I..T.As. Nos. 4901/LB of 2004 and 2581/LB of 2005, decided on 26th November, 2005. VS I..T.As. Nos. 4901/LB of 2004 and 2581/LB of 2005, decided on 26th November, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1699 (2005)

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

----S.62(1)---Assessment on production of accounts, evidence etc.---Setting aside of assessment for de novo consideration---Assessee contended that returned version merited acceptance, reason being provision of S.62(1) of the Income Tax Ordinance, 1979 were not adhered to---Question arose as to whether assessment should be set aside where in a case legal infirmity of non-issuance of statutory notice existed---Validity---Assessment was set aside with the direction to pinpoint the defects after careful examination of book of accounts in terms of S.62(1) of the Income Tax Ordinance, 1979---In fact appropriate course available with First Appellate Authority in such circumstances was to direct acceptance of returned version in its totality instead of resorting to set aside the assessment for de novo proceedings---Assessee's returned version merited acceptance and it was ordered accordingly by the Appellate Tribunal---Order of First Appellate Authority was vacated.

2005 PTD (Trib.) 1437 rel.

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

----S.80-D---Minimum tax on income of certain persons---Commission income---Assessee was aggrieved on account of charging turnover tax on gross turnover/distribution of products on behalf of principal company---Validity---Turnover tax under S.80D of the Income Tax Ordinance, 1979 was to be charged on the commission earned by the agent/distributor from the principal company as a part of its turnover---Assessing Officer was directed to charge the tax under S.80D of the Ordinance on the commission income earned by the assessee.

I.T.A. Nos.4469 and 4470/LB of 2002 rel.

Tipu Sultan, I.T.P. for Appellant.

Ghazanfar Hussain, D.R. for Respondent.

ORDER

This order is intended to dispose off above titled two appeals which are directed against two separate orders passed by C.I.T.(A) Zone I, Faisalabad; one dated 16-6-2004 for the assessment year 2001-02 and the other is dated 16-4-2005 in respect of assessment year 2002-03.

2. First common grievance of the assessee-appellant pertains to setting aside the assessment for de novo consideration by the first appellate it was vociferously submitted by the learned counsel for the assessee that the returned version of the assessee-appellant merits acceptance reason being provision of section 62(1) of the repealed Income Tax Ordinance, 1979 are not adhered to in the instant case. In such-like situation it has been held not only by the higher appellate Courts but also by Tribunal that the returned version is liable to be accepted. Thus setting aside the assessment by the First Appellate Authority was not at all warranted on the facts and in the circumstances of the case. Support in this regard was sought from the case-law cited as 2006 PTD (Trib.) 1437. Conversely the learned D.R. appearing on behalf of the Revenue supported the impugned order for the reason embodied therein.

3. The assessee-appellant in this case is a private limited company and is acting as a distributor of Pakistan Tobacco Company Limited (herein called PTCL). Return of Income was filed whereby gross profit/income on cigarette was returned at Rs.28,98,443 and Rs.27,31,212 and gross-commission income on sale of soap, tea and dalda ghee at Rs.17,02,504 for the former assessment year while at Rs.27,31,212 and Rs.19,12,196 for the later assessment year and after deducting operating expenses therefrom net loss of Rs.451,944 and Rs.13,55,360 was declared respectively. To substantiate the returned version, books of accounts and the other related/allied documents were furnished during the course of assessment proceedings. Thereafter the so-called defects noted in the books of accounts for the assessment year 2001-02 were confronted. Such as declaration of lesser gross profit rate viz. history of the case and this was attributed due .to claiming trading expenses under the administrative head. Reference in this regard was made to the expenses claimed under the heads freight octroi cartage, loading/unloading and wages which were part of the trading expenses but were claimed in profit and loss account. Besides addition of Rs.100,000 was intended to be made on account of sale of goods of Lever Brothers Private Limited. Also confronted that miscellaneous income has not been declared during the year whereas such income had always been declared in the past. Besides it was too observed that the expenses claimed under the head administrative expenses, selling and distribution expenses and financial charges remained unvouched and unverifiable. Similar observations are made with regard to the expenses claimed under various heads. Further observed that no supportive evidence whatsoever has been provided to authenticate the claim of deferred cost.

