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

----S. 32(3)---Rejection of accounts---Higher gross profit rate in the past made basis for rejection of account ---Validity---Assessee had maintained the accounts properly and no fault could be found with the method of accounting---Held, higher gross profit rate in the past under special circumstances, could not be made the basis of rejection of accounts.

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

----S.32-A---Rejection of accounts---Audited accounts were duly certified by the company of chartered accountant---Defects pointed out by the department being not sustainable, rejection of accounts was not justified in circumstances.

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

----Ss.32(3) & 32-A---Rejection of accounts---Purchases had nowhere been attacked by the Assessing Officer ---Assessee had not been blamed for inflating costs of sales and trading account was verifiable which was accepted by the department---Sales were admittedly made through commission agents in whose hands the purchases had been accepted by the department---No specific defects had been pointed out in the books of accounts---Notice under. S.62, Income Tax Ordinance, 1979 had not been issued to the assessee-- Chartered accountant had audited and verified the accounts---Held, in circumstances, there was hardly anything left with the department to interfere with the declared result in the light of audited report which was in line with the prescribed procedure---Question of estimate of sales and application of gross profit rate, thus, did not arise.

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

----S. 32-A---Rejection of accounts---Validity---Accounts of assessee were properly audited in accordance with relevant law---No sound reasoning had been given by the department for rejection of accounts---No defects had been found and pointed out in the books of accounts of assessee but the common phrases like "unverifiable sales and various expenses" had been used---No charge had been levelled regarding inflated debt side of the trading account-- Sales had been made through commission agents in whose hands the same had been accepted by the department---Held, with all such facts before the Assessing Officer, there was no reasons to resort to his own estimates blindly following the alleged past history of one year.

Mian Ashiq Hussain for Appellant (in I.T.As. Nos.6666/LB, 6665/LB of 1992-93, 2009/1.13 and 2010/LB of 1995).

Fiza Muzaffar, D.R. and Shafqat Mehmood Chohan, L.A. for Respondent (in I.T.As. Nos.6666/LB, 6665/LB of 1992-93, 2009/LB and 2010/LB of 1995).

Fiza Muzaffar, D.R. and Shafqat Mehmood Chohan, L.A. for Appellant (in I.T.As. Nos.5588/LB, 5589/LB of 1992-93, 1989/LB, 1990/LB of 1995 and 1860/LB of 1996).

Mian Ashiq Hussain for Respondent (in I.T.As. Nos.5588/LB, 5589/LB of 1992-93, 1989/LB, 1990/LB of 1995 and 1860/LB of 1996).

Date of hearing: 25th October, 1997.

ORDER

The four cross-appeals for the years 1988-89 to 1991-92 and Departmental appeal for the year 1992-93 arise out of various appellate orders discussed as below.

2. Both the parties were heard and the assessment record has been perused.

3. The learned AR filed the following documents in support of his contentions: ---

(i) Sindh High Court decision in the case of M/s. A & B Oil Industries Limited v. Commissioner of Income Tax, Karachi reported as 1992 PTD 736.

(ii) Photo copies of the accounts for all the years.

(iii) Karachi High Court decision in the case of M/s. Coronet Paints & Chemicals Ltd. v. CIT, (Central), Karachi reported as 1984 PTD 355.

(iv) Photo copies of the following case law:--

(a) PLD 1992 Supreme Court 562.

(b) 994 PTD 174

(c) 1994 PTD 123.

(d) 1984 PTD 276.

(e) Copy of the assessee's own assessment order for the year 1986-87

4. Assessment Year 1988-89

The assessee, a Public Limited Company, derives income from manufacturing /sale of Acrylic/Woollen Yarn. As against declared income of Rs.7,91,062, the following income was assessed:---

The Chairman, Income Tax Panel Companies rejected the declared-version with the following findings: --

(i)There is an improvement in turnover but GP rate has gone down by 6.22 % .

(ii)The assessee could not put forth any cogent reason for decline in GP rate.

(iii)GP rate applied in agreement with the assessee last year at 15.47% shall be applied.

(iv)Scrutiny of books-of-accounts revealed that purchases are entirely imparts only wool purchased locally amounts Rs.2,68,000. Hence purchases are verifiable.

(v)Sales had been made through Commission Agent as before.

(vi)Details of sales reveals that sales are partly unvouched for lack of complete addresses of the parties. Hence the sales of the assessee are not open to verification.

(vii) Declared yield of 96.12% is an improvement over last year yield of 95.77 % .

