RIAZ BOTTLERS (PVT.) LIMITED, LAHORE VS COMMISSIONER OF INCOME TAX, COMPANIES ZONE-I, LAHORE, 2008 PTD-LAHORE-HIGH-COURT-LAHORE 877 (2008)

(a) Income-tax---

----Res judicata---Principle---Applicability---Principle of res judicata does not apply to income tax proceedings---Each year is independent and even some times facts in the same year may be helpful in supporting one issue but may not be equally helpful on some other issue.

The Commissioner of Sales Tax, Central Zone `B', Karachi v. Messrs Captain Chemical Industries Ltd. 1991 PTD 678 rel.

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

----Ss.62 & 136(2)---Direct reference-Question of law---Assessee assailed notice under S.62 of Income Tax Ordinance, 1979---Assessing Officer in his order had thoroughly discussed issue of market sample and discount distributors, margin, low fill allowance---Claims of incentives, payment of wages of temporary workers paid through cash, salary, wages, selling and advertisement, dispensing units, purchase of deep freezer etc. etc. were indicators of the quality of accounts of assessee---Income Tax Appellate Tribunal concluded that there was a proper notice under S.62 of Income Tax Ordinance, 1979, and that adds back had rightly been made---Income Tax Appellate Tribunal was of the view that questions proposed by 'assessee were mostly not referable---Validity---Income Tax Appellate Tribunal had confirmed treatment after due consideration of facts of the case---Acceptance of trading account of assessee did not create a good impression in favour of tax payer's and credibility of his accounts---As the findings of fact at the subordinate stage had not satisfactorily been controverted, there was no question of emergence of a question of law from the judgment of Income Tax Appellate Tribunal---Notice under S.62 of Income Tax Ordinance, 1979, was issued and the same was particular in respect of additions---Some misapplication of mind while making adds back existed but the mistakes were a matter of rectification and did not give rise to a question of law---Questions proposed by assessee did not arise out of the order of Income Tax Appellate Tribunal hence dismissed---Question referred by Income Tax Appellate Tribunal was answered in affirmative---Reference was disposed of accordingly.

Mughal Technical Industries (Pvt.) Ltd. v. C.I.T., Central Zone, Lah. 1996 PTD 263; Messrs Shahroom International (Pvt.) Ltd. Lahore v. Deputy Commissioner of Income Tax Circle-5, Companies Zone-I, Lah. and 2 others 2006 PTD 2654 and Mrs. Rani v. Commissioner of Wealth Tax, Lahore 1993 PTD 206 ref.

Ch. Anwar ul Haq for Appellant.

Sajjad Ali Jaffari for Respondent.

Date of hearing: 14th January, 2008.

JUDGMENT

KH. FAROOQ SAEED, J.---This judgment will dispose of P.T.R. No.56 of 2005, P.T.R. No.57 of 2005, P.T.R. No.58 of 2005, P.T.R. No.59 of 2005 and C.T.R. No.3 of 2007.

2. These P.T.Rs. filed by the assessee and C.T.R. referred by Income Tax Appellate Tribunal are on the basis of a common issue and the questions are also on the basis of the same facts.

3. The facts leading to these reference applications are that the petitioner was assessed to tax by Taxation Officer. In two years his accounts were rejected as a whole while for the remaining two years the trading accounts were accepted and add back were made in various heads of the profit and loss. In appeal before the first appellate authority i.e. C.I.T. (A) the trading accounts in respect of other two years were also accepted. Further more partial relief in some parts of the profit and loss expenses were also allowed after separately discussing each and every claim of the assessee. Before learned Tribunal the petitioner inter alia argued that in the first two years there was a notice under section 62 but the same was not particular as it had not identified separately the claims and defects. However, learned Tribunal noticed that the profit and loss expenses were in line, with the assessee own history and that proper notice under section 62 of erstwhile Income Tax Ordinance, 1979 was issued. The main argument of learned counsel for the petitioner was that the issuance of notice under section 62 was a mandatory requirement of law hence it should have been particular, clear and itemized. In his opinion in the present case this requirement was not fulfilled, hence the judgments of this Court as well as ITAT are applicable on all fours. His special emphasis is on the cases of "Mughal Technical Industries (Pvt.) Ltd. v. C.I.T., Central Zone, Lah. 1996 PTD 263 and Messrs Shahroom International (Pvt.) Ltd. Lah. v. Deputy Commissioner of Income Tax Circle-5, Companies Zone-I, Lah. and 2 others" 2006 PTD 2654 decided by this Court. The Income Tax Tribunal felt that aforementioned judgments were not applicable on the facts of the case under discussion as issuance of notice under section 62 was not being denied. The claim of learned counsel for the petitioner remains that the same were not particular. However, the learned Tribunal after giving some more relief decided the case mostly against the petitioner.

