COMMISSIONER OF INCOME TAX, COMPANIES ZONE-I, LAHORE VS AYESHA WOOLLEN MILLS (PVT.) LIMITED, LAHORE, 2012 PTD-LAHORE-HIGH-COURT-LAHORE 1611 (2011)

Income Tax Ordinance (XXXI of 1979)---

---Ss.32-A, 62(1) & 136---High Court Appeal---Certificate of Chartered Accountant---Scope---Distinction between falsity of accounts and method of accounting---Commissioner Income Tax assailed orders of the Income Tax Appellate Tribunal whereby assessee's appeal was allowed and it was ordered that the assessee's declared trade results be accepted---Contention of the Department was that in presence of a qualified certificate by auditor / Chartered Accountant of the assessee, and the qualification being that that they had not carried out valuation of stock and stores and verification of markup payable or examined the bills payable by verification; provided justification for rejection of trading accounts of the assessee in terms of S. 32A of the Income Tax Ordinance, 1979---Validity-In interpretation of provisions of S. 32A of the Ordinance, there was a distinction between method of accounting and falsity of accounts---Method of accounting could not be questioned in view of the fact that the Chartered Accountant of the assessee audited the accounts and certified that the balance sheet profit and loss accounts together with the notice forming part thereof, gave a true and fair view of the affairs of the assessee company and thus it could not be suggested that the method of accounting was such that income could not be deduced therefrom---Said certificate given by the Chartered Accountants was not false and no material or evidence to that effect was gathered or relied upon by the Assessing Officer or confronted to the assessee---Assessing Officer did not issue notice to assessee under S. 62(1) of the Ordinance which was a mandatory obligation and proceeded to reject the books of accounts without recording any cogent or legally sustainable reasons---Ground that the said certificate was qualified, did not furnish sufficient reason to reject the accounts altogether in absence of cogent and plausible reasons to do so---Appeal was dismissed.

CIT v. Krudd Sons Ltd. 1994 PTD 174; Collector, Sahiwal v. Muhammad Akhtar 1971 SCMR 681 and Messrs Pimpa (Pvt.) Ltd., Karachi v. CIT Companies-I, Karachi 1994 PTD 123 rel.

Muhammad Ilyas Khan for Appellant.

Mian Ashiq Hussain for Respondent.

Date of hearing: 11th November, 2011.

JUDGMENT

IJAZ UL AHSAN, J.---Through this single judgment we propose to dispose of Income Tax Appeals Nos.45, 46, 47, 48 and 49 of 1998, as an identical question of law has been raised in all these appeals. The appellant is aggrieved of a consolidated order passed by the Income Tax Appellate Tribunal (ITAT), Lahore Bench, through which the ITAT dismissed the appeal of the department and allowed the assessee's appeal by ordering that its declared trade results may be accepted.

2.The assessee is a Limited Company engaged in manufacture of woolen fabrics, acrylic and woolen yarn. Its assessment for the financial years 1988 to 1993 was completed under section 62 of the Income Tax Ordinance, 1979 (the Ordinance). The Assessing Authority rejected the declared trading results and computed its income after undertaking an assessment of trading accounts and making certain additions in the profit and loss accounts. The declared trading results were ostensibly rejected for the reason that the same were not entirely open to verification. Besides, the assessee had shown decrease of margin of gross profit without any cogent reason. It was also stated that the assessee had a case history of rejection of accounts which furnished justification for rejection of subsequent accounts.

3.The assessee filed an appeal before the CIT (Appeals) against rejection of trading accounts and additions in profit and loss accounts. The first appellate authority allowed relief to the assessee by reducing the assessee's sales as well as the assessed rate of gross profits. The assessee as well as the Department filed further appeals before the ITAT. The appeals filed by the Department were dismissed while those filed by the assessee were partly accepted by ordering that declared trading results may be accepted. Being dissatisfied with the order passed by the ITAT, the Department has filed these appeals raising the following question of law:---

"Whether under the facts and circumstances of the case, learned ITAT was justified to direct acceptance of accounts despite a qualified certificate by the Chartered Accounts which stated that they had neither carried out valuation of stock and stores nor verification of markup payable, nor examined the bills payable for verification as stated in note 10(2) of the balance sheet"?

