I.T.As. Nos.4226/LB to 4229/ LB of 2000, 5177/LB and 5178/LB of 2001, decided on 1st October, 2002 VS I.T.As. Nos.4226/LB to 4229/ LB of 2000, 5177/LB and 5178/LB of 2001, decided on 1st October, 2002
2003 P T D (Trib.) 1506
[Income-tax Appellate Tribunal Pakistan]
Before Zafar Ali Thaheem, Judicial Member and Javed Tahir Butt, Accountant Member
I.T.As. Nos.4226/LB to 4229/ LB of 2000, 5177/LB and 5178/LB of 2001, decided on /01/.
st
October, 2002. (a) Income-tax-----
----Proceedings----Legal issue---Issue being purely legal in nature can be raised at any stage of proceedings.
1999 SCMR 1072 rel.
(b) Income Tax Ordinance (XXXI of 1979)-----
----S. 62, proviso---Confrontation of defects in the books of accounts was not necessary for the assessment year commencing prior to 1-7-1993.
1996 PTD 263 rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 62, proviso & 132---Assessment or production of books of accounts, etc.---Addition was made without confronting the defects in the books of accounts---Validity---Additions made to the declared results were not maintainable as the mandatory provision of law for issuance of notice under S.62 of the Income Tax Ordinance, 1979 was not fulfilled and the same was deleted by the Appellate Tribunal.
(1999) 79 Tax 263; (1984) 50 Tax 44; (2002) 85 Tax 21; (1999) PCTLR 1098; I.T.A. No.927/LB of 1998; I.T.A. No.6300/LB of 1995; (1967)16 Tax 34 (H.C. Kar.) and PTD (Trib.) 424 rel.
(d) Income-tax-----
----Rejection of accounts---History---Assessing Officer was justified is discarding the declared trading results and estimating and applying G.P. rate of 25 % on the basis of facts as well as assessee's history of rejection of accounts ---G.P. rate applied as per history, was upheld by the Appellate Tribunal---A bit excessive estimated sales was reduced in view of the history.
I.T.A. No.7109/LB of 1996 and I.T.A. No.7956/LB of 1996 rel.
(e) Income Tax Ordinance (XXXI of 1979)-----
----S. 23---Deductions---Financial charges---Disallowance. under the head of financial charges would need proper verification in view of assessee's plea that the matter was in dispute with the Banking Authorities---Issue was set aside for de novo decision after providing an opportunity of being heard to the assessee and ascertaining the facts' of the case.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 25(c)---Amounts subsequently recovered in respect of deductions, etc.---Addition made under S.25(c) of the Income Tax Ordinance, 1979 having not been pressed before the First Appellate Authority, the same was not adjudicated upon by the Appellate Tribunal as same did not arise from the order of the First Appellate Authority.
Siraj-ud-Din Khalid for Appellant.
D.R. Younas Khalid, I.T.P.
Ahmed Kamal for Respondent.
Date of hearing: 19th September, 2002.
ORDER
JAVED TAHIR BUTT (ACCOUNTANT-MEMBER).---These six appeals have been filed by the assessee for the assessment year 1992-93, 1994-95 to 1998-99 challenging the rejection of the trading results, estimate of sales., add-backs out of P & L account expenses as well as addition under section 25(c) in the assessment year 1998-99.
2. In all these years under appeal the assessee has taken up additional ground. of appeal as under:--
"That since mandatory notice as required under proviso to subsection (1) of section 62 was not issued, the rejection of trading account; estimation of sales, application of G.P. rate and add backs from P & L account are illegal, unwarranted by law and unjustified."
Assessee's AR has contended that this additional ground of appeal is purely legal and goes to the very root of case and can be raised at any stage. In support of his contention the AR of the assessee has cited judgment reported as 1999 SCMR 1072 wherein it was held that:----
"It is true that the question of allowing benefit to the appellant under S.R.O. 1284(i)90, dated 13-12-1990 was not raised before the High Court nevertheless this Court allowed the appellant to raise this point of law at the time of leave which was accordingly granted to consider the same as it related to the 'very fundamental of the issues involved therein. Clearly this was within the competence of this Court. It is well-settled that even where leave is not granted on a point, this Court is competent to allow the same to be canvassed in appeal if it is necessary for doing complete justice, in any case or matter, pending before it, as contemplated by clause (i) of Article 187 of the Constitution. It is also well-settled that a pure question of law could be raised at any stage of the appeal depending upon the facts and circumstances of each case."
We are in argument with the AR of the assessee that/issue being purely legal in nature can be raised at any stage of proceedings. Additional ground of appeal is, therefore, entertained in all the years under appeal.' However, this issue was not pressed in the assessment years 1997-98 and 1998-99. The AR of the assessee argued that the notice under section 62 was not issued in the assessment year 1992-93, 1994-95 to 1996-97 which is a mandatory requirement under the proviso to section 62 which was inserted vide Finance Act, 1993 and reads as under:--
"Provided that where the assessee produces books of account as evidence in support of the return, the Deputy Commissioner shall, before disagreeing with such accounts, give a notice to the assessee of the defects in the accounts and provide an opportunity- to the assessee to explain his point of view about such defects and record such explanation and the basis of computation of total income of the assessee in the assessment order."