(viii)Sales and purchases rates declared are reasonable,

5.Additions out of P&L claims were made on account of unvouched and unverifiable claims.

6. The assessee went in appeal against the original orders dated 30-11-1989 and the learned CIT(A) in his order dated 28-11-1990 set aside the same to be made de novo. In further appeal, the AR contested the appellate findings on the following grounds: --

(i)The Chairman Pane 106 found that purchases which were mostlyimports were fully verifiable.

(ii)The complete clients data was available and the wastage in yield were both satisfactory.

(iii)The sales had been made through Commission Agents and the learned ITO held that the rates of purchases and sales were reasonable.

7.Our learned brothers remitted the case back to the CIT(A) for re-adjudication in view of existing contradictions in his orders:

8. While re-adjudicating the learned CIT(A) compared the sale rate of assessee's competition in the market and categorically found that assessee appellant's sale .rates were far better than the sale rates of his competitors in the market. He observed as under:--

(i)I find considerable force in the argument that having conceded that the purchases, consumption, production, wastage were documented verifiable and reasonable and having also accepted on the basis of material that the average sales rates were also reasonable, there apparently would remain no source from which extra income could come.

(ii)If any addition is made it would make the already reasonable sales rates as unreasonably high and would be thus unwarranted and unsustainable.

(iii)I am, therefore, inclined to agree in the context of these facts that the department prima facie would not be able to explain from what source such extra profits could be derived.

(v)Since both the purchases and sale rates were admitted to be reasonable by the ITO, the decline in rate of GP need no further explanation.

(vi)The rejection of book-version, the estimate of sales and the application of rate of gross-profit to the extent of 15.6% cannot be upheld.

(vii) In the end, the learned CIT(A) gave the following findings:--

"Considering the facts that sales had increased considerably as compared to preceding year I consider it fair to reduce the rate of GP to 10% and estimate of sales to Rs.13,60,00,000 as the latter is also excessive."

9. While arguing before us, the learned AR highlighted the above referred findings of the assessing officer as well as the Appellate Commissioner and strongly argued that the conclusions were diagonaly opposed to the findings of the two officers below. He distinguished his past history of 1987-88 with the arguments that during that year, the financial charges were debited to the P&L Account thus resulting in exceptionally high margin of profit. His other strong arguments were that he had made all his sales admittedly through commission agents and the sales in the hands of his commission agent had been accepted by the Department. He challenged the rejection of accounts also, just because his method of accounts had been rejected. The final arguments were regarding legal aspect of the case. He drew our attention to section 32-A of the Income Tax Ordinance which is reproduced as below:--

"32-A. Documents certificates etc. to be furnished by certain companies.---(1) Every private company as defined in the Companies Ordinance, 1984 (XLVII of 1984), whose paid-up capital on the last day of any income year is three million rupees or more shall, with the return of total income for that year, furnish a copy of the balance-sheet and profit and loss account for that year (and auditor's report for that year, in Form 35-A of the Companies (General Provisions and Forms) Rules, 1985, prepared and singed) by a person who is a chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961), or a cost and management account within the meaning of the Cost and Management Accountant Act, 1966 (XVI of 1996).

(2) Where a company has not complied with the requirements of subsection (1) its income profits and gains shall be computed upon such basis and in such manner as the (Deputy Commissioner) may determine .

10. Form 35-A of the Companies (General Provisions and Forms) Rules, 1985 reads as under:--

"We have audited the annexed balance-sheet ofas at and the related profit and loss account and statement of changes in financial position, together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit and after due verification thereof, we report that:--

(a)in our opinion, proper books of account have been kept by the company as required by the Companies Ordinance, 1984.

(b)in our opinion--

(i)the balance-sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of account and are further in accordance with accounting policies consistently applied except for the changes as stated in note(s) .. .with which we concur;

(ii)the expenditure incurred during the year was for the propose of the company's business; and

(iii)the business conducted, investment, made and the expenditure incurred during the year were in accordance with the objects of the company: ,

(c)in our opinion and to the best of our information and according to the explanations given to us, the balance-sheet, profit and loss account and the statement of changes in financial position, together with the notes forming part thereof, give the information required by the Companies Ordinance,, 1984, in the manner so required and respectively give a true and fair view of the state of the company's affairs as at ..and of the profit (loss) and the changes in financial position for the year then ended; and

(d).in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980, was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance".

11. Thereafter, he drew our attention to his own audited accounts, original set of which was produced wherein the following certificate had been given by M/s. Hameed Chaudhri & Company, Chartered Accountant:--

"We have audited the annexed balance-sheet of AYESHA WOOLLEN MILLS LIMITED as at 31st December, 1987 and the related profit and loss account, together with the notes forming part thereof, for the year then ended and we state that:

(1)We have relied upon certification of the Management for existence and valuation of stocks and stores.

