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

‑‑‑‑S.12(18)‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Company‑ Director‑‑‑Lean‑‑‑Amount paid by the directors from their personal bank account on .behalf of company/assessee in order to clear its tax liability, to third parties from whom new buses had to be purchased and cash loan received from sister companies by recording transfer entries was shown as loan received from directors in the books of account of the company) assessee‑‑‑Such amount was added in the total income under S.12(18) of the Income Tax Ordinance, 1979 on the ground that the payments should have been routed through the company's bank account rather making direct payment by the director to the third parties‑‑‑Validity‑‑‑Specific purpose of S.12(18) of the Income Tax Ordinance, 1979 was to check fictitious loan and to preclude back dated introduction of credit in the books of account‑‑‑Where genuine loans shown to have been received from identifiable persons either cash or through the banking channel should not be treated as deemed income of the assessee merely on the ground that the amount of loan had not been received through crossed cheque‑‑‑Where nature and sources of money was not satisfactorily explained, addition to the income of the assessee could still be made under S.13 of the Income Tax Ordinance, 1979, notwithstanding the claim that any loan was received through crossed cheque etc.‑‑ Withdrawal of amount by the director of the company from his personal bank account and clearance of company's tax liability had never been disputed by the Department, likewise, payment made on behalf of company/assessee by another director by way of crossed cheque to the manufacturer of buses which were intended to be purchased by the company/assessee, was never subject of objection by the Assessing Officer‑‑‑Addition made under S.12(18) of the Income Tax Ordinance, 1979 was not legally made and Assessing Officer had not lawfully exercised his powers‑‑‑Action of Assessing Officer treating the sum as assessee's deemed income under S:12(18) of the Income Tax Ordinance, 1979 did suffer from legal infirmity‑‑‑Order of First Appellate Authority was vacated and addition made by the Assessing Officer was deleted by the Appellate Tribunal.

2002 PTD 63; I.T.As. Nos.331 and 331‑A/PB of 1997‑98 and 2002 PTD (Trib.) 2133 rel.

Ramkola Sugar Mills (Pvt.) Ltd. v. CIT, Punjab and N.‑W. F. P. Lahore 1955 SCC (Federal Court) distinguished.

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

‑‑‑‑Ss. 63 & 62‑‑‑Best judgment assessment‑‑‑Ex parte assessment for non-production of books of account at the time of assessment ‑‑‑Validity‑‑Framing of ex parte assessment could not be held good because the assessee had all along been replying to the notices issued on various dates coupled with it the auditors appointed by the department had in their report acknowledged production of books and other allied documents and details‑‑‑Had the assessee not produced any books of accounts during the course of assessment proceedings that would only entail penalty proceedings rather resorting to ex parte assessment‑‑‑Ex parte order passed under S.63 of the Income Tax Ordinance, 1979 was converted into under S. 62 of the Income Tax Ordinance, 1979.

Ahmed Nauman Sheikh, ITP and Iqbal Hashmi for Appellant.

Mian Ashiq Hussain, LA for Respondent.

Date of hearing: 6th April, 2002.

ORDER

RASHEED AHMED SHEIKH (JUDICIAL MEMBER).‑‑‑1. The appellant, a private limited company has assailed the order passed by CIT (A) Zone‑1, Lahore, dated 22‑5‑2000 in respect of assessment year 1998‑99 on the following grounds but was also exclusive and high.

(1) Framing of ex parte assessment was not justified.

(2) Estimation of receipts under various heads of accounts was not only arbitrary but was also excessive and high.

(3) Curtailment of expenses in profit and loss accounts was unwarranted on the facts and circumstances of the case.

(4) Addition under section 12/18 of the Income Tax Ordinance, 1979 was not legally made.

2. Facts leading for disposal of all the issues in hand are that the appellant enjoys income from plying buses on different routes such as Lahore to D.G. Khan, Lahore to D.I. Khan and Lahore to Karore Road. However, the instant case in terms of section 4A of the Income Tax Ordinance, 1979, was assigned to a firm of Chartered Accountants which besides pointing out certain discrepancies in the books of accounts also proposed to make additions in the declared income. Thereafter a notice under section 62 was issued confronting the assessee as to why estimation of receipts/income may not made and the loan shown from the directors of the company be added. The, reply furnished by the assessee could not convince the Assessing Officer. Resultantly the assessment was formulated by the Assessing Officer in terms of section 63 of the Income Tax Ordinance, 1979 by the Assessing Officer. All the issues involved in this appeal are being adjudged hereunder:‑‑

