I.T.AS. NOS.970/LB, 971/LB, 943/LB AND 944/LB OF 2000 VS I.T.AS. NOS.970/LB, 971/LB, 943/LB AND 944/LB OF 2000
2001 P T D (Trib.) 994
[Income-tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and Muhammad Tauqir Afzal Malik, Judicial Member
I.T.As. Nos. 970/LB, 971/LB, 943/LB and 944/LB of 2000, decided on 18/11/2000.
(a) Income-tax---
----Trading account ---Assessee, manufacturer of ghee and cooking oil etc.-- Foreign exchange losses and leakage of material at customer's store-- Treatment---Principles---Charge of foreign exchange losses and leakage of goods at customer's store in trading account was against the basic principles of accounting.
(b) Income-tax---
----Sale---Considerable improvement in sale as declared in the previous years ---Assessee showed considerable improvement in the declared sales than the last two years---Assessing Officer estimated the sales---Validity-- Appellate Tribunal directed the Assessing Officer to accept the declared sale in circumstance.
(c) Income-tax---
----Trading account---Defective accounts----Different sale rate for different parties---Admissibility---Reduced sale rate for one party as compared to the other parties---Rejection of account was- upheld by the Tribunal.
(d) Income-tax---
----Loss---Closure of business on account of loss---Declaration of sale for six months only---Addition---Addition was made by making comparison with the previous years---Validity---Assessing Officer was directed by the Tribunal to accept the declared sale in circumstances.
(e) Income-tax---
----Gross profit rate ---Assessee, a manufacturer of ghee, cooking oil and soap---Declaration of loss by the assessee---Assessing Officer applied 4% gross profit rate against the 5.81% and 3.82% declared rate for the previous years---Contention of the assessee was that there was a decline of G.P. rate from 6.85% to 2.62% in the parallel cases and if a similar adjustment was made to the declared results, it would result in a deficit---Validity-- Contention of the assessee being illogical was repelled by the Tribunal by making no interference in the G.P. rate in circumstances.
(f) Income-tax---
--Scrap/packing material---Declaration of sale of scrap/packing material-- Addition by Assessing Officer---Validity---Appellate Tribunal declined interference with addition made by the Assessing Officer which was tinkering against the declared sale of scrap/packing material.
Muhammad Iqbal Hashmi for Appellant (in I.T.As. Nos. 970/LB and 971/LB of 2000).
Sajjad Ali, D.R. for Respondent (in I.T.As. Nos. 970/LB and 971/LB of 2000).
Sajjad Ali, D.R. for Appellant (in I.T.As. Nos. 943/LB and 944/LB of 2000).
Muhammad Iqbal Hashmi for Respondent (in I.T.As. Nos. 943/LB and 944/LB of 2000).
Date of hearing: 10th November, 2000.
ORDER
INAM ILLAHI SHEIKH (CHAIRMAN). ---These are four cross -appeals in the case of a public limited company deriving income from manufacture of ghee, cooking oil and soap. The appeals arise out of two orders of the learned Commissioner of Income/Wealth Tax (Appeals), Zone-I, Faisalabad, both dated 27-11-1999.
2. The learned counsel of the assessee has tiled two charts showing position and results therein of the ghee and oil accounts as well as soap account in the context of history and content there of are summarised below:---
| Sale of Ghee/Cooking Oil & G. Profit |
| Assessment Year | Declared | Estimated | CIT (Anneals) | I.T.A.T. |
| 1992-93 | 469,520,000 117,000 0.26 % | 472,500,000 29,531,250 6.25 % | Declared trading result accepted | Order of CIF (A) confirmed. |
| 1993-94 | 299,493,777 569,038 0.19% | 302,500,000 18,906,250 6.25% | Addition restricted to addition in sales i.e. Rs. 3,006,223 G.P. evolved 1.19% | -do- |
| 1994-95 | 354,979,585 20,624,314 5.81 % | 359,000,000 22,437,500 6.25 %6 % | Addition in sales confirmed, G.P. reduced to Addition reduced to Rs.915,680 | -do- |
| 1995-96 | 320,320,000 12,240,000 3.82 % | 337,500,000 16,375,000 5 % | Declared trading result Accepted. | -do- |
| 1996-97 | 541,253,000 (28,920,000) Loss | 553,400,000 22,136,000 4% | Addition upheld | Under Appeal |
| 1997-98 | 268,023,000 (19,998,000 Loss | 275,000,000 11,000,000 4% | Addition upheld | Under Appeal |
Sale of soap |
Assessment Year | Declared | Estimated | CIT (Anneals) | I.T.A.T. |
| 1992-93 | 3,190,000 | 3,250,000 | Declared trading results accepted | Order of IT(A) confirmed. |
| 1993-94 | 2,305,000 | 2,365,000 | Confirmed. | Confirmed. |
| 1994-95 | 9,517,000 | 9,600,000 | Confirmed. | Confirmed. |
| 1995-96 | 6,296,000 | 7,500,000 | Declared trading results accepted | Confirmed. |
| 1996-97 | 14,860,000 | 17,700,000 | 16,300,000 | Under Appeal |
| 1997-98 | 6,824,000 | 8,000,000 | 7,500,000 | Under Appeal |
The assessee is aggrieved against the rejection of declared trading results as well as the estimation of sales and G.P. rate in both the years whereas the department has challenged the relief allowed to the assessee indicated above and in the estimation of miscellaneous income.
