I.T.As. Nos. 5062/LB to 5064/LB, .4231/LB to 4233/LB of 1999, 3280/LB, 2880 of 2000 and 3989 of 2003, decided on 26th September, 2006 VS I.T.As. Nos. 5062/LB to 5064/LB, .4231/LB to 4233/LB of 1999, 3280/LB, 2880 of 2000 and 3989 of 2003, decided on 26th September, 2006
2007 P T D (Trib.) 1292
[Income-tax Appellate Tribunal Pakistan]
Before Rasheed Ahmed Sheikh, Judicial Member and Masood Ali Jamshed, Accountant Member
I.T.As. Nos. 5062/LB to 5064/LB, .4231/LB to 4233/LB of 1999, 3280/LB, 2880 of 2000 and 3989 of 2003, decided on 26/09/2006.
(a) Income-tax---
----Rejection of accounts---Variance in sales and purchase rates or law of GP rate could not be made basis of rejection of accounts.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.62---Assessment on production of accounts, evidence etc.---Rejection of accounts---No effort had been made by the Assessing Officer to bring home any material and plausible basis warranting rejection of accounts---Assessing Officer while completing assessment had given some instances of un-verifiability of sales whereby out of 212 parties names of 9 parties had been mentioned---First Appellate Authority found that detail of sales showed the complete and verifiable particulars of the parties with whom the sales were transacted and which included the names of the person mentioned in the assessment order as unverifiable---First Appellate Authority was justified in directing the acceptance of declared version and Appellate Tribunal confirmed the finding of the First Appellate Authority in this regard.
P.T.R. No.2 of 2001 ref.
(c) Income-tax---
----Provision for octroi expenses---Such provision was rightly created and claimed in the Profit and Loss account as the same was created on the ground that in case the petition before High Court fails the same shall become payable to the Town Committee.
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss. 144 & 148---Power to call for information---Power to take evidence on oath, etc.--Scope---Scope of Ss.144 and 148 of the Income Tax Ordinance, 1979 was altogether different for the reason that under the earlier section an information could be called for while under S.148 of the Income Tax, 1979 the Assessing Officer could compel production of evidence and witnesses by taking resort to the later section.
(e) Income Tax Ordinance (XXXI of 1979)---
---Ss. 24(ff) & 148---Deductions not admissible---Additions on account of payment other than through crossed cheque---Endorsement available on the reply submitted by the Bank Manger belies the stance taken by the Assessing Officer---No notice under S.148 of the Income Tax Ordinance, 1979 was issued by the Assessing Officer in exercise of the powers conferred under the said section---Addition could only be made to the extent of Rs.2,58,000 being a payment other than through crossed cheque---Addition made to the tune of Rs.1,53,00,000 was uncalled for and the same was restricted to Rs.2,58,000 only.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 13(1)(aa)---Unexplained investment etc., deemed to be income---Assessing Officer confronted for making an addition of Rs.2,95,000---Subsequent to confrontation and receipt of reply, the Assessing Officer reached to the conclusion that the addition to the tune of Rs.30,20,638 was warranted and same was made accordingly---Validity---Assessing Officer was under legal obligation to confront the assessee in respect of all the amount of enhanced addition but he failed to confront the assessee with the proposed addition, which was not tangible in the eyes of law---Law specifically required that the assessee must be given an opportunity to explain his position with regard to any addition made under the deeming provisions of S. 13 of the Income Tax Ordinance, 1979---Since the mandatory requirement of confronting the assessee with the proposed addition had not been fulfilled, First Appellate Authority was justified in deleting the said addition.
(g) Administration of justice---
----When law requires a thing to be done in a particular manner, if not so done, the same shall be nullity in the eyes of law.
(h) Income Tax---
----Disallowances---Add backs made at assessment stage and subsequently reduced/confirmed/modified by the First Appellate Authority were called in question on the ground that such addition in various heads was made by using stock phrases such as `unverifiable expenses' and `expenses of personal nature' while First Appellate Authority had confirmed the same without passing any speaking order by only stating that Profit and Loss expenses were not agitated seriously'---Assessee was maintaining regular books of accounts duly supported by evidence and all the expenses claimed in Profit and Loss account were properly vouched and authenticated---Contention of assessee a corporate body was that the expenses could not be disallowed on the ground that the same were of personal nature---Validity---Until the nature of the expense was proved through tangible evidence that same reflected personal nature of expense, such addition was not called for---Appellate Tribunal found force in the arguments of the assessee and the additions made in the Profit and Loss account by the Assessing Officer or reduced by the First Appellate Authority was restricted to 20% and 10% of various heads accordingly.
Rana Javed Iqbal, D.R. for Appellant (in I.T.As. Nos.5062/LB to 5064/LB of 1999, 3280/LB of 2000 and 3989 of 2003).
Shahbaz Butt for Represented (in I.T.As. Nos.5062/LB to 5064/LB of 1999, 3280/LB of 2000 and 3989 of 2003).
Shahbaz Butt for Appellant (in I.T.As. Nos.4231/LB to 4233/LB of 1999 and 2880 of 2000).
Rana Javed Iqbal, D.R. for Represented (in I.T.As. Nos.4231/LB to 4233/LB of 1999 and 2880 of 2000).