ESTIMATION OF RECEIPTS‑OPERATING INCOME

3. Income from this source has been divided by the assessee into four sub‑heads (i) passenger income, (ii) other income (iii) cargo income and (iv) commission income. During the course of assessment proceedings it was noted by the ACIT that by the end of the year under appeal fleet of buses has been increased to 36 viz. initially consisted of 18 buses. Having taken regard to factum of increase in buses it was observed that the receipts were suppressed by the assessee owning to understatement of number of trips, adoption of capacity of each bus at 61 passengers against actual capacity of 64 passengers and overstatement of time for completion of a trip. To support this view, the ACIT was critical of the fact that when 18 buses were in operation, total receipts recorded in the month of September, 1997 were at Rs.21,37,840 which has alleviated to Rs.12,48,862 in the month of June, 1998 particularly when 18 additional buses were introduced into the company's fleet in this very year. The assessee was accordingly confronted with the basis to be adopted for working out the receipts of a single bus plying on each route. The Assessing Officer besides allocating his own time for completion of a round of a bus had also adopted number of working days which were arrived at after deducting the days spent for repair of a bus. Repair time was allowed by the ACIT in view of the treatment accorded in the past. Sitting capacity of the bus was adopted at 64 passengers. In this manner total, net receipt were worked out by the ACTT at Rs.5,36,96,078, against shown at Rs.2,12,14,468, after deducting vacancy allowance of Rs.1,42,04,881 as was claimed. Resultantly, an addition of Rs.3,24,81,660 was made towards the declared receipts. When this issue came up for adjudication before the Appeal Commissioner, he after having gone through the registration book, directed to adopt sitting capacity of each bus at 61 as was declared by the assessee.

4. Before us the learned AR's contention was that the receipts were estimated by the ACIT on conjectures and surmises being most of the buses plied were four to five years old and more time was required for their repair and maintenance as has been declared by the assessee. It was also pointed out by the learned AR that as competition in this line of business has increased owing to plying of buses by other transport companies on the same routes, the assessee's receipt were bound to be declined. Adoption of the same methodology for computing the receipts was stressed to be taken into account by the learned counsel for the assessee as was followed by the department in the past. A comparative history chart has also been placed before us for our consideration to substantiate the contention that effective fleet which was plied on roads was 19.93

5. The learned legal advisor on the other hand supported the order of the learned Appeal Commissioner on this point.

6. Anxious thought has been given to the arguments advanced by the two sides and have also perused the documents furnished before us. We feet convinced that the ACIT has worked out the receipt on hypothetical basis. The prime factor which had to be taken into account was to find out on which day and month the new buses were plied by the assessee As per the details furnished before us it was noted that 10 buses were introduced on 27th April, 1998 meaning thereby those could only plied for 65 days in the year under appeal. Similarly 8 buses were inducted in the last 10 days of June, 1998 the closing month of the income year, which means that those remained on the road from 4 to 10 days in the year under appeal. This important factor has altogether been ignored by the Assessing Officer while working out the receipts. There is also force in the learned AR's contention that receipts in the month of July to September were increased due to summer vacations in schools on account of frequent travelling by the families from one place to another. The learned DR could not controvert factum of running of average fleet in the year under appeal at 19.93 and number of trips per bus of effective fleet at 116 with any substantial material. Thus there was no valid reason with the ACIT to add 6308 trips towards the declared number of trips at 2317 particularly when effective fleet was 19.93. Even adoption of average trip per bus at 433 in the year under appeal against assessed at 174 in the immediately preceding assessment year have no credibility in absence of adducing any concrete and solid documentary evidence to do so. In view of foregoing discussion the basis adopted by the Assessing Officer for working out the receipts is hereby discarded being devoid of any objective rationale. Having taken regard to the facts in its entirety the Assessing Officer is directed to work out the receipts by following the same methodology as was the practice of the department in the past in order to maintain consistency in this regard. That method such as the receipts would be computed in the following method:

No. of Trips x declared fare x average No. of seats x No. buses = Total gross receipts.

