VS, 2008 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 383 (2007)

(a) Income-tax---

----Profit and loss expenses---Penalty and additional tax---Allowable ness---Any fine or penalty imposed due to irregularity committed by the assessee for non-adherence to statutory provision of law, could not be termed to be the fine or penalty, rather additional tax was levied which was charged in accordance with the provisions of law and was not allowable business expense.

1999 SCMR 1213 distinguished.

(b) Income-tax---

----Profit and loss expenses---Ad hoc observations---Addition made on ad hoc observations was not sustainable and was deleted by the Appellate Tribunal.

(c) Income-tax---

----Gross profit rate---Addition---Department contended that First Appellate Authority was not justified in deleting the trading addition which was worked out consequent upon applying gross profit rate of 25% against declared rate at 22.78%-Validity---Obtaining more volume of turnover lessens the margin of profit---Volume of turnover was exhibiting increasing trend year after year---First Appellate Authority after thorough appreciation and appraisal of the facts had directed to accept declared GP rate of 22.78%-Order of First Appellate Authority was maintained being well based on the history of the case---Department objection was rejected by the Appellate Tribunal.

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

----Ss. 24(c) & 50---S.R.O. No.586(I)/91, dated 30-6-1991---Deductions not admissible---Advertisement expenses---Addition on the ground that while making payment to local authorities Cantonment Board City Development Authority and Horticulture Authority tax under S.50 of the Income Tax Ordinance, 1979 was not deducted---Validity---Department while holding the assessee to be the assessee in default conceded that no tax was leviable from the payments made to the local authorities by virtue of S.R.O. No. 586(I)/914, dated 30-6-1991---Addition made was Addition made was liable to be struck down---Order of First Appellate Authority was upheld by the Appellate Tribunal.

(e) Income-tax---

---Profit and loss expenses---Sales tax paid to Government Exchequer was claimed as a business expense in the profit and loss account--Amount was added back by observing that since the "Sales Tax" was recoverable from the consumers, that could not be allowed as a business expense---Assessee contended that some of the bakery items were subjected to "Sales Tax", their sale prices were fixed inclusive of "Sales Tax"---Gross sales were offered for taxation and payment of `sales tax' was claimed in the profit and loss expenses-Appellate Tribunal did not find any infirmity in findings of First Appellate Authority whereby the issue was set aside for reconsideration---Objection was rejected by the Appellate Tribunal.

(f) Income-tax---

---Profit and loss expenses---Payment of "Workers Welfare Fund" was an allowable expense under the head `profit and loss account'.

(g) Income-tax---

----Sales tax---Methods for recording payment of `sales tax' in the books of accounts---Explained.

(h) Income-tax---

---Profit and loss expenses---Sales tax---Disallowance of---Validity--Since, gross sales inclusive of sales tax were declared in the trading account, the disallowance of amount of sales tax claimed in the profit and loss account was uncalled for---Claiming payment of sales tax in the profit and loss account will not affect the assessee's net profit rather will set off the two amounts for the reason that the sales tax was recovered from the one hand and was deposited in the Government Exchequer by the other hand---Add back made on the score deleted by the Appellate Tribunal.

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

---S. 66-A---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Invocation of provision of S.66-A of the Income Tax Ordinance, 1979 on the ground that payment of sales tax was claimed in the profit and loss account--Validity---Claiming of payment of "sales Tax" was an allowable expenses because the assessee declared its sales inclusive of sales tax the payment of which had already been made to the exchequer and thus Inspecting Additional Commissioner's objection .dashes to the ground---Order passed under S.66-A of the Income Tax Ordinance, 1979 was declared to be of no legal effect which was annulled/cancelled by the Appellate Tribunal.

Javed Iqbal Khan, F.C.A. for Appellant (in I.T.As. Nos.1617/LB, 1618/LB of 2002, 2101/LB of 2003 and 1593/LB of 2005).

Shahban Bhatti, D.R. for Respondent (in I.T.As. Nos.1617/LB, 1618/LB of 2002, 2101/LB of 2003 and 1593/LB of 2005).

Shahban Bhatti, D.R. for Appellant (in I.T.A. No.2682/LB of 2002).

Javed Iqbal Khan, F.C.A. for Respondent (in I.T.A. No.2682/LB of 2002).

ORDER

This order is intended to dispose of above titled five appeals, through this consolidated order. The details of which are hereunder:--

2. Both the learned representatives appearing at the bar have been heard at a great length and perused the details and documents as well as the case-law referred to by the rival parties in appeal.

