I.T.As. Nos. 3332/LB and 3333/LB of 2001, decided on 3rd April, 2002 VS I.T.As. Nos. 3332/LB and 3333/LB of 2001, decided on 3rd April, 2002, 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2230 (2002)

(a) Income Tax Ordinance (XXXI of 1979)-------66-A(1A)---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Issue not the subject-matter of appeal or reference---Revising Authority according to S.66-A(lA) of the Income Tax Ordinance, 1979 is vested with the powers, though limited and qualified, to invoke S.66-A to the point or issue which has not been subject-matter of appeal or reference---Revising, Authority can give only such direction as will be independent of, and not inconsistent with or not in derogation of, any determination made by theAppellate Authorities.

1996 PTD (Trib.) 492 distinguished.

(b) Income Tax Ordinance (XXXI of 1979)-------S. 66-A---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Doctrine of merger---Issues raised by the Inspecting Additional Commissioner were not the subject-matter of appeal before the First Appellate Authority---Doctrine of merger did not apply to the facts of the case.

(c) Income Tax Ordinance (XXXI of 1979--------Ss. 66-A & 156---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Depreciation not correctly allowed---Rectification---Depreciation was a statutory allowance and no expenses were actually incurred---Where depreciation had not been correctly allowed that could be rectified by passing, an order to this effect in terms of 5.156 of the Income Tax Ordinance, 1979 and not by invoking the provisions of S.66-A of the Income Tax Ordinance, 1979.

(d) Income Tax Ordinance (XXXI of 1979)-------S. 66-A---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Allowing sales tax as an expense of Profit and Loss Account---Cancellation of assessment ---Validity-- Assessment cancelled by the Inspecting Additional Commissioner on the ground that sales tax claimed had illegally been allowed as an expense of Profit and Loss Account whereas that was an item of trading account and was to be deducted from the gross sales after recasting the accounts, was upheld by the Tribunal to be justified.

(e) Income-tax------Gross profit rate---Recasting of trading account---Parallel cases Inspecting Additional Commissioner applied higher Gross Profit rate than prevailing in other parallel cases---Appellate Tribunal directed to recast the trading account and thereafter apply Gross Profit rate as was available in the parallel cases to the resultant sales.

2002 PTD 275 and I.T.As. Nos.9371 and 9594/LB of 1992-93 ref.

Shahid Abbas and Muhammad Hamid for Appellant.

Javed-ur-Rehman, D.R. for Respondent.

Date of hearing: 2nd April, 2001.

ORDER

RASHEED AHMAD SHEIKH (JUDICIAL MEMBER).-- 1. Vide these appeals the assessee a private. limited company assails the order of I.A.C. Range II, Companies Zone t, Lahore, dated 22-7-2001 whereby he has cancelled already completed assessments in respect of assessment years 1996-97 and 1997-98 by invoking the provisions of section 66A of the income Tax Ordinance, 1979.

2. Facts in brief leading for disposal of these appeals are that the original assessments in this case were finalized under section !,7 of the Income Tax Ordinance, 1979 at net loss of Rs.40,455 and Rs.1,72,517 respectively for the years under consideration. Subsequently, on examination of the record it was noted by the I.A.C. (hereinafter called revising authority) that the sales tax claimed at Rs.232,23,641 and Rs.22.61,104 respectively for the two years under appeal had illegally been allowed as an expense of P&L Account whereas that was an item of trading account and was to be deducted from the gross sales after recasting the accounts. Also noticed by the Revising Authority that, for the purpose of charging depreciation, value of Toyota Corolla Car No. LOZ 1972 had erroneously been adopted by the Assessing Officer at Rs.7,37,391 whereas that should have been taken at 8.6,00,000 and this negligence on the part of the Assessing Authority had resulted into excessive allowance of depreciation thereon. Thus, a show-cause notice was issued as to why the assessments earlier made should not be cancelled by invoking the provisions of section 66-A of the Ordinance which was responded in the following words:--