CARGO INCOME

7. Income from this head was shown to have been earned at Rs.89,709, which was disbelieved, by the Assessing Officer as the assessee could not furnish any details thereof. The Assessing Officer accordingly worked out income from this sources at Rs.10,10,229 by taking average daily receipts at Rs.3,000 and multiplying the same by number of days adopted at 365. At the first appellate stage, a slight excessiveness was found by the Appeal Commissioner in the estimated average daily receipts and he accordingly ordered to be taken at Rs,2,000. In this regard it was contended by the learned counsel of the assessee that the buses are designed in way that no cargo can be transported. Also contended that since the assessee's business is not to transport the luggage. However, the income shown in this head, in fact, reflects on account of excess luggage carried on by the passengers which is to be charged. Thus, the learned Appeal Commissioner had fallen in grave error in confirming the estimate of income from cargo.

8. Having considered the rival arguments, we find that the Assessing Officer has estimated average daily receipts of Rs.3,000 on whims and surmises. Likewise the Appeal Commissioner has restricted it to Rs.2,000 by adducing general observations. On going through the facts available on record we find that no addition in the cargo income was warranted in the year under appeal if looked in view of the past treatment as the declared cargo income of Rs.77,320 was accepted by the department in the immediately proceeding assessment year 1997‑98 was concerned. Anyhow since claim of the assessee is not supportive of any documentary evidence, we deem it fair to slash down the cargo, income to Rs.100,000 for the year under appeal.

OTHER INCOME

9. During the course of proceedings the learned counsel for the assessee has opted not to press the addition made in this regard.

COMMISSION INCOME

10. An income of Rs.356,309 was earned by the assessee by plying buses of other parties in this account. However, after taking into account the auditor's report total commission was proposed to be adopted at Rs.25,55,600 by taking average number of buses at 10 and multiplying the same by per bus Commission of Rs.700 and then by number of working days at 365. Resultantly, an addition of Rs.21,98,610 was made by the Assessing Officer. The Appeal Commissioner upheld this treatment by observing that no plausible explanation was put forth by the assessee to rebut this proposed treatment. After giving anxious thought to the rival parties we feel convinced that neither any material evidence was adduced by the Assessing Officer to substantiate the basis adopted for estimation of daily Commission of Rs.7,000 nor the Appeal Commissioner has advanced any plausible reasonings to maintain the impugned commission income. The basis adopted by the Assessing Officer in estimating the commission is certainly baseless, bald and whimsical having no basis whatsoever with regard to adoption of average number of buses at 10 and receipts per bus at Rs.7000. It is imperative to mention that this was the first year of declaring commission income by the assessee. Since the commission income has been estimated on hypothetical basis, therefore, we strike down the basis adopted by the Assessing Officer to compute income from this source to such an abnormal figure unless some unequivocal material is brought on record to justify the action. Considering the facts of the case in its entirety we deem it appropriate to fix the commission income at Rs.500,000 for the year under appeal.

ADDITION UNDER SECTION 12(18)

11. Next contention of the learned AR relates to the addition amounting to, Rs.3,76,55,900 made by the Assessing Officer under section 12(18) of the Income Tax Ordinance 1979. Main thrust of the learned counsel for the assessee was that the impugned addition has been made without any lawful jurisdiction and as such the Appeal Commissioner has acted in flagrant violation of law in confirming the same. According to him the addition is not sustainable in law in view of the case‑law decided not only by the higher Appellate Courts but also by the Appellate Tribunal whereby it was held that any sum paid by the directors on behalf of the company does not amount to receipts in the hands of the company or receipt of money through book entries is not tantamount to be receipt in the company's hands. It was further observed that the demand draft/crossed demand draft/bearer cheques are as good as crossed cheques in terms of section 12(18) of the Income Tax Ordinance, 1979. Reliance in this regard was placed on case‑law reported as 2002 PTD 63 (Peshawar H.C.) an unreported decision of Full Bench of the Tribunal bearing ITA No.331 and 331‑A/PB/1997‑98 order, dated 27‑9‑2000 and 2002 PTD (Trib.) 2133. The learned legal advisor appearing on behalf of the department reiterated the observations as were recorded by the two authorities below hereby the impugned addition was upheld by he First Appellate Authority.

12. What happened in this case was that a sum of Rs.3,76,55,900 in aggregate was said to have been received by the company as loan from its two directors and also from its two associated companies. Out of this total amount, a sum of Rs.10,00,000 was received from one of its directors namely Mr. Abdullah Khan Rokri. The assessee was required to furnish bank statement of payer of money and also that of the recipient if the loan was paid through cross cheque. It was explained that in fact the company's tax liability pertaining to assessment year 1997‑98 was paid by the said director by drawing money from his personal bank account after encashing the cheque. The Assessing Officer did not find himself convinced with such explanation and he, therefore, added the sum of Rs.10,00,000 under section 12(18) of the Income Tax Ordinance, 1979 as the statutory conditions for making payment through crossed cheque was not adhered to.

