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

----Ss. 22 & 32---Income from business---Trading account ---Addition--Assessee debited expenses on account of part of manufacturing work done by others and instead of showing expenditure under a separate head, had debited the expenses under cost of sales Assessing Officer, in spite of being satisfied that sales and purchases were verifiable and G.P. had shown improvement, made addition of these expenses paid to others against manufacturing work---Validity---Addition after acceptance of trading account was unjustified---Appellate Tribunal taking into account declaration of higher G.P. rate from preceding year, deleted the addition accordingly.

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

----Ss. 22 & 32---Income from business---Manufacturing account ---Wastage-- Addition---Assessing Officer made addition on account of presumed wastage, although none was declared by the assessed, on the ground that assessee was a manufacturer and manufacturing necessarily involved wastage ---Validity-- Appellate Tribunal deleted the addition made on the basis of presumption taking into account Tribunal's order for the previous years.

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

----Ss.22 & 32---Income from business---Profit and loss account---Staff welfare account---Nominal expenditure without details ---Addition-- Validity---Nominal expenses in a business of huge volume should have been allowed unless it was shown that such expenditure was not incidental to business---Addition was deleted by the Tribunal.

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

----Ss.80-C, 143-B, 50(5-A) & 22(C)---Import---Tax deduction at source-- Price compensation---Assessed was compensated by its principals on account of sale of imported goods on lesser price to compete in the market on which tax had been deducted under S.50(5-A) of the Income Tax Ordinance, 1979---Remittance received as price compensation in respect of imported goods was treated as a separate income by way of extra benefit under S.22(c) of the Income Tax Ordinance, 1979 by the Assessing Officer and was confirmed by First Appellate Authority---Validity---Reduction in sale price caused loss of profit to the assessee who was compensated by the principals, who wanted to make it sure that his products stayed in the market for a long time---Admittedly compensation or discount was received in respect of the same goods---Discount was generally given with the invoice, but there was no bar to such discount being allowed subsequently as same was reduction in sale price which may be done at the time of delivery or even subsequently if the products had not fetched the expected. sale price---Immaterial under presumptive tax regime as to when the imported goods were sold or at what price, as tax collected at the import stage was full and final discharge in respect of those imported goods--Price compensation/ discount received by assessed in respect of imported goods which had suffered tax, was not liable to be included in income of the assessee but was covered under S.80-C of the Income Tax Ordinance, 1979.

1997 PTD (Trib.) 1143 rel.

Jane-e-Alam, I.T.P. and Jawad Zakaria for Applicant.

Muhammad Umer Farooq, D.R. for Respondent.

Date of hearing: 29th April, 1999.

ORDER

SHAHID JAMAL (ACCOUNTANT MEMBER).---The above appeal is directed against learned CIT(A)'s order, dated 3-9-1998. The appellant is aggrieved by maintenance of additions of Rs.1,50,000 in Manufacturing account, Rs.80,000 from wastage account, several add backs from P&L A/c. and mainly by his decision to hold price compensation received on imported goods to be not covered by section 80-C.

2: Brief facts giving rise to above grounds are that appellant, a Private Limited Company, engaged in manufacturing of various type of brushes,' filed its return of income under section 55. of the Income Tax Ordinance declaring total income of Rs.10,38,557, the return being accompanied by statement of audited accounts, such as trading and manufacturing, P&L A/c. and Balance Sheet and also filed statement under section 143-B disclosing commercial imports at Rs.71,97,335 and exports at Rs.64,929 with corresponding tax deduction under section 50(5) amounting to Rs.3,54,120 and under section 50(5-A) amounting to Rs,649. Assessment proceedings were initiated vide notice under section 61 of the Income Tax Ordinance in response to which appellant produced books of accounts and filed necessary details. As far as manufacturing account of Brushes was concerned, appellant had declared sales of Rs.3,12,86,919, including export sales of Rs.64,929, which were separately shown in statement under section 143-B, with G.P. of 30.66% as compared to sales and G.P. of the immediately preceding year amounting to Rs.1,18,18,023 with G.P. of 30.2%. The Assessing Officer noticed that there was fall in sales and required the assessee to explain reasons thereof. The appellant explained that this was due to the reason that it had concentrated more on sale of imported goods, the turnover of which had gone up from 1.9 (M) to 11.2(M). The Assessing Officer found the explanation to be reasonable and also, on scrutiny of accounts found that sales and purchases were verifiable and hence, he accepted the trading results. At the same, time, however, he discovered that assessed had debited expenses on account of part of the Manufacturing work done by others and instead of showing the expenditure under a separate head, had debited the expenses under cost of sales. He required, vide a show-cause notice, to file separate statement of expenses incurred on account of self-manufacturing and manufacturing done by others and in case of failure, he showed his intention to make an addition of Rs.2,50,000 as was made in the past also on similar facts and circumstances. As separate accounts were not filed, he, therefore, made an addition of Rs.2,50,000 on account of such manufacturing expenses paid to others. He further noticed that assessee had not declared any wastage or sale of wastage. Considering it as an improbability he made an addition of Rs.80,000 on account of undeclared wastage sale, as was made last year also. Thereafter, he made several additions under various heads, from P&L A/c., on account of un-verifiability of non-business use carrying personal element.

