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

‑‑‑‑S.62(1), proviso‑‑‑Assessment on production of accounts etc.‑‑ Conditions to be enforced where the assessee produced books of accounts and effects for non‑compliance of‑‑‑Proviso to S.62(1) of the Income Tax Ordinance, 1979 canvassed three conditionalities to be enforced where the assessee produces books of accounts as evidence in support of the return income, firstly, that the Deputy Commissioner of Income Tax shall give a notice to the assessee, of the defects noted in the books of accounts, secondly, that he shall provide opportunity to the assessee to explain his point of view about such defects in the accounts and thirdly that he shall record such explanation and the basis of computation of total income of the assessee in the assessment order‑‑‑Since proviso to S.62(1) of the Income Tax Ordinance, 1979 had been inserted by finance Act, 1993, therefore, this was the statutory obligation of the Assessing Officer to comply with such conditionalities in seriatim and if any one of these ceased to be implemented or not followed in proper order the returned version could not be disbelieved‑‑‑If the assessee was confronted prior to examination of books of accounts such notice would certainly be held to have been issued in violation of law‑‑‑Such notice could not be proclaimed to be substitution of the notice to be issued after examination of books of accounts‑‑‑Merely mentioning S.62 of the Income Tax Ordinance, 1979 on the top of the notice, without adhering to the statutory obligations, would not absolve the Assessing Officer from his responsibility to issue a notice in terms of proviso to S.62(1) of the Income Tax Ordinance, 1979‑‑‑In such eventuality there was no cavil except to accept the declared results of the assessee.

2002 PTD (Trib.) 1583; 2001 PTD (Trib.) 2938 and 1999 PTD (Trib.) 3892 rel.

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

‑‑‑‑S. 62‑‑‑Assessment on production of accounts etc.‑‑‑Issuance of notice under S.62 of the Income Tax Ordinance, 1979 prior to examination of books of accounts ‑‑‑Assessee contended that since statutory requirement of law in terms of proviso to S.62(1) of the Income Tax Ordinance, 1979 prior to completion of assessment had not been met, therefore, Appellate Authority was not justified in setting aside the assessment instead of annulling the same‑‑‑Validity‑‑‑Prior to examination of books of accounts, a notice was issued by the Assessing Officer, mentioning S.62 on the top of the said notice, calling for certain documents and details from the assessee which was complied with‑‑ Books of accounts were scrutinized but no specific defects were pointed out by the Assessing Officer for his disagreement with such accounts rather those were discarded by the Assessing Officer by advancing general remarks‑‑‑Philosophy for issuance of notice under S.62 of the Income Tax Ordinance, 1979 after examination of books of accounts was to seek evidence on specific points before disagreement with such accounts‑‑‑Evidence had been sought prior to examination of books of accounts meaning thereby that no specific defects could be pointed out by the Assessing Officer from the books of accounts' maintained by the assessee‑‑‑No notice as contemplated by law was issued which was sine qua non for discarding the returned version‑‑‑Appellate Tribunal held that the notice issued prior to examination of books of accounts could not be equated with the notice to be issued in terms of proviso to S.62(1) of the Income Tax Ordinance, 1979 which the law required to be issued before disagreeing with the declared results‑‑‑Same being a mandatory provision of law, the Assessing Officer was bound to follow such statutory obligation and violation thereof naturally rendered the assessment framed to be ab initio illegal and void‑‑ Declared results were not lawfully discarded as a result of which the Assessing Officer was directed to accept returned version of the assessee‑‑‑Order passed by the Appellate Authority was vacated which resulted into acceptance of the assessee's appeal on legal plane.

1985 PTD 375 ref.

2002 PTD 1195; 2002 PTD (Trib.) 1583; 2001 PTD (Trib.) 2938 and 1999 PTD (Trib.) 3892 rel.

Ch. Abdul Ghafoor, I.T.P. for Appellant.

Javed‑ur‑Rehman, D.R. for Respondent.

Date of hearing: 27th July, 2002.

ORDER

RASHEED AHMED SHAIKH (JUDICIAL MEMBER).‑‑‑1. At the very outset Chaudhary Abdul Ghafoor, ITP the learned counsel for the assessee attacked the impugned order on legal plane by contending that since statutory requirement of law in terms of proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979 prior to completion of assessment has not been met, therefore, the Appeal Commissioner was not justified in setting aside the assessment instead of annulling the same. Strength in this regard was acquired by the learned A.R. on the case law cited as 1985 PTD 375 (Lah. H.C.) 2002 PTD 1195 (Lah. H.C.) and (2002) 85 Tax 21 (Trib.). On the contrary Mr. Javed‑ur‑Rehman, the learned D.R. appearing on behalf of the department opposed the contention of the assessee's learned A.R. stating that while framing the assessment, the case was discussed with the learned A.R. at great length across the table. In addition a notice under section 62 was issued on 16‑3‑2000, meaning thereby statutory requirement of law was duly complied with by the Assessing Officer. Thus, the assessment in such circumstances has rightly been set aside by the Appeal Commissioner for de novo decision.

