2010 P T D (Trib.) 1038
[Income-tax Appellate Tribunal Pakistan]
Before Nazir Ahmad, Judicial Member and Mian Masood Ahmad, Accountant Member
I.T.A. No. 6020/LB of 2004, decided on 03/09/2009.
(a) Income Tax Ordinance (XXXI of 1979)---
----Third Sched., R.5A--- C.B.R. Circular No. 22 of 1957, dated 2-10-1957---Depreciation allowance---Addition of machinery---First year allowance---Disallowance of first year allowance was upheld by the first Appellate Authority on the ground that the same was only admissible on the installation of machinery on the basis of setup of industrial undertaking on a specified date and not on the addition of machinery---Assessee contended that spinning units were involved in conversion of cotton to yarn which was a value added process, and it was an addition in value of cotton and part of overall value addition process from cotton to weaving and from fabric to manufacturing of garments---Machinery installed in spinning unit was entitled for first year allowance---Validity---First Appellate Authority had not discussed the issue of value addition and merely rejected the first year allowance on the ground that the same was allowable only to the industrial undertaking setup on or after date specified i.e. 1st day of November, 1997 and not on the addition or renewal of machinery--Unit was involved in process of value addition---Value added is generally the sum of all wages, interest, rent and profit---Since word `value added' had not been defined in the Income Tax Ordinance, 1979, the Appellate Tribunal adopted the ordinary dictionary meaning and observed that claim of first allowance on both the counts was admissible which was directed to be allowed accordingly.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.62(1)---Assessment on production of accounts; evidence etc.---Addition out of profit and loss account---Assessee being an unlisted public limited company was maintaining proper accounts and had produced for scrutiny to the Assessing Officer---Assessing Officer, in circumstances, was obliged to thoroughly examine the same and confront the assessee with defects noted by him by way of issuance of notice under S.62(1) of the Income Tax Ordinance, 1979 which was a mandatory requirement of law---Assessing Officer failed to do so---Add backs made in profit and loss account was deleted by the Appellate Tribunal.
2003 PTD 2668; 2007 PTD (Trib.) 155; 2005 PTD (Trib.) 1437; 1999 PTD (Trib.) 3892 and I.T.A. No.4406/LB of 2001 rel.
(c) Income Tax Ordinance (XXXI of 1979)---
----First Sched: Part-III & S. 80DD---C.B.R. Circular. No.5 of 2001 dated 4-7-2001---Rate of surcharge---Minimum tax on income of certain persons---Levy of surcharge @ 5% on minimum tax liability---Validity---Provisions of Part-II of First Schedule of Income Tax Ordinance, 1979 regarding rates of surcharge were not applicable/leviable to Ss.80-D & 80D/80DD of the Income Tax Ordinance, 1979---Order passed by both the authorities below were vacated by the Appellate Tribunal.
2002 PTD 2662 overruled.
ITAT cited as 99 Tax 212 rel.
Aqeel Ahmad for Appellant.
Sajjad Rizvi, L.A. for Respondent.
ORDER
This further appeal at the instance of the assessee pertaining to assessment year 2002-03 has been directed against the impugned order dated 1-9-2004 recorded by C.I.T.(A) Zone-III, Lahore, whereby the following issues have been raised as per memo of appeal for adjudication:
(i) That the learned C.I.T.(A) Zone-III, Lahore has erred in confirming the rejection of first year allowance.
(ii) That the learned C.I.T.(A) Zone-III, Lahore has erred in confirming the additions regarding add backs/disallowance of expenses made by the Assessing Officer under the different heads of P&L account.
(iii) That the learned C.I.T.(A) Zone-III, Lahore is not justified in confirming the levy of surcharge.
2. Brief facts of the case are that the assessee, an unlisted public company, engaged in the business of manufacturing and sale of yarn filed return for the year under consideration declaring a loss of Rs.6,190,516. The Assessing Officer after making comparison of the trading results of the charge year with that of the last year came to the conclusion that assessee has increased sales for the year under consideration whereas the gross profit was declined from 8.85% to 7.49%. He, therefore, proceeded to assess income of the assessee by accepting declared trading results but making additions out of P and L account expenses, curtailing triple shift allowance, levying of surcharge on tax demand raised under section 80D and disallowing the first year allowance, Addition under section 12(18) of the repealed Income Tax Ordinance, 1979 was also made. Thus after adjustment loss from local business was determine at Rs.214,377. Feeling aggrieved the assessee preferred appeal before C.I.T.(A) Zone-III, Lahore, who allowed relief to the assessee by deleting the addition made under section 12(18) but confirmed the action of assessee authority on the issues regarding rejection of the first year allowance, additions made in P and L Account and levy of surcharge.
