2007 P T D (Trib
2007 P T D (Trib.) 2566
[Income-tax Appellate Tribunal Pakistan]
Before Zafar Ali Thaheem, Judicial Member and Mazhar Farooq Shirazi, Accountant Member
M.A. Nos. 115/LB and 116/LB of 2004, I.T.As. Nos. 4526/LB to 4528/LB of 2004, 3672/LB, 3673/LB of 2005 and 5183/LB of 2004, decided on 10/10/2006.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 156---Rectification of mistake---Application for recall of ex parte order on the ground that assessee was condemned unheard but while disposing the application that very Appellate Tribunal treated the same as Rectification Application. under S.156 of the Income Tax Ordinance, 1979 despite the fact that there was no issue of rectification before the Bench---Validity---Miscellaneous application filed for recall of ex parte order could not be treated as Miscellaneous Application for rectification filed under S.156 of the Income Tax Ordinance, 1979---Orders passed, being not sustainable in the eyes of law, were vacated by the Appellate Tribunal in view of established principle of law that nobody could be condemned unheard---Ex parte order passed was recalled as absence marked on the date of hearing was accidental and not intentional on behalf of the assessee.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 156---Rectification of mistake---Application for recall of order---Merits and demerits of the case could not be considered until and unless the Appellate Tribunal's ex parte order was recalled.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 62(1)---Assessment on production of accounts, evidence etc.---
Non-issuance of notice before finalizing assessment---Effect---Before finalization of assessments, it was obligatory upon the Assessing Officer to confront the assessee with the defects noted by him in the accounts maintained by the assessee by issuance of specific notice under S.62 of the Income Tax Ordinance, 1979---Assessing Officer failed to do so because after examination of books of accounts and necessary details furnished by the assessee notice under S.62 of the Income Tax Ordinance, 1979 was issued but same was not specific notice under this section as the contents of the same were of notice under S.61 of the Income Tax Ordinance, 1979 requiring the assessee to furnish further details, which could not be termed as specific notice under S.62 of the Income Tax Ordinance, 1979---After that notice no other notice was ever issued and assessment was finalized without confronting the assessee with the defects noted by the Assessing. Officer, hence did not afford the assessee an adequate opportunity to explain his position---Assessee had been condemned unheard---Orders passed were liable to be cancelled for non-issuance of specific notice under S.62(1) of the Income Tax Ordinance, 1979 which was mandatory under the law---Orders passed by both the authorities below on the issues under consideration were vacated and the assessee's appeals were accepted on legal as well as factual plane by directing the Assessing Officer to accept the returned version of the assessee.
(1999) 80 Tax 241; 2001 PTD (Trib.) 2938; 2003 PTD (Trib.) 625 and 1999 PTD. (Trib.) 382 rel.
(d) Income-tax---
----Notional gain---Assets and liabilities in foreign currency were translated into Palo rupees at the exchange rate prevailing on the balance sheet date, which resulted gain on revaluation of foreign currency and did not come within the meaning of real income and was not liable to tax---Action of Assessing Officer was unsustainable and was vacated by the Appellate Tribunal.
1998 PTD (Trib.) 288 rel.
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 62(1)---Assessment on production of accounts, evidence etc.---Profit .and loss account---Addition---Addition under the head of Profit and Loss account had been made without confronting the assessee with specific instances of unverifiability, which was clear cut violation of provisions of 5.62(1) of the Income Tax Ordinance, 1979---While making additions authorities below had also deviated form established history of the case history of the case---All expenses were incurred for smooth running of business and could not be termed as inadmissible merely on the basis of stock phrases and conjectures---Since, Assessing Officer had failed to confront the assessee with specific instances of unverifiability, the additions made were illegal.
2006 PTD (Trib.) 2325 rel.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 24(1)(i)---Deductions not admissible---Assessing Officer had admitted submission of complete details of total expenditure relating to salaries and allowances in respect of employees of the company drawing taxable as well as non-taxable emoluments---Additions made without pinpointing specific instances of unverifiability in no way could be termed as justified, due to unsustainability of the same in the eyes of law---Additions were deleted by the Appellate Tribunal.
Ch. Wasim Ismail and Ch. Muhammad Ismail for Appellants.
