LT.As. Nos. 4222/LB, 4752/LB of 2004 and 296/LB, 5203/LB, 5204/LB, 6233/LB to 6235/LB of 2005, decided on 18th May, 2006. VS LT.As. Nos. 4222/LB, 4752/LB of 2004 and 296/LB, 5203/LB, 5204/LB, 6233/LB to 6235/LB of 2005, decided on 18th May, 2006.
2007 P T D (Trib.) 345
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Blratti, Judicial Member and Shaheen Iqbal, Accountant Member
LT.As. Nos. 4222/LB, 4752/LB of 2004 and 296/LB, 5203/LB, 5204/LB, 6233/LB to 6235/LB of 2005, decided on 18/05/2006.
Income Tax Ordinance (XXXI of 1979)---
----S. 25(c)---Amounts subsequently recovered in respect of deductions, etc.---Assessee a sugar mill---Financial charges---Department contended that addition deleted should have been restored as the assessment at NIL income did not mean that financial charges had not been allowed---Validity---No interference was warranted by the Appellate Tribunal, deletion of addition made under S.25(c) of the Income Tax Ordinance, 1979 was upheld in circumstance. [pp. 351, 3531 A & G
1998 PTD (Trib.) 3478 ref
(b) Income Tax Ordinance (XXXI of 1979)---
--S. 62. on production of accounts, evidence etc.---Rejection of accounts---Addition on account of purchase rate of sugarcane and the add backs in Profit and Loss account expenses---Only one notice titled as "Notice under section 62" and no specific defects in the books of accounts warranting rejection of book version had been mentioned despite the fact that hooks were- admittedly maintained, were produced and had been examined by the Taxation Officer---Neither parallel cases of purchase price of sugarcane nor their purchase prices had been confronted in the notice---Intention to curtail the declared purchase price of sugarcane by Rs.50 per Metric Ton had also not been confronted---On failure of the Taxation Officer to confront the assessee as provided under the mandatory requirement of law under S.62(1) of the Income Tax Ordinance, 1979, addition as well as the disallowances out of Profit and Loss Account expenses were liable to be deleted---Purchases of sugarcane were fully verifiable, as complete identifying particulars, addresses including National Identity Card Nos. were mentioned in the pass book issued to the growers by the assessee and the reference of pass book number was given on the CPRs on which the payment was made by the bank to the growers---Addition merited deletion on legal and factual premises---Same was the position of disallowances out of Profit and Loss Account expenses, which had also been made without pointing out any specific defects in the books of accounts pertaining to the expenses claimed---Addition made on account of purchase rate of sugarcane and the add backs in Profit and Loss Account expenses were deleted by the Appellate Tribunal.
2002 PTD 407; 1986 PTD 84; 2003 PTD 625 (Trib.); 1989 PTD 1233 (Trib.); 1997 PTD (Trib.) 1408; 1990 PTD 731 (Trib.); 2004 PTD 1572 (Trib.); 1999 PTD ('Trib.) 382; 2002 PTD (Trib.) 1583 and 2003 PTD (Trib.) 2668 rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence etc.---Rejection of accounts---Merely mentioning notice under S.62 of the Income Tax Ordinance, 1979 on the top of the notice did not make it a notice as contemplated under the proviso pertaining to pointing of specific defects in the books of accounts---Statutory requirements were mandatory and not directory and on failure to fulfil the mandatory requirement, the addition ought to be deleted.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence etc.---Disallowance of Profit and Loss expenses---Opportunity to fill in the lacunas---For Profit and Loss Account disallowances in the claimed expenses, the legal requirement of S.62 of the Income Tax Ordinance, 1979 was to be fulfilled and in case of failure to do so, the additions were to be deleted and the Department was not to be given an opportunity to fill in the lacunas and to improve upon its case in another round of assessment.
