it is not a question of consultation but simply that -of bringing forth of the fact correctly.

(c)There is no evidence that the assessee took any action against the A.R. for taking the so-called incorrect stand.

For the above reasons the plea of the assessee on this ground is rejected being devoid of any merit.

In view of the foregoing reasons the assessee was duly confronted through notice under section 62/13 issued vide No.8, dated 29-3-1990. His reply No.Nil, dated 7-4-1990 has been considered. It is a repetition of its earlier contentions as reproduced/mentioned in the foregoing paras. The explanation given by the assessee in respect of investment in import of yarn worth Rs.43,15,922 against L.C. No.15703 and 15704 is therefore not satisfactory. The said amount of Rs.43,15,922 is added in the income of the assessee for the assessment year 1988-89 under section 13(1)(b) read with section 30 of the Income Tax Ordinance, 1979. Prior approval of the CIT, Cos., Lahore has been obtained for the addition under section 13(1)(b) vide his Letter No.K-156(Panel-01)/89-90/J/3775, dated 10-4-1990."

...Rs.43,15,922

9. The appellant assailed the above addition in first appeal. It was contended before the learned CIT(A) that the import licence was obtained in the name .of appellant itself and the source of investment was explained. It was submitted that the appellant constituted Mr. Muhammad Farooq as its lawful attorney vide irrevocable power of attorney, dated 8-9-1987'. It was further contended that in order to finance the import of the yarn Ch. Manzoor Elahi the Chief Executive of the appellant company apart from executing the power of attorney made arrangement of financing the imports through the process of advancing the money to Mr. Muhammad Farooq and the source of its financing was clearly specified in the affidavit sworn by the Chief Executive on 29-10-1989 filed with the assessing officer. It was further urged that the source is supported by the documentary evidence in the shape of wealth statement, copies of the loan/personal account of borrowers, in the account of M/s. Punjab Sugar Mills and M/s. Decora Carpet Ltd. and re investment sale process. It was pleaded before the learned CIT(A) that investment included the following unimpeachable sources:

(i)Chaudhary Manzoor Elahi, the Chairman advanced a sum of Rs.8,35,917 out of cash in hand available in his wealth statement as on 30-6-1987.

(ii)The Chief Executive further secured a temporary loan of Rs.10,00,000 from M/s. Decora Carpet Industries Ltd. on 24-10-1987 which was returned on 14-12-1987. The said loan is duly reflected in the copies of the accounts already filed.

(iii)Furthermore a loan of Rs.14,25,000 was obtained from M/s. Punjab Sugar Mills Ltd. which is reflected by the copies of the personal account already filed with the assessing officer as well as the certificate from the said mill and statement of its accounts.

(iv)A sum of Rs.9,89;817 was generated through the sale of 113 cartons of imported yarn against L/C No. 15704 which were cleared from the ship on 10-11-1987 and which were sold away to have the further consignment of import against L/C No.15703 cleared on 22-11-1987. It is clarified by the A.R. that evidence of the clearance of 113 cartons of yarn about 12 days before clearance of the second consignment had been led and the plea had been taken for sale of such yarn through Mr. Muhammad Farooq".

10. It was pleaded that the assessing officer had no justification in disbelieving the appellant's version. Reliance was placed on two judgments from Indian jurisdiction reported as (1978) 111 ITR 951 and (1979) 117 ITR 690. The learned CIT(A) accepted the pleas raised on behalf of the appellant and deleted the addition with the following finding:

"Considering all aspects of the case there is considerable force in the arguments of the learned A.R. of the appellant that section 13(1)(b) of the Income Tax Ordinance, 1979 itself is not applicable to the facts of the case which clearly shows that entries with regard to the investment in the purchase of yarn have been duly incorporated in the books of accounts maintained by the appellant and it cannot fairly and reasonably be suggested that the appellant had failed to disclose the fact of investment in the purchase/import of yarn in the books of accounts and for that reason clause (b) of subsection (1) of section 13 would not be applicable to this- case. Furthermore the source of investment as explained by the A.R., in the purchase of yarn had been clearly and elaborately elucidated and documented and the findings recorded by the assessing officer are presumptive and hypothetical. The explanation of bulk of the investment is duly supported by the accounts as well as the wealth statements of lenders and the only doubt which existed was the reinvestment or financing of the import through sale of earlier consignment. The margin of 12 days between the clearance of the first consignment and that of the second was long enough to afford the appellant an opportunity to sell away the yarn and such an eventuality could have happened in real life in the ordinary course of business. The assessing officer has not placed any material on record to disbelieve such reinvestment as well. In the circumstances section 13(1)(b) was totally inapplicable to the facts of this case. Accordingly the sum of Rs.43,15,922 added under section 13(1)(b) of the Income Tax Ordinance, 1979 is directed to be deleted."