Anwar Ali Shah D.R. for Respondent.
ORDER
ZAFAR ALI THAHEEM, JUDICIAL MEMBER.---The above captioned Miscellaneous Applications as well as appeals have been filed by the assessee and department. Since, representatives on behalf of rival parties are present, therefore, the same are being .disposed of in the following manner.
First of all, we take up the Miscellaneous Applications arising out of ITAT order, dated 24-9-2002 recorded in M.As. Nos. 750 and 231/LB of 2001 pertaining to assessment years 1997-98 and 1998-99 respectively, which were earlier decided by the Division Bench. Since, both the learned Members were not available at Lahore Bench, therefore, the Honourable Chairman vide his order, dated 7-6-2006 directed to fix the instant Miscellaneous Applications before this Bench where the assessee's appeals for the assessment years 1998-99 to 2002-2003 were already fixed for hearing on 20-6-2006. Later on a departmental appeal for the assessment year 1999-2000 was also transferred inthis Bench from DB-VII..
Brief facts emanating from record are that an ex parte order dated 30-9-2000 was recorded in assessee's appeals pertaining to I.T.A. No.4658/LB of 1999 (Assessment year 1997-98) and I.T.A. No.2420/LB of 2000 (Assessment year 1998-99). On receiving ex parte decision supra the A.R. of the assessee moved a consolidated Miscellaneous, Application bearing M.A. No.657/LB/2000 pertaining to assessment .years 1997-98 and 1998-99 supported with a sworn affidavit requesting for recall of ITAT order dated 30-9-2000 to be decided afresh after affording and adequate opportunity of being heard to the assessee on the following grounds : ---
"Mr. M. Nawaz Khan, AR of the appellant had a sudden departure for reason of an emergency involving heard attack to a nearest relative in Riyadh Saudi Arabia. The documents proving such a bona fide reason are being enclosed herewith in the shape of departure fixed on the passport. In his absence, his junior Mr. Wasim Ismail, ITP was waiting outside the Bar Room on 30th September, 2000 for seeking adjournment on the basis of facts stated in the above paragraph but unfortunately, he could not hear- the call for appearance before the Honourable Court. At about 10:00 A. M. Mr. Wasim Ismail on his own entered the Court room for making the request for adjournment but by that time, the Honourable Members had just left the Court room. .Then, he made personal appearance before the Honourable Judicial Member and explained the facts regarding sudden departure of AR of the appellant to Saudi Arabia on 29th September, 2000 with necessary documentary evidence.."
The assessee's Miscellaneous Application-supra was treated by the Tribunal only for the assessment year 1997-98 whereas in respect of assessment year .1998-99, the assessee was directed to file separate Miscellaneous Application. Hence, while deciding the Miscellaneous Application for the assessment year 1997-98, the Honourable ITAT vide its order, dated 26-4-2001 recorded in M.A. No. 657/LB of 2000 held that: --
"After due consideration, we find that so far as perquisites are concerned, there is really no "history" here as the perquisites need to be appraised afresh each year given the total salary bill for the year and the composition of perquisites as allowed in each year. That being so, we find that the Tribunal's approval of the treatment as has been accorded by the CIT(A) is not open to rectification under section 156. In the case of business promotion expenses too, we are of the considered opinion that there is no scope for any interference under section 156 as no "error" in the .finding as recorded by the Tribunal in para. 10 of its order is evident. In the case of provision for bad debts, whoever, we find that the applicant company had indeed voluntarily added back the provision amount in full and the DCIT in his computation of applicant's income for the year had again included the provision amount thus leading to a double addition. The CIT(A) had set aside the addition and before the Tribunal the applicant had contested the setting aside of the addition of provision amount which the Tribunal appears to have ignored in the adjudication made for 1997-98 vide order, dated 30-9-2000. We accordingly hereby rectify Tribunal's cited order and direct that the Assessing Officer is to ensure that there is no addition of provision for bad debts in the computation of applicants total income for 1997-98 following adjudication by the Tribunal. "
The plain reading of above mentioned finding given. by learned Members reveals that they have treated the Miscellaneous Application filed by the assessee to be an application filed under section 156 for rectification despite the fact that assessee's Miscellaneous Application bearing M.A. No.657/LB/2000 was purely based on the 'request for recall of ITAT ex paste order, dated 30-9-2000. Again feeling aggrieved, the assessee filed further Miscellaneous Application bearing No. 760/LB of 2001 with the similar request for recall of ITAT ex paste order, dated 30-9-2000 by affording fresh hearing. However, for the assessment year 1998-99, the assessee filed a separate Miscellaneous Application baring M.A. No.231/LB of 2001 containing the same prayer as of assessment year 1997-98 in compliance with the direction of Honourable ITAT. While disposing of the Miscellaneous Applications bearing M.A. Nos.750 and 231/LB of 2001 filed by the assessee, the ITAT vide order, dated 24-9-2002 instead of recalling its ex paste order, dated 30-9-2000, which was root cause of the grievances of the assessee, upheld its earlier treatment meted to the assessee vide ex paste order, dated 30-9-2000 and subsequent Miscellaneous Application decided by ITAT vide order; dated 26-4-2001.
