I.T.As. Nos. 260/LB, 562/LB, 1721/LB and 699/LB of 2003, decided on 16th April, 2005. VS I.T.As. Nos. 260/LB, 562/LB, 1721/LB and 699/LB of 2003, decided on 16th April, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1665 (2005)

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

----S.62---Constitution of Pakistan (1973), Arts. 199(4A) & 254---Assessment on production of accounts, evidence etc.---Passing of assessment after expiry of six months from the date of passing the interim order by the High Court---Validity---Assessing Officer acted within his jurisdiction to formulate the assessment after expiry of six months from the date of passing the interim order---Article 199(4A) of the Constitution provided that period of six months would run in a case where proceedings taken or act done by any authority or person or purported to have been done was connected 'with assessment or collection of public revenue shall cease to have effect on the expiration of a period of six months following the day on which it was made unless the case was finally. decided or the interim order was withdrawn by the Court earlier---Objection, that Assessing Officer was debarred to pass the order after the expiry of six months from the date of passing the interim order by the High Court was overruled by the Appellate Tribunal reason being that the Assessing Officer was within the jurisdiction to proceed after six months to finalize the assessment.

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

----Ss.62 & 4(A)---Constitution of Pakistan (1973), Art.199---Assessment on production of accounts, evidence etc.---Assessment on the basis of Audit Report sub judice before High Court---Validity---Assessing Officer was not competent to rely upon the contents of the audit report for the purposes of formulating the assessment as the said report was sub judice before the High Court---Assessing Officer had either to wait for the decision of the High Court till the writ was disposed of---If the assessment was not hit by limitation, notice should have been given after examination of books of accounts by the Assessing Officer---Assessing Officer had acquired extra constitutional powers to make the assessment basing upon the audit report which was sub judice before the High Court---Entire superstructure of the assessment order revolved around the shortcomings pointed out by the auditor in the books of accounts examined by him---Such act of the Assessing Officer was not sustainable in law.

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

----Ss. 62 & 4(A)---Assessment on production of accounts, evidence etc.---Assessment---Assessing Officer had to form his independent opinion about the defects noted in the books of accounts but not by any other authority or agency or forum etc. until and unless so authorized in accordance with law.

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

----Ss.62(1) & 4(A)---Assessment on production of accounts, evidence etc.---Assessee had been confronted under S.62 of the Income Tax Ordinance, 1979 with the defects pointed out by the auditor in its verbatim and audit report had been made the basis for assessment which was sub judice before the High Court---Books of accounts were examined by the auditor and not by the Assessing Officer which was statutory requirement of law---Assessing Officer was directed by the Appellate Tribunal to accept the returned version on account of being non-adherence to statutory requirement of law.?

1999 PTD (Trib.) 382 rel.???????

(e) Income tax---

----Addition in workshop labour income (mechanical), workshop labour income (denting & painting) and miscellaneous income---Validity---Additions were not maintainable on account of two reasons: firstly, complete procedure as to how the car which was taken for repair in the premises was explained, first of all job card was prepared which gives complete identifying particulars of the party such as car number, model and the items which were to be repaired, cash memo/credit invoice was issued mentioning therein job card number, date, party's name and the amount to be received from the client was recorded, entire income was properly documented and supportive of material evidence and secondly higher appellate Courts had always deprecated making of round/ad hoc addition in account cases.

1976 PTD 119 and 1984 PTD 239 rel.

(f) Income tax---

----Profit and Loss expenses---Tele none expenses---Assessce, a company---Addition on account of personal use---Validity---Disallowance made against the expenses claimed was unwarranted---Company was an artificial juridical person and the directors were employees of the company which were being separately assessed---No addition could be made on account of involvement of personal element of the assessee ?company---Addition was deleted by the Appellate Tribunal.

(g) Income tax---

----Bonus---Disallowance of---Deletion of addition---First Appellate Authority observed that disallowance was made without discussing merits of the claim---Nothing had been brought on record wherefrom it could be deduced that element of un-verifiability of the claim was available---Assessing Officer had not bothered to mention that payment of bonus was not in accordance with treatment and condition of employment---Deletion of addition by the First Appellate Authority was maintained by the Appellate Tribunal in circumstances.