(Cross Appeals):

3. At the very outset the learned counsel for the assessee has opted not to press grounds raised relating to the additions made under section 13(1)(aa) and (e) of the Income Tax Ordinance, 1979 amounting to Rs.11,00,000, Rs.60,000 respectively and the disallowance made under the head "advertisement/site rent portion" which amounted to. Rs.3,06,460. It is for the reason that all these issues have been laid at rest during the course of re-assessment proceedings. Perusal of the re- assessment order, dated 29-3-2003, made under sections 62/132 of the Income Tax Ordinance, 1979 testifies the above submission. Hence, the said grounds, raised against the order-in-original made under section 62 of the Income Tax Ordinance, 1979, are dismissed having been not pressed.

4. The assessee's next ground of appeal is that the learned Appeal Commissioner has erred in confirming the disallowance made under the head "fine and penalties". The appellant claimed expenses of Rs.2,71,378 statedly to have been incurred on account of fines and penalties which has been disallowed by the Assessing Officer. It has been argued by the counsel that this amount represented the additional tax levied for the default committed by the company not to deduct tax under section 50 of the Income Tax Ordinance, 1979 at the time of making payments to the receipts. According to the appellant since the amount paid was in the nature of fine and penalty and was laid out wholly and exclusively of the purposes of such business, therefore, that is an admissible expense in terms of section 23(xviii) of the Income Tax Ordinance, 1979. We do not agree with the line of argument advanced by the appellant. Any fine or penalty imposed due to irregularity committed by the assessee for non adherence of statutory provision of law cannot be termed to be fine or penalty. Rather additional tax was levied in the instant case which was charged in accordance with the provisions of law, hence is not allowable business expense. Reliance is placed on a judgment of the apex Court of Pakistan reported as 1999 SCMR 1213, which is distinguishable viz. the facts stated supra, hence cannot be followed. Accordingly, the addition made by the Assessing Officer and upheld by the First Appellate Authority does not warrant any intervention which is hereby confirmed.

5. Next contention of the assessee pertains to the additions made under the head "travelling and miscellaneous expenses". A sum of Rs.270,381 and Rs.111,023 was claimed to have been incurred out of which disallowance was made to the extent of Rs.125,000 and Rs.50,000 respectively and that treatment was set aside by the First Appellate Authority. However, on re-assessment, disallowance of expenses has been restricted to the tune of Rs.70,000 and Rs.25,000 respectively. Before us, it has been contended that the additions so made thereunder by the Assessing Officer was unwarranted on the facts and in the circumstances of the case. As regard travelling and conveyance expenses, partial disallowance was made by the Assessing Officer on the ground that the claim was unverifiable and element of personal use of the expenses cannot be ruled out. It was stated that the entire claim was documented, thus, setting aside the addition under this head was unjustified. We have also noted that no specific instance in this regardhas been quoted by the Assessing Officer in the assessment order. Since, the addition under this head was made on ad hoc observation which cannot be sustained. Hence, the addition made under this head is deleted. In miscellaneous expense account, a sum of Rs.50,000 was added and this issue was also set aside. On going through the re-assessment order made under sections 62/132 of the Income Tax Ordinance, 1979, the addition made at the time of original assessment at Rs.50,000 has been further curtailed to Rs.25,000 which seems to be reasonable. This would result into restricting the addition of Rs.25,000 against made at Rs.50,000. However, the treatment accorded in these two heads in the reassessment is directed to be deleted. The assessee's plea partially succeeds.

Departmental Appeal:--

6. The department is also aggrieved against setting aside the addition made under section 13(1)(e) amounting to Rs.11,00,000 and under section 13(1)(aa) at Rs.60,000 as well as under the head "advertisement advance" at Rs.3,06,460 by the CIT(A). Nevertheless, during the course of reassessment proceedings, the impugned additions were deleted by the Assessing Officer by passing the order under sections 62/132 of the Income Tax. Ordinance, 1979, dated 29-3-2003. Since, the Revenue has by itself settled the issues on re-assessment, therefore, the pleas taken before us have no legs to stand upon, hence are rejected.