3. The learned representative of both the parties have been heard. The learned AR has contended that the 1st year allowance claimed by the assessee/appellant should have been allowed by the Assessing Officer as well as by the learned C.I.T.(A) as the same was claimed in accordance to the rule 5A of the third schedule of the (late) Income Tax Ordinance 1979. He added that the spinning units are involved in conversion of cotton to yarn which is a value added process, and in fact it is an addition in the value of cotton and part of overall value addition process from cotton to weaving and from fabric to manufacturing of garments. Thus in his view the machinery install in the spinning unit is entitled for first year allowance. The learned AR also added that the learned C.I.T.(A) has erred and misconceived by holding that the 1st year allowance is only admissible on the installation of machinery on the basis of setup of industrial undertaking on a specified date and not on the addition of machinery. Learned AR relying on Board Circular No.22 of 1957 dated 2-10-1957 explaining the said issue in the following words:--
"The expression `install' in its ordinary dictionary meaning is wide enough to cover initial installation as well as subsequent installations. The Board is, therefore, of the view that initial depreciation allowance is admissible not only to new units of industry but also to new installations or erections in an existing unit of industry."
4. So, the learned AR emphasized that the objection raised by the Assessing Officer regarding value addition and learned C.I.T.(A) about addition of machinery in already set up unit are not well founded and the appellant claim of first year allowance is admissible under the law and qualifies for acceptance.
5. The learned DR on the other hand opposed the arguments advanced by the learned AR and supported the view taken by the lower authorities, and vehemently argued that since the appellant is not involved in any type value addition so his claim of first allowance is not at all admissible and learned C.I.T.(A) was quite justified to reject the claim.
6. We have heard the arguments advanced by the learned representatives of the both the parties and pursed the available record. The contention of the learned AR of the appellant carries weight, the Board circular discussed supra clarified the difference between installation and addition or renewal (which is self-explanatory), thus need no further dilation from our side. Moreover as far as the value addition is concerned the learned first appellate authority has not discussed the issue in the impugned order and merely rejected the claim of 1st year allowance as in his opinion the allowance was allowable only to the. industrial under taking setup on or after date specified i.e. 1st day of November, 1997 and not on the addition or renewal of machinery, but as explained by the learned AR of the appellant the unit is involved in the process of value addition although the value addition as per Black Law Dictionary is "the value added is generally the sum of all wages, interest, rent and profit." Since the word value added has not been defined in the Income Tax Ordinance, 1979 so we have to adopt the ordinary dictionary meaning. Thus in our considered opinion the claim of the appellant regarding first year allowance on both the Courts is admissible which is accordingly directed to be allowed.
P & L Expenses
7. The learned AR vehemently objected the additions made in the P&L Account by the Assessing Officer party reduced and confirmed by the learned first appellate authority. As per learned AR, the appellant has maintained proper record and books of account which were produced before the Assessing Officer for examination, with supporting documents and vouchers resultantly the declared trading results were accepted but certain additions were made in the P&L Account. The learned AR pointed out that as per section 62(1) of the repealed Income Tax Ordinance, 1979 the Assessing Officer was legally bound to pinpoint specific defects in the books of accounts before making additions in the P&L Account but he fails to do so. Hence, the additions are contrary to statuary provision of law which merit deletion he also relied on a number of reported judgments of the tribunal particularly 2003 PTD 2668, wherein it has been held.
"In the light of the above discussion we would like to conclude that since in the instant case the Assessing Officer failed to point out any defect in spite of production of books of account with all the relevant details, did not cite any instance of un-verifiability except using common jargon and stock phrases, and omitted to confront to the assessee about the disallowances, the learned C.I.T.(A) was not justified to send back the case to the Assessing Officer for de novo consideration on the issue, hence, the impugned order passed by learned C.I.T.(A) is vacated, addition made in profit & loss accounts are directed to be deleted."
8. The learned DR on the other hand supported the additions in the P&L Account as per impugned order which has according to his history, fact and details available.
9. Arguments heard and record perused. The issue before us for adjudication is that as to whether without issuance of mandatory notice under section 62(1) add backs made by Assessing Officer under impugned heads of P&L Account are sustainable under the law or not. On the issue under consideration the law is very clear and the appellate forums in a number of cases where non-issuance of mandatory notice under section 62(1) is found, the assessing authority has been directed to accept declared version of the assessee. In order to lend credence, we would also like to place reliance on the following reported judgments of ITAT, the ratio of which is reproduced as under:-
2007 PTD (Trib) 155.
Since notice under proviso to section 62(1) was not issued pointing out specific defects in the books of accounts and no intention was shown to make add-back from P&L Accounts, the rejection of the accounts and add-back made are illegal and unjustified. Hence the Assessing Officer is directed to accept the returned version declared by the assessee for the years 1998-1999, 2000-2001 and 2001-2002.
2005 PTD (Trib.) 1437.
In view of the foregoing discussion we hold that the declared trading results of the assessee have been directed by the Assessing Officer without adhering to the statutory obligation as has been stipulated in section 62(1) of the repealed Income Tax Ordinance, 1979 and also without pointing out any substantial nature of defects in the books of accounts which may warrant departure from history of the case of rejection of the declared trading version. We, therefore, direct the Assessing Officer to accept the declared trading version of the assessee in the assessment year, 1997-98 as well. This would ultimately result into deletion of addition made in the declared gross profit by way of estimating sales and applying higher gross profit as well as in yielding accounts.
