2007 P T D (Trib
2007 P T D (Trib.) 2583
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Khawar Khurshid Butt, Accountant Member
I.T.As. Nos. 6370/LB and 6372/LB of 2005, decided on 17/03/2007.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 62(1)---Assessment on production of accounts, evidence etc.---Profit and loss expenses---Disallowance by using- stock phrases and in generalized 'terms that expenses involved were personal in nature and unverifiable--Validity---If some expenses were unverifiable and un vouched the Assessing Officer should keep in his mind the volume and nature of the business and proportion of the expenses claimed by the assessee---Taxation Officer failed to find out any item in which personal element of expenditure was involved---Matter was an account case and the assessee was maintaining day to day account books---Audited books of accounts were produced before the Assessing Officer, consisting of all the details, explanations, vouchers and ledgers of the respective heads---Law cast a legal obligation upon the Assessing Officer before disallowing expenses where books of accounts were being produced---Taxation Officer, in terms of proviso to subsection (1) of S.62 of the Income Tax Ordinance, 1979 should have confronted the assessee with the defects found in the books of accounts; it was a mandatory provision which, was required to be followed---Mandatory notice under S.62(1) of the Income Tax Ordinance, 1979 was prerequisite condition which was added in income tax law just enabling taxpayer to know the allegation against him and give a proper reply and detail thereof so that the taxpayer be saved from the arbitrary action of the Assessing Officer---Assessing Officer having failed to do so he had no legal authority to make any disallowance---Such disallowances were ab initio void and illegal which were rightly deleted by the First Appellate Authority.
1991 PTD (Trib.) 531; 1992 PTD (Trib.) 1176; .ITA No. 176/KB of 1998-99; ITA No. 2519/KB of 1992-93 in I.T.A. No. 314/KB of 1981-82; 1989 PTD (Trib.) 39 and I.T.A. No. 922, 923, 1595/KB/84-85 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 62(1)---Assessment on production accounts, evidence etc.---Profit and loss expenses---Principles/position regarding deduction of expenditure set out by the Tribunal and High Courts recorded.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 62(1)---Assessment on production of accounts, evidence etc.---Profit and loss expenses---Disallowances in the profit and loss account expenses were not to be made without any basis and without examining the claim in details and without due notice" and without incorporation the instances' of defects in assessment order by the Assessing Officer---Disallowances in profit and loss account expenses were made in a slipshod manner without pinpointing specific defects and instances and the assessee/taxpayers were constrained to contest those disallowances in first and second appeals---Order of First Appellate Authority in deleting the disallowance was maintained by the Appellate Tribunal in circumstances.
2006 PTD 2654 rel.
(d) Income Tax---
----Setting aside of assessment---Assessment year 2001-2002---Issue regarding setting aside of prorating of expenses was agitated on the ground that First Appellate Authority was not competent to set aside the assessment after 1st July, 2005---Validity---Powers of setting aside were withdrawn w.e.f. 1st July, 2005, which pertained to assessment year 2005-2006 (Tax Year, 2006) and not for the assessment year under appeal, as said provision of law was not applicable retrospectively.
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 156(3)---Rectification of mistake---Where any mistake was brought to the notice of any income tax authority by the assessee and no order under subsection (1) of the S.156 of the Income Tax Ordinance, 1979 was made by such authority before the expiration of the financial year, next following the date in which it was so brought to its notice, the mistake shall be deemed to had been rectified.
Dr. Ishtiaq Ahmed, D.R. for Appellant.
Jawed Zakaria for Respondent.
ORDER
Through these two appeals, the appellant Department has objected the two separate orders of the learned CIT(A), dated 1-7-2005 for the assessment years 2000-2001 and 2001-2002.
For both the years, deciding the appeals without issuing notice under section 128(1) of the Income Tax Ordinance, 2001 and disallowances out of P & L A/c expenses under the heads "Fee and Subscription" and "Other Expenses" have been objected. For the assessment year 2000-2001, the disallowances out of "Postage, Tele phone", "Travelling and Conveyance" and "Motor Vehicle Expenses" have been objected: While for the assessment year 2001-2002, the disallowances of "Repair" and "Entertainment", the deletion of addition of Rs.192,593 made under section 12(9A) of the repealed Income Tax Ordinance, 1979 and the setting aside of the case after 1st July, 2005, on the issue of proration of income have been objected.