7. The other departmental contention is that the learned Appeal Commissioner was not at all justified in deleting the trading addition of Rs.24,17,641 which was worked out consequent upon applying gross profit rate of 25% against declared at 22.78%. As is evident from pages 4, 5 and 6 of the assessment order, complete books of accounts along with quantitative and qualitative details of purchase of raw material and its consumption, value-wise opening and closing stock, purchase invoices/bills and the name of sole distributor of the company's products and the allied details were not only produced but copies thereof were also furnished which were brushed aside by the Assessing Officer without advancing any plausible reasoning. Accordingly, the Assessing Officer proceeded to apply gross profit rate of 25% on the declared sales. History of the declared as well as the treatment accorded by the department and the Appellate Authorities with regard to application of gross profit rate is as under:--

It is a hard fact that obtaining more volume of turnover lessens the margin of profit. In the instant case volume of turnover is exhibiting increasing trend year after year. However, the learned Appeal Commissioner, while directing to accept the declared gross profit rate of 22.78%, has concluded as under:--

"I have considered the arguments put before this Court by the appellant. The Assessing Officer while deviating from history stated that in the previous assessment years purchases and sales were fully verifiable while position was not so far the year under reference. I have also gone through the reasons assigned by the Assessing Officer for the application of G.P. rate and am fully convinced that he failed to develop the case for deviation from history and application of G.P. of 25%. He did not bring on record basis or parallel case for application of GP of 25%. He did not point out specific defects for rejection of trading account. Although as held by superior Courts res judicata is not applicable on Income Tax proceedings but at the same time it has been held that there must be definite basis and specific reasons for deviation from history. Use of common phrases like "unverifiable purchasers" and "unverifiable expenses" have been discouraged by the superior Courts. Similarly, rejection on the basis of general charge that expenses were inflated is again improper and cannot be termed as justified. History of the case reveals that the department itself in the previous assessment years accepted G.P. rate even at lower figure. The appellant very strongly contended that position/record, relating to purchases and sales and other expenses debited to trading account was exactly the same as in the year under appeal.

On the basis of facts discussed I feel no hesitation in holding that the Assessing Officer was not justified in applying G.P. rate at 25%. It is hereby directed that declared G.P. rate be accepted."

8. The learned DR could not pinpoint any untoward objection which may warrant us to intervene in the findings recorded supra by the First Appellate Authority. Since, the learned Appeal Commissioner after thorough appreciation and appraisal of the facts of the case has directed to accept declared G.P. rate of 22.78%, therefore, his order is maintained on this point being well based. This would result into dismissal of the departmental objection.

9. Next contention of the department is that deletion of addition by the learned CIT(A) made under section 24(c) of the Income Tax Ordinance, 1979 was unwarranted in absence of assigning any cogent reasons. This contention of the Revenue does not carry any weight. Perusal of the facts reveals that a sum of Rs.4,32,165 was added by the Assessing Officer under the head "advertisement expenses" on the ground that while making payments to the Cantonment Board, LDA and PHA, tax under section 50 was not deducted thereon. However, the First Appellate Authority, after examining the facts of the case deleted the impugned addition. We have also noted that the department while holding. the assessee-respondent to be the assessee in default during the course of passing the order under section 52/132 of the Income Tax Ordinance, 1979, dated 21-1-2003 conceded that no tax was leviable from the payments made to the local authorities by virtue of S.R.O. No.586(I)/914, dated 30-6-1991. In such circumstance the addition made in terms of section 24(c) of the Income Tax Ordinance, 1979 was liable to be struck down. The learned Appeal Commissioner's order is therefore, upheld.

10. Another departmental contention was that the First Appellate Authority was not justified in setting aside the addition made under the head "Sales Tax" amounting to Rs.2,66,684. Under this head a sum of Rs.2,66,684 was statedly to have been paid to the Government Exchequer which was claimed as a business expense in the profit and loss account. That amount was added back by the Assessing Officer by observing that since the "Sales Tax" is recoverable from the consumers, therefore, that cannot be allowed as a business expense. In this regard, it was the assessee's contention that some of the bakery items are subjected to "Sales Tax", thus, their sale prices are fixed inclusive of "Sales Tax". In this view of the matter, gross sales are offered for taxation and payment of "sales tax" is claimed in the profit and loss expenses. We do not find any infirmity in such findings of the first appellate authority whereby this issue was set aside for re-consideration. Hence, this objection is rejected.

11. The last departmental contention pertains to setting aside the addition made on account of "Workers Welfare Fund". Actually this issue was set aside by the First Appellate Authority with certain direction. However, on reassessment the assessee's contention has been adhered to by the Assessing Officer by holding that payment of "Workers Welfare Fund" is an allowable expenses under the head profit and loss account. Thus, this objection of the department is not sustainable.

Assessee's appeal against the order made under sections 62/132 of the Income Tax Ordinance, 1979.

