VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 377 (2008)

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

----Ss.122(1), 177 & 120---Amendment of assessment---Addition in sales by reliance on audit report of Sales Tax Department---Assessee contended that reliance by the Taxation Officer for the purpose of addition in sales on the basis of sales tax audit was in no way to constitute a definite information as the, matter had already been decided in favour of the assessee and as the Taxation Officer had made the addition in sales placing reliance on the Sales Tax Department which had already been reversed, and there was no basis for the addition made by the Taxation Officer--:Validity---Taxation Officer admittedly had made the addition on the basis of the finding of Excise Department which had already been held not to be legal, logical and tenable---If the very foundation of action was illegal, the whole superstructure built upon it could not validly and legally stand---Even otherwise, chart showing the year-wise details of sales which showed substantial increase for the year as compared to the previous assessment year when the sales had always been accepted by the Department---No justification was found for the addition in sales---Order of First Appeal Authority was vacated and the Taxation Officer was directed to accept the sales declared by the assessee.

1991 PTD 658 rel.

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

----Third Sched.---Depreciation---Disallowance of---Assessee contended that addition during the previous year on account of plant and machinery was made and the cost of machinery was partly charged in the year 2003 and assessment year 2002-03---Initial deprecation for the tax year 2003 was restricted to amount capitalized on plant and machinery for the year 2003 but the Taxation Officer had disallowed the claim of deprecation without any justification---Department contended that plant and machinery were added in the previous year and no claim in this respect was made---Initial depreciation on the same basis could not be allowed in the. current year---Validity---No interference was made by the Appellate Tribunal in the order or First Appellate Authority in respect of disallowing the claim of initial deprecation on plant and machinery as the First Appellate Authority had rightly upheld the treatment meted out by the Taxation Officer and the observations of the Taxation Officer while disallowing the claim were well founded and legally valid.

Zafar Iqbal, F.C.A. for Appellant.

Dr. Malik Muhammad Khan Awan, D.R. for Respondent.

ORDER

The appellant through this appeal has objected to the impugned order of the learned C.I.T.(A) dated 3-6-2008 on the following grounds:--

(1) That the learned Taxation Officer had unjustly made an addition in the income by making an addition in the sales of Artificial Leather by Rs.348,139,628 which amounts to 80% toward the declared sales of Artificial Leather of Rs.436,080,313 for the tax year 2003 which was already 11% higher than immediate past year and the learned C.I.T. (Appeals) to ignore this fact.

(2) That the Taxation Officer was wrong to rely in making an addition of sales of Rs.348,139,628, on the basis of sales tax audit who had based their calculation on total wrong assumption and usage of both P.V.C. and PU as against the P.V.C. Raw Material consumption of 0.790 Kg per meter of Artificial Leather declared by the tax payer to the Engineering Development Board (EDB) for a specific year and the learned C.I.T. (Appeals) was wrong to maintain that despite of the fact that the Sales Tax Appeals Forum quashed in totality the said addition of alleged suppressed sales.

(3) That the learned C.I.T. (Appeals) was wrong to ignore the reconciliation report signed by official of sales tax department which was submitted with written arguments as a testimony that the suppression of sales was based on hypothecation itself corrected by the Sales Tax Officials.

(4) That the learned C.I.T. (Appeals) was wrong to ignore the order in appeal passed by learned Collector Customs, Sales Tax and Federal Excise (Appeals) which was personally delivered by the AR on August 6, 2008 with covering letter # AZC/A-05/0688 dated 6-8-2008 but issued the appellate order in an ante-date by scraping these vital documents.

(5) That the learned Taxation Officer was wrong to reject the trading results on flimsy grounds and purely on hypothetical consideration and the learned C.I.T. (Appeals) ignored this despite of facts that the company maintained complete books of account as per requirements of section 230 of Companies Ordinance, 1984.