2. Succinctly, the facts of the case necessary for disposal of these appeals are that the assessee is a Public Limited Company derives income from manufacturing and sale of cotton, polyester, viscose and acrylic yarn. The returns for both the years were filed declaring loss. While making the assessments for both years the Assessing Officer accepted the declared trading results being supported with books of accounts.
For the assessment year 2001-2002, additions of Rs.192,593 under section 12(9A) of the repealed Income Tax Ordinance, 1979, at Rs.200,000 on account of sales of store and scrape were made. The Assessing Officer prorated the income pertaining to section 80C and section 62 of the repealed Ordinance, 1979. Being aggrieved from the orders of the Assessing Officer the assessee preferred appeals before the learned CIT(A), -who vide orders mentioned supra, deleted the additions out of P & L account of postage; telephone, travelling and conveyance, Motor vehicle expenses, other expenses and fees and subscription for the assessment year 2000-2001 and for the assessment year 2001-2002 additions on account of repairs, fees and subscription, other expenses and entertainment expenses were deleted. For this year, the learned C.I.T.(A) has also deleted the addition under section 12(9A) of the Income Tax Ordinance, 1979 and set aside the issue of proration of expenses for further consideration and fresh order. Hence, the presence appeals on the grounds mentioned supra have been filed by the tax department.
3. The learned D.R. representing the appellant Department has reiterated the contents of the assessment order in his arguments. He submitted that the Assessing Officer was fully justified in making the disallowances as there exist some personal element and unverifiability. He therefore, submitted that the learned C.I.T.(A) was not justified in deleting the disallowances made by the Assessing Officer for both the years under appeal. .Furthermore, he submitted that the learned C.I.T.(A) -was not justified in deleting the addition made under section 12(9A) for the assessment year 2001-2002. It was also argued by .the learned D.R. that after promulgation of the new Ordinance, 2001 the powers of the learned C.I.T.(A) for setting aside the issue has been withdrawn, therefore, the learned C.I.T.(A) was not justified in setting aside the issue of pro rata of income for the assessment year 2001-2002 for fresh consideration by the Assessing Officer.
4. On the other hand, Mr. Jawed Zakaria, Advocate has appeared on behalf of the assessee/respondent and has contended that the grounds agitated by the department are vague and not specific with regard to each item of the profit and loss disallowances, therefore, this Tribunal should decline to entertain the grounds being vague and not specific. According to the learned counsel, from perusal of the grounds, it is crystal clear that the department has not agitated the specific separate ground of each item of expenditure. Therefore, three grounds are vague and unspecific and the appeal on these grounds should be dismissed in limine. Reliance in this respect is placed on judgments reported as 1991 PTD (Trib.) 531, 1992 PTD (Trib.) 1176 and unreported judgments of this Tribunal viz. I.T.A. No. 176/KB of 1998-99 vide order, dated 10-4-1999 in I.T.A. No.2519/KB of 1992-93 order, dated 25-2-1999.