ORDER
1. This consolidated order shall dispose of nine cross appeals viz five filed by the Income Tax Department and four by the Assessee. The Revenue in all the five appeals has commonly called into question findings of the First Appellate Authority accepting the declared trading results of the Assessee, with the exception of appeals related to assessment year 1998-99. In addition to, deletion of addition made under section 13(1)(aa) of the Income Tax Ordinance, 1979 (hereinafter called "the repealed Ordinance") amounting to Rs.30,20,638 has also been challenged at the instance of the revenue.
2. Contrary the assessee in all the four appeals has impugned confirmation, reduction and modification of the additions made out of certain heads of the P&L expenses by the First Appellate Authority. Besides the assessee is also not satisfied with the disallowances made at Rs.1,53,00,000 and Rs.12,58,154 respectively in assessment years 1998-99 and 2000-2001 under the head packing and advertisement viz selling expenses, by invoking the provisions of section 24(1'1) of the repealed Ordinance and subsequently confirmation thereof by the First Appellate Authority. For the assessment year 1998-99 the addition made under the head packing and advertisement expenses to the extend of Rs.60,00,000 as reduced to Rs.14,08,304 by the learned Commissioner of Income Tax (Appeals) has also been attacked by the assessee appellant.
3. The facts giving rise to the present appeals are stated in brief that the assessee Private Limited Company (hereinafter referred to as "The Company") after its incorporation on 2nd March, 1991, set up an industrial undertaking for the purposes of manufacturing and sale of vegetable 'ghee, cooking oil and allied products, such as soap etc. The profit and gains of the Company remained exempt from charging of income tax for a period of three years from the date of commencement of its commercial production as provided under Clause (118-C) of Part-I of Second Schedule to the late Ordinance. Since the said exemption was first granted in the assessment year 1993-94, therefore, the assessment year 1996-97 was the first year which partially fell under the exempt and non exempt period. As per the Revenue exemption period in the said assessment year was comprised of three months only. However, the Company was of the view that it extended to four months. In first appeal, the controversy was resolved in favour of the taxpayer and was not challenged by the Revenue in the present appeal.
4. As per the assessment order proper books of accounts were maintained by the company by employing a regular method of accounting as was required under the law. Those books of accounts were also subjected to audit by a recognized firm of Chartered Accountants. On examination of the books of accounts and the allied evidences, it was noticed by the Assessing Officer that those suffered from various common defects, such as partial unverifiability of local purchases of raw material, sale of vegetable ghee and cooking oil, complete records and vouchers in respect of claimed expenses were missing, lowerness of gross profit rate etc. The assessee's company was accordingly confronted in this regard and after having found the explanation and the evidence produced by the assessee during the course of assessment proceedings to be unsatisfactory, discarded the declared book version of the Company. Resultantly the income was determined by estimating sales and subjecting them to a higher gross profit rate and by curtailing claimed profit and loss expenses. The sales were bifurcated in cooking oil and ghee and soap and were subjected to varying gross profit rates.
5. The Assessee feeling aggrieved challenged the same before the First Appellate Authority who vide a consolidated order, dated 25th of June passed in respect of assessment years 1996-97 to 1998-99 directed acceptance of trading results. While in the appeals for the subsequent assessment years viz 1999-2000 and 2000-2001, similar directions were given through separate orders, dated 22nd May, 2000 and 30th June, 2003 respectively.
6. In the assessment year 199' 6-97 the Assessing Officer noticed that the Assessee has claimed provisions for Octroi Expenses at Rs.726,410 in the Profit and Loss account. The same was disallowed on the ground that the expenses did not actually incur and the said provision was not an admissible deduction under the law. This disallowance was confirmed in appeal by. the Commissioner of Income Tax (Appeals).
7. Additions to the tune of Rs.1,53,00,000 and Rs.12,58,154 were made in assessment years 1998-99 and 2000-2001 respectively under the head publicity and advertisement viz selling expenses on the ground that payments were not made through proper banking channel as therefore, caught by the mischief of section 24(ft) of the repealed Income Tax Ordinance. The said additions were confirmed in first appeal on the ground that the Assessee Company could not sufficiently rebut the finding and objection of the Assessing Officer. The First Appellate Authority further noticed that in assessment year 1998-99 apart from addition under section 24(ft) of the repealed Ordinance a further addition of Rs.60,00,000 was also made under the same head of expenses on the ground of unverifibility. Taking cognizance of the matter the First Appellate Authority restricted the said addition to Rs.14,08,308.
8. An addition of Rs. 30,20,638 was also made under sec tion 13(1)(aa) of the repealed Ordinance in assessment year 1998-99 on the ground that the amounts did not appear in the general ledger in chronological sequence and opening entries were not genuine for the reason that instead of credit balance shown. These reflect a deficit balance, for want of explainable sources. The Assessing Officer thus inferred that the said entries were inserted on subsequent dates. In first appeal the addition was deleted being unlawful for want of fulfilment of legal requirements of section 13 of the repealed Ordinance and having been made without providing opportunity to the Assessee.
9. Claimed profit and loss expenses under various heads were curtailed in all the years under appeal on common ground of their partial unverifiability and being of personal nature. The said curtailment was confirmed in first appeal with the exception of reduction of Rs.10,000 in addition made in assessment year 1996-97 under the head Postage and Telegram and by deleting addition of Rs.7,70,000 made in assessment year 1998-99 on account of robbery.