3-A. The petitioner filed reference before the learned Tribunal under section 136(1) of Income Tax Ordinance, 1979. The learned Tribunal felt that the questions as referred were not fit enough for the indulgence of this Court and since the issue was common and in fact one, a consolidated question for all the years was drafted and referred for the consideration of this Court. The same reads as follows:

"Whether in the facts and in the circumstances of the case, the Tribunal was legally justified to maintain the add backs, additions/disallowance of the expenditure claimed or not?"

4. The learned Tribunals in the above question has covered the entire controversy concerning the case under discussion. However, the petitioner was not satisfied hence moved reference application directly wherein for the first two years he posed following four questions:--

(i) Whether on the facts and circumstances of the case, when the applicant/assessee produced the books of account as evidence in support of the return, was it mandatory to issue specific notice under section 62 of the Ordinance, 1979 to point out the defects in the accounts and provide an opportunity to the assessee to explain his point of view?

(ii) Whether on the facts and circumstances of the case, when the assessing officer failed to record and reasons to substantiate its findings on the issue of additions out of profit and loss account in the notice under section 62 or assessment order, was the learned Tribunal justified in upholding such add backs?

(iii) \Whether on facts and the circumstances of the case, is the principle of Res Judicata applicable in the proceedings under the Income Tax Ordinance, 1979?

(iv) Whether on facts and circumstances of the case, is the order of learned

Tribunal "per incurium" in nature?

5. For the subsequent two years he posed five questions. The same speak as follows:

(i) Whether on the facts and circumstances of the case, when the applicant/assessee produced the books of accounts as evidence in support of the return, was it mandatory to issue specific notice under section 62 of the Ordinance, 1979 to point out the defects in the accounts and provide an opportunity to the assessee to explain his point of view?

(ii) Whether on the facts and circumstances of the case, when the assessing officer failed to record any reasons to substantiate its findings on the issue of additions out of profit and loss account in the notice under section 62 or assessment order, the learned Tribunal justified in upholding such add back?

(iii) Whether on facts and circumstances of the case, when the assessee pleaded that no specific notice under section 62 of the Ordinance has been issued by the assessing officer regarding the addition out of profit and loss account and the only one notice issued under section 62 has been incorporated in the assessment order, was the Tribunal justified in confirming the said additions?

(iv) Whether on facts and the circumstances of the case, is the principle of Res Judicata applicable in the proceedings under the Income Tax Ordinance, 1979?

(v) Whether on facts and circumstances of the case, is the order of the learned Tribunal "per incurium" in nature?

