VS, 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2381 (2006)

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

----S.62(1)---Assessment on production of accounts, evidence etc.---Gross profit rate---Enhancement of, in the presence of verifiable purchases and sales---Validity---Assessing Officer observed that "sales had been made to verifiable parties and most of the sales. were to limited concerns; tax at source had been deducted wherever applicable by the said concerns and deposited into the government treasury; tax at source had been deducted against supplies received as well for which copies of monthly statements being furnished; "declared sales were accepted"---Orders of both the authorities on the issue of gross profit rate in view of such observation were vacated by the Appellate Tribunal and Assessing Officer was directed to accept the declared gross profit rate.

2005 PTD 2534 rel.

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

----S.62(1)--Assessment on production of accounts, evidence .etc.---Profit and Loss expenses---Disallowance of expenses by using stock phrases like `unverifiable/personal nature of expenses' and without confronting the add-backs under S.62(1) of the Income Tax Ordinance, 1979---Validity---Orders passed by both the lower officers being in flagrant violation of settled law were nullity in the eye of law---All the add-backs made in such manner were deleted by the Appellate Tribunal.

2003 PTD (Trib.) 2668 and I.T.A. No.2609/LB of 2003 rel.

Zulfiqar Ali Sheikh, I.T.P. and Ghulam Murtaza Ch. for Appellant.

Rana Muhammad Luqman, D.R. for Respondent.

ORDER

SYED NADEEM SAQLAIN (JUDICIAL MEMBER).---Titled two appeals at the behest of the assessee have been filed calling in question two separate orders dated 30-6-2004 for the assessment years 2001-02 and 28-5-2004 for the assessment years 2002-2003 passed by the learned C.I.T.(A), Zone-II, Lahore. The identical ground for both the years under appeal is with regard to confirmation of disallowance made in the P&L account by the learned C.I.T.(A). However, main grouse of the assessee for the assessment year 2001-02 is with regard to application/confirmation of G.P. rate at 5% against the declared at 4.05%. Since almost common issues are involved the appeals for both the years are disposed of by this consolidated order as under.

2. The facts in brief are that the assessee is a Private Limited Company which engaged in the business of manufacturing and assembling of humidification plants being used in textile sector. Returns for the two years under appeal were filed declaring income of Rs.2,6.6,981 and Rs.6,07,191 respectively. The position of declared results is as under:

The Assessing Officer after examining the books of accounts and confronting the assessee, accepted the declared sales for both the years, G.P: rate declared at 4.05% for the assessment year 2001-02 was rejected being on the lower side and the same was applied at 5 %. A number of add-backs were also made under the different heads of P&L account for both the years due to unverifiability and having element of personal use. Net income for the two years were adopted at Rs.11,41,569 and Rs.15,17,377 respectively. Being aggrieved .the assessee preferred appeal before the learned C.I.T.(A) who vide its two separate orders of even date confirmed the treatment meted out by the Assessing Officer except deletion of add-back under the head computer expenses at Rs.10,000 for the assessment year 2002-03. The assessee still dissatisfied with the impugned findings of the learned First Appellate Authority is in second appeal before the Tribunal."

3. Both the parties have been heard and relevant orders, perused. It was contended by the learned A.R. that the learned C.I.T.(A) was not justified to confirm the application of G.P. rate at 5% against the declared at 4.05 % for the reason that for the year 2001-02 the major component of cost of production was imported steel sheets and electric motors and also that due to fluctuation in exchange rate, the cost had substantially gone up whereas the assessee-appellant had to dispose of the goods according to the advance payments received under agreements, resulting lower margin of profit. It was also contended that the sales and purchases were accepted by the Assessing Officer, hence rejection of declared G.P. rate is not justified. In this regard reference was made to the reported judgment of the Karachi High Court cited as 2005 PTD 2534. The relevant part of the reported judgment is reproduced as under: ---

"On the contrary, the Assessing Officer has held that the purchases and sales are verifiable. In these circumstances the Income Tax Appellate Tribunal ought to have accepted the declared G.P. rate as well. It appears that the Income Tax Appellate Tribunal failed to advert to the point that in the wake of acceptance of declared purchases and sales the enhancement of G.P. rate would be against the principle of accountancy and would be certainly a bad mathematics.

The provision contained in section 32(3) of the Income Tax Ordinance, 1979 thus could not be invoked."

4. The learned D.R, on the other hand opposed the arguments advanced. by the learned A.R. and submitted that the learned C.I.T.(A) has rightly rejected the claim of the assessee since G.P. rate was applied in view of G.P. rate declared for the immediately preceding year.

5. After hearing both the parties and going through the relevant orders as well as reported judgment cited supra. Perusal of the assessment orders shows that declared sales were accepted being verifiable. The relevant portion of the assessment order for the assessment year 2001-02 is reproduced as under:---

"Books of accounts presented by the assessee have been .examined. As regards sales, these have been made' to verifiable parties and most of the sales are to the limited concerns. Tax at source has been deducted wherever applicable by the said concerns and deposited into the Government Treasury. Tax at source has been deducted against supplies received as well. In support of this contention the A.R. produced office copies of monthly statements being furnished to this office. In these circumstances the declared sales are accepted."

Keeping all the facts in view as well as the judgment cited supra, we are constrained to observe that the supra cited case on all fours to the case of the assessee especially in view of the observations made by the Assessing Officer reproduced above. Therefore, the orders of both the authorities on the issue of G.P. rate are vacated and the Assessing Officer is directed to accept the declared G.P. rate for the assessment year 2001-02.

6. As regards confirmation of add-backs for both the years under appeal, it was contended that the add-backs were made without confronting the assessee. It is the contention of the assessee that the expenses were disallowed without confronting the assessee. It was submitted that P&L expenses were made by using stock phrases like unverifiable/personal nature of the expense. It was also the contention of the assessee that the Assessing Officer has not confronted the add-backs under section 62(1) of the repealed Income Tax Ordinance, 1979 which is a mandatory provision of law. In this regard reference was made to the reported judgment of the Tribunal cited as 2003 PTD (Trib.) 2668 wherein it has been held:---

"If the Assessing Officer did not conform with the mandatory provisions of section 62(1) of the Income Tax Ordinance, 1979 and failed to confront the assessee with regard to defects in books of accounts, all the proceedings conducted subsequent thereto will be considered null and void and unsustainable in the eye of law. Since the Assessing Officer did not comply with the provisions of section 62(1) of the Income Tax Ordinance, 1979 on the issue of pointing out defects in the books of accounts and confronting the same to the assessee, disallowances made out of profit and loss account were liable to be deleted."

7. Similar viewpoint has been taken in an unreported judgment passed vide I.T.A. No.2609/LB of 2003 dated 10-2-2004. The relevant portion of the order is reproduced as under:---

"Admittedly, the impugned additions in the present case have been made by the Assessing Officer without adherence to the provisions of section 62(1) of the repealed Income Tax Ordinance coupled with it the principle laid down in the reported cases, I have no other alternative except to delete the additions made by the Assessing Officer."

8. Keeping all these facts in view and the case-law cited supra as well as unreported judgment of the Tribunal, we are of the considered. opinion that orders passed by both the learned lower officers being in flagrant violation of ratio laid down by the Tribunal are hereby declared to be nullity in the eye of law, hence all the add-backs made in such manner warrant deletion.

9. As a result of above discussion, appeals of the assessee succeed.

C.M.A./79/Tax(Trib.)Appeals succeeded.