Per Rasheed Ahmad Sheikh, Judicial Member and Mazhar Farooq Shirazi, Accountant Member‑‑agreed.

(a) Income‑tax‑‑‑

‑‑‑‑Sales‑‑‑Estimation of sales on the basis of income Tax Inspector's report‑‑‑Inquiry report, general in nature ----Legality‑‑‑Remarks of Appellate Tribunal regarding such report.

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

‑‑‑‑Ss. 62 & 13‑‑‑Assessment on production of accounts, evidence etc.‑‑ Sales‑‑‑Estimation of sales by drawing, adverse inference regarding incurring of more personal expenditure bye member of un‑registered firm and such claimed expenses were understated‑‑‑Validity‑‑‑In no way this factor could be made basis for estimating sales in the case of a firm because the firm and the members of firm were two separate and independent assessable entities‑‑‑If on assessment of the firm it was found that any member of the firm had understated the expenses then the suppression so worked out shall be added in terms of S.13 of the Income Tax Ordinance, 1979 in his individual hands rather drawing adverse inference in the case of firm.

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

‑‑‑‑S. 62‑‑‑Assessment on production of accounts evidence etc.‑‑ Confrontation with proposed treatment before formulating the assessment‑‑‑Notice issued under S.62 of the Income Tax Ordinance, 1979 was nothing except requiring the assessee to furnish break‑up of party‑wise names and addresses to whom the sales were made, details of profit & loss expenses, holding of agency of branded names, if any etc.‑ Such notice could not be equated with the notice to be issued confronting the assessee with the proposed treatment‑‑‑Merely mentioning S.62 on top of the notice without adhering to the principle of audi alterum partem would not absolve the Assessing Officer from his responsibility to confront the assessee with the basis of computation .of income to be adopted‑‑‑In absence thereof, assessment was suffering from legal infirmity because it was obligatory on the part of the Assessing Officer to confront the assessee with the treatment to be accorded, once he disagreed with the declared results‑‑‑Failure to take such steps was the violation of principle of natural justice.

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

‑‑‑‑S. 62‑‑‑Assessment on production of accounts, evidence etc.‑‑ Estimation of sales on the basis of wild guesswork that the shop was well stocked ignoring history of the case in respect of declared sales‑‑ Validity‑Since Assessing Officer had estimated the sales on the whimsical inference drawn from certain set of facts and a wild guess as well as of a fanciful estimate therefore, such estimation of sales could not be held good and made basis for adoption sales‑‑‑As a natural sequel the sales should be adopted considering history of the case and having taken regard to the encouraging results declared by the assessee from year after year‑‑‑Appellate Tribunal directed the Assessing Officer to adopt the sales at Rs. 28,00,000 for the year under consideration.  

(1984) 50 Tax 44 (Trib.) and 1997 PTD (Trib.) 2197 rel.

Per Amjad Ali Ranjha, Accountant Member‑‑Minority view.

None for Appellant.

Iqbal Anwar Mehdi, I.T.P, for Respondent.

Date of hearing: 11th September, 2003.

ORDER

RASHEED AHMAD SHEIKH (JUDICIAL MEMBER).‑‑‑By this single order we proceed to adjudge the cross‑appeals filed by the assessee as well as by the Revenue against the order passed by CIT (Appeals) Zone‑IV, Lahore, dated 6‑12‑2000 in respect of the assessment year 1995‑96.

As per the grounds of appeal, the assessee has attacked the impugned order on account of confirmation of rejection of declared trading version, allowing inadequate relief in the estimation of sales and the additions made under certain heads of the P&L expenses. On the other hand, the Revenue has assailed the Appeal Commissioner's order on the sole ground of relief allowed by him in the estimation of sales.

Facts giving background of the present case are that the assessee‑appellant, a U.R.F. derives income from dealing in ready made garments on retail basis. The original assessment framed under section 59(1) was subsequently cancelled by the IAC by invoking the provisions of section 66A of the Income Tax Ordinance, 1979. On re assessment the assessee was required to furnish certain details and documents, which were supplied to the Assessing Officer but the reply furnished was not found satisfactory by the, Assessing Officer. In order to ascertain magnitude of the assessee's business, an enquiry was got conducted through the Circle Inspector who reported that business premises is located in the main Naqi Market, Lahore. The shop is fully stocked with children garments both locally and imported. Average daily sales was reported by the Circle Inspector from Rs.2000 to Rs.25,000. In this backdrop the declared trading version was rejected by the Assessing Officer and he, therefore, estimated sales at Rs.55,00,000 against declared at Rs.25,76,900 which were subjected to a GP rate of 15%. Certain additions out of the P&L expenses were also made.

Felt aggrieved by the order of the Assessing Officer, the assessee filed appeal before the First Appellate Authority, who restricted the sales to Rs.50,00,000 after having observed that those were estimated on the higher side. Rest of the treatment was upheld by the Appeal Commissioner. This dispensation has compelled not only the assessee but also the Revenue to come up in appeal before the Tribunal.

