I.T.As. Nos. 5323/LB of 2003, 2132/LB of 2002, 5192/LB to 5194/LB, 4329/LB to 4331/LB of 2004, decided on 13th August, 2005. VS I.T.As. Nos. 5323/LB of 2003, 2132/LB of 2002, 5192/LB to 5194/LB, 4329/LB to 4331/LB of 2004, decided on 13th August, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2146 (2005)

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

----S. 12(18)---Addition---First Appellate Authority disallowed addition by placing reliance on the decision of High Court---Appellate Tribunal did not interfere in the order of First Appellate Authority and appeal of the department was dismissed.

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

----S. 24(ff)---C.B.R. Circular No.11 of 1998, dated 25-7-1998---Deductions not admissible---Payment in respect of lease of building plant and machinery---Disallowance---Validity---First Appellate Authority keeping in view the Circular No.11 of 1998, dated 25-7-1998 wherein it had been clarified that clause (ft) of S.24 of the Income Tax Ordinance, 1979 applies to expenditure normally chargeable to Profit and Loss Account---Like wages and freight on purchases debitable to said account fell outside the ambit of said clause---In view of the manufacturing expenses, addition had rightly been deleted---No interference was made by the Appellate Tribunal in the order and appeal of the department was dismissed.

Principles of Accountancy" p.183 by M.A. Ghani rel.

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

----S.62---Assessment on production of accounts, evidence etc.---Assessment without confrontation under S.62 of the Income Tax Ordinance, 1979---Validity---Assessing Officer rejected book version without confronting the assessee despite the fact the assessee had furnished books of accounts comprising of cash book, ledger, salary register and vouchers etc. which had been examined---Declared version could not be rejected without confronting the assessee through notice under S.62 of the Income Tax Ordinance, 1979 as this was the mandatory requirement of law for rejection of accounts---Orders of the two authorities below were vacated and declared version of the assessee was directed to be accepted.

2001 PTD (Trib.) 2983; 2002 PTD (Trib.) 1583 and 1999 PTD (Trib.) 3892 rel.

Shahid Pervez Jami for Appellant.

Nemo for Respondent.

Date of hearing: 13th August, 2005.

JUDGMENT

MUKHTAR AHMAD GONDAL (ACCOUNTANT MEMBER).---Out of these eight appeals, one for the assessment year 1993-94 against the impugned order of the learned CIT(A), dated 2-9-2003 deleting the addition made under section 12(18) and the other appeal for the assessment year 1998-99 against the impugned order of the learned CIT(A), dated 11-2-2002 deleting the addition made under section 24(ft) of the repealed Income Tax Ordinance, 1979 have been filed by the Department. While the remaining six are cross-appeals against the consolidated impugned order of the learned CIT(A), dated 21-6-2004 for the assessment years 1999-2000 to 2001-2002. The Department has objected the impugned order on the common issue that the estimated sales have been reduced for all the three years under review without any justification, while the assessee for all the three years has objected to the confirmation of rejection of accounts when no notice under section 62 was issued by the Assessing Officer for all the three years.

None has appeared on behalf of the department. Mr. Shahid Pervez Jami, Advocate has appeared on behalf of the assessee and has contended that original assessment for the assessment year 1993-94 was completed under section 62 at the net income of Rs.6,23,962, as against declared at Rs.41,279. Subsequently, the case was reopened/cancelled vide order, dated 5-11-1999 with the directions to make fresh assessment as in the Balance Sheet, the assessee had shown long term loan amounting to Rs.5.00 million under the head "due to associated undertaking" which was not probed by the Assessing Officer, which according to the Commissioner attracted the provisions of section 12(18). Against that order under section 66A, the appeal was filed before this Tribunal and vide order, dated 28-6-2000 in I.T.A. No.5853/LB of 1999 (assessment year 1993-94), the appeal filed by the assessee was dismissed. Thereafter, the Panel finalized fresh assessment under sections 62/66A wherein addition under section 12(18) of Rs.5.00 million was made, which has been disallowed by the learned CIT(A) vide impugned order placing reliance on the decision of Hon'ble High Court. No interference is, therefore, required and the appeal filed by the Department for the assessment year 1993-94 is dismissed.