6. The petitioner's counsel firstly proposed hearing of reference in PTR No.58 and PTR No.59 of 2005 and said that by deciding these five questions the entire controversy shall stand resolved. His emphasis remained on the arguments that notice under section 62 was mandatory. His arguments in the light of the questions posed by him under section 136(2) of the Ordinance was that non-issuance of same is fatal and additions made in absence thereof is liable to cancellation. Further that in such eventuality the accounts of the assessee stand automatically accepted. Without going into the arguments referred by him his direct question No.1 as reproduced above has got a simple answer. Since the same only speaks of the status of the notice under section 62 and not about consequences of non-issuance, one can immediately agree with him that issuance of notice like this is mandatory and in this regard reference to the judgments of this Court in terms of "Mughal Technical Industries (Pvt.) Ltd. v. C.I.T., Central Zone, Lah. 1996 PTD 263 and Messrs Shahroom International (Pvt.) Ltd. Lah. v. Deputy Commissioner of Income Tax Circle-5, Companies Zone-I, Lah. and 2 others" 2006 PTD 2654 is quite relevant. However, it does not help him. Our agreement with the A.R. that issuance of a notice under the proviso of section 62(1) is mandatory before disagreeing is obviously of no help to the taxpayer in this case. The assessing officer issued notice under section 62 after finding defects in the books of accounts. This has been maintained in the last part of the Ist page of the assessment order. Furthermore the assessee was specifically required vide letter, dated 25-4-2000 to furnish copy of franchise agreement which was withheld still. Further the assessee was issued pro forma for supplying employee wise details of salary and prerequisite which was not furnished but a letter was filed by company for salary detail. On further instance for compliance of the pro forma for looking into details, another reply on company's pad was given but information as demanded as per pro forma was withheld. This is not all as while dealing with selling and advertisement expenses as well as dispensing units the assessing officer confronted the assessee through specific notice under section 62 that only residual value of the said assets can be capitalized. These are some examples of the specific confrontations by the assessing officer. This in fact is a statement of fact. The learned Tribunal having clearly mentioned that notices were issued though its nature could not be determined, the claim that there was no notice is incorrect. Moreover, the details of the particular's mentioned in the notice or notices is exhaustive. This detail should have been brought to the notice of the learned Tribunal. However, the same makes it clear that not only there was a specific notice under section 62 but that the same was exhaustive and fulfilled the requirements of the proviso of section 62(1).

7. Regarding question No.2 the same does not arise out of the order of ITAT and is out of context. The petitioner has himself presumed "that assessing officer failed to record any reason to substantiate his findings on the issue of additions out of profit and loss". The findings of fact with regard thereto by ITAT and the other subordinate officers is that discrepancies were there and the assessee's history also justified the treatment. Learned counsel for the petitioner tried to dislodge the observations and relied upon various judgments. He said that in the absence of record with the D.R the burden of proof shifted to his shoulders. Non-production of record by the department should not have been used against the assessee but against the department. He said that Qanoon-e-Shahadat Order, 1984, is fully applicable on the proceedings under Income Tax Ordinance and section 2 of the order makes it clear in unequivocal terms. He claimed that the matter has been discussed in many cases, however, language of Article 2 of the Qanoon-e-Shahadat Order, 1984 is very clear. His reliance in this regard is on the case of "Mrs. Rani v. Commissioner of Wealth Tax, Lahore 1993 PTD 206.

8. One may not doubt the legal position in the averments of the learned counsel for the petitioner. However, the facts narrated in the assessment order by the first appellate authority and subsequently the learned Tribunal makes it clear that officers below had discussed each and every aspect separately with detail initially in first part of the order and specifically while ultimately making, the additions and their confirmation. Since the facts do not support the proposition the emergence of question of law from the order of ITAT in the sense the learned counsel wants us to believe, appears to be a misconception.

9. The question No.3 as posed by learned counsel is a repetition of question No.2. It is in its nature an argument in support of his question, discussed earlier. The controversy is not that whether there should be a number of notices as even one notice may answer the requirements of the law. Moreover whether it was specific or otherwise cannot be decided at the stage of this Court. The same being question of fact and having properly been taken care of by ITAT, would not require more discussion. We would however, like to add that the direction that while disagreeing with the accounts the officer shall give a notice of the defects and record such explanations has not been properly understood. Confrontation of the defects is definitely a pre-requisite for disagreeing with the accounts. But wherefrom the argument that every item should be demonstrated by mentioning defects in each one of them has emerged is not answered. If we apply the golden principle of interpretation of remaining within the intentions of the legislature and not going beyond the language of law, the law wants confrontation of defects in accounts. We agree that the same should be comprehensive but we do not agree that each and every entry should be confronted to be as defective, for disagreeing with the accounts. The arguments that notices under section 62 were there but the same did not cover some of the add backs, hence requirement of law was not fulfilled, is repelled.