11. The department is aggrieved with the above finding and hence this appeal.

12. The learned D.R. has vehemently argued that the learned CIT(A) accepted the contentions raised on behalf of the assessee without considering the merits of the case as discussed by the ITO elaborately the assessment order. The first objection raised to the finding of learned CIT(A) is that he was not justified in observing that as the assessee had made entries with regard to the investment in the purchase of yarn and it cannot be said that appellant had failed to disclose the fact of investment in the books of accounts, therefore, clause (b) of subsection (1) of section 13 would not be applicable. The learned D.R., has contended that merely because a wrong section has been cited the addition was not liable to be deleted. In this regard he has placed reliance on the provisions contained in section 155 of the income Tax Ordinance, 1979 which reads as follows:--

" 155. Certain mistakes not to vitiate assessment, etc.---No assessment order, notice, warrant or other document made, issued or executed or purporting to be made, issued or executed under this Ordinance shall be void or otherwise inoperative merely for want of form, or for a mistake, defect or omission therein, if such want of form, or mistake, defect or omission, is not of a substantial nature prejudicially affecting as assessee."

13. The learned D.R. has submitted that admittedly the sum is found to be credited in the books of assessee and, therefore, section 13(1)(a) was attracted. However, citation of section 13(1)(b) has not caused any prejudice to the assessee. On the contrary more stringent conditions have been complied with which were not required in the case of addition under section 13(1)(a). The learned D.R. has thus, submitted that the learned CIT(A) instead of being influenced with the wrong citation of provision of law ought to have considered the substance of the matter in the light of the provisions contained in section 155 of the Income Tax Ordinance. The learned counsel for the assessee is not able to rebut the contentions. We specifically asked whether any prejudice was caused with the wrong citation of provision of law to which the learned counsel could not give any satisfactory reply except that the law was wrongly cited. We are persuaded to agree with the submissions made by the learned D.R., that notwithstanding the wrong citation of provision of law no prejudice has been caused to the assessee as all the requirements of law have been complied with and, therefore, no adverse inference is to be drawn and the assessment order on this point shall not be vitiated. The learned D.R. has further assailed the finding of learned CIT(A) on merits to the effect that the source of investment as explained by the A.R. of the assessee in purchase of yarn has been clearly and elaborately elucidated and documented and the findings recorded by the assessing officer are presumptive and hypothetical. Mr. Shahid Bashir, the learned D. R. has submitted that the learned CIT(A) accepted the pleas taken on behalf of the assessee at the first appellate forum without considering the fact that the assessee has been changing the pleas. He has taken us through the assessment order according to which the imports were effected between 19-8-1987 and 29-11-1987 while entries in the books were recorded much later in April, 1988 by showing receipts of Rs.47,47,514 from Mr. Muhammad Farooq, Karachi and recording expenses of Rs.43,15,922 on imports from 3-4-1988 to 5-4-1988. Vide letter, dated 9-9-1989 in response to the explanation called by assessing officer it was contended that the yarn was to be imported by Mr. Muhammad Farooq on the basis of irrevocable power of the attorney and according to the irrevocable power of attorney the entire investment was to be made by Muhammad Farooq. Para 6 of the Power of Attorney was reproduced in the letter which reads as follows:

"To obtain loan from any bank or banks against pledge or hypothecation of the goods and to sign all documents that may be required by the bank/banks in this respect."

