2008 P T D (Trib.) 1354
[Income-tax Appellate Tribunal Pakistan]
Before Zafar Ali Thaheem, Judicial Member and Mazhar Farooq Shirazi, Accountant Member
I.T.A. No. 4541/LB of 2005, decided on 13/02/2007.
(a) Income Tax Ordinance (XLIX of 2001)---
----S. 122(5A)---Income Tax Ordinance (XXXI of 1979), S.66-A---Amendment of assessment---Profit and loss account additions---Invoking of S.122(5A) of the Income Tax Ordinance, 2001 was upheld by the First Appellate Authority on the ground that assessee was not able to justify the admissibility of the expenses on legal and factual grounds during the assessment proceedings with the help of books of accounts and other supporting documentary evidence---Validity---Action on the part of Assessing Officer to have allowed expenditure which was not genuine did result in passing of an assessment order which was "prejudicial to the interest of Revenue" as the Revenue was deprived of the legitimate tax due from the assessee, and at the same time the Assessing Officer, probably due to lack of experience, was not able to appreciate the facts of the case in view of which the order passed by him was also erroneous---Two conditions co-existed, the action on the part of the Commissioner by invoking S.122(5A) of the Income Tax Ordinance, 2001 was justified in the ambient circumstances of the case---Assessee's appeal was dismissed accordingly.
(1968) 18 Tax 2 (H.C. Dacca) and 1969 SCC 335 rel.
(b) Income Tax Ordinance (XLIX of 2001)---
----S. 122(5A)-Amendment of assessment---Prejudicial to the interest of Revenue---If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person it will certainly be prejudicial to the interest of Revenue.
(c) Income Tax Ordinance (XLIX of 2001)---
---S. 122(5S)---Amendment of assessment---Loss of revenue---Erroneous order---Order when erroneous/prejudicial to the interest of Revenue---Every loss of revenue as a consequence of order of. the Income Tax Officer could not be treated as prejudicial to the interest of Revenue---When the Assessing Officer adopted one of the courses permissible under the law and it had resulted in loss of revenue or where two views were possible in law and the Assessing Officer had taken one view with which the Inspecting Additional Commissioner did not agree, it could not be treated as a `erroneous' order prejudicial to the interest of Revenue unless the view taken by the Assessing Officer was not sustainable in law---Order was `erroneous' when there was an incorrect assumption of facts or incorrect application of law.
(d) Income Tax Ordinance (XLIX of 2001)---
----S. 122(5A)---Amendment of assessment---Disallowance of expenditure not supported by documentary evidence---Prejudicial to the interest of Revenue---Assessing Officer had disallowed expenditure which was not supported by documentary evidence---Expenditure allegedly incurred for providing free petrol to the police, "gup shup" programme, free petrol to truck and tanker drivers/free meal to drivers etc.---Expenditure incurred by a business to earn "profit" against expense which were either admissible or otherwise if these were not properly supported by documentation---Onus of proof regarding an expenditure incurred was on the taxpayer who should prove before the Assessing Officer that it was genuine and was supported by proper documentation---In case the assessee was unable to produce relevant documentary evidence then the Assessing Officer could disallow the expenditure or curtail same according to the facts of the case.
(e) Income tax---
---Commercial expediency- -Expenditure---Commercial expediency could not be used for inflating expenditure or evasion of tax, etc., which was not allowed under the law.
(f) Income tax---
----Expenditure---Illegal gratification-Law did not recognize any expenditure which could be described as "illegal gratification" for securing any benefits from any official, for example the Police Department for patrolling the area for providing security etc. to the assessee and his business, in other words, not under the table payments were permissible in law.
S.A. Khan for Appellant.
Anwar Ali Shah, D.R. for Respondent.
ORDER
MAZHAR FAROOQ SHIRAZI (ACCOUNTANT MEMBER).-This appeal by assessee filed against the order passed by the learned C.I.T. (A), Zone-I, Lahore, pertaining to tax year, 2003 and the appellant contested the order of the learned CIT(A) on the following grounds:-
(1) That provision of section 122 are not attracted for the disallowance of P&L A/c expenses.
(2) That to determine commercial expediency of expenses is a right of assessee and no assessment can be re-opened on the ground of commercial expediency or reasonableness of expenses therefore orders of IAC AND C.I.T. are illegal and void.
(3) That the power under section 122 is available only if the order is erroneous and prejudicial to interest of Revenue. That since no aspect of erroneous order has been pointed out by the IAC or by C.I.T. appeal. Therefore orders of C.I.T. Appeal and IAC are illegal and void.
