I.T.As. Nos. 1650/KB and 1651/KB of 2002, decided on 27th October, 2005. VS I.T.As. Nos. 1650/KB and 1651/KB of 2002, decided on 27th October, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2060 (2005)

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

----S. 62---Assessment on production of accounts, evidence etc.---Confrontation of facts through order sheet entry---Fact regarding fall in sales with nominal increase in gross profit rate; sales were verifiable being made to known parties; purchases were not open to complete verification and day to day production record was not being maintained and also with unverifiability of debit side of the trading account were confronted through order sheet entry---Validity---Addition in order sheet entry had disturbed the sequence to the sentence and differing in written patterns---Order sheet entry was neither a substitute nor equal to statutory notice under S.62 of the Income Tax Ordinance, 1979 and also did not refer to specific defects in the books of accounts produced through order sheet entry---No evidence was available to the effect that assessee accepted the rejection of book version by acknowledging the order sheet entry---Even presence of assessee on the particular date was also shaky---No justification was available to reject the trading version for the application of gross profit---Orders of the two authorities below were annulled by the Appellate Tribunal.

(b) Income-tax---

----Additions out of profit and loss expenses---Neither the assessee was confronted on the addition of entertainment expenses, printing and stationery, repairs and maintenance and general expenses nor any discussion had been made to disallow the claim---Assessing Officer had used general phrases for making disallowances, whereas complete books of account were furnished and no defects had been pointed out---Additions were deleted in circumstances.

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

----S. 62---Assessment on production of accounts, evidence etc.---Reasons for decline in gross profit rate were accepted but addition was made for the reason that there was unverifiability of expenses charged to cost sales which were nor fully vouched---Validity---Rejection of trading version was not permissible when the sales were verifiable---Decline in gross profit rate had been duly explained---Case also suffered from mandatory requirement of service of notice under S.62 of the Income Tax Ordinance, 1979---Contents of order sheet had been duly replied to make out a case for decline in gross profit rate and explanation thereof had been accepted---Even otherwise entry in order sheet carried general observation, not relevant for, the rejection of account or the proposed treatment---Signature on the order sheet entry by the attending assessee could not be taken as acceptance for the purpose of rejection of trading version---When reasons for decline in gross profit rate had been accepted and additions in expenses had been made separately, there remained no reason to apply gross profit rate for making addition in trading account observing that expenses were not verifiable---Addition in gross profit rate was annulled by the Appellate Tribunal in circumstances.

Shahid Pervez Jami for the Assessee.

Zaki Ahmed, D.R. for Respondent.

Date of hearing: 27th July, 2005.

JUDGMENT

S. HASAN IMAM (JUDICIAL MEMBER).---The assessee through above captioned appeals has objected the consolidated order of the learned CIT(A), dated 26-2-2002, confirming application of G.P. rate of 25.56% and 24.49% ,as against declared at 18.96% and 15.93% in the years under appeal respectively.

2. In the assessment year 1999-2000 further objection has been taken to the order confirming the disallowance of following expenses, allegedly incurred from business:---

(i) 20% out of Travelling expenses???????? Rs.230,250

(ii) 10% out of telephone, postage & telegram expenses??????????? Rs.9,158

(iii) 20% out of entertainment expense?? Rs.21,168

(iv) Charity & Donation (Full)?? Rs.8,610

(v) 20% out of repair & Maintenance expensesRs.10,370

(vi) 20% out of General expenses????????? Rs.13,492

(vii) Worker's Profit Participation FundRs.29,149

For this year assessee also challenged the order of the learned CIT(A) confirming the disallowance of the Gratuity amounting to Rs.400,785 on ground of being a provision.

3. The disallowance of expenses in the head travelling and out of postage and telegraph to the extent of 20% and 10% of the claim is also challenged in addition to application of G.P. and rejection of trading result respectively.

4. The above captioned appeals were heard and decided by the ITAT, on merit vide order, dated 24-3-2005, but on 14-4-2005 both the orders were recalled for re-adjudication along with an order in appeal pertaining to assessment year 2001-2002.

