I.T.As. Nos.3276/LB to 3278/LB of 2005, decided on 2nd February, 2007. VS I.T.As. Nos.3276/LB to 3278/LB of 2005, decided on 2nd February, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1016 (2007)

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

----S.62(1), proviso---Assessment on production of accounts, evidence etc.---Rejection of accounts without noting discrepancies or defects in the books of accounts---Validity---Assessment had been made on whimsical inferences drawn from certain set of facts which were based on fanciful assumption to which no credence could be attached--Sales were estimated on the desires of Assessing Officer---Neither suppression in purchase nor understatement of sales had been pointed out on examination of books of accounts---Even no glaring discrepancies or defects had been noted from the books of accounts produced for examination---Assessing Officer though had vast powers to make assessment but his estimate must be based on facts and circumstances of, the case as borne out from the record---Notice issued under S.62(1) of the Income Tax Ordinance, 1979 did not contain any defect to be noted in the books of accounts in order to render the declared version to be unreliable---Declared trading version had been rejected on vague and imaginary reasons---Rejection of trading version having been made by blatantly disregarding the terms laid down in proviso to subsection (1) of S.62 of the Income Tax Ordinance, 1979, Assessing Officer was directed by the Tribunal to accept the declared trading version.

1989 PTD 177; 2001 PTD (Trib.) 1480; I.T.A. No.139/LB of 1997; I.T.As. Nos.2073 and 2074/LB of 2005; 1989 PTD (Trib.) 508 and 2004 PTD (Trib.) 1642, rel.

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

----S.62(1), proviso---Assessment on production of accounts, evidence etc.---Notice issued under S.62 of the Income Tax Ordinance, 1979 based on general observations and gossips could not be equated with the notice to be issued confronting the assessee with the defects noted in the books of accounts.

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

----S.62(1), proviso---Assessment on production of accounts, evidence etc.---Mere mentioning S.62 on the face of the notice without adhering to the terms of the notice to be issued under S.62(1) of the Income Tax Ordinance, 1979 could not absolve the Assessing Officer from his responsibility to confront the assessee with the defects to be .noted in the books of accounts.

(d) Income-tax---

----Sales---Estimation of---Stocks and survey report---Assessee admittedly had declared better turnover qua assessed by the survey team---Average stock of goods was also available with the assessee at Rs.650,000 (opening stock of Rs.610,500 and closing stock of Rs.705,500) as was declared in the income tax return and was not objected by the Assessing Officer---If such average stock was to be rotated to six times, the sales were evolved at Rs.39,50,000---Viewing the facts in its entirety, Appellate Tribunal fastened the sales at Rs.43,00,000.

Hafeez-ur-Rehman Cheema, I.T.P. for Appellant.

Sheraz Mirza, D.R. for Respondent.

ORDER

This order is intended to dispose of above titled three appeals which are directed by the assessee-appellant against the consolidated order passed by C.I.T.(Appeals), Zone-V, Lahore dated 20-9-2004 in respect of assessment years 2000-01, 2001-02 and 2002-03.

2. Focal point for the assessment years 2000-01 and 2001-02 revolves around rejection of declared book version which has been contested on account of being uncalled for and unwarranted in particular when books of accounts were produced for examination and no notice in terms of section 62(1) of the Income Tax Ordinance, 1979 was issued to the assessee-appellant. Alternate pleas were taken with regard to estimation of sales to have been estimated on conjectures, surmises and arbitrarily as well as the additions made out of the profit and loss expenses. The divergent views expressed by the two learned representatives appearing at the bar have been heard as well as perused the documents furnished before us and the reported cases in re: 1989 PTD 177 (Kar. High Court), 2001 PTD (Trib.) 1480, 2004 PTD (Trib.) 1642 and the unreported cases bearing I.T.A. No.139/LB of 1997 (assessment year 1995-96) dated 23-2-1998 and I.T.As. Nos.2073 and 2074/LB of 2005 (assessment years 2000-01 and 2001-02) dated 19-8-2005.

3. The facts in brief as emerged are that the assessee-appellant is selling shoes under the name and style of Clifton Shoes. As per the assessment order sales were shown to have been effected at Rs.33,10,500, Rs.38,10,400 and Rs.40,37,750 which were estimated by the Assessing Officer at Rs.81,00,000, Rs.87,50,000 and Rs.96,25,000 respectively for the reasons embodied in the assessment orders. At the first appellate stage, those were fastened by the First Appellate Authority at Rs.60,00,000, Rs.65,00,000 and Rs.68,00,000 respectively. The gross profit rate applied at 20% in each under appeal against yielded at 19.07%, 19.98% and 20% was maintained by the First Appellate Authority.