(e) Income Tax Ordinance (XXXI of 1979)---
----Ss. 62 & 88---Income Tax Ordinance (XLIX of 2001), S.128(1)---Assessment on production of accounts, evidence etc.---Rejection of accounts---Cancellation of assessment by the First Appellate Authority on the ground that books of accounts were produced on 12-5-2003, while the assessment was finalized on 13-5-2003 without issuing any notice under S.62 of the Income Tax Ordinance, 1979---Additional tax was also deleted---Department contended that notice under S.62 of the Income Tax Ordinance, 1979, dated 12-4-2003 was issued on the basis of details filed during assessment proceedings and since the details were based on books of accounts, the legal requirement of issuing notice under S.62 of the Income Tax Ordinance, 1979 after examination of books of accounts was fulfilled---Validity---Unambiguous mention of books of accounts existed in the proviso to S.62(1) of the Income Tax Ordinance, 1979, though the books of accounts were not defined in the Income Tax Ordinance, 1979, yet in the prescribed notice under S.61 of the Income Tax Ordinance, 1979, the cash book, ledger, journal, stock register, Bank pass book, original vouchers of purchases and carbon copies of cash memo/bills for sales were specifically mentioned---Assessing Officer had not mentioned in the body of assessment order that any of the books/documents requisitioned by him were not produced, it could be safely inferred that books of accounts as contemplated under the proviso were produced in support of declared version---Any details riled were not substitute to the books of accounts which were maintained on double entry system of accounting and each entry therein was supported by vouchers reflecting debit and credit effect of each transaction--Assessment made in violation of provisions of S.62 of the Income Tax Ordinance, 1979 having rightly been cancelled by the First Appellate Authority, the same was upheld by the Appellate Tribunal.
2003 PTD 368 and 2002 PTD 388 (Kar. H.C.) ref.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 62---Assessment on production of accounts, evidence etc.--Rejection of accounts---Notice not based on examination of books of accounts---Validity---If notice titled as "Notice under section 62" was issued before the production and examination of books of accounts requiring certain information, documents and explanation and in response to that notice, books of accounts were produced in support of declared version and if the Assessing Officer was not in agreement with the declared version then a fresh notice was to be issued based on examination of books of accounts and in such situation, the previous notice issued before the examination of books of accounts would become infructuous.
2003 PTD (Trib.) 625 rel.
(g) Income Tax Ordinance (XXXI of 1979)---
----Ss. 88 & 54---Charge of additional tax 'or failure to pay tax with the return---Levy of additional tax on the ground that declared income had not been correctly worked out as adjustment of unabsorbed depreciation allowance was made whereas no such allowance was available in the assessment order of the previous year---Validity---Additional tax under S.88 of the Income Tax Ordinance, 1979 was leviable if the tax payable under S.54 of the Income Tax Ordinance, 1979 on the basis of return under S.55 of the Income Tax Ordinance, 1979 was either not paid or there was short payment---Admitted position was that return to total income vas filed declaring loss and admitted taxability thereon being minimum tax under S.80D of the Income Tax Ordinance, 1979 stood paid---No default of S.54 of the Income Tax Ordinance, 1979 was found and accordingly, additional tax under S.88 of the Income Tax Ordinance, 1979 was not chargeable---No interference was called for in the order of First Appellate Authority and departmental appeal on this issue was dismissed by the Appellate Tribunal.
2002 PTD 388 (Kar. H.C.) rel.
(h) Income Tax Ordinance (XXXI of 1979)---
???????????
----S.62---Assessment on production of accounts, evidence etc.---Addition---Financial charges---Interest free advances---Advances and other receivables appearing in notes to final accounts, which included receivable from various sister concerns, were considered interest free advances---Addition was on the ground that assessee failed to prove that the said amounts were given from the sources other than borrowed funds so it was considered appropriate to make addition of 10% in net financial charges---Validity---Assessing Officer had acknowledged the production of books of accounts, vouchers and bank statement etc., but while making addition, he had given the observation that "the assessee had failed to prove that the said amounts were given from sources other than borrowed funds" which was not valid---Onus of proof was on the Assessing Officer and he had failed to discharge the said onus---Had he discharged his onus, he might have come with an exact addition instead of ad hoc addition of 10% of the claim---Order of First Appellate Authority was vacated and addition in financial charges were deleted by the Appellate Tribunal.
1986 SCMR 968 rel.
(i) Income Tax Ordinance (XXXI of 1979)---
----S.62---Assessment on production of accounts, evidence etc.---Rejection of accounts---Profit and loss expenses---Addition in Profit and Loss Account expenses were deleted as the same had been made without pointing out specific defects in the books of accounts in respect of expenses claimed under the specific heads.
