I.T.As. Nos.3556/LB of 2003, 5575/LB, 5576/LB, 5947/LB to 5949/LB of 2004, decided on 31st October, 2005. VS I.T.As. Nos.3556/LB of 2003, 5575/LB, 5576/LB, 5947/LB to 5949/LB of 2004, decided on 31st October, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2078 (2005)

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

----S.62, Explanation---Additions on the basis of general reasons and stock phrases in stereotyped manner---Validity---Assessee was maintaining proper accounts which were produced before the Assessing Officer at the time of assessment---Assessing Officer without pointing out defects in the accounts had made the additions on the basis of general reasons and stock phrases in stereotyped manner which was disapproved.

2003 PTD (Trib.) 2668; 1997 PTD (Trib) 2190; 1989 PTD (Trib.) 39 and I.T.As. Nos. 4081, 4085 and 4086/LB of 2001 rel.

(b) Income-tax---

----Rejection of accounts---Improper for the Assessing Officer to base his order only on mere guess, there should be something more than suspicion to justify the rejection of the book version of the assessee's business---Account books could not be rejected merely because some of the sales and. expenses were not vouched and were not verifiable.

Civil Reference No.28 of 1960 rel.

(c) Income-tax---

----Method of accounting---Assessing Officer should have material to lead him to the conclusion that the method employed was defective or that the case required consideration and a new computation must be made.

(1954) 26 ITR p.159 rel.

(d) Income-tax---

----Certificate of Chartered Accountant---Rejection of, in a summary manner---Validity---Certificate issued by the Chartered Accountant should not simply be rejected in a summary manner.

1998 PTD (Trib.) 86Q rel.

(e) Income-tax--

----Rejection of accounts---Method of accounting---"Accounts" must be distinguished from "method of accounting", there may be a regular method of accounting and yet for defects the accounts may be rejected but it does not lead to automatic rejection of system and method of accounting employed by assessee---Occasion may also arise where although the profit shown in the accounts is not true or correct---Assessing Officer can deduce correct figures from the accounts---If the accounts books are found to be false and manipulated with a view to suppress the income and profit and the same cannot be deduced correctly, then the declared version can be rejected.

C.I.T, Companies-II Karachi v. Krudd. Sons Limited 1994 SCMR 229 rel.

(f) Income-tax---

----Rejection of method of accounting---If rejecting the method of accounting employed by the assessee, the Income Tax Officer was simply to add a particular amount of income returned or to disallow a part of business expenses properly received by the assessee, he must disclose the basis and the manner of computation.

Seth Mathuram Mannala v. C.I.T. C.P and Behari (1954) 25 ITR 216 rel.

(g) Income-tax---

----Res judicata---Rejection of accounts in account cases, on the basis of history of the case was not justified, and there was no res judicata in income tax proceedings.

PLD 1992 SC 562 rel.

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

----S.62---Assessment on production of accounts, evidence etc.---Rejection of audited account version of the assessee without pinpointing specific . instances of unverifiability---Validity---While rejecting the account version of the assessee, both authorities below had not appreciated the facts of the case but action of rejection of books version had been based merely on surmises and conjectures, which had no legal sanctity---Parallel case relied upon by the Assessing Officer were also not parallel to assessee's case and the same were neither disclosed nor properly confronted to the assessee---Since the assessee was maintaining accounts according to prevalent standard of accounting, therefore, rejection of audited account version of the assessee without pinpointing specific instances of unverifiability could not be approved.

1998 PTD (Trib.) 860; 1994 SCMR 229; (1954) 15 ITR 216; S.M. Yousaf and Brother v. C,I.T. 1974 PTD 45; Webster's New International Dictionary Second Edition; Corpus Joris Secundum; Civil Reference No.28 of 1960; (1954) 26 ITR 159; 1998 PTD (Trib.) 860; C.I.T, Companies-II Karachi v. Krudd. Sons Limited 1994 SCMR 229; Seth Mathuram Mannala v. C.I.T. C.P and Behari (1954) 25 ITR 216 and PLD 1992 SC 562 rel.

