I.T.As. Nos. 1337/LB, 815/LB, 1203/LB of 2003 and 1349/LB of 2005, decided on 24th November, 2005. VS I.T.As. Nos. 1337/LB, 815/LB, 1203/LB of 2003 and 1349/LB of 2005, decided on 24th November, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 838 (2005)

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

---S.12(18)---Income deemed to accrue or arise in Pakistan---Preliminary expenses---Liability shown in balance-sheet in respect of pre-incorporation expenses was considered as loan and addition was made, which was deleted by the First Appellate Authority---Validity---When transactions took place there was no company on ground and as such provisions of S.12(18) of the Income Tax Ordinance, 1979 were not attracted---No option was available before formation of the company with the promoters but to incur preliminary expenses from their own pocket---Assessee-company did not violate the provisions of income tax law---Addition made under S.12(18) of the Income Tax Ordinance, 1979 by the Department was totally misconceived and not tenable---Departmental appeal being devoid of any merit was rejected by the Appellate Tribunal on this issue.

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

---S.62(1)---Assessment on production of accounts, evidence etc.---Yieldage rate---Declared yieldage rate of 82.07% was rejected and applied the same at 84%---Additions were also made out of P&L account on account of unverifiability under various heads---Assessee contended that no notice under S.62(1) of the Income Tax Ordinance, 1979 was issued to confront the deficiencies, if any, which was a sine qua non---Nothing was brought on record to reject the books of accounts and to make addition in declared yieldage---Summary rejection of books and final accounts was against the settled principles---Validity---Declared trading version could not be rejected on the basis of parallel cases until and unless some concrete material was brought on record to do so---Rejection of, trading version was not sustainable in law and even on the facts and in the circumstances of the case---Corollary of the events was that the declared trading results merited acceptance.

86 Tax 117 (H.C. Kar.) and 90 Tax 117 (Trib.) ref.

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

---S. 62(1)---Assessment on production of accounts, evidence etc.---Rejection of trading account without issuance of notice---Validity---Department failed to point out any material deficiencies in the books of accounts or practically speaking to issue a notice under S.62(1) of the Income Tax Ordinance, 1979 which was a mandatory condition for rejection of accounts---Trading account was directed to be accepted as such, as there was no reason to reject the same or the books of accounts.

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

---S.62---Assessment on production of accounts, evidence etc.---Addition out of profit and loss account---Assessee contended that department failed to pinpoint any expense through a notice under S.62 of the Income Tax Ordinance, 1979 which was exaggerated or unverifiable---Additions had been made on account of stock phrases like un-verifiability and excessiveness---Additions were made with the remarks "as per history of the case" whereas this was the first year of the company' business and there was no history as such-Validity-Additions and 'arbitrarily been made under various heads which were not warranted at ,all and the same were deleted by the Appellate Tribunal.

?

2004 PTD 2231 rel.

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

---S.62---Assessment on production of accounts, evidence etc.--Addition was made on account of sale rate without rejection of books of accounts---Validity---No proper show-cause notice after examination of details was issued---Assessing Officer had also not commented upon purchases which were made from verifiable parties---Considering the fact that purchases were made from verifiable parties, Appellate Tribunal directed to accept the declared trading results.

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

---S. 62---Assessment on production of accounts, evidence etc.--Workers profit participation fund---Addition of---Validity---Addition made on account of workers profit participation fund without any plausible reason was deleted by the Appellate Tribunal.

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

---S. 62---Assessment on production of accounts, evidence etc.---Abnormal loss---Assessee contended that abnormal loss was correctly declared on account of sale of damaged raw material, supported by relevant details and that Assessing Officer was not justified at all to disallow the same without assigning any cogent reason or justification---Validity---Since on account of abnormal loss the matter had been remanded to the Assessing Officer and no prejudice had been caused to the assessee, Assessing Officer was directed to proceed afresh strictly in accordance with the directions issued by the First Appellate Authority.

Ch. Abdul Rasheed, D.R. for Appellant (in I.T.A. No. 1337/LB of 2003).

Muhammad Shahid Baig for Appellant (in I.T.As. Nos. 815/LB, 1203/LB of 2003 and 1349/LB of 2005).

Ch. Abdul Rasheed, D.R. for' Respondent (in I.T.As. Nos.815/LB, 1203/LB of 2003 and 1349/LB of 2005).

Muhammad Shahid Baig for Respondent (in I.T.A. No. 1337/LB of 2003).

Date of hearing: 23rd November, 2005.