(j) Income Tax Ordinance (XXXI of 1979)---
---S. 62---Assessment on production of accounts, evidence etc.---Rejection of accounts---Addition of purchase rate---Assessing Officer failed to rebut the reply of assessee and had made the addition on the basis of general observations---Addition was rightly deleted by the First Appellate Authority on the ground, among others, that when declared gross profit rate was being accepted, no addition in an item of the cost of sale was justified.
Shahid Pervaiz Jami for Appellant (in I.T.As. Nos.4222/LB of 2004 and 296/LB, 5203/LB, 5204/LB of 2005).
Mehmood Aslam, D.R. for Respondent (in I.T.As. Nos.4222/LB of 2004 and 296/LB, 5203/LB, 5204/LB of 2005).
Mehmood Aslam, D.R. for Appellant (in I.T.As. Nos. 4752/LB of 2004 and 6233/LB to 6235/LB of 2005).
Shahid Pervaiz Jami for Respondent (in I.T.As. Nos. 4752/LB of 2004 and 6233/LB to 6235/LB of 2005).
ORDER
Out of these eight appeals, six are the cross appeals against the three separate impugned orders of the learned CIT(A) dated 3-6-2004 for the assessment year 1998-99 and two separate orders, dated 29-6-2005 for the assessment years 2001-2002 and 2002-2003. While out of the remaining two appeals, one has been filed by the assessee against the impugned order, dated 3-6-2004 for the assessment year 1999-2000 and the other by the Department against the impugned order, dated 29-6-2005 for the assessment year 2000-2001.
The issues involved in the appeals referred supra are being adjudicated year-wise as under:--
Assessment year 1998-1999
The assessee for this year has agitated against confirmation of trading addition on account of purchase rate of sugarcane, addition of depreciation allowance, addition made under section 24(fl) of the repealed Income Tax Ordinance, 1979 and disallowances made in the Profit and Loss A/c under the heads "Vehicle Running Expenses", "Postage/Telephone etc.", "Travelling and Conveyance", "Entertain?ment", "Printing and Stationery", "Misc. Expenses" and "Selling and Distribution Exp."
While the Department in the cross appeal for this year has objected the deletion of addition made under section 25(c) of the repealed Income Tax Ordinance, 1979.
It has been contended that for this year, period from 1-10-1996 to 31-12-1996 was exempt and period from 1-1-1997 to 30-9-1997 became taxable on account of expiry of exemption period under clause (118-D). The Taxation Officer has made the assessment or taxable period at net income of Rs.1,74,90,137 against declared loss of Rs.2,94,11,270 by making certain additions. Mr. Shahid Pervaiz Jami, Advocate representing the assessee has contended that addition in purchase rate of sugarcane has been made without fulfilling the legal requirement of section 62 of the repealed Income Tax Ordinance, 1979, as notice, dated 7-6-2001 titled as "Notice under section 62" was a general notice seeking information, documents and explanation on certain issues, but specific defects in the books of accounts were not pointed despite the fact that books of account are admittedly produced and were examined by the Taxation Officer. He has, in this respect, referred contents of notice under section 62, the reply of assessee in this respect and the observations of the Taxation Officer in the assessment order. Learned counsel for the assessee has argued that the proviso to section 62(1) lays down that "where the assessee produces books of accounts as evidence in support of the return, the DCIT 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 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". Mr. Jami has pleaded that in the present case, the mandatory requirement of law being not complied with, the addition cannot be maintained. He has, in this respect, placed reliance of the decisions of Hon'ble High Court reported as 2002 PTD 407 (H.C. Karachi) and 1986 PTD 84 and the following reported decisions of the Tribunal:--
2003 PTD 625 (Trib.); 1989 PTD 1233 (Trib.); 1997 PTD (Trib.) 1408; 1990 PTD 731 (Trib.); 2004 PTD 1572 (Trib.); 1999 PTD (Trib.) 382 and 2002 PTD (Trib.) 1583.