Section 32 of the Income Tax Ordinance, 1979 gives option to the assessee to employ any method of accounting and the Assessing Officer has no authority to reject it unless the employed method creates impediments in determination of true profits of the business. Also contended that the method of crediting sales tax into sales and then charging the same to the PL Account has been the assessee consistent practice in the past and the department never objected to. It has been stated that sales tax when received .credited to the sales account and when paid subsequently, to Government is debited to as an expense in the profit and loss account. The company is following this policy consistently and it is in accordance with double entry system and practice of accountancy;

It has also been pleaded that in case trading account is recast, then amount of gross profit has to be reduced by the amount of sales tax as the same amount already stands credited straight in the gross profit;

Application of G.P. rate as per history has also been objected on the ground that the department is bound to make comparison with the previous years on the same line inasmuch as complete details of trading expenses have been provided.

Lastly it was explained that rule 8(8) does not apply on the car being not a passenger transport.

3. However, the contentions, put forth by the assessee did not find favour with the revising authority who accordingly held that the sales tax collected on behalf of Government is not an expense incurred by the assessee entitling him to claim the said amount in the profit and loss account. This expense being inadmissible should have not been allowed in the P&L account. Regarding application of G.P. rate it has been observed that since method of accounting adopted by the assessee was discarded in the preceding assessment year and as a consequence thereof gross profit rate of 25 % .was applied to the sales and no appeal was filed by the assessee against such treatment. So once the accounts are recast, then history of the case shall be followed. On the point of depreciation of car it was concluded that the same was allowed in violation to Third Schedule to the Income Tax Ordinance, 1979. It was, therefore, held that not only the already completed assessments had erroneously been formulated that those were also prejudicial to the interest of revenue. Consequently, the assessments framed under section 62 of the Income Tax Ordinance were modified by invoking the provisions of section 66A of the Income Tax Ordinance, 1979 and net income was, resultantly, worked out by the I. A. C. at Rs.17,24,258 and Rs.15,54,539 respectively for the two assessment years under consideration by deducting Sales Tax from the gross sales and by applying gross profit rate of 25 % to the resultant sales.

4. On legal plain the learned A.R. of the assessee contended that since the order originally made by the Assessing Officer under section 62 of the Income tax Ordinance, 1997 had been merged in the order rendered by the CIT (A) on the assessee's appeals filed against those orders, the revising authority has fallen in grave error in invoking the provisions of section 66A of the Income Tax Ordinance, 1979 in the case of such assessment orders. He tried to throw light on the words used in section 66-A as subject-matter of appeal with the help of case-law cited as (1976) 73 Tax (Trib.) 149 and 1996 PTD (Trib.) 492 to support the contention that principle of merger applies on all fours to the facts of the instant case. Also contended that provisions of section 66-A cannot be invoked where part of the assessment order has been set aside by the first appellate authority because, consequent upon such order there remains no order in the field whereas existence of an order is a precondition for invocation of provisions, of this section. Further argued that since final order or determination of income has not yet been made owing to, setting aside the assessment order partially; the proceedings under section 66-A have illegally been invoked and cancellation. of already completed assessment is nullity in the eye of law.

5. The learned D.R. on the other contended that for the reasons recorded in the impugnedorder, invocation of section 66-A was warranted in the present case because the already completed assessments were erroneously made insofar as those were also prejudicial to the interest of the revenue. Thus the I.A.C. has rightly cancelled them by invoking the provisions of section 66-A of the Income Ta Ordinance, 1979.

