Messrs SHAHROOM INTERNATIONAL (PVT.) LTD., LAHORE VS DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-5, COMPANIES ZONE-I, LAHORE, 2006 PTD-LAHORE-HIGH-COURT-LAHORE 2654 (2006)

Income Tax Ordinance (XXXI of 1979)---

----Ss.62 (1), proviso [as inserted by Finance Act, 1993] & 136 (1)---Assessment---Production of accounts---Verification of accounts---Non -issuance of notice under S.62 of Income Tax Ordinance, 1979---Assessing Officer made add-hacks out 'of profit and loss account expenses without confronting assessee, who had produced books of account/vouchers as evidence in support of his return---Assessments for previous years were framed by Assessing Officer, after promulgation of Finance Act, 1993, without issuing notices under S.62 of Income Tax Ordinance, 1979---Validity---After insertion of proviso to S.62 (1) in Income Tax Ordinance, 1979, no doubt was left regarding procedure for rejection of declared version, where proper books of accounts were maintained and produced by assessee for examination---Even though the proviso which clarified and explained procedure to be followed by Assessing Officer for rejecting declared version was inserted through Finance Act, 1993, it applied even to prior assessment years where assessments were framed after insertion of the proviso---Assessments in question were framed after insertion of proviso thus, it applied even to those assessments---All assessments in question were framed in violation of mandatory provision of law as contained in S.62 of Income Tax Ordinance, 1979---Assessing Officer could not make add-backs out of profit and loss account expenses without confronting the assessee, especially where the assessee had produced books of accounts/ vouchers as evidence in support of returns---For confronting assessee on the point of proposed additions of unverifiable nature, issuance of notice under S.62 of Income Tax Ordinance, 1979, was mandatory---Appeal was allowed accordingly.

Nemo for Appellant.

Nemo for Respondent.

Date of hearing: 13th March, 2006.

JUDGMENT

SYED HAMID ALI SHAH, J.---This single judgment will dispose of Income Tax Appeal No.3 of 1998 titled "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", Income Tax Appeal No.4 of 1998 titled "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", Income Tax Appeal No.5 of 1998 tilted "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", Income Tax Appeal No.6 of 1998 titled "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", Income Tax Appeal No.7 of 1998 titled "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", Income Tax Appeal No.8 of 1998" titled "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", Income Tax Appeal No.8 of 1998" titled "Messrs Shahroom International (Pvt.) Limited v. Deputy Commissioner of Income Tax and 2 others", as all these appeals have been filed under section 136(1) of the late Income Tax Ordinance, 1979 (the late Ordinance) for the assessment years 1988-89, 1989-90, 1990-91, 1993-94, 1994-95, 1995-96 and 1996-97 and common question of law and fact is involved in all these appeals.

2. Brief facts of the case are that in all the assessment years under appeal the appellant/assessee, a private limited company, furnished Income Tax Returns declaring receipts in the shape of indenting commission; and against the receipts claimed various expenses under section 23 of the late Ordinance in the Profit and Loss Account. In all the assessment years the declared receipts were accepted whereas substantial additions were made in declared income from the expenses claimed in the profit and loss account mainly on the ground that the same were either non-business expenses or the same were not properly vouched. The appellant/assessee challenged the assessment orders before the Commissioner of Income Tax (Appeals) mainly on the ground that the additions from profit and loss account had been made without confronting the same through a specific notice under section 62 of the late Ordinance; and pointing out specific instances of unverifiable expenses. Assessment for the assessment year 1988-89 was twice set aside by the CIT(Appeals) with a specific direction to the Assessing Officer to frame re-assessment after providing the assessee proper opportunity to present its case. Assessment for the assessment year 1989-90 was once set aside by the CIT(Appeals). Similarly the assessment for the year 1990-91 was set aside by the learned Income Tax Appellate Tribunal (ITAT) with identical directions. However, the re-assessments (like the original assessments in the assessment years 1988.89, 1989-90 and 1994-95 and the original assessments in the assessment years 1993-94, 1994-95, 1995-96 and 1996-97 were framed by the Assessing Officers without issuing notices under section 62 of the late Ordinance or pointing out specific instances of unverifiability of the expenses claimed.