Regarding the merits of the case, the learned counsel has contended that the purchase rates of Shakarganj Sugar Mills Ltd. and Crescent Sugar Mills Ltd. have been incorrectly mentioned in the assessment order. He has pointed out that the Taxation Officer has mentioned the declared purchase rate of these units at Rs.600 and Rs.598 per Metric Ton respectively, whereas in the assessment order of Messrs Shakarganj Sugar Mills Ltd., the declared purchase rate is Rs. 1,008 per Metric Ton, which according to the learned counsel indicates that for making arbitrary addition, Taxation Officer has gone to the extent of distorting the facts and figures. He has contended that in the notice under section 62, neither the aforesaid so-called parallel cases are mentioned nor the purchase rates are provided. He has submitted that in the case of the assessee, the purchases of sugarcane are fully verifiable, as has been made with elaborated documentation and payments in this regard arc through banking channel through CPRs. Learned counsel for the assessee has contended that in the subsequent years, identied addition made by the Taxation Officer in the case of the assessee has been deleted by the learned CIT(A) by holding that the purchases are verifiable and factual, therefore, the addition cannot be made.
Regarding the disallowances in respect of Profit and Loss A/c, learned counsel for the assessee has contended that all the details regarding expenses were furnished and the Taxation Officer has admitted in the assessment order that cash payment vouchers were produced and their instances have also been given with dates and amounts, but without pointing out specific defects in the books of accounts in respect of expenses, which is mandatory requirement of law, the disallowances cannot be made as per principle laid down by this Tribunal in a case reported as 2003 PTD (Trib.) 2668.
Regarding the cross appeal filed by the Department, learned counsel has contended that the learned CIT(A) has deleted the addition made under section 25(c) of the repealed Income Tax Ordinance, 1979 placing reliance on the decision of this Tribunal reported as 1998 PTD (Trib.) 3478, which is at all four applicable in this case.
On the other hand, Mr. Mehmood Aslam representing the Department has contended that the average purchase rate of cane has been shown at Rs.1,068.47 per Metric Ton against support price of Rs.600 per Metric Ton and the purchase price shows an increase of 50% as compared to last year price of Rs.714.56 per Metric Ton vis-a-vis increase in support of price of 12% only. He has argued that the purchases are unverifiable, as the assessee has failed to establish that the payment has been transferred in the book account of the grower. However, he has admitted that the purchase rates of Messrs Shakarganj Sugar Mills Ltd. and Messrs Crescent Sugar Mills Ltd. have been incorrectly mentioned in the assessment order at Rs.600 and Rs. 598 per Metric Ton respectively. Regarding the addition made under section 25(c) of the repealed Income Tax Ordinance, 1979 deleted by the learned CIT(A), learned DR has pleaded that the assessment at NIL A income does not mean that financial charges have not been allowed, therefore, according to him, the addition has been deleted without any justification and the addition should have been restored.
We have heard the learned representatives from both the sides and have also perused the impugned order of the learned CIT(A), the assessment order, the relevant provisions of law and the reported decisions referred by the parties.
We have round that admittedly, as mentioned in the assessment order, there is only one notice, dated 7-6-2001 titled as "Notice under section 62" and inn this notice, no specific defects in the books of accounts warranting rejection of book version have been mentioned despite the fact that books are admittedly maintained, were produced before the Taxation Officer and have been examined by the Taxation B Officer. In that notice, neither parallel Cases of purchase price of sugarcane nor their purchase prices have been confronted. Even the intention to curtail the declared purchase price of sugarcane by Rs.50 per Metric Ton has not been confronted. We are, therefore, of the view that on the failure of the Taxation Officer to confront the assessee as provided under the mandatory requirement of law provided under section 62(1), the addition as well as the disallowances out of P & L A/c expenses are liable to be deleted. By now, it is well established that merely mentioning notice under section 62 on the top of the notice does not make it a notice as contemplated under the proviso pertaining to pointing of specific defects in the books of accounts. The statutory requirement is mandatory and not directory and on failure to fulfil the mandatory requirement, the addition ought to be deleted. We are of the view that the cases referred by the learned counsel in this regard are fully applicable in this case. We find force in the contention made by the learned counsel for the assessee that the purchases of sugarcane are fully verifiable, as complete identifying particulars, addresses including NIC Nos. is mentioned in the pass book issued to the growers by the assessee and the reference of Pass Book number is given on the CPRs on which the payment is made by the bank to the growers. We have, therefore, no hesitation in holding that the addition merits deletion on legal and factual premises. Same is the position of disallowances out of P & L A/c expenses, which have also been made without pointing out any specific defects in the books of accounts pertaining to the expenses claimed. It is, also by now a well established preposition of law that even for Profit and Loss A/c disallowances in the claimed expenses, the legal requirement of section 62 is to be fulfilled and in case of failure to do so, the additions E are to be deleted and the Department is not to be given an opportunity to fill in the lacunas and to improve upon its case in another round of assessment.
