VS, 2008 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1119 (2007)

Income Tax Ordinance (XXXI of 1979)---

---Ss.111 & 13(1)(c)---Penalty for concealment of income etc.---Addition on account of under-statement in valuation of stock declared in the account and as per reports furnished to the Banks---Every addition under S.13 of the Income Tax Ordinance, 1979 except addition under its S.13(1)(a) was tantamount to concealment---Such concealment was treated wilful, deliberate and penalty was imposed with prior approval of Commissioner of Income Tax---First Appellate Authority observed that no such penalty could be levied unless there was positive income and there was tax sought to be evaded and that too in the same income year--Penalty was not leviable, as instead of positive income, loss had been assessed and tax leviable before addition and after addition remained the same---Validity---Charging and penal provisions of fiscal statute were to be interpreted very strictly and in favour of taxpayer---When provisions of S.13 and S.111 of the Income Tax Ordinance, 1979 were compared it became obvious that the same were based on different principles---Addition in the declared income or loss could be made under S.13 of the Income Tax Ordinance, 1979, irrespective of the facts whether assessee had declared loss or income; or whether income had been determined or the loss---While imposing penalty under S.111 of the Income Tax Ordinance, 1979 on account of addition under S.13 of the Income Tax Ordinance, 1979 a different yardstick was to be applied---Such yardstick was that of actual tax sought to be evaded and not of any notional or deemed tax---In other words, it was the tax which an assessee was required to pay as a result of assessment which contained an addition under S.13 of the Income Tax Ordinance, 1979---Imposition of penalty on the basis of notional or deemed evasion of tax cuts at the very roots of income tax jurisprudence---Deletion of penalty under S.111 of the Income Tax Ordinance, 1979 by the First Appellate Authority was maintained by the Appellate Tribunal being fair and reasonable in the given facts and circumstances of the case.

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

----S.13(1)(c)---Unexplained investment etc., deemed to be income---Valuation of stock on the basis of declaration made in the books and in the bank---Addition was made on account of difference in value of hypothecated stock---Validity---Assessing Officer should have tried to find out whether the correct value was declared in the books or the same was suppressed and the actual value was the one declared to the bank---If the value declared in the books was the correct one then obviously there was no room for any addition---If it contained some element of suppression then the addition could have been made, in such a situation addition would have been made on the basis of independent evidence and not merely on the basis of monthly statements of hypothecated stock furnished to the bank---Mere difference between the value of hypothecated stock declared to the bank and disclosed in the books was too weak a basis of any addition under S.13 of the Income Tax Ordinance, 1979---Deletion of addition by the First Appellate Authority was maintained by the Appellate Tribunal.

(c) Income Tax Ordinance (XLIX of 2001)---

----S.205--- Income Tax Ordinance (XXXI of 1979), S. 80-D---Additional tax---Tax under S.80-D of the Income Tax Ordinance, 1979 was not fully paid along with the return---Assessee failed to make compliance of show cause notice on the due date---Imposition of additional tax---Assessee contended that assessee was entitled for refund, the short payment of tax, if any, should have been adjusted against such refund---First Appellate Authority found that admittedly there was short payment of turnover tax---Default of late payment was established and Assessing Officer was justified to charge additional tax---No created refund on the material dates existed---Validity---Matter was remanded to Assessing Officer for de novo consideration, especially when it was assessee's contention that its refund was legally available and Assessing Officer was not justified to impose additional tax---First Appellate Authority had given a categorical finding that there was no `created refund' on the material dates---Order of First Appellate Authority was vacated and Assessing Officer was directed to decide the matter afresh, after giving proper opportunity of being heard to the assessee.

Sajid Ijaz Hotiana for Appellant (in I.T.A. 3509/LB of 2005).

Ghazanfer Hussain, D.R. for Respondent (in I.T.A. 3509/LB of 2005).

Ghazanfer Hussain, D.R. for Appellant (in I.T.A..I658/LB of 2005).

Sajid Ijaz Hotiana for Respondent (in I.T.A. 1658/LB of 2005).

Date of hearing: 5th September, 2007.

JUDGMENT

MAZHAR FAROOQ SHIRAZI (ACCOUNTANT MEMBER).--The titled three appeals pertaining to assessment years 1998-99, is preferred by assessee while for assessment years 1999-00 & 2000-01, are preferred by department, arising out of orders passed by the learned CIT(A), Faisalabad.