3. All the assessment and the re-assessment orders in the above assessment years were challenged by the appellant/assessee before the CIT (Appeals) who through a consolidated order, dated 25-8-1997 allowed partial relief to the assessee for the assessment years 1988-89, 1989-90 and 1990-91 whereas the assessments for the assessment years 1993-94 through 1996-97 were set aside with an observation that there was no sufficient evidence of unverifiability and unvouched ness. Unruffled and unrattled the appellant/assessee challenged the confirmation of additions from profit and loss account in some assessments and the setting aside of the remaining assessments before the learned ITAT in second appeal. The learned ITAT confirmed some of the additions from profit and loss account whereas allowed partial relief of the other additions.

4. Now the appellant/assessee has assailed the order of the ITAT through these appeals further appeals before. A number of questions of law stated to have arisen out of the impugned consolidated order of learned ITAT have been proposed before us. The following five questions of law are identical in all the appeals:---

(1) Whether on facts and circumstances of the case, the Assessing Officer could make add-backs out of profit and loss Account expenses without confronting the assessee, especially where the assessee produced the books of accounts/vouchers as evidence in support of the return.

(2) Whether on facts and circumstances of the case, the issuance of notice under section 62 of the Ordinance, 1979 is mandatory for confronting the assessee on the point of proposed additions of unverifiable nature.

(3) Whether on the facts and circumstances of the case, being the Company concerned (Artificial identity) any disallowance could be made on account of personal nature/element.

(4) Whether on facts and circumstances of the case, is the Tribunal justified to restrict the add-backs under the head telephone upto 15% especially in the case of a Company.

(5) Whether on the facts and circumstances of the case, is the Tribunal justified to confirm the additions made without confronting the assessee under section 62 of the Ordinance.

The following questions of law are independent to each appeal.

Assessment year 1988-89

(1) Whether on facts and circumstances of the case, the Arbitration fee paid by the appellant is an admissible expenses under section 23 of the Ordinance (Question No.VI).

(2) Whether on facts and circumstances of the case, for making the assessment fresh under sections 62/132, after the set aside order, dated 24-2-1991, was the Assessing Officer required to give fresh notice under section 62 of the Ordinance on the point of Arbitration fee and confront the assessee. (Question No.vii)

(3) Whether on the facts and circumstances of the case, is the Tribunal justified to confirm the addition of Arbitration fee made without confronting the assessee under section 62 of the Ordinance (Question No.viii).

Assessment year 1990-91

(1) Whether on facts and circumstances of the case, the financial expenses of Rs.526,831 as on 31-12-1989 are admissible deduction under section 23(vii) of the Ordinance being the interest paid in respect of capital borrowed for the purpose of the profession. (Question No.6).

(2) Whether on facts and circumstances of the case, there in any provision under the Income Tax Ordinance, 1979 that income of any advance to any person the interest paid shall be curtailed proportionate to that extent. (Question No.7).

Assessment years 1993-94, 1994-95, 1995-96 and 1996-97.

The following question of law is common in all the above mentioned assessment years except for the amount of expense involved.

(1) Whether on facts and circumstances of the case, the Tribunal justified to confirm the addition of Rs.30,000 under the head of V.R.M. against the claim of Rs.49,469 added on the plea that no vehicle has been shown in the detail of fixed assets. (Question No.VI).

5. A perusal of the proposed questions of law as referred above shows that the main controversy is covered by the first two questions of law which are common to all the appeals. The provision of the late Ordinance which is directly in issue in all the appeals is section 62 which is reproduced below for ready reference:--

"62. Assessment on production of accounts, evidence, etc.---(1) The Deputy Commissioner, after considering the evidence on record (including evidence, if any, produced under section 61 and such other evidence as the Deputy Commissioner may require, on specific points, shall, by an order. in writing, assess the total income of the assessee and determine the tax payable by him on the basis of such assessment:

Provided that where the assessee produces books of account 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 defects and record such explanation and the basis of computation of total income of the assessee in the assessment order.

(2) Where a person is authorized by the Central Board of Revenue under section 7 to assist the Deputy Commissioner in making an assessment and the Deputy Commissioner with the opinion of such person' on any point concerning assessment, the Deputy Commissioner shall record, in the order under subsection (1), the opinion of such person and the reason for his disagreement with such opinion.