Both the learned representatives appearing at the bar have been heard at a great length. Main thrust of learned counsel for the assessee was that estimation of sales to such an exorbitant figure on the basis of "so‑called enquiry report" is not at all warranted. Rather, the Assessing Officer while estimating the sales has altogether, ignored history of the case. It was also pleaded that the proposed treatment was never confronted to the assessee instead certain statements and documents were required to be submitted which were duly submitted during the course of re‑assessment proceedings and were disbelieved by the Assessing Officer without assigning any cogent reasons. It was, thus, prayed that adequate relief may be allowed in view of the facts and the circumstances of the case available on record. While arguing the Departmental appeal, the learned DR appearing oh behalf of the Revenue vehemently contended that in view of the enquiry report, .the sales so estimated by the Assessing Officer were quite reasonable.

We have given anxious thought to the rival arguments and have gone through the impugned orders passed by the two lower authorities as well as the history chart filed before us. We find that the only basis adopted by the Assessing Officer for estimating the sales to such an exorbitant figure of Rs.55,00,000 was based on conjectural estimate and also on surmises. There is no denying the fact that the contents of the enquiry report, relying upon which the sales have been estimated are based on whims. Nothing substantial material has been adduced wherefrom it could be inferred that the treatment accorded by the Assessing Officer was justified. As per the learned counsel for the assessee, the enquiry was got conducted in June, 2000 which is relevant to the assessment year 2000‑2001 while the re‑assessment which is to be made revolves around the facts available in the assessment year 1995‑96. Meaning thereby the enquiry report on the basis of which the sales were estimated has been got conducted after the lapse of five years from the charge year for which the assessment is to be made. Thus such enquiry report does not have any legal sanctity to be followed blindly. There is no ambiguity to this cavil that the enquiry report is so general in its nature and so vague in its character, which in any case has to be ignored for the purposes of estimating the sales for the year under appeal. Neither any effort has been made to point out the quantum of stock lying in the shop except the observation that the shop is fully stocked with garments nor any inventory has been prepared by the Inspector at the time of his visit at the assessee's business premises. Even not an iota of evidence has been adduced by the Circle Inspector to corroborate his statement that average daily sales were ranging from Rs.2000 to Rs.25,000. This estimate may or may not be true for the assessment year, 2000‑2001 but in no relevant way for the assessment year 1995‑96 which is under consideration before us. Hence, no reliance can be placed upon such "so‑called enquiry report".

According to the learned AR stock amounting to Rs.261,000 was declared for the year under appeal while that is exceeding Rs.600,000 in the assessment year in which the enquiry was got conducted and this factum could not be controverted by bringing any solid material on record. Thus how come the sales can be estimated on the basis of wild guesswork that the shop is well stocked.

We have also noted that regular assessment in this case, for the first time, was finalized in the charge year 1990‑91 in which the sales were estimated at Rs.6,20,000 against declared at Rs.5,08,000. Thereafter, the assessee is disclosing encouraging turnover in the subsequent assessment years, which can be visualized from the chart tabulated hereunder:--

The Assessing Officer has also drawn adverse inference regarding incurring of more personal expenditure by the members of the U.R.F. In this regard it was observed that the expenses claimed were understated. In no way this factor can be made basis for estimating sales in the case of a firm because the firm and the members of U.R.F. are two separate and independent assessable entity. If on assessment of: the firm it is found that any members of U.R.F. has understated the, expenses, then the suppression so worked out shall be added in terms of section 13 of the Income Tax Ordinance, 1979 in his individual hands rather drawing adverse inference in the case of firm.

Above all it is evident from the assessment order that the assessee was never confronted with the proposed treatment before formulating the assessment. The only notice which was statedly to have been issued under section 62, dated 23‑10‑1999 was nothing except requiring the assessee to furnish break‑up party‑wise names and addresses to whom the sales were made, details of P&L expenses, holding of agency of branded names, if any, etc., this notice cannot be equated with the notice to be issued confronting the assessee with the proposed treatment. Merely mentioning section 62 on top of the notice without adhering to the principle of audi alterum partem would not absolve the Assessing Officer from his responsibility to, confront the assessee with the basis of computation of income to be adopted. In absence thereof it would mean that the assessment was suffering from legal infirmity for the reason it is obligatory on the part of the Assessing Officer to confront the assessee with the treatment to be accorded, once he disagrees with the declared results. Admittedly, the Assessing Officer has not taken any such step in the present case which is violative of the principle of natural justice.

Resume of foregoing discussion is that we declare the enquiry report to be null and void having no legal sanctity in the eye of law. This view is strengthened from the case‑law reported as (1984) 50 Tax 44 (Trib.) and 1997,PTD (Trib.) 2197. The ratio and the principle laid down in these two cases is that burdening a subject with heavy taxation on personal views of the official involved irrespective of the position held by him in the income tax hierarchy, cannot be sustained. Since, the Assessing Officer has estimated the sales on the whimsical inference drawn from certain set of facts and a wild guess as well as of a fanciful estimate, therefore, such estimation of sales cannot be held good and made basis for adoption of sales for the year under appeal. As a natural sequel the sales should be adopted considering history of the case and having taken regard to the encouraging results declared by the assessee from year after year. The Assessing Officer is, accordingly, directed to adopt the sales at Rs.28,00,000 for the year under appeal.

