I.T.As. Nos.6254/LB to 6260/LB and 7199 of 2005, decided on 22nd January, 2007. VS I.T.As. Nos.6254/LB to 6260/LB and 7199 of 2005, decided on 22nd January, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1462 (2007)

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

----S. 62(1), proviso---Assessment on production of accounts, evidence etc.---Disallowances out of Profit and Loss account expenses--Disallowances without confronting the assessee relying on stock phrases like 'un-verifiability', 'excessiveness' and 'element of personal use' without pointing out any specific instance and quantifying the ratio of the same---Validity---None is to be condemned unheard and instances of un verifiability were to be confronted to the taxpayer and after obtaining explanations and evidence, if the assessing authority was still not satisfied, only then disallowances out of Profit and Loss Account expenses could be made---No addition could be made without pointing out specific instances and pointing out any defect through a notice under S.62 of the Income Tax Ordinance, 1979---Disallowances were deleted and the claim of expenses was directed to be accepted.

2004 PTD (Trib.) 2231; 2006 PTD (Trib.) 838; 2005 PTD (Trib.) 1437; 2007 PTD (Trib.) 163 and 2002 PTD 407 ref.

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

----S.62----Assessment of production of accounts, evidence etc.---Rejection of accounts---Trading results were rejected and assessment was made by estimating local sales, gross profit and yieldage---Validity---Since books of accounts were rejected without considering, examining and confronting deficiencies to assessee Appellate Tribunal disapproved such treatment and directed to accept the trading results---Assessments for succeeding years were also made by accepting declared trading results---No reason existed for rejection of accounts, as Taxation Officer had rejected the account referring the history of the case---Trading results declared by the assessee were directed to be accepted.

2005 PTD (Trib.) 1437 rel.

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

----S. 80-D---Minimum tax on income of certain persons---Supply to sister concern---Isolated transaction of supplying raw material at cost admittedly without gaining any profit to the sister concern, did not attract the provision of S.80-D of the Income Tax Ordinance, 1979.

1997 PTD (Trib.) 1143 rel.

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

----S. 62---Assessment of production of accounts, evidence etc.---Notice under S.62 of the Income Tax Ordinance, 1979 on the pattern of notice under S.61 of the become Tax Ordinance, 1979---Rejection of accounts--Validity---No notice had been issued under S.62 of the Income Tax Ordinance, 1979---Only one notice on the pattern of notice under S.61 of the Income Tax Ordinance, 1979 had been issued, which simply required submission of the various documents and in that notice nowhere it had been mentioned that books of the assessee were examined but found defective---History of the assessee being acceptance of accounts, the Taxation Officer had failed to point out change in maintaining the fashion of account, therefore, there was no justification for rejection of declared version and to make the addition on account of sales, gross profit rate or yieldage---Declared version of the assessee was directed to be accepted by the Appellate Tribunal.

2002 PTD 407; 1999 PTD (Trib.) 3892; 2002 PTD (Trib.) 1583; 1994 PTD 123; 2004 PTD (Trib.) 1233; 2004 PTD (Trib.) 1572; 2001 PTD (Trib.) 2938; 2005 PTD (Trib.) 2032 and 2006 PTD (Trib.) 2078 ref.

Shahid Baig for Appellant.

M. Aslam Lillah, D.R. for Respondent.

Date of hearing: 21st December, 2006.

JUDGMENT

JAWAID MASOOD TAHIR BHATTI, (JUDICIAL MEMBER).---Through these eight appeals, the appellant has agitated against six impugned orders of the learned CIT (A) out of which, one order for the assessment year 1999-00 regarding assessment made under section 62 is dated 8-9-2004, while the remaining five separate orders are of the same date i.e. 28-7-2005. For the assessment years 1996-97 and 1998-99, separate impugned orders are regarding assessment made under section 62 of the repealed Income Tax Ordinance, 1979. Two separate orders for the assessment years 1998-99 and 1999-00 are regarding order passed by the Taxation Officer under sections 52/86 of the repealed Ordinance, 1979 and one consolidated order for the assessment years 2000-01 to 2002-03 is regarding assessment made under section 62 of the repealed Ordinance, 1979.

