I.T.As. Nos. 4114/LB and -14115/LB of 2001, decided on 2nd June, 2003. VS I.T.As. Nos. 4114/LB and -14115/LB of 2001, decided on 2nd June, 2003., 2004 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1868 (2003)

Per Rasheed Ahmad Sheikh, Judicial Member [Majority view].

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

‑‑‑‑S. 13(1)(e)‑‑‑Unexplained investment etc., deemed to be income‑‑ Word "incurred"‑‑‑Connotation‑‑‑‑‑‑Expenditure‑‑‑Section 13 (1)(e) of the Income Tax Ordinance, 1979 vividly spells out that where an assessee during any income year "incurred" any expenditure and he offered no explanation about the nature and source of such expenditure or the explanation offered by the assessee was not satisfactory in the opinion of the Assessing Officer, the sums so expended shall be deemed to be the income of the assessee of such income year chargeable to tax under the Income, Tax Ordinance, 1979‑‑‑Significant word used in Cl. (e) to subsection 13(1) is "incurred"‑‑‑In common parlance the word "incur" means‑ disbursement of expenses‑‑‑Legislature, has intentionally used second form of verb in‑the clause which would denote actual expending of expenses and not those of .incurring expenses on notional basis.

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

‑‑‑‑S. 13(1)(e)‑‑‑Unexplained‑ investment etc, deemed to be income‑‑ Expenditure‑‑‑Addition of expenditure on the basis of expenses claimed in a civil suit against Municipal Committee in respect of staff salaries and rent paid .for vehicles on notional basis‑‑‑Validity‑‑‑No edifice of assessment could be built on pre‑supposed and imaginary figures' of expenses claimed by the assessee in Civil Suit‑‑‑Purport and the tenor of the Civil, Suit was nothing but to compel the competent authorities to award contract to the assessee, how could the provisions of S.13 of the Income Tax Ordinance, 1979 could be invoked in such eventuality .particularly when not a single penny had been spent by the assessee on account of making payment to the staff and vehicles rental‑‑‑Assessing Officer could very easily ascertain the veracity of the assessee's claim as to whether company's cash had been affected by the such payments or not and whether any corresponding entries were recorded in the respective ledger account or not‑‑‑Fact whether a lump sum salary was paid to staff on a particular date of the year or was paid on periodical basis i.e. month wise could also not be ignored‑‑‑Other factors could also be looked into by adducing additional evidence to corroborate denial of the assessee's claim‑‑‑By doing such exercise, the whole controversy would become crystal clear as to whether the assessee had incurred any expenditures on account of payment made to staff and the vehicles rental‑‑‑Order passed by the two lower authorities suffered from factual infirmity insofar as claim of expenses on account of staff salaries and vehicles rental was concerned‑‑‑Order of First Appellate Authority was vacated and that of Assessing Officer was set aside for de novo consideration‑‑‑Assessing Officer was directed to proceed afresh after resolving factual controversy ‑‑‑Assessee was also allowed to adduce any documentary evidence in support of its claim during the course of re assessment proceedings‑‑Assessing Officer was also directed to confront the assessee with proposed treatment.

(1989) 59 Tax 112 (High Court) ref.