ORDER

Departmental appeal (assessment year 1999-2000)

In this year the Department has agitated the deletion of addition under section 12(18) of the repealed Income Tax Ordinance, 1979. During the course of assessment proceedings the assessing panel observed that a liability amounting to Rs.186,000 was shown in the balance sheet which was in fact a loan obtained for meeting the pre-incorporation expenses. This amount was considered as a loan and, therefore, the addition was made under section 12(18) to the tune of Rs.186,000. The addition so made was deleted by the learned CIT(A).

2. The DR agitated against the relief allowed by the learned first appellate authority. On the other hand, the learned AR for the assessee ?defendant supported the order of the learned first appellate authority.

The learned AR for the assessee-defendant stated that the company was incorporated on 18-9-1998: Before its incorporation the company was non-existence, hence it did not fall into the definition of an assessee as defined under the relevant provision of Income Tax Ordinance, 1979.

3. We have heard both the sides and perused the available record. There is considerable force in the arguments of the learned AR for the assessee-defendant. We agree with the submissions of the' learned AR that when transactions in question took place there was no company on ground and as such the provisions of section 12(18) of the Income Tax Ordinance, 1979 were not attracted. We also agree with the observations of the learned first appellate authority that practically speaking there was no option before formation of the company with the promoters but to incur preliminary expenses from their own pocket. In this manner we observe that the assessee-company did not violate the provisions of Income Tax Law and in view of this situation we hold that the addition made under section 12(18) by the Department is totally misconceived and not tenable. The departmental appeal being devoid of any merit stands rejected.

Assessment years 2000-2001

4. The appellant is a private limited company which derives income from spinning of cotton yarn has filed appeal against the order passed for the year, 2000-2001 under section 132 of the Income Tax Ordinance, 1979.

5. Brief facts of the case are that the appellant filed return declaring loss of Rs.(18,430,440) which was assessed at Rs.(9,937,725) after rejecting the declared version of the appellant by the assessing panel. The assessing panel has also rejected the declared yieldage rate of 82.07% and applied the same at 84%. Additions were also made out of P&L a/c on account of unverifiability under various heads amounting to Rs.1,02,756. The assessing panel further observed an accretion of 15(M) in the assets of the company out of which Rs.72,50,000 were paid by Director to Banking consortium through cross cheques and Rs.60,00,000 were paid by the sponsors/shareholders to the company in cash and company paid the same to the previous owners of Zahoor Textile Mills. The said cash loan of Rs.60,00,000 was added under section 12(18). The appellant made various payments were no tax deduction was made like waste purchased, payments made for painting, cement and payment to legal advisor. The Assessing Officer charged the tax under section 52 at Rs.1,28,425 and additional tax under section 86 at Rs.40,955.

6. On appeal, the learned CIT(Appeals) set aside the addition under section 12(18) for de novo consideration and maintained rest of the order hence this Appeal.

7. Before us the learned counsel of the appellant-company contended that being a private limited company, proper books of accounts are being maintained. The Company is also paying Sales Tax and maintaining Sales Tax record as well along with Sales Tax Returns, invoices and other supporting details. The Assessing Panel failed to confront any material deficiencies in the books of accounts and made additions in trading account without rejection of books and final accounts. In this regard, a copy of Notice under section 62 has been provided. The para-1 of this Notice states that declared yieldage of 62.07% is low which is adopted at 85% in other parallel cases but no parallel cases were confronted. As per Para-5 of this Notice P&L additions have been proposed which reads under:

"Appropriate additions are called for in respect of certain P&L expenses in view of their unverifiability, internal vouching as well as element of personal nature and the same is the history of your case. Please comment"

As per para-2 details of loan from directors were requisitioned whereas as per para-3 details of fixed assets have been requisitioned. The para-4 asked for submission of spindle details. Whereas Para-6 asked for submissions of details regarding waste purchases.

This is the contention of the A.R. that in fact this was a notice under section 61 whereby certain details were requisitioned and practically no notice under section 62(1) was issued to confront the deficiencies, if any, which was a sine qua non, A/R further contended that nothing was brought on record to reject the books of accounts and to make addition in declare yieldage. The summary rejection of books and final accounts in against the principles settled by the judiciary. Reliance has been placed by the AR on the following cases.