10. The learned D.R. Mr. Javed Iqbal Rana appearing on behalf of the Revenue contended that the declared results/book version in all the years was rejected for the reason that the books of accounts were not properly maintained by the Assessee and specifically in assessment year 1996-97, separate 'books were not maintained for exempt and non-exemption period and the Assessee just apportioned the income on periodical basis. He further contended that, the raw materials locally purchased was not open to verification as complete addresses of various parties were not recorded. Similarly the sales were not open to verification for want of complete addresses. He argued that the cost of sales was not verifiable for want of documentary evidence. He contended that all the payments were not made through banking channel and the Assessee had shown its inability to provide complete and verifiable addresses of the parties. He added that the production did not commensurate with electric consumption. He further added that the sales were estimated and gross profit rate was applied on the basis of parallel cases. In this view of the matter he pleaded that the treatment meted out at assessment stage was justified, while the Commissioner of Income Tax (Appeals) without taking cognizance of the fact that the production of the Assessee did not commensurate with electric consumption has erred in' directing the acceptance of accounts.
11. Mr. Shahbaz Butt Advocate appeared on behalf of the Company and vehemently supported the order of the First Appellate Authority to the extent of acceptance of trading results, contends that the company employees regular method of accounts and the books of accounts are maintained property, regularly and faithfully in accordance with the requirements of law, while all the entries appearing therein are supported by necessary evidence and tangible material and the accounts are audit by a renowned firm of chartered accountants in accordance with the requirements of the Income Tax and Companies Ordinance. Answering the first objection of the learned D.R. he submit that, the company was not legally required to maintaining separate set of books for exempt and non-exempt periods, as alleged by the D.R. He further pointed out that such an objection was neither raised at assessment stage nor before First Appellate Authority. He added that this objection only relates to assessment year 1996-97 alone since no such objection was either raised or made basis of rejection of accounts, therefore, it was pleaded that the objection was unwarranted and uncalled for. He submits that the C.B.R. itself devised formula of apportionment of income in the present Circumstances, he added that in all parallel cases of the income was regularly apportioned by the department on periodical basis.
12. Commenting upon the alleged unverifiability of purchases, it was submitted that the major raw materials are through imports while a megre portion thereof is purchased from local market. Explaining the ratio of imports and local purchases he draws our attention to the orders of Commissioner of Income Tax (Appeals) wherein the ratio of imports and purchase from local market in relation to cost of sales has been considered by the First Appellate Authority. He states that the imports and local market are represented in the following manner:--
Assessment year | Imports | Local purchases |
1996-97 | 77.65% | 22.35% |
1997-98 | 91.82% | 8.18% |
1998-99 | 97.25% | 2.75% |
1999-2000 | 97.82% | 2.18% |
2000-2001 | 87.88% | 12.12% |
13. He added that in view of the above petition, the purchases represented through import are open to 100% verification being routed through proper banking channel while explaining local purchases, it was submitted that a very small portion of raw material as indicated in the above schedule and endorsed by the learned Commissioner of Income Tax (Appeals) represented purchases from local market. He added that the payments in respect of local purchases were also routed through proper banking channel and were from known verifiable parties on one hand while the complete particulars and party-wise details of the transacting parties were also provided to the Assessing Officer. He has taken a strong exception to the remarks that complete addresses were not provided. Referring to the reply to notice under section 62, it was submitted that Assessing Officer specifically informed that where a name of a party appears more than one time in such cases, complete address only appears once. He pointed out that in this context the Assessee also requested the Assessing Officer to confirm the business transactions from the concerned transacting parties directly by issuing notices under section 144(c) of the repealed Ordinance.
14. He contends that in view of heavy imports and duly documented local purchases, there was justification for any tinkering in the accounts. He submits that out of total cost of sales only 1.52% was routed otherwise than the proper banking channel and represented cash purchases. He added this negligible portion too was properly authenticated and documented. Therefore, there was no reason for attributing unveifiability thereto. Thus he claims that debit side of trading account was open to 100% verification.
15. Explaining the credit side of trading account he submits that the same too is open to 100% verification for the reason that firstly the complete identifiable particulars of the purchasing parties were provided to the Assessing Officer during assessment proceeding and secondly wherever any shortcoming was noticed, by the Assessing Officer, the same was removed so as to enable him to verify the correctness of sales.He further added that more than 95% total sales were on credit basis and same too were routed through proper banking channel and evidence in this regard was produced at assessment stage. He submits that 5% of total sales were on cash basis. Even then the same, were verifiable. He added that the very estimate of sales by the Assessing Officer, itself confirms the correctness of the contention of the assessee. He submits that only a tinkering has been made so as to round the declared sales. He contended that even the parties shown as unverifiable appearing in the impugned orders bear their complete addresses. Remarking on the objection that the Commissioner of Income Tax (Appeals) has not taken cognizance of the fact that accounts were also rejected on the ground that the production did not commensurate with electric consumption. He submits that firstly no such basis were ever evolved for rejection of the trading results and secondly the assessment proceedings for the assessment years 1996-97 and 1997-98 were taken up together by the Assessing Officer and he himself at Page 9 in Para. 9 of the assessment order admits as under:--
"however on the basis of consumption of electricity units, the production results declared by the assessee are reasonable."
Therefore, he pleaded that in view of the pointed observation the common ground taken by the department for acceptance of its appeals on this score falls down to the earth.