14. The learned D.R. has submitted that according to above explanation the investment was made by Mr. Muhammad Farooq, attorney of the assessee through loans obtained from bank. However, when original power of attorney was demanded the same was never produced. Subsequently, the assessee was required to produce Mr. Muhammad Farooq for verification of facts, he was not produced. On requisition by the assessing officer the address of Muhammad Farooq which was c/o Ahmed A. Daya & Company was furnished. Summons under section 148 were issued and in response thereof M/s. Ahmed A. Daya & Co. wrote a letter to the assessee with the copy to the assessing officer stating that they do not have any employee by the name of Muhammad Farooq and they believe that there was some mistake. On being confronted with these facts the assessee took plea that M/s. Ahmed A. Daya & Co. have explained the position as in January, 1990 and not in June, 1988. Placed in the above situation the assessee changed plea and came with new explanation in respect of source of investment which was reiterated before CIT(A). Mr. Shahid Bashir has argued that the assessing officer though could reject the changed plea for the simple reason that the change of plea was not permissible, examined the new pleas also and found that in case of advance from M/s. Decora Carpet Industries at Rs.10,00,000 no funds were available and a purchaser namely Mian Naeem -ur-Rehman was introduced. The amount of Rs.10,00,000 was received on three dates, to wit, 10th, 20th and 22nd of October, 1987 and this amount was paid to Mr. Chaudhary Manzoor Elahi, Managing Director of assessee company on 24-10-1987 by four entries. No actual transaction took place and it was stated that Mian Naeem-ur-Rehman made payment for purchase of carpets but did not start business and, therefore, amount was returned on 19-12-1987. It was further stated that Mian Naeemur Rehman took loan of Rs.6,50,000 from his father Mian Fazle Haq. Mr. Shahid Bashir has submitted that the examination of entire facts shows that it was a cock and boll story. So far the loan from Punjab Sugar Mill is concerned the books were called which were not produced for several months on the plea that directors were not available and ultimately it was stated that the books were stolen and F.I.R. was lodged at police station. The fourth source is same Mr. Muhammad Farooq of Karachi who was not traceable and was a non-existing entity. The assessing officer has further observed on page 12 of the assessment order that originally entire investment was attributed to Mr. Muhammad Farooq and subsequently on 17-1-1990, it was explained in the letter written on behalf of assessee that the plea that investment was made by Mr. Muhammad Farooq was taken by the A.R., without consulting the assessee. It was further stated in the changed plea that the investment was made by the Chief Executive of the company from four sources disclosed by him. The learned D.R. continued to argue that the learned CIT(A) absolutely ignored the fact that the plea which he was accepting was a result of a complete summersault taken on behalf of assessee which cannot be allowed. He further ignored the fact that originally a power of attorney was stated to have been executed in favour of Muhammad Farooq, who was proved to be non-existing entity. However, even in the subsequent plea an amount of Rs.10,55,799 was again alleged to have been procured from a sale made through same Muhammad Farooq. The learned D.R. has vehemently argued that the impugned direction of learned CIT(A) is the result of total non- application of mind and non-appreciation of facts which may be vacated. Mr. Muhammad Sarfraz, learned representative for the respondent supported the impugned order of learned CIT(A). He was heard at length. However, when asked to explain the circumstances under which a false plea was taken by the assessee in the initial stage, he was not able to advance any convincing reason except that the plea was taken by A.R. without consulting the assessee. He has, however, conceded that the assessee has duly authorised the representative to plead his case and that specific reference was made to an irrevocable power of attorney, dated 8-9-1987 with the plea that instrument also mentioned the licence No issued in favour of Chief Executive of the Company and its face value. Even at the appellate stage plea was taken that Muhammad Farooq was lawfully appointed attorney for the purpose of import of yarn and that in the affidavit sworn by Chief Executive of the Company on 29-10-1989 the transaction with Mr. Muhammad Farooq was alleged. He has further conceded that even in the changed plea an amount of Rs.10,55,799 was alleged to have been arranged through Mr. Muhammad Farooq but said Muhammad Farooq was not traceable at all Mr. Muhammad Sarfraz was asked to show any law under which a party to a judicial proceeding can be allowed to change pleas of facts, but he was not able to produce any law.