(2)Balance confirmation certificates from Banks in respect of mark-up payable and Bills payable were not made available for verification as stated in note 10.2.

(3)Penal interest for the year amounting Rs.155,320 on debentures and bridge advanced has not been provided on the basis of a letter received from ICP although ICP has not waived it till 31^st December, 1987 as revealed by its Balance Confirmation Certificate.

Subject to the foregoing remarks and contents of notes 10.1, 11 and 12; we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit and, after due verification thereof, we report that:

(a)In our opinion, proper books of account have been kept by the Company as required by the Companies Ordinance, 1984;

(b)in our opinion---

(i)the balance-sheet and profit and loss account together with the notes thereon have been drawn up m conformity with the Companies Ordinance, 1984 and are in agreement with the books of account and are further in accordance with accounting policies consistently applied;

(ii)the expenditure incurred during the year was for the purpose of theCompany's business; and

(iii)the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Company;

(c)in our opinion and to the best of our information and according to the explanations given to us, the balance-sheet profit and loss account together with the notes forming part thereof, give the information required by the Companies Ordinance, 1984 in the manner so required and respectively given a true and fair view of the state of the Company's affairs as at 31st December, 1987 and of the profit for the year then ended; and

(d)in our opinion no Zakat was deductible at source under Zakat and Ushr Ordinance, 1980."

12. The learned AR insisted on acceptance of his accounts arguing that the required certificate in Form 35-A of the Companies (General Provisions and Forms) Rules, 1985 had been given by the renowned Chartered Accountant in the appellant's case and the law impolitely debars the DCIT from rejecting the book-version. In support of his contention, he further relied on the following case-law:--

(i)1984 PTD 355 in the case of M/s. Coronet Paints and Chemicals Ltd. v. CIT (Central), Karachi wherein the learned Judges of the Karachi High Court held that:--

"Low gross profit should certainly put the Department on enquiry to verify if the entries in the accounts books were spurious or to verify if the system of accounts itself was defective which made it impossible to accept the books results as disclosed true profits of the applicant. In other words, on the only ground that the gross profit was low and compared unfavourably with preceding year with those of other manufacturers, the system of accounting adopted by the appellant cannot be rejected. What the proviso to section 13 require is that the system of accounting adopted by the assessee is defective."

13. Subsection (3) of section 32 authorises the DCIT to compute the profits and gains of an assessee on such basis and in such manner as he thinks fit, in case "where no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the DCIT, the income, profits and gains cannot be properly deduced therefrom or ".

14. In this case, the provisions of subsection (3) could certainly not be attracted in view of proper books-of-accounts maintained and duly certified by the company of Chartered Accountant.

15.1994 PTD 174. (Supreme Court of Pakistan):

In the case of CIT v. Krudd Sons Limited, the honourable Judges of the Supreme Court of Pakistan decided that:

"Acceptance of accounts in earlier years does not give rise to any vested rights as Income Tax Proceedings for each assessment year is separate unit and has to be judged in view of the special facts and circumstances of the year in question and the principles of estoppel res Judicate did not apply to such proceedings.

16. 1994 PTD 123: M/s. Pimpa Pvt. Ltd., Karachi, v. CIT, Companies-1, Karachi.

The Learned Judges of the High Court held that:--

"In the absence of any omission, irregularity, or other defect in the method of maintaining of accounts or positive evidence to show that the accounts did not disclose the whole income of the assessee, his books-of-accounts could not be rejected."

17. The perusal of law placed before us and the orders of the two Officers below do support the appellant/assessee. Not only that the learned Assessing Officer did neither find any fault with the method of accounting nor with the accounts maintained by the assessee/appellant. The learned CIT(A) found the proper maintenance of accounts with better results. Under the circumstances, higher GP rate in the past under special circumstances could not be made the basis of rejection of accounts.

18. Assessment Year 1989-90:

As against declared income of Rs.41,71,659, the following income was assessed:-

The assessee was confronted with the low yield of 94.19% and required to explain as to why GP rate as per history should not be applied. In his reply of 24-2-1992, the following submissions were made:--

"(1)Almost all purchases as per previous year, consist of imports madethrough banks and are fully vouched.

(2)Sales have been made as usual through commission agents and are fully verifiable.

(3)As regards fluctuation in GP rate it has been argued that all along the years it has been fluctuating depending upon various factors.

