I.T.AS. NOS.897/KB TO 899/KB OF 1993-94 VS I.T.AS. NOS.897/KB TO 899/KB OF 1993-94
2001 P T D (Trib.) 2941
[Income-tax Appellate Tribunal Pakistan]
Before Shahid Jamal, Accountant Member and
Syed Kabirul Hasan, Judicial Member
I.T.As. Nos.897/KB to 899/KB of 1993-94, decided on 19/10/2000.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence etc.---Assessee, a spinning mill---Rejection of accounts---Absence of Spinning Master's report---Effect---Spinning Master's report was though an important and relevant document of the record but non-production of such record could not invest the Assessing Officer with power to reject the accounts, contrary to -established history of the case---Admitted positions being that assessee's accounts, without production of Spinning Master's reports, were accepted from 1977-78 to 1982-83 in spite of a much higher claim of wastage, Department could not make the absence of Spinning Master's report the basis of rejection of accounts.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence etc.--Rejection of accounts---Unverifiable cash sales---Name and addresses of the buyers-- Arguments that sales were not verifiable did not hold good because the Assessing Officer himself accepted the declared average sales rate in all the three assessments in dispute while making additions on account of excessive wastage, and in cash sales the seller could not insist on names or the addresses of the buyers---Non-verifiability of purchases in export account was mere formality as no specific instance was either confronted to assessee or cited in assessment order, nor any discrepancy in purchase rate had been pointed out---Assessing Officer did not have any material basis to reject either the manufacturing account or the export account.
I.T.A. No. 1127/HQ of-1989-90; 1.T.A. No.3895/KB of 1986-87; dated 1-6-1995; I.T.A. No.494/HQ of 1989-90, dated 4-9-1997 and I.T.A. No. 137/HQ of 1991-92, dated 12-6-1994 ref.
1997 PTD 76; 1990 PTD 254; Indus Textile Mills v. CIT 1989 PTD 567 and 1992 PTD 341 rel.
Vishno Raja Qavi, D.R. for Appellant:
Muhammad Javed Zakaria for Respondent.
ORDER
SHAHID JAMAL (ACCOUNTANT MEMBER). ---These three appeals filed at the instance of the Department are directed against CIT(A)'s order, dated 10-7-1993. The Department is aggrieved by CIT(A)'s directions to accept trading result in manufacturing as well as trading account.
2. Briefly stated the facts giving rise to the above appeals are that respondent is a public limited company quoted on stock exchange, engaged in uniting spinning mills and producing cotton yarn. The respondent's company had declared following result during the three years under appeal:
| Year | Sales | Gross Profit | G. P. rate |
| 1989-90 | Rs.22,79,90,847 | Rs.2,94,50,442 | 12.91% |
| 1990-91 | Rs.63,18,15,380 | Rs.3,23,12,347 | 5.11 % |
| 1991-92 | Rs.10,90,69,667 | Rs.1,03,28,893 | 9.47% |
| 1992-93 | Rs.36,42,32,759 | Rs.4,97,64,155 | 13.66% |
The comparative trading result showed fall in turnover in G.P. in 1990-91 but improvement during 1991-92, and again fall in G. P. in 1992-93. As regards experts sales account assessment year 1990-91 was the first year in which G.P. rate 5.11 % declared which further improved to 9.47 % and 8.59 % during the subsequent year. During the first year of export, i.e. assessment year 1990-91 ITO accepted the trading result in respect of raw cotton export, but during the subsequent two years, in spite of improvement in G.P., he discarded the declared result and applied G.P., of 11 % for the reasons that purchases were not verifiable, making addition in gross profit from the debt side. As regards manufacturing result the respondent-company had declared wastage of 16.36 % , 15 % and 15.6 % as against immediately preceding three years of 24 % , 16.74 % and 16.15 % shown during assessment years 1987-88, 1988-89 and f989-90 respectively. Other relevant details concerning production are detailed below in respect of the three years:
1990-911991-92
| Cotton Consumption Production of | 1,47,89,140 Lbs. | 1,39,24,880 Lbs. |
| | |
| Cotton yarn | 1,23,69,417,Lbs. | 1,17,27,118 Lbs. |
| Wastage percentage | 16.36% | 15.78% |
| Average Count Spin | 29.23 | 21.05 |
| Average Sales Price | 16.20 | 20.45 |
| Nos. of Shifts Worked | 1,035 | 1,030 |
| Nos. of Spindles Worked | 27,324(Avg.) | 27,457(Avg.) |
1992-93
| Cotton Consumption Production of | 1,24,84,721 Lbs. |
| |
| Cotton Yarn | 1,05,36,000 Lbs. |
| Wastage percentage | 15.61 % |
| Average Count Spin | 23.57 |
| Average Sales price | 25.98 |
| Nos. of Shifts worked | 1.065 |
| Nos. of Spindles worked | 26,636 (Avg.) |