13. Additional loan of Rs.3,42,98,900 was said to have been received by the assessee from its another director namely Mr. Amir Hayat Khan Niazi. As the sum of Rs.12,43,100 was statedly to have been received in cash to which the provisions of section 12(18) were duly attracted in such eventuality, hence this amount was also added towards the business income of the assessee. As regards residual amount of loan of Rs.2,30,55,800 it was observed by the Assessing Officer that this part of money too was not directly received through banking channel. It was explained that the assessee‑company had intended to purchase buses from Ghandara Nisan and Hino Pak Motors and there was shortage of funds. In order to mature of the contracts Mr. Amir Hayat Khan Niazi, the Director, made the entire payment on behalf of the assessee‑company directly to the manufacturer of buses by issuing cross cheques from his personal bank accounts. This explanation was not accepted and it was thus held by the Assessing Officer that as those cheques were not deposited in any of the company's bank accounts rather the payment were made directly to the third party, hence the statutory condition of payment of loan through cross cheque has not been complied with. Accordingly the balance amount of Rs.2,30,55,800 was also added under section 12(18) of the Income Tax Ordinance, 1979.

LOAN FROM ASSOCIATED COMPANY

14. As per the facts available on record another sums amounting to Rs.351,000 and Rs.200,600 was received by the assessee from its two associated companies, namely New Khan Road Runner, Private Limited and from Adil Beverage private limited. These two sums were also added in the income for the year under appeal being hit by mischief of section 12(18) of the Income Tax Ordinance, 1979. At the stage of first appeal, the Appeal Commissioner confirmed the impugned addition as the said amount suffered from legal infirmity as has been envisaged in section 12(18) of the Income Tax Ordinance, 1979. Strength in this regard was sought by the Appeal Commissioner from a judgment delivered by apex Court in the case of Ramkola Sugar Mills (Pvt.) Ltd. v. CIT Punjab and N.‑W.F.P. Lah. 1955 SCC (Federal Court).

15. The question as to whether the payments made by the directors from their personal bank accounts, either drawing money from banks or through cross cheques, on behalf the assessee‑company in order to clear its tax liability or to the third parties from whom new buses had to be purchased or acknowledging cash loan said to have been received from the sister companies by recording transfer entries in its books of accounts falls within the mischief of section 12(18) of the Income Tax Ordinance. 1979 or not.?

16. We do not take long to resolve this controversy because a similar question came up for adjudication before a Full Bench of the Tribunal, number and date mentioned ante. In that case namely Ali Flour Mills (Pvt.) Ltd. Hari Pur, had obtained a long term loan from Pak Libya Holding Company "the bank". The company could not repay the loan within the scheduled and stipulated period. Resultantly, the directors of the company were constrained to settle the accounts with the bank from their personal accounts and resources. However, the Assessing Officer disapproved this arrangement and added the entire amount paid by the company's directors directly to the said bank. Ultimately it was held by the Tribunal that the amount transferred through cross cheque even though that has not come directly to the account of the assessee‑company, serves the requirements of exemption from section 12(18) of the Income Tax Ordinance, 1979.

17. Subsequently, a similar issue came up before High Court Peshawar in a case cited 2002 PTD 63 while deciding a tax reference. The Hon'ble High Court after evaluating pros and cons of section 12(18) of the Income, Tax Ordinance, 1979 and also the various circular issued by the C.B.R. viz. the facts of the case, had gone to the extent that any amount received through cross cheque, cash or any other banking channel is not liable to tax under section 12(18). The following two questions were referred for the opinion of the High Court:‑‑

Whether any amount received through crossed cheques, cash or any other banking channel is liable to tax under section 12(18) of Income Tax Ordinance, 1979? and

Whether Income Tax Appellate Tribunal has rightly declared Circulars Nos. 3, 11 and 12 of 1992 and Circular No. 1 of 1993 ultra vires of section 12(18) of the Income Tax Ordinance, 1979?