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

----Ss.111 & 116---Penalty for concealment of income etc.---Suppression of stock---No adverse inference---First Appellate Authority found that Assessing Officer although brought on record the issue of suppression of stocks but did not draw any adverse inference by giving directions for the issuance of notice under S.116 of the Income Tax Ordinance, 1979; since no such finding had been given, therefore subsequent initiation of penalty proceedings and levy of penalty were illegal ; Assessing Officer had neither determined any extent of concealed sales nor made any addition under S.13 of the Income Tax Ordinance, 1979 on account of suppressed stocks and that levy of penalty was deleted being without merit in circumstances---Validity---Appellate Tribunal agreed with the finding given by the First Appellate Authority which being justified---Discrepancies pointed out by the First Appellate Authority were confronted to the Representative of Department, who could not displace the same with plausible reasons or by any dictum of law, which might persuade the Appellate Tribunal to have a view contrary to that of the established discrepancies pinpointed by the First Appellate Authority---Penalty order was not sustainable, which had rightly been vacated by First Appellate Authority deleting the penalty imposed under S.111 of the Income Tax Ordinance, 1979---Order of First Appellate Authority was upheld by the Appellate Tribunal in circumstances.

Aslam Khan, F.C.A. for Appellant (in I.T.As. Nos.3556/LB of 2003, 5575/LB and 5576/LB of 2004).

Anwar Ali Shah, D.R. for Respondent (in I.T.As. Nos.3556/LB of 2003, 5575/LB and 5576/LB of 2004).

Anwar Ali Shah, D.R. for Appellant (in I.T.As. Nos. 5947/LB to 5949/LB of 2004).

Aslam Khan, F.C.A. for Respondent (in I.T.As. Nos. 5947/LB to 5949/LB of 2004).

Date of hearing: 13th, October, 2005.

JUDGMENT

ZAFAR ALI THAHEEM (JUDICIAL MEMBER).---For the assessment year 1998-99 only the assessee has come up in appeal before us against the impugned order dated 26-6-2003 whereas for the assessment years 1999-2000 and 2000-2001 cross-appeals have been filed at the 'instance of the assessee as well as Department against the consolidated impugned order dated 13-8-2004 passed under section 62 along with one more departmental appeal pertaining to assessment year 1999-2000 preferred against the impugned order dated 13-8-2004 passed under section 111, all recorded by C.I.T.(A) Zone-I, Lahore. All the titled appeals are being disposed off in the following manner:-

The learned AR has raised the issue of disallowance of claim in P&L account expenses with the contention that both authorities below have dealt upon the issue of impugned additions in P&L account in an arbitrary manner as the relevant documentary evidence including books of accounts in support of declared expenses were produced before the assessing authority but no due consideration was given to it. He has argued that in the presence of properly maintained books of accounts and in the absence of pinpointing specific defects therein, the assessing authority had no justification to make the additions. He maintains that learned C.I.T.(A) has also not fully appreciated the facts of the case and has accorded an unjustified and arbitrary treatment. He has attacked the impugned treatment with the assertion that no specific defects were pointed out in the properly audited accounts along with complete documentary evidence. He has summed up that on the basis of stock phrases and general reasons no additions can be made against the assessee.

On the contrary, the learned DR has controverted the line of arguments adopted by the learned AR and has pleaded that the assessee failed to prove declared version with the support of documentary evidence. According to him, the assessee was properly confronted by the Assessing Officer and as such he was given opportunity to prove his version. In short, he has defended the impugned treatment by terming it as fair and judicious.

We have heard the arguments advanced on behalf of rival parties and also carefully gone through the relevant record available on file. It is noteworthy that the assessee is maintaining proper accounts, which were produced before the Assessing Officer at the time of assessment. The perusal of case file reveals that the Assessing Officer without pointing out defects in the accounts has made the impugned additions on the basis of general reasons and stock phrases in stereo-typed manner, which have been disapproved by the judicial pronouncements in the following reported cases:-

(1) 2003 PTD (Trib.) 2668, (2) 1997 PTD (Trib) 2190, (3) 1989 PTD (Trib) 39 and (4) ITAT order dated 18-3-2002 recorded in I.T.As. Nos.4081, 4085 and 4086/LB of 2001.