Departmental appeals for 1999-00 & 2000-01

1. For assessment year 1999-00, it is the departmental contention that the learned CIT (A) was not justified in deleting the penalty imposed under section 111 at Rs.2,310,246 on the basis of addition under section 13 (1) (c). It is contended that the CIT (A) was not justified in holding that no tax was sought to be evaded. As far as assessment year 2000-01, is concerned, it is the departmental contention that the learned CIT (A) was not justified in deleting the addition under section 13 (1) (c) of the repealed Income Tax Ordinance, 1979.

2. The relevant facts are that in the year 1999-00, assessment was completed at net loss of Rs. 70726451 by making an addition under section 13 4,1) (c) at Rs.7000746, on account of under-statement in valuation of stock declared in the accounts and as per reports furnished to the banks. According to the assessing officer, every addition under section 13 except addition under section 13(1)(a), tantamount to concealment, therefore, taking into consideration, allegedly, established concealment on the part of the assessee company, show cause notice under sections 116/111 was issued by the assessing officer which was complied with by the assessee-company. The assessing officer found that concealment made is wilful and deliberate, penalty under section 111 of the Income Tax Ordinance, 1979, is thereof, imposed at Rs. 23,10,246 with the prior approval of the CIT, Special Zone, Lahore.

3. Being aggrieved, the assessee went in appeal before learned CIT(A) and challenged the treatment accorded by the assessing authority. The learned CIT(A) after hearing the arguments of the AR has observed that it is an established principle that the penal provisions are to be strictly interpreted and subject to be taxed only if expressly provided under the letter and spirit of law. Keeping the aforesaid principle in mind, when the language of section 111(1) is closely examined there cannot be any two opinion that unless there is positive income and there is tax sought to be evaded and that too in the same income year. It is further observed by the. learned CIT (A) that penalty is not leviable as in the instant case instead of positive income, loss has been assessed and the tax leviable before addition under section 13 (1)(c) and after addition remains the same. Accordingly, the learned CIT (A) held that in the instant case penalty under section 111 at Rs. 23,10,246 is not leviable.

4. For assessment year 2000-01, the assessee availed short term borrowing facility from UBL, Bank Square, Faisalabad, against pledge/ hypothecation of stocks of raw material. On scrutiny of record and getting information directly from the bank under section 144 (c), the assessing officer found that there was difference in value of stock of raw material, finished goods and work in process to the extent of Rs.10365945. Accordingly, the assessee-company was confronted through notice under section 13(1)(c) requiring to explain the source -of investment of the excess 'stock of various goods amounting to Rs.10365945. The reply submitted by the AR of the assessee was found unsatisfactory and he accordingly added the difference in value of stock of raw material/finished goods to the extent of Rs. 10365945 was added into the income of the assessee under section 13 (1) (c) of the repealed Ordinance.

5. Being aggrieved, the assessee went in appeal before the learned CIT(A) and challenged the treatment accorded by the assessing authority. Before the learned CIT (A), it was argued by the AR that the quantity of stock both as per Bank's certificate obtained by the assessing officer and declared by the assessee is the same. The difference between the value adopted by the Bank and declared by the assessee is prevalent for obtaining loans in this line of business. It was submitted by the AR that it is a common practice in business circle that the banks usually examine the total worth of the company in the shape of investment in fixed assets and working capacity of the enterprise. The submissions of statements showing availability of stock was only a matter of routine just to fill in the blanks in the banking records otherwise there was no reality.

6. The learned CIT (A) after hearing the arguments of the learned AR, has observed that it is a settled issue at the appellate stage that addition in stock made due to the difference in the hypothecated value is not sustainable because it is a common practice in the field of finance to show the inflated value of the stocks to obtain higher limits of finance. Consequently, the learned CIT(A) held that the addition cannot be made in respect of hypothecated value of stocks under section 13(1)(c).

7. We have heard both sides and have perused the orders passed by the authorities below. The learned DR has opposed the treatment as accorded by the First Appellate Authority while the AR of the assessee supported the findings as recorded by the learned CIT(A).