4. What happened in this case was that in order to support the returned version for the assessment years 2000-01 and 2001-02, books of accounts consisting of cash books ledger, purchase and sale register along with vouchers regarding incurring of expenses were produced for examination of the Assessing Officer. Besides details of salary, overtime, leave encashment , rent, electricity, telephone, ice charges, legal expenses and mobile phones expenses were furnished. Moreover, wealth statement along with reconciliation statement personal expenditure statement and the allied expenses were also filed during the course of assessment proceedings. However perusal of the assessment orders depict that not a single defect whatsoever has been pinpointed therefrom to disbelieve the book results. Rather the entire superstructure of the assessments has been built up on heap of whims and surmises. The reasons advanced by the Assessing Officer for estimating sales are summarized as under:--

(a) Lengthy history of the case.

(b) Goodwill of the assessee and brand name.

(c) Price indexation.

(d) Capital in business.

(e) Living standard of the assessee and his personal expenses.

Accordingly the returned version was discarded considering the factors mentioned supra coupled with it the sales were unverifiable. However, while formulating the assessments for the two years under consideration it was inter alia, observed by the Assessing Officer at page 2 of the order as under:---

The above facts clearly show that your business is deeply entrenches and extremely well established. In fact Clifton Shoes is located in Liberty Market virtually for more than one and half decade, thus becoming a household name of Lahorities whenever they buy a shoe any time in general or on special occasions like Eid Festivals etc.

"Your business premises location is also or utmost important and must be considered before estimating any income being accrued to you from the business in question. In fact it is situated in the very heart of Liberty Market providing easy excess to the customers. No shopping becomes completed without buying a shoe when it comes on occasion like marriages, birth-days, ceremonies or festivals like Eid, Christmas etc. and on such occasions the favourite place for Lahorities to visit and to buy is Liberty Market and in case of buying shoes it is Clifton Shoes as well."

5. So far as capital in business is concerned, this was evolved by the Assessing Officer at Rs.44,95,363 which was inclusive of cash/prize bonds declared by the assessee. On the other hand it was replied by the assessee-appellant that the calculation made to work out available fund by the Assessing Officer was incorrect. Whereas it was the assessee's contention, reproduced at page 8 of the assessment order, that major amount was representing prize bonds while hard cash available for business was Rs.845,363 only. It was also categorically stated that copies of the prize bonds could be produced for verification. Thus major chunk of cash was blocked in the form of prize bonds and remained idle. This is also to be kept in mind that where accounts are maintained, this is the average stock which is to be rotated to evolve turnover and not the capital employed in business or availability of liquid cash. Reference in this regard may be made to a case-law cited as 1989 PTD (Trib.) 508.

6. It would not be out of place to mention here that local enquiry was also got conducted through the Circle Inspector but no stock inventory whatsoever was prepared by him wherefrom the assessee's business position could be ascertained, Conversely it was the assessee appellant's contention before the Assessing Officer that measurement of the shop is hardly 10 x 12 sq ft wherein shoes worth Rs.44,95,363 (the assumed capital) cannot be stocked in the shop. Besides quantitative details of stock of shoes lying in the shop with its value was also furnished by the assessee during the course of assessment proceedings which was neither verified nor was objected by the Assessing Officer. It is also interesting to note that the survey team had also reported size of the shop 8 x 10 sq. ft after giving effect of fittings rack etc. The survey team was also amazed to know that the sales declared with this size of the shop were quite reasonable. Accordingly the survey team estimated sales at Rs.38,10,500. Moreover the assessee-appellant had also submitted names of eight other cases of shoes dealers to contend that extent of the assessee's business may be gauged viz. those cases especially considering size of the shops etc.

7. Reference was also made by the Assessing Officer to a case namely Messrs Kumfort shoes allegedly to be parallel one. That case was distinguished by the assessee stating firstly that size of that shop is much bigger viz. the assessee and secondly that firm has two outlets one in Lahore and the other is in Islamabad. Thus, that case cannot be held to be parallel one.

8. In view of foregoing discussion we are persuaded to hold that the assessment for the charge year 2000-01 and 2001-02 has been made on whimsical inferences drawn from certain set of facts which are based on fanciful assumption to which no credence can be attached. Evidently, the sales are estimated on the desires of the Assessing Officer. Neither suppression in purchase nor understatement of sales has been pointed out on examination of books of accounts. Even no glaring discrepancies or defects has been noted by the Assessing Officer in the books of accounts produced for his examination. Although the Assessing Officer has vast powers to make assessment but his estimate must be based on facts and circumstances of the case as borne out from the record. At the outset it roust be kept in mind that the notice issued under section 62(1) did not contain any defects to be noted in the books of accounts in order to render the declared version to be unreliable. Actually the declared trading version in the present case has been rejected on vague and imaginary reasons and also against legal normal set-forth by the higher appellate Courts.