3. The next ground which is the subject-matter of this appeal pertains to price compensation of Rs.26,40,360 credited by the assessee against cost of imported goods account and accounted for under section 80-C. of the Income-tax Ordinance. The facts are that appellant is the sole importer of Reymolds Bail-pen in Pakistan. During the year imports to the tune of Rs.74,38,177 was made sales of which were shown at Rs.1,12,46,092 with G.P., of 36.33 % on which tax under section 50(5) was deducted at Rs.3,54,120. This import under section 80-C was reported in statement under section 143-B, however, appellant's margin on sale of imported goods drastically fell from 41.66% to 36.33% during the year. It would be pertinent to give below the comparative trading results as well as the details of import sales during the year.

4. The details of imports and the accounting of price compensation are as under:

Less: Trade discount/price compensation from

(principal) on import of goods.26,40,360

Net import purchases47,97,817

4-A. Thus, it would be seem from the above that appellant accounted for net imports to the tune of Rs.47,97,817 as against total imposts of Rs.74,38,177 on which tax was deducted. The reason given for the above accounting was that in order to capture major market share of the imported items, the assessee was forced to sell the goods at less than competitive price which resulted in loss of profit, this was duly compensated by the principal by remittance of Rs.60,000 US $, converted @ Rs.44, per $, amounting to Pak. Rupee, 26,40,360, although the said remittance. was received on 3-11-1997, yet it pertained in respect of the same imported goods which we're reported in the statement under 143-B for the year ended 30--6-199'' and was covered under section 80-C income. The DCIT did not agree with this contention, as in his opinion it was an extra commercial benefit to the assessee liable to be created as a separate source of income, to which assessee objected that if it was not considered to be covered by section 80-C; it was not liable to be included in income for the year ended 30-6-1997 for the simple reason that the income accrued on 31-10-1997, as a result of compensation allowed, the principal and finally remitted on 30 -11-1997 relevant to assessment year 1998-99. This argument of the appellant was accepted and DCIT deferred the matter for next year i.e., assessment ear 1998-99. The appellant was aggrieved by this finding as well as various additions made to his income. as detailed above, and accordingly fil4d appeal before learned CIT(A). The learned CIT(A) considered the additions to . be similar to those for the assessment year 1996-97, which appeal was dismissed by him, and following his earlier decision he dismissed, this appeal also. As regards the issue of price compensation he upheld the decision of the Assessing Officer to consider the matter in assessment year 1998-99, as in his opinion also, the compensation was not covered under section 80-C of the Income Tax Ordinance. The appellant being aggrieved by learned CIT(,A, s decision has filed the above appeal and has taken objection against confirmation of various additions and mainly determent on tile issue of price compensation. We intend to take up the grounds one by one.

5 Heard Mr. Jan-e-Alam, I.T.P. and Mr. Jawed Zakaria, Advocate for the appellant and Mr. Muhammad Umer Farooq, learned D.R. for the respondent.

6. The first objection relates to an addition of Rs.2,50,000 on account of Manufacturing expenses debited to cost of sales, on account of such expenses having been paid to others, details of which were as alleged by the Assessing Officer, not separately filed. Mr. Jan-e-Alam appearing for the appellant submitted that Assessing Officer, being satisfied that sales and purchases were verifiable and G.P. had showed improvement, had accepted the trading account and in spite of the acceptance he further proceeded to make an ad hoc addition from cost of sales. The said addition, after acceptance of the trading account, was unjustified. He admitted that such addition was made in the past also and drew our attention to Tribunal's order vide 'I.T.A. No.1740/KB of 1997-98, dated 4-11-1998, pertaining to assessment year 1996-97 where similar addition was reduced to Rs.1,25,000. We have referred to trading account of 1996-97 wherein G.P. of 30.2% declared. on sales of Rs.3,92,33,892 and with the addition of Rs.1,25,000, as ordered by Tribunal, the effective G. P. rate was bushed up to 30.4 % whereas during the year under consideration, appellant had himself declare(' G. P. of 30.66 %therefore, we do not see any basis for the said addition. Accordingly, the addition is deleted.

7. The next objection relates to addition of Rs.80,000 on account of presumed wastage. The Assessing Officer thought that assessee being a manufacturer and manufacturing necessarily involving wastage, assumed the wastage, although, none was declared by the assessee and made an addition of. Rs.80,000, keeping in view the treatment meted by the predecessor. Mr Jan-e-Alam submitted that said addition was deleted by the Tribunal in all the preceding years , vide Tribunal's order cited supra. We are in respectful agreement with the cited decision of the Tribunal and we also do not see any' merit in the addition on the basis of presumed wastage, we, therefore, accordingly delete the addition.

8. The next objection relates to an addition of Rs.5,182 under Staff Welfare Account. Appellant had claimed an amount of Rs.5,182 under the head Staff Welfare details of which were not furnished in response to notice under section 62, .whereby the assessing officer disallowed the entire sum. Mr. Jan-e-Alam submitted that the claim itself was very nominal and the disallowance of the entire sum was highly unjust. We are inclined to agree with him, in a business of such huge volume, a nominal expense of Rs.5,182 should have been allowed unless it was shown that such expenditure was not -incidental .to business. We, therefore, order for the deletion of the addition.