In view of these facts and legal position, the addition made on account of purchase rate of sugarcane and the add backs in Profit and Loss A/c expenses are, therefore, deleted.
The appeal filed by the assessee regarding addition of depreciation allowance and addition made under section 24(ff) is, however, dismissed, as grounds framed by the assessee being not pressed by the learned counsel for the assessee.
Regarding the appeal filed by the Department against deletion of addition made under section 25(c) of the repealed Income Tax Ordinance, 1979, the view point of the Department is not convincing. The learned CIT(A) has deleted the addition with the observation as under:
"Examination of record reveals that assessments for the years ending on 30-9-2004 and 30-6-1995 were completed at "NIL" income by granting exemption under clause (118-D) of Part-I of Second Schedule to the repealed Ordinance. Since no expense on account of interest was allowed for the year ending 30-9-1994, therefore, question of its addition under section 25(c) for its non-payment by 30-9-1994 does not arise. Ratio of judgment reported as (1998) 78 Tax 4 (Trib.) that interest liability for the period enjoying exemption cannot be applied in his case. It is held that provisions of section 25(e) of the repealed Income Tax Ordinance, 1979 are not applicable on unpaid interest liability of exemption period."
We have noted that this Tribunal in the reported decision referred in the impugned order referred supra has deleted the addition, wherein all the assessments of earlier years were made at "NIL" income and in that case, it was held that for the application of section 25(c), there is a pre-requisite that the deduction has to be allowed under section 23 of the repealed Income Tax Ordinance, 1979. Apart from this legal position, it has been contended by the learned representative of the, assessee that in the subsequent year i.e. 2000-2001, no addition in this regard under section 25(c) in similar facts and circumstances has been made by the Taxation Officer placing reliance on this very judgment referred supra.
In view of these facts and circumstances of the case, we find no warrant for interference in the impugned order in this respect. The deletion of addition made under section 25(c) is, therefore, upheld and the Appeal filed by the Department is dismissed.
Assessment year 1999-2000
Through this appeal, the assessee has objected to the setting aside of the assessment for de novo proceedings, but the learned counsel for the assessee has sought permission to withdraw the appeal. Learned DR has no objection. Permission is allowed and the appeal for this year filed by the assessee is dismissed as withdrawn.
Assessment year 2000-2001
Through this appeal, the Department has objected to the impugned order of the learned CIT(A) deciding the appeal without issuing notice under section 128(1) of the Income Tax Ordinance, 2001, directing the Taxation Officer to accept declared version and deleting the additional tax under section 88 of the repealed Income Tax Ordinance, 1979.
The brief facts of the case for this year are that return declaring loss of (Rs.21,951,329) was filed by the assessee, but the declared loss was not accepted and the assessment was made at net income of Rs.94,988,674 by making various additions. The assessment for this year has been cancelled by the learned CIT(A) through impugned order on the basis that books of accounts were produced on 12-5-2003, while the assessment was finalized on 13-5-2003 without issuing any notice under section 62. The learned CIT(A) has deleted the additional tax levied under section 88 of the repealed Income Tax Ordinance, 1979 placing reliance on the decision of this Tribunal reported as 2003 PTD 368.
Mr. Mehmood Aslam, the learned DR representing the appellant Department has contended that notice under section 62, dated 12-4-2003 was issued on the basis of details filed during assessment proceedings and since the details were based on books of accounts, therefore, the 1 legal requirement of issuing notice under section 62 after examination of books of accounts stands fulfilled. He prayed for the vacation of the order of the first appellate authority. Where in respect of additional tax under section 88, he pleaded that assessee had deliberately declared loss by making an incorrect adjustment of brought forward depreciation allowance and therefore, the levy of additional tax was justified, which has been deleted by the learned CIT(A) without any justification.
On the other hand, Mr. Shahid Pervaiz Jami, Advocate representing the assessee on his turn pleaded that the mandatory legal requirement is to issue notice under section 62 after production of books of accounts, pointing out specific defects therein. He pointed out that the books of accounts were produced on 12-5-2003 and assessment has been made on 13-5-2003 wherein the book version has been rejected. He has argued that before doing so, it was mandatory to issue notice under section 62 confronting defects in the books of accounts. Regarding additional tax, the learned counsel has pleaded that the same is leviable with reference to declared income only and it is immaterial that the declared income has been worked out correctly or not. For this, he has placed reliance on the decision of this Tribunal reported as 2003 PTD 368 on the basis of which the learned CIT(A) has deleted the addition. Learned counsel, in this regard, has also placed reliance on the decision of Ilon'ble Karachi High Court reported as 2002 PTD 388 (Kar. H.C.).