In view of the foregoing reasons, the impugned additions are not legally sustainable, thereby deleted.

Assessment Year 1999-2000 & 2000-01

For the both years under consideration, the assessee has raised the following common issues as per memo. of appeals for adjudication:---

1. That the learned C.I.T.(A) Lahore was not justified in upholding the rejection of accounts.

2. That without prejudice to grounds the learned C.I.T.(A) Lahore has erred in estimation of sale.

3: That without prejudice to ground of Appeal No.8, the learned C.I.T.(A) Lahore had misdirected herself in directing the application of gross profit rate @ 35% and 40% for the assessment years 1999-2000 and 2000-01 respectively.

4. That the learned C.I.T.(A) Lahore was not justified in setting aside the addition of loss on foreign exchange.

5. That the learned C.I.T.(A) Lahore was also not justified in setting aside the addition of interest on loan.

6. That the learned C.I.T.(A) Lahore was not justified in confirming the addition of Profit & Loss of the following:-

On the other hand, the Revenue has raised the following common issues for both the years under review, for adjudication:-

(1) That learned C.I.T.(A) was not justified to reduce the assessed sales from . Rs.1,60,00,000 and Rs.3,10,00,000 to Rs.1,25,00,000 and Rs.2,65,00,000 for the assessment years 1999-2000 and 2000-01 respectively.

(2) That learned C.I.T.(A) was not justified to reduce applied G.P rate from 45% to 35% for the assessment year 1999-2000 and 45% to 40% for the assessment year 2000-01.

(3) That learned C.I.T.(A) was not justified to set aside the addition of Rs.18,62,000 and Rs.16,35,107 made under section 24(b) of the repealed Ordinance for the assessment years 1999-2000 and 2000-01 respectively.

(4) That learned C.I.T.(A) was not justified to set aside addition of Rs.35,52,812 and Rs.40,59,024 regarding loss on foreign exchange for the assessment years 1999-2000 and 2000-01 respectively, without appreciating the facts of the case.

(5) That learned C.I.T.(A) was not justified to reduce the disallowances made under the heads "Travelling & Conveyance" and "Conference & Meeting" for the assessment year 1999-2000 and "Marketing & Selling Expenses" and "Conference and Meeting" for the assessment year 2000-01.

Brief facts of the case are that the assessee, a Private Limited Company, deriving income from pharmaceutical trading, declared the loss of Rs.93,56,614 and Rs.78,20,669 for the assessment years 1999-2000 and 2000-01 respectively as per following trading results:-

The Assessing Officer after discarding declared version of the assessee finalized assessment at an income of Rs.30,02,034 and Rs.78,06,949 by estimating sales at Rs.1,60,00,000 and Rs.3,10,00,000 subjecting to a G.P rate of 45% each for the assessment years 1999-2000 and 2000-01 respectively. Addition under the head foreign exchange loss was made at Rs.35,52,812 for the assessment year 1999-2000 whereas additions were made on account of marketing & selling at Rs.575,000 and Rs.400,000 and interest on loan paid at Rs.18,62,000 and Rs.16,35,107 in the assessment years 1999-2000 and 2000-01 respectively. Hence, income was assessed at-Rs.30,02,034 for the assessment year 1999-2000 against the declared loss of Rs.93,56,614 and Rs.78,06,949 against the declared loss of Rs.78,20,669 for the assessment year 2000-01.

Feeling aggrieved, the assessee preferred appeal before C.I.T(A) Zone-I, Lahore, who confirmed rejection of accounts but allowed relief in respect ,of sales, G.P rate and addition made under section 13(l)(aa) by deleting the same. However, matter was set aside for de nova proceedings on the issue of loss on foreign exchange Rs.35,52,812 and interest on loan Rs.18,62,000.