4. For the assessment year 2002-03 almost identical detects were noted from the books of accounts produced for examination of the Assessing Officer. The reply furnished by the assessee-appellant could not convince the Assessing Officer and he proceeded to reject the declared version. Accordingly sales were estimated at Rs.15,50,00,000 and Rs. 14,60,00,000 respectively under the head "cigarette section" which were subjected to a gross profit rate of 2.1%. In lever Brothers account the sales as were declared at Rs.4,41,84,248 and Rs.4,78,87,570 were subjected to a gross profit rate of 4.1%. Besides after making a huge additions out of certain heads of the profit and loss expenses, the declared loss was converted into net income of Rs.664,513 and Rs.254,062 respectively.

5. When the orders passed by the Assessing Officer were assailed before the First Appellate Authority, he resorted to set aside the assessment for de novo decision as the facts of the case could not be fully appreciated at the assessment stage. The Assessing Officer was therefore, directed to point out the defects after carefull examination of the books of accounts in terms of section 61(1) of the Income Tax Ordinance, 1979. Further directed that the Tribunal's decision dated 4-10-2002 for assessment year 2000-01 may be given due consideration while making fresh assessment. This treatment forced the assessee?appellant to come up in further appeal before the Tribunal.

6. The divergent views as well as the documents and the case-law furnished before us have been perused. On going through the contents of the so-called notice issued under section 62(1) of the Income Tax Ordinance, 1979, these clearly depict that those do not come at par with the defects to be noted in the books of accounts. Proviso to sub-section (1) of section 62 spells out that the D.C.I.T. shall confront the assessee of the defects noted in the accounts produced as evidence in support of the return. In no way the deficiencies pointed out in the notice issued under section 62(1) can be held to be the defects noted in the books of accounts. Those observations are general in their character which cannot be declared to be the defects noted in the accounts. In fact, vide that notices merely certain details and documents were requisitioned by the Assessing Officer in order to disbelieve the declared version and nothing more. Interestingly, in the present case a specific request was made to the Assessing Officer, in response to the notices issued under section 62, to please identify and quantify the instances of transactions which lead to the conclusion for rejection of returned version. Further requested that as to why last years rate of gross profit i.e., 2.1% is being adopted instead of 1.92% achieved for the assessment year 2002-03 in cigarette account.

7. With regard to grouping of trading expenses under the head administrative expenses, it was categorically stated that the alleged trading expenses are solely administrative and setting expenses and have been rightly classified under the administrative and selling expenses. Thus the observation recorded in this regard were based on surmises and whims and as such is not tenable and sustainable in law.

8. We are convinced that the reasons advanced and the basis given by the Assessing Officer in the notice issued under section 62(1) are not the substitution of the notice to be issued under the said section. In fact the assessee has shifted his onus on the Assessing Officer's shoulders by stating in writing that please identify and pinpoint the transactions which were not open to verification or not supportive at any material evidence. In such eventuality it was the Assessing Officer's duty to fasten blame at the assessee's door by identifying the transactions or the expenses which were not open to verification, once he had examined the books of accounts produced before him. There is no cavil to this proposition that the declared results cannot be discarded without adhering the proviso to section 62(1) of the Ordinance which is fatal and non-curable. This ratio and principle has been enumerated in quite a number of reported and unreported judgments rendered by the higher as well as by the Appellate Tribunal. Reference in this regard can be made to a Full Bench judgment cited as 2005 PTD (Trib.) 1437 whereby it was held in majority that issuance of notice under section 62(1) of the Income Tax Ordinance in its letter and spirit is sine qua non and non-observance thereof is fatal which would ultimately result into acceptance of declared version of the assessee. Relevant para. of that judgment is being reproduced hereunder for ready reference:---