Per Khawaja Farooq Saeed, Judicial Member [agreeing]‑‑

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

‑‑‑‑S. 13(1)(e)‑‑‑Qanun‑e‑Shahadat (10 of 1984) Art. 144‑‑‑Unexplained investment etc., deemed to be income‑‑‑Expenditure‑‑‑Addition made on the basis of expenses claimed in a civil suit against Municipal Committee in respect of staff salaries and rent paid for vehicles on notional basis was set aside by one of the Members of Appellate Tribunal‑‑‑Department contended that assessee's original statement debared him from changing position and assessee was estopped by law to reprobate from what he had expressed by action earlier‑‑‑ Validity‑‑‑Assessee had statedly not done any business during the assessment years‑‑‑Entire addition was made on account of expenditure, which he claimed against performance of the agreement during continuation before cancellation‑‑‑Denial of assessee from incurring of expenses that the same were notional and claimed to 'pressurise the local government authorities to award contract was not supported by any evidence‑‑‑Assessing Officer, had also been able to prove his onus‑‑‑After denial of assessee the responsibility of proving that the expenses had been incurred lay strongly on the shoulders of the Assessing Officer to prove that the expenses were incurred‑‑‑One may agree with the department that the assessee having taken a stand could not subsequently be allowed to reprobate which means when something suits him he swallows it but when the same could not help him he denies ‑‑Issues of expenses had not yet been touched at any stage of the proceedings‑‑‑Neither Assessing Officer had categorically asked the assessee to explain nor the matter had been thrashed out from that angle‑‑‑Matter was also set aside by the third Member of the Appellate Tribunal.

2000 PTD 869 and 2001 PTD 2274 rel.

Per Amjad Ali Ranjha Accountant Member (Minority view) --

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 13(1)(e)‑‑Unexplained investment etc., deemed to be income‑‑ Expenditure ‑‑‑Assessee claimed expenditure in a civil suit against Municipal Committee in respect of staff salaries and rent paid for vehicles but did not claim/declare such expenditure in the income‑ax returns in the relevant assessment years‑‑‑Addition of such expenditure was made by the Assessing Officer ‑‑‑Assessee argued that addition was baseless as the assessee did not incur any such expenditure and the same was mentioned in the civil suit to develop pressure for obtaining the cancelled contract‑‑‑Addition was confirmed by the First Appellate Authority‑‑‑Validity‑‑‑Order of First Appellate Authority was judicious and was based on facts which did not call for any interference‑‑‑Order of First Appellate Authority was maintained and assessee's appeal was rejected.

Muhammad Arshad, I.T.P., for Appellant.

Nemo for Respondent.

Date, of hearing: 30^th May, 2003.

ORDER

AMJAD ALI RANJHA (ACCOUNTANT MEMBER).‑‑‑These are two appeals filed by an assessee relevant to assessment years, 1994‑95 and 1995‑96 against the order of the CIT(A), Zone‑I, Faisalabad, dated 31‑7‑2001 in income‑tax appeals Nos. 336 and 337.

2.Assessee's grievances are summarized as under:‑‑

(i)Assessing Officer as well as CIT(A) was not justified in confirming the addition at Rs. 19,50,000 and at Rs. 11,90,000 as the assessee did not incur any such expenditure for the years, 1994‑95 and 1995‑96.

3. Call notices were issued in response to which, Mr. Muhammad Arshad, ITP was present for the assessee‑appellant, whereas none appeared on behalf of the Revenue. Hence, the appeal is decided ex parte on merits under Rule. 20(2) of ITAT Rules, 1981.

4. Brief facts of the case are that the assessee‑appellant is a private limited company but it failed to file any suo motu returns. Assessing) Officer issued notices in response to which assessee filed return, declaring nil income. Assessee has failed to disclose the expenditure incurred on staff salaries and rent paid for vehicles, which was admitted itself by filing copy of Civil Suit against the Municipal Committee Jhang and the Secretary, Local Government of Punjab. However, in view of the facts discussed above and elaborately recorded in assessment order, the Assessing Officer was fully justified in marking the impugned additions of Rs. 19,50,000 and Rs. 11,90,000 respectively under section 13(1)(e) of the Income Tax Ordinance, and made an addition at Rs.19,50,000 and at Rs.11,90,000 respectively for the assessment years 1994‑95 and 1995‑96 as assessee has failed to disclose the expenditure and explain the sources. Assessees being aggrieved filed appeals before CIT(A) who in his appellate order rejected the appeals of the assessee with the following remarks:‑‑

"Facts of the case have been considered. Factually the assessee failed to disclose the expenditure incurred on staff salaries, rent paid for vehicles as well as expenditure on pursuance of civil suit as admitted by the assessee itself vide Civil Suit filed against the Municipal Committee, Jhang and the Secretary, Local Government of Punjab. However, in view of the facts discussed above and elaborately recording in assessment order, the Assessing Officer was fully justified in making the impugned additions of Rs.19,50,000 and Rs.11,90,000 respectively under section 13(1)(e) of the Income Tax Ordinance, 1979 for assessment years under appeal which we upheld."