The comparative result showed that average count of yarn during these years was 20,23,21.05 and 23.57 with wastage declining from 16.36%, 15.78 % and 15.61 % . The number of working spindles had increased during 1990-91 and 1991-92 but decrease during 1992-93. The average sale price has shown constant increase. However ITO rejected the accounts because in his opinion the claim of wastage was high, sales were on cash and not verifiable, production records, particularly Spinning Master record was not produced and qualitative reconciliation of cotton and yarn was not possible. ITO therefore restricted the wastage to 15 % and added back the balance production at the average sale rate disclosed by the respondent-company. The additions were worked out are as under:
1990-911991-921992-93
| Production of cotton yarn in which isrestricted to 15 % | 125,70,769 Lbs . | 118,36,148 Lbs | 106,12,013 Lbs |
| Actual Production declared | 123,69,417 Lbs | 117,27,118 Lbs. | 105,36,000Lbs |
| Balance Difference | 2,01,352,Lbs | 1,09,030 | 76,013 Lbs. |
| Valued at the rate of | 16.70 per Lbs. | 20.54 per Lbs. | 25.98 per Lbs. |
The respondent-company was aggrieved by this assessment order and hence it challenged the rejection of accounts and resultant addition before the first appellate authority. The learned CIT(A), after having considered the established history of the assessee which was acceptance of trading version, deleted the additions and directed to accept the book version. He also did not find any justification for rejection of export account and hence deleted the addition. It is against these directions that the Department has come up in appeal before us. Mr. Vishno Raja Qavi, the learned D.R. initiating the arguments in respect of the above departmental appeal, submitted that most crucial report in the case of spinning mills was the Spinning Master's report which assessee, despite specific requisition, had failed to submit, coupled with that sales of yarn was also not verifiable and wastage was excessive. These factors promoted the Assessing Officer to reject the accounts. The rejection he submitted, on facts and circumstances of the case, was justified because production result of spinning mills could not be accepted unless these were supported by Spinning Master's report and daily production of wastage account. He further submitted that assessee's accounts were rejected in the past also on the similar ground.
3. Mr. Javed Zakaria, respondent's authorised representative/counsel, on the other hand submitted that the Department had accepted much higher wastage claim in the preceding year such as assessment, years 1977-78 to 1982-83 when wastage claim as high as between 16.97% to 22.18% was accepted. From assessment year 1983-84 onward the department had restricted wastage to 15 % but additions made on this account were deleted by CIT(A) and on 2nd appeal by the Department before the Tribunal, the appeals were dismissed and assessee declared wastage was accepted he cited this Tribunal's order bearing I.T.A.. No.1127/HQ of 1989-90, I.T.A. No.3895/KB of 1986-87, dated 1-6-1995 and I.T.A. No. 494/HQ of 1989-90, dated 4-9-1997 I.T.A. No.137/HQ of 1991-92, dated 12-6-1994. In all these years, from assessment years 1983-84 to 1985-86 and 1988-89, 1989-90 this Tribunal had accepted the declared wastage. It was further pertinent to mention that during assessment year 1986-87, 1987-88 the Department had not gone in 2nd appeal against CIT(A)'s order to delete the addition on account of wastage, further during subsequent year as such 1996-97, 1997-98, 1998-99 and 1999-2000, the Department has accepted wastage as high as 18% to 21%. With regard to production record Mr. Javed Zakaria denied the D.R's assertion that such record was not produced. He referred us to the first pare of the assessment order wherein it is mentioned that, "books of account in the from of cash book, ledger, journal, stock register and production record alongwith voucher was also produced for examination. " Further giving us the history of trading results, Mr. Zakaria, submitted that never in the past sales were estimated of G.P. applied, in fact from assessment year.1985-86 onward to 1989-90, the declared sales and G.P, were accepted and G.P. during this period varied between 3.58% to 7.55 % , Even G. P. of 5.11 % during 1990-91 was accepted. It was `for the first tithe during assessment year 1990-91 the declared G. P. 9.47% on export sales of Rs.10,90,69,667 was rejected and G. P. of 11 % applied for alleged non verifiability of purchases. Following assessment year 1991-92, ITO had further rejected the trading result of 1991-92 when G.P. 8.59% was declared on sales of Rs.421,00,481. The rejection, he argued, was based on stock phrases as neither was the assessee