We have examined the respective arguments and are of the view that the learned CIT(A) has rightly cancelled the assessment, as mandatory requirement of law has been violated by the Taxation Officer. The proviso to subsection (1) of section 62 relevant to the point in issue reads as under:
"Provided that where the assessee produces books of accounts as evidence in support of the return, the Deputy Commissioner shall, before disagreeing with accounts, give a notice to the assessee of the defects in the accounts and provide an opportunity 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."
In the aforesaid text, there is unambiguously mention of books of accounts. Though the books of accounts are not defined in the repealed Income Tax Ordinance, 1979, yet in the prescribed notice under section 61, the following are specifically mentioned:--
(a) Cash Book
(b) Ledger
(c) Journal
(d) Stock Register
(e) Bank Pass Book????
(f) Original Vouchers of purchases and Carbon Copies of cash memo/bills for sales
In the body of assessment order, the Assessing Officer has not mentioned that any of the aforesaid books / documents requisitioned by him were not produced. Therefore, it can be safely inferred that books of accounts as contemplated under the proviso were produced in support of declared version. Any details filed during the proceedings are not substitute to the books of accounts which are maintained on double entry system of accounting and each entry therein is supported by vouchers reflecting debit and credit effect of each transaction. By now, it is well settled that if a notice titled as "Notice under section 62" is issued before the production and examination of books of accounts requiring certain information, documents and explanation and in response to that notice, books of accounts are produced in support of declared version and if the Assessing Officer is not in agreement with the declared version, then a fresh notice is to be issued based on examination of books of accounts. In that situation, the previous notice issued before the examination of books of accounts becomes infructuous. In this regard, reliance of the CIT(A) on 2003 PTD 625 (Trib.) is valid being at all four. Therefore, we have no hesitation in holding that the assessment made in violation of provisions of section 62 has been rightly cancelled by the learned CIT(A), which is upheld.
As far as the levy of additional tax under section 88 of the repealed Income Tax Ordinance, 1979 is concerned, the same is leviable if the tax payable under section 54 on the basis of return under section 55 is either not paid or there is short payment. In this case, it is admitted position that return of total income was filed declaring toss of Rs.29,411,270 and admitted tax liability thereon being minimum tax m under section 80D stood paid. However, the Assessing Officer was of the view that the declared income had not been correctly worked out as adjustment of unabsorbed depreciation allowance was made whereas no such allowance was available in the assessment order of the previous year. Whereas the contention of the AR is that leviability is dependent on declared income and not on assessed income. We have been able to lay upon our hand on a judgment of the Hon'ble Karachi High Court reported as 2002 PTD 388 in the matter CIT v. Civil Aviation Authority wherein on an identical issue, the departmental reference application was rejected. As per facts of that case, the Civil Aviation Authority had filed return claiming exemption of its income and no tax was paid under section 54 along with return. The plea of exemption was rejected and assessment order was passed assessing taxable income and through a separate order, additional tax under section 88 was levied on account of default in payment of tax under section 54. In first appeal, the Commissioner (Appeals) held that "no tax was payable on the basis of return hence no additional tax can be charged". The Department filed second appeal before this Tribunal and this Tribunal held that "a bare perusal of section 54 shows that under this section, the tax was payable on the basis of return and the assessee having claimed exemption with the result that no tax was payable on the basis of such return and consequently, there was no default as envisaged under section 54". On that, Department filed reference application. The Hon'ble High Court answered the question in affirmative that the Tribunal was justified in its decision. The Hon'ble High Court further observed that the revenue has been allowed to levy penalty under section 1I1 (2A) by proving that an assessee had deliberately claimed an exemption from tax in respect of any item of receipt, which was not genuine. We, therefore, following the judgment of the Hon'ble Karachi High Court holding that there was no default of section 54 and accordingly, additional tax under section 88 was not chargeable in the present case. Hence, no interference is called for in the order of the learned CIT(A) and the Departmental appeal on this issue is also dismissed.