86 Tax 117 (H.C. Kar)

(15) Now we come to the assessment year 1986-87. For this year the books of accounts were produced. by the appellant. The four reasons for rejecting the trading results have been spelt out in para. 2 above. The first reason pertains to the expenses claimed in the Profit and Loss Account being highly disproportionate to the quantum of sales and the Gross Profit earned. This reason is completely inappropriate for the rejection of trading results. The trading results are the sales i.e. turnover and the Gross Profit/Gross Profit rate, which are to be found in the Trading Account. The profit and loss expenses find entry in the Profit and Loss Account. The entries in the Profit and Loss Account cannot be a yardstick for the entries in the Trading Account. In other words, the profit and loss expenses are not a standard for measuring trading results in case the Assessing Officer finds the profit and loss expenses to be excessive, disproportionate, unvouched or unreasonable he can disallow the same under section 23 of 1979 Ordinance, but of course after proper reasoning and after pointing out specific items which warrant disallowance. Accordingly, the first objection with regard to the rejection of the trading results is improper. The second reason reflected for rejecting the trading results is that the expenses towards salaries are very high confirming the business activity on a large scale. Once again this ground is not proper as salaries find mention in the Profit and Loss Account and not in the Trading Account. In case any item of salary is not found to be in accordance with law, the Assessing Officer can' disallow the same under section 23. This ground accordingly also does not warrant rejection of the trading results. The third ground which influenced the Assessing Officer to reject the trading version was with regard to that unverifiability of sales and purchases. This once again is an improper ground since it is now settled law unverifiability of sales and purchases cannot be a ground for rejection of trading results (see Pimpa (Pvt.) Ltd. v. CIT 1994 PTD 123). The last ground expressed by the Assessing Officer for rejecting the trading results is with regard to the adverse past history of the appellant. Once again this is not a correct ground to reject the accounts since it is also settled law that no res judicata is known to income-tax proceedings as every year is an independent year (see CIT v. Captain Chemical 1991 PTD 678). For the assessment year 1986-87 books of accounts were produced and no specific defects have been found in the books of accounts. In this respect we have been able to lay our hands on the decision of the Full Bench of Hon'ble Supreme Court in CIT v. Krudd Sons Ltd. 1994 PTD 174, wherein Saleem Akhter, J., as he then was writing for Court has observed that the accounts cannot be rejected till such time specific defects are found in the accounts from where it can be, seen that correct profits cannot be determined there from. No such defect, was pointed out by the Assessing Officer or the I.T.A.T for the assessment year 1986-87. The assessment order for the, year, 1986-87 is not an ex parte or best judgment assessment under section 63 as unlike the assessment for the year 1987-88 it has not been framed on account of default of the appellant. It makes no difference that the assessment order for the year 1986-87 mentions section 63, in its recital since it is settled law that mere mention of a wrong section number is inconsequential (see Safia Bibi v. Aisha Bibi 1982 SCMR 494 and Baigan v. Abdul Hakeem 1982 SCMR 673. Thus the assessment order for the year, 1986-87 has to be construed as an order under section 62 of the 1979, Ordinance.-

(16) It is further observed that the orders of the Commissioner of Income-tax (Appeals) and the I.T.A.T. suffer from the same defects as have been pointed out in para. 14 above pertaining to the assessment year 1987-88. However, due to the reasons explained in para. 15 above the assessment order for the assessment year 1986-87 and the order of the I.T.A.T. cannot be sustained.

(17) Also for both the years no basis has been reflected for arriving at the estimates, thus militating against the rule laid down in Star Rolling Mills, v. CIT PLD 1974 Note 129 p.189.

(18) The appeals are accordingly allowed and the trading results of the appellant are directed to be accepted. In doing so we were considering the prospects of a remand, however, we feel that the same would not be proper since in framing the assessment orders it is the Assessing Officer who has to blame himself for the wrongful exercise of power. A remand order would have meant that the assessee would have been subjected to another round of cumbersome proceedings which is depreciated in law and such orders should not be passed in a routine manner to allow a party to improve his case or to fill in the lacuna (see Muhammad Sadiq v. ITO 1988 PTD 1014 and Chairman WAPDA v. Gulbat Khan 1996 SCMR 230).

90 Tax 117 (Trib.)

(8) Upon having perused the facts of the present case in its totality we find that the case-law cited supra squarely applies to the case 'in hand. In view -of foregoing discussion we hold that the declared trading results of the assessee have been discarded by the Assessing Officer without adhereing to the statutory obligation as has been stipulated in section 62(1) of the Income Tax Ordinance, 1979 and also without pointing out any substantial nature of defects in the books of account which may warrant departure from history of the case or rejection of the declared trading version. We, therefore, direct the Assessing Officer to accept the declared trading. version of the assessee in the assessment year 1997-98 as well. This would ultimately result into deletion of addition made in the declared gross profit by way of estimating sales and applying higher gross profit as well as in yieldage account.