9. Proviso to section 62(1) of the Income Tax Ordinance, 1979 clearly envisages that where the assessee produces books of accounts as evidence in support of returned version the Assessing Officer shall before disagreeing with such accounts give a notice to the assessee of the defect in the account 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. Admittedly no such exercise has been putforth by the Assessing Officer. The notice which was issued under section 62 in the instant case was patently based on general observations and gossips. That notice cannot be equated with the notice to be issued confronting the assessee with the defects noted in the books of accounts. Merely mentioning section 62 on the face of the notice without adhering to the terms of the notice to be issued under section 62(1) of the Income Tax Ordinance, 1979 cannot absolve the Assessing Officer from his c responsibility to confront the assessee with the defects to be noted in the books of accounts. Thus, the assessment was suffering from statutory legal lacuna which cannot be cured therefore, we are obliged to hold that the trading version has been rejected by the Assessing Officer without assigning any cogent reasons. While dealing with the similar and the identical eventuality, it was concluded in the reported case in re: as 2004 PTD (Trib.) 1642 as under:---

Assessee was never confronted with the proposed treatment before formulating the assessment. The only notice which was statedly to have been under section 62 dated 23-10-1999 was nothing except requiring the assessee to furnish break-up of party-wise names and addresses to whom the sales were made details of P&L expenses, holding of agency of branded names, if any, etc. This notice cannot be equated with the notice to be issued confronting the assessee with the proposed treatment. Merely mentioning section 62 on top of the notice without adhering to the principle of audi alter partem would not absolve the Assessing Officer from his responsibility to confront the assessee with the basis of computation of income to be adopted. In absence thereof it would mean that the assessment was suffering from legal infirmity for the reason it is obligatory on the part of the Assessing Officer to confront the assessee with the treatment to be accorded once he disagrees with the declared results. Admittedly, the Assessing Officer has not taken any such step in the present case, which is violative of the, principle of natural justice.

"Burdening a subject with heavy taxation on personal views of the official involved, irrespective of the position held by him in the income-tax hierarchy, cannot be sustained. Since, the Assessing Officer has estimated the sales on the whimsical inference drawn- from certain set of facts and has made a wild guess as well as of a fanciful estimate, therefore, such estimation of sales cannot be held good and made basis for adoption of sales for the year under appeal. As a natural sequel the sales should be adopted considering history of the case and having taken regard to the encouraging results declared by the assessee from year after year."

10. Respectfully following the ratio decidendi in the reported cases mentioned to supra, we have come to an inescapable conclusion that rejection of trading version for the assessment years 2000-01 and 2001-02 has been made by blatantly disregarding the terms laid down in proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979. Accordingly the Assessing Officer is directed to accept the declared trading version for these two assessment years.

11. For the assessment year 2002-03 no books of accounts were maintained by the assessee-appellant. The Assessing Officer, after scrutiny and examination of the details requisitioned by him, finalized the assessment on the same reasoning which were recorded in respect of preceding two assessment years. Nevertheless it was the assessee's contention before the Assessing Officer that the sales so assessed by the survey team may be adopted for this assessment year because the C.B.R. had directed all the Assessing Officers to adopt the sales assessed by the survey team provided the declared sales are less whereas in the present case it is otherwise. But the Assessing Officer proceeded to estimate sales at Rs.96,25,000 by raising the last assessed sales by 10% against declared at Rs.40,37,750.

12. Since we have discarded the reasonings advanced by the Assessing Officer while formulating the assessment in respect of preceding two assessment years and directed to accept the declared trading version, thus those are also ignored in order to dispose of the appeal for this year. Resultantly we will have to fall back to the history of the case, if any is available. The history chart furnished before us depicts that there is a remote history of the case which pertains to assessment year 1994-95. Thereafter, the assessments till the assessment year 1999-2000 were made under the scheme of self-assessment. Hence, history of the case is not being followed. Admittedly the assessee has declared better turnover in this assessment year qua assessed by the survey team. Coupled with it average stock of shoes was available with the assessee at Rs.650,000 (opening stock of Rs.610,500 and closing stock of Rs.705,500) as was declared in the income tax return and was not objected by the Assessing Officer. If this average stock is to be rotated to six times, the sales are evolved at Rs.39,50,000. Viewing the facts of the case in its entirety, the sales for this assessment year are fastened at Rs.43,00,000.

13. Coming to the profit and loss additions, having taken regard to the volume of turnover, the expenses claimed under the head travelling, entertainment, miscellaneous conveyance are hereby deleted for the assessment years 2000-01 and 2001-02 and also the addition made in conveyance A/c and over time encashment A/c is knocked off for the assessment year 2002-03. The disallowances made under the head telephone and mobile phones are maintained being reasonable.

14. In the result all the three appeals are, accordingly, disposed of to the extent and in the manner indicated above.

C.M.A./9/Tax(Trib.)Order accordingly.