8. We have considered the rival arguments and have also perused the impugned orders. For assessment year 1999-00, we find that is a cardinal principle of interpretation of charging and penal provisions of a fiscal statute that the same are to be interpreted very strictly and in favour of taxpayer. When provisions of sections 13 and 111 of the repealed Ordinance, are compared it becomes obvious that the same are based on different principles. Addition in the declared income or loss can be made under section 13, irrespective of the fact whether assessee has declared loss or income; or whether income has been determined or loss. However, while imposing penalty under section 111 on account of addition under section 13, a different yardstick is to be applied. This yardstick is that of actual tax sought to be evaded and not of any notional or deemed tax; in other words, it is the tax which an assessee is required c to pay as a result of assessment which contains an addition under section 13. Even otherwise, imposition of penalty on the basis of notional or deemed evasion of tax cuts at the very roots of income tax jurisprudence.

9. In view of the above observation, we are inclined to maintain the deletion of penalty under section 111 as made by the CIT (A) which is under the given facts and circumstances of the case is fair and reasonable and calls for no interference by the Tribunal.

Order of the C.I.T.(A) is accordingly maintained.

10. As far as departmental appeal for 2000-01, wherein deletion of addition under sections 13(1)(c) has been contested as unjustified, we find that addition in this case was made only on account of difference in value of hypothecated stock. This fact could have promoted the assessing officer to analyze the value of hypothecated stock as declared in the books and should have tried to find out whether the correct value was declared in the books or the same was suppressed and the actual value was the one declared to the Bank. If the value declared in the books was the correct one then obviously there was no room for any addition under section 13. However, if it is contained some element of suppression then the addition could have been made. In such a situation the addition, if any would have been made on the basis of independent evidence and not merely on the basis of monthly statements of hypothecated stock furnished to the bank. We are of the .considered view that mere difference between the values of hypothecated stock declared to the bank and disclosed in the books is too weak a basis for any addition under section 13 and this view has constantly been held by this Hon`ble Tribunal. The learned DR has failed to persuade us to take a contrary view in the light of some distinguishable facts of this case, in view of which, we are inclined to maintain the impugned order passed by the CIT(A) for assessment year 2000-01.

ASSESSEE'S APPEAL FOR 1998-99

11. It is the assessee's contention for the assessment year 1998-99 that the learned CIT (A) was not justified in ignoring the facts that the reply of the assessee in response to the show-cause notice of assessing officer which was filed on February 25,2005, while the compliance date of show-cause notice was February 26, 2005. It is the AR's contention that the learned CIT (A) was not justified to maintain the order of additional tax under section 205, as the refund of Rs. 439,823 was due to the assessee.

12. Briefly stated, the relevant facts are that the assessee in this case is a public limited company, deriving income from manufacturing and sale of yarn. The assessing officer of perusal of assessment record for 1998-99, found that tax under section 80-D was not fully paid by the assessee along with the return of income filed. The assessing officer issued show-cause notice to explain his position regarding late payment of tax under section 80-D, but the assessee had failed to make compliance on the due date. Consequently, the assessing authority imposed additional tax under section 205 amounting to Rs. 73,748.

13. Being aggrieved the assessee went in appeal before the learned CIT(A) and challenged the treatment accorded by the assessing authority. It was the AR's contention before the CIT(A) that the assessee had duly complied the show-cause notice but the assessing officer has unjustifiably ignored the same. It was contended by the AR that the assessee was entitled for refund, so the short payment of tax, if any, should have been adjusted against the said refund. The learned CIT (A) after hearing the arguments of the learned AR has observed that admittedly in the instant case there was short payment of turnover tax under section 80-D and the same was paid on 29-6-1999, hence the default of late payment was established and additional tax was to be charged under the provisions of law, so the assessing officer was fully justified to charge additional tax. It is also observed by the learned CIT (A) that there was no created refund on the material dates.

14. We have looked into the matter and we find it expedient to remand the matter back to the assessing officer for de novo consideration, especially when it is the appellant's contention that its refund amounting to Rs. 439, 823 was available to the assessee and the assessing officer was not justified to impose additional tax. We have also noted that the CIT (A) has given a categorical finding that there was no created refund on the material dates. Order of the CIT (A) is accordingly vacated and assessing officer is directed to decide the matter afresh, after giving proper opportunity of being heard to the assessee.

15. Resultantly, appeal of the Revenue and assessee are disposed of in the manner as dilated supra.

C.M.A./30/Tax(Trib.)Order accordingly.