For the assessment made under section 62 of the repealed Income Tax Ordinance, 1979, the common issue is regarding treatment in respect of disallowances out of P& L A/c expenses. For the assessment year 1999-00 regarding assessment made under section 62, the appellant has objected the upholding of rejection of accounts, application of GP rate at 20.50%, as against 11.90% and estimation of local sales upheld by the learned CIT (A). While for the remaining five years i.e. 1996-97, 1998-99 and 2000-01 to 2002-03, the appellant has objected the setting aide of the assessments for all these years. Through the remaining two appeals for the assessment years 1998-99 and 1999-00, the appellant has objected the upholding of order passed by the Taxation Officer under sections 52/86 of the repealed Ordinance, 1979 treating the appellant an assessee in default in terms of section 52 and imposing tax and additional tax under sections 52/86 regarding certain items for both the years.

Mr. Muhammad Shahid Baig, Advocate has appeared on behalf of the appellant and has at the very outset submitted that he is not pressing the appeals filed by the assessee for the assessment years 1998-99 and 1999-00 regarding order passed under sections 52/86 of the repealed Ordinance, 1979. Both the appeals in this respect are, therefore, dismissed being not pressed.

Regarding the disallowances out of P&L A/c expenses, the learned counsel for the appellant has contended that claims of expenses for all the years under review were very reasonable and all the details regarding expenses with supporting evidence were furnished before the Taxation Officer, but the Taxation Officer without confronting the appellant has made the disallowances. He has contended that it is the settled proposition of law that no addition can be made relying on the stock phrases such as 'un-verifiability', 'excessiveness' and 'element of personal use' without pointing out specific instances in this respect and also quantifying the ratio of the same. He has contended that it is also an established principle of law that none is to be condemned unheard. The instances of unverifiability are to be confronted to the tax payer and after obtaining explanations and evidences, if the assessing authority is still not satisfied, the addition can be made. According to the learned counsel, law does not permit to make any addition as per own sweet-will of the Taxation Officer without pointing the same before passing the order. He has contended that it is clear from the assessment orders for all the years under review that the Taxation Officer in this case did not bother to fulfil these statutory obligations of issuance of notice as provided in the proviso to subsection (1) of section 62 of the repealed Income Tax Ordinance, 1979 and to confront the instances of unverifiability, excessiveness or element of personal use. 'The learned counsel has contended that the Taxation Officer has arbitrarily Made the additions without asking the appellant to furnish any detail or to produce any documents, despite the fact that books of accounts in this case are admittedly been maintained and were produced before the Taxation Officer. The learned counsel has contended that the Taxation Officer did not apply her mind while making these additions. In this respect, he has pointed out assessment order for the assessment year 1996-97, where at page-1 the appellant has itself made the addition of Rs.3,400 on account of 'Charity and Donation', hence there was hardly any reason to make this addition again. In support of his arguments, the learned counsel has placed reliance on the reported decisions of this Tribunal as well as of the Honourable High Court wherein, it has been held that where the statutory requirement of issuing a specific notice has not been fulfilled, additions made by the Taxation Office were deleted. The following decisions in this respect have been referred:-

(1) 2004 PTD (Trib.) 2231; (2) 2006 PTD (Trib.) 838; (3) 2005 PTD (Trib.) 1437; (4) 2007 PTD (Trib.) 163 and (5) 2002 PTD 407.

Regarding the assessment year 1996-97, the learned counsel for the appellant has argued that return for this year was filed declaring loss of Rs.2,49,38,865 and the Taxation Officer while making the assessment has accepted the trading results. However, he has made the additions regarding:-

(i)Inter-company transaction charging to tax under section 80-D, which is the supply of raw cotton;

(ii)Interest income has been assessed; and

(iii)Additions have been made on account of P&L A/c expenses.

