I.T.As. Nos. 577/KB and 880/KB of 2005, decided on 9th January, 2007. VS I.T.As. Nos. 577/KB and 880/KB of 2005, decided on 9th January, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1509 (2007)

(a) Income Tax Ordinance (XLIX of 2001)---

----S.122(5A)---Income Tax Ordinance, (XXXI of 1979), Ss.62 & 66A---Amendment of assessments---Assessment year 1996-97---Assessment was finalized under S.62 of the Income Tax Ordinance, 1979 on 30-6-1999---Assessment amended under S.122(5A) of the Income Tax Ordinance, 2001 as on 28-6-2004 was annulled by the First Appellate Authority---Validity---Section 122(5A) of the Income Tax Ordinance, 2001 was not applicable in respect of assessment finalized prior to 1-7-2003---First Appellate Authority had rightly annulled the assessment as admittedly case had been reopened already finalized before 30-6-1999---Appeal was dismissed by the Appellate Tribunal on this issue.

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

----S.62---Assessment on production of accounts, evidence etc.---Food and beverage cost---Curtailment of food and beverage cost to 35% of Revenue by relying on case-law---Validity---Account could not be rejected by merely relying on parallel cases without pointing out any defect in method of accounting employed by the assessee or merely by stating that some of the purchases were not fully verifiable.

I.T.A. No.1379/KB of 1998-99; I.T.A No.1512/KB and I.T.A. No.89/KB of 2002 ref.

1994 PTD 517; 2004 PTD 2231; 1986 PTD 84; 1962 PTD (Trib.) 23 and 1990 PTD (Trib.) 731 rel.

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

----Ss.62, 52 & 24ff---Assessment on production of accounts, evidence etc.---Unverifiability of purchases---Validity---Payments to parties had been made through cross cheques and due tax had been deducted according to law---Taxation Officer had neither treated the assessee as assessee in default under S.52 of the Income Tax Ordinance, 1979 nor had he pointed out any breach of provisions of S.24ff of the Income Tax Ordinance, 1979 nor had he rebutted argument of assessee in the body of assessment order---Not a single instance of purchase had been pointed out where deduction of tax under S.50(4) of the Income Tax Ordinance, 1979 had not been made---Entire exercise was merely a desk exercise and was without any basis or evidence---No defects in method of accounting had been pointed out---Observation of Taxation Officer about alleged unverifiability of some of the purchases was without any basis. or evidence and not sustainable on facts and in law.

1968 Tax 193; 2002 PTD 407 and 1999 PTD (Trib.) 4 rel.

(d) Income-tax---

----Parallel case---For a case to be parallel the nature of business, the machinery employed, the location and all other factors need to be same.

Karachi Textile Dying and Printing Works v. C.I.T. 1984 PTD 150 rel.

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

----S.62---Assessment on production of accounts, evidence etc.---Cost of food and beverage---Food and beverage cost declared at 38.09% was reasonable---Gross Profit rate declared 31.86% as compared to 31.81 last year were explained---Taxation Officer was directed to accept the declared food and beverage cost--Rejection of accounts and addition made was not sustainable on facts and in law---First Appellate Authority had rightly deleted the addition.

(f) Income-tax---

----Rejection of accounts---Slight variation in Gross Profit rate---Accounts could not be rejected if rate of profit was not ridiculously low---Slight variation in Gross Profit was normal feature of any trade and there was nothing odd about it.

C.I.T. v. Chaudhri Brothers (1980) 42 Tax 119 rel.

(g) Income-tax---

----Rejection of accounts---Accounts could not be rejected till such time specific defects are found in the method of accounting from where it could be seen that correct profits could not be determined from.

C.I.T. v. Kruddsons Ltd. 1994 PTD 174; 2002 PTD 407 and Karachi Textile Dying and Printing Works v. C.I.T. 1984 PTD 150 rel.

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

----Ss.22, 19 & 20(a)---Sales Tax Act (VII of 1990)---Pakistan Hotels and Restaurants Act (LXXXI of 1976), Preamble---Pakistan Hotels and Restaurants Rules, 1977---Constitution of Pakistan (1973), Art.189---Income from business or profession---Shop licence fee---Addition was made by treating shop licence fee as property income---Validity---Requirement of Pakistan Hotels and Restaurants Act, 1976 and Rules that facilities of shops had to be provided to get 3 stars, 4 stars & 5 stars rating under Pakistan Hotels and Restaurants Act, 1976 and Rules---Licence fees from shops was to be treated as business income and required to be taxed as business income under S.22 of the Income Tax Ordinance, 1979---First Appellate Authority rightly made directions in this respect.