The learned A.R., vehemently argued that the Tribunal has wrongly treated the assessee's first Miscellaneous Application bearing No. 657/LB of 2000 as a rectification application under section 156 of the Income Tax Ordinance, 1979 whereas the fact remains that such application was purely based on request of recalling the Tribunal's ex paste order, dated 30-9-2000 and decide the same afresh without mentioning any .particular add-back or reference of section 156 of the Income Tax Ordinance, 1979 on the face of it. The learned AR has drawn our attention to para.2 of Page 2 of ITAT order, dated 24-9-2002, which is reproduced below:-
"For the assessee year 1998-99, the applicant's Miscellaneous Application is directed against I.T.A. No.2420/LB of 2000 (Assessment year 1998-99), dated 30-9-2000 and it is the applicant's contention that. ex paste decision was not justified and the appellate -order should therefore be recalled and appellant's appeal reheard and disposed of on merits."
The learned AR has stressed that learned Bench was conscious of fact that Miscellaneous Application filed by the assessee pertained to recall of ITAT ex paste order, dated 30-9-2000 but while deciding the same, the Honourable Bench rejected the Miscellaneous Application by simply upholding its earlier treatment without recalling ITAT ex paste order, dated 30-9-2000. The A.R. while concluding his arguments with regard to treatment given by the Tribunal against the assessee's Miscellaneous Applications pleaded that it is an established dictum of law that nobody can be condemned unheard. He further contended that his failure for seeking adjournment on the date of hearing of main appeal was an accident and not intentional and in support of his bona fide assertion, he had furnished an affidavit duly sworn by him. He further argued that it has been repeatedly held by the superior Courts that the litigant should not be penalized for the default of his counsel. He, therefore, prayed that assessee's right of appeal should not be deprived of and he may be heard by recalling the original ITAT main ex paste order, dated 30-9-2000.
On the country, the learned BR has opposed the contentions of learned AR by maintaining that on .the date of hearing of the main appeals pertaining to assessment years 1997-98 and 1998-99, the assessee did not tender its appearance before the Honourable ITAT, which resulted in ex paste order, dated 30-9-2000. He has asserted that since against the said ITAT ex part order, further ,two Miscellaneous Applications have also been decided by the Honourable ITAT one after another, therefore, ITAT ex paste order, dated 30-9-2000 has attained finality and does not merit recall of the same at this belated stage. He, therefore, prays for dismissal of instant Miscellaneous Applications filed by the assessee.
We have heard the arguments advanced on behalf of rival parties and also carefully gone through the relevant record available on file. We find ourselves in agreement with the assertions made by learned AR, which are forceful being supported by plausible reasons. It has been observed by us that ITAT orders, dated 24 and 26-4-2001 recorded against. Miscellaneous Applications filed by the assessee for recalling of ITAT ex paste order, dated 30-9-2000 suffer from the following palpable mistakes:--
As per Miscellaneous Application bearing M.A. No. 657/LB of 2000 the sole grievance of the assessee pertained to recall of ITAT ex paste order, dated 30-9-2000 simply on the reason that he was condemned unheard but while disposing of the same the ITAT treated the same as Rectification Application under section 156 despite the fact that there was no issue of rectification before the Bench. We are of the considered opinion that if the Miscellaneous Application is filed by the assessee for recall of ex parte order therefore the same cannot be treated as Miscellaneous Application for rectification filed under) section 156.