(4) That the order of IAC confirmed by C.I.T. is simply based on difference of opinion and power of IAC under section 122 is not available for difference of opinion and checking of quality of assessment.
(5) That C.I.T. (A) has erroneously confirmed the un-signed order of the IAC. Thus the order of C.I.T. (A) and order of IAC are illegal and void.
(6) That the following P&L A/C additions made by IAC and confirmed by C.I.T. are harsh, excessive and arbitrary:---
| ITEM | Claim | Addition |
| Free Petrol | 137,337 | 137,337 |
| Free Petrol for police | 528,939 | 528,939 |
| Petrol used at Pump | 469,410 | 469,410 |
| Repair and Maintenance of bikes | 155,938 | 155,938 |
| Charity | 77,928 | 77,928 |
| Gup Shup Programme | 101,000 | 101,000 |
| Free petrol Shell | 29,258 | 29,258 |
| Free meal to drivers | 629,521 | 629,521 |
| Total | 21,29,331 | 21,29,331 |
2. Briefly stated, the relevant facts are that the appellant in this case is an individual/who derives income from running three petrol pumps at different places. Return of income for tax year 2003 was filed declaring net income at Rs.21,92,696. As per the provisions of section 120 of the Income Tax Ordinance, 2001 the return filed is treated as an assessment order and issued under the said section. On examination of trading, profit and loss account, the Assessing Officer found that the assessee had claimed inadmissible expenses. As a consequence, the Assessing Officer issued notice under section 122(5A) read with section 122(9) of the Income Tax Ordinance, 2001 and confronted the assessee that the assessment order treated as issued under section 120, is erroneous insofar as prejudicial to the interest of Revenue. In response, the A.R. of the assessee contended that the notice under section 122 had been issued on erroneous presumptions and misconceived facts. The A.R. further submitted that the expenses claimed are allowable under sections 20 and 21 of the Income Tax Ordinance, 2001, as the expenses were incurred in deriving the income from the business. After examination of assessee's reply, the Assessing Officer asked the A.R. to justify the expenditure on legal as well as factual grounds with documentary evidences and also furnished books of accounts, in response, the AR attended the proceedings but had failed to produce books of accounts and supporting documentation to justify the expenditure claimed. The Assessing Officer, accordingly, treated the assessment order as erroneous insofar as prejudicial to the interest of Revenue for the reason of claim of inadmissible expenses under different heads, as tabulated supra.
3. Being aggrieved, the assessee filed appeal before the learned C.I.T. (A) challenging the treatment accorded by the Assessing Officer and reiterated the submissions as made before the Assessing Officer. The learned C.I.T. (A) after hearing the arguments of the AR, observed that although the Assessing Authority has no lawful authority to challenge the reasonableness of an expense, however, it is well within the jurisdiction of an assessing authority .to check the admissibility of an expense in terms of sections 20 and 21 of the Income Tax Ordinance, 2001. The learned C.I.T. (A) further observed that the assessee had failed to prove inadmissibility of expenses on legal and factual grounds with the help of books of accounts and supporting documentation. The expenses under appeal, claimed by the appellant do not appear to have been incurred wholly and exclusively for the purposes of business. Consequently, the learned C.I.T. (A) upheld amendment of assessment under section 122(5A) and confirmed the P&L expenses claimed for the tax year 2003.
4. We have heard both the sides and have perused the orders passed by the authorities below:---
The learned A.R. of the assessee argued that invoking of section 122 of the I.T. Ordinance, 2001 was illegal considering the ambient circumstances of the case. He was of the view that an assessment could not be reopened on the ground that certain expenditure by a business was not reasonable as the assessee was within his right to determine on the basis of "commercial expediency", the reasonableness of an expenditure. The A.R. further submitted that it was the consistent view of the superior Court that an assessment cannot be reopened on the issue of expenses and the expenditure under reference was undertaken for the smooth running of the business of the assessee which is a petrol pump.
It was argued by the learned A.R. that the IAC had issued notice under section 122 on the issue of inadmissibility of Profit and Loss expenses and thus had invoked revisional powers under section 122(5A) although he had pointed out that the notice issued (supra) was based on an erroneous presumptions and misconceived facts. The A.R. in his reply, dated 8-6-2004 addressed to the learned IAC, in which he justified different expenditure incurred in respect of free petrol to the truck and tanker drivers, free petrol for police amounting to Rs.5,28,939 petrol used at the pump, charity, gup shup programme amounting to Rs.101,000 free meal to drivers, etc.