The AR of the assessee further argued that where an assessee produces books of accounts, for rejection of accounts notice under section 62 is a mandatory requirement. The AR of the assessee has cited number of reported cases: --
(i)???????? (1999) 79 Tax 263; (ii) (1998) 50 Tax 44; (iii) (2002) 85 Tax 21; (iv) 1999 PCTLR 1098 (add back); (v) ITA No.927/LB/98 dated 20-6-1998 and (vi) ITA No.6300/LB/95 dated 2-3-1999.
Wherein it has been held that the issuance of a notice under section 62 confronting the assessee with the defects in the books of accounts was a mandatory provision which the Assessing Officer is required to follow and failure to do so the Assessing Officer has no legal authority to make any addition in the declared trading results. This mandatory requirement was brought into statute book through Finance Act, 1993 by insertion of proviso to section 62. As per AR of the assessee this proviso also applies to the assessment year 1992-93. The D.R. on the contrary asserted that the proviso to section 62 was introduced vide Finance Act, 1993 and is effective from 1-7-1993 and as such is not applicable for the assessment year 1992-93. The Lahore High Court in its decision reported as 1995 PTD 263 held that:---
"It is manifest from bare reading of substituted section 62 and the original section that there was no provision to issue notice under section 62 to the assessee before disagreeing with his accounts and to provide an opportunity to the assessee to explain his point of view prior to finalizing the assessment. The provisions of section 61 to section 62 of the Ordinance to the . effect that whether the assessee produces books of accounts as evidence in support of his version; the Assessing Officer shall, before discarding such accounts give a notice to the assessee of the defects. noted in the accounts book to provide an opportunity to the assessee to explain his point of view and record such explanation in the assessment order, was added by Finance Act, 1993, With the introduction of this provision following such a practice has become mandatory with effect from the amendment i.e. July, 1993 and such mandatory notice was neither necessary nor required during the assessment year under consideration, therefore, the Tribunal was justified that notice under section 62 was not necessary"
In view of the judgment of the Honourable Lahore High Court, confronting the assessee on the defects in the books of accounts was not necessary for the assessment year commencing prior to 1-7-1993. As such this additional ground of appeal is not entertained in the assessment year 1992-93.
3. For the assessment year 1994-95 to 1996-97, the proviso to section 62 requires that where the assessee produces books of accounts, the Assessing Officer shall before disagreeing with such accounts give notice to the assessee of the defects in the accounts and provided an opportunity to explain his point of view about such defects. Also that Assessing Officer shall record explanation of the assessee and the basis of computation of total income by the assessee in assessment order. According to the learned counsel the procedure contemplated in this proviso is mandatory before making any addition in account cases. The AR of the assessee has also produced a copy of C.B.R. Circular No. 11, of 1993 explaining the various amendments made through finance Act, 1993 and explanation with reference to section 62 which is reproduced as under:----
"A proviso has been added to subsection (1) of section 62 to the effect that. where the assessee produces books of account as evidence in support of the return, the Assessing Officer shall, before discarding such accounts, give a notice to the assessee of the defects noted in the accounts to provide an opportunity to the assessee to explain his point of view and record such explanation and the basis of computation of total income of the assessee in the assessment order. This is in line with judicial decisions on the subject. With the introduction of this provision following such a procedure has become mandatory."
In thin case in the original assessments which were set aside in appeal, the assessee was issued notice under section 62 but in re-assessment under section 62/ 132 the assessee was not confronted of the defects in the books of accounts as required under proviso to section 62 of the Income Tax Ordinance, 1979. The AR of the assessee stressed that in re? assessment proceedings as well the issuance of mandatory notice under section 62 was required before rejecting the declared version as original assessment which were set aside had no validity or force of law and the proceedings on which they were based became non-existent and issuance of notice under section 62 in the original assessment are of no consequences as held in reported cases (1967) 16 Tax 34 (H.C. Kar), PTD (Trib) 424 and re-issuance of notice under section 62 was necessary rather mandatory. The DR could not controvert the argument put forth by the AR of the assessee.
4. We have heard both sides and also perused the relevant record available on file. We are of the considered view that the mandatory provision of law for issuance of notice 62 was not fulfilled. Therefore, the additions made to the declared results are not maintainable. We are inclined to accept the assessee plea and delete the additions made to the declared version in the assessment year 1994-95 to 1996-97.
5. In the assessment order -for the years 1992-93 made under section 62/132 the Assessing Officer observed that the sales of the assessee are partly unverifiable and on .the basis of the decision of I.T.A.T relating to assessment year 1991-92 estimated the sales at Rs.6,000,000 against declared sales of Rs.4,048,601 which were reduced in appeal by the CIT(Appeals) to Rs.5,500,000. It is pertinent to note here that the I.T.A.T. vide ITA No.7109/LB of 1996 (assessment year 1991-92) and vide ITA No.7956/LB of 1996 (assessment year 1993-94) has maintained the rejection of accounts. Thus it is established that the assessee has a history .of rejection of accounts on the basis of which as' well as on the facts of the case the Assessing Officer was justified in discarding the declared trading results and estimating the sales and applying G.P. rate of 25%. The G.P. rate applied is as per history of the case and is upheld. However, the sale estimate at Rs.5,500,000 by the CIT (Appeals) is considered a bit excessive and in view of the history of the case the same is reduced to Rs.5,250,000.