Civil Review Petition No.45-K of 1991 rel.

(i) Constitution of Pakistan (1973)---

----Art.189---Decision of Supreme Court of Pakistan is binding on all legal authorities in terms of Art. 189 of the Constitution of Pakistan, 1973.

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

----Ss.20(a) & 50(4)---Deductions---Taxation Officer had disallowed 10% of the claim out of repair & maintenance account after reducing repair and maintenance expenses attributable to shops/property income by observing that expenses were mostly of capital nature and not fully verifiable and that complete vouchers in respect of such properties were not produced---Deletion of---Validity---Assessee had a history of such disallowance---Licence fee from shops was to be treated as business income and as such the notional repair expense allowed under S.20(a) of the Income Tax Ordinance, 1979 stood automatically deleted---Disallowance of 10% as per history of the case was however to be done inclusive of the same.

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

----S.20---Deductions---Financial expenses---Curtailment of---Taxation Officer failed to correlate investment with borrowed funds and unless the same was done financial expenses could not be curtailed---Curtailment of financial expenses were not sustainable on facts and had rightly been directed to be deleted.

1986 SCMR 968; 1988 PTD 626 and 1987 PTD 149 rel.

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

----Ss.24(i) & 66BB---C.B.R. Circular No.16 of 1991 dated 1-7-1991---Deductions not admissible---Addition on account of free meal provided to employees---Validity---Taxation Officer was not justified on facts and in law to propose addition in respect of expenses incurred on employees' meals---Addition deleted by the First Appellate Authority was upheld by the Appellate' Tribunal.

I.T.As. Nos. 89/KB; 257/KB of 2002; I.T.As. Nos.1331/KB and 1332/KB of 2002 rel.

Dr. Muhammad Ali Khan, D.R. for Appellant.

Abid Shaban for Respondent.

ORDER

Through these two appeals, the department has objected against the impugned order of the learned C.I.T.(A) dated 30-4-2005 for the assessment year 1996-97, annulling the order passed by the Taxation Officer (TO) under section 122(5A) of the Income Tax Ordinance, 2001 and order dated 20-12-2004 for the assessment year 2002-2003, `deleting the addition made by the TO while curtailing the. expenses of food and beverage cost, repairs and maintenance expenses, financial charges and addition made under section 24(i) on account of free meal to employees. For this year the appellant department has also objected the impugned order regarding holding that shop licence fee is to be treated as business income'.

2. We have heard the learned representatives of both the sides and have also perused the impugned orders of the learned C.I.T.(A) and the orders passed by the T.O.

3. Regarding the assessment year 1996-97, we have found that the assessment for the year was finalized under section 62 of the repealed Income Tax Ordinance, 1979 on 30-6-1999 against which the assessee preferred an appeal before the learned C.I.T.(A) and certain reliefs were allowed. Against which the cross-appeals were filed before this Tribunal, which was disposed off vide order dated 22-1-2003, but this order was recalled vide order dated 20-9-2003 on the Miscellaneous Applications. The IAC on the similar causes issued notice under section 66A of the Ordinance on 17-5-2002, which was replied on 30-6-2002 and according to the representative of assessee, no further action was taken. According to the assessee, the proceedings under section 66A of the repealed Ordinance become time-barred on 30-6-2003. Subsequently, another notice under section 122 (5A) of the Income Tax Ordinance, 2001 was issued by the IAC on 12-12-2002 reply of which was filed on19-12-2002. Now, the Additional Commissioner of Income Tax has passed order under section 122(5A) of the Income Tax Ordinance, 2001 on 28-6-2004 which has been annulled by the learned C.I.T.(A) placing reliance on the order of the Hon'ble Sindh High Court wherein it has been held that the section 122(5A) of the Income Tax Ordinance, 2001 are not applicable in respect of assessment finalized prior to 1-7-2003. Against which the department has tiled the instant appeal.

4. We are of the view that the learned C.I.T.(A) has rightly annulled the assessment as admittedly in this case for the assessment year 1996-97, the Additional Commissioner of Income Tax has reopened the case already finalized before 30-6-1999. There is no merit in this appeal filed by the department for the assessment year 1996-97 and is, therefore, dismissed.

