I.T.As. Nos. 5627/LB, 5626/LB, 5625/LB, 5793/LB of 2005 and 4150/LB of 2003 decided on 3rd February, 2006. VS I.T.As. Nos. 5627/LB, 5626/LB, 5625/LB, 5793/LB of 2005 and 4150/LB of 2003 decided on 3rd February, 2006., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 624 (2006)

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

----S. 62(1), proviso---Assessment on production of accounts, evidence etc.---Additions of profit and loss account without pointing out any specific defect or instance of unverifiability---Setting aside of asses went---Validity---Assessing Officer having failed to point out any specific defect or instance of unverifiability of the claim of expenses, was not justified either to set aside these additions or to confirm/reduce the same---Additions of the profit and loss account were ordered to be deleted.

1971 SCMR 681; 87 Tax 162; 2002 PTD 1583 and 1996 SCMR 230 rel.

(b) Income-tax---

----Addition---Addition was a capital expenditure---Payment against purchase of modern cards, reimbursement of maintenance of electricity i.e. for replacement of electricity cable, purchase of wooden pallets, dismantling of equipment, design of underground water tank and shifting of plant were treated as capital expenditure---Validity---No sufficient reasons were available to treat the expenditure as of capital nature---Such expenses were for keeping the equipment in running and working condition which was of revenue nature--Assessing Officer was accordingly directed by the Tribunal to allow such expenses as of revenue nature.

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

----Third Sched---Depreciation allowance---Addition on the grounds that written down value of assets as per depreciation schedule was different from the written down value 'as per statement of operating fixed assets in the books of accounts; that certain assets like vehicles and furniture the rate of accounting 'depreciation was same as per rate of tax depreciation but the written down value in both the situations was different and that most of the assets had been claimed as written off at nil value because no salvage value was realized/placed on assets---Assessee contended that written down value as per tax depreciation schedule and as per book valuation schedule was different because the lax depreciation schedule was prepared in accordance with the rules as per Third Schedule of the Income Tax Ordinance, 1979, whereas for purpose of book value the normal accounting procedure and practice was adopted which may differ from the tax depreciation rules---Assets which had been written off at nil value were in fact scraped without realizing any value on them--Validity---Addition was made without any proper basis and without any proper working of the written down value as well as the sale value 'of the assets disposed of---Appellate Tribunal endorsed the order of First Appellate Authority deleting such addition.

(d) Income-tax---

----Addition---Stock---Addition on account of diminishing value of stock on the ground that assessee could not furnish any documentary evidence with regard to damaged raw material---Addition was deleted by the First Appellate ,Authority on the explanation of assessee that values closing stock at net realizable value or the cost whichever was less and the value of closing stock to the amount of differential in the realizable value and the cost value was charged to the profit and loss account---If Such differential was charged in any particular year by reducing the value then its effect in the next year was that gross profit to that extent would be enhanced---Validity---Issue having not been properly examined by the tax authorities, the same 'was remanded for it's proper re-consideration by the Tribunal with the direction that assessee shall furnish complete evidence of the realizable value on account of stock the value of which had been diminished.

M. Awais, A.C.A. for Appellant (in 1.T.As. Nos.5625/LB to 2627/LB of 2005 and 4150/LB of 2003).

Mehmood Aslam Lillah, D.R. for Respondent (in I.T.As. Nos.5625/LB to 2627/LB of 2005 and 4150/LB of 2003).

Mehmood Aslam Lillah, D.R. for Appellant (in I.T.A. No.5793/LB of 2005).

M. Awais, A.C.A. for Respondent (in I.T.A. No.5793/LB of 2005).

ORDER

Assessee appeal for the years 1999-2000, 2000-2001, 2001-2002 and 2002-2003 pertain to the add-backs from the profit and loss account. The impugned add-backs with the grounds of appeal are as follows:--

Assessment year 1999-2000

(1) The learned Commissioner of Income Tax (Appeals has erred in setting aside the assessment instead of deleting the following additions made out the expenses claimed in the profit and loss account by the learned Assessing Officer, although the learned Commissioner of Income Tax (A) held that:--

Additions have not been made on sound footings.

No specific instance of unverifiability was either pointed out in the body of order nor confronted to appellant for rebuttal.

Additions have been made in routine and stereotyped manner without any solid basis.

Expenses????????????????????????????????????????????? Claimed??????????????????????? Disallowed by

DCIT

Selling Expenses?????????????????????????????????? Rupees???????????????????????? Rupees

Postage and Telegram?????????????????????????? 3,334,000??????????????????? 369,750

Travelling????????????????????????????????????????????? 8,921,000??????????????????? 446,050

Miscellaneous expenses??????????????????????? 1,610,000??????????????????? 161,000

General and Administrative Expenses.