5. Assessee has now come up in appeal before this forum challenging the action of the authorities below.

6. AR of the assessee has strongly contested the orders of the authorities below and has contended that the assessment has been finalized without providing sufficient opportunity. He has argued that show‑cause notice under section 13(1)(aa) and 13(1)(e), dated 17‑5‑2001 for compliance by 23‑5‑2001 was received on 28‑5‑2001 and after receiving the notice the assessee made an application for adjournment which was not considered. He further argued that the addition of Rs.19,50,000 and Rs. 11,90,000 is baseless as the assessee did not incur any such expenditure and the same was mentioned in the civil suit. In support of this contention he has produced the copy of the civil suit and the order of the Secretary Local Government and some other documents.

7. We have looked into the facts of the case, perused the orders of the authorities below and have listened to the arguments of the A.R. Since we find that the order of the CIT(A) is judicious and is based on facts which does not call for any interference. Hence the appellate order of the CIT(A) is maintained and appeals filed by the assessee for both theyears i.e. 1994‑95 and 1995‑96 stand rejected and disposed.

RASHEED AHMAD SHEIKH (JUDICIAL MEMBER).‑‑‑I have gone through the proposed order of my learned brother Mr. Amjad Ali Ranjha the Accountant Member who in the present case has maintained the impugned order by holding that the same was judicious and, is based on facts which does not call for any interference therein. I beg to differ with the findings so recorded in the proposed order by observing hereunder:‑‑

2. What happened in this case was that a contract was awarded to the assessee‑appellant by the Municipal Committee, Jhang but soon thereafter that was cancelled by said authority. Against that decision a Civil Suit was instituted by the assessee before the Civil Judge making the Administrator Municipal Committee, Jhang and the Secretary Local Government Punjab to be as parties for recovery of retention money and compensation alongwith claiming expenditure allegedly incurred on account of salaries paid to the staff and rent paid for vehicles etc. which amounted to Rs.19,50,000 and Rs.11,90,000 respectively for the assessment years 1994‑95 and 1995‑96. In compliance to a show‑cause notice issued by the Assessing Officer as to why the said amount may not be added under section 13(1)(e) of the Income Tax Ordinance, 19'79, it was submitted by the assessee that though suit for compensation. for specific relief was filed just to compel the other parties to carry on contractual obligations and nothing else. In fact the Civil Suit was fictitious in its nature and had nothing to do with the facts and figures mentioned therein. It was, also stated that the amount shown as compensation had never been spent but was based on pre‑supposes and imaginary figures as well as on guess work. As no expenditure was actually expended rather the said amount was claimed for some other considerations, thus no addition under section 13 was warranted in such circumstances. Support in this regard was sought from a case‑law reported as (1989) 59 Tax 112 (High Court) in re: CIT v. General Steel Industry. However the reply tendered could not convince the Assessing Officer and he, accordingly, added a sum of Rs.19,50,000 and Rs. 11,90,000 respectively for the years under appeal under section 13(1)(e) on account of failure to disclose the expenditure and to explain the sources thereof. At the first appellate stage, the Appeal Commissioner upheld the assessment order as the Assessing Officer was fully justified in making the impugned additions in view of the facts embodied in the assessment order.