While disposing of the second Miscellaneous Applications bearing M.A. No.750/I.,B of 2001 (Assessment year 1997-98) and M.A. No.231/LB.of 2001 (Assessment year 1998-99), the Honourable Bench vide its order, dated 24-9-2002 has discussed to some extent the merits and demerits of the case, which isunjustified. Since, the Honourable Bench had not acceded to the request made by the assessee as per Miscellaneous Applications for recall of the ITAT ex parte order, dated 30-9-2000, B therefore, merits and demerits of the case could not be considered until or unless the ITAT ex parte order, dated 30-9-2000 was recalled.
In view of above patent errors observed by us, the ITAT orders, dated 26-4-2001 and 24-9-2002 recorded against Miscellaneous Applications filed by the assessee for recalling of original ITAT ex parte order, dated 30-9-2000 being not sustainable in the eyes of .law are vacated. In the present situation and in view of established principle of law that nobody can be condemned unheard, we deem it more appropriate and justified to recall ITAT ex parte order, dated 30-9-2000 as absence marked by the learned Bench on the date of hearing was accidental not intentional on behalf of the assessee because it is evident from the contents of the assessee's first Miscellaneous Application bearing M.A. No.657/LB of 2000 and also recorded by us in earlier part of this .order in paragraph relating to brief facts of the case. The office is directed to prefix the appeals pertaining to assessment years 1997-98 and 1998-99 in its original form as per Roster.
Now, we come to assessee's appeals pertaining to assessment years 1999-2000 to 2002-2003 and departmental cross appeal pertaining to assessment year 1999-2000 directed against the consolidated impugned orders, dated 29-6-2004 and 6-6-2005 both recorded by CIT(A) Zone-II, Lahore, whereby the following common issues have been raised as per memo of appeals for adjudication:--
That the addition made in the order under section 62 of the Income Tax Ordinance, on account of conversion of foreign currency balance abroad i.e. the notional gain amounting to Rs.23,541,000 and Rs.1,990,000 for the assessment years 1999-2000 and 2000-2001 respectively ought to have been deleted following .the case-law- presented by the appellant with support of past history.
That following additions under profit and loss expenses have been wrongly confirmed by ignoring the clear-cut findings of honourable ITAT vide orders M.A. No. 135/LB of 1999 (Assessment year 1995-96) and M.A. No.136/LB of 1999 (Assessment year 1996-97), dated 5-7-1999, relating to accounts of our company, a hundred per cent Government owned organization, in utter disregard to the treatment given in earlier appeals upto to the assessment year 1996-97.
Survey Investigation and Training Exp.
Business Promotion Expenses.
Miscellaneous Expenses
Advertisement and Entertainment.
Repair and Maintenance Expenses.
Travelling and Conveyance.
Medical Expenses.
Printing and Stationery.
Vehicle Running and Maintenance.
Communications.
That the additions under section 24(i) on account of excess perquisites and allowances, under salaries of employees, divided into two categories, have been wrongly confirmed/not fully allowed in utter disregard to legal and factual consideration despite providing complete employee wise details to the Assessing Officer and CIT(A):-
(i) Employees covered in statement under section 139 (wrongly confirmed) Rs.5,224,310, Rs.7,529,665, Rs.50,00,000 and Rs.50,00,000 for the assessment years 1999-2000 to 2002-2003 respectively.
(ii) Employees getting below taxable salaries (not fully allowed) Rs.20,000,000 and Rs.25,000,000 for the assessment year 1999-2000 and 2000-2001 respectively.
(iii) Out of medical expenses addition has been made at Rs.50,00,000 and Rs.50,00,000 for the assessment years 2001-2002 and 2002-2003 respectively.