(9) Before parting with this order we would also like to mention that the assessee has prima facie a good case in its favour even on factual grounds. We have noticed that neither the parallel cases mentioned in the assessment order are exactly parallel nor substantial material has been brought on record to have departure from established history of acceptance. of the trading accounts. In the first case to which the Assessing Officer has alleged to be parallel i.e., bearing NTN 30-1-1718316, in this case yieldage adopted at the first instance at 85% was ultimately restricted in appeal to 80% while in the second case having NTN 30-02-0802773 yieldage was adopted by the Revenue at 76.74%. While the case in hand yieldage is being declared 80.3% since long which is certainly higher than the two cases relied upon by the Assessing Officer to discard the trading results. Adding to it the assessee has conceded higher G.P. rate in the year under appeal viz. the immediately preceding year. For facility of reference the declared and assessed position of the G.P. rate in the three preceding assessment years is detailed below which supports the assessee's contention.

A/year????????????? Yieldage?????????????????????? G.P. rate????????? Action of the DCIT

1994-95?????????? 8.06%????????????????????????? 19.87%??????????? Accepted

1995-96?????????? 80.19%??????????????????????? 22.20%??????????? -do-

1996-97?????????? 80.48%??????????????????????? 7.96%????????????? -do-

1997-98?????????? 80.03%??????????? 15.65%??????????? Under appeal

8. Considering these facts in view we are of the considered view that the declared trading version cannot be rejected on the basis of so-called parallel cases until and unless some concrete material is not brought on record to do so. Thus no justifiable reasons could be adduced or in existence which may warrant departure from the history of the case at all in particular when the same method of accountancy has been followed in the year under appeal as was adopted in the past. In view of discussion made ante, we also hold that rejection of trading version was not sustainable in law and even on the facts and in the circumstances of the case. Corollary of the events is that the declared trading results merit acceptance.

9. Besides above case-law, it was further contended that the Textile Mill in question was established in 1965 under the title Messrs Zahoor Textile Mills. Due to various reasons the management of this concern could not run the business successfully. Resultantly this unit was closed being defaulter of various Banking Companies. That is why the said Banking companies made a consortium to sell this sick unit to recover their loans. In short, our company acquired a sick unit which was established about sixteen years ago. Further it was not in operation for the last many years. Likewise its repute was also badly affected. We owed all these problems along with acquisition of said unit. It was a troublesome process to convert a sick/closed unit into a working one. Due to scarcity of funds the machinery tools and implements could not be replaced. The unit needed extensive overhauling and replacements but it could not be done due to the reasons mentioned earlier. By hook or by crook the company started production with old spindles, and allied machinery. It is worth-mentioning that spindles installed therein are not only old but also heavy in weight and larger in size. Whereas at present very smart and lightweight spindles are being erected due to competition in the market and to coop with the modern techniques. Another important factor is that this was the first year of our production. Being inexperienced and newcomers company could not grasp the things properly and deprived to compete with its companions.

10. Further as per given results, 67% cotton and 33% waste including 13% reused waste was used. Obviously these factors reduced the yieldage and production. Thus their results cannot be compared with the modern and flourishing spinning units. It is not out of place to add that in order to meet the canons of justice, only likes can be compared with likes and not vice versa.

11. We have 'consciously considered the arguments of the learned AR in the light of above case-law and found that the department failed to point out any material deficiencies in the Books of Accounts or practically speaking to issue a Notice under section 62(1) which was a G mandatory condition for rejection of Accounts. In view of submissions made by the counsel, above case-law and the peculiar circumstances, the Trading Account is directed to be accepted as such as there is no reason to reject the same or the Books of Accounts.

P & L Account

11-A. In connection with additions out of P&L Account the learned A.R. contended that the department failed to pinpoint any expense through a Notice under section 62 which was exaggerated or unverriable. The additions have been made on account of stock phrases like unverifiability and excessiveness. Further the Assessing Panel as well as H the CIT(Appeals) have remarked that additions were made as per history of the case. Whereas this was the first year of the company's business and there was no history as such. This shows that how carelessly, addition have been made out of P&L expenses. The AR has relied upon the following case in this regard:

2004 PTD 2231

Profit and Loss Account Additions without Specific Notice.

"On the issue of additions from profit and loss account we are in agreement with the AR of the assessee that no addition can be made by relying on stock phrases such as unverifiability, excessiveness and element of personal use without pointing out specific instances and also quantifying the ratio of the same. Even otherwise' such an ad hoc approach is in violation of the mandatory provisions of section 62 of the repealed Income Tax Ordinance."

12. Above discussion clearly depicts that additions of Rs.1,02,756 have arbitrarily been made under various heads which were not I warranted at all; hence same are deleted.