6. The assessee has also objected the addition made under the head of salary, financial charges, packing expenses and miscellaneous expenses in the assessment year 1992-93. The disallowances under the head packing expenses and miscellaneous expenses have not been pressed. As regards the disallowance of salary, the Assessing Officer in the absence of salary register and other details disallowed an amount of Rs.90,000 out of total claim of Rs.214,057 which was confirmed by the CIT (Appeals). The AR has pleaded that the details of salary were filed and the disallowance has been confirmed summarily by CIT(Appeals). In the assessment year 1991-92 disallowance under this head was set aside by the CIT (Appeals). The disallowances for the assessment year 1992-?93 is also set aside for de novo consideration with the direction that a proper opportunity should be provided to the assessee to present his case. A disallowance of Rs.200,000 out of financial charges' claimed at Rs.628,507 was confirmed by the CIT (Appeals). The financial charges have been allowed by the Assessing Officer in the absence of details/supporting evidence. The AR of the assessee pleaded that a dispute was going on between the assessee and the bank and has not been settled as yet. The issue is also set aside and remitted to the Assessing Officer to look into matter and decide the issue after providing an opportunity of being heard to the assessee.
Assessment years 1997-98 and 1998-99.
7. These two assessments were completed under section 62 of the Income Tax Ordinance, 1979. The Assessing Officer confronted the assessee on the defects in the books of accounts through a notice under section 62 issued for each year. The assessee submitted reply in response to notice under section 62 which was considered but found unsatisfactory for the reasons as discussed in the assessment year for each year. The declared version of the assessee was discarded and income of the assessee was worked out by estimating sales at Rs.10,892,317 against declared sales at Rs.7,411,943 in the assessment year 1997-98. Sales were estimated at Rs.12,000,000 in the assessment year 1998-99 against declared sales of Rs.6,494,140, G.P. rate of 25% was applied 'in both the years under appeal. Disallowances were also made under various heads of P & L account and income of the assessee was worked out at Rs.541,957 against declared loss of Rs.1,452,848 in the assessment year 1997-98 and at Rs 1,626,323 against declared loss of Rs.518,251 in the assessment year 1998-99. In the assessment year 1998-99 the Assessing Officer observed that. an amount of Rs.308,778 was allowed on account of financial charges in the assessment year 1994-95 which remained unpaid till 30-6-1998. Therefore, the amount of Rs.308.778 was aided tc the total income under section 25(c) of the Income Tax Ordinance, 1979 which has also been challenged by. the assessee. In appeal the CIT(Appeals) confirmed the rejection of accounts and reduced the estimated sales to Rs.10,000,000 in the assessment year 1997-98 and Rs.10,500.000 in the assessment year 1998-99. Add backs out of P & L account expenses were also reduced. In both the years .under appeal, the AR of the assessee has not challenged the disallowances out of P & L account expenses except under-the head of salary and financial charges and additions unifier section 25(c) in the assessment year 1998-99.
8. After considering the arguments of both sides, it is observed that the assessee has a history of rejection- of account which stood upheld at appeal stage' in earlier years. The Assessing Officer pointed out specific defects in the accounts of the assessee which were not satisfactorily explained by the assessee resulting in the rejection of the accounts by the Assessing Officer which was also upheld by the CIT (Appeals). The order of CIT(Appeals) does not call for any interference. The rejection of accounts is upheld.
9. The estimated sales as. reduced by the CIT (Appeals) to Rs.10,000,000 in the assessment year 1997-98 is considered reasonable and are upheld. In the assessment year 1998-99 against declared sales the estimated sales as reduced by the CIT (Appeals) at Rs.10,500,000 are considered a, bit excessive and the sales are directed to .be adopted at Rs.10,000,000 grounds of applied G.P. rate of 25% was not pressed before the First Appellate Authority forum. Therefore, we need not adjudicate upon the same. Out of disallowance in P & L account, the assessee has only pressed the disallowance out of expenses under the head of salaries and financial charges for the year 1997-98 and 1998-99, The arguments of the assessee are same as put forth in the assessment year 1992-93. The issue under the head of disallowance out of salary is set aside for de novo consideration after providing an opportunity of being heard to the assessee. The disallowance under the head of financial charges needs proper verification in view of the assessee's plea that the matter is in-dispute with the banking authorities. This issue is also set aside for de novo decision after providing an opportunity of being heard to the assessee and ascertaining the facts of the case. As regards the addition made under section 25(c) at Rs.308,778 in the assessment year 1998-99. It was not pressed before the CIT (Appeals) and as such, the issue does not arise from' the CIT (Appeals) order and is not adjudicated upon.
10. All the assessee's appeals are disposed of as above.
C.M.A./672/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Order accordingly.