16. While contesting on the disallowance of Rs.7,26,410 on account of octroi duty in 1996-97, it was submitted that a dispute arose amongst Kot Abdul Malik Town Committee and the appellant regarding payment of octroi duty in 1993. The said dispute came up before Lahore High Court, who vide order, dated 16-5-1993 directed the Town Committee for return of octori payments already made by the appellant on furnishing of bank guarantee. It was contended that the dispute was pending adjudication, therefore, the appellant created a provision of the octroi duty and in view of the pendency of writ petition before the Court the company created a provision of Rs.7,26,410 on account of the octroi expenses and same was claimed lawfully in profit and loss account. It was submitted that the Commissioner of Income Tax (Appeals) has confirmed this addition without passing a speaking order and considering the nature of the provision. The learned D.R. on the other hand supported the confirmation of disallowance for the reason recorded in the impugned order.
17. In assessment year 1998-99 an addition of Rs. 1,53,00,000 was made in the advertisement and publicity expenses, in terms of section 24(ff) of the repealed Ordinance, the said addition was confirmed by the Commissioner of Income Tax (Appeals). The learned AR of the
assessee has vehemently contested the treatment was unlawful and unjustified. He submits that total expenses under the head packing and advertisement viz. selling expenses were claimed at Rs.2,88,75,488 out of which a sum of Rs.1,53,00,000 was disallowed by invoking provisions of section 24(ff) of the late Ordinance of 1979 while out of remaining expenses of Rs.1,35,75,488 a sum of Rs.6,00,000. The learned CIT(A) confirmed the addition of Rs.1,53,00,000 on the ground that satisfactory explanation could not be tendered while out, of further disallowance of Rs.60,00,000 under the same head of account the addition was restricted to the extent of Rs.14,08,308. He explained that the Assessing Officer took contradictory stance for such a huge addition, He remarked that, the Assessing Officer firstly said that the claimed expenses were excessive in view of parallel cases, secondly he took the stance that, the claimed expenses had not actually been incurred through the same were ancillary and incidental to the business of the assessee and since the same were not incurrent for the purposes of business, therefore, the same were caught by the mischief of section 23(1)(xviii). Thirdly, it was the case of the Assessing Officer that the payments to the extent of Rs.1,53,00,000 having not been made through crossed cheques therefore, the same were hit by the provisions of section 24(ft). Fourthly he was of the view that the bills issued by the recipients were not in accordance with Rule 34 read with Rule 34A(2)(1) of Income Tax Rules, therefore, the transactions were dubious. The learned A.R. in the above background explained that the Assessing Officer in the body of the order had admitted that such expenses are ancillary and incidental to the business of the assessee and after such observation he cannot turn his face by stating that the expenses in question were not incurred for the purpose of business. He further added that the responsibility of issuing bills in accordance with the Income Tax Rules was on the third party and any irregularity committed by such third party cannot operate against the present appellant. Regarding excessiveness, it was explained that the assessee/appellant introduced 1/2kg consumer packing for general public for the first time in history of Ghee Industry. Therefore, because of introduction of new consumer packing higher expenses were bound to incur on this count on one hand and for introduction of such packs and promotion of sales heavy expenses on advertisement was made on the other hand. This feature, according to him distinguishing his case from the parallel cases. He added that while distinguishing the alleged parallel cases, it was explained to the Assessing Officer, that both the quoted cases deal in bulk, 16 kg packing tins alone and since the assessee/appellant sell its products in 1/2kg, 1kg, 2-1/2kg, 5kg, and 16kg packing along with one litre, 2 litres and 5 litres Plastic Bottle packing. Therefore, the products sold by the assessee cannot be compared with said cases. Finally it was pointed out that the Assessing Officer left all the allegations with the exception of one that out of claimed expenses an amount of Rs.1,53,00,000 was not made through proper banking channel. Therefore, the same were caught by the mischief of section 24(ff) of the Ordinance and therefore, he made addition of Rs.1,53,00,000. He remarked that the Assessing Officer ignored the payments made through crossed cheques to the tune of Rs.1,07,58,880 to 12 different parties as listed at page 27 of the Commissioner of Income Tax (Appeals) order and arbitrarily made a further addition of Rs.60,00,000 under this head, whereas according to his own calculation unverifiable portion restricts to Rs.28,16,608 only. He added that even after admitting that the whole position the Commissioner of Income Tax (Appeals) unilaterally confirmed the addition under section 24(ft) and restricted the remaining disallowance of Rs.60,00,000 to 50% of the alleged unverifiable amount of. Rs.28,16,608.