5. Assessment year 1999-2000

Return of income has been furnished on 31-12-1999 for the period ending on 30-6-1999 under section 55(1) showing loss of Rs.2,727,066 accompanied with Audit statements of account. In compliance to Notice under section 61, the assessee also furnished necessary details, documents explanation, books of accounts consisting of cash books and ledger duly supported by documentary evidence.

6. The assessee a private limited company and continue to derive income from manufacturing and sale of Auto Mobile Parts and Dye Casting Parts declared sales at Rs.43,162,586 showing gross profit of Rs.8,186,924 (G.P. rate of 18.96%). The Assessing Officer compared the trading results with immediate preceding years and noted (i) fall in sales with nominal increase in G.P. (ii) sales are verifiable being made to known parties (iii) purchases are not open to complete verification, and (iv) day to day production record is not being maintained. The Assessing Officer confronted the assessee on these facts and also with unverifiability of debit side of the trading account vide order sheet entry, dated 22-3-2000. As per assessment the assessee's counsel accepted the factum of unverifiability of debit side of trading account. Assessee was further confronted to explain the situation that details in respect of cost of sales do not carry names, addresses, quality and quantity in respect of any item of material consumed, details of buffering and plating charges of Rs.9,726,383 and names and addresses of the person to whom payments have been made. ,The Assessing Officer in view of the above facts and because of history of rejection of account and application of G.P. rate of 24.49% applied G.P. at the same rate giving an addition of Rs.2,383,855, however, accepted the declared sales.

7. The learned CIT(A) maintained the order in this context observing that no material to show departure from the nature of business and the patterns of the maintenance of the account have been evident for the years under appeal.

8. We have heard the learned representatives of the two parties at length and have also gone through the record and file of this appeal. Admittedly there is nominal increase in declared G.P. rate, whereas sales have declined, however, complete details appears to have been furnished in compliance to Notice under section 61, but no notice under section 62 has been issued pin pointing the defects in the books of accounts which is almost mandatory after production of books of account. Besides the sales are to known parties and thus fully verifiable as per assessment order. It is stated that purchases are not open to complete verification day to day production record is not maintained and debit side of the trading account is not verifiable but such important defects were never brought to the notice of the assessee through Service of Notice under section 62, which is absolutely mandatory when books of accounts are admittedly furnished in compliance to notice under section 61, whereas order sheet entry refers to incomplete names and addresses quality and quantity of material consumed, we however of the view that such flaws always require detailed answer hence cannot be communicated through order sheet, for this purpose notice under section 62, which is mandatory in the circumstances is not para materia to order sheet entry, hence there remains only one ground, that is, history of rejection of trading version and application of GP rate of 24.49%. We are therefore of the considered view, in spite of fall in sales assessee has shown GP, at an increased rate, hence clubbed with the acceptances of verifiable declared sales the application of GP find no reason. Besides complete reply has been furnished in respect of decline in sales, which is not controverted in the assessment order, on the contrary has been accepted.

9. The learned AR of the assessee argued that during the initial proceedings certified copies of order sheet entries were furnished to demonstrate that in both the years under appeal no Notice under section 62 was issued. Counsel in the circumstances placed reliance on the following reported judgments for annulling the assessment in the giving circumstances.

85 Tax 21 (Trib.); 29 Tax 263 (Trib.) and 2003 PTD (Trib:) 625.

10. The learned counsel further referred the order sheet entries to highlight the contents thereof. For the assessment year 1999-2000 the relevant order sheet read as under:--

"22-3-2000 Mr. Muhammad Saleem from Ebrahim & Co. attends and produces books of accounts and details and document vide letter No. S-90/1-0549/2000. Adjourned for want of other details and explanation to 30-3-2000 and also regarding rejection of trading result in the past.

30-3-2000 Mr. Muhammad Saleem from Ebrahim and Co. attends and produced explanation and certificate regarding 25(c), 24(ff), 24(b) and 24(c) vide letter No. S-90/T-0567/2000, dated 29-3-2000. The position regarding trading result is same, as in the past case discussed and reserved for order."