The learned counsel has invited our attention to sections dealing with the expenditure and submitted that under section 22 of the repealed Income Tax Ordinance; 1979, income chargeable to tax from business and profession has been defined and under section 23 deductions as allowable have been provided. Those expenses which are not legally admissible have been dealt by section 24. Sub-clause (xviii) of section 23 of the late Ordinance, 1979, provides that "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession. The learned counsel submitted that the term "for the purpose of business" has significant and has wider amplitude than the terms as visualized under section 31(1)(b) of the late Ordinance, 1979, which provides for deduction of expenses for the purpose of earning such income. According to the learned counsel, the Assessing Officer has disallowed expenses by using stock phrases such as personal element and unverifiability. He submitted that the respondent is a public limited company and not a living person (human being), therefore, every expenses which have been discharged on behalf of the company does not become personal expenditure under section 23(xviii) of the repealed Ordinance, 1979. The expenses incurred by the respondent cannot be termed as personal in nature. All the expenses incurred have to be allowed in toto. He has urged that the Assessing Officer/Taxation Officer has made disallowances by mere use of generalized statements and Stock Phrases without pointing out specific instances of unverifiability. It was further argued that complete books of amounts and supporting details were produced and. examined by the Taxation Officer and the details and explanation as were required by the Taxation Officer were duly furnished. According to the learned counsel, if the Taxation Officer noted or had found any specific instance of unverifiability etc. of said expenses, it was his duty to point out the same. He is therefore of the view that the Taxation Officer not having pointed out the specific instances of alleged unverifiability, such disallowances which were made by mere use of Stock phrases are rightly strucked down by the learned CIT(A).
Elaborating further his point of view, the learned counsel has submitted that Ibrahim Textile Mills Limited, the assessee in this case is a public limited company quoted on all the Stock Exchanges in Pakistan. The accounts of the company are being maintained on day to-day regular basis which were prepared by the qualified Chartered Accountants and also is being audited by a firm, of Chartered Accountants and accounts were not only audited but were also placed before the General Body meeting of the shareholders. These accounts were also furnished to Stock Exchanges, Securities and Exchange Company of Pakistan and Registrar of Joint Stock Companies. The closed, adjusted and audited books of accounts produced along with details and explanations before Assessing Officer/Taxation Officer who have acknowledged in assessment order in the following lines:--
"Produced books) of accounts consisting of Cash Book, ledger and journal etc. Records and the details have been perused and the case has been discussed at length with the A/R of the assessee. Details, documents and explanations offered have been placed on record."
In view of the above all the expenses of the company are properly supported by Vouchers, Invoices and Bills etc. and there is no element of any of these expenses as personal in nature or unverifiable. The learned counsel has further submitted that the Assessing Officer has further based the above disallowances on the ground that in past such disallowances had been made. He submitted that each assessment year has separate and distinct entity and each claim has to be looked into relevant assessment year. .Instead of relying on the past history of the Assessing Officer should have looked into the claim of the relevant assessment year. Reliance in this connection was placed on the judgment of this Tribunal, dated 8-5-1982 in I.T.A. No. 314/KB of 1981-82. The learned counsel has argued that when all the books of accounts along with details, vouchers placed before Assessing Officer, it is mandatory upon the Assessing Officer to confront the assessee with the defects and the same cannot be rejected by using stock phrases being personal and unverifiable". Reliance was placed on the case reported as 1989 PTD (Trib.) 39. He has contended that the following two conditions are required to be fulfilled by the Assessing Officer while making the disallowances:--
(i) The Assessing Officer should cite the specific instances of unverifiability.
(ii) Such instances should be brought to the notice of the assessee affording them opportunity of being heard.
According to the learned counsel, in this case, none of these two conditions have been fulfilled by the Assessing Officer, therefore, the learned CIT(A) was fully justified in deleting these disallowances .for the years under, consideration. Reliance in this respect is placed by the learned counsel on the larger bench decision of this Tribunal in I.T.As. Nos. 922, 923, 1595/KB/84-85 order, dated 9-10-1988. The learned counsel regarding deletion of addition under section 12(9A) of the repealed Ordinance, 1979 in the assessment year, 2001-2002, has frankly submitted that the department has amended the assessment under section 122 whereby imposed the tax of Rs. 190,000 under section 12(9A). However, this fact was not brought in the knowledge of the learned CIT(A), therefore, he deleted the addition under section 12(9A). He therefore, submitted that neither the order of the learned CIT(A) is maintainable on this issue nor the ground of appeal on this issue is maintainable therefore, the appeal of the department may be dismissed being misconceived as the issue has already been decided in favour of department, .hence, this ground of the department has become infructuous.