Since we have granted further relief in the estimation of sales, therefore, the departmental contention that the relief allowed by the First Appellate Authority in the estimation of sales was un‑called for loses its force.

The next contention of the learned counsel for the assessee was that additions made out of certain heads of the P&L expenses were un justified. Having taken regard to the volume of turnover we deem it appropriate to restrict the additions made under the heads. Misc, expenses, stationery and printing, entertainment, subscription, conveyance expenses, packing expenses and business tour expenses to the extent of 20% of the claims in these heads being the claims were nominal. So far as the addition made under the telephone expenses is concerned, the same is hereby maintained being in order.

In the result, the assessee's appeal succeeds to the extent and in the manner indicated above while the departmental appeal is dismissed having no force.

(Sd.) (Sd.)

(Amjad Ali Ranjha) (Rasheed Ahmad Sheikh)

Accountant MemberJudicial Member

As per Amjad Ali Ranjha, Accountant Member:

I beg to differ with the findings of my learned brother (Judicial Member) in accepting the assessee's appeal by further reducing sales to Rs.28,00,000 against declared at Rs. 25,76,900 and rejecting departmental appeal.

Accepting my learned brother's order would mean giving a total relief of Rs. 4,05,000 in income to the assessee and reducing net income already assessed at Rs.5,71,604 to Rs.1,66,604 which is again the glaring facts as discussed in detail by the Assessing Officer.

Personal expenses declared by a member of URF out of three Mr. Bashiruddin, at Rs.137,600 are ridiculous low when electricity expenses out of it are worth Rs.63,287, especially when he is residing in a 2‑kanal house at 90‑Shadman, Lahore.

I also do not agree with the other findings of my learned brother, as he has completely ignored the departmental arguments in assessing the income, when personal expenses of the other two members of URF declared are also very low. It definitely means that income is not being declared properly, as they are not getting income out of air in meeting with their day to day expenses.

It is a no accounts case and the assessee is declaring daily sales at Rs.8,590 only. He is occupying a three floor shop in the heart of the city of Lahore at Naqi Market, Anarkali, and sales at Rs.8,590 means the sale of only about 17‑garments per day if average price is taken at Rs.500 or on average one and a half garment per hour. In my humble view even estimate of sales at Rs.55,00,000 giving an average of Rs.18,333 per day of about 37‑garments per day or three garments per hour is still on the lower side.

Hence, having considered all the facts, I am inclined to accept the Departmental appeal by restoring sales at Rs.55,00,000 and rejecting assessee's appeal in toto, being against facts.

(Sd.)

(Amjad Ali Ranjha)

Accountant Member

As the difference of opinion has arisen between the members of this Bench, hence the case is referred to the Hon'ble Chairman for nomination of a third member to resolve the following question:‑‑‑

Whether in view of the facts and circumstances of the case, assessee's appeal or departmental appeal need to be accepted or rejected?

(Sd.)(Sd.)

(Rasheed Ahmad Sheikh)(Amjad Ali Ranjha)

Judicial Member Accountant Member

MAZHAR FAROOQ SHIRAZI (ACCOUNTANT MEMBER).‑ The titled cross‑income‑tax appeals pertaining to the assessment year 1995‑96 have been referred to me by the worthy Chairman for resolving the difference of opinion which arose between the Learned Judicial Member and the learned Accountant Member on the issue whether in view of the facts and circumstances of the case assessee's appeal of departmental appeal need to be accepted or rejected?

2. The brief facts giving rise to the present appeals are that the assessee a URF derives income from dealing in ready made garments. Assessment was finalized by determining sales at Rs.5,500,000, as against declared by the assessee at Rs.2,576,900, to which GP rate was applied at 15 %. Some addition in the P&L expenses. On being aggrieved with the treatment meted out by the Assessing Officer the assessee preferred appeal before the learned First Appellate Authority who reduced the sales to Rs.5,000,000 whereas rest of the treatment was upheld. The learned Judicial Member for the reasons recorded (supra) reduced the sales estimate to Rs.2,800,000. The learned Accountant Member disagreed with the findings of the learned Judicial Member as it was completely ignored the arguments of the department for assessing the income. It was observed by the learned Accountant Member that the learned Judicial Member also ignored the fact that the personal expenses declared by a member of URF and the other two members were ridiculously low and that the shop was located in the heart of city. The learned Accountant Member, therefore, accepted the departmental appeal by restoring the sales estimate at Rs.5,500,000.

I have heard both the parties and have also gone through the orders passed by my learned brother, the Judicial Member and the learned Accountant Member. I agree with the findings recorded by my learned brother the Judicial Member for the reasons recorded by him in detail while passing the order. The sales as reduced by my learned brother, the Judicial Member were in accordance with the history of the case, hence the same are upheld.

The appeal filed by the assessee is allowed as per majority view whereas the appeal filed by the department is dismissed being devoid of merits.

C.M.A./63/Tax (Trib.) Order accordingly.