18. The learned AR contended that after making addition under section 24(ff) all the objections regarding excessiveness of claim and expenses hit by section 23(1)(xviii) fell down to the earth. He added that restricting himself to the provisions of section 24(ff) falsifies the other allegations. He contended that even otherwise the addition made under section 24(ff) was highly unjustified. He submitted that 'the Assessing Officer issued a notice under section 62 on 26th February, 1999 intending to make addition of the disputed expenses, the assessee while explaining its position submitted that out of total expenses claimed under this head payment of Rs.1,53,00,000 were related to the year under appeal and these payments too were made through crossed cheques. It was pointed out to the Assessing Officer that he himself has confirmed the correctness of the contention of the assessee directly from the bankers of the assessee by issuing notice under section 144(c) after obtaining approval the Commissioner of Income Tax on 12th March, 1999. He added that in turn the bankers of the assessee responded on 24th March, 1999 vide letter No.CRL/GEN/FAX-411 of even date and had confirmed that all the cheques as detailed in the notice under section 144(c) with the exception of cheque No.14319864 for Rs.2,58,000 were crossed cheques. Copies of notice under section 144(c) and reply submitted by the Banks were produced and placed on appeal record. The AR further submitted that in the body of the impugned order, the Assessing Officer has stated that notice under section 144(c) was not responded, while the Bank Manager has not produced original cheques despite issuance of notice under section 148. The learned AR has contended that this state of affairs is totally incorrect for the very simple reason that the Assessing Officer issued a notice under section 144(c) whereby he asked the Bank Manager (a) to confirm that as to whether the cheques mentioned in notice are bearer cheques and (b) cheques referred in the notice be produced in original. He commented that the very reading of notice under section 144(c) shows that no notice under section 148 for production of evidence in terms of original cheques was issued, which is sufficient to judge' the correctness and worthiness of the fact recorded in the assessment order. He submits that the scope of sections 144(c) and 148 are altogether different. Under the earlier provision of law, information could be collected while in the later the evidence and witnesses can be requisitioned. The information in the circumstances could only be asked for after obtaining approval, which under section 148 the Assessing Officer had the powers of a Civil Judge for the purposes of evidence and examination of witnesses. He states that the Assessing Officer therefore, cannot call for evidence and witnesses through notice under section 144(c). Therefore, being conscious of this fact he not only denied response to notice under section 144(c) but also alleged issuance of notice under section 148. He further provided a copy of the reply of the Bank Manager, dated 24th March, 1999, bearing the receipt thereof on the same date in the Tax Office. Therefore, he submits that the addition made under section 24(ff) was not tenable. He stated that addition could only be made to the extent of Rs.2,58,000 being a payment otherwise than the crossed cheques as confirmed by the bankers. He further commented that the address of Messrs. Dot Word was provided to the Assessing Officer during the course of assessment proceedings. He submits that the Assessing Officer was not right in stating that the notices on said party could not be served. He read over the relevant part of the reply submitted during the course of proceedings, whereby it was pointed out to the Assessing Officer that the above referred party has shifted its business premises and, therefore, correspondence be done on the new address provided in the reply. But the Assessing Officer had failed to take notice of such change. He added that total expenses under this head were claimed at Rs.2,88,75,485 and after making addition under section 24(ff) and allowing reduction of payments to the extent of Rs.1,07,58,880 made through crossed cheques to 12 parties listed in Commissioner of Income Tax (Appeals) only unverifiable alleged balance remains Rs.28,16,608. Therefore, further addition of Rs.60,00,000 was unwarranted. He commented even after admitting the ground reality the Commissioner of Income Tax (Appeals) unilaterally restricted the addition to 50% of above said alleged unverifiable expenses. He pleaded that the addition so made was unjustified and unwarranted and therefore, merits deletion.
19. The D.R. on his turn supported the additions made under section 24(ff) and the addition as reduced by Commissioner of Income Tax (Appeals) in respect of remaining unverifiable expenses on the grounds recorded in the impugned order.
20. Addition under section 13(1)(aa) was made to the tune of Rs.30,20,638 in assessment year 1998-99 which was subsequently deleted by the Commissioner of Income Tax (Appeals) vide order, dated 25-6-1999. The learned D.R. representing the department has contended that the addition was justified and the Commissioner of Income Tax (Appeals) had erred in deleting the same.' It was contended that the addition was made for the reason that the receipts were inserted after-words and they were not appearing in the ledger in chronological order. Further that the opening entries of related accounts were not genuine and instead of credit balances there was deficit balance and the same was not shown by the, assessee for want of explainable sources. It was pleaded that one of the distributor of the assessee company had denied any business relation with the assessee company, yet the credit balance was appearing in his name. Therefore, the addition was justifiably made. The AR of the assessee has supported the order of the first appellate authority. He submits that admittedly notice was issued for making addition of Rs.2,95,000 under section 13(1)(aa) but allegedly after receipt of reply and cross checking the Assessing Officer reached to the conclusion that the addition should have been made at Rs.30,20,638. He contended that these facts specifically find place in the assessment order. Having reached to the above conclusion that instead of confronted addition of Rs.2,95,000 an addition of Rs.30,20,638 was warranted. The Assessing Officer was under legal obligation to confront the assessee Company on the enhanced addition. But the Assessing Officer without confronting the company made the impugned addition of Rs.30,20,638 which is not tenable in the eyes of law. According to him providing opportunity of being heard was a mandatory requirement in terms of section 13 in the given circumstances. Therefore failure at the part of Assessing Officer to confront the appellant with the intended addition has made the same unlawful. In this back ground it was pleaded that the Commissioner of Income Tax (Appeals) had lawfully deleted the addition taking the proper cognizance of the matter. It was therefore, prayed that the order of the Commissioner of Income Tax (Appeals) on this count be maintained.
21. Parties have been heard at length and available record perused.
22. We have consciously considered the rival arguments. The Revenue in all the years under appeal is commonly aggrieved by the orders of the first appellate authority directing acceptance of trading results. It is important to state here that in assessment years 1996-97 to 1998-99 the only ground of appeal which has been annexed to the Memorandum of appeal reads as under:
"That the CIT(Appeals) was not justified to accept the declared trading results as the consumption of electricity did not commensurate with the production results."