ever confronted about non-verifiability of purchases nor any single instance was cited in the assessment order. Under the circumstances deletion of addition by CIT(A) was fully justified. Mr. Jav'ed Zakaria referred to the ratio of decision in the case cited as 1997 PTDwherein it is held by the Honourable High Court of Sindh that rejection of accounts cannot be made by an arbitrary exercise of discretionary power but must be exercised in a judicious manner so as to confront the assessee about defects in the books of account. He further relied on cases cited on 1990 PTD 254 SC Karachi and 1989 PTD 567. He submitted that in both these citations the Honourable High Court had held that accounts would not be rejected for non-production of step-wise wastage account. Advocating the case of his client Mr. Javed Zakaria concluded his arguments by saying that rejection of accounts was not sustainable both on facts and law and as per history of the case.
4. We have considered the arguments of the rival representatives and also perused the record. We find from the perusal of the assessment order that amounts were rejected by using stock phrases such as sales were not verifiable, production record was not produced and wastage is excessive, whereas, even the facts are contrary to this observation. In the every first para of the assessment order ITO has observed that production record was produced and examined. As for the Spinning Matter's report which Mr. Vishno Raja Qavi, emphasised to be a crucial document in the case of spinning mills, do not have any doubt about the importance and relevance of this record, but at the same time non-production of this record alone can not invest the Assessing Officer to reject the accounts, contrary to establish history of the case. It is an admitted fact that assessee's accounts, without produces of Spinning Master's reports, were accepted from 1977-78 to 1982-81 in spite of a much higher claim of the wastage. It has also subsequently been accepted by the Department during assessment year 1993-9t to 1999-2000, based on APTMAS' record which has certified wastage of the extent of 18-20%. So the department cannot make the absence of Spinning Master's report to be the basis of rejection of accounts under these admitted facts and circumstances. He has further referred to the cases cited above. In the case reported as 1989 PTD 567, it has been held by the Honourable Karachi High Court that non-maintenance of stage-wise production and stage-wise wastage could not be made a basis for deviation from the past, if accounts were maintained properly and in similar manner Similarly in the case cited as 1990 PTD 254 it has been held that if wastage account was not mentioned in the past, and it was not possible to maintain such as extensive record, accounts could not be rejected for non-maintenance of such record unless defects were found in other books of accounts maintained by the assessee. In yet another case which was cited by the learned D.R. 1992 PTD 341 the ratio decided in the Indus Textile Mills v. CIT 1989 PTD 567 was endorsed. It is evident that department has been accepting the method of accounts employed by the assessee in the past. The other arguments taken by the learned D.R. that sales were not verifiable also does not hold good because in the first place ITO himself accepted the declared average sales rate in all the three assessment while making addition on account of excessive wastage, and secondly in a cash sale the seller could not insist on name or the addresses of the buyers as has been held in the case cited above ITO's observations about non-verifiability of purchases in export account, during assessment years 1991-92 and 1992-93 it is also a mere formality as no specific instance was neither confronted to the tax-payer or cited in the assessment order, nor any discrepancy in the purchase rate has been pointed. Therefore we are convinced that ITO did not have any material basis to reject either the manufacturing account or the export accounts.
Mr. Vishno Raja Qavi, also taking arguments, during the course of proceedings, submitted that the respondent Co. had made substantially addition in machinery, such addition being 6 million during 1990-91, 14 millions during 1991-92 and 17 millions 1992-93 and hence the wastage should have been minimized. We are however, unable to accept this argument because it has not been discussed in the assessment order or the impugned order and this cannot be made the basis for justification of rejection of accounts.
6. In view of above discussion we maintain the impugned orders and dismiss the departmental appeals.
C. M. A. /M. A. K./112/Tax (Trib.) Appeals dismissed.