Regarding the ground of appeal pertaining to assessment year 2001-2002 whereby the learned CIT(A) has set aside the issue of proration of income the learned counsel has argued that this ground of appeal is vague and not maintainable for the reasons that .powers of setting aside were withdrawn w.e.f. 1st July, 2005 which pertains to assessment year 2005-2006 Tax year 2006 and not for the assessment year under appeal. He has contended that this provision of law is not applicable retrospectively. According to the learned counsel, the learned CIT(A) has also set aside the issue of scrape sales but the same has not been agitated by the department. He is of the view that the department cannot breath hot and cold in the same breath. According to the learned counsel, the assessee has filed a Miscellaneous Rectification Application on this very issue on 31-5-2002. This fact has also been admitted by the learned CIT(A) in the impugned order, therefore, as per provision of subsection (3) of section 156 the Income Tax Ordinance, 1979 where any such mistake is brought to the notice of any income tax authority by the assessee and no order under subsection (1) is made by such authority before the expiration of the financial year, -next following the date in which it was so .brought to its notice, the mistake shall be deemed to have been rectified. Therefore, the ground agitated by the department is misconceived and it 'has become infructuous which is liable to be dismissed.
5. We have heard the rival arguments of both the sides and perused the record, .the case-laws cited, the impugned orders of the learned CIT(A) and the assessment orders.
6. Adverting to the issues of disallowances which are common for both the years, we have observed from perusal of the order of the Assessing Officer for the years under appeal it is manifest that he has made the disallowances by using stock phrases and in generalized terms that, expenses involved are personal in nature and unverifiable. If some expenses are unverifiable and unvouched the Assessing Officer should keep in his mind the volume and' nature of the business and proportion of the expenses claimed by the assessee. It seems that the Assessing Officer has no idea of disallowing the expenses. From the details of all the expenses filed by the respondent, the Taxation Officer have failed to find out any item in which personal element of expenditure is involved. It is an admitted fact that it is an account case and the respondent is maintaining day to day account book. The respondent, had produced before the Assessing Officer audited books of accounts, consisting all the details, explanations,' vouchers and ledgers of the respective heads. The law cast a legal obligation upon the Assessing Officer before disallowing expenses where books of accounts are being produced. The Taxation Officer in terms of proviso to subsection(1) of section 62 of the repealed Ordinance, 1979 should have confronted the assessee with the defects found in the books of accounts. It was a mandatory provision which he required to follow. In other words, the mandatory notice under section 62(1) is prerequisite condition. This was added in income tax law just enabling taxpayer to know the allegation against him and give proper reply and detail thereof so that the taxpayer be saved from the arbitrary action of the Assessing Officer, As the Assessing Officer had failed to do so he has no legal authority to make any disallowance, therefore, the disallowances are ab initio void and illegal which were rightly deleted by the learned CIT(A). Learned counsel for the assessee has placed before us the decisions of this Tribunal and the Hon'ble High Courts. From the criterion set out by this Tribunal and the Hon'ble Superior Courts, following position/principles regarding deduction of expenditure may be summed up:--
* The assessment order being quasi-judicial in nature should be speaking and while making disallowance for the reason of un verifiability the Assessing Officers are required to cite specific instances and before making additions the instances should be brought to the notice of assessee affording them opportunity of being heard. If these two conditions are not satisfied the disallowances made are bound to be struck down. This has been held by this Tribunal vide larger Bench in I.T.As. Nos.922, 923, 923-B and 1599/KB of 1984-85 vide order, dated 9-10-1988.
* It is not necessary for claiming a deduction under section 23(xviii) of the Income Tax Ordinance, 1979 that there must be documentary evidence to prove the expenditure incurred. What is required is that Expenditure should not be Personal or Capital expenditure if expenditure incurred for business or professional purposes, such expenditure would be allowable even if there is no documentary evidence to prove it and no expenditure can be disallowed merely documentary evidence required or on ground of unverifiablity. The .following conditions should concur in order that a particular item of expenditure may be deductible under section 23(xviii) of Income Tax, Ordinance, 1979.
(a) The expenditure should not be of the nature described in other clauses of subsection (1) of section 23 of Income Tax Ordinance, 1979.
(b) It should have been incurred in the accounting year.