3. After having perused the orders of the two authorities below and after having given anxious thought to the arguments put forwarded by the learned counsel for the assessee, I am of the considered view that this case needs thorough appraisal and appreciation of the facts of the case. Section 13(1)(e) of the Income Tax Ordinance, 1979 vividly spells out that where an assessee during any income year "incurred" any expenditure and he offers no explanation about the nature and source of such expenditure or the explanation offered by the assessee is not in the opinion of the Deputy Commissioner of Income Tax satisfactory, the sums so expended shall be deemed to be the income of the assessee of such income year chargeable to tax under this Ordinance. The significant C word used in‑ clause (e) to subsection 13(1) is "incurred". In common parlance the word "incur" means disbursement of expenses. The legislature has intentionally used second form of verb in this clause which would denote actual expending of expenses and not those of incurring expenses on notional basis.

4. As is evident from assessment order rendered in the present case, not an iota of evidence has been brought on record by the Assessing Officer to hold that the assessee had actually incurred any expenditure on account of staff salaries and vehicles rental. It is also pertinent to mention here that claim of the assessee has been turned down not only by the administrative and the Appellate Authorities but also by the apex Court of Pakistan. Thus, no edifice of assessment can be built on pre‑supposed and imaginary figures of expenses claimed by the assessee in Civil Suit. In fact the purport and the tenor of the Civil Suit was nothing but to compel the competent authorities to award contract to the assessee. How could the provisions of section 13 can be invoked in such eventuality particularly when not a single penny has been spent by the assessee on account of making payment to the staff and vehicles rental. It is also noted that this is a case of limited company and the Assessing Officer could very easily ascertain veracity of the assessee's claim as to whether company's cash has been affected by such payments or not and whether any corresponding entries are recorded in the respective ledger accounts are not? This factor can also be not ignored as to whether a lump sum salary was paid to the staff on a particular date of the year or that was paid on periodical basis, i.e. month‑wise. Other factors can also be looked into by adducing additional evidences to corroborate denial of the assessee's claim. By doing such exercise, the whole controversy would become crystal clear, as to whether the assessee has incurred any expenditures on account of payment made to staff and the vehicles rental.

5. After appraising the facts obtaining on record I cannot help but reach the conclusion that the orders passed by the two lower authorities do suffer from factual infirmity insofar as claim of expenses on account of staff salaries and vehicles rental is concerned. Consequently the order of the Appeal Commissioner is vacated and that of the Assessing Officer is set aside for de novo consideration. The Assessing Officer is directed to proceed afresh after unearthing factual controversy arisen in this case. The assessee is also at liberty to adduce any documentary evidence in support of its claim during the course of re‑assessment proceedings. The Assessing Officer shall also confront the assessee with the proposed treatment.

6. In the result, the assessee's appeal stands disposed of to the extent and in the manner indicated above.

Since a difference of opinion has arisen between the two members case is referred to the Hon'ble Chairman for nomination of 3^rd Member to resolve the following question:

"Whether on the facts and in the circumstances of the case, the impugned addition made under section 13(1)(e) is sustainable or not and whether such addition is liable to be maintained or set aside for de novo consideration?"

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑This is a case of difference of opinion; which has occurred between the two learned brothers Honourable Members of this Tribunal. The question proposed for decision is as follows:‑‑

"Whether on the facts and in the circumstances of the case the impugned addition tinder section 13(1)(e) is sustainable or not and whether such addition is liable to be maintained or set aside for de novo consideration?

As is evident from aforementioned proposed question it has restricted its scope to whether the impugned addition is liable to confirmation or set aside for de novo consideration.