10. The other question which speaks about the principle of res judicata as well as the judgment of ITAT was "per incurium" also has nothing to do with the order of ITAT. This has been decided in a number of cases that principle of res judicata does not apply to the income tax proceedings. Each year is independent and even some times the facts in the same year may be helpful in. supporting one issue but may not be equally helpful on some other issue. The judgment referred as "The Commissioner of Sales Tax, Central Zone `B', Karachi v. Messrs Captain Chemical Industries Ltd." 1991 PTD 678 does support this view. In principle we agree with the proposition but it is not applicable on the facts of this case. It is not a question of estoppel. This is in a way a reflection of the attitude of the taxpayer towards additions made by the department. If in the same set of circumstances a taxpayer keeps accepting the treatment meted out by the Income tax department, for some other years, raising objection on similar treatment on the said identical facts, obviously weakens the arguments. The taxpayer by not challenging such and similar treatment in past has created an impression of its acceptability. The impression of the assessing officer that he has not properly prepared the respective documents or his claim is excessive and unverifiable is as per his own accepted practice. The higher Courts have in chain of judgments disproved stereo type methods but one can not ignore that if such method remained acceptable to taxpayer in the past for many years the credibility of the claim blurrs. In any case it is not an issue of res judicata as the Assessing Officer has made add backs after due consideration of most of the expenses claimed by the assessee. One need not go into repetition of the discussion made by the Assessing Officer in the order. However, reference can be made to the discussion made by the assessing officer at page 4 of the order wherein issue of market sample and discount distributors, margin, low fill allowance has been thoroughly discussed. The claims of incentives, payments of wages of temporary workers statedly paid through cash, salary wages, selling and advertisement, dispensing units, purchase of deepfreeze etc., etc., are indicators of the quality of the accounts of the petitioner. In this background the Tribunal concluded that there was a proper notice under section 62 and that add backs had rightly been made. Furthermore that learned Tribunal also on the same facts found that the question proposed by the petitioner were mostly not referable and only recommended the one which has been reproduced by us. In fact while discussing the direct reference under section 136(2) we have dilated upon the said question also. Our observation remains that he Tribunal has confirmed the treatment after due consideration of the facts of this case. We understand that the acceptance of trading account of assessee does create a good impression in favour of the taxpayer's and the credibility of his accounts. However, since the findings of fact at the subordinate stage have not satisfactorily been controverted, there was no question of emergence of a question of law from the judgment of ITAT. Learned Tribunal while disposing of the main appeal as well as reference application has discussed the issue in the following manner:---

"We have gone through the contentions of the assessee and the arguments of the learned AR along with the case law produced by him. Case law produced by the learned AR mostly relates to the rejection of trading accounts and additions made without issuing notice under section 62(1). No doubt in some of the cases it has been held by the appellate Courts that add backs out of profit and loss account expenses cannot be validly made without confronting defects and discrepancies in accounts in a notice under section 62. But the said case law, we regret to say, is not applicable in the instant case. In the case of the assessee notice under section 62 have been issued from time to time. Even the learned AR of the assessee has produced copies of such notices for the assessment year 1997-98 and 1998-99. Defect and discrepancies in those notices regarding the items of profit and loss account expenses have also been pointed out and confronted to the assessee. It has been pointed, out that some of these expenses are unverifiable and un-vouched and so additions as per history would be made. So far as the assessment years 1999-2000 and 2000-2001 are concerned neither the DR has produced the assessment record nor the AR of the assessee produced copies of notices and so we cannot verify to what type of notices are issued under section 62 to the assessee by the assessing officer. However, the assessment order passed by the ITO for these years indicates that notices under section 62 were issued. In this situation case law produced by the learned AR cannot be applied."

11. From the above para it is clear that in this case notice under section 62 was issued and the same was particular in respect of additions. There is some misapplication of mind while making add backs but the said mistakes are a matter of rectification and do not give rise to a question of law. We therefore, have no hesitation in holding that questions proposed by the petitioner do not arise out of the order of the Tribunal. Hence dismissed. The question referred by the Tribunal however, is answered in the affirmative. All the PTRs and CTR are accordingly decided.

M.H./R-8/LOrder accordingly.