It was pleaded by the learned A. R. that the assessee had not claimed any expenses which are not permissible under the law and the declared results had merited acceptance and no action under section 122(5A) was justified. The A.R. also relied on a case decided by the apex Court in Atta Hussain Khan Limited v. C.I.T. East Pakistan, Dhaka reported as (1968) 18 Tax 2 (H.C. Dacca) = 1969 SCC 335 wherein it was held as under:---
"This appeal by special leave arises a question of general importance as to the power of the Income Tax Officer to examine the reasonableness of any expenditure claimed to have been "wholly and exclusively for the purpose" of any business as contemplated by section 10(2) of Income Tax Act."
It is further held as under:
"It will, be seen that the most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director is "wholly and exclusively for the purpose" of the business of the Company, is whether the expenditure is voluntary and is incurred on the ground of commercial expediency and in order to facilitate the carrying on of the business. The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency, if is not/or the Income Tax Department to say that the expenditure is not reasonable."
"The perusal of above judgment clearly shows that if expenditure is incurred on ground of commercial expediency and to facilitate the business whether directly or indirectly, the expenditure is allowable under the income tax."
"Thus on ratio of above judgment if the expenditure are perused the entire expenditure are for commercial expediency and to facilitate the business directly and indirectly. The expenditure is perfectly legal and admissible under the law."
We have also noted that the learned First Appellate Authority has upheld the invoking of section 122(5A) and on the ground that the assessee was not able to justify the admissibility of the expenses in question on legal and factual grounds during the assessment proceedings with the help of books of accounts and other supporting documentary evidence. It was further observed that the expenses under 'reference claimed by the assessee did not appear to have been incurred wholly and exclusively for the purposes of business.
In our considered view, it would be informative to examine as to what the superior Courts have held as to how an assessment order is both "erroneous" and "prejudicial" to the interest of Revenue, the basis on which an assessment could be reopened under section 66A of the repealed Act, 1979 and section 122(5A) of the I.T. Ordinance, 2001. The phrase prejudicial to the interest of Revenue is not an expression of art understood in its ordinary 'meaning, it is of wide import and is not confined to loss of tax. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person it will certainly be prejudicial to the interest of the Revenue.
Every loss of revenue as a consequence of the order of the Income Tax Officer cannot, however, be treated as prejudicial to the interest of Revenue, for example when the ITO adopted one of the courses permissible under law and It has resulted in loss of revenue or where two views are which possible in law and the Income Tax Officer has taken one view with which the IAC does not agree, it cannot be treated as an erroneous order prejudicial to the interest of Revenue unless the view taken by the ITO is not sustainable in law. An order is erroneous when there is an incorrect assumption of facts or incorrect application of law.
"In the present case before us, the Assessing Officer had disallowed expenditure which was not supported by documentary evidence. For example, the expenditure allegedly incurred for providing free petrol to the police, "gup shup" programme, free petrol to the truck and tanker drivers/free meal to drivers etc. as held by the superior Courts in a number of judgments the expenditure incurred by a business to earn "profit" against expenses which are either admissible or otherwise if these are not properly supported by documentation. The "onus" of proof regarding an expenditure incurred is on the taxpayer who should prove before the Assessing Officer that it was genuine and is supported by proper documentation. In case the assessee is unable to produce relevant documentary evidence then the Assessing Officer can disallow the expenditure or curtail it according to the facts of the case.
The A.R.'s arguments that expenditure incurred in the present case under different heads of accounts was done on the basis of "commercial expediency" then it is our considered view that this plea of the AR is misconceived as "commercial expediency" cannot be used for inflating expenditure or evasion of tax, etc. which is not allowed under the law.
Moreover, the law also does not recognize any expenditure which can be described as "illegal gratification" for securing any benefits from any official, authority like for example the Police Department for patrolling the area for providing security, etc. to the assessee and his business. In other words, not under the table payments are permissible in law for obvious reasons.
In our considered view, the, action on the part of the Assessing Officer to have allowed expenditure which was not genuine did result in the passing of an assessment order which was "prejudicial to the interest of Revenue" as the Revenue was, thus, deprived of the legitimate tax due from the assessee, and at the same time the Assessing Officer probably due to lack of experience was not able to appreciate the facts of the case in view of which the order passed by him was also "erroneous". As the two conditions co-exist in the present case, the action on the part of the learned IAC by invoking section 122(5A) is justified in the ambient circumstances of the case.
In view of the above reasons as narrated above, we are not inclined to accept the appeal of the assessee-appellant in respect of assessment year 2003 which is dismissed accordingly.
C.M.A./39/Tax(Trib.)Appeal dismissed.