(6) That the Taxation Officer was totally wrong to work out the excess production of 2,384,518 Meters of Artificial Leather on the basis of clubbing the consumption of Poly Vinyl Chloride (P.V.C.) (PU despite of the fact that the tax payer has made the declaration of consumption ratio of P.V.C. Material only to the Engineering Development Board (EDB) and the learned C.I.T. (Appeals) was wrong to maintain that without giving any consideration to that most vital declaration which was not relevant to the year under appeal.

(7) That the reliance by the learned Taxation Officer for the purpose of addition in sales on the basis of Sales Tax Audit is in no way constitute a `definite information' as the issue was sub judice at the time of order and the learned C.I.T. (Appeals) was wrong to ignore this issue.

(8) That the learned Taxation Officer was wrong to make an addition in the rightly claimed initial depreciation on the plant & Machinery worth Rs.13,848,882 and the learned C.I.T. (Appeals) was wrong to maintain.

We have heard the learned representatives of both the sides and have also perused the impugned order of the learned C.I.T. (A), the assessment order, the documents and the case-law referred by the learned counsel for the appellant and the other relevant documents.

The taxpayer in this case is a private limited company deriving income from manufacture and sale of artificial leather. The return filed by the taxpayer was deemed assessment in terms of section 120 of the Income Tax Ordinance, 2001. However, later on the case was selected by the Commissioner under section 177 for detailed audit of the business affairs. The taxpayer challenged the selection of case in the Honourable High Court and after pronouncement of the judgment of the Supreme Court of Pakistan dated 30-3-2006 in C.A. No.1962/2005 etc. the case was re-selected for audit by the Commissioner and the order under section 122(1) was passed by the Taxation on January 9, 2008. The Taxation Officer has made the addition under the head Suppressed Production and Sales and has not allowed the claim of depreciation which has been agitated by the taxpayer before the learned C.I.T.(A) who has upheld the treatment meted out by the Taxation Officer; hence this appeal by the taxpayer.

Mr. Zafar Iqbal, FCA has appeared on behalf of the appellant and has contended that the Taxation Officer has rejected the declared trading results without any justification on flimsy ground and purely on hypothetical consideration despite the fact that the appellant company is maintaining complete books of accounts as per requirement of section: 230 of the Companies Ordinance, 1984 and all the books of accounts along with vouchers and other relevant documents were presented before the Taxation Officer for verification. He has contended that the addition in the income has been made by making the addition in the sales of artificial leather which amounts to 80% towards the declared sales of artificial leather which was already 11% higher than the immediate past year. The learned counsel has contended that the Taxation Officer has made the addition in sales on the basis of Sales Tax audit which has already been reversed vide order dated 31-7-2008 by the Collector, Customs and Sales Tax and Federal Excise (Appeals), Lahore. The excess production of 23845181 meters of artificial leather on the basis of clubbing the consumption of Poly Vinyl Chloride (P.V.C.) and Polyurethane (PU) despite the fact that the taxpayer has made the declaration of consumption ratio of P.V.C. material only to the Engineering Department Board (E.D.B.). According to the learned counsel for the appellant the reliance by the Taxation Officer for the purpose of addition in sales on the basis of sales tax audit is in no way constitute a definite information as the matter has already been decided in favour of the assessee and as the Taxation Officer has made the addition in sales placing reliance on the Sales Tax Department which has already been reversed, therefore, there is no basis of the addition made by the Taxation Officer. The learned counsel has contended that the addition in sales has been made by wrongly taking the different of sales declared to sales verified of the renowned buyers who are themselves sales tax registered persons and different is in decimal and subject to reconciliation keeping in view the quantum of sales made by the tax payer.' The learned counsel has contended that the Taxation Officer has totally ignored the history of the taxpayer, as in the immediate past two years this Tribunal has upheld the treatment meted out by the learned C.I.T. (A) accepting the declared results of the taxpayer for the past two years. The learned counsel has submitted that the Taxation Officer has referred a parallel case of Messrs. Nimir Chemicals Pakistan Limited to make a comparison of the gross profit but that company only produces Di-Octyle Phthalate (DOP) and Pthalic Anhydride (PA) and not produce the artificial leather and P.V.C. sheets which are produced by the taxpayer in the present appeal.