First of all, we take up the issue of rejection of accounts raised by the assessee. The learned AR has argued that details, documents, complete books of accounts, vouchers along with evidence/according record were submitted before the Assessing Officer, who without pinpointing any defects therein rejected the same. He has stressed that in case of any adverse inference, the Assessing Officer should have confronted the assessee but he failed to do so and based his impugned action for rejection of accounts merely on assumptions and general phrases such as "plausible explanation" and "afterthought and crude attempt", which have no legal sanctity. Such-like attitude on behalf of the Assessing Officer is quite unjustified being contrary to established norms of justice as well as proviso 62 of the repealed Income Tax Ordinance, 1979. In order to lend credence to his submission, he has referred before us reported judgments cited as 1998 PTD (Trib.) 860, 1994 SCMR 229 and (1954) 15 ITR 216. He has submitted that proper accounting record are being maintained by the assessee which was submitted along with the vouchers and all other documentary evidence to the Assessing Officer for - the examination of the same. In addition to that details of accounts were also provided, and found in order by the Assessing Officer vied letter No.SCPPL/TAX/2002-695 dated 2-12-2002 and SCPP/TAX/2002-700 dated December 10,2002. He has asserted that rejection of declared version just on the basis of whims and surmises and without pointing out any specific defects both in the method and veracity of accounts, which has been regularly employed by the assessee have also been not confirmed by the higher courts in the following reported case laws : ---

1. In the case of S.M. Yousaf & Brother v. C.I.T. reported in 1974 PTD 45, the Honourable High Court observed that the rejection of declared version, without determining the proportion of case sale to the total sale as well as unverified expenses to the total expenses is not justified.

The proviso under section 62 of the repealed Income Tax Ordinance, 1979 does not give any arbitrary, unguided, un- controlled or naked power to the Assessing Officer. In Webster's New International Dictionary Second Edition, the word "opinion" has been defined as "a notion or conviction founded on probable evidence, belief stronger than impression, less strong than positive knowledge". According to Corpus Juris Secundum, the word "opinion" contemplates "conclusion or judgment held with confidence, but falling short of positive knowledge."

An opinion on the basis whereof a statutory authority is entitled or empowered to take any action or initiate any legal proceeding, may be accurate or erroneous but it must be an honest opinion or conviction, based upon or tangible material capable of sustaining such opinion, and not mala fide opinion or a colourable exercise of statutory power.

It was further held by the Karachi Bench of the former High Court of Pakistan held in an unreported case, Civil Reference No.28 of 1960, decided on 28-2-1962 that it is improper for the Assessing Officer to base his order only on mere guess and that there should be something more than suspicion to justify the rejection of the book version of the assessee's business. It was further held by Morul Arfir, J. that the accounts books could not be rejected merely because some of the sales and expenses were not vouched and were not verifiable.

In case of Pandit Brothers v. Commissioner of Income Tax reported in (1954) 26 ITR page No.159, it was held that, there must be material before the ITO to lead him to the conclusion that the method employed is defective or that the case requires consideration and a new computation must be made. It is submitted that in this case the assessee maintained regular accounts of his purchases, imports and sales.

So far as application of section 32 is concerned, the Tribunal in a judgment registered in 1998 PTD (Trib.) 860, for the assessment year 1988-89 to 1991-92 dated 3-11-1997 held that the certificate issued by the Chartered Accounted sthould not simply be rejected in a summary manner.

The Honourable Supreme Court of Pakistan in case of C.I.T, Companies-II Karachi v. Krudd. Sons Limited reported in 1994 SCMR 229, it was held that:---

"While interpreting section 13 accounts must be distinguished from method of accounting. There may be a regular method of accounting and yet for defects the accounts may be rejected but it does not lead to automatic rejection of system and method of accounting employed by an assessee. Occasion may also arise where although the profit shown in the accounts is not true or correct. The Assessing Officer can deduce correct figures from the accounts. If the accounts books are found to be false and manipulated with a view to suppress the income and profit and the same cannot be deduced correctly, then the declared version can be rejected."