1999 PTD (Trib.) 3892
Income Tax Ordinance in terms of proviso to subsection (1) of section 62 should have confronted the assessee with the defects found in the books of accounts. It was a mandatory provision which he was required to follow. As he failed to do so he has no legal authority to make any addition in the declared trading results. Any addition made is therefore ab anitio illegal and void. Even otherwise on fact Income Tax Ordinance was not justified to reject the trading results.
I.T.A. No.4406/LB of 2001, Assessment year 1998-99
We are of the considered view that the learned first appellate authority was erred in law while setting aside the case instead of annulling the assessment when the Assessing Officer failed to confront the assessee with the defects found by him in the books of account which is mandatory provision of law for framing the assessment. We, therefore, vacate the order of the learned first appellate authority and annul the assessment framed by the Assessing Officer being in violation of section 62 of the repealed Income Tax Ordinance, 1979.
10. In the light of ratio settled in the above referred judgments of the ITAT, we are of the considered view that/since the Assessee being an unlisted public limited company is maintaining proper accounts and also produced for scrutiny to the Assessing Officer, therefore, it was obligatory upon the Assessing Officer to thoroughly examine the same and confront the assessee with defects noted by him by way of issuance of notice under section 62(1) of the repealed Income Tax Ordinance, 1979 being mandatory requirement of law C but he failed to do so. Therefore, we are left with no other option except to delete the add backs made .in P&L Account. We order accordingly.
11. Now, we come to the issue regarding levy of surcharge. The perusal of assessment order reveals that the taxation officer levied 5% surcharge amounting to Rs. 86,682 on minimum tax liability worked out at Rs.1,733,647 by placing reliance on an unreported judgment of ITAT recorded in I.T.A. No.23/KB of 2002. Feeling aggrieved, the assessee preferred appeal before C.I.T. (A), who also confirmed the action of assessing authority by placing reliance on a reported judgment cited as 2002 PTD 2662. Against the treatment meted out by both authorities below, the assessee has come up in appeal before the ITAT.
12. The learned AR has termed the action of both authorities below to be arbitrary. He has elaborated his view point that the issue under consideration already stands resolved in favour of the assessee/appellant in a reported judgment cited as 99 Tax 212, wherein the Larger Bench of learned ITAT has held as under:
"Accordingly we hold that provisions of Part-III of the First Schedule of the repealed Income Tax Ordinance, 1979 regarding rates of surcharge are not relevant to sections 80D and 80DD of the late Ordinance 1979."
"Consequently decision of the Division Bench of the Tribunal dated 24-2-2006 in I.T.A. No.4453/LB of 2005 reported as 2006 PTD 1189 and the similar view taken in this regard by the other benches of the Tribunal are approved and the decision of the Tribunal dated 17-5-2002 in I.T.A. No.23/KB of 2002 reported 2002 PTD 2662 = 86 Tax 305 and similar view taken in this regard by the other benches of the Tribunal overrules."
---In order to further strengthen his view point he has placed reliance on circular No.5 of 2001 dated 4-7-2001 wherein it has been held as under:--
Abolition of Surcharge
[Paragraphs B and C of Part-III of First Schedule].
"The surcharge of Rs.300 payable by assesses qualifying under the self-assessment scheme and 10% surcharge payable by non-salaried individuals and AOPs, URF, HUF where income exceeds Rs.100,000 would not be applicable from assessment year 2002-03. Similarly, companies would also not be liable to 5% surcharge from assessment year 2002-03."
---In view of above, the learned AR has laid emphasis on this point that since according to the provisions contained in circular No.5 of 2001 dated 4-7-2001 and ratio settled in reported judgment supra passed by Larger Bench of learned ITAT, the surcharge is not leviable on the turn over worked out under sections 80D and 80DD of the repealed Income Tax Ordinance, 1979 therefore, assessment order and impugned appellate order on the issue under consideration merit vacation and he prays accordingly.
13. On the other hand, the DR has supported the action of both authorities below by confining, his arguments to the reasons enumerated in the body of impugned order. However, his sole contention before us is that since the order passed by revenue authorities are supported by reported judgment of learned ITAT, therefore, the same should have been upheld.
14. Arguments heard and record perused. We find weight in the arguments advanced by learned AR being supported not only by reported judgment of learned ITAT cited as 99 Tax 212 but also by provisions contained in circular No.5 of 2001 dated 4-7-2001. In the reported judgment referred by the AR it has been held by Larger Bench of learned ITAT in unequivocal manner that/provisions of Part-III of First Schedule of the repealed Income Tax Ordinance, 1979 regarding rates of surcharge are not applicable/leviable to sections 80D/80DD and/reported judgment cited as 2002 PTD 2662 relied by both authorities below in support of their action is no more in the field being over-ruled by them. The stance taken by learned AR is further strengthen by the Circular No.5 of 2001 dated 4-7-2001 whereby it has been provided that surcharge would not be leviable from assessment year 2002-2003.
15. In view of the foregoing discussion we are left with no other option accept to vacate the orders passed by both authorities below and accept the appeal of the assessee in terms of prayer on the issue under consideration.
C. M. A./16/Tax(Trib.)Appeal accepted.