Repair and Maintenance?????????????????????? 1,637,000??????????????????? 163,700

Postage, Telegram and Telephone???????? 3,186,000??????????????????? 369,750

Travelling????????????????????????????????????????????? 3,639,000??????????????????? 181,950

Miscellaneous Expenses??????????????????????? 1,307,000??????????????????? 130,700"

Assessment year 2000-2001:--

"The learned Commissioner of Income Tax has erred in confirming the capitalization of following amounts of expenses claimed in the Profit and Loss Account.

Expenses Head???????????????????????????????????????????????????????????????????????? Rs.

Payment against purchase of modem cards??????????????????????????????????????????? 50,000

Payment against reimbursement of maintenance of

Electricity i.e. for replacement of electricity cable?????????????????????????????????? 36,960

Payment for purchase of wooden pallets??????????????????????????????????????????????? 124,250

Payment for dismantling of equipment??????????????????????????????????????? 47,618

Payment for design of underground water tank????????????????????????? 8,700

Payment for shifting of plant from Faisalabad to Parna?????????????? 182,496

Total??????????????????????????????????????????????????????????????????????????????????????? 450,024

The learned Commissioner of Income Tax has erred in confirming the following additions out of total additions made by the Assessing Officer under different heads of expenses claimed in the profit and loss account.

Description?????????????????????????????? Claimed??????????? Disallowed?????????????????? Reduced/

Confirmed

Miscellaneous expenses??????????? 4,548,000??????? 454,800?????????????????????? 300,000

Repair and maintenance??????????? 2,947,560??????? 294,756?????????????????????? 200,000

Telephone and Postage6,088,334??????? 913,250?????????????????????? confirmed

Travelling????????????????????????????????? 11,970,000????? 598,500?????????????????????? 350,000

Assessment year 2001-2002:--

Description?????????????????????????????? Claimed??????????? Disallowed?????????????????? Reduced/

Confirmed

Selling & Marketing Expenses

Postage and Telephone8,867,000??????? 709,650?????????????????????? 709,650

Misc./Other Expenses?????????????? 4,157,000??????? 415,700?????????????????????? 300,000

Travelling and Automobile???????? 15,465,000????? 773,250?????????????????????? 450,000

General & Admin. Expenses

Postage and Telephone6,373,000??????? 777,150?????????????????????? 777,150

Misc./Other expenses?????????????? 4,017,000??????? 401,700?????????????????????? 250,000

Travelling and Automobile???????? 4,402,000??????? 220,100?????????????????????? 200,000

Assessment year 2002-2003:

Description?????????????????????????????? Claimed??????????? Disallowed?????????????????? Reduced/

Confirmed

Selling and Marketing Expenses

Postage and Telephone9,470,000??????? 752,850?????????????????????? 752,850

Other Expenses??????????????????????? 7,218,000??????? 721,800,????????????????????? 450,000

Travelling and Automobile???????? 22,119,000????? 1,105,950??????????????????? 600,000

General and Admin Expenses

Postage and Telephone5,950,000??????? 1,154,850??????????????????? 1,154,850

Other expenses???????????? 7,680,000??????? 768,000?????????????????????? 400,000

Travelling and Automobile???????? 8,837,000??????? 441,850?????????????????????? 350,000"

Revenue appeal for the year 2000-2001 is on the following grounds: --

"(1) That the learned CIT(A) was not justified to decide the case without issuing notice under section 128(1) of the Income Tax Ordinance, 2001.

(2) That the learned CIT(A) was not justified in deleting the addition under the head gain on sale of fixed assets at Rs.500,000 without any cogent reason.

(3) That the learned CIT(A) was not justified in deleting the addition -on account of diminution in value of stock at Rs.10,76,635 without any valid reason."

Learned AR and the DR have been heard.

The learned AR has referred to second paragraph of the order of' the CIT(A) for the assessment year 1999-2000 which reads as follows:--

"It is evident from the assessment order that additions made out of the P&L account expenses have "not been made on sound footings. No specific instance of unverifiability was either pointed out in the body of the assessment order not confronted to the appellant for rebuttal. It appears that the additions have been made in a routine and stereotyped manner without any solid basis."

It was submitted by him that when the CIT(A) found that additions out of the P&L account expenses were made without sound footings and that no specific instance of unverifiability was either pointed out in the body of the assessment order nor the appellant was confronted to rebut the same and that the additions were made in a routine and stereotyped manner and without any basis, then there was no justification to set aside the additions, which were liable to be deleted for the reasons mentioned by the CIT(A) in his order as quoted above. For the remaining years, the AR referred to the findings of the CIT(A) made in the last paragraph of the Appellate order:--

"The examination of assessment order reveals that Assessing Officer has not pointed out any specific defect, however, he has mentioned unvouched, unverifiability and undocumented."

