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

‑‑‑‑S. 62(1)‑‑‑Assessment on production of accounts, evidence etc.‑‑ Disallowance of expenses without confrontation‑‑‑Validity‑‑‑Factually the assessee was not confronted at all with the defects with regard to the disallowances out of the profit and loss account expenses‑‑‑If Assessing Officer did not conform with the mandatory provisions of S.62(1) of the Income Tax Ordinance, 1979 and failed to confront the assessee with regard to the defects in books of account, all the proceedings conducted subsequent thereto will be considered null and void and unsustainable in the eye of law‑‑‑Since the Assessing Officer did not comply with the provisions of S.62(1) of the Income Tax Ordinance, 1979 on the issue of pointing out defects in the books of accounts and confronting the same to the assessee, disallowance made out of profit and loss account were liable to be deleted.

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

‑‑‑‑S. 62(1)‑‑‑Assessment on production of accounts, evidence etc.‑‑ Disallowance of expenses without pointing out any defects in the books of accounts and on the basis of mere stock phrases i.e. `personal element', `too excessive', `unvouched and unverifiable' and `not supported by the vouchers' etc.‑‑‑Validity‑‑‑Assessing Officer used common jargon. i.e. "personal element" and unvouched, ignoring the fact that it was a case of public limited company, which being a juristic and legal person could not be equated with the case of an individual, because a juristic person could not be attributed the element of personal use‑‑ Stricter test was required to bring home that any employee/director of the company had in fact used or availed the same which was not directly or indirectly connected with the business of the company‑‑‑Since Assessing Officer failed to point out any defect in spite of production of books of accounts with all the relevant details, did not cite any instance of unverifiability except using common jargon and stock phrases, and omitted to confront the assessee with the disallowances, the First Appellate Authority was not justified to send back the case for de novo consideration on the issue‑‑‑Order passed by the First Appellate Authority was vacated and addition made in profit and loss accounts was directed to be deleted by the Appellate Tribunal.

2002 PTD 1496; 1991 PTD (Trib.) 643; 1998 PTD (Trib.) 860 and 1989 PTD (Trib.) 39 rel.

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

‑‑‑‑S. 62(1)‑‑‑Assessment on production of accounts, evidence etc.‑‑ Disallowance of expenses without confrontation and pointing out any defects in the books of account and on the basis of mere stock phrases i.e. `personal element', `too excessive', `unvouched and unverifiable' and `not supported by the vouchers' etc.‑‑‑Setting aside of assessment by the First Appellate Authority‑‑‑Validity‑‑‑All the books of accounts were though produced before Assessing Officer yet he could not point out any defects in the books ‑‑‑Assessee was also not confronted with regard to making addition in the profit & loss accounts‑‑‑In such situation, what compelled the First Appellate Authority to remit the case back to Assessing Officer, except that Department was given premium and an extra opportunity to make up the deficiencies in the assessment order, committed in the earlier round‑‑‑Such practice of remanding case without assigning any substantial reason was deprecated.

Solvex Pakistan Ltd. v. Commissioner of Income‑tax PTR No.2 of 2002 rel.

Asim Zulfiqar, A.C.A. and Shahzad Hussain, F.C.A. for Appellant.

Bashir Ahmad Shad, D. R. for Respondent.

Date of hearing: 3rd April, 2003.

ORDER

SEYD NADEEM SAQLAIN (JUDICIAL MEMBER),‑‑‑The titled two appeals pertaining to the assessment years 2000‑2001 and 2001‑2002 at the instance of the assessee/appellant have been directed against the combined impugned order, dated 16‑1‑2003 passed by the learned CIT(A) Zone‑1 Lahore. The assessee has assailed the impugned findings recorded by learned First Appellate Authority whereby the case was set aside on the issue of the add backs out of profit and loss account expenses.

2. The assessee is a public limited company engaged in the business of manufacturing, assembling and sale of Auto Mobile Motor Vehicles. The expenses claimed and disallowed for the assessment years 1999‑2000 and 2000‑2001 under various heads of profit and loss account expenses are summarized hereunder:

Assessment year 2000‑2001.

Assessment year 2001‑2002.

3. The learned representatives of both the parties have been heard. The learned AR has contended that the additions in the above mentioned various profit and loss account have been made by the Assessing Officer without pointing out any defect in the books of accounts and on the basis of mere stock phrases i.e. "personal element", "too excessive", "un vouched and unverifiable" and "not supported by the vouchers" etc. He submitted that no basis whatsoever was provided ' by the learned Assessing Officer while making the additions out of profit and loss account expenses. In this regard he drew our attention to page 1 of the assessment order relating to the assessment year 2000‑2001 where the Assessing Officer himself observed i.e.

"Produced books of accounts alongwith other necessary details and..."