15. We have carefully considered the contentions raised by the learned representatives for the parties and the material available on record. We are of the considered opinion that the learned C.I.T.(A) has not applied his mind at all to the facts obtaining on record. His observation that the assessing officer has not placed any material on record to disbelieve such investment appears to be preposterious. The entire material brought on record by the assessing officer in a very laborious manner leads to one conclusion only that the assessee was not able to explain the source and he has been trying unsuccessfully to wriggle out of the wood. However, on finding one plea to be absolutely false and untenable it resorted to change of plea which cannot be permitted, as it is established principle of the dispensation of justice that the Courts will help only such person who comes with clean hands. The impugned finding of learned CIT(A) is absolutely arbitrary, perverse and not sustainable in law which is hereby vacated. The addition as made by the assessing officer is, therefore, restored. Before concluding our finding on this issue we would like to observe that in fact it appears to be a fit case for criminal prosecution of the Chief Executive of the company for forgery and fabrication of false evidence alongwith his A.R., who appeared before the assessing officer. It is admitted on record that the false plea was taken by the A.R. of the assessee during the assessment proceedings. A copy of this order should be sent to the Institute of Chartered Accountants of Pakistan to conduct enquiry against Mr. Abdul Aziz Chaudhary, FCA of Abdul Aziz Chaudhary and Co., Chartered Accountants, Lahore and if the allegation of the assessee is found correct the possibility of the cancellation of the licence to practise as Chartered Accountant may be considered. This action should be in addition to the criminal prosecution of the assessee and its A.R., if deemed fit by the department.

16. The second objection raised is to the direction for accepting the declared sales and applying G.P. rate at 23.75% as against application of G.P. rate at 25 % by the assessing officer on the estimated sales of Rs.1,15,79,890 in textile section and for adjustment of Rs.4,31,592 in the imported yarn against textile section. A perusal of the assessment order and first appellate order shows that the assessing officer discarded the declared sales and estimated the same for the reason that the imported yarn was used by the assessee for its own manufacturing. The assessing officer did not believe the version that the imported yarn was sold at a profit of about 9 %. The learned CIT(A) held that there was no material available with the assessing officer for coming to the conclusion that imported yarn was used by the assessee for its own manufacture. So far the application of G.P. rate is concerned the learned CIT(A) reduced the same on the basis of past history. We asked the learned D.R. if there was any material available with the Assessing Officer in support of his view that the imported yarn was not sold and was used by the assessee itself for manufacturing purposes. The learned D.R., has frankly conceded that there was no material in this behalf available on record. In these circumstances we do not find any reason to interfere with the impugned finding of leaned CIT(A) which is hereby maintained. This finding concludes the objection to the direction for adjustment of Rs.4,31,592 from the assessed figure of profit in the textile mill section by assessing the same as part of declared income while profit in textile mill section is to be assessed as directed by the learned CIT(A).

17. The next objection raised on behalf of the department is to the direction for applying G.P. rate on declared turnover of Rs.97,98,815 as against assessed sales of Rs.1,94,72,510 in the dying and printing section. A perusal of the assessment order shows that the assessee declared receipts in dying and printing section at Rs.97,88,815. The assessing officer observed that job was performed for third parties but no details were furnished. It was admitted on behalf of the assessee that no day-to-day consumption/production record was maintained. The assessing officer further observed that receipts were not verifiable due to lack of complete addresses and the purchase of dyes and chemicals was also not verifiable. No stock register was maintained in respect of raw materials. He further observed that the assessee has the history of rejection of accounts and the rejection of accounts was conceded in the preceding years. The assessing officer for the foregoing reasons rejected the declared version. The assessing officer further obtained the description of various machineries acquired by the assessee during the year. He further cited a parallel case at N.T.N. 07-09-1714566 having same type of machinery in which ratio of Sui-gas consumption to the declared receipts was 1:14. In the case of assessee the declared ratio to the consumption of Sui-gas was 1:5 only. The assessee was confronted on this point. It was replied that the consumption of gas varies from the nature of plant and circumstances. It was stated that the boiler was to be operated for continuous period of 24 hours irrespective of the fact whether there was any order of finishing/printing or not. It was further contended that the ratio of l:5 declared by the assessee was on consonance with the past history. In support of his contention the assessee placed reliance on a parallel case. The assessing officer did not accept the contention for the reason that the type and nature of machinery available with the assessee was the same as in the parallel case cited by the department. On the other hand, in the case cited by assessee the machinery was not sophisticated as in the case of assessee. He further observed that the Rotary Printing Machine possessed by the assessee has five to six times higher capacity as compared to the ordinary printing machines. The assessing officer further observed that the assessee's machinery was slightly older, than, in the parallel case in which ratio was 1:14 and, therefore, he adopted the ratio of 1:10. Thus, on the basis of Sui- gas consumption charges at Rs.19,47,25 the receipts were estimated at Rs.1,94,72,510. The assessee assailed the estimated receipts mainly on the basis of past history. Reliance was placed on certain decisions of the Tribunal where production was estimated at four times of the consumption of Sui-gas. The learned CIT(A) accepted the contention and directed to apply the G.P. rate on declared receipts. The learned D.R. has vehemently argued that the learned CIT(A) has again failed to consider the material facts. He has submitted that in the year under consideration sophisticated machinery was purchased, the details whereof is given in the assessment order and which fact has not been dented. He has further contended that a parallel case was duly confronted and the assessee did not deny the fact except that the consumption of gas varies with the nature of plant and circumstances. He has submitted that the receipts as estimated by the assessing officer may be restored as the assessing officer has already taken very lenient view. We asked the learned counsel for the appellant to show if the learned CIT(A) while considering the history as considered the fact that sophisticated machinery was acquired by the assessee in the period relevant to the assessment year and he has frankly conceded that this fact was not considered at all. We are of the considered opinion that when the parallel case is available then past history is of no help particularly when the circumstances are not the same, inasmuch as, the machinery which has been acquired in the period relevant to the assessment year under consideration was not available in the earlier years. However, we are inclined to take a lenient view for the reason that the assessing officer has observed that the machinery possessed by the assessee is older as compared to the parallel case and, therefore, while vacating the impugned direction of learned CIT(A) in respect of acceptance of the declared receipts we direct that the receipts should be worked out in ratio of 1:8 of the consumption of Sui-gas. The third objection is to the direction for taking the estimated sales at Rs.50,00,000 and G.P rate at 42% against the sales estimated at Rs.96,77,010 and G.P. applied at 44.60 0, in the calendering section. The facts and circumstances in respect of calendering section are similar as in respect of issue relating to dyeing and printing section. In this section also the assessing officer has taken receipts at 10 times of the Sui-gas consumed. It is directed that the receipts should be taken in calendering section also at 8 times of the Sui-gas charges. The direction for applying G.P. rate at 42 % by the CIT(A) is reasonable looking to the past history and is hereby maintained.

