2005 PLP (Trib (PTD)

RASHEED AHMAD SHEIKH (JUDICIAL MEMBER).

This appeal at the behest of the assessee is directed against the order of learned CIT(A) Zone-III, Lahore, dated 4-7-2001 in respect of the assessment year 1997-98.

2. First objection of the assessee relates to rejection of its declared trading version and in the alternative the additions made towards the declared sales, by way of estimation of sales and application of higher gross profit rates, as well as in yieldage account have been contested on account of being unwarranted on the facts and in the circumstances of the case. Facts leading for disposal of this very appeal are that the appellant a Public Limited Company duly quoted on the Stock Exchange continues to derive income from operating a Spinning Unit. For the year under appeal, tax return was filed by it declaring net loss of Rs. 4,30,17,

611. Predominantly, the yarn so manufactured is exported but local sale of yarn is also being made. After examining the account statements a notice, dated "nil" was issued by the Assessing Officer requisitioning certain details from the assessee. Subject of this notice was "Finalization of assessment for the charge year, 1997-98. Notice under section 62" and the case was fixed for hearing on 19-6-2000. This notice does not have any locus standi in the eye of law as this notice was issued prior to examination of books of accounts. Thereafter no notice in terms of section 62(1) was ever issued pointing out specific defects in the books of accounts. This section envisages that the DCIT shall give a notice to the assessee of the defects noted in the books of accounts before disagreeing with such accounts. Anyhow, the assessment was completed by the Assessing Officer on 26-6-2000. However, prior to examination of books of accounts the appellant was confronted regarding declaring low gross profit rate viz a comparable case bearing NTN 30-02-0820773 whereby G.P. rate of 20.05% was declared. Also confronted on the point of disclosing low yieldage i.e. 80.03% and NTN of two cases, one existing at 30-02-0820773 and the other at 30-02-1718316, were referred to in which yield of yarn @ 85% had either been assessed of declared in those cases. Sales have also been attacked being made on cash basis and identifying particulars of the parties were also lacking. A few instances in this regard are quoted in the assessment order. Variation in sales rate to verifiable and unverifiable parties have been noted too. Expenses debited to the cost of sales; such as repair and maintenance, factory and stores was also required to be explained an account of being partly un-verifiable. The explanation furnished on all these points could not convince the Assessing Officer. Accordingly after discarding the declared trading version, resultant addition in local sales account was made by the Assessing Officer at Rs.1,30,64,609 by estimating sales at Rs.24,50,00,000 and applying gross profit rate of 20.05% as was available in the comparable cases against declared sales of Rs.21,48,34,968 and gross profit rate of 15.63% in consolidation. Similarly addition on account of low yieldage was made at Rs.1,80,06,181 by virtue of adopting yieldage @ 85%. The expenses claimed at Rs.11,32,676 in commission paid to selling agents account were disallowed and added back in its entirety in terms of section 24(c) of the Income Tax Ordinance, 1979 (i.e. no tax under section 50(4) of the Income Tax Ordinance, 1979 had been deducted on such payments). On similar reasoning addition of Rs.205,690 was made under the head legal and professional charges. In freight and export expenses the entire claim of Rs.45,71,312 was added back as those expenses were not allowable against local sales rather to be covered against the export sales.

3. When this treatment was challenged in appeal before the First Appellate Authority who restricted the sales to Rs.24,00,000 while action of the Assessing Officer regarding application of gross profit rate and the addition made in yieldage account was maintained. The matters relating to addition on account of commission paid to selling agents and legal and professional charges were remanded to the Assessing Officer for fresh adjudication. The amount of addition made under the head legal and secretarial services had been curtailed to Rs.1,00,

000. Hence, this further appeal by the assessee.

4. Both the learned representatives appearing at the bar have been heard at great length on all the issues raised before us. At the very outset, the learned AR for the assessee strongly agitated discarding of declared trading version of the assessee. While explaining this plea, he stated that the assessee has a history of acceptance of its declared trading version and departure therefrom without assigning any justifiable reasons, particularly when the books of accounts are being maintained on the same pattern as had been accepted by the department in the past, was uncalled for. A typed chart depicting history of the case has been placed on record to support the contention. Further stated that though over all sales are showing decline yet the fact remains that much better results have been disclosed in local sales account. To substantiate this, he stated that the local sales and the gross profit rate in the year under appeal, have been declared respectively at Rs.21,48,34,968 and 15.63% against accepted in the immediately preceding assessment year at Rs.16,265,151 and 7.96%. Also argued that the so-called cases relied upon by the Assessing Officer to adopt higher gross profit rate and also the yieldage are distinguishable in terms of machinery involved in those cases. Elaborating his point of view he cited that the assessee has employed "spindle machines" while "rooter machines" are being used in the comparable cases as a consequence of which production of yarn is bound to vary in each case. As regard adoption of yield of yarn @ 85% he stated that the two cases relied upon by the Assessing Officer cannot be termed as parallel because those units are not producing export quality of yarn. Even otherwise it was pointed out that the yieldage in one of the so-called parallel cases relied upon by the Assessing Officer bearing NTN 30-01-1718316, has been restricted to 80% which is much less than declared by the assessee-appellant. The learned AR also added that there is no denying the fact that the present assessee is an export oriented unit and despite this fact encouraging yield of yarn has been declared. So far as the case bearing NTN 30-02-0820773 is concerned, he mentioned that though gross profit rate of 20.5% was declared in that case yet yieldage had been adopted therein at 76.47% against shown at 75.67% therein. While the present assessee has declared yieldage over 80% not only in the year under appeal but had also declared all along in the past. With regard to next objection of the Assessing Officer that the sales were un-verifiable, the learned AR contended that all the necessary details were furnished during the course of assessment proceedings and this was the Assessing Officer who had to point out glaring discrepancies therein in order to reject the declared trading version.

5. Arguing on legal plea he contended that without confronting the assessee with the defects noted in the books of accounts in terms of notice under section 62(1) of the Income Tax Ordinance, 1979, which is a mandatory requirement of law, rejection of account is not at all warranted. Copy of the notice issued under section 62 has also been placed on our file which merely calls upon the assessee to furnish certain documents. Reliance in this regard has been placed on two reported judgments of the Tribunal one cited as 1999 PTD 3892 and the other 2002 PTD 1583. Also urged that mere mentioning NTN to discard the returned version does not amount to fulfilment of requirement of law. The higher appellate Courts in such circumstances has held the assessment to be not sustainable in law. Reference in this regard has been made to the judgment of