5. Regarding the appeal for the assessment year 2002-2003, we have found that the curtailment of the expense claimed under the head food and beverage cost, to 35% has been deleted by the learned C.I.T.(A) in accordance with the history of the case. The food cost percentage declared for this year is 38.09%. In the assessment year 2001-2002 the same was 39.52%. The food and beverage revenue declared this year is Rs.851.288 millions as compared to Rs.831.245 millions of last year. The receipts are liable to sales tax. The department during the year under review has accepted the declared revenue receipts. The learned C.I.T.(A) in this respect has also given the details of parallel cases, the case law and other relevant facts of the case. We have found that the T.O. has curtailed the food & beverage cost to 35% of revenue based primarily on following four alleged defects:---

-Reliance on parallel case to curtail food & beverage cost to 35%.

-Un-verifiability of food & beverage purchases.

-P.C. Bhurban -- separate details not filed.

-And some minor observations.

Although the T.O. had not confronted assessee about any particular case as parallel case. We have found that the appealing amply demonstrated that there is no other hotel chain that has hotels in FIVE cities where the assessee operates hence there cannot be a parallel case to that of assessee having similar scale of operations in the given cities. Further we have found that the department had also cited Sheraton as parallel case in other cases and this Tribunal did not approve it: e.g. in I.T.A. No.1'379/KB of 1998-99 Avari Hotel food cost of 48.11% was directed to be accepted, in I.T.A No.1512/KB dated 13-5-1999. Regent Plaza Hotel food cost of 52.17% was directed to be accepted. Further we have found that in case of Hashwani Hotels Ltd., this Tribunal in I.T.A. No.89/KB of 2002 has held the reliance on Sheraton Hotel as parallel case to be incorrect and of no significance at all and accounts were directed to be accepted. The food cost declared was 47%.

We also agree with the ratio of the case laws relied upon in support of the arguments that accounts cannot be rejected by merely relying on so-called parallel case without pointing out any defect in method of accounting employed by the assessee or merely by stating that some of the purchases are not fully verifiable.

The ratio of following judgments cited is found relevant:--

(i) 1994 PTD 517; (ii) 2004 PTD 2231; (iii) 1986 PTD 84; (iv) 1962 PTD (Trib.) 23 and (v) 1990 PTD (Trib.) 731.

In respect of allegation of alleged unverifiability of some of the purchases we find the same is without any evidence. Evidently all payments to parties have been made through cross-cheques and due tax has been deducted according to law. The above fact also stands re inforced as the T.O. has not treated the assessee as assessee in default under section 52 of the repealed I.T.Ord., 1979 nor has he pointed out any breach of provisions of section 24ff of the repealed I.T. Ord., 1979 nor has he rebutted this argument of the assessee in the body of the assessment order that all payments have been made through cross cheque. The T.O. has failed to point out even a single instance of purchase where deduction of tax under section 50(4) of I. T. Ord., 1979 (R) has not been made ill respect of supplies of food & beverages.

We find that the T.O. has not pointed out a single specific example of so-called unverifiable purchase in the assessment order or in any letter issued by him. No letter of verification was issued by T.O. hence the entire exercise of the T.O. is merely a desk exercise and is without any basis or evidence. No defects in method of accounting has been pointed out by the T.O.

Based on the above we find that the observation of T.O. about alleged unverifiability of some of the purchases is without any basis or evidence, and not sustainable on facts and in law. We also agree with the ratio of the following case laws relied upon in support of the arguments of the learned counsel of the assessee:

"1968 Tax 193 (HC) and 2002 PTD 407 (H.C.) wherein it has been held that unverifiability of sales and purchases cannot be ground for rejection of trading result.

And the reported case 1999 PTD (Trib.) 4 wherein it has been held that mere statement that addresses of parties were incomplete or letters issued to them have not been received was not sufficient ground for rejection and making addition."

As to the observation of T.O. that details of purchases in respect of P.C. Bhurban was not specifically provided, we find that the statement of T.O. is not correct as the assessee had provided details of food and beverage purchase in respect of each property and provided complete addresses of all parties.

As to the T.0's. observation that the assessee has hotels in five cities and same is not relevant. We agree with the arguments of the learned A.R. that there is no hotel chain that has hotels in five cities. We also agree with the ratio of decision of Hon'ble High Court of Sindh in case reported as 1984 PTD 150 that for a case to be parallel the nature of business, the machinery employed, the location and all other factors need to be same. We agree with the submissions that the case of assessee is different and unique and there is no parallel case.