6. These contentions of the learned counsel for the assessee are not sustainable. According to section 66-A(lA) of the Income Tax Ordinance, 1979 the revising authority is vested with the powers, though limited and qualified, to invoke section 66-A to the point or issue which has not been subject-matter of appeal or reference. In other words the revising authority can give only such direction as will be an independent of, and not inconsistent with or not in derogation of, any determination made by the Appellate Authorities. Coming to the facts of the present case, admittedly the issues raised by the revising authority in its order were not the subject-matter of appeal before the first appellate authority. Thus the case-law referred to by the learned counsel for the assessee to support the contention does not come at the assessee's rescue and those are being ignored at this juncture. It is, therefore, held that since the issues raised by the I.A.C. were not the subject-matter of appeal before B the first appellate authority, the doctrine of merger does not apply to the facts of the present case. Similarly the other contentions put forth by the learned A.R. of the assessee, as mentioned (ibid), automatically lay to rest owing to availability of section 66-A(lA) on the Statute Book. Hence those are rejected.

7. We are thus convinced that the factors discussed above except the depreciation allowance, give rise to an occasion for invoking the provisions of section 66-A being the conditions precedent for initiating proceedings in this section were certainly having existence in the present case. As regards depreciation, this is a statutory allowance and no expenses are actually incurred in this regard. Had the depreciation not been correctly allowed, that could be rectified subsequently by passing C an order to this effect in terms of section 156 of the Income Tax Ordinance, 1979 and not by invoking the provisions of section 66-A. We, therefore, hold that the revising authority had rightly assumed jurisdiction under section 66-A of the Income Tax Ordinance to cancel the already completed assessment. Accordingly, the revising authority's order upheld by us to the extent of cancellation of the assessments earlier D made under section 62 of the Income Tax Ordinance, 1979 to be justified. However, findings of the revising authority regarding application of gross profit rate of 25 % need modification which are being discussed hereunder.

8. Alternate plea of the learned A.R. for the assessee was that that if as a consequence of charging sales tax in wrong segment of accounts i.e. in the P&L Account instead of trading account then the trading account shall have to be recast and the gross profit rate so arrived at shall have to be either adopted or the prevailing G.P. rate available in this line of business, applied ignoring history of the case because Sales Tax has been credited in the sales account. Reliance in this regard has been placed on a reported decision of the Lahore High Court in re: 2002 PTD 275 and also on one unreported decision of the Tribunal bearing I.T.As. Nos.9371 and 9594/LB of 1992-93, dated 23-9-1995. Too substantiate that lower gross profit rate is available in this line of business, the learned A.R, pointed out that only three parties are manufacturing welding electrodes in Pakistan including the present assessee and in both those cases much lesser G.P. rate is being applied viz. the assessee's case. Copies of those assessment -orders in re: Razik Engineering Industries (Pvt.) Ltd., Karachi bearing NTN 13-01-3306713 and Pakistan Welding Electrodes (Pvt . ) Limited, Karachi have been furnished whereby gross profit rate of 15 % and 16.25 % respectively has been applied or accepted by the department. Also added that since the sales have been declared inclusive of sales tax, therefore, it would be a case of double taxation i.e. once by adopting gross sales and secondly by applying higher G. P. rate than available in other parallel cases.

9. Actually sales tax is a Federal Government levy. The assessee company collects it on behalf of the Government and is subsequently deposited into Government's treasury as per the prescribed rules. Sales Tax collected on behalf of Government is not an expense incurred by the assessee entitling him to claim the said amount in the P&L account. Thus collecting sales tax by the assessee on behalf of the Government and crediting the same into sales and then charging to the P&L account is violative of provisions of section 23 of the Income Tax Ordinance, 1979. It is so because ultimate outcome of crediting and debiting sales tax in the trading and the P&L account respectively is that the assessee company has successfully deprived the department from deducting profits and gains correctly from the method of accounting employed by the company which is certainly in conflict with the provisions of section 32 of the Income Tax Ordinance, 1979. Though the method of crediting Sales Tax into sales and the charging such amount to the P&L account as business expense was the assessee's consistent practice in the past and allegedly the Department had never objected to such practice but be that as it may two wrongs do not make one right.