Whereas the department has come up in cross-appeal only for the assessment year 1999-2000 whereby the following issue has been raised as per memo of appeal for decision:--
"That the learned CIT(A) was not justified to reduce the addition from Rs.30,00,000 to Rs.20,000,000 made under section 24(i) without any cogent reason. "
First of all, the learned AR has attacked the treatment of both authorities below on a legal point that before finalization of assessment, the Assessing Officer should have confronted the assessee with the defects by pinpointing in the books of accounts by issuance of specific notice under section 62(1), which was mandatory requirement under the law but he failed to do so. He has submitted that during the course of assessment proceedings, the Assessing Officer had issued first notice under section 61 requiring the assessee to furnish books of accounts along .with other relevant material/details, which was provided as admitted by him in the body of assessment orders. It is also contended after examination of books of accounts and other relevant material furnished by the assessee, although the Assessing Officer issued notices under, section 62 but it is surprising to note that contents of the said notices were of section 61 by virtue of which the assessee was again required to furnish some further documents, which in no way can be termed as specific notice under section 62 and thereafter he .without confronting the assessee by issuance of further required notice under section 62 finalized assessment according to his own wishes. He has submitted that since, the assessments pertaining to assessment years under review have been finalized without issuance of specific notice under section 62, therefore, are liable to be cancelled in view of the reported judgment cited as 2006 PTD (Trib.) 2325.
With regard to the additions made on account of Notional Gain, the learned AR has termed the action of both authorities below to be baseless. He has elaborated his viewpoint on the issue of additions made on account of "foreign exchange gain" in the years 1999-2000 and 2000-2001 by maintaining that the additions made in the years 2001-2002 and 2002-2003 had been deleted by the CIT vide his order, dated 6-6-2005. The A.R. contended that the appellant had explained to the Assessing Officer that as per requirement of audit for the preparation of .Balance Sheet, all assets and liabilities in foreign currencies were converted into Pak rupees at the exchange rate prevailing on the Balance Sheet date. All exchange differences were reflected in notional gain. However such exchange gain was a hypothetical accrual of income which was a gain on revaluation of foreign currency and not a real income and even otherwise the currency exchange gain was in the nature of a capital transaction and, therefore, not liable to be taxed as held in case-law reported as (1997) 76 Tax 173 (Trib.). The learned AR has argued that in spite of assessee's such explanations, the Assessing Officer has made arbitrary additions in all the years under appeal without confronting the assessee in terms of section 62(1) of the repealed Income Tax Ordinance, 1979. In order to lend credence to his submissions, he has furnished before us a copy of company's audited account wherein under the heading foreign currency translation it has been specifically mentioned that all assets and liabilities in foreign currencies were transferred into Pak Rupees at the exchange rates prevailing on the balance sheet date. He has also drawn our attention to the appellate orders of CIT(A) pertaining to assessment years 2001-2002 and 2002-2003 in the appellant's own case wherein the said exchange gain was treated exempt after thrashing out the issue in the light of case laws provided by the assessee on this issue. In this context the A.R. asserted that the Department has accepted the treatment given by the learned CIT(A) on the issue under review as no appeals were filed by the Department before the ITAT against appellate orders supra.
With regard to additions, he submitted that no basis whatsoever was provided by 'the learned Assessing Officer while making huge additions out of profit and loss expenses in all the years under appeal. In this regard he drew our attention to page 3 of the assessment .order 2000-2001 and page 5 of the assessment order 2001-2002 where the Assessing Officer in the same wording stated that:--
"In response to notices under section 61, Mr. Muhammad Nawaz Khan along with Ch. Muhammad Ismail Manager Budget and Taxation attended the proceedings from time to time and produced books of accounts consisting of cash book, general ledger (computerized) along with relevant details/vouchers wherever necessary which have been examined. Relevant details/ vouchers have also been obtained, scrutinized and placed on file".
The learned AR contended that it is an admitted fact that similar facts regarding production of books of accounts along with supporting details/vouchers has also been recorded in the bodies of assessment orders pertaining to assessment years 1999-2000 and 2002-2003 but treatment accorded to the assessee is whimsical and unsustainable.. The learned A.R. has elaborated that in the light of the above observations by the learned Assessing Officer it is crystal clear that all the books along with supporting vouchers were duly produced before t1le learned Assessing Officer which has not been disputed anywhere in all the assessment orders under appeal.
The learned A.R. also referred to another observation made at page 4 of the assessment order .pertaining to the assessment year 2000-2001 which is as under:--
"Please note that in case administrative expenses are found not supported by genuine/paka vouchers appropriate add backs under various heads shall be made keeping in view the past history of year case as well as directions of the higher appellate authorities".