While in the appeal pertaining to assessment year 1999-2000, the department is aggrieved with the order of the CIT(A) on the following ground:--
"that the CIT(Appeals) was not justified to issue direction for acceptance of trading results without appreciating the facts available on record."
As well as in the appeal pertaining to assessment year 2000-2001, the department has raised the following ground:--
"That the CIT(Appeals) was not justified to accept the declared trading results for the year under consideration because the assessment was finalized by rejecting the declared results due to un-verifiability of sales/purchases. The AR of the assessee himself admitted that out of total purchases 1.52% represented cash purchases. No complete identifiable particulars' like permanent addresses and NTN have been provided by the assessee, therefore, instances of un-verifiability of purchases and rate of sales charged by the Company differs from party to party were duly confronted to the assessee through notice under section 62 of the Income Tax Ordinance, 1979 in response to which no whereabouts of the party to whom the purchases were made by the assessee have been provided and also failed to discharge the observation made by the department regarding verifiability of purchases in letter and spirit. Therefore, reply received was found unconvincing and rejected."
23. We have examined the orders of the appellate authority in the light of rival arguments and found that the learned CIT(A) has directed acceptance of book version on sound reasoning. According to the first appellate authority the Assessing Officer has failed to determine the quantum of unverifiable purchases in relation to sales and without attempt to verify quantum of unverifiability of sales and purchases book version has been rejected on the basis of suspicion and guess work. The first appellate authority has also observed that the lowerness of GP rate cannot be made basis for rejection of account and unless the Assessing Officer has spelled out his belief that the accounts are fictitious and the same does not reflected the true picture of the assessee, until such belief is bona fide and judicious the books of account cannot be rejected. According to the CIT(A) the Assessing Officer had failed to prove with positive evidence that the accounts did not disclose the whole income of the present assessee. According to the CIT(A), the Assessing Officer has a discretion to discard the book version but such discretion has to be exercised judiciously and in accordance with law. He observed that the Assessing Officer has to form an opinion upon tangible material, which must not be subjective and this phenomena is missing in the present use.
The CIT(A) has reached to the conclusion that the book version in the instant case has been rejected by use of abstract and general expression, which are not warranted by law.. In assessment year 1999-2000, the CIT(A) has observed that the facts of the case are similar to the cases relevant to assessment years 1996-97 to 1998-99. Therefore relying upon CIT(A)'s order, dated 25-3-1999, he observed that perusal of record of the assessee shows that during the income year relevant to assessment year 1999-2000, purchase of edible oil amounting to Rs.1,07,61,78,613 were made out of which purchases to the extent of Rs.1,05,27,57,506 being 97.82% of the total purchases represented imports while local purchases were worth Rs.2,34,21,170, which represents 2.8% of total purchases. According to him after adjustment of opening and closing stock respectively of the value of Rs.9,65,11,385 and Rs.6,17,84,930 total material consumed during the relevant period works out to Rs.1,11,10,09,089, which constitutes 91% of the total cost of sales amounting to Rs.1,22,03,47,523. Dealing with the instances of unverifiability of the sales provided at page 2 of the assessment order, it was observed that complete addresses have not intentionally been mentioned in the impugned order and perusal of the assessment record reveals that the assessee had provided complete addresses of the parties during the, course of assessment proceedings, which confirms the contention of the assessee. He further observed that perusal of the party-wise detail of sales confirms the contention of the assessee that he had provided complete addresses of the parties during the course of assessment proceedings. The CIT(A) after discussing the debit and credit side of the trading results has reached to the conclusion that the manufacturing results were verifiable and there is no justification left to exercise the discretion rejecting the declared results of the assessee.
24. While deciding appeal for the assessment year 2000-2001, the CIT(A) vide order, dated 3-6-2003 has specifically observed that the main basis assigned by the Assessing Officer for rejection of accounts were that the assessee has failed to provide the identifiable particulars of the transacting parties. While on perusal of record it reveals that complete details were submitted and it was contended with the support of evidence that in all the cases mode of payment was through proper banking channel. The learned CIT(A) was surprised with the approach of the Assessing Officer that the book version was rejected unilaterally on the basis of incomplete addresses. The learned CIT(A) had held that even non-availability of addresses of the customers will hardly clothe the Assessing Officer with an authority to make addition. The CIT(A) further observed that 1.52% of the total sales represents cash and the book version was rejected without bringing on any tangible material on record. It was also noticed by the first appellate authority that production results of the present appellant were never objected by the Assessing Officer and the estimated sales is just a round of the declared version. According to him the declared trading results were supported by books of accounts and in case he intended to discard the trading results and substitute the declared figures, the same must have been done with some basis. According to him nothing in this regard was done by the Assessing Officer. Relying upon a judgment in a similar case in PTR No.2/2001, he directed acceptance of the accounts.