The AR says that the finding of learned JM is well based as it has discussed all the factual and legal implication of the circumstances prevailing in this case. He admitted that the assessee did claim certain expenses from the corporation but argued that the effort was not intended to take money from the corporation but was a lever‑used to develop pressure for re‑obtaining the cancelled contract. He said that if statement is being used for addition against him why not the refusal by the corporation as well as other higher juridical authorities in local bodies hierarchy as well as of superior Courts is considered as an evidence in his favour. He also challenged the issuance of notice under section 65 on the ratio of an earlier judgment of the ITAT reported as 2000 PTD 869 which we ignore for the reason that the same has been overruled by the High Court in another judgment. The AR also challenged the merits from another angle, He said that this addition required two approvals and the Assessing Officer having not done so the assessment should have been cancelled. He referred 2001 PTD 2274. He reiterated his earlier argument that assessment has not incurred any expenses and only notional expenses were claimed as damages of breach of the contract.

The DR said that the finding of learned JM is contrary to the actual position for the simple reason that the DR was not heard on the said date. He said that the assessee claim of having incurred expenses for working out of octroi charges from the Jhang Municipal Corporation was a categorical declaration. It was not claimed as a compensation of some loss. It was against an unequivocal claim that the assessee has incurred expenses during the period of contract with the Municipal Committee. This he remarked is against clause 144 of Qanoon‑e‑Shahadat Act; which has already been, held to be as fully applicable by the superior Courts on income‑tax proceedings. The evidential value of the assessee statement in' writing cannot be undermined. The assessee claim that the authorities have rejected their petition by holding their claim as bogus, he remarked is‑also not fortified by any finding. In any case learned DR remarked even if there was any such finding he still maintains that the assessee's original statement debars him from changing position. He referred relevant Chapter of Qanoon‑e‑Shahadat and reiterated that assessee is stopped by law to reprobate from what he had expressed by action earlier. He also said that law does not help those who come with unclean hands.

I appreciate the efforts and arguments of two sides. However, being a referee Judge any jurisdiction is restricted to the question proposed which says that whether the addition under section 13(l)(e) for both the years, should be confirmed or, set aside for de novo consideration.

Going to the facts mentioned above if I go through the same and arguments the matter can be resolved following the principle of natural justice that no one should be condemned unheard.

This principle has always been followed with approval by all Courts. I do not find any reason for me to agree that additions of Rs.19,50,000 and Rs.11,90,000 respectively have been made in strict compliance to above principle and section 13 of the Income Tax Ordinance, 1979. In this regard the judgment of Honourable Lahore High Court reported as 2001 PTD 2274 can be referred. The Honourable High Court has held that if the Assessing Officer fails to comply with the provisions of section 13(1) and 13(2), where two separate statutory approvals have been provided, the cancellation is justified. In this regard one may argue that in this case the provisions of section 13(2) cannot come into operation. However, this cannot be ignored that the addition, which has been made is a deemed income and not a regular income as such. The assessee has statedly not done any business during these two assessment years. The entire addition is on account of expenditure; which he claimed against, performance of the agreement during continuation before cancellation. This claim, the assessee says is notional. He has not incurred these expenses but have only claimed to purport the local Government authorities to award contract. This denial has not been supported by evidence. On the other hand the Assessing Officer has also been able to prove his onus. He was to assess this income in strict compliance of the language of section 13 which speaks of finding'. In my humble opinion after denial of the assessee the responsibility of provide that the expenses had been incurred lied strongly on the shoulders of the Assessing Officer. His reliance is totally on the assessee's claim before local government authorities and no further proof has been advanced for making others believe that the expenses were incurred.

One may agree with the department that the assessee having taken a standing cannot subsequently be allowed to reprobate which means when something suits him he swallows it but when the same cannot help him he denies. Furthermore the issue of said expenses has not yet been touched at any stage of the proceedings. Neither Assessing Officer has categorically asked the assessee to explain nor the matter has been thrashed out from that angle. This being so it was in the interest of justice that the matter should have been set aside. The learned J.M. has taken the same course, which to me is correct. In view of the same I respectfully concur with his final verdict and agree with his proposal of set aside.

The result is obvious the assessee appeal stands allowed in the manner that orders of the two subordinate officers are set at naught.

C.M.A./66/Tax (Trib.)Appeals allowed.