4.The learned counsel for the Department submits that a perusal of the certificate issued by the Chartered Accounts of the Assessee shows that they did not make the estimates of value of stores and spares. Further, they did not obtain balance confirmation certificates from Banks in respect of the markup table. In addition, bills for receivables were not made available for perusal of the auditors. Therefore, the certificate given by the auditor was a qualified one. It is argued that since the certificate was a qualified one, the same provided enough justification for rejection of trading accounts in terms of section 32-A of the Ordinance. He therefore argues that the order passed by the ITAT is not sustainable.

5.The learned counsel for the respondent, on the other hand, has supported the order passed by the ITAT.

6.We have heard the arguments of the learned counsel for the parties and gone through the record with their assistance.

7.In order to determine the controversy before us, it would be useful to reproduce the provisions of section 32-A of the Income Tax Ordinance for ease of reference:--

"32-A. Documents certificates, etc. to be furnished by the certain companies---(1) Every private company as defined in the Companies Act, 1913 (VII of 1913), whose paid up capital on the last day of any income year is five hundred thousand rupees or more shall, with the return of total income for that year, furnish a copy of the balance sheet and profit and loss account for that year and an auditors' report for the year, in Form 35-A of the Companies (General Provisions and Forms) Rules, 1985, prepared and signed by a person who is a Chartered Accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961), or a costs and management accountant within the meaning of the Cost and Management Accountants Act, 1966 (XIV of 1966).

(2)Where a company has not complied with the requirements of subsection (1) its income, profits and gains shall be computed upon such basis and in such manner as the Deputy Commissioner may determine."

We have also gone through the certificate issued by Hameed Chaudhary and Company, the Chartered Accountant of the Assessee, which states as follows:--

"We have audited the annexed balance sheet of AYESHA WOOLEN MILLS LIMITED as at 31st December, 1987 and the related profit and loss account, together with the notes forming part thereof, for the year then ended and we state that:--

(1)We have relied upon certification of the Management for existence and valuation of stocks and stores.

(2)Balance confirmation certificates from Banks in respect of Markup payable and Bills payable were not made available for verification as stated in note 10.2.

(3)Penal interest for the year amounting Rs.155,320 on debentures and bridge advanced has not been provided on the basis of a letter received from ICP although ICP had not waived it till 31st December, 1987 as revealed by its Balance Confirmation Certificate."

Subject to the foregoing remarks and contents of note 10.1, 11 and 12; we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit and, after due verification thereof, we report that:--

(a)in our opinion, proper books of account have been kept by the Company as required by the Companies Ordinance, 1984;

(b)in our opinion:

(i)the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984 and are in agreement with the books of account and are further in accordance with accounting policies consistently applied;

(ii)the expenditure incurred during the year was for the purpose of the Company's business; and

(iii)the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Company;

(c)in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, profit and loss account together with the notes forming part thereof, give the information required by the Companies Ordinance, 1984 in the manner so required and respectively give a true and fair view of the state of the Company's affairs as at 31st December, 1987 and of the profit for the year then ended; and

(d)In our opinion no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.

8.It is common ground between the parties that the case of the appellantiscovered under section 32-A oftheOrdinancewhichrelatesto private limited companies as opposed to section 32 which dealswith methods of accounting applicable in case of any business or person or class of business or persons. As such being a special provision, section 32-A effectively excludes operation of section 32(3) in the facts and circumstances of the present case.

9.It appears that in interpreting the provisions of section 32-A of the Ordinance, there is a distinction between method of accounting and falsity of accounts. In case where there is an allegation about falsity of accounts the Assessing Officer has the power to proceed according to the mandate under section 62 of the Ordinance. That was, however, not the case of the appellant. In the case of CIT v. Krudd Sons Limited (1994 PTD 174), the Honourable Supreme Court of Pakistan held that the method of accounts was distinct from falsity of accounts, i.e., method may be irregular but accounts books may be true or the method of accounting may be irregular but accounts books may be false. In the present case the method of accounting cannot be questioned in view of the fact that the Chartered Accounts of the Assessee audited the accounts and certified that the balance sheet, profit and loss accounts together with the notice forming part thereof gave a true and fair view of the affairs of the Company. Thus it cannot be suggested that the method of accounting is such that income cannot be deduced therefrom. It is not the case of the Department that the accounts or the certificate given by the Chartered Accounts were false nor was any material or evidence to that effect gathered or relied upon by the Assessing Officer or confronted to the appellant. It is further noticed that the Assessing Officer did not fulfill the mandatory requirement of issuance of notices under the proviso to subsection (1) of section 62 of the Ordinance. According to the proviso the Deputy Commissioner was obliged to give a notice to the assessee pinpointing defects in the accounts, if any, and providing an opportunity to the assessee to explain its point of view about such defects and record such explanation and the basis of computation in the assessment year. Such notice was to precede rejection of accounts. It is evident from the record that the Assessing Officer failed to discharge its mandatory obligation and proceeded reject the books of accounts without recording any cogent or legally sustainable reasons. In the case of Collector, Sahiwal v. Muhammad Akhtar (1971 SCMR 681), the honourable Supreme Court of Pakistan held as follows:--