The learned AR in respect of these years also submitted that when the Assessing Officer/CIT(A) failed to point out any specific defect of unvouched or unverifiability of the claim then there was no reason to confirm or reduce the additions which merited to be deleted. The learned-AR also pleaded that requirement of the proviso to subsection (1) of section 62 had not been fulfilled and in that circumstance the only option available with the CIT(A) was to delete the additions. In this regard he has placed reliance on the following case-law:--

"1971 SCMR 681

The Courts in Pakistan have taken the view that where the giving of a notice is provided for by the statute itself, then the failure to give such a notice is fatal and cannot be cured????.The principle, so far as this country is concerned, is accordingly well settled that where notice required to be given by the statute is a mandatory notice, then the failure to comply with such a mandatory requirement of the statute would render the act void ab initio as being an act performed in disregard of the provisions of the statute."

"(87 Tax 162)

Whether Tribunal failed to take into consideration that assessee being juristic or legal person its personal use of facility like telephone, vehicle, need all the more strict test to bring home that any employee/ director of company had in fact used or availed same which was not directly or indirectly connected with business company.

Whether Tribunal was justified to vacate order of CIT(A) and to uphold disallowance of expenses which Assessing Officer had made use stock phrases and without pointing any specific defects or identifying any expenses which suffered from defects which he had alleged to exist-Held No.

Assessee was justified in claiming that no disallowance could be based upon stock phrases like partial unverifiability and alleged presence of an element of personal use---Tribunal failed to take into consideration that assessee being a juristic or legal person its personal use of a facility like telephone, vehicles needed all the more strict test to bring home that arty employee/director of the company had in fact used or availed the same which was not directly or indirectly connected with the business of the company."

2002 PTD 1583

???????????

First Appellate, Authority had erred in law while setting aside the case instead of annulling the assessment when the Assessing Officer failed to confront the assessee with the defects found by him in the books of accounts which was mandatory provision of law for framing the assessment---Order of the Assessing Officer was vacated by the Appellate Tribunal being in violation of section 62 of the Income Tax Ordinance, 1979."

1996 SCMR 230

O. XLI, R.23---Remand of case---Remand of case being not a routine matter, it should not be adopted as a matter of course to allow any party or Authority to fill in lacuna or to improve its case."

2002 PTD 407

Remand---Remand order would have meant that the assessee would have been subjected to another round of cumbersome proceedings which is deprecated in law and such order should not be passed in the routine manner to allow a party to improve his case or to fill in the lacuna."

Submissions of the AR carry force. Since the Assessing Officer has failed to point out any specific defect or instance of unverifiability of the claim of expenses, there was no justification either to set aside these additions or to confirm/reduce the same. Accordingly additions of the profit and loss account as mentioned in the grounds of appeal for all the four years are ordered to be deleted as per the ratio settled by the case-law cited supra.

As regards capitalization of expenses for assessment year 2000-2001 we have perused the reasons given by the ITO for treating the same as capital expenditure. These are not sufficient reasons to treat the c expenditure of capital nature. In fact these expenses are for keeping the equipment in running and working condition which is of revenue nature. The Assessing Officer is accordingly directed to allow these expenses as of revenue nature.

Assessee appeals for all the years succeed.

The Assessing Officer made an addition of Rs.5 lacs on account of sale of fixed assets for the reasons that the WDV of assets as per depreciation schedule was different from the WDV as per statement of operating fixed assets in the books of accounts. It was also mentioned by the Assessing Officer that in certain assets like vehicles and furniture the rate of accounting depreciation is same as per rate of tax depreciation but the WDV in both the situations is different. The other reason given by him was that most of the assets have been claimed as written off at nil value because no salvage value was realized/placed on these assets. The AR explained before the CIT(A) that it is a common practice that WDV as per the tax depreciation schedule and as per the book valuation schedule is different because the tax depreciation schedule is prepared in accordance with the rules as per the Third Schedule of the Income Tax Ordinance, whereas for purpose of book value the normal accounting procedure and practice is adopted which may differ from the tax depreciation rules. It was also submitted that assets which have been written off at nil value were in fact scraped without realizing any value on them. Considering all these facts the CIT(A) deleted the addition of Rs.5 lass made under this head. Examination of the assessment order shows that this addition was made without any proper basis and without any proper working of the written down value as well as the sale value of the assets disposed off. We would therefore, endorse the order of the CIT(A) deleting this addition.

As regards addition of Rs.10,76,635 on account of diminishing the valuation of stock, the same was made by the Assessing Officer because the assessee could not furnish any documentary evidence with regard to the damaged raw material. This addition was however deleted by the CIT(A). It was pleaded before him that the appellant values closing stock at net realizable value or the cost whichever is less and the value of closing stock to the amount of differential in the realizable value and the cost value is charged to the profit and loss account. It was further submitted that if this differential is charged in any particular year by reducing the value then its effect in the next year is that gross profit to that extent will be enhanced. Since this issue has not been properly examined by the income, tax authorities below the same is remanded back to the Assessing Officer for its proper re-consideration. The assessee shall furnish complete evidence of the realizable value on account of stock the value of which has been diminished at Rs.10,76,635.

All the appeals are disposed off as above.

C.M.A./207/Tax (Trib)???????????????????????????????????????????????????????????? Order accordingly.