According to the learned AR, net loss was assessed by the Taxation Officer at Rs.56,59,600. On appeal before the learned CIT (A), additions on account of supplies to associated undertaking and interest income were set aside. However, partial relief was allowed on account of additions made out of P&L A/c expenses. The learned counsel has contended that owing to acute shortage of funds, raw material valuing Rs.18,28,63,622 in the shape of cotton bales numbering 18,652 were supplied to the sister concern i.e. Messrs Ramzan Buksh Mills at cost without any profit motive whatsoever. He has contended that the appellant is running a spinning unit and is not engaged in the business of supply of raw cotton. This extraordinary effort of supply of raw cotton was made just to facilitate the said sister concern. According to the learned counsel, this exercise is not contrary to the prevailing market practice. Such transactions are beyond the scope of taxation. These supplies hardly constitute the turnover of the appellant company, hence provisions of section 80-D were not attracted at all. The learned counsel has contended that the matter was thoroughly explained to the Taxation Officer, but she has arbitrarily charged tax on account of said inter-company transaction in terms of section 80-D of the repealed Income Tax Ordinance, 1979. The learned counsel in this respect has referred the decision of this Tribunal reported as 1997 PTD (Trib.) 1143, wherein it has been held that "supplies to sister concern are not taxable". The learned counsel has submitted that instead of deleting the addition made in this respect, the learned CIT (A) has set aside the same without any instructions.

Regarding the interest income/financial charges, the learned AR has contended that interest expenses of Rs.1,85,86,068 were claimed as per Note 21 of the Final Accounts. These were reduced by an amount of Rs.7,369 being profit on short term deposit and also, by an amount of Rs.60,27,001 being interest charged on advances to associated undertaking and net interest expenses were claimed at Rs. 1,25,57,698. While making the assessment, the Taxation Officer has picked up the figure of Rs.6,26,63,643 which is under Note No.15 of the Final Accounts vis-a-vis other receivables and has calculated interest of Rs.1,04,25,415 on it and has assessed the same as interest income under section 30 of the repealed Income Tax Ordinance, 1979. According to the learned counsel, the Taxation Officer has failed to appreciate that interest of Rs.60,27,001 has already been charged to advances to associated undertakings and other receivables represent old balances from various companies and the appellant company has already not only credited but adopted interest on the said balances of sister concern. The learned counsel has pointed out that similar situation arose in the subsequent year i.e. 1997-98, when the issue was agitated in appeal and this Tribunal set aside this issue to the Taxation Officer, who has deleted the addition of Rs.96,74,36a earlier made on account of interest income. The learned counsel has contended that for the year under review i.e. 1996-97, all the details have duly been produced, which have been examined and scrutinized by the Taxation Officer. These details are very much relevant to the year under reference, as opening balances of other receivables are in fact the closing balances of the assessment year. 1996-97 and in the given circumstances, there is no reason to estimate any further interest on advances to associated undertakings, when the same has already been charged and adjusted by the appellant company. He has contended that as the issue has already been thrashed out and decided by the department in favour of the assessee, no addition on this account has been made in any other subsequent year. He is, therefore, of the view that there was justification for setting aside the issue by the learned CIT (A) for further consideration.

Regarding the assessment year 1998-99, the learned counsel has contended that for this year also, return was filed declaring net loss of Rs.1,95,93,019. Before charging unabsorbed depreciation, net profit was shown at Rs.2,28,07,584, but the Taxation Officer while making the assessment has assessed total income of Rs.4,11,40,651 making addition on account of yield-age estimating at 85% as compared to declared at 84.28% and applying GP Q 20.05%, as compared to declared GP rate of 17.16%. The learned counsel has contended that the declared version has been rejected by the Taxation Officer on account of flimsy and general remarks on the basis of history of the case. He has contended that in the previous assessment year i.e. 1997-98, trading results were rejected by the Taxation Officer, but during the course of appeal, this Tribunal has directed to accept the declared results including sales, GP rate and yield-age. He has contended that admittedly, accounts are being maintained by the appellant in the similar fashion as were maintained in the previous assessment year. Books of accounts have admittedly been furnished and apparently there is no reason left behind to reject the declared results for this year. The learned counsel has contended that the Taxation Officer has miserably failed to record any reason to discard the declared purchases. Sales and yield-age as applied by the Taxation Officer has already been disapproved by this tribunal. According to the learned counsel, obvious history as stated in the outset is acceptance of the trading results. Likewise, there was no history of rejection of declared GP rate hence assessing authority was not competent enough to discard the same. In support of his contention, the learned counsel has placed reliance on the decision of this Tribunal reported as 2005 PTD (Trib.) 1437 and the decision of Honourable Karachi High Court reported as 2002 PTD 407. The learned counsel for the appellant has also referred the following reported decisions:--