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

----S.62(1)---Assessment on production of accounts, evidence etc.---Assessing Officer could not unearth any substantial discrepancy whatsoever in the declared receipts as were required to be confronted in terms of proviso to S.62(I) of the Income Tax Ordinance, 1979.

(i) Income tax---

----Receipts---Addition on the basis of history---Validity---Assessee had discharged his onus probandi by adducing the material and evidence---Blame could not be fastened at its door by merely stating that the receipts were not fully verifiable or the assessee had a history of making addition---Appellate Tribunal directed the Assessing Officer to accept the declared receipt.

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

---Ss. 24(i) & 24(ff)---Deductions not admissible---Expenses claimed was added back by merely stating "under S.24(i) and 24(ff)"---No discussion had been made as to why and to what extent these provisions were attracted to the payments of salary---In the absence of giving any reason or making any discussion in that regard, the addition could not be made or maintained under cis. (i) and (ff) of the S.24 of the Income Tax Ordinance, 1979---Addition made was deleted by the Appellate Tribunal in circumstances.

Muhammad Ali Asghar Qazi, I.T.P. for Appellant.

Ahmad Rauf, Legal Advisor for Respondent.

ORDER

RASHEED AHMED SHEIKH (JUDICIAL MEMBER).---By this single order we proceed to adjudge four titled appeals out of which two are cross-appeals which pertain to assessment year 1999-2000. The remaining two appeals for the assessment years 1998-99 and 2000-2001 are also directed at the instance of the assessee-appellant. In respect of assessment year 1998-99, the order passed by C.I.T.(A), Zone-I, Lahore dated 17-3-2003 has been called into question while for the subsequent assessment years 1999-2000 and 2000-2001, the orders dated 18-12-2002 and 13-11-2003 passed by the said Appeal Commissioner are under attack.

2. The divergent views expressed by the learned representatives appearing at the bar have been seriously deliberated. Besides the documents and the case-law furnished by the learned counsel for the assessee in support of the contentions have also been gone through.

3. Common grievance of the assessee-appellant pertains to rejection of returned version. It was the learned counsel for the assessee's contention that the learned Appeal Commissioner has fallen in grave error in confirming the additions made in commission income account for the assessment year 1998-99 and also in workshop receipts particularly when the declared income/receipt in these two heads were entirely documented. Secondly, estimation thereof was made in violation to proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979. According to the learned counsel, no addition whatsoever in the declared commission income and the workshop receipts could be made without pinpointing specific defects in the books of accounts produced for examination of the Assessing Officer and failure on the part of the Assessing Officer to confront the defects found therein renders the declared version liable to be accepted.

4. The facts leading for disposal of this issue are that the assessee? appellant, a private limited company, which is acting as a commission agent on behalf of Honda Motors. For the assessment year 1998-99 the case was outsourced in terms of section 4(A) of the Income Tax Ordinance, 1979. Accordingly Messrs Rehman Sarfraz & Company, Chartered Accountant, was directed for preparation of audit report. On receipt of the report, a notice under section 62 of the income Tax Ordinance was issued to the assessee for compliance to be made on 26-10-2000. Against that notice writ jurisdiction of the Lahore High Court, Lahore was invoked consequent upon which proceedings to assess the income were stayed by the Court. Nevertheless, the Assessing Officer, after expiry of period of six months from the date of passing the order by the Lahore High Court, Lahore, proceeded to finalize the assessment. Before finalizing the assessment, final opportunity for furnishing reply to the earlier notice issued under section 62 was provided on 29-12-2001 which was not availed by the assessee by contending that the stay proceedings w'1 remain operative till disposal of the writ petition. But this request wa turned down by the Assessing Officer as a result of which major. additions made in the following heads the returned version was rejected and estimated commission income as well as the workshop receipts. Besides additions out of certain heads of the profit and loss expenses were made. At the first appellate stage, the Appeal Commissioner had set aside the assessment with the direction to issue a fresh notice under section 62 and then finalize the assessment according to law and facts.