Similarly on page 1 of the assessment order relating to the assessment year 2001‑2002 the learned Assessing Officer has stated that:‑‑‑

"attended the proceedings and produced books of account comprising computerized general ledger, salary sheets, dealer; lodger, creditors ledger, inventory ledger and bank statement together with supporting vouchers. The learned AR also produced details of purchase, sales commission paid to dealers, imports and transactions with associated concerns in support of declared version. The books of accounts were examined. Details filed during the course of proceedings have been scrutinized in the light of books of accounts and placed on file."

The learned AR further pointed out that observation at page 8 of the assessment order for the assessment year 2000‑2001 clearly depicts that:‑‑‑

"complete ledger together with supporting vouchers is being furnished for necessary verification."

The learned AR also referred to another observation made at page 4 of the order pertaining to the assessment year 2000‑2001 which is as under:‑‑

"Books of accounts comprising lodger, salary register, vouchers, purchase book and sales book etc. are being produced for your examination." .

4. The learned AR elaborated that in the light of the above observations by the learned Assessing Officer it is crystal clear that all the boos together with supporting vouchers were duly produced before the learned Assessing Officer which has not been disputed any where in the assessment order. It was further stated that the financial statements of the appellant‑company are subject to both internal and external audit. Internal audit is periodical and conducted by the holding company after regular intervals. Besides each and every payment is subject to dual authorization i.e. one by the Manager and other by the Director Finance. Therefore, question of un verifiability does not arise at all. Continued to argue that while finalizing the assessment for the year 2001‑2002, the Assessing Officer has categorically conceded that deduction of tax at source on payments for expenses was accurate, therefore, the Assessing Officer did not make any addition under section 24(c) of the Ordinance. In these circumstances, the action of the Assessing Officer of arbitrarily disallowing expenses on the basis of stock phrase is not tenable and hence illegal in view of numerous reported judgments of the Courts. The learned AR also averred that the Assessing Officer did not confront the appellant with the instances of un verifiability through specific notice which is mandatory under the law. In this regard he referred to proviso to subsection 1 of section 62 of the Income Tax Ordinance, 1979 which is also being reproduced for sake of convenience:‑‑

"Provided that where the assessee produces books of accounts 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 the 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. "

5. The learned AR also assailed the impugned findings recorded by the learned First Appellate Authority whereby he remanded the case after having observed that the Assessing Officer did not confront the appellant with the instances of unverifiability through specific notice and then directing to the Assessing Officer to confront the appellant with the instances of unverifiability. Since it would afford an opportunity to the department to fill up the lacuna and also make up the deficiencies on the issue, the remand was not justified. On the issue of setting aside th6 learned AR contended that time and again the Courts have held that this procedure of allowing premium to the Department should not be adopted where a right has been accrued to the assessee. In support of his contention the learned AR relied upon various judgments of the Lahore High Court as well as this Tribunal reported as 2002 PTD 1496 H.C., 1991 PTD (Trib.) 643, 1998 PTD (Trib.) 860 and 1989 PTD (Trib.) 39.

6. The relevant orders alongwith the case‑law cited at the .bar perused. Before we embark upon adjudicating upon the issue which is subject‑matter of appeals, we would like to discuss the case‑law referred to by the learned AR in respect of his contentions. In the first cited case reported as 2002 PTD 1496 which is also a case of multinational company i.e. Coca Cola Company. The Honourable High Court held:‑

"The assessee appears justified in claiming that no disallowance could be based upon stock phrases like partial un verifiability and alleged presence of an element of personal use. Learned Tribunal also failed to take into consideration that assessee being a juristic or legal person its personal use of a facility like telephone, vehicles, needed all the more strict test to bring home that any employee/director of company had in fact used or availed the same which was not directly or indirectly connected with the business of the company. "

In the second case which was relied upon by the learned AR reported as 1991 PTD (Trib.) 643 the learned Division Bench of the Tribunal while dilating upon the issue of additions made out of profit and loss account expenses observed as under:‑‑‑

"This brings us, to the last grievance of the assessee regarding disallowances made in the profit and loss account expenses in the charge year 1987‑88 and 1998‑99. A perusal of the impugned orders reveals that details of the assessee's claimed expenses were not considered. Disallowances were, made in a stereo type manner by holding the same as to be unverifiable. It is high time that the Assessing Officer should learn that disallowances in the profit and loss account expenses are not to be made without any basis and without examining the claim in detail. We have noticed that invariably in' all the cases disallowances in P & L account expenses are 'made in the slipshod manner without assigning any reason and the assessee are constrained to contest those disallowances in first and second appeals. As, in both the years disallowances have been made in the arbitrary manner, we vacate the impugned orders."