Assessment years 2001-2002 and 2002-2003
For these two years, both assessee and the Department are in cross appeals. Department for this year has objected the impugned order of the learned CIT(A) being passed without issuing notice under section 128(1) of the Income Tax Ordinance, 2001. While for the assessment year 2001-2002, the deletion of addition made on account of purchase of sugarcane and for the assessment year 2002-2003, the disapproving the treatment of the Taxation Officer rejecting of accounts and resultant addition in manufacturing and Profit and Loss A/c have been objected by the Department.
While the assessee in the cross appeals for both the years has objected the impugned order regarding addition of financial charges and disallowances under the heads "Motor Vehicle Expenses", "Telephone", "Fee and Subscription", "Travelling and Conveyance", "Entertain?ment", "Printing and Stationery" and "Selling and Distribution". For the assessment year 2001-2002, the impugned order has also been objected on the grounds that the learned CIT(A) was not justified to uphold that the assessment was not time barred and to hold that the notice under section 62 was issued after examination of books of accounts. While for the assessment year 2002-2003, it has been pleaded that the learned CIT(A) should have directed for acceptance of return version, as no notice under section 62 was issued after examination of books of accounts on 25-6-2004.
Mr. Shahid Pervaiz Jami, Advocate representing the assessee pleaded that the common relevant facts in these years are that while making assessment under section 62, certain additions were made in the declared income. Aggrieved with that, assessee went into first appeal and the learned CIT(A) deleted the addition in purchase rate of sugarcane and maintained the addition of Profit and Loss A/c expenses and addition of financial charges. On this, both assessee as well as the Department are in cross appeals. He has contended that addition of financial charges was not justified, as amount advanced to the associated was from own sources of the company and not out of borrowed funds. According to the learned counsel, the books of accounts and bank statements were produced during the assessment proceedings and the Assessing Officer failed to prove that the borrowed funds have not been used in the business. In this respect, he has placed reliance on the judgment of the Hon'ble Supreme Court of Pakistan reported as 1986 SCAM 968. Whereas, in respect of Profit and Loss A/c additions, he has reiterated that the same have been made on the basis of general observation without pointing out specific defects in the books of accounts and when the learned CIT(A) had deleted the trading addition, there was no independent basis for maintaining the Profit and Loss A/c additions.
On the other hand, Mr. Mehmood Aslam, learned DR is of the view that in the notes to the final accounts, advances and other receivable are appearing, which include receivable from various sister concerns and according to him, the perusal of record reveals that these 0 are interest free advances. The learned DR has argued that the company had failed to prove that the said amounts were given from the sources other than borrowed funds so it was considered appropriate to make addition of 10% in net financial charges for not using borrowed capital in business. In respect of Profit and Loss A/c additions, he has pleaded that the same were made for the reason given under each head in the assessment order.
Whereas, in support of departmental appeal against the deletion of addition in purchase rate, the learned DR has pleaded that here again, the declared purchase price has increased substantially from the preceding year, whereas there is no corresponding increase in the support price of sugarcane. Whereas, the learned counsel for the assessee rebutted the above said arguments contending that the order of the learned CIT(A) is very detailed and speaking order on the issue wherein the addition has been deleted on multiple legal and factual basis including that of verifiability of purchases.
We have perused the impugned orders, the assessment order, the ,provisions of law and the case law referred by both the parties and have also considered the respective arguments.
On the issue of disallowance of financial charges, the reliance has been placed on judgment of the Hon'ble Supreme Court reported as 1986 SCMR 968 and it has been pleaded that the same is at all four. The brief facts of the said judgment titled as CIT v. Shaikh Ismail and Co. are that assessee was a Private Limited Company and had paid substantial interest to various banks from which, overdraft had been secured. At the same time, the Managing Director of the company had borrowed substantial amounts free of interest from the company. The Income Tax Officer held that as the loans taken by the company were directed to the Managing Director, the entire interest paid by the company could not be treated as capital borrowed for the purposes of business of the company. The Income Tax Officer consequently made addition in the financial charges. The addition was confirmed by the AAC, but on further Appeal filed before the Tribunal, the addition was deleted. While doing so, this Tribunal has observed as under:
"We are, however, of the opinion that the funds available were greater than the borrowings of the managing director and there is apparently no bar on a business concern to advance its own funds or utilize them in the particular manner" ??????????? "This may be an arranged affair but there can be no possible restriction on a business concern to arrange its affairs in a particular manner as to suit the revenue. There is no evidence on record to show that the advances made to Mian Aziz A. Sheikh were out of the borrowings that were obtained from various banks."