11. The learned A.R. stressed that order sheet entry, dated 30-3-2000, is neither signed by the assessee nor A.R. of the assessee, hence there is no evidence to substantiate their presence and authenticity of the proceedings besides it appears that some additions have been made in the order sheet to refer rejection of trading result in the past. The addition in order sheet entry, dated 22-3-2000 has disturbed the sequence of the sentence and differing in writing patterns, besides we have already held that order sheet entry is neither a substitute nor pre-mature of statutory notice under section 62 of the Income Tax Ordinance, .1979 and also do not refer to specific defects in the books of accounts produced through order sheet entry. There is also no evidence that A.R. accepted the rejection of book version by acknowledging the order sheet entry even presence of assessee on the particular date is also shaky.

12. In the circumstances supra we find that there appears no justification to reject the trading version, for the application of GP, hence the two orders below are not warranted in law whereby annulled.

13. So far as add backs out of P&L accounts are concerned, we find that 1/5th out of the travelling expenses and 10% of telephone postage and telegram is as per history, hence confirmed, so far as remaining expenses in the heads out of entertainment expenses, printing and stationery, repairs and maintenance and general expenses are concerned, we find that neither assessee was confronted on these additions nor any discussion has been made to disallow the claim. The Assessing Officer has used general phrases for making disallowances, whereas complete books of accounts were furnished and no defects have been pointed out. In the circumstances the additions are deleted in these heads.

14. Addition in the head Charity and Donation claimed at Rs.8,610 is confirmed for want of evidence that it relates to business.

15. Disallowance of the gratuity amounting to Rs.400,785 on ground of being a provision has been disallowed and later on confirmed in appeal. The assessment order shows no discussion in this context, it is also not clear whether gratuity has been paid, hence we find reason to set aside the order in this context directing the Assessing Officer to record the order after obtaining complete details, affording an opportunity of hearing to the assessee.

16. Assessment year 2000-2001:

Original return of income was filed on 15-1-2001, which is subsequently revised on 4-6-2001 declaring income of Rs.2493102. Notice under section 61 appears to have been issued and duly replied, containing complete details, documentary evidence and books of accounts consisting of cash books, ledgers and vouchers.

17. The Assessing Officer compared the results with the immediate preceding year and observed that GP has gone down, however, there is notable increase in sales. The assessee was also asked to explain the decline in GP rate vide order sheet entry, dated 18-5-2001. The Assessing Officer accepted the reasons given for decline in G.P. rate, however, made the addition for the simple reason that there is unverifiability of expenses charged to cost of sales being not fully vouched.

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18. We are of the considered view that circumstances do not permit the Assessing Officer to reject the trading version when sales are verifiable, the decline in GP rate has been duly explained and when case is suffering from mandatory requirement of service of Notice under section 62. Contents of order sheet have been duly replied to make out a case for decline in GP rate and explanation thereof has been accepted, even otherwise entry in order sheet carry general observation, even not relevant for the rejection of account or the proposed treatment, hence more signature on the order sheet entry by the attending A.R. cannot be taken as acceptance for the purpose of rejection of trading version. In the circumstances, when reasons for decline in GP rate have been accepted and additions in expenses have been made separately, there remain to reason to apply GP for making addition in trading account observing that expenses are not verifiable. In the circumstances the learned CIT(A) was not justified to confirm the finding of the learned Assessing Officer in this context. Accordingly, appeal of the assessee on this issue is accepted. Consequently, addition in G.P. rate stands annulled.

19. The next issue in this appeal is regarding disallowance of expense in the head travelling and out of postage and telegram 1/5th addition out of travelling expense and 10% out of telephonic postage and telegram is as per history, we therefore, find reason to maintain the order in this context.

20. Appeals are disposed of as indicated above.

C.M.A./73/Tax (Trib.)????????????????????????????????????????????????????????????? Order accordingly.