9. The next grievance was in respect of various add backs from P&L A/c. which was not pressed by the A.R. of the appellant and hence the same are confirmed.

10. The next objection with regard to application of rate of deduction on export proceed which in the opinion of the appellant should have been at 0.75. % as against 1 % , was not pressed and hence disposed off accordingly.

11. The last and the main grievance of. the appellant is with regard to price compensation received in respect of imported goods on which tax was collected under section 50(5-A) of the said Ordinance, but held by the WIT and confirmed by learned CIT(A) to be not part, of 80/C income but a separate income, by way of extra benefit as defined .in section 22(c) of Income Tax Ordinance accruing on 21-10-1997, by virtue of principles agreement to compensate the appellant in respect of loss suffered on the sale of imported goods. Mr. Jan-e-Alan, arguing the ground submitted that his client had made imports of Rs.74,38,177 on which the tax was Rs.3,63,120 collected under section 50(5-A) of the Income Tax Ordinance, it was duly reported in statement under section 143-B of the Income Tax Ordinance and-, hence the entire declared value of imports was deemed income under section 80-C and the assessment stood completed under section 59-A of the said Ordinance, the .compensation received from the principal in respect of the 'same goods could not be brought to charge of tax as appellant had discharged full and final tax liability in respect of those goods. This issue, he said; stands settled by Tribunal's decision reported as 1997 PTD (Trib.) 1143. Mr. Jawaid Zakaria assisting Mr. Jan-e-Alam, and arguing the same ground, submitted that there was no dispute that the price compensation was received in respect of the same imported goods which had suffered tax, this fact stands admitted in para.3 on page.4 of the DCIT's assessment order. The DCIT's contention, he said that since the compensation was received after the import as well as sale of the goods and during the next accounting year and, hence it could not be related to section 80-C income, was incorrect, because the point of time of sale of imported goods, profit or loss thereof, are immaterial for purposes of assessment under section 80-C, as long as the receipt can be linked with the same goods which have suffered tax under section 50(5-A), it does not matter when and how the receipts came and how they were accounted for. Further, elaborating the point, lie drew our attention to international accounting standard where cost of purchase has been defined as under:-

"6.3 'Cost of Purchase' consists of the purchase price including duties and taxes, freight inwards and other expenditure directly attributable to acquisition, less trade discounts, rebates, duty drawbacks and subsidies, in the year in which they are accounted, whether immediate or deferred, in respect of such purchase."

12. Referring to above, he submitted that price compensation was rightly set off against duty paid value of imported goods because it was in the nature of trade discount and such discount could not be part of the. revenue as per definition given in the compendiam of guidance notes volume.

1.of Third addition:---

"Trade discounts and volume rebates received are not encompassed within the definition of revenue; since they represent a reduction of cost. Trade discounts and volume rebates given should be deducted in determining revenue. "

13 Referring to DCIT's objection that the adjustment was made after the close of accounting year he referred us to a publication called. A guide to company audit; note 2.1:---

"Adjustments in the Balance Sheet and/c:.,- P&,I. A/c. arising out of events occurring, after Balance Sheet date.

It should be seen that where certain events take place after the balance sheet date of certain information reach the company after such date necessitating adjustments to be made in any item to the balance sheet and/or the P&L A/c., the same have been duly carried out. " '

14. Finally he submitted, call it compensation, benefit, trade discount or whatever, the amount received from the principal was in respect of imported goods and was to be reduced from the cost of purchases, and since the entire value of imports, in fact the enhanced value of imports prior to reduction had suffered tax, the price compensation or discount received could not be brought to tax.

15. We have considered the above arguments. The appellant, being sole distributor, was importer. for the first time, of Reynolds Ball pens in Pakistan and in an effort to capture the market, he had to sell imported pens at the price of Rs.8 per pen, progressively reduced to Rs.6 and Rs.4 per pen and it is evident that with such reduction in the sale price, the appellant, suffered loss of profit, and was compensated by the principal, who wanted to make it sure that his products stays in the market for a long time. There is no dispute to the fact that compensation or discount 'was received in respect of the same goods. The discount is generally given with the invoice, but there is no bar to such discount being allowed subsequently, after all, it is reduction in sale price which may be done at the time of delivery or even subsequently, if the products had not fetched the expected sale price. Further, under the presumptive tax' regime it is immaterial as to when the imported goods are sold or at a what price, as tax collected at the import stage is full and final discharge in respect of those imported goods. This principle has been settled by the Tribunal in a comprehensive decision reported as' 1997 PTD (Trio.) 1143. Following the above decision we hold that price compensation/discount received by the appellant in respect of the imported goods which had suffered tax, is not liable to be included in income and is covered under section 80-C of the Income Tax Ordinance, 1979.

16. There being no other ground the appeal succeeds in the manner and to the extent indicated above.

C.MA./93/Tax (Trib.)Appeal succeede