18. The department has next objected to the deletion of addition at Rs.8,30,076 on account of interest expenses for non-business activities. A perusal of the assessment order shows that interest expenses were claimed at Rs.48,46,777. The total overdraft was at Rs.3,09,79,588. The assessing officer observed that loan was advanced to Sabco Private Limited at Rs.41,01,442 and investment was made in joint stock companies at Rs.21,39,000. The assessing officer held that this amount of Rs.62,40,449 was diverted outside the business and, therefore, the proportionate interest at Rs.8,30,076 was not admissible. It was contended before the learned CIT(A) on behalf of the assessee that the amount advanced to M/s. Sabco Pvt. Ltd. was in the ordinary course of business as it supplied yarn to the assessee for manufacture of carpets. It was further contended that the amount was never uniform. It was further pleaded that the amount in question was not an interest-free loan but for the purchase of yarn for manufacturing carpets which is one of the important lines of the appellant's business. So far the investment in purchase of shares of the joint stock companies are concerned it was contended that it had no relation to the borrowing of the company because investment was made more than 10 years ago and the company was entitled to invest its fund in the purchase of shares and run its business through borrowed capital. The contentions were accepted by the learned CIT(A). The learned D.R. is not able to show that the assessing officer was able to establish the fact that the investment in purchase of shares was made out of borrowed capital and the amount paid to Sabco (Pvt.) Limited was not on account of advance for supplying yarn and was in the nature of loan. We are persuaded to agree with the reasons prevailing with the learned CIT(A) for accepting the contention. The impugned direction is hereby maintained and the objection raised by the department is hereby repelled.

19. The last objection is to the deletion of addition of Rs.46,78,245 made under section 25(c) of the Income Tax Ordinance, 1979. A perusal of the assessment order shows that the assessing officer held that the amount relating to National Finance Corporation on account of liabilities showed at Rs.2,62,93,496 included unpaid interest for the period ending 30-6-1985 Information was sought from the National Industrial Finance Corporation who vide its letter, dated 22-1-1990 intimated that an amount of Rs.46,78,245 was unpaid interest from the period ending 30th of June, 1984. The assessing officer, therefore, added this amount under section 25(c) of the Income Tax Ordinance. It was contended before the learned CIT(A) that provision contained in section 25(c) were not attracted because it related to trading liabilities which contain transaction of purchase and sale. It was further contended that the interest which was allowed as a deduction under section 23 was made a part of substantive loan and became interest bearing liability, therefore, it could not be added back to the total income. The learned CIT(A) held as follows:

"Considering all aspects the plea of appellant that deduction on account of interest would be chargeable to the extent that which is received back by the assessee within the meaning of clause (a) of section 25 is tenable. Clause (c) of section 25 would be attracted only -to the liabilities arising in relation to the purchase made by the assessee which would remain unpaid for a period of three years or more which the assessing authority may add back within the term mentioned in section 25(c). In fact the interest bearing liability which can be added up to the principal do not exist separately as a part of liability for which deduction has been allowed not to speak of being a trading liability."

20. With this finding the learned CIT(A) deleted the addition. The learned D.R. has vehemently assailed the impugned finding and has contended that the learned CIT(A) has ignored plethora of rulings on the point. He has submitted that the learned CIT(A) has restricted the connotation of term trading liability, while by now it is established through large number of judgments by the superior Courts in the sub-continent that trading is a wider term and is not confined to the purchasing and selling only. The learned D.R. has submitted that the interest has always been treated as a trading liability and the provisions contained in section 23(1)(vii) which says that a deduction shall be made while computing income from business or profession in respect of any interest paid in respect of capital borrowed for the purpose of business or profession, leaves no scope for any doubt in this behalf. The learned A.R. of the assessee tried in a lukewarm manner to support the impugned direction of learned CIT(A) but the finding is so preposterous and perverse that he was not able to support it with any vehemence. The point canvassed by the learned D.R. is so established that we need not to refer judgments of the Tribunal and superior Courts in this behalf. However, we would like to make a reference to the proviso to section 25 itself which says that where a trading liability referred to in clause (c) is paid in a subsequent year the amount so paid shall be deducted in computing the income in respect of that year and by virtue of this proviso there is a long established practice in the department that if the liability on account of interest is not paid within the period specified in clause (c) of section 25 addition is made and whenever the assessee discharges liability on account of interest they deduct the same in the computation of income in the year of payment. The impugned finding of learned CIT(A) is, therefore, vacated and the disallowance as made by the assessing officer is hereby restored. The appeal at the instance of department is allowed accordingly.

ASSESSMENT YEAR 1989-90

21. In ITA No.7027/1992-93 the department has raised the following objections:

(1) That the learned CIT(A) was not justified in reducing the sales (in Textile Mills Section) from Rs.45,00,000 to Rs.32,00,000 in view of the reason that the assessee-company failed to produce stock register, record of daily sales and other allied documents during the course of hearing. Sales were rightly estimated in the light of facts and past history of the case.

(2)That the learned CIT(A) was not justified in directing to accept the declared sales (in dyeing and printing section) since the assessee company did not furnish any details regarding the quantity of cloth processed, capacity, charges per meter, quantitative analysis of consumption of chemical as well as party ledger. The declared version was rightly rejected in the light of the history of the case.

(3)That the CIT(A) was not justified in reducing the sales to Rs.35,00,000 (in calendering section) which is totally contrary to the facts and the circumstances of the case.

(4) That the additions out of interest at Rs.1,95,704 was rightly made since the assessee was carrying on business entirely through borrowed funds (as per balance-sheet) and a part of the fund had not been employed to the business of the assessee.

(5)That the learned CIT(A) was not justified in deleting the addition under the head "Repair and Maintenance" and "Staff Welfare expenses being unvouched, and unverifiable",,

22. Grounds Nos. l, 2 and 3 contain the same issues as decided in the assessment year 1988-89. The issues are decided in the same terms as in the assessment year 1988-89. Ground No.4 also contains the same issue as decided in the assessment year 1988-89 and stands disposed of in similar terms. The last objection is to the deletion of addition under the heads repair and maintenance and staff welfare expenses. A perusal of the assessment order and first appellate order shows that the assessing officer made disallowances without considering the fact that the expenses claimed are much lower as compared to the earlier year. The learned CIT(A) deleted the addition by considering the fact that the claims in this year were lower as compared to the claim allowed by the department in the earlier year. The impugned direction of learned CIT(A) is fully justified which is hereby maintained.

23. The appeal stands disposed of as above.

M.B.A./463/Trib.Order accordingly.