12. Re-assessment for the assessment year 1998-99 has been made by the Assessing Officer on certain points which were set aside by the First Appellate Authority. First issue relates to claiming of payment "Sales Tax" in the profit and loss account. First of all it is to be looked into as to whether claiming of payment of "sales tax" in the profit and loss account was allowable expense or not? However, on re-assessment, the payment of "sales tax" claimed in the profit and loss account was disallowed once again and that treatment was upheld by the First Appellate Authority in the 2nd round of litigation. Before us it was the contention of the learned counsel for the assessee that the learned Appeal Commissioner has acted in flagrant violation of law while confirming the charge of "sales tax" which was claimed in the profit and loss account, particularly when sale prices of some of the company's products, on which sales tax was chargeable, were inclusive of sales tax. Since, gross sales were declared in the trading account, therefore, this charge has to be claimed in the profit and loss account in order to set off its effect. Thus, the assessee has rightly claimed payment of "sales tax" thereunder.

13. We have deliberated the rival contentions with all its seriousness and find the assessee's contentions to be quite legitimate. Actually there are two methods for recording payment of "sale tax" in the books of accounts. First one is that if the sale price of the product is fixed including the "sales tax", and narration to this effect is mentioned on the packing of the product. In such eventuality entry in the books of accounts is recorded by grossing up the total sales effected in a day and the amount of sales tax calculated thereon is deposited in the government treasury under the sales tax payment challan. If this method is to be followed then the gross sales are declared in the trading account and the amount of sales tax paid to the government treasury is charged to the profit and loss account in order to set off the effect of sales tax. The other method is that the sale price of the item is mentioned in the cash memo. and the sales tax to be charged is separately written thereon. By following this practice, net sales are recorded in the book of account and a separate of head of account namely "payment of sales tax" is opened in the ledger for making debit and credit entries to this effect. In this background only the net sales are declared in the trading account and payment of "sales tax" does appear to be an expense in the profit and loss account because the two amounts of sales tax are squared up. It is also imperative to mention here that sales tax returns are also filed periodically with the Sales Tax Department. So, it is easy to cross cheque veracity of claim of payment of sales tax from the record. However, it was vehemently stated by the learned counsel for the assessee at the bar first method of recording sales tax is being followed and this was also the past practice in the instant case. To our mind the Assessing Officer has not taken any pain on re-assessment to find out the ground realities rather resorted to repeat the treatment which was accorded while framing the original assessment. Moreover, direction of learned CIT(Appeals) has also been flouted by the Assessing Officer while proceedings for re-assessment particularly when this issue was set aside by him in the first round of litigation with specific directions. It was remarked in that appellate order as under:--

"I have considered the matter and remand back the issue' to the Assessing Officer for verification of explanation offered by the appellant. If the amount of sales tax has been offered for tax in the trading account and the same is according to accounts maintained and accepted in the past then it must be allowed as and expense."

14. Since, the assessee is following the first method whereby gross sales inclusive of sales tax are declared in the trading account, therefore, the disallowance of amount of sale tax which was claimed in the profit and loss account was uncalled for. In fact by claiming payment of sales tax in the profit and loss account will not effect the company's net profit rather set off the two amounts for the reason that the sales tax is recovered from the one hand and is deposited in the Government Exchequer by the other hand. Thus, the add-back made by the Assessing Officer on this score is hereby deleted.

15. The other ground of appeal relating to computation of Worker's Welfare Fund Contribution is willy nully pressed. There is another ground of appeal of the assessee whereby it has been contended that tax credit of Rs.2463, which was deducted under section 50(5) of the Income Tax Ordinance, 1979, has not been allowed by the Assessing Officer. On going through the facts available on record and after healing the learned representatives, the Assessing Officer is, therefore, directed to allow credit of tax amounting to Rs.2463 which was deducted under section 50(5) of the Income Tax Ordinance, 1979.