We also agree with the submission that the food and beverage cost declared during the year at 38.09% seems to be reasonable considering the specific facts of the case, and the fact that assessee runs 5 hotels in five cities. The G.P. rate declared this year is 31.86% as compared to 31.81% last year and the reasons were duly explained as noted on page 2 of the assessment order. The Hon'ble Supreme Court of Pakistan in case reported as C.I.T. v. Chaudhri Brothers reported as (1980) 42 Tax 119 has held that accounts cannot be rejected if rate of profits is not ridiculously low. Slight variation in G.P. is normal feature of ally trade and there is nothing odd about it.

Considering the above findings and discussions and the case-law and the facts of the case during the year we find that the T.O. was not justified in curtailing the food and beverage cost to 35% of food and beverage revenue. The Hon'ble Supreme Court of Pakistan in case reported as C.I.T. v. Kruddsons Ltd. 1994 PTD 174 has held that the accounts cannot be rejected till such time specific defects are found in the method of accounting from where it can be seen that correct profits cannot be determined from. The same view has been followed by Hon'ble High Court of Sindh in case reported as 2002 PTD 407. Reliance is also placed on case reported as 1984 PTD 150 Karachi Textile Dying and Printing Works v. C.I.T. Based on the above the T.O. is directed to accept the food and beverage cost declared. The rejection of accounts is not warranted on facts and in law. The addition made by the T.O. is, not sustainable on facts and in law and we find no warrant for interference in this respect, as the learned C.I.T.(A) has rightly deleted the addition.

6. Regarding holding that the shop licence has to be treated as business income, we have found that the T.O. has made addition of Rs.4,381,600 by treating shop licence fee as property income. The factual position is that the company is engaged in the hotel business and some of the premises in the hotels have been given on licence from which fee of Rs.34,92,17,516 was declared. The T.O. only considered rent of Rs.54,77,000 and allowed 1/5th of the rental receipt as statutory expenses under section 20(a) of I.T.Ord., 1979 (R) and added the balance as property income. The T.O. did not consider Amenities charges etc. of Rs.2,94,43,789 received in respect of these shops as property income. It was argued by the assessee that the entire receipt of Rs.34,92,17,516 is part of hotel business and not a property income but business income as has been correctly declared. On behalf of the assessee, it has been argued that shop licence fee revenue is subject to sales tax whereas rental income under section 19 of the I.T.Ord., 1979 (R) is not assessable under the Sales Tax Act, 1990. Learned counsel for the assessee has contended that the decision of the Hon'ble Supreme Court of Pakistan is of binding nature as per Article 189 of the Constitution of Pakistan and in Civil Review Petition No.45-K of 1991 dated 25-2-1999, the Hon'ble Supreme Court of Pakistan has observed that under section 6 of the Pakistan Hotels & Restaurants Act, 1976, the star classification of hotel is done according to the facility made available by the management of the hotel to its guests and visitors. It was further noted that minimum facility prescribed for a five star hotel amongst other includes a shopping arcade within the premises of the hotel. We find merit in the arguments of the assessee that to obtain 3 star, 4 star, 5 star hotel classification under the Pakistan Hotels & Restaurants Act, 1976 and Pakistan Hotels & Restaurants Rules, 1977 certain amenities including shopping areas need to be provided by the Hotels. As to the case laws relied upon by the T.O. all of them are of Indian jurisdiction and are totally distinguishable and revolve around their own facts. When a case law of our own Supreme Court of Pakistan exists on an issue, it is neither proper nor correct to rely on decisions of Indian Court. The decision of Supreme Court of Pakistan is binding on all legal authorities in terms of Article 189 of the Constitution of Pakistan.

Hence considering the facts of the case, the requirement of Pakistan Hotels & Restaurants Act and Rules that facilities of shops has to be provided to get 3 star, 4 star & 5 star rating under Pakistan Hotels of Pakistan and Restaurants Act & Rules and the decision of Hon'ble Supreme Court and Hon'ble High Court cited above, we hold that licence fees from shops is to be treated as business income and requires to be taxed as business income under section 22 of the Income Tax Ordinance, 1979 (Repealed). The T.O. is directed accordingly. The learned C.I.T.(A) has rightly made directions in this respect.