5. Before us it was stated that since the assessment having been framed during the currency in which the proceedings were ordered to be kept in suspension thus the order made under section 62 of the Ordinance is liable to be quashed/annulled because in such like situation automatic ceasure of stay order does not operate. According to him the Assessing Officer has incorrectly referred to Article 199(4A) of the Constitution of Pakistan. This Article should not be read in isolation rather to be considered with reference to Article 254 of the Constitution of Pakistan. Also pleaded that since the assessment order has been passed solely after placing reliance upon the audit report submitted by the Chartered Accountants firm is nullity in law because the High Court had restrained the Assessing Officer to use the said audit report for the assessment to be made. Further argued that the books of accounts have been discarded by the Assessing Officer on conjectures, surmises and whims. Since, the Assessing Officer has not adduced substantial reasonings for disagreeing with the defects noted from the books therefore, disbelieving the declared results was not at all warranted. It was, accordingly, prayed that the declared version for assessment year 1998-99 be ordered to be accepted.

6. Perusal of the facts available on record depicts that the assessee had not only challenged issuance of show-cause notice dated 18-10-2000 but also the order of the Central Board of Revenue made under section 4(A) of the Income Tax Ordinance, 1979, authorizing the Chartered Accountants firm to conduct audit of the books of accounts, in a writ jurisdiction. Accordingly assessment proceedings were stayed by the order of the High Court dated 18-6-1996. To our mind the Assessing Officer has acted within his jurisdiction to formulate the assessment after-expiry of six month prom the date of passing the interim order. According to clause (4A) of Article 199 of the Constitution of Pakistan (1973), the period of six months would run in a case where proceedings taken or act done by any authority or person or purported to have been done is connected with assessment or collection of public revenue shall cease to have effect on the expiration of a period of six months following the day on which it is made unless the case is finally decided or the interim order is withdrawn by the Court earlier. Hence, objection of the Assessing Officer that he was debarred to pass the order after the expiry of six months from the date of passing the interim order by the High Court is overruled reason being the Assessing Officer was within the jurisdiction to proceed after six months to finalize the assessment.

7. Anyhow the Assessing Officer was not competent to rely upon the contents of the audit report for the purposes of formulating the assessment as the said report was sub judice before the High Court. Thus Assessing Officer had either to wait for the decision of the High Court till the writ is disposed of. If the assessment was not hit by limitation or fresh notice should have been given after examination of books accounts by himself. To our mind the Assessing Officer has acquired extra constitutional powers to make the assessment basing upon the audit report which was sub judice before the High Court.

8. When viewed in this perspective it is noted that the entire superstructure of the assessment order revolves around the shortcomings pointed out by the auditor in the books of accounts examined by him. Such act of the Assessing Officer is not sustainable in law. According to proviso to subsection (1) of section 62, this is the DCIT who, before disagreeing with the accounts, shall give a notice to the assessee of the defects noted in the books of accounts produced for his examination. Thereafter an opportunity to the assessee to explain his point of view about such defects shall be afforded by the Assessing Officer and he shall also record such explanation and the basis of computation of total income in the assessment order. Actually the DCIT has to form his independent opinion about the defects noted in the books of accounts but not by any other authority or agency or forum etc. until and unless so authorized in accordance with law. Before us it was pleaded that complete books of accounts are maintained which were not only examined by the auditor but were also produced for the examination of the Assessing Officer. There is no dearth of case-law wherein it has been categorically held that non-adherence to proviso to subsection (1) of section 62 renders the assessment liable to be cancelled. One may refer to a case law cited as 1999 PTD (Trib.) 382 for the purposes of ready reference. To sum up it is imperative to mention here that the assessee has been confronted under section 62 with the defects pointed out by the auditor in its verbatim. Moreover the audit report has been made the basis for assessment which was sub judice before the High Court. In addition to, the books of accounts were examined by the auditor and not by the DCIT which was statutory requirement of law. In the given scenario we have no ambiguity in our mind but to direct the Assessing Officer to accept the returned version of the assessee so far as assessment year 1998-99 is concerned on account of being non adherence to statutory requirement of law. We have accepted the assessee's returned version for this assessment year therefore the other grounds raised in the memos. are not being dilated upon hereunder.