25. Now coming to the arguments addressed by the learned DR in the context of the grounds of appeal narrated in the earlier part of this order. It is observed that the Assessing Officer himself while dealing with the production in relation to consumption of electricity, while completing the assessment for assessment year 1996-97 has specifically observed at page 9 in para 9 thereof that the production of the assessee on the basis of consumption of electricity units is reasonable. Similar position exists in assessment years 1997-98 and 1998-99. Therefore, the first objection that CIT(A) has not looked into the account has lost its efficacy. It is noticed that the major part of the purchases of the assessee represents through imports while a very small portion represents local purchases. The CIT(A) has specifically noticed that the bulk of purchases are represented through imports and a very meagre part of purchases have been made from the local market ranging from 2.8% to. 22.35% respectively in all the years under appeal. It is also important to notice that the Assessing Officer has failed to pinpoint a single instance of unverifiability with regard to local purchases. Despite the contention of the assessee that the local purchases were made from the verifiable parties and routed through proper banking channel. It has also been noticed that nothing is available on record to show that the Assessing Officer has taken any pain so as to attribute and prove any alleged unverfiability of sales or purchases. Regarding the credit side of the trading account it has constantly been urged before both the forums below that over and above 95% of the total sales declared by the assessee were routed through proper banking channel and the remaining 5% cash sales are also made to verifiable parties. The Assessing Officer without demolishing the above contention has rejected the results declared by the assessee. Nothing has been brought on record to justify the rejection of trading results. It is by now settled that a variance in sale and purchase rates or lowerness of GP rate cannot be made basis of rejection of accounts. In our opinion it is not the case of the Assessing Officer that the assessee has not maintained books of accounts faithfully, properly and regularly in accordance with law and the same in any manner does not reflect the true income of the assessee. Notwithstanding the fact that no effort has been made by the Assessing Officer to bring home any material and plausible basis warranting rejecting of accounts, the Assessing Officer while completing the assessee order for assessment year 1999-2000 has given some instances of unverifiability of sales whereby out of 212 parties names of 9 parties have been mentioned. It is noticed that the CIT(A) while deciding the appeals has found that the perusal of the detail of sales available on record shows the complete and verifiable particulars of the parties with whom the sales were transacted and which, include the names of the person mentioned in the impugned assessment order as unverifiable.
26. In view of the discussion narrated above, we are inclined to hold that the CIT(A) was justified in directing the acceptance of declared version in all the years under appeal and we accordingly confirm the findings of the first appellate authority and consequently all the appeals of the department on this point fails.
27. In appeal relevant to assessment year 1996-97 the assessee has called in question the disallowance of provisions for octroi claimed in the Profit and Loss account. The AR of the assessee has submitted that a dispute regarding payment of octroi duty arose amongst the Kot Abdul Malik Town Committee and the appellant in the year, 1993. The said dispute was challenged in the Lahore High Court by the assessee, who vide order, dated 1'6-5-1993 directed the Town Committee to return the payments made by the appellant on account of octroi on furnishing of bank guarantee. The matter related to payment of octroi duty was sub judice before the Lahore High Court and since the fate was not known, therefore, the assessee created a provision on the ground that in case the petition before the High Court fails the same shall become payable to the Town Committee. Keeping the legal position in mind the provision for octroi expenses was correct in assessment year 1996-97 and was accordingly claimed therein. According to him the provision was rightly created and claimed in the Profit and Loss account. We are not persuaded with the stance taken by the AR of the assessee for the reasons firstly that creation of provision in the given circumstances was not warranted and secondly the provision created on the basis of a presumption cannot be reckoned as an admissible deduction under the Income Tax Law. In this view of the matter the provision of octroi expenses claimed by the assessee in Profit and Loss account is held to be an inadmissible deduction and we accordingly upheld the action of both the authorities below.
28. In appeal relevant to assessment year 1998-99 assessee has called in question the addition of Rs.1,53,00,000 made under the head Packing. Advertisement and Publicity expenses by invoking the provision of section 24(ff) of the repealed Ordinance. The AR of the assessee submits that the assessee claimed total expenses of Rs.2,88,75,488 under the head selling expenses out of which a sum of Rs.1,53,00,000 was disallowed by the Assessing Officer on the ground that the same were hit by the mischief of section 24(ff) of the repealed Ordinance. It was urged that the learned Assessing Officer issued a show-cause notice under section 62 of the repealed Ordinance on 26th February, 1999 showing intention to make addition of the disputed expenses. He urged that at the same time Assessing Officer issued notice under section 124(c) to the bankers of the assessee for confirmation of transaction of the expenses of Rs.1,53,00,000 after obtaining approval on 12th March, 1999 of the concerned CIT. He submits that despite the fact the assessee made compliance of notice under section. 62 the bankers also responded to the notice issued under section 144(c) and confirmed that all the cheques as detailed in the notice referred supra with the exception of cheque No.14319864 for a sum of Rs.2,58,000 were crossed cheques. The AR of the assessee has produced the copy of notice under section 62 along with reply thereto and notice under section 144(c) of the repealed Ordinance along with reply of the bankers, which have been placed on record of the appeals. Perusal of the same would reveals that the bankers of the assessee have confirmed that out of total cheques mentioned in the said notice only one payment related to cheque No. 14319864 was other than crossed cheque. The other limb of arguments for disallowing the amount of Rs.1,53,00,000 was that the assessee has not responded to the notice issued under section 148 whereby the bankers were asked to produce the original crossed cheques. We have noticed that no notice under section 148 was issued to bankers. However, at the bottom of notice under section 144(c) the bank manger has been directed to produce the original cheques. We found that the bank manager was asked (a) to confirm that as to whether cheques mentioned in the notice are bearer cheques, and (b) cheques referred to in the notice be produced in original. We will rightly agree with the submissions made at bar by the AR of the assessee that the scope of sections 144 and 148 is altogether different for the reason under the earlier section an information can be called for while under section 148 the Assessing Officer can compel production of evidence and witnesses by taking resort to the later section. But in the instant case no notice under section 148 was issued in exercise of powers conferred under section 148. The endorsement available on the reply submitted by the bank manager, dated 24th March, 1999 belies the stance taken by the Assessing Officer. Therefore, addition under section 24(ff) could only be made to the extent of Rs.7,58,000 being a payment other than through crossed cheque. Under the circumstances we hold that addition made under section 24(ff) to the tune of Rs.1,53,00,000 is uncalled for and keeping in view the reply of the bank manager, the same is restricted to Rs.2,58,000 only.