Addition under section 12(18)

13. Addition of Rs.60,00,000 was made under section 12(18) on account of loan from directors. This portion of the order has already been set aside by the CIT(Appeals). The learned AR in this behalf stated that on setting aside by the learned CIT(A) the matter has been reassessed by the concerned- Taxation Officer, therefore, he did not press this issue. Thus order of the CIT(Appeals) on this account is confirmed.

Order under section 52/86

14. During assessment proceedings the assessing panel observed that the appellant made certain payments on. account of purchase of raw material/waste. While finalizing the assessment, the Assessing Officer levied tax under section 52 for non-deduction of withholding tax under section 50(4) and also charged additional tax on this amount. The objections raised by the appellant were repelled by the CIT(Appeals). During the course of appeal proceedings on the issue of 52/86 the learned A P. for the appellant was confronted that a separate appeal was required be filed on this account. The learned AR, however, submitted that in Score of the position as pointed out he did not press this issue, hence no interference on this score is required.

Assessment years 2001-2002 and 2002-2003

15. The common issues agitated by the assessee in both the years are the rejection of declared trading results and maintenance of addition in sales at Rs.6,564,975 and Rs.1,079,673 respectively for the years 2001-2002-2003 and various additions made in the profit and loss account expenses. The Assessing Officer discarded the declared sale rate on the ground that there was difference in sale rate of the same count. The assessee submitted count-wise details., The Assessing Officer observed that 22/S count was sold on lower rate. The assessee submitted that a very little quantity of 22/S was produced which could not be sold out hence the assessee was complied to sale the same at lower rate. In the assessment year 2002-2003 the sale rate was applied after making comparison with the assessment year 2002-2003.

16. The learned AR for the assessee-appellant stated that the sales have been enhanced without any solid reason. The learned AR submitted that the assessee made purchases from verifiable parties which are also registered with the Sales Tax Department. He further stated that in this case books have not been rejected and the Assessing Officer was not J justified in making addition on account of sale rate in both the years. He further stated that after noting down the defects in the assessment order the Assessing Officer did not confront the assessee with the, hence the rejection of declared version in both the years was not justified. The learned AR also agitated against the additions made out of P&L expenses. On the other hand the learned DR defended the order of the learned first appellate authority.

17. We have heard both the sides and perused the orders of the authorities below. So far as the issue of addition on account of sale rate is concerned we have perused the impugned assessment orders and found that no proper show-cause notice after examination of details by the Assessing Officer for these years was issued. This issue has already been discussed in detail while dealing with the 'assessment year 2000-2001 as above. We have also noticed that the Assessing Officer has also not commented upon the purchases which were made from verifiable parties. K For the reason stated above while dealing with the assessment year 2000-2001 and considering the fact that the purchases were made from verifiable parties, we feel no hesitation in directing that the declared trading results for the years, 2001-2002 and 2002-2003 are directed to be accepted. Similarly the additions made in the profit and loss account expenses in both the years are deleted for the reasons recorded above while dealing with the assessment year 2000-2001.

18. In the assessment year 2001-2002 the assessee has to agitated the addition made on account of WPPF to the tune of Rs.??. The addition was made by Assessing Officer since the provision was made without any justification it was agitated by the learned AR that the amount was the part of accrued expenses and hence was allowed. The Assessing Officer while disallowing the claim of WPPF has not given any plausible reason, hence we delete the addition made in this behalf.

19. In the assessment year 2002-2003 the assessee has agitated that the abnormal loss of Rs.2,226,790 was correctly declared on account of sale of damaged raw material being supported by relevant details. The AR has agitated that the Assessing Officer was not justified at all to m disallow the same to the extent of Rs.1,026,790 without assigning any cogent reason or justification. The learned DR has submitted that on setting aside of the issue no prejudice has been caused to the assessee because he has once again an opportunity to prove its claim.

20. After hearing both the sides and going through the orders passed by the authorities below we find that since on account of abnormal loss the matter has been remanded to the Assessing Officer and feel that no prejudice has been caused to the assessee-appellant. We, therefore, direct the Assessing Officer to proceed afresh strictly in accordance with the directions issued by the learned first appellate authority on this score.

20-A. As a result of the above discussion the appeal filed by the Revenue for the assessment year 1999-2000 is dismissed whereas the appeals filed by the assessee for the assessment years 2000-2001 to 2002-2003 are decided in the manner and to the extent indicated above.

C.M.A. /580/Tax (Trib.)?????????????????????????????????????????????????????????????????????? Order accordingly.