ASSESSMENT YEAR 1999-2000

9. First objection for this assessment year is that the learned DCIT was not justified in making round addition in workshop labour income (mechanical), workshop labour income (denting & painting) and miscellaneous income respectively particularly when income/receipts from these heads were fully documented. As per the assessment order receipts/income were shown to have been earned at Rs.13,78,412, Rs,30,89,584 and Rs.132,870. Out of which a sum of Rs.50,000, Rs.60,000 and Rs.35,000 respectively was added towards the declared receipts/income after having observed that those were not open to verification. At the first appellate stage, the Appeal Commissioner maintained the order of the Assessing Officer on the point of workshop receipts in the two heads referred to supra. However, miscellaneous income was curtailed to Rs.15,000 after having found excessiveness in the impugned addition. We have a lot of substance in the contention of the learned counsel for the assessee that there was no valid reason whatsoever with the Assessing Officer to make round addition in all the three heads referred to above. Thus, the additions made are not maintainable on account of two reasons. Firstly, complete procedure as to how the car which is taken for repair in the premises of Honda Fort (Pvt.) Ltd. was explained. It was stated that first of all job card is prepared which gives complete identifying particulars of the party such as car number, model and the items which are to be repaired. Thereafter, cash memo/credit invoice is issued mentioning therein job card number, date, parties name and the amount to be received from the client is recorded. From all this it can be safely inferred that the entire income is properly documented and supportive of material evidence. Secondly the higher appellate Courts-have always deprecated making of round/ad hoc addition in account cases. Reference in this may be made to a case law reported as 1976 PTD 119, 1984 PTD 239. Hence, the round addition made in the three heads maintained to ante is hereby deleted. Since, we have deleted the addition made under the head miscellaneous income, therefore, the departmental objection in this regard looses its force.

10. Next assessee's contention is that the learned Appeal Commissioner was not justified in confirming the addition made under the head telephone, entertainment, repair & maintenance (General), repair & maintenance (building) repair & maintenance (office equipment), vehicle running and repair of vehicle without pointing out any specific defects therein. We decline to intervene in the treatment accorded by the First Appellate Authority except the addition made in telephone account reason being curtailment in the claims were made by the Assessing Officer for the reasons embodied in the assessment order as well as considering history of the case. Similarly curtailment in miscellaneous expenses by the Appeal Commissioner from Rs.17,000 to Rs.10,000 is also upheld being excessive disallowance was made by the Assessing Officer. In telephone account, the disallowance made amounting to Rs.49,359 against the expenses claimed at Rs.329.065 was unwarranted. Since, the company is an artificial juridical person and the directors are employees of the company which are being separately assessed, therefore, no addition can be made on account of involvement of personal element of the Assessee-Company. The impugned addition is accordingly deleted. The department has also challenged deletion of addition made under the head bonus payable to the employees amounting to Rs.300,000. On going through the impugned appellate order on this point it was observed by the Appeal Commissioner that the Assessing Officer had made the disallowance without discussing merits of the claim. Nothing has been brought on record wherefrom it could be deduced that element of unverifiability of the claim was available. Even the Assessing Officer has not bothered to mention that payment of bonus was not in accordance with treatment and condition of employment. This resulted into deletion of addition of Rs.300,000 by the Appeal Commissioner. The Iearned D.R. could not dislodge these observations with any plausible reasonings. The order of the Appeal Commissioner is hereby maintained on this point.