2. Facts leading for disposal of this legal objection are that the assessee‑appellant is a private limited company which derives income from manufacture and sale of Poly Propylene bags. Income Tax return was filed by it declaring net loss of Rs.652,227 which was accompanied by duly audited trading, profit and loss account and balance sheet as well as the other charts and schedules. Books of accounts were also produced in the course of assessment proceedings. Statedly, as per the assessment order, a notice under section 62 was issued on 16‑3‑2000, the relevant portion of which is being re‑produced hereunder for ready reference;

(1) You have filed your return for the assessment year 2000‑2001 declaring loss of Rs.652,227 with sales of Rs.1,86,24,793 G.P. has been shown at Rs.37,19,160 which gives rate of 19.96 which is low in this line of business.

(2) On the basis of following two parallel cases G.P. in your case was applied at 25% in the preceding year which has been confirmed by the learned CIT (A) Faisalabad vide his appellate order, dated 18‑9‑2000, the particular of parallel cases are as under:

(a) 22‑11‑1718632

(b) 7‑8‑1725133

(3) In the parallel case existing at NTN 22‑11‑1718632 the following results were found declared for the assessment year 1999‑2000 as under:‑‑‑

On the basis of said parallel case, sales in your case for the preceding year were estimated at Rs.4,43,51,200 against declared at Rs.1,79,84,257. Having due regard to the said ratio of estimation of sales as well as confirmation thereof at appellate stage I intend to estimate your sales at Rs.4,59,30,833 against declared at Rs.1,86,24,793.

(4) You have declared sales at Rs.1,86,24,793. Please provide complete party‑wise detail of sales showing name, address, NTN, (if any) above Rs.10,000. In case of unverifiability of sales tote same shall be estimated on the lines as indicated above.

(5) Cost of sales as per note No. 10 have been shown at Rs.1,49,05,631 as under;

Work in process.

(I) Opening Stock 711651.

(II) Closing stock. (877116)

(Rs.165,465)

Cost of goods manufactured. Rs.14,995,565

Finished goods.

Please provide complete details with regard to quantity of raw material consumed, duly supported by stock register, salary and wages paid, electricity bills worth Rs.53,81,239 as well as other factory overhead expenses charged at Rs.1,61,127.

(6) Complete details in respect of opening stock shown at Rs.1,25,62,800 as well as closing stock shown at Rs.73,09,236 may be provided for examination duly supported by stock register, if any.

(7) As per Note No. 11 operating expenses have been claimed at Rs.17,75,500. Please provide head‑wise details of all expenses claimed duly supported by relevant vouchers.

(8) As per Note No. 1 accrued charges have been claimed at Rs.350,733. Please provide necessary details head‑wise.

(9) As per Note No.2 directors account has been reduced to Rs.2,30,07,723 against Rs.2,78,73,103 of the preceding year. Please give reasons which led to decrees of Rs.48,65,380 in the said account.

(10) As per note No.4 capital work in progress has been shown at Rs.12,60,274. Please provide necessary details indicating the nature of civil work being carried on and the stage of its completion.

(11) As per Note No.6 Income‑tax has been shown at Rs.5,85,137 please provide necessary documentary evidence.

(12) You have maintaining a current account with the bank. Please provide complete bank statement for the whole year under assessment.

(13) Complete books of accounts alongwith relevant vouchers may also be produced for examination.

The reply furnished by the assessee was not found satisfactory and the Assessing Officer after having examined the books of accounts, rejected the returned version being the books of accounts were not faithfully maintained. After completing the other formalities, net income was computed by the Assessing Officer at Rs.69,65,573.

3. When order of the Assessing Officer was assailed before the Appeal Commissioner Zone‑I Faisalabad who by virtue of his order, dated 5‑11‑2001, recorded in Income Tax Appeal No.321, set aside the case for fresh adjudication with the direction that the Assessing Officer should examine the case in its proper perspective and if the defects are found, which warrants addition, the same should be made after its pointation in the notice under section 62.

4. Anxious thought to the contentions of the two sides has been given and have also perused the impugned orders as well as the case law alongwith the documents furnished before us. We find that the proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979, around which whole controversy of this case revolves, converses three conditionalities to be enforced where the assessee produces, books of accounts as evidence in support of the returned income. Those are being described hereunder: ‑‑

(1) Firstly, that the Deputy Commissioner of Income Tax shall give a notice to the assessee of the defects noted in the books of accounts.