(c) It should be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed under normal law other than assessed under presumptive Tax region and should be incurred after the business is set up.
(d) It should not be in the nature of personal expenses of the assessee.
(e) It should not be in the nature of capital expenditure.
(f) It should have been laid out or expended wholly and exclusively for the purpose of such business.
* There is nothing, in the language of section 23 of the Income Tax Ordinance, 1979 from which it can be fairly implied that an expenditure or, allowance falling within the section must fulfil some other conditions before if can be allowed. In construing the several clauses of the section we must adhere closely to the language of the Ordinance. In allowing a deduction which is permissible one need not look beyond the expenditure and see whether it has the quality of directly or indirectly producing taxable income.
* Expenditure need not produce taxable income. There is no basis for the view that only expenditure incurred in respect of a business activity giving rise to Income, profits or gains taxable under the Ordinance can be allowed as a deduction under section 23(xviii) and not otherwise.
* The expression for the purpose 'of the business" is wider in scope than the expression "for the purpose of earning profit." Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as pre-condition to commence or for the carrying on of a business; it may comprehended many other acts incidental to the carrying on the business.
* The expression "wholly and exclusively" used in section 23 (xviii) of the Income Tax Ordinance, 1979, does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 23(xviii) of the Income Tax Ordinance even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure ahould not come in that way of an expenditure being allowed by way of deduction.
* The Assessing Officer should keep in mind before making disallowances reasonableness of the claim vis-a-vis the volume and nature of the business. Unverifiability or personal nature of the expenses is not the sole criterion for making the disallowances as held by the superior-Courts. In the present case, the Assessing Officer has simply mentioned that expenses were not fully verifiable and being personal. This is definitely a general remark. If the expenses .were not fully vouched and verifiable, it meant that some of them were vouched and verifiable. What was the ratio of vouched and verifiable expenses and unvouched and unverifiable expenses has not been shown by Taxation Officer at all. If he found some expenses which were verifiable and vouched, he should have asked the respondent to explain them. Moreover, if the unvouched and unverifiable expenses were nominal or negligible in proportion to the total amount of expenses vis-a-vis turnover then he should have completely ignored them.
* It is not open to the Department to adopt a subjective standard of reasonable and disallow a part of business expenditure as being unreasonably large, or decide what type of expenditure the assessee should incur and in what circumstances. If the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may ensure to the benefit of a third party. Another test is whether the transaction is properly entered into as apart of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby.
* In determining whether an amount expended by the assessee is deductible under section 23 (xviii) of the Income Tax Ordinance, 1979 the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles from the point of view of businessmen and not of the department.
* In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has also to be adjudged ,from the point of view of the business and not of the revenue.
* The respondent is a public, limited company and not. a living thing (human being), therefore, being; a public limited company quoted on stock exchanges of Pakistan, the personal element of the expenses cannot be attributed to such ,public limited company. Disallowances ought not to be made light heartedly being personal element involved in case of Public Limited Company as Company is not a living person as in the case of individual.
* The power of Taxation Officer to reject accounts and make additions and disallowances of expenses is not a mere discretionary power but amounts to a statutory duty such power is not purely a subjective or arbitrary exercise of discretion and it is required to be exercised judicially. Disallowances out of expenses cannot be made by using Stock phrases "Expenses un-verifiable and personal element and or past history. "
* No disallowances can be made on the basis of facts of last year and "like last year" because each assessment year being a separate and independent one, the disallowance has to be made and sustained on merits and on facts of each year.
Ad hoc, bold and lumpsum add-backs are always frowned at by the higher Appellate Forum.
*Each disallowance should be enumerated under specific and distinct head underground of appeal as per Rule of the Income Tax Appellate Tribunal Rules, if the same are not done so, the disallowances made cannot be upheld.
* Disallowance of expenses on ground of being unverifiable not to be made without any basis and without examining the claim in detail.. Making of disallowances in arbitrary manner by the Assessing Officer is always deprecated by this Tribunal as well as by High" Courts.