Regarding the initial depreciation the learned counsel has contended that the initial depreciation was rightly claimed by the taxpayer pertaining to assets added. According to the learned counsel the addition on account of plant and machinery was made during the year to the extent of Rs.1,64,87,295. The addition during the previous year on account of plant and machinery was at Rs.9,38,74,673 as the cost of machinery was partly charged in the year 2003 and assessment year 2002-03, therefore, the initial depreciation for the tax year 2003 was restricted of amount capitalized on plant and machinery for the year 2003 but the Taxation Officer has disallowed the claim of depreciation without any justification and the learned C.I.T. (A) has also upheld the treatment meted out by the Taxation Officer.

On the other hand, the learned DR is supporting the treatment meted out by both the officers below. He has contended that the Taxation Officer has made the addition under the head suppressed production and sales as the business affairs of the appellant were audited by two independent departments and both had reached the same conclusion of suppressed production. According to the learned DR the appellant's own declaration of Engineering Development Board was made basis of working of suppressed production and sales. The learned DR has contended that the appellant has completely failed to rebut the contentions of the Taxation Officer without cogent reasons and valid documentary evidence and, therefore the learned C.I.T.(A) has rightly maintained the addition under the head suppressed production and sales.

Regarding the initial depreciation the learned DR has contended that the plant and machinery worth Rs.1,38,48,882 was added in the previous year and no claim in this respect was made by the assessee, therefore, the initial deprecation on the same basis cannot be allowed in the current year.

After considering the contentions from both the sides, we are of the view that as far as the addition made by the Taxation Officer in the sales of artificial learned is concerned, we have found that the Taxation Officer has made the addition with the observation that the Sales Tax Department conducted audit of the company to the period relevant to the tax year 2003 and noted huge discrepancies in production results and rejected the declared results and has estimated the addition at Rs.34,81,39,628 by applying consumption rate of' 0.790 Kgs per meter of 54" width and has made the addition at the same figure of Rs.34,81,39,628 in the head suppressed production and sales.

In this regard on behalf of the assessee the order of the Collector of Customs and Sales Tax and Federal Excise (Appeals) Customs House, Lahore dated 31-7-2008 has been placed before us wherein the appeal filed by the assessee has been allowed with the observation that "in terms of Sales Tax Act which levies tax on the supply of the goods with the help of the records which are to be maintained in accordance with law such a hypothetical calculation with a plethora of unanswered questions can hardly pass the test of juridical security. For these reasons I am not inclined to accept the base year formula as a legal, logical and a tenable base for making out a case of the suppression of sales by the appellant. It is only obvious that the question of its retrospective extrapolation would be premature at this stage. The appeal is allowed on this issue." We, therefore, find force in the contentions made by the learned counsel for the appellant that if the very foundation of an action has been reversed the whole superstructure built upon cannot validity and legal stand. In this case it is an admitted position that the Taxation Officer has made the addition on the basis of the finding of the Excise Department which has already been held not to be legal, logical and tenable, therefore, if the very foundation of action was illegal, the whole superstructure built upon it could not validly and legally stand as has already been held by the Honourable High Court in a case reported as 1991 PTD 658 (Karachi H.C). Even otherwise, the learned counsel for the appellant has placed before us the chart showing the year-wise details of sales which shows substantial increase for the year under review as compared to the previous assessment years when the sales have always been accepted by the department.

In view of these facts and circumstances of the case, we find no justification for the addition in sales of artificial leather. The impugned order of the learned C.I.T. (A) in this respect is, therefore, vacated and the Taxation Officer is directed to accept the sales of artificial leather declared by the taxpayer. We however, find no warrant for interference in the impugned order of the learned C.I.T.(A) in respect of disallowing the claim of initial depreciation on the plant and machinery as the learned C.I.T. (A) has rightly upheld the treatment meted out by the Taxation Officer and the observations of the Taxation Officer while disallowing the claim are well founded and legally valid.

The appeal filed by the assessee is partly allowed to the extent and in the manner referred above.

C.M.A./126/Tax(Trib.)Order accordingly.