(4)In support of acceptance of low GP rate, a copy of the order of another Woollen Mills assessed at NTN 07-09-1700251 is provided to wherein against declared GP rate of 7.24 % round addition of Rs.3,00,000 was made resulting into assessed GP rate of 9.33%. It was argued by the Accountant of the firm that for-the year under consideration the other cases were assessed between the GP rate of 9 % to 10 % and therefore, it would not be fair to apply GP rate or 15.47 % during the assessment year 1987-88 and 1988-89. " ,

The explanation was rejected with the following defects otherwise not confronted to the appellant/assessee:--

"(1)The case has established history of rejection of trading results and similar circumstances exist for the year under consideration as discussed above, sales version is not fully verifiable. Average rate of sales varies in the case of credit and cash sales for which the company has failed to give any plausible explanation.

(2)The perusal of cost of sales above, shows that this year expenses under the head salary, wages, fuel and power, stores consumed increased. The details examined in respect of power and fuel consumed at Rs.3,631,393 and packing material consumed at Rs.9,98,340 shows that-these are not fully vouched and verifiable.

(3)Day to day manufacturing record has not been produced on the pleathat the same is not being maintained.

(4)The sales on cash are not reliable as complete identifying particulars have not been recorded on such sales.

(5)When confronted with all these facts, the accountant of the firm didnot contest the rejection of accounts as per history of the case."

19. The assessee went in appeal and the learned CIT(A) considered the following arguments of the assessee's AR:--

(i)The purchases are fully verifiable, the same being imports from abroad through normal banking channels.

(ii)The ITO failed to mention even a single instance of variation in the rates of cash and credit sales.

(iii)the expenses incurred under the head 'salaries', 'wastage' 'fuel power' and 'stored consumed' are fully verifiable and the details were filed without pin-pointing any defect or deficiency by the assessing officer.

(iv)The production record elaborately maintained for the ExciseDepartment was produced before the ITO.

(v)The sales are made through commission agents at reasonable rates and fully verifiable.

(vi)Rejection of book-version was never considered nor past history wasagreed to be followed.

He gave the following finding:-

"I have considered the arguments advanced by the AR of the assessee and feel that the learned ITO has not applied his mind to the facts and circumstances and objections taken by him are not substantiated by any details. No instance of unvouched purchases and expenses have been pointed out."

20. The AR appearing before the learned CIT(A) also explained his past history when declared GP rate of 3.2% in 1985-86 was assessed by making ad hoc additions which evolved GP rate of 4.5 % . Similarly, declared GP rate of 4.45 % during 1986-87 after assessment evolved to GP rate of 5.1 %. Even GP during 1987-88 when created in line with the other years, evolved to 8%. The CIT(A) also found the sale rates reasonable and observed that it deserves acceptance on merits. He also observed that the rejection of sales and estimate of GP rate is without any basis or material and is as such unsustainable. According to the learned CIT (A) GP rate of 7 to 10% was being applied in parallel cases but still he fixed GP rate of 10%, the upper slab of the rate prevalent in the market.

21. The learned AR repeated his arguments as advanced for the earlier years i.e. 1988-89 and challenged the treatment in the light of provisions of section 32-A of the Income Tax Ordinance.

22. Considering the audited accounts duly certified by the company of Chartered Accountant, the defects pointed out by the Assessing Officer and the findings given by the learned CIT(A), we do not find any reason to reject the trading account of the appellant/assessee. The DC (IT)s action was not justified and the same cannot be allowed.

23. Assessment Years 1990-91 and 1991-92:

Both the parties are in appeal against the combined order dated 9-3-1995 of the learned CIT(A), Zone-I, Lahore passed in ITAs Nos. 1722 and 1723. The assessee is aggrieved with the rejection of his accounts in the absence of notice under section 62 of the Income Tax Ordinance, estimate of sales as modified in appeal, GP rate fixed by the Appellate Commissioner and the additions made out of 'travelling and conveyance', 'commission', motor vehicle expenses', 'general expenses' and 'entertainment'. On the other hand, the Department is aggrieved in reduction of sales, GP rate and the add-backs out of P&L claims.

24. As against declared loss of Rs.53,49,398 revised to loss of Rs.74,63,095 during 1990-91 and loss of Rs.50,56,257 during 1991-92, the following income was assessed under section 62/132 of the Income Tax Ordinance:--

The DCIT gave the following reasons for his above order:--

(i)Sales are partly vouched and purchases are fully verifiable.