The Department filed reference application and the same was answered in affirmative that the Tribunal was justified in the above referred observations. Referring to the argument of the Department that the evidence was in the possession of the assessee and it was for him to have produced it, Hon'ble Judge of the Hon'ble High Court observed:
"We are afraid we cannot see eye-to-eye with the learned counsel of the petitioner on this point, because it was the Income Tax Officer who was making the assessment and he could not make it arbitrarily. He had to base it on evidence before him and if he did not agree with the deduction sought by the company, it was for him to have summoned the necessary record and place the material on record to justify the making of impugned order."
Still being unsatisfied, the Department filed appeal before the Hon'ble Supreme Court of Pakistan, which was also dismissed and during the course of discussion in the judgment, following observations were made by the Hon'ble apex Court:--
"Thus, the only eventuality which might disentitle an assessee to claim the deduction of the whole or any part of the interest is where the amount is not shown to have been used as capital in the business carried on by the assessee. In this case, the entire account including the cash book and the bank accounts were before the Income Tax Officer who completed the assessment under subsection (3) of section 23 but he failed to show that any part of the borrowed money was not used in business and was diverted to the personal use of Mian Aziz A. Sheikh."
The perusal of the assessment orders for the years under review in the context of the judgment of the Hon'ble apex Court indicates that on first page, the Assessing Officer has acknowledged the production of books of accounts, vouchers and bank statement etc., but while making the addition, he has given the observation that "the assessee has failed to prove that the said amounts were given from sources other than borrowed funds", which is not valid. As per aforesaid authoritative pronouncement of the Hon'ble apex Court in the given situation, the onus of proof was on the Assessing Officer and he has failed to discharge the said onus. If he had discharged his onus, he might have tome with an exact addition instead of ad hoc addition of 10% of' the claim. Therefore, the order of the learned CIT(A) on this issue maintaining the addition is vacated and the additions in financial charges made by the Taxation Officer for both the years are deleted.
Similarly, addition in Profit and Loss A/c expenses are also deleted, as the same have been made without pointing out specific, defects in the books of accounts in respect of' expenses claimed under the specific heads.
Regarding the cross appeals for the years under review filed by the Department against the deletion of addition of purchase rate, we are of the view that from the assessment order, it is evident that for the assessment year, 2001-2002, certain instances of unverfiability were pointed out. However, in its written reply of the assessee reproduced at page-6 of the assessment order, the proposed addition was contested iii, the following words:--
"As far as the verifiability is concerned, the CPR contains the name and 'chak number which is sufficient for any direct verification as growers of sugarcane in any village are limited in number and are known. Representative CPRs were produced earlier and now we are producing the entire CPRs for your examination and satisfaction. The perusal of books of accounts would reveal that invariably the payments are made through banking channel and hardly any payment in cash to the grower is appearing in the cash book even not of the instances mentioned. A folder containing CPRs, bank scrolls and bank statement is enclosed for your kind examination in support of contention of verifiability of purchases even in respect of instances pointed out."
In the assessment order, the Assessing Officer has failed to rebut the aforesaid reply of the assessee and has made the addition on the basis of general observations. The learned CIT(A) has passed a detailed speaking order on this issue and had deleted the addition on merit. Whereas in the assessment year 2002-2003, six independent reasons have been given by the learned CIT(A) for deleting the addition, which include the reason that when declared GP rate is being accepted, no addition in an item of the cost of sale is justified.
In view of the discussion made herein above, we are convinced that the addition in purchase rate of sugarcane has been rightly deleted by the learned CIT(A) in both the years under review, therefore, the departmental appeals failed on this score.
Since other grounds as framed in the memo. of appeals from both the sides for all the years under review have not been pressed, therefore, all the eight appeals, four filed by the assessee for the assessment years 1998-99, 1999-2000, 2001-2002 and 2002-2003 and four cross appeals filed by the Department for the assessment years 1998-99, 2000-2001 to 2002-2003 are being disposed of in the manner referred supra.
C.M.A./148/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Order accordingly.