I.T.A. No.4981/LB of 2004, decided on 30th August, 2005. VS I.T.A. No.4981/LB of 2004, decided on 30th August, 2005., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1091 (2005)

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

----S. 62---Assessment on production of accounts, evidence etc.---Non- confrontation of lowness of gross profit rate---Assessee contended that order of adjudication based on ground which was not mentioned in the show-cause notice was palpably illegal on the face of it and the notice issued under S.62 of the Income Tax Ordinance, 1979 did not mention the lowness of declared gross profit rate nor application of gross profit rate of 8%---Validity---Notice issued pointed out various defects e.g. variation in sale rate, unverifiability of various expenses debited to Profit and Loss Account, low yield and addition on account of variation in sale rate but lowness of declared gross profit rate had not been confronted to the assessee---Notice also did not point out any defect in the expenses debited to trading account though the defects in expenses debited to Profit and Loss Account had been confronted to the assessee---Assessee having not been confronted on lowness of gross profit rate, defects in the expense debited to trading account and the sales had been accepted, there was no justification for application of gross profit rate of 8% against declared gross profit rate of 7.18%-Order of First Appellate Authority directing to accept the trading results was justified and was not interfered by the Appellate Tribunal.

1987 SCMR 1840 ref.

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

----S. 24(ff)---Deductions not admissible---Additions were made on account of unverifiable nature of expenses---Such additions were deleted by the First Appellate Authority with the observation that Assessing Officer failed to pinpoint any specific defects of unverifiability expenses---Deletion of additions by the First Appellate Authority were confirmed by the Appellate Tribunal as Assessing Officer had failed to pinpoint any instances of unverifiable nature of such expenses.

Dr. Shahid Siddique Bhatti, D.R. for Appellant.

Ch. Mumtaz-ul-Hassan for Respondent.

ORDER

This appeal has been filed by the Revenue assailing the order of the CIT(A), dated 2-6-2004 on the following grounds:

(i) That the learned Commissioner of Income Tax Additional Appeal Zone was not justified to direct for acceptance of declared trading results.

(ii) That the learned Commissioner of Income Tax Additional Appeal Zone was not justified to delete the additions made under the heads machinery repair, electricity repair and spare parts.

2. Brief facts of the case are that the assessment in this case was framed under section 62 of the Income Tax Ordinance, 1979. Through a notice under section 62 of the Income Tax Ordinance, 1979 the assesese was confronted on the defects in the books of accounts. After considering the reply of the assessee the sales as declared were accepted on which GP rate of 8% was applied on declared sales against declared GP rate of 7.18%. Disallowances under various heads of P&L account were also made and total income of the assessee was determined at Rs.1,729,863 against declared income of Rs.999,594. In appeal, the CIT(A) observed that the GP rate of 8% has been applied in this case against declared GP rate of 7.18% without pointing out any specific defects in the books of accounts and directed to accept the trading results. The disallowances made under the heads of machinery repair, electricity repair and spare parts were deleted as the Assessing Officer failed to pinpoint any specific defects of unverifiability in respect of these expenses.

3. We have heard both sides and have also gone through the relevant record available on file. The DR vehemently argued against the direction of the CIT(A) to accept the declared trading account and submitted that the specific notice under section 62 was issued in this case pointing out various defects in the books of accounts and the Assessing Officer after considering the reply of the assessee filed in response to this notice accepted the declared sales and applied GP rate of 8% in view of the past treatment. On the other hand, the AR of the assessee pointed out that last year assessment was completed in agreement and as such the GP rate evolved on account of this agreed assessment cannot be the basis for application of GP rate of 8% in the year under appeal. The AR of the assessee stressed that the order of adjudication based on a ground which was not mentioned in the show-cause notice was palpably illegal on the face of it and in this case notice issued under section 62 by Assessing Officer did not mention the lowness of declared GP rate nor application of GP rate of 8%; The AR of the assessee cited the case law 1987 SCMR 1840 in support of its contention.

4. The Assessing Officer in the assessment order has observed that the assessee has shown gross profit of 7.18% which is found low as compared to previous year and further expense of wages and benefits, packing material is found unverifiable and therefore, declared trading results are liable to be rejected and GP rate of 8% is applied as per history of the case. The CIT(A) while deciding the issue observed that the assessee was not confronted under section 62 on the defects of debit sides of trading account.

5. We have examined the issue. The notice under section 62 issued by the Assessing Officer points out various defects e.g. variation is sale rate, unverifiability of various expenses debited to P&L account, low yield and addition on account of variation in sale rate but lowness of declared GP rate has not been confronted to the assessee. The notice under section 62 issued by the Assessing Officer also does not point out any defects in the expenses debited to trading account though the defects in expenses debited to P&L account have been confronted to the assessee. Further the low declared GP rate alone does not warrant the rejection of trading account and application of GP rate. In view of the fact that the assessee has not been confronted to lowness of GP rate and defects in the expenses debited to trading account and in view of the fact that the declared sales have been accepted by the Assessing Officer, we do not see any justification for application of GP rate of 8% against declared GP rate of 7.18%. The CIT(A) order directing to accept the trading results is found justified and does not call for any interference. The order of the CIT(A) on this issue is upheld.

6. The department is also agitating the deletion of addition under the heads of machinery repair, electricity repair and spare parts. The assessee was confronted on the issue of disallowance under these three heads with the observation that the payments exceeding Rs.5,000 have not been paid through cross cheques and assessee was asked to file proof of payment through cross cheque. The assessee in response to this notice explained that the provision of section 24(f1) of the Income Tax Ordinance, 1979 are not attracted.

7. While making additions under these heads, the Assessing Officer did not make disallowances under the provisions of section 24(ff) but on account of unverifiable nature of the expenses. The CIT(A) while deleting these disallowances observed that the Assessing Officer failed to pinpoint any specific defects of unverifiability of these expenses. We agree with the observations of the CIT(A) on this issue. The Assessing Officer has failed to pinpoint any instances of unverifiable nature of these expenses. The order of the CIT(A) does not call for any interference. The deletion of the additions under these three heads are confirmed.

8. The departmental appeal fails.

C.M.A.13/Tax (Trib.)Appeal dismissed.