(a) 1999 PTD (Trib.) 3892, (b) (2002) PTD (Trib.) 1583, (c) 1994 PTD 123, (d) 2004 PTD (Trib.) 1233, (e) 2004 PTD (Trib.) 1572, (1) 2001 PTD (Trib.) 2938, (g) (2005) PTD (Trib.) 2032, (h) (2006) PTD (Trib.) 2078.

In all these cases, it has been held that in the cases where the Revenue has failed to point out any material deficiency in the books of accounts and have not issued notice under section 62(1) of the repealed Ordinance, rejection of books of account is not justified.

Regarding the assessment year 1999-00, the learned counsel has submitted that return for this year declaring net loss of Rs.1,32,46,203 was filed. Before charging unabsorbed depreciation, net profit was shown at Rs. 63,46,816. The Taxation Officer has assessed total income at Rs.6,51,82,839 making addition in yield-age and applying GP rate and disallowances out of P&L A/c. For this year, add back has also been made in local sales. It has been contended by the learned counsel for the appellant that addition for this year has been made without any details in the body of the assessment order. The learned counsel has contended that facts of the case and the addition made are similar as that of the assessment year 1998-99, which should have been deleted.

For the assessment year 2000-01, return was filed declaring net loss of Rs.12,57,476. Before charging unabsorbed depreciation, net profit was shown at Rs. 1,19,88,727, which has been assessed at net income of Rs.4,55,93,441 making addition in yield-age, Gross Profit and disallowances out of P&L A/c expenses. For the assessment year 2001-02, return has been filed declaring net income at Rs.7,39,53,614. Before charging unabsorbed depreciation, net profit has been shown at Rs.7,52,11,090, which has been assessed at Rs.7,75,99,892. For this year, addition regarding depreciation/depreciation on vehicle and provision for gratuity has been made. The learned counsel has contended that these additions have been made without any cogent reasons or justification. According to the learned counsel, these additions have been made twice, as aggregate to these three additions amounting to Rs.3.,20,117, Rs.4,58,811 and Rs.47,079 comes to Rs.12,54,007, which were to be added in the declared income of Rs.7,52,11,090 before charging unabsorbed depreciation, whereas the Taxation Officer has added this amount in total income of Rs.7,63,72,891. He has contended that this figure is already included in the aforesaid three additions, so above three additions have been made twice. Regarding the interest income, the learned counsel has argued that Taxation Officer has separately assessed interest income under section 30 at Rs.30,30,008 and has failed to realize that this income has already been included in the declared income. He has, therefore, contended that to assess this income separately, the same was to be excluded from the declared total income and thus income has been assessed twice.

For the assessment year 2002-03, return has been filed declaring net income at Rs.1,59,38,996, which has been assessed by the Taxation Officer at Rs.4,62,20,711, making addition under the heads depreciation/ depreciation on vehicle/provision for gratuity at Rs.2,56,094, Rs.96,848 and Rs.6,87,214 respectively. The learned counsel has contended that these additions have been made without any justification. He has, however, not given any material reasons in this regard. For this year also, the Taxation Officer has separately assessed interest income under section 30 of the repealed Ordinance, 1979 at Rs.32,27,234 in the similar style as in the previous year i.e. 2001-02. In this year, the appellant has objected disallowance of provision for diminution in value of investment. Expenses of Rs. 2,95,39,005 were claimed under this head. The Taxation Officer declined to allow these expenses being in the nature of provision and secondly due to the reason that the matter is already sub judice before the Honourable High Court and yet has not attained finality. The learned counsel for the appellant has contended that the Taxation Officer was not justified to disallow these expenses, as all the details of expenses were furnished before the Taxation Officer.