In Seth Mathuram Mannalal v. C.I.T. C.P and Behari (1954) 25 ITR 216, it was held that if rejecting the method of accounting employed by the assessee, the Income Tax Officer were simply to add a particular amount of income returned or to disallow a part of business expenses properly received by the assessee, and that he must disclose the basis and the manner of computation.

He has submitted that parallel case confronted to the assessee by the Assessing Officer is not parallel because the facts and circumstances of the parallel case are quite distinguishable to the facts as well as circumstances of the instant case for the following reasons:---

?Assessee of the instant case is a multinational company, that is about 99.99% owned by the Scharper C.A. Ltd. (UK)

? Products of assessee company are specialities of top European Companies not a single similar molecule in Pakistan (Niche-Specific) or manufactured in Pakistan due to very high technology required.

? Products of the assessee company are manufactured by the top multinational companies of advanced Europe (Italy, Switzerland ) the molecules are patented in the world.

He has asserted that while finalizing assessment, the Assessing Officer had also ignored established history of the case, which contrary to findings recorded in reported judgment cited as PLD 1992 SC 562, wherein it was held that the, assessment has to be made on the basis of facts of each year as every year is independent. Rejection of accounts in account cases on the basis of case was not justified as there was no res judicata in income tax proceedings. He has submitted that cost of promotional activities consisting samples, training and conference, cath covers, brochures, aids references folders etc. are reimbursed by the parent company namely Sharper Srl Italy when the remittance in foreign currency is received, the said account is credited, that's the reason, the account is not appeared in audited accounts. Photocopy of the Bank statement of US$ Account No. 1122278557092 of Emirates Bank International was also furnished before the Assessing Officer. He has contended that it can be easily observed from the journal vouchers and the concerned accounts have been credited on the receipt from parent company and debited to their respective account and on this basis the return was revised by claiming capital receipt being non-taxable. He has emphatically argued that interest on long term loans amounting to Rs.28,003,281 have already been disallowed in their respective assessments by the Assessing Officer and this very fact can be verified from assessment record. Account version of the assessee has been misconceived by Assessing Officer just by treating the conversion of sponsors short term loan into long due to non-availability of funds as deemed to be paid, which is contrary to facts as evident from Notes No.7 and 11-3 of the audited balance sheet for the year ending June 30, 2000 which read as under:

"Long term loans of Rs.28,003,251 were created by taking over sponsors outstanding liabilities as January 01, 2000. Interest is payable @ 5% per annum. Loan and interest is payable after December 31, 2004."

Note No.7 reproduced as follows:---

"The loan was obtained from sponsors to meet the trading cash requirements. Interest on sponsor's loan is payable at rates ranging from 6% to 9% per annum. The loan and interest is payable as and when funds are available."

It is crystal clear from the above notes of the audited account that the said loan along with mark-up had not been paid due to non-availability of funds that's why it was converted into long term loans. He has further added that treatment of conversion of short term loan into term loan due to non-availability of fund equivalent to hard cash payment is contrary to facts of the case as well as proposition of law.

On the contrary, the learned DR has supported the action of both authorities below by maintaining that rejecting the books of accounts maintained by the assessee, the Assessing Officer had confronted the assessee with the following difference in stocks:-

The learned DR continued to argue, that assessee could not explain the reasons for such understatement of stocks but only asserted that samples were distributed. He has further argued that if we accept the version of the assessee in this regard then too, amount should have been declared in P&L account expenses.

We have heard the arguments advanced on behalf of rival parties and also carefully gone through the relevant record available on file. In our considered opinion, the assertions made on behalf of the assessee look forceful being supported by plausible reasons. The learned DR has not been able to dislodge the contentions raised on behalf of the assessee. We fully endorse the emphasis of assertions made by learned AR that while rejection the account version of the assessee, both authorities below have not appreciated the facts of the case but action of rejection of hook version has been based merely in surmises and conjectures, which have no legal sanctity. So much so parallel case relied by the Assessing Officer in support of his action is also not parallel to assessee's case for the reasons and factor as put forth before us by the learned AR that facts of so called parallel case were neither disclosed nor properly confronted to the assessee. Since, the assessee was maintaining accounts according to prevalent standards of accounting, therefore, rejection of audited account version of the assessee without pinpointing specific instances of unverifiability cannot be approved by us. Furthermore, the reported judgments referred before us by learned AR is fully applicable to the facts and circumstances of the instant case and the learned DR is not in a position to displace the same.