"The principle, so far as this country is concerned, is accordingly well settled that where notice required to be given by the statute is a mandatory notice, then the failure to comply with the such mandatory requirement of the statute would render the act void ab-initio as being an act performed in disregard of the provisions of the statute. Furthermore any further action taken on the basis of such a void order would also be vitiated and the defect at the initial stage would be incurable by a hearing at a subsequent stage".

10.We find that since the mandatory notice under the proviso to section 62(1) had not been issued by the Assessing Officer before disagreeing with the accounts and details produced by the assessee, the assessment order was clearly arbitrary and not sustainable.

11.In the case of Messrs Pimpa (Pvt.) Ltd., Karachi v. CIT Companies-I, Karachi (1994 PTD 123), the Court held that, "in the absence of any omission, irregularity, or other defect in the method of maintaining of accounts or positive evidence to show that the accounts did not disclose the whole income of the assessee, his books-of-accounts could not be rejected".

12.In the instant case, in the presence of properly audit accounts prepared in accordance with the relevant provisions of law, the Department could not have been allowed the power to reject the same arbitrarily without recording reasons for the same. The record indicates that no defects had been found in the books of accounts, balance sheet and profit and loss account for the relevant years which were prepared by a Chartered Account. There was neither reason nor lawful justification for the Assessing Officer to resort to his own estimates without fulfilling the requirements of law including issuance of a notice under section 61(1) of the Ordinance.

13.In the case of Commissioner of Income Tax v. Kurdd Sons (ibid) the honourable Supreme Court of Pakistan held that if an assess adopts a method of accounting from which income profits and gains can be deduced, the Assessing Officer has no option but to accept it. The honourable Court further proceeded to hold that accounts must be distinguished from method of accounting. There may be a required method of accounting and yet for defects, the accounts may be rejected. But it does not lead to automatic rejection of the assessment and method of accounting employed by an assessee. Occasion may arise where although the profit shown in the accounts is not treated as correct, the Assessing Officer can deduce correct figures from the accounts. If the accounts are found to be false and manipulated with a view to appraise the income and profit and the same cannot be deduced correctly, the Assessing Officer can reject the accounts. However, it was held that mere expression or opinion that such deduction cannot be made is not sufficient unless cogent reasons to support this conclusion are also stated. It is noticed that the sole reason for rejection of trading, accounts of the appellant given by the Assessing Authority was that the certificate issued by the Chartered Accountant of the Company was a qualified one. The Assessing Officer, however, ignored the specific statements made in the certificate that, "in our opinion proper books of account have been kept by the company as required by the Companies Ordinance, 1984, and the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of account .." and finally, "In our opinion, and to the best of or information and according to the explanations given to us, the balance sheet, profit and loss account together with the notes forming part thereof give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the company's affairs .." The Assessing Officer has not found that the accounting methodology used by the company was wrong or irregular, the books of account were false or from the method of accounting or other material available to him, it was not possible for him to deduce the income of the assessee. The sole ground used as a basis for rejecting the trading accounts of the assessee was that the certificate issued by the Chartered Accountant was a qualified one. We are afraid, such qualification does not furnish sufficient reason or justification to reject the accounts altogether in the absence of cogent and plausible reasons to do so. The learned ITAT, after considering the case of the Department on merits as well held that the Assessing Officer lacked lawful authority to reject the method of accounting under the relevant provisions of law. We are not persuaded to hold otherwise.

14.For reasons recorded above, we do not find any merit in these appeals. The same are accordingly dismissed. The question of law raised in this appeal is answered in the affirmative.

K.M.Z./C-2/LAppeal dismissed.