On the above observation, the learned AR has commented that the Assessing Officer himself deviated from the past history of the case wherein additions were made in three heads only i.e. survey investigation expenses, business promotion expenses and misc: expenses which too were subsequently deleted by the higher appellate authorities. He further added that the Assessing Officer has violated the directions of the Honourable ITAT while deciding the assessee's appeals for the years 1995-96 and 1996-97 on the issue of rejection of assessee's accounts by the department in a careless manner. In order to lend credence to his submissions, he has furnished before us copy of ITAT's order, dated 5-7-1999 pertaining to assessment years 195-96 and 1996-97 and invited our attention on the finding recorded by the learned Tribunal regarding the authenticity of the assessee's accounts at para.2 of page. 3 which is being reproduced below for the sake of reference:--
"The learned DR argued that the additions had been made keeping in view the unverifiable nature of the accounts which surprises us. NESPAK is not a simple business house where account can be rejected by the department in a careless manner. It is a Government controlled organization, which is under strict internal and external audit control by the concerned agencies. Unverifiability in such cases shall amount something more than non preparation of proper accounts".
The learned A.R. also referred to another observation made at page. 5 of the Tribunal's order supra which is as under:--
"So far as the miscellaneous expenses are concerned, we have .gone .through the order of the CIT(Appeals). The relief has been allowed in keeping view the history of the add-back. The direction of the CIT(Appeals) is that disallowance should be restricted to 5 % of the total claim as per history. Though we have reservations about the concept of history, so far as the present case is concerned, however, the same does not adversely affect the assessee's claim. In our opinion under the circumstances the reduction needs no interference. It is not a case whereunder stock phrases addition can be made in any head".
The learned AR argued that despite the clear-cut finding of the Honourable ITAT in the immediate preceding years 1995-96 and 1996-97 mentioned above, both the subordinate authorities acted unjudiciously. He has emphatically objected that the Assessing Officer who made such huge arbitrary additions on the- basis of stock phrases without pointing out any defects in the books of accounts and the learned CIT(A) who despite knowing the illegality of the Assessing Officer confirmed these arbitrary additions in the assessment year 1999-2000 and 2000-2001 and merely reduced up to certain percentage in the years 2001-2002 and 2002-2003 instead of deleting the same in toto. In this regard he has pointed out to the findings recorded by the First Appellate Authority at page 5 of the appellate order, dated 29-6-2004 pertaining to assessment years 1999-2000 and 2000-2001 whereby the learned CIT(A) has confirmed all the impugned additions under the heads of profit and loss expenses by making the following observations:--
"I have considered the rival arguments, I find that the impugned additions under the head "survey and investigation" and "business promotion" are more or less in line with the history of the case. There is no explanation regarding the fact that when appellant had Claimed various expenses under a number of heads, then, what was there to be claimed under the unspecified head of "miscellaneous expenses". The Assessing Officer has however, allowed the expenses in the vicinity of 60 to 70% of the claim. In view of the unspecific nature of expenses, the allowance appears to be more than reasonable. The remaining disallowances have also been made in the impugned orders after reasonably detailed discussion, for which there is no rebuttal from the appellant's side. Under the facts and circumstances of the case, all the impugned additions being in order do not call for any interference, hence, their confirmation".
The learned A.R. on the above observation commented that it is a blatantly wrong observation that the impugned additions under the head "survey and investigation" and "business promotion" are more or less in line with the history because the assessee has a history of elections of additions in the head of survey and investigation expenses and business promotion expenses and reduction up to 5 % of total claim in the head of miscellaneous expenses and at ITAT level comprising of more than .two decades. With regard to CIT(A)'s observation that the remaining- disallowances have also been made in the impugned orders after reasonably detailed discussion, for which there is no rebuttal from the appellant's side, the A.R. contended that all the impugned additions in both the years under appeal were made by the Assessing Officer on the basis of stock phrases without confronting the assessee company. He further argued that no specific defect has been pointed out in any of the expense which was incurred in the conduct of business and no expense was legally inadmissible. He categorically stated that no instance of tin-verifiability was confronted. No instance of incurring expenses for personal benefit and claiming as business expenses was pointed out. According to his viewpoint his assessee was condemned unheard. The learned A.R. while concluding his arguments .contended that his contention of condemned unheard could easily be verified from the contents of all the assessment orders under appeal. The learned A.R. also assailed the findings recorded by the learned First Appellate Authority in its order, dated 6-6-2005 pertaining to assessment. years 2001-2002 and 2002-2003 whereby the impugned additions under the different .heads of profit and loss expenses and excess perquisites were .restricted up to certain percentage of claims. He has argued that the learned CIT(A) although considering the assessee's legal objection regarding the non compliance of proviso to section 62(1) of the Income Tax Ordinance, 1979 correct, instead of deleting all the impugned, additions made by the Assessing Officer only reduced the same up to certain limits. However in the similar circumstances, the superior Courts have always deleted the entire additions with the directions to accept the declared results be added.
The learned A.R. also put forward his forceful arguments on the issue of additions made by the Assessing Officer in the head of excess perquisites under section 24(i) in all the years under appeal. In this regard he contended that the assessee has always provided complete details of total expenditure relating to the head salary and allowances in respect of all the employees of the company, who had taxable and non taxable salaries and allowances which was admitted by the Assessing Officer too at the opening paragraphs of all the impugned orders under appeal. For proving his contention, he drew our attention at last para of page. 2 of the assessment order pertaining to assessment year 2001-2002 whereby the reply submitted by the assessee-company was reproduced by the Assessing Officer as under:--
"The assessee-company vide their letter No. Nil dated 23rd May, 2003 has submitted reply which has been duly considered and placed on file. The relevant portion of which is also reproduced below:--
"...We are submitting herewith the complete details of the total expenditure relating to the head salary and allowances in respect of all the employees of the company, who had taxable and non taxable salary and allowances: On basis of such information, we are now in a position to state that our company is not at all liable to any addition under the provisions of section 24(1)(1) of the Ordinance.
While concluding his arguments, the learned AR has drawn overall picture of the accounts maintained by the assessee company, by maintaining that financial statements of the appellant company are subject to both internal and external audit as observed by the Honourable ITAT in the immediate preceding years 1995-96 and 1996-97. Therefore, question of un-verifiability does not arise at all. He continued to argue that while finalizing the assessments for the assessment year 2000-2001, the Assessing Officer has categorically conceded that deduction of tax at source on payments for expenses was accurate because he requisitioned the proof of tax deductions under section 50(4) against the payment made to suppliers on account of purchases etc. which was produced by the assessee. However the Assessing Officer did not obtain to make any addition under section 24(c) of the Income Tax Ordinance, 1979. In these circumstances the action of the Assessing Officer of disallowing expenses arbitrarily on the basis of stock phrases is not tenable and hence illegal in view of numerous reported judgments of the Courts including the judgment of the Honourable Tribunal, dated 5-7-1999 in the assessee's own case. The learned A.R. also averred that the Assessing Officer did not confront the appellant with the instances of unverifiability---through specific notice which is mandatory under the law. In this regard he referred to proviso to subsection (1) of section 62 of the Income Tax Ordinance, 1979 which is also being reproduced forsake of convenience:
"Provided that where the assessee produced books of accounts as evidence in support of the return, the Deputy Commissioner shall, before disagreeing with such accounts, give a notice to the assessee of the defects in the accounts and provide an opportunity to the assessee to explain the point of view about such defects and record such explanation and the basis of computation of total income of the assessee in the assessment order. "
In rebuttal, the learned DR has termed the assertions made by learned AR to be frivolous and baseless. On the issue of non-issuance of specific notice under section 62 he has submitted that before finalization of assessment the assessee was afforded an adequate opportunity of being heard by issuance of notice under section 61 and thereafter notice under section 62: He has contended that by issuance of notice under section 61 the assessee was required to .file necessary documents, which were filed and also scrutinized by the Assessing Officer. After that notice a second and final notice under section 62 was issued which cannot be termed as notice under section 61 because section 62(1) was clearly mentioned on the face of it. When confronted by us that in fact the contents of the notice under section 6l are notice under section 61 as in the body of said notice the assessee was neither confronted with the defects noted in the books of accounts or with the proposed treatment. On this query he asserted that during the course of assessment proceedings, the AR of the assessee was verbally confronted with the defects pinpointed by the Assessing Officer as well as proposed treatment. On rest of the issues, he has fully supported the treatment meted out to the assessee in respect of P&L add backs, additions made under section 24(1)(i)~and notional gain to be justified and in accordance with law. However, relief allowed in respect of excess perquisites, he has termed the action of leaned, CIT(A) to be illegal and contrary to facts of the case but has not been able to put -forth plausible reasons or any dictum of law in support his version.
Arguments heard and record perused. We find ourselves in agreement with the assertions made by the learned AR, which are forceful being supported by cogent reasons and documentary evidence., After going through the orders passed by both authorities below, the following infirmities in the impugned orders have been noted by us:--
Before finalization of assessments, it was obligatory upon the Assessing Officer to confront the assessee with the defects noted by him in the accounts maintained by the assessee, which is well reputed organization, by issuance of specific notice under section 62 but he failed to do so because after examination of books of accounts and necessary details furnished by the assessee notice under section 62 was issued but same` was not specific notice under this section as the contents of the same were of notice section 61 requiring the assessee to furnish further details which cannot be termed as specific notice under section 62. After that notice no other notice was ever issued and assessment was finalized without confronting the assessee with the defects noted by the Assessing Officer, hence did not afford the assessee an adequate opportunity to explain his position. From this treatment meted out to the assessee, an inference can easily be drawn that assessee has been condemned unheard. In view of following reported judgments, the assessments orders passed for all the years under consideration are liable to be cancelled for non-issuance of specific notice under section 62(1) which was mandatory under the law:--
(1999) 80 Tax 241 (H.C. Lah.), 2001 PTD (Trib.) 2938, 2003 PTD (Trib.) 625 and 1999 PTD (Trib.) 382.
With regard to notional gain, we are persuaded with the assertions of learned AR that all assets and liabilities in foreign currency were translated into Pak rupees .at the exchange rate prevailing on the balance sheet date, which resulted gain on revaluation of foreign currency and .does not come in the meaning of real income, hence not liable to tax as per rationale E settled in reported judgment cited as 1998 PTD (Trio.) 288. By taxing the notional gain, both authorities below have not appreciated the facts of the case as well as established Law. Therefore action of Assessing Officer in this regard is unsustainable and thereby vacated.
With regard to issue of add-backs, it has been observed by us that all additions under the impugned heads of P&L account have been made without confronting the assessee with specific instances of unverifiability, which is clear-cut violation of provisions of section 62(1) of Income Tax Ordinance, 1979 (Repealed). Furthermore, while making the impugned additions both authorities below have also deviated from established history of the case comprising of more than two decades especially pertaining to assessment years 1995-96 and 1996-97, .whereby only three additions were made under the following heads : --
Survey Investigation and Training Exp.
Business Promotion Expense.
Miscellaneous Expense.
Which too were deleted by the Honourable ITAT vide order, dated 5-7-1999. Moreover it is pertinent to observe that all the expenses were incurred for smooth running of business. Hence, could not be termed as inadmissible merely on the-basis of stock phrases and conjectures. Since the Assessing Officer had failed to confront the assessee with the specific instances of unverifiability noted by him, therefore, the impugned additions made under P&L heads are illegal in view of the reported judgment cited as 2006 PTD (Trib.) 2325.
With regard to additions made under section 24(1)(i), it has also . been observed that the Assessing Officer has admitted submission of complete details of total expenditure relating to salaries and allowances in respect- of employees of the company drawing taxable as well as non-taxable emoluments, therefore, impugned additions made by Assessing Officer without pinpointing specific instances of unverifiability in no way can be termed as justified due to unsustainability of the same in the eyes of law. Therefore the additions are deleted.
In view of above observations, the orders passed by both authorities below on the issues under consideration are vacated and the assessee's appeals pertaining to assessment years 1999-2000 to 2002-2003 are accepted on legal as well as factual plane by directing the Assessing Officer to accept the returned version of the assessee. Since, the department has also come up in appeal before us 'only for the assessment year 1999-2000 against the relief allowed to the assessee in .respect of excess perquisites under section 24(1)(1) and since we have already granted further relief to the assessee on this issue, therefore, the same stands dismissed.
C.M.A./128/Tax (Trib.)Order accordingly.