25. The assessee argued that fall in GP rate was direct results of various concessions granted to the competitor industry set up in Gadoon Amazai which directly effected the assessee's margin of profit. The explanation was rejected on the plea that concessions were granted on 3-6-1989 whereas the assessee's accounts for the year 1990-91 were closed on 31-12-1989. However, no notice under section 62 was issued specifically pin-pointing the defects in the book-version or the reasons why the assessee's explanation is not accepted.

26. In appeal, the learned CIT(A) reduced the sales as well as GP rate simply following the past history and without discussing, the two assessment orders before him. In this case, the purchases have nowhere been attacked. No specific defects had been pointed out in the books-of-accounts. Notice under section 62 has not been issued and, in spite of all this, rejecting the book-version duly audited by a company of Chartered Accountant was against the spirit of section 32-A of the Income Tax Ordinance. If the sales are admittedly made through commission agents in whose hands the purchases have been accepted by the Department then there is hardly anything left with the Department to interfere with the declared results in the light of detailed audited report in line with the prescribed procedure. The assessee has nowhere been blamed for inflating cost of sales and the two sides of the trading account being verifiable have been accepted by the Department. The concept of estimate of sales and application of GP rate does not arise. The audited trading account is, therefore, ordered to be accepted. However, the additions made out of P&L claims as modified in appeal stand confirmed.

27. Assessment Year 1992-93:

The Department is aggrieved with the appellate orders dated 16-1-1996 passed in ITA No.3209 alleging that the learned CIT(A) was not justified--

(i) in accepting the declared trading results;

(ii) in setting aside the assessment regarding additions out of P&LClaims.

28. The declared loss of Rs.64,72,232 was rejected and the following income was assessed after examining the books-of-account accounts and list of details totalling 39 in number as per body of the order:---

The DCIT gave the following reasons for his estimate:---

(i)Better trading results toad been declared as compared to preceding year with the higher GP rate.

(ii)Sales had been made through commission agents as before which arepartly unvouched.

(iii)The assessee has a history of rejection of trading results.

The explanation was rejected again relying on the past history without pin-pointing any instances of unverifiable sales or any expense claims. It was nowhere mention as to why the audited accounts properly certified as required under the law were being rejected.

29. In appeal, the learned CIT(A) accepted the trading account with the following findings:---

(i)The assessing officer did not question the debt side of the manufacturing. account which was entirely documented and verifiable. He attacked the sales only and thus, resorted to estimate of sales and application of GP rate which is arithmetically incorrect.

(ii)The appellant's case was covered under section 32-A of the Ordinance and not under section 32 wrongly employed. The rejection of audited accounts just on the basis of suspicions and allegations was not justified.

(iii)The method of accounting adopted by the assessee/appellant could not be questioned being duly certified by renowned company of Chartered Accountant.

(iv)Notice under section 62 of the Income Tax Ordinance was not issued which was a legal obligation in the absence of which the orders were illegal. Case relied upon 1971 SCMR 681 in the case of Collector, Sahiwal v. Muhammad Akhtar. The explanation filed by the appellant was not considered properly.

(v)The cash sales rates compared favourably with the verifiable sales, and the cash sales only accounted for 6.22% of the total sales. Case relied upon 1971 PTD 108.

(vi)The allegations levelled by the assessing officer have no nexus with the treatment in the assessment order.

30. He, finally, held that appellant's case is covered under section 32-A of the Ordinance and the method of accounting was, therefore, rejected without lawful authority as if the case was covered under section 32 of the Ordinance.

31. We find ourselves in agreement with the learned CIT(A). In the presence of properly audited accounts in accordance with the relevant provisions of law, the Department cannot be allowed the liberty to reject it without sound reasoning. No defects had been found in the books of accounts and the common phrases like unverifiable sales and various expenses was against the facts of the case. The purchases were admittedly verifiable. No charge has been levelled regarding inflated debt side of the trading account. The sales have been made through Commission Agents in whose hands the same had been accepted by the Department. With all these facts before the Assessing Officer there was no reason to resort his own estimates blindly following the alleged past history of one year. It was unfair to ignore the Gadoon Amazai effect on the appellant's business in view of the heavy duties charge over the assessee as against free imports and production in Gadoon Amazai of the same products. Even otherwise, the law is very clear on the subject and the Department was to proceed under section 32-A of the Income Tax Ordinance wherever accounts had been audited by a Chartered Accountant duly certified in the prescribed proforma.

32. The Departmental appeals fail and are dismissed for want of merit whereas assessee's appeals partly succeed.

M.B.A./461/Trib.Appeals dismissed.