29. An addition of Rs.30,20,638 was made by the Assessing Officer in assessment year 1998-1999 by invoking provisions of section 13 (1)(aa). The said addition was deleted by the first appellate authority vide order dated 25-6-1999. The department has challenged the said deletion being unjustified and baseless. We have heard the rival arguments on the point and have perused the order of the first appellate authority deleting the said addition. It is noticed that the Assessing Officer confronted the assessee for making an addition of Rs. 2,95,000 in terms of section 13(1)(aa) of the repealed Ordinance. Subsequent to confrontation and receipt of reply the Assessing Officer reached to the conclusion that the addition to the tune of Rs.30,20,638 was warranted. It is noticed that the Assessing Officer was under legal obligation to confront the assessee in respect of all the amount of enhanced addition but he has failed to confront the appellant with the proposed addition, which is not tangible in the eyes of law. It is settled principle that when a law requires a thing to be done in a particular manner, if not so done, the same shall be nullity in the eyes of law. The above principle applies on all fours of the present proposition. The law specifically requires that the assessee must be given an opportunity to explain his position with regard to any addition made under the deeming provisions of section 13 of the repealed Ordinance. But since the mandatory requirement of confronting the assessee with the proposed addition has not been fulfilled, therefore, the CIT(A) was justified in deleing the said addition.
30. P&L add backs made at assessment stage in all the years and subsequently reduced/confirmed/modified by the first appellate authority have been called in question by the assessee on the ground that the Assessing Officer using stock phrases such as unverifiable expenses and expenses of personal nature has made the addition in various heads while the CIT(A) has confirmed the same without passing any speaking order by only stating the P&L expenses were not agitated seriously. According to the learned AR the assessee is maintaining regular books of accounts duly supported by evidence and all the expenses claimed in P&L account were properly vouched and authenticated. At the same time it was argued that assessee being a corporate body, the expense cannot be disallowed on the ground that the same are of personal nature. According to him until the nature of expense is proved through tangible evidence that same reflects personal nature of expenses, such addition is not called for. We have considered the arguments and found a little force therein and therefore, the P&L additions made by the Assessing Officer or reduced by the CIT(A) are restricted in the following manner:--
Particulars | 1996-97 |
| Claimed | Disallowed | C.I.T. | Restricted |
Medicalexpenses | 74,558 | 20,000 | Maintained | 20% |
Particulars | 1996-97 |
| Claimed | Disallowed | C.I.T. | Restricted |
Medical expenses | 74,558 | 20,000 | Maintained | 20% |
Travelling | 3,26,082 | 1,00,000 | -do- | 20% |
Vehicle running | 11,60,697 | 50,000 | -do- | Maintained |
Postage & Telegram | 41,480 | 44,000 | 10,000 | 20% |
Printing & stationery | 5,21,148 | 1,00,000 | Maintained | 10% |
Entertainment | 5,84,123 | 1,50,000 | -do- | 10% |
Miscellaneous | 2,09,644 | 75,000 | -do- | 20% |
1997-98 |
Claimed | Disallowed | C.I.T. | Restricted to |
1,04,024 | 30,000 | Maintained | 20% |
7,42,851 | 2,30,000 | -do- | 20% |
18,47,338 | 5,00,000 | -do- | 20% |
41,082 | 10,000 | -do- | 20% |
7,66,831 | 1,50,000 | -do- | 10% |
7.73,213 | 2,00,000 | -do- | 10% |
3,49,937 | 1,25,000 | -do- | 20% |
Particulars | 1998-99 |
| Claimed | Disallowed | C.I.T. | Restricted |
Travelling | 9,82,018 | 1,50,000 | Maintained | 20% |
Vehicle running | 21,14,607 | 3,25,000 | -do- | Maintained |
Printing & stationery | 3,68,853 | 55,000 | -do- | 10% |
Entertainment | 11,51,287 | 2,50,000 | -do- | 10% |
1999-2000 |
Claimed | Disallowed | C.I.T. | Restricted to |
11,31,646 | 1,75,000 | Maintained | 20% |
20,37,291 | 3,13,000 | -do- | Maintained |
3,32,036 | 50,000 | -do- | 10% |
12,11,282 | 2,60,000 | -do- | 10% |
Particulars | 2000-2001 |
| Claimed | Disallowed | C.I.T. | Restricted to |
Travelling | 12,37,101 | 80,000 | Maintained | 20% |
Vehicle running | 19,97,922 | 1,00,000 | -do- | Maintained |
Printing & stationery | 3,90,688 | 58,756 | -do- | 10% |
Entertainment | 9,64,702 | 78,000 | -do- | 10% |
31. In the result, all the nine appeals are disposed of to the extent and in the manner indicated above.
C.M.A./14/Tax (Trib.)Order accordingly.