3. The learned counsel of the assessee submitted that due to poor economic condition the assessee was suffering losses which compelled the assessee to close down business in December, 1996 and then subsequent leasing of the factory to another public company in June, 2000. The learned counsel further submitted that the gross loss in the assessment year 1996-97 was mainly caused by exchange losses and leakage of goods at Utility Store Corporation which is main customer of the assessee. It was submitted that the assessee had suffered a loss of more than Rs. 10 million on account of foreign exchange fluctuation in the palm oil purchase. A loss of over Rs. 7 million was said to have been suffered because of leakage of ghee/oil at the Utility Stores against which no recoveries were made. The learned counsel of the assessee also submitted that trading results of the company had been accepted in the past in similar circumstances. The learned D.R., however, strongly opposed the submissions of the learned counsel of the assessee with the arguments that the Assessing Officer had already considered these explanations of the assessee and allowed due benefit while making the estimate of sales as well as G.P. rate. The learned D.R. also argued that the losses on account of foreign exchange fluctuation as well as leakage could not be charged to manufacturing or trading account and thus, these could not be the cause of decline in the manufacturing/trading results.
4. The submissions of both the parties have been considered. The major reason given for huge decline in the trading results is that there were exchange losses on the import of palm oil and also the leakage of goods at utility stores. So far as the element of cash sales is concerned, the learned counsel of the assessee has also submitted that the Assessing Officer had not attacked the sale rate charged on such unverifiable sales. A perusal of the comparison of the trading results in the assessment year 1996-97 shows that the assessee has recorded a sharp increase in the sales of ghee/oil and at the same time there is a turnaround in gross margin of approximately Rs. 40 million towards deficit. The learned counsel says that there was a leakage and there was a foreign exchange loss.. These two items put together come to approximately Rs. 20.8 million as per assessee's own submission. A perusal of the accounts shows that the assessee has charged expenditure worth approximately Rs. 8 million on account of depreciation and wages which may be treated as fixed cost. This would add up to about 28.8 million whereas the assessee has shown a decline of approximately of Rs. 40 million in the gross margin to end up with the gross loss of Rs. 29 million in the assessment year 1996-97. In any case there is no evidence to substantiate the contention that A the assessee had charged foreign exchange losses and leakage to the manufacturing and trading account which is against the basic accounting principle. There is no mention of any such wrong treatment of accounting in the Auditor's report or in the notes of the account. Any such material item would have been shown in the accounts and may even have required a qualification from the auditors. In these circumstances, we are not inclined to accept this explanation. So far as the argument of the learned counsel of the assessee with regard to the sale rate as compared to the verifiable sale is concerned, the assessee has admittedly reduced the sale rate, to the utility corporation and the sale to the third party may not be at the same rate. In any case considering defective nature of the accounts already mentioned, this argument requires no further consideration. The rejection is upheld.
5. In the assessment year 1996-97 the assessee had shown sales of Rs. 541.253 as compared to the sales of Rs. 320.320 million in the assessment year 1995-96 and Rs. 350.00 million approximately in the assessment year 1994-95. This reflects a considerable improvement in the declared sales. The Assessing Officer has estimated the sales at Rs. 553.4 million in the assessment year 1996-97. We direct that declared sales in the assessment year 1996-97 be accepted. In the assessment year 1997-98 the sales have been shown at Rs. 268.023 million for a period of approximately six months and these have been estimated at Rs. 275 million by the Assessing Officer. The learned counsel of the assessee has submitted that the factory had been closed down after December, 1996 due to losses. Considering these circumstances we also direct the acceptance of declared sales in the assessment year 1997-98.
6. The Assessing Officer has applied a G.P. rate of 4% in both the years under consideration as against declared gross losses in both the years. In the assessment year 1995-96 the trading results were accepted when the assessee had shown the G. P. rate of 3.82%. In the assessment year 1994-95 the assessee had shown the G.P. rate of 5.81% which was finally fixed at 6% as shown in the chart. Before the Assessing Officer the assessee took the plea that in a parallel case there was a decline of G.P. rate from 6.85% to 2.62% in the assessment year 1996-97. According to the assessee, if a similar adjustment was made to the assessee's declared results in the assessment year 1995-96, that would result in a deficit. However, this explanation appears to be illogical and unacceptable. The learned counsel of the assessee has not pressed any other argument to invite any interference in the G.P. rate fixed by the departmental officials. Hence no interference is made in G. P. rate in both the years.
7. On the issue of soap sales estimate, no serious arguments were addressed by either party. However, considering the history of the case and the decision already given in the ghee and oil account, we direct that the declared sales of soap account in both the years be accepted. No interference is made on the issue of G.P. rate.
8. The department has also agitated the relief allowed to the assessee in miscellaneous income in both the years under consideration. The assessee had shown the sales of packing material/scrap at Rs. 7.8 million in the assessment year 1996-97 and Assessing Officer made an addition of Rs. 25,000 which can only be considered to be a tinkering. Similarly in the assessment year 1997-98, the Assessing Officer has made an addition of Rs. 20,000 against the declared sales of packing material/scrap at Rs. 5.25 million which is a tinkering. Hence no interference on this issue. As a result of the above discussions, the assessee's appeals in both the years are accepted to the extent that the declared sales are accepted whereas the departmental appeals are dismissed.
C.M.A./M.A.K./60/Trib. Order accordingly.