Order under section 52 of the Income Tax Ordinance, 1979 Assessment year 1998-99

16. This is the assessee's appeal whereby it was contended in the grounds of appeal that the learned Appt al Commissioner has fallen in grave error in setting aside the issue of .folding the assessee to be the assessee-in-default in terms of section 52 of the Income Tax Ordinance, 1979. While setting aside the order made under section 52 of the Income Tax Ordinance, 1979 it was observed by the First Appellate Authority that this issue needs to be reappraised and directions were also given to the Assessing Officer that first of all he shall identify the payments to which the provisions of section 50(4) are attracted and will proceed accordingly. At the very outset the learned counsel for the assessee has pointed out to the Bench that the issue of treating the company to be the assessee in default for an amount of Rs.35,642 and Rs.15,126, on account of alleged failure to deduct tax under section 50(4) of the Income Tax Ordinance, 1979 on the petty purchases and inter-company charges, has been set at naught at the level of the department vide order, dated 21-10-2003 passed under section 52/132 of the Income Tax Ordinance, 1979. Resultantly the impugned additions, which were originally made on this score, were ultimately deleted on re-assessment. Also pointed out that the additional tax earlier charged was also corrected/revised at the time passing the order under section 52/132 of the Income Tax Ordinance, 1979. In this view of the matter, the learned counsel for the assessee opted not to contest the present appeal. Since, the issues involved have already been redressed in the re-assessment proceedings, hence this objection is not main tainable.

Assessment's appeal against the order made under section 66-A of the Income Tax Ordinance, 1979.

17. This is the assessment year 1999-2000 which is under appeal. As per the order passed under section 66-A of the Income Tax Ordinance, 1979, the already completed assessment was modified by the IAC by holding that the same was erroneously made and that was also prejudicial to the interest of Revenue. Two reasons were advanced for inviting the provisions of section 66-A of the Income Tax Ordinance, 1979. First one was that the "sales tax paid" amounting to Rs.338,596 was erroneously charged in the profit and. loss expenses being an inadmissible expenses because that levy is recoverable from the consumers on behalf of the Government and is deposited in the government treasury. The second reason was that the lease rentals expenses amounting td Rs.21,37,885 were also claimed in the profit and loss account whereas a sum of Rs.39,72,01.5 were claimed under the head lease and insurance expenses. Since, no lease agreement was available on record, therefore, lease insurance expenses could not be allowed and only the expenses incurred on lease rental were admissible.

18. In response thereto it was stated that the sales reflected in the trading account are the gross amount inclusive of sales tax charged from the customers that is why payment of sales tax has been claimed in the profit and loss account and this was also the practice in the past. Details of monthly sales tax returns, which were submitted to the sales tax department evidencing the said position, were not only furnished during the course of original assessment but are also filed in the re-assessment proceedings. Thus, the sales tax was rightly charged to the P&L account as a selling expense. According to the learned counsel net result of this presentation is that the two amounts are net off resulting in no charge to the company expense. As regards insurance expenses it was replied that his expense is also an admissible expense under clause (iv) read with clause (xviii) of subsection (1) of section 23 of the Income Tax Ordinance, 1979. Copy of the lease agreement executed between the leasing company and the assessee was also produced. It was, accordingly, prayed that the proceedings initiated under section 66A of the Income Tax Ordinance, 1979 may be dropped as no expenditure whatsoever has been claimed in the profit and loss account which is inadmissible under the law. The explanation tendered by the assessee could convince the IAC to the extent of payment made on account of lease rental and insurance expenses only, as such, no adverse inference was drawn in this regard. However, the amount of "sales tax" paid by the assessee amounting to Rs.3,38,596, which was claimed as an expense in the profit and loss account, was added back by him to the income originally assessed. Resultantly net income was determined by the IAC under section 66-A of the Income Tax Ordinance, 1979 at Rs.32,33,341.

19. On going through the reasons putforth by the IAC for inviting the provisions of section 66-A of the Income Tax Ordinance, 1979 in the light of submission advanced by the learned counsel for the assessee. We have come to an inescapable conclusion that the proceeding under section 66-A of the Income Tax Ordinance, 1979 have not been invoked lawfully. There was nothing substantial on record wherefrom the learned IAC could draw inference that the order passed by the Assessing Officer was erroneous insofar as was also prejudicial to the interest of Revenue. Sole reason on the basis of which the provisions of section 66-A of the Income Tax Ordinance, 1979 are invited refers to claiming of payment of sales tax in the P&L account. Since, we have already concluded in para. 14 of the instant order, while disposing of assessee's appeal on this issue against the order made under section 62/132 of the Income Tax Ordinance, 1979, that claiming of payment of "Sales Tax" is are allowable expense because the assessee declared its sales inclusive of sales tax the payment of which had already 'made to the exchequer. When viewed in this perspective the IAC's objection on this point also dashes the ground. In view of foregoing discussion the order passed by the learned IAC under section 66-A of the Income Tax Ordinance, 1979 is declared to be of no legal effect which is hereby annulled/cancelled.

20. In the result, all the five appeals are disposed of to the extent and in the manner indicated above.

C.M.A./171/Tax (Trib.)Order accordingly.