7. Likewise, regarding deletion of addition made in respect of repairs & maintenance` expenses, we have found that the T.O. has disallowed 10% of the claim out of repair & maintenance account after reducing repair & maintenance expenses attributable to shops/property income by observing that expenses are mostly of capital nature and not fully verifiable and that complete vouchers in respect of all five properties were not produced. The learned A.R. of the assessee argued that Details and break up of repair and maintenance showing amounts charged to cost of sales and Admin., expenses were filed and were supported by challans of tax deducted and deposited under section 50(4) as per statement under section 142 of Income Tax Ordinance, 1979 (R) and the observations of the T.O. about expenses being partly unverifiable or complete bills not being there or complete addresses not being there is without any facts. We, however, find that the assessee has a history of such disallowance. The addition made by the T.O. is, hence, confirmed. As to the addition of Rs.52,21,088 made in respect of repair & maintenance expenses attributable to shops, as we have held above, the licence fee from shops is to be treated as business income and as such the notional repair expenses allowed under section 20(a) stand automatically deleted, disallowance of 10% as per history of the case, is however to be done inclusive of the same.

8. Regarding the financial charges, it is clear from plain reading of first para of page 11 of the assessment order that the T.O. was under wrong impression that balance due from subsidiary companies and 'short term investments of Rs.1,27,65,000 and Rs.24,50,000 are loans and investments which have been provided to subsidiary companies. The assessee has clarified that Rs. 11,27,65,000 due from subsidiary companies is not a loan but current account balance, (vide letter dated 26-3-2004) and that Rs.24,50,000 is not investment in subsidiary company but is an investment in WAPDA BONDS.

We are of the view that the T.O. is not justified in not appreciating the explanation given by assessee as he went on and has through formula basis disallowed proportionate mark-up on investments made in shares of Messrs Orient Petroleum of Rs.3,19,23,280. It is argued that these shares were sold during the year (July) and capital gain of Rs.76,720 made and the same was offered for tax and it was explained that no borrowed amount has been used in investment in shares of Orient Petroleum and self funds were used. The T.O. has failed to correlate investment with borrowed funds and unless the same is done financial expenses cannot be curtailed as has been held by the Hon'ble Supreme Court of Pakistan in case of (Sh. Muhammad Ismail) reported as 1986 SCMR 968. The decision of Hon'ble High Court reported as 1988 PTD 626 and case reported as 1987 PTD 149 has also been referred in this respect.

Keeping in view all these facts and case law we find that the curtailment of financial expenses are not sustainable on facts and has rightly been directed to be deleted by the learned C.I.T.(A).

9. Regarding the addition made under section 24(i) of the repealed Income Tax Ordinance, 1979 on account of free meal provided to employees, we have found that the T.O. has not made any addition in income in terms of section 62 BB of Income Tax Ordinance, 1979 (R). We find the assessee has advanced very cogent arguments inter alia stating that these are statutory obligations discharged to provide simple meals to staff on duty and same cannot be considered as perquisites. Further reliance was also placed on C.B.R. Circular No.16 of 1991. We find that this Tribunal in I.T.As. Nos. 89/KB and 257/KB of 2002 has deleted similar addition. In assessee's own case, this Tribunal vide I.T.As. NOs.1331/KB and 1332/KB of 2002 in order dated 30-8-2003 deleted the similar addition. Considering the nature of expense, the nature of business, the history of the case, provision of the law and the decision of this Tribunal, we find that the T.O. was not justified on facts and in law to propose addition under section 24(i) of the Income Tax Ordinance, 1979 (R) in respect of expenses incurred on employees s meals. The same is not sustainable on facts and in law and the learned C.I.T.(A) has rightly deleted the same.

10. We are of the view that the treatment meted out in respect of agitated issues are asonable and in accordance with law. The learned counsel for the assessee in this respect has also placed before us the order of this Tribunal dated 10-5-2006 in the case of the assessee on the cross-appeals for the assessment years 2000-01 and 2001-02 and the appeal filed by the assessee for the assessment year 2002-03 in I.T.As. Nos.115, 116/KB of 2004 and 987/KB, 988/KB of 2004 (assessment years 2000-01, 2001-02) and I.T.A No.350/KB of 2005 (assessment year 2002-03) wherein all the issues have already been decided in favour of the assessee.

11. In view of all these facts, we find no warrant for interference in the impugned order of the learned C.I.T.(A), which is upheld and the appeal for the assessment year 2002-03 is also dismissed.

12. Both the appeals filed by the department are dismissed for the reasons discussed as above.

C. M.A. /31 /Tax(Trib. )Appeals dismissed.