On the other hand, learned DR is supporting the impugned orders of the officers below. He has submitted that additions were made as per history of the case and the learned CIT (A) has remanded back the assessments for most of the years and in the remaining years, disallowances have been reduced in accordance with the history. The learned DR is, therefore, of the view that no interference in the impugned orders is required. Regarding inter-company transaction, the learned DR has contended that inter-company supplies duly fall within the ambit of definition of turnover and treatment meted out by the Taxation Officer is in accordance with law. He has contended that the case-law referred by the learned .counsel for the appellant is distinguishable and is not applicable in the present case. Regarding interest income/financial charges, he has contended that while making revised assessment for the assessment year 1997-98, the said addition was deleted after receiving necessary details, which were not before the Taxation Officer while making the addition and therefore the learned CIT (A) has rightly set aside the matter and the appellant may explain his position before the Taxation Officer. Regarding rejection of accounts, the learned DR has contended that Taxation Officer has rightly rejected the accounts and has pointed out deficiencies as per law. Regarding the additions in respect of depreciation/depreciation on vehicle/provision for gratuity, the learned DR has accepted that there is an apparent mistake, which should have been rectified by the Taxation 'Officer. Similar is the position regarding interest income.

We have heard the learned representatives from both the sides and have also perused the impugned orders of the learned CIT (A) and the assessment orders for all the years under review.

Regarding the disallowances out of P & L A/c expenses, which is the common issue for all the years under review, we have found that books of accounts in this case have properly been maintained, furnished before the Taxation Officer and have been' examined, but the disallowances in this respect have been made without confronting the assessee relying on stock phrases like 'unverifiability', 'excessiveness' and 'element of personal use' without pointing out any specific instances and quantifying the ratio of the same. It is up to now an established principle of law that none is to be condemned unheard and instances of unverifiability are to be confronted to the taxpayer and after obtaining explanations and evidences, if the assessing authority is still not satisfied, only then disallowances out of P&L A/c expenses can be made.

On behalf of the appellant number of cases have been referred wherein, it has been held by this Tribunal as well as by the Honourable higher Courts that no additions can be made without pointing out specific instances and pointing out any defect through a notice under section 62. We, therefore, find no reason in the present case for the disallowances and the disallowances made out of P&L A/c by the Taxation Officer for all the years under review i.e. 1996-97, 1998-99 to 2002-03 are deleted and the claim of expenses is directed to be accepted.

Likewise, regarding rejection of accounts, we have found that the appellant is a Public Limited Company being quoted on Stock Exchange deriving income from running a Spinning Mill. The appellant company has an established history of acceptance of accounts. Final accounts and supporting books were accepted right from assessment year 1990-91 to 1996-97. However, for the assessment year 1997-98, trading results were rejected and assessment was made by estimating the local sales, gross profit and yield-age. Since books of accounts were rejected without considering, examining and confronting any deficiencies whatsoever, hence this Tribunal disapproved this treatment and directed to accept the trading results of the appellant company vide its reported decision as 2005 PTD (Trib.) 1437. We have' further found that consequently, assessments for the assessment years 2001-02 and 2002-03 were also made by accepting declared trading results. We therefore, find no reason for rejection of accounts, as the Taxation Officer in the remaining assessment years has rejected the accounts referring the history of the case. We find no justification for rejection of accounts for the assessment years 1998-99 to 2000-01 keeping in view the previous history and other relevant facts of the case, the trading results declared by the appellant for all the years under review are, therefore, directed to be accepted.