6. After promulgation of the late Ordinance in 1979, it was substituted by Finance Ordinance, 1980. Thereafter the material amendment in this subsection which is relevant for the disposal of these appeals before us was made through Finance Act, 1993 when proviso to subsection (1) was added. Through para. 8 of Circular 11 of 1993 the reason for the insertion of the proviso was explained as under:--

"(8). Procedure for assessment in account cases: Section 62(1).--A proviso has been added to subsection (1) of section 62 to the effect that where the assessee produces books of account as evidence in support of the return, the Assessing Officer shall, before discarding such accounts, give a notice to the assessee of the defects noted in the accounts to provide an opportunity to the assessee to explain his point of view and record such explanation and the basis of computation of total income of the assessee in the assessment order. This is in line with judicial decisions on the subject. With the introduction of this provision following such a procedure has become mandatory."

7. The purpose of the proviso is self-explanatory.---It slates that where an assessee produces books of accounts in support of declared income, the Assessing Officer before discarding the declared accounts, partially or wholly, shall issue a show-cause notice confronting assessee the noted defects in the books of accounts and providing an opportunity to furnish an explanation. It is only after providing assessee an opportunity to furnish that the Assessing Officer can proceed on the basis of the noted defects in the books of accounts. Such a procedure was implicit in section 62 even before introduction of the proviso; and the proviso made merely explicit what was previously implicit in it. In the scheme of the repealed Ordinance the procedure for processing of an income tax return for detailed scrutiny was that after making an initial scrutiny of the return the Assessing Officer would issue a notice under section 61 to the assessee providing him an opportunity to produce books of accounts maintained for the concerned assessment year as well as any other evidence which he wanted to produce in support of his declared version. After putting the evidence adduced including the books of accounts to detailed scrutiny the Assessing Officer could either accept the declared version of the assessee or discard the declared version, either wholly or partially; however, it was just an elementary requirement of natural justice that where an assessee maintains and produces proper books of accounts and the Assessing Officer does not agree with the declared version the assessee should have been specifically confronted on the alleged defects noted in the books of accounts under section 62.

8. It is an admitted position in all these appeals that the assessee produced books of accounts in response to notices under section 61 of the late Ordinance which were duly examined by the Assessing Officer. After fully examining the books of accounts the Assessing Officer made substantial additions out of profit and loss account, without issuing any notice under section 62 and thereby pointing out specific instances of unverifiable or unvouched expenses. The assessment for the assessment year 1988-89 was set aside twice by the first appellate authority on the ground that assessee was not confronted with specific instances of unvouched expenses whereas the assessment of the assessment years 1989-90 and 1990-91 were set aside at least for once. It appears that the different Assessing Officers who framed the assessments under appeal Neither gave serious attention to the concerned provision of law nor attentively read the directions given in the remand orders; and the CIT (Appeals) continued to provide the Assessing Officers one after another opportunity to make good defects in the assessment orders. The learned ITAT in the consolidated impugned order rejected the appeals of the assessee for the assessment years 1993-94, 1994-95, 1995-96 and 1996-97 even against remand orders and instead confirmed the additions made out of profit and loss account (under some heads after providing partial relief). The CIT(Appeals) had set aside the assessment orders for these years on the ground that the Assessing Officer had failed to establish the alleged factum of unverifiability.

9. After the insertion of the proviso to subsection (1) of section 62 no doubt whatsoever was left regarding the procedure for rejection of the declared version where proper books of accounts were maintained and produced by the assessee for examination. Even though the proviso which clarified and explained the procedure to be followed by the Assessing Officer for rejecting the declared version was inserted through Finance Act, 1993, it applied even to prior assessment years where assessments were framed after the insertion of the proviso. In the case of the appellant even the impugned assessment for the assessment years 1988-89, 1989-90 and 1990-91 were framed after the insertion of the proviso it applied even to those assessments; and as all the impugned assessments were framed in violation of mandatory provision of law as contained in section 62 of the Ordinance. The CIT(Appeals) as well as the learned ITAT were clearly in error in not vacating the same.

10. For the foregoing the appeals are disposed of answering the question No.1 in the negative and question No.2 in the affirmative in all the appeals in favour of the appellant/assessee and against the Revenue. In view our answer to questions Nos.1 and 2 we need not answer the remaining questions of law proposed by the appellant/ assessee.

M.H./S-166/LOrder accordingly.