Therefore, in the interest of justice, we vacate the orders passed by both authorities below on the issue under consideration by appreciating the reasons and factors put forth by leaned AR, the quotation of which in this part of the order would be repetition and nothing else as the same have been enumerated in detail in the earlier part of this order. Consequently, the account version of the assessee is directed to be accepted by accepting the appeal preferred by the assessee.

Since the appeal of the assessee on issue of account version has been accepted in terms of prayer therefore, there is ,no need to adjudicate upon rest of the issues raised as per memo. of appeal.

Assessment Year 1999-2000

For the charge year one more departmental appeal has been preferred agitating the deletion of pellalty amounting to Rs.13,39,096 under section 111 of the repealed Income Tax Ordinance, 1979.

Brief facts of the case are that .assessment in the case of assessee was finalized for the charge year under section 62 at a net income of Rs.30,02,099 by estimating sales at Rs.1,60,00,000 whereby the following two elements of concealments were detected by the Assessing Officer as enumerated in the assessment order i.e., sale and stock. Marking it a base, the Assessing Officer proceeded to impose penalty under section 111 and calculated the same at Rs.13,39,096. Feeling aggrieved, the assessee preferred appeal before C.I.T(A) Zone-I, Lahore, who deleted impugned penalty as per finding given below:-

"I have gone through the facts of the case in the light of arguments of the appellant as well as judgments of superior courts. The Assessing Officer as evident from assessment order although brought on record the issue of suppression of stocks but did not draw any adverse inference by giving directions for the issuance of Notice under section 116 of the repealed Ordinance. Since no such finding has been given therefore subsequent initiation of penalty proceedings and levy of penalty are illegal. It is further added that the Assessing Officer neither determined any extent of concealed sales in the assessment order nor made any addition under section 13 of the repealed Ordinance on account of suppressed stocks. Levy of penalty under section 111 of the repealed Ordinance is without merit hence deleted."

The learned DR has vehemently agued that action of learned C.I.T(A) is not only arbitrary but also contrary to facts of the case. He has further added that while giving the impugned relief, the learned C.I.T(A) totally ignored this material aspect of the case that the factum of concealment of sales and stock was established from record. He has asserted that he impugned order on the issue under consideration is not based on facts but reliance seems to be placed merely on assumptions and presumptions, which have no legal sanctity in the eyes of Law. He has contended that while imposing the penalty under section 111 the Assessing Officer had given due consideration to all pros and cons of the instant case against which relief allowed by the first appellate authority is not legally tenable. He, therefore, prays for vacation of the impugned order and restoration of the treatment meted out by the Assessing Officer.

On the contrary, the learned DR has supported the action of first appellate authority by confining his arguments to the factors and reasons as enumerated in the body of impugned order.

We have given anxious consideration to. the arguments advanced on behalf of rival parties and also carefully gone through the relevant record available on file. We are not convinced with the assertions made on behalf of the Department but find . ourselves in agreement with the finding given by the learned C.I.T(A) which being justified is fully endorsed by us. Furthermore, the discrepancies pointed out by the learned C.I.T(A) were confronted to the learned DR, who could not displace the same with plausible reasons or any dictum. of law, which may persuade us to have a contrary view to that of the established discrepancies pinpointed by the learned C.I.T(A) the impugned penalty order was not sustainable, which has rightly been vacated by him deleting the impugned penalty imposed under section 111. The learned DR has not been able to make out a case for our interference. Therefore, we have no other option except to uphold the impugned order on the issue under consideration and we order accordingly.

C.M.A./90/Tax(Trib.)?????????????????????????????????????????????????????????????????????????? Order accordingly.