10. We have given anxious thought to the averments advanced by the rival parties are of the considered view that the method employed by the assessee for recording sales tax amounts in the books of account was absolutely improper. Either the assessee should have shown sales tax amount in each side of the trading account or net sales should have been recorded on the credit side of the trading account. Upon having perused the case-law relied upon by the learned A.R. of the assessee we find that in an identical situation the Honourable Lahore High Court, Lahore has observed that history of the case while applying higher gross profit rate uses its significance once the trading account is recasted. While doing ~, the learned Judges of the august High Court has observed as under:--

"6.After hearing the learned counsel for the parties at quite some length, we are persuaded to agree with the learned counsel for the appellant/assessee that in the given situation, the application of a rate at 20% following the alleged history of the case after recasting of the account appears unjustified. Although we are in full agreement with the Assessing Officer that earlier the assessee has been having the best of both by deducting the alleged discount from gross sales and at the same time claiming the commission/discount as an expense in profit and loss account yet we find that the treatment meted out to it after recasting of trading account is unfair. Even if the claim of the assessee is accepted that earlier it was disclosing G.P. rate on gross receipts still we are of the considered view that the commission/discount having never been paid in cash could nqt be claimed and allowed an expense. The findings of the learned first appellate authority in the first round are quite pertinent and relevant. However, in second round the Tribunal wrongly refused to interfere in the application of G.P. rate on the ground that the petitioner had failed to assail the first appellate order in the first round. The remand order as reproduced above was clearly open ended and it was for the first time after remand that the trading account was recast.. Therefore, the assessee could take up the issue as a ground of appeal before the Tribunal.

7. As noted earlier, we are of the view that after recasting of the account the application of rate as per the history of the case was not justified. Learned counsel for the petitioner appears justified is stating that application, of that rate at 20% after recasting has the effect of knocking the petitioner out of the market. According to him the application of that rate has made the petitioner totally non-competitive. He claims that the applied rate is unrealistic as it is not at all achievable in the kind of the business and the commodity in which the assessee is dealing. That aspect of the matter if the assessee achieved a particular G.P. rate during the particular period necessarily entails factual enquiry. Before us a case was attempted to be made out that during the period involved before us the assessee undertook a particular kind of activity on which only a low rate could be achieved. That aspect of the matter again cannot be effectively ruled upon by us while considering an appeal under section 136 (since repealed) of the Income tax Ordinance, 1979.

Similarly in the unreported decision of the Tribunal, the Assessing officer was accordingly directed to recast the trading account by including commission as a part of the trading expense which would result in reducing the gross profit rate to 4.9% against originally declared by the assessee at 6.25 % and applied by the Assessing Officer at 6.50%, Consequently application of gross Profit to of 5.5 % as ordered to be adopted in that case.

11. In view of foregoing discussion we hold that in the given circumstances application of gross profit rate as per history of the case is certainly in conflict with the ratio decidendi in the reported as well as unreported judgments of the appellate Authorities. Reiterating the facts of the case, we find that as a consequence of recasting the trading account, gross profit rate is evolved at 6.69 % whereas much higher gross profit rate has been applied in the comparable cases. According to the learned counsel for the assessee application of gross profit rate 25 will push the appellant out of market on account of totally non competitive rate. He also claimed that the gross profit rate applied by the revising authority is unrealistic as it is not at all achievable in the kind of business and the commodity which is being manufactured by the assessee. This aspect of the matter can be ruled upon by us while considering appeals of the assessee. Following the principle laid down in the cited judgments, we are of the considered view that the revising authority has definitely applied higher G.P. rate than prevailing in other parallel cases. Therefore, the IAC is directed to recast the trading account of the assessee for the two assessment years under appeals and he shall thereafter apply gross profit rate as is available in the parallel cases to the resultant sales. This would result into disapproval of application of G.P. rate as per history of the case in the present case. Rest of the order of the Revising Authority shall hold the field.

12. The assessee's appeals are accordingly disposed of to the extent and in the manner indicated above.

C. M. A. /M. A.K./331/Tax(Trib.)Order accordingly.