7. Above all, the fact remains that the assessment order suffers from legal infirmity. Section 62(1) of the Income Tax Ordinance, 1979 vividly stipulates that prior to rejection of declared trading version, the Assessing Officer is obliged to confront the assessee with the defects noted by him in the books of accounts maintained by the assessee, in the present case the notice issued by the Assessing Officer under section 62 number and dated "Nil", for compliance to be made on 19-6-2000, merely spells out submissions of certain details by the assessee which according to the assessee had been complied with. In no way this notice comes at par or can be equated with the notice to be issued under section 62(1) of the Income Tax Ordinance, 1979. Issuance of notice under section 62(1) of the Income Tax Ordinance is sine qua non and non-observance thereof is fatal, Since no such notice has even been issued in the present case which would ultimately result into acceptance of declared trading version of the assessee. Support in this regard has been sought from the reported decisions of the Supreme Court and the Tribunal, i.e. 1971 SCMR 681, 1985 PTD (Trib.) 170; (1999) 79 Tax 764; 1999 PTD (Trib.) 3896; 2001 PTD (Trib.) 2938 and 2002 PTD (Trib.) 1583 whereby in similar circumstances it was held that any addition made in the declared trading results is ab initio illegal and void. So far as the Tribunal is concerned, the point relating to issuance of notice under section 62(1) of the Income Tax Ordinance, 1979 first came under discussion before the Karachi Bench in a reported judgment 1999 PTD (Trib.) 3892 in which it was observed as under:---

"In view of the above facts and conclusions drawn, I.T.O. in terms of proviso to subsection (1) of section 62 should have confronted the assessee with the defects found in the books of accounts, it was a mandatory provision which he was required to follow. As he failed to do so he has no legal authority to make any addition in the declared trading results. Any addition made is, therefore, ab initio illegal and void. Even otherwise on fact I.T.O. was not justified to reject the trading results."

9. Now, the question arises as to whether the assessment should be set aside where in a case legal infirmity of non-issuance of statutory notice exists. The answer to this question is very simple and has already been answered in the cited judgment. The relevant part thereof is appearing at page 1444 which reads as under---

"Subsequently this point was adjudged by the Lahore Bench in another reported case cited as 2002 PTD (Trib.) 1583. The learned Accountant Member, who is sitting in the present Bench, was also signatory to that judgment. The operative part of which reads as under:---

"After hearing both the parties and going through the case-law cited at the bar, we are of the considered view that the learned First Appellate Authority was erred in law while setting aside the case instead of annulling the assessment when the Assessing Officer failed to confront the assessee with the defects found by him in the books of accounts which is mandatory provisions of law for framing the assessment. We, therefore, vacate the order of the learned First Appellate Authority and annul the assessment framed by the Assessing Officer being in violation of section 62 of the Income Tax Ordinance, 1979."

What happened in the present case was that for the assessment year 2001-2002, the learned Appeal Commissioner after appreciating the facts of the case came to the conclusion that the assessment is not sustainable set aside the assessment for de novo decision with the direction to pinpoint the defects after careful examination of books of accounts in terms of section 62(1) of the Income Tax Ordinance, 1979. While for the subsequent assessment year 2002-03 the assessment has been simply set c aside with certain directions in fact appropriate course available with the Appeal Commissioner in such circumstances was to direct acceptance of returned version in its totality instead resorting to set aside the assessment for de novo proceedings. Thus in view of foregoing discussion and the case-law cited at the bar we cannot help but reach the conclusion that the assessee's returned version in the instant case merited acceptance for the two years under appeal and it is ordered accordingly. Consequently the Appeal Commissioner's order stands vacated.

10. For the assessment year 2002-03 the assessee-appellant is also aggrieved on account of charging turnover tax under section 80D of the repealed Income Tax Ordinance, 1979 on the gross turnover. The point involved is as to whether the turnover tax is to be charged on the gross turnover of the gross commission income earned by the assessee?appellant on the distribution of products on behalf of the principal company. Admittedly the assessee in the instant case is a distributor of products of Lever Brothers (Pvt.) Ltd. and Pakistan Tobacco Company. We, therefore, do not take long to dispose of the instant issue, reason being this issue has already been laid to rest by the Appellate Authorities in a number of cases by holding that turnover tax under section 80D is to be charged on the commission earned by the agent/distributor from the principal company as a part of its turnover. Anyhow, copy of unreported decision of the Tribunal bearing I.T.A. Nos.4469 and 4470/LB of 2002dated 6-5-2004 has been placed on record whereby in the similar circumstances it was held that tax under section 80D shall charge on the declared commission earned from Lever Brothers Ltd. as part of its turnover. Respectfully following the ratio settled in this regard the Assessing Officer is directed to charge 80D on the commission income earned by the assessee-appellant.

11. This would result into acceptance of the assessee's appeals on the legal planes only.

C.M.A./44/Tax(Trib.)?????????????????????????????????????????????????????????????????????????? Appeal accepted.