Regarding inter-company transaction charged to tax under section 80-D for the assessment year 1996-97, we are of the view that although this transaction was not separately incorporated in the final accounts, but yet it was recorded in the relevant books of accounts. The department has not received any other extraneous information about this transaction, but has taken cognizance of the same from appellant company's own books of accounts. We are, therefore, of the view that there is no question of any concealment. We have further found that the appellant company is engaged in spinning of yarn. To purchase raw material and to supply the same as such to associated undertaking or other buyers is not the regular feature of the appellant company. We are, therefore, of the view that this isolated transaction of supplying raw material at cost admittedly without gaining any profit to the sister concern does not attract the provision of section 80-D of the repealed Ordinance. We, therefore, following the decision referred by the learned counsel for the appellant reported as 1997 PTD (Trib.) 1143 wherein, it has been held that supplies to sister concern are not taxable, delete the addition made in this respect. For this year, addition made out of interest income/financial charges has also been objected. In this regard, we have found that the appellant company has already charged interest on advances and the addition in this respect has been made by the Taxation Officer without bringing on record any evidence whatsoever. We have further found that similar treatment made by the Taxation Officer was set aside by this Tribunal in the subsequent year i.e. 1997-98 and the Taxation Officer has accepted the claim of the assessee in this regard. Admittedly, necessary details were produced before the Taxation Officer. We, therefore, find no justification for the addition in this regard, which is deleted. We are of the view that there was no justification for setting side the assessment in this regard.

The learned CIT (A) has set aside the assessment for the assessment year 1998-99. In this regard, on behalf of the appellant, many cases have been referred wherein, it has been held that books of accounts cannot be rejected without specifically confronting the assessee regarding deficiencies in the books of accounts. In this case, no notice has been issued under section 62. Only one notice dated 8-6-2001 in the pattern of notice under section 61 has been issued, which simply requires submission of various documents and in that notice, nowhere it has been mentioned that books of the appellant company were examined, but found defective. We are of the view that as the history of the appellant is acceptance of the accounts and the Taxation Officer has failed to point out change in maintaining the fashion of accounts, therefore, there was no justification for rejection of declared version and to make the addition on account of sales, GP rate or yield-age. In view of these circumstances, declared version for the assessment years 1998-99 to 2000-01 is also directed to be accepted.

Regarding the assessment year 2001-02, we have found that Taxation Officer has made the addition twice. On behalf of the appellant, details of figures have been referred and the learned DR has also accepted that there is a mistake apparent from the record. We are, therefore, of the view that the addition made by the Taxation Officer has lawfully been made, but the declared income has not been adopted as per final accounts. The matter in this regard is, therefore, set aside with the direction to the Taxation Officer to adopt correct figure in this regard. For this year i.e. 2001-02 and 2002-03, assessing of interest income under section 30 has also been objected by the appellant. We have found that the Taxation Officer has failed to realize that this income has already been included in the declared income as contended by the appellant. So to assess this income separately, the same was to be excluded from the declared total income. Keeping in view this position, this issue is also set aside for fresh consideration by the Taxation Officer, who is directed that interest income may be excluded from the declared income, as it has been assessed as a separate block.

We however, find no warrant for interference regarding addition made under the head depreciation/depreciation on vehicle/ provision for gratuity' for the assessment year 2002-03, as the addition in this respect for this year has rightly been made. The appeal for the assessment year 2002-03 on this issue is dismissed.

Regarding the provision for diminution in value of investment, which is issue for the assessment year 2002-03, we have found that expense claimed in this regard has been disallowed by the Taxation Officer being in the nature of provision and secondly due to the reason that the matter is already sub judice before the Honourable Lahore High Court, Lahore and has not yet attained finality. We are of the view that the Taxation Officer has rightly disallowed the same. The treatment meted out by the officers below in this respect is, therefore, upheld and the appeal on this issue is dismissed.

The two appeals filed by the assessee for the assessment years 1998-99 and 1999-00 regarding order passed under sections 52/86 of the repealed Ordinance, 1979 are dismissed being not pressed by the learned counsel for the appellant, while the remaining six appeals for the assessment years 1996-97 and 1998-99 to 2002-03 are decided in the manner as indicated above.

C.M.A./25/Tax (Trib.)Order accordingly.