Regarding the appeal for the assessment year 1998-99 filed by the department, the learned counsel for the assessment has contended that the. Assessing Officer has made addition under section 24(ft) of the repealed Income Tax Ordinance, 1979 on the basis that the payment has been made through cash. He has submitted that the assessee claimed factory lease at Rs.19,00,000 paid to Messrs Rana Fibre Limited. This amount was paid in respect of lease of building, plant and machinery and vehicles etc. The payments made in respect of the above mentioned items exceeded Rs.50,000, hence the expenditure under consideration was not allowed by the DCIT. He has contended that as per accounting standard, the factory lease is an item of cost of sales whereas section 24(ft) of the repealed Income Tax Ordinance, 1979 is not applicable to the items of cost of sales. He has, in this respect, referred to C.B.R.'s Circular No.11 of 1998, dated July, 25, 1998, wherein it has been clarified that clause (ft) of section 24 applies to "expenditures normally chargeable to Profit and Loss Account like wages and freight on purchases debitable to said account, fall outside the ambit of said clause. Similarly, purchases of agricultural products and commodities like milk etc. being direct trading or manufacturing expenses, the provision of clause (ft) shall not apply". He has contended that character of a receipt or expenditure is determined as per accounting standards/principles, whereas as per principle of accountancy, the factory lease is an item of manufacturing account (cost of sales). He is referring page-183 of Book "Principles of Accountancy" by M.A. Ghani. The learned counsel for the assessee has submitted that all other expenses such as factory rent, factory insurance, factory repair, etc. are direct expenses and should be charged to Trading Account being manufacturing expenses. He has, therefore, contended that the addition made by the Assessing Officer under the head "Factory Lease" has rightly been deleted by the learned CIT(A).

After considering the above submissions made by the learned counsel of the assessee, the perusal of the impugned order of the learned CIT(A) and the assessment order, we have found that the learned CIT(A) keeping in view the Circular No.11 of 1998, dated July 25, 1998 wherein it has been clarified that clause (ft) of section 24 applies to expenditure normally chargeable to Profit and Loss Account like wages and freight on purchases debitable to said accounts fall outside the ambit of said clause.???????????

After considering the above said Circular, we are of the view that as the Circular has been issued at the time when this provision was inserted in the statutes and keeping in view the manufacturing expenses as defined by M.A. Ghani in his Book "Principles of Accountancy" as referred supra, the addition has rightly been deleted. No interference is required in this impugned order in this respect. The appeal filed by the Department for the assessment year 1998-99 is also dismissed.

Regarding the cross-appeals for the assessment years 1999-2000 to 2001-2002, the learned counsel for the assessee has at the very outset contended that assessments for all the three years under review i.e. 1999-2000 to 2001-2002 have been made without issuing notices under section 62 which is the mandatory requirement of law as mentioned in the proviso to subsection (1) of section 62 of the repealed Income Tax Ordinance, 1979 wherein it has been specifically mentioned that where the assessee produces books of accounts as evidence in support of the return, the Deputy Commissioner shall, before disagreeing with such accounts give a notice to the assessee of the defects in the accounts and provide an opportunity to the assessee to explain his point of view about such findings and record such explanation on the basis of computation of total income of the assessee in the assessment order. The learned counsel has contended that in response to notice issued under section 61, as has been admitted in the assessee order, the assessees furnished before the Assessing Officer books of accounts comprising of cash book, ledger, production record, salary register, sale tax/excise record and vouchers etc. which have been examined, but no notice confronting the assessee has been sent to the assessee and the sales have been estimated, GP rate applied and Profit and Loss Account additions have been made without confronting the assessee which is in violation of the mandatory requirement of law. According to the learned counsel, the learned CIT(A) upheld the rejection of book version without any justification. He has submitted that although the sales have been reduced, but the addition made out of Profit and Loss Account and GP rate applied has been upheld without any justification. The learned counsel; in this respect has placed reliance on the decision of this Tribunal reported as 2001 PTD (Trib.) 2983 , 2002 PTD (Trib.) 1583 and 79 Tax 263 (Trib.).

After hearing the learned counsel for the assessee and perusal of the impugned order of the learned CIT(A) and all the three assessment orders for the assessment years 1999-2000 to 2001-2002, we have found that the Assessing Officer has rejected the books version without confronting the assessee despite the fact that the assessee had furnished books of accounts comprising of cash book, ledger, salary register and vouchers etc. which have been examined. We are of the view that in c cases where the assessee produces books of accounts, the declared version cannot be rejected without confronting the assessee through notice under section 62, as this is the mandatory requirement of law for rejection of accounts. We, therefore, keeping in view the facts and circumstances of the case, vacate the consolidate impugned order of the learned CIT(A) and the assessment order for all these three years i.e. 1999-2000 to 2001-2002 and the declared version of the assessee is directed to be accepted. The three appeals filed by the department for these three years are dismissed while the cross-appeals filed by the assessee are allowed for these three years.

The five appeals filed by the Department for the assessment years 1993-94 and 1998-99 to 2001-2002 are dismissed, while the three appeals filed by the assessee for the assessment years 1999-2000 to 2001-2002 are allowed for the reasons as discussed supra.

C.M.A./89/Tax (Trib.)????????????????????????????????????????????????????????????? Order accordingly.