(2) and secondly, that he shall provide an opportunity to the assessee to explain his point of view about such defects in the accounts.

(3) and thirdly that he shall record such explanation and the basis of computation of total income of the assessee in the assessment order.

5. Since proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979, has been inserted by Finance Act 1993, therefore, now this is the statutory obligation of the DCIT to comply with such conditionalities in seriatim and if any one of them ceases to be implemented or not followed in proper order the returned version cannot be disbelieved. To illustrate this, if the assessee is confronted prior to examination of books of accounts such notice would certainly be held to have been issued in violation of law. In no way such notice can be proclaimed to be substitution of the notice to be issued after examination of books of accounts. Merely mentioning section 62 on the top of the notice, without adhering to the statutory obligations, would not absolve the Assessing Officer from his responsibility to issue a notice in terms of proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979. In such eventuality there is no cavil except to accept the declared results of the assessee.

6. Strength in this regard has also been acquired from three case law. In the first case law cited as 2001 PTD (Trib.) 2938, the Tribunal has gone to the extent that even certain entries on order sheet were not the substitute of the statutory requirement of law which had to be met in any case and accordingly the Assessing Officer was directed to accept the declared version of the assessee. In the second case reported as 1999 PTD (Trib.) 3892, the declared trading results were accepted by the Tribunal as the Assessing Officer had failed to confront the assessee by issuing a notice issued under section 62(1) of the Income Tax Ordinance, 1979 by declaring the addition made in the trading account was to be ab initio illegal and void. Similarly, in the third one in re: (2002) 85 Tax 21 (Trib.) the Appeal Commissioner had set aside the case for de novo consideration but the Tribunal came at the rescue of the assessee by observing that since mandatory provisions of law in terms of section 62(1) was not complied with, the assessment framed by the Assessing Officer was annulled being violative of section 62 of the Income Tax Ordinance, 1979.

7. The other limb of argument of the learned counsel of the assessee was that setting aside of the assessment for fresh adjudication was not at all warranted on the facts and in the circumstances of the case. According to him the assessment should have been cancelled/annulled especially when the Assessing Officer had failed to confront the assessee with the defects found in the books of accounts. Two case law, one cited as 2002 PTD 195 (L.H.C.) and the other (2002) 85 Tax 21 (Trib.) were put forward whereby in such eventuality the assessment was annulled. It is now settled law that the order should not be set aside by the appellate authorities where legal infirmity is visible in case. This would tantamount to be affording an opportunity to the department to fill in its legal flaws. This practice is certainly against the established norms of justice which says that opportunity of being heard should be provided to the party in appeal so that he could plead his case in proper perspective but not to the department. Considering the facts of the case, we hold that the Appeal Commissioner had fallen in grave error in setting, aside the assessment for de novo consideration in particular where statutory requirement of law was not complied with. In fact appropriate course available with the Appeal Commissioner was to annul/cancel the assessment being suffered from legal infirmity.

8. Reverting to the facts of the case what happened was that prior to examination of books of accounts, a notice was issued by the Assessing Officer, mentioning section 62 on the top of the said notice, calling for certain documents and details from the assessee which was complied with. Thereafter, books of accounts were scrutinized but no specific defects were pointed out by the Assessing Officer for his disagreement with such accounts. Rather those were discarded by the Assessing Officer by advancing general remarks. In fact the philosophy for issuance of notice under section 62, after examination of books of accounts, is to seek evidence on specific points before disagreement with such accounts. But in the instant case the evidence has been sought prior to examination of books of accounts meaning thereby that no specific defects could be pointed out by the Assessing Officer from the books of accounts maintained by the assessee. It thus stands established that no notice as contemplated by law was issued which was sine qua non for discarding the returned version. We, therefore, hold that the notice issued prior to examination of books cannot be equated with the notice to be issued in terms of proviso to subsection (1) of section 62 which the law requires to be issued before disagreeing with the declared results. This being a mandatory provision of law the Assessing Officer is bound to follow such statutory obligation and violation thereof naturally render the assessment framed to be ab initio illegal void.

9. In view of foregoing discussion as well as the ratio and the principle decided in the reported case we are persuaded to hold that the declared results were not lawfully discarded as a result of which the Assessing Officer is directed to accept returned version of the assessee.

Consequently, the order passed by the First Appellate Authority stands vacated. This would result into acceptance of the assessee's appeal on legal plane.

C.M.A./530/Tax.(Trib.) Appeal accepted.