Both the questions were answered by the High Court in negative. In this case of the High Court loan of Rs.29,66,228 was obtained by the assessee from its sister, concern through banking channel (cheque). The explanation of the assessee was not accepted and the said amount was considered as deemed income of the assessee under section 12(18) of the Income Tax Ordinance, 1979. Finally the assessee through a reference application came up for determination of question posed supra. Inter alia it was answered that cash was also not liable to tax under section 12(18) of the Income Tax Ordinance, 1979. The purport and the tenor of the High Court's judgment is that since specific purpose of section 12(18) is to check fictitious loan and to preclude back dated introduction of credit in the books of accounts. But where genuine loans shown to have been received from identifiable persons either cash or through the banking channel should not be treated as deemed income of the assessee merely on the ground that the amount of loan has not been received through cross cheques. Further observed that in any case whether the nature and sources of money is not satisfactorily explained, addition to the income of the assessee can still be made under section 13, notwithstanding the claim that any loan was received through cross cheque etc. Apart from this judgment of the High Court the Tribunal has also taken the same: view in its two judgments cited ante.

18. As regard the case‑law of Court cited by the First Appellate Authority relying upon which the impugned addition was maintained by the Appeal Commissioner, we have profoundly gone through the said case‑law, allegedly to be squarely applicable to the facts of the present case, and are of the considered opinion that by no stretch of imagination neither the ratio decidendi nor the principle laid down therein applies to the facts of the present case. In fact the decision of the apex Court rests on altogether different set of facts besides distinguishing features involved therein. Hence, that case is being ignored for the purposes of adjudication the issue in hand.

19. Viewing the facts of the present case in the context of the case law cited supra we come to an unequivocal conclusion that the entire addition made by the Assessing Officer is not sustainable in law. As regard the first amount of Rs.10,00,000 shown as loan payable by one of its directors namely Mr. Abdulah Khan Rokiri, factum of withdrawal of this amount by the director from his personal bank account and clearance of the company's tax liability for assessment year 1997‑98 has never been disputed by the department. Likewise making payment on behalf of the assessee by another director of the company Mr. Amir Hayat Khan Nazi amounting to Rs.3,42,98,900 by way of cross cheque to the manufacturer of buses which were intended to be purchased by the assessee, was never subject of objection by the Assessing Officer. Only grouse of the department in this regard was that these payments should have been routed through the company's bank account rather making direct payment by the director to the third party. This controversy has also been resolved by the judgment delivered by Full Bench of the Tribunal bearing ITA No. mentioned ante.

20. The foregoing discussion brings us to an unequivocal decision that the addition made by the Assessing Officer under section 12(18) of the Income Tax Ordinance, 1979 in the present case was not legally made. We therefore, hold that the Assessing Officer has not lawfully exercised his powers under section 12(18) of the Income Tax Ordinance, 1979. Accordingly the impugned action of the Assessing Officer in treating the entire sum of Rs.3,76,55,900 as the appellant's deemed income under section 12(18) of the Income Tax Ordinance, 1979 does suffer from legal infirmity. Consequently the Appeal Commissioner's order is vacated and the addition made by the Assessing Officer under section 12(18) of the Income Tax Ordinance, 1979 stands deleted.

21. The last but not the least contention of the learned counsel for the assessee is that the ex parte assessment made by the Assessing Officer is not maintainable. Perusal of the assessment order reveals that not a single sentence has been mentioned therein which could spell out completion of assessment to be made under section 63 of the Ordinance, 1979 except recording a last sentence at the close of the assessment order "assessed as per I.T. 30. Issue demand notice and challan. Also issue notice under section 116" for incompliance for default of statutory notice under section 61. While the Appeal Commissioner has upheld the action of the Assessing Officer in passing the order under section 63 to be justified by observing in para. 25 that "admittedly the appellant did not produce books of accounts which were required to be produced by the Assessing Officer by way of a notice issued under section 61 of the Income Tax Ordinance, 1979 hence no intervention is called for as far as completion of assessment proceedings under section 63 is concerned.

22. We are persuaded to incline with the learned counsel for the assessee that framing of ex parte assessment under section 63 of the Income Tax Ordinance, 1979 cannot be held good. It is so because the assessee had all along being replying the notices issued on various dates coupled with it the auditors appointed by the department have in their report acknowledged production of books and other allied documents and details. Had the assessee not produced any books of accounts during the course of assessment proceedings that would only entail penalty proceeding rather resorting to ex parte assessment. Thus the ex parte order passed under section 63 is converted into to be under section 62 of the Income Tax Ordinance, 1979.

23. No further ground of appeal has been pressed by the learned counsel for the assessee during the course of hearing of this appeal.

24. In the result, the assessee's appeal succeeds to the extent indicated above.

C.M.A./34/Tax (Trib.)Appeal accepted.