* It is well-settled that each assessment/tax year is separate and independent and even if taxpayer does not challenge specific additions/disallowances in earlier years, it does not preclude them to challenge the same in the later year.
* Any expenditure which is to be incurred by an assessee on the directions of the Government is an admissible expenditure.
On the issue of disallowances out of P&L A/c expenses, the latest decision of the Hon'ble Lahore High Court reported' as 2006 PTD 2654 has been placed before us wherein, while deciding the appeals by the Shahroom International (Pvt.) Ltd. Lahore filed against the Department, this issue has been discussed in detail. The concluding paras of that decision are reproduced hereunder:--
"(5). A perusal of the proposed questions of law as referred above shows that the main controversy is covered by the first two questions of law which are common to all the appeals. The provision of the late Ordinance which is directly in issue in all the appeals is section 62 which is reproduced below for ready reference:--
"(62). Assessment on production of accounts, evidence, etc.(1) The Deputy Commissioner, after considering the evidence on record (including evidence, if any, produced under section 61" and such other evidence as the Deputy Commissioner may require, on specific points, shall, by an order, in writing, assess the total income of the assessee and determine the tax payable by him on the basis of such assessment:
Provided that where the assessee produces 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 oppor tunity to the assessee to explain his 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.
(2) Where a person is authorized by the Central Board of Revenue under section 7 to assist the Deputy Commissioner in making an assessment and the Deputy Commissioner with the opinion of such person on any point concerning assessment, the Deputy Commissioner shall record, in the order under subsection (1), the opinion of such person and the reason for his disagreement with such opinion.
(6) After promulgation of the late Ordinance in 1979, it was substituted by Finance Act, 1980. Thereafter, the material amendment in this subsection which is relevant for the disposal of these appeals before us was made through Finance Act, 1993 when proviso to subsection (1) was added. Through para.8 of Circular 11 of 1993, the reason for the insertion of the proviso was explained as under:--
"(8) Procedure for assessment in account cases: Section 62(1).----A proviso has been added to subsection (1) of section 62 to the effect that where the assessee produces books of accounts as evidence in support of the return, the Assessing Officer shall, before discarding such accounts, give a notice to the assessee of the defects noted in the accounts to provide an opportunity to the assessee to explain his point of view and record such explanation and the basis of computation of total income of the assessee in the assessment order. This is in line with judicial decisions on the subject. With the introduction of this provision following such a procedure has become mandatory".
(7) The purpose of the proviso is self-explanatory.---It states that where an assessee produces books of accounts in support of declared income, the Assessing Officer before discarding the declared accounts, partially or wholly shall issue ashow-cause notice confronting assessee the noted defects in the books of accounts and providing an opportunity to furnish and explanation. It is only after providing assessee an opportunity to furnish that the Assessing Officer can proceed on the basis of the noted defects in the books of accounts. Such a procedure was implicit in section 62 even before introduction of the proviso and the proviso made merely explicit what was previously implicit in it. If the scheme. of the repealed Ordinance the procedure for processing of an income tax return for detailed scrutiny was that after making an initial scrutiny of the return the Assessing Officer would issue a notice under section 61 to the assessee providing him an opportunity to produce books of accounts maintained for the concerned assessment year as well as any other evidence which he wanted to produce in support of his declared version. After putting the evidence adduced including the books of accounts to detailed scrutiny the. Assessing Officer could either accept the declared version of the assessee or discard the declared version, either wholly or partially, however, it was just an elementary requirement of natural justice that where an assessee maintains and produces proper books of accounts and the Assessing Officer does not agree with the declared version the assessee should have been specifically confronted on the alleged defects noted in the books of accounts under section 62.