ASSESSMENT YEAR 2000-2001

11. For this year confirmation of workshop income by the Appeal Commissioner has been called in question. It was contended that the income has been estimated without adhering the proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979. Gross income, under this head, was disclosed at Rs.3,10,12,112 against which expenses on account of workshop purchases (consumed) were shown at Rs.1,74,64,320. The resultant amount of Rs.1,35,47,792 was representing net income from workshop. The Assessing Officer of his own evolved gross profit rate of 43.7% on the total receipts. As regards workshop income, it was observed by the Assessing Officer that this was not fully verifiable. The batch cards and the details of job done did not show complete particulars of the customers, car number or nature of job done besides the item appearing in debit side were also found unverifiable. Moreover, the assessee has history of rejection of return income such as the receipts in preceding assessment year 1998-99 were estimated. All these discrepancies were confronted to the assessee and the reply furnished by the assessee was not found satisfactory. Accordingly the Assessing Officer proceeded to make addition of Rs.13,63,000 towards workshop income account against the income stated in the assessment order at Rs.600,000 and gross profit rate of 43.7% was applied thereon as was evolved by the Assessing Officer of his own. At the first appellate stage, the Appeal Commissioner maintained the addition being reasonable. However the Assessing Officer was directed that addition towards workshop income be restricted to 43.7% of the gross addition, It was stated that although the assessee has a history of making addition in workshop income nevertheless the fact remain that each year is a separate and independent assessable entity and principle of res judicata does not apply to the income tax proceedings. Thus the assessee has a right to improve hi account in the subsequent years. as has been done in the instant case. It was also added that the entire receipts are open to verification.

12. Perusal of batch card, job card and cash/receipts/credit invoices vividly spells out that the workshop receipts and expenses are fully vouched and verifiable. To our mind the Assessing Officer could not unearth any substantial discrepancy whatsoever in the declared receipts as were requited to be confronted in term of proviso to section 62(1) of the Income Tax Ordinance, 1979; We are convinced that complete record of workshop receipts is being maintained. The job card clearly depicts complete details such as name and address of the customers, vehicles Nos., description of job done and the amount charged from the client. In addition to complete stock record of spare parts has been maintained and sales tax was also paid on sale of spare parts. In such situation how can it could be held that the workshop income was not fully verifiable. We are persuaded to hold that the assessee has discharged his onus probandi by adducing the material and evidence, thus the blame cannot be fastened at its door merely stating that the receipts were not fully verifiable or the assessee has a history of making addition in this head. Even otherwise this Tribunal, in the instant order has directed to accept the declared income under this head in respect of the immediately preceding assessment years. We therefore, direct the Assessing Officer to accept the declared workshop receipts.

13. The assessee's next contention is that the learned Appeal Commissioner was not justified in confirming disallowance of Rs.80,000 made under the head salary and wages in terms of sections 24(1) and 24(ff). This addition has been made without appreciating the facts in its proper perspective. We are failed to understand as how can the Appeal Commissioner has refused to interfere in the impugned addition. As per the assessment order out of the total expenses claimed at Rs.25,74,632, a sum of Rs.80,000 was added back by the Assessing Officer merely stating "under sections 24(1) and 24(ff)". No discussion whatsoever has - been made as to why and to what extent these provisions are attracted to the payments of salary. How come in absence of giving any reasdn or making any discussion in this regard, the addition can be made or maintained under clauses (1) and (ff) of section 24 of the Ordinance. This shows careless attitude of the Assessing Officer while curtailing expenses under this head. In the given circumstances the addition made in this head is hereby deleted.

14. Next plea of the assessee is that the learned Appeal Commissioner should have deleted the addition made under the head legal and professional charges which amounted to Rs.12,000 being the claim was fully vouched and verifiable. A sum of Rs.12,000 was disallowed by the Assessing Officer from this head by mentioning "due to non-verifiability of the claim and history of the case". We do not appreciate such practice of curtailing the claims. This 100% disallowance . certainly seems to have been made on stock phrases. The impugned addition is therefore deleted.

15. The other objection of the assessee pertains to allowing inadequate relief in the add-back made under the head entertainment, repair and maintenance, vehicle running, miscellaneous, travelling and conveyance and printing and stationery. This contention is devoid of any force being additions thereunder were made on valid reasonings by the Assessing Officer, hence are maintained.

16. In the result, all the four appeals are disposed of in the terms discussed above.

C .M . A. /50/Tax(Trib.)?????????????????????????????????????????????????????????????????????? Order accordingly.