Similarly in the reported case i.e. 1998 PTD (Trib.) 860 it was held that:‑‑

"In the presence of properly audited accounts in accordance with the relevant provisions of law, the Department cannot be allowed the liberty to reject it without sound reasoning."

And lastly in the judgment reported as 1989 PTD Trib. 39, the learned Division Bench of the Tribunal observed:‑‑

"Disallowing amounts as personal expenses and unverifiable receipt‑‑‑Validity‑‑‑when details of such expenses and receipts are available on record, Assessing Officer or the Appellate Authority, without pointing out the items of personal expenses and. unverifiable receipts, cannot reject the accounts by simply using stock phrase "expenses personal and unverifiable".

On the issue of setting aside the case, the learned AR referred to an unreported judgment bearing No.PTR No.2 of 2002 in re: Solvex Pakistan Ltd. v. Commissioner of Income Tax. It was held by the. Honourable High Court that:‑‑‑

"Even otherwise it is by now established law that a remand should not be directed in a light vien. In ultimate analysis a remand neither favours the Revenue nor the assessee. In revenue matters, without an excepting after remand the fate of an assessee never changes for the better. In most of the cases the remand order is rather employed by the Assessing Officer to make the fate of assessee even worse. All previous discrepancies are meticulously taken care of so that the assessee finds no favourable factual or legal proposition to urge the appellate forums. ".

7. After hearing the submissions made by the learned counsel for both the parties, we feel ourselves persuaded .to agree with the assertions made by the learned AR especially in the light of judgment cited at the Bar. Admittedly the learned First Appellate Authority committed the same mistake which the Assessing Authorities have been repeating again and again. There is no denying the fact that the assessee was not confronted at all with the defects with regard to the disallowances out of the profit and loss account expenses. It is trite law that if Assessing Officer does 'not conform with the mandatory provisions of section 62(1) of the Ordinance and fails to confront the assessee with regard to the defects in books of accounts, all the proceedings conducted subsequent thereto will always be considered null and void, hence, unsustainable in the eye of law. Since the Assessing Officer did not comply with the provisions of section 62(1) of the Ordinance on the issue of pointing out defects in .the books of account and confronting the same to the assessee, we are constrained to observe that disallowances made out by profit and loss account are liable to be deleted on this score only.

8. It is also matter of record that the assessee is a Public Limited Company quoted on the stock exchange having foreign shareholding subject to both internal and external audit. Obviously in such‑like cases, question of un verifiability does not arise. Even otherwise, no instances of un verifiability or unvouchedness have been cited by the Assessing Officer. The Assessing Officer used common jargon i.e. "personal element" and unvouched, ignoring the fact that it was a case of Public Limited Company, which being a. juristic and legal person cannot be equated with the case of an individual, because a juristic person cannot be attributed the element of personal use and as already held by Hon'ble High Court in the case of Coca Cola, it would require stricter test to bring home that any employee/director of the company had in fact used or availed the same which was not directly or indirectly connected with the business of the company.

9. As regards the issue of setting aside, we would like to observe that assessee being a Public Limited Company of international repute was maintaining books of accounts which were subject to all kinds of audit under the Company Law. The learned Assessing Officer also conceded that assessee produced books of accounts alongwith other necessary details. Further admitted that assessee produced books of accounts comprising computerized general ledger, salary sheets, dealers ledger, creditors ledger, inventory ledger and bank statement together with supporting vouchers". We are at loss to understand, what else the Assessing Officer needed to ascertain the nature of the true picture with regard to assessee's accounts. Yet the Assessing Officer embarked upon making disallowances out of profit and loss account merely using stock phrases i.e. unvouched and unverifiable. Still further, the learned First Appellate Authority also fell in error by remanding the case to Assessing Officer. Since all the relevant books of accounts were produced before the learned Assessing Officer, still he could not point out any defects in the books. Besides, the assessee was not duly confronted with regard to making addition in the profit and loss account. In such‑like situation, we wonder, what compelled the learned First Appellate Authority to remit the case back to the Assessing Officer, except that department was given premium and an extra opportunity to make up the deficiencies its the assessment order, committed in the earlier round. We would like to add that this practice of remanding case without assigning any substantial reason has been deprecated by the High Court through its various pronouncements and some of them have been cited in the earlier part or our order.

10. In the light of above discussion, we would like to conclude that since in the instant case the Assessing Officer failed to point out any defect in spite of production of books of accounts with all the relevant details, did not cite any instance of unverifiability except using common jargon and stock phrases, and omitted to confront to the assessee about the disallowances, the learned CIT(A) was not justified to send back the case to the Assessing Officer for de novo consideration on the issue hence, the impugned order passed by learned CIT(A) is vacated, addition made in profit & lose accounts are directed to be deleted.

11. Assessee's appeal allowed accordingly.

C.M.A./862/Tax (Trib.) Appeal allowed.