(8) It is an admitted position in all these appeals that the assessee produced books of accounts in response to notices under section 61 of the late ordinance which were duly examined by the Assessing Officer: After fully examining the books of accounts, the Assessing Officer made substantial additions out of profit and loss account, without issuing any notice under section 62 and thereby pointing out specific instances of unverifiability or unvouched expenses. The assessment for the assessment year 1998-99 was set aside twice by the first appellate authority on the ground that assessee was not confronted with specific instances of unvouched expenses whereas the assessment of the assessment years 1989-90 and 1990-91 were set aside at least for once. It appears that the different Assessing Officers who framed the assessments. under appeal neither gave serious attention to the concerned provision of law nor attentively read the directions given in the remand orders; and the CIT(Appeals) continued to provide the Assessing Officers one after another opportunity to make good defects in the assessment orders. The learned ITAT in the consolidated impugned order rejected the appeals of the assessee for the assessment years 1993-94,1994-95 and 1996-97 even against remand. orders and instead confirmed the additions made out of Profit and Loss Account (under some heads after providing partial relief). The CIT(Appeals) had set aside the assessment orders for these years on the ground that the Assessing Officer - had failed to establish the alleged factum of unverifiability.
(9) After the insertion of the proviso to subsection (1) of section 62 no doubt whatsoever was left regarding procedure for rejection of the declared version where proper books of accounts were maintained and produced by the assessee for examination. Even though .the proviso which clarified and explained the procedure to be followed by the Assessing Officer for rejecting the declared version was inserted through Finance Act, 1993, it applied even to prior assessment years where assessments were framed after the insertion of the proviso it applied even to those assessments; .and as all the impugned assessments were framed in violation of mandatory provision of law as contained in section 62 of the Ordinance. The CIT(Appeals) as well as the learned ITAT were clearly in error in not vacating the same.
(10) For the foregoing the appeals are disposed- of answering the question No.1 in the negative and question No.2 in the affirmative in all the appeals in favour of the appellant/assessee and against the Revenue. In view of our answer to questions Nos. and 2 we need not answer the remaining questions of law proposed by the appellant/assessee".
After considering the above discussed legal position in this respect, we may also observe that it is high time that the Assessing Officer/Taxation Officer should learn that disallowances in the profit and loss account expenses are not to be made without any basis and without examining the claim in details and without due notice and without incorporation the instances of defects in assessment order. We have noticed that invariably in all the cases of disallowances in profit and loss account expenses are made in a slipshod manner without pinpointing specific defects and instances and the assessees/taxpayers are constrained to contest those disallowances in first and second appeals.
In view of the discourse made supra, we have reason to maintain the orders of the learned CIT(A) in deleting the disallowances made for both the years under consideration.
Regarding ground pertaining to deletion of addition of Rs.192,593 made under section 12(9A) of the Income Tax Ordinance, 1979 for the assessment year 2001-2002, it can be seen from the record that the department had itself imposed the tax under section 12 (9A) at the time of passing the order under section 122 of the Income .Tax Ordinance, 2001 for the same assessment year and the assessee had deposited the tax. However, it seems that this fact was not brought in the knowledge of the learned CIT(A) by either side. Therefore, the departmental appeal on this ground is misconceived and. is dismissed accordingly.
Regarding the last ground which relates to setting aside of the issue of proration of income the arguments of the learned A.R. carry much force. For the .assessment year 2001-2002 the department has agitated the setting aside of the issue of proration of expenses on the ground that the learned CIT(A) was not competent to set aside the assessment after 1st July, 2005. In this regard, we are of the view that the powers of setting aside were withdrawn w.e.f. 1st July, 2005, which pertains to assessment year 2005-2006 (Tax Year 2006) and not for the assessment year under appeal, as this provision of law is not applicable retrospectively. Even otherwise as contended, the assessee has filed a Miscellaneous Rectification Application on this very issue on 31-5-2002. This fact has also been admitted by the learned CIT(A) in the impugned order. As per provision of subsection (3) of section 156 of the repealed Income Tax Ordinance, 1979, where any such mistake is brought to the notice of any income tax authority by the assessee and no order under subsection (1) is made by such authority before the expiration of the financial year, next following the date in which it was so brought to its notice, the mistake shall he deemed to have been rectified. The ground agitated by the department is misconceived and in view of the-above position it is hereby dismissed.
Consequently, both the appeals filed by the department being devoid of any merits are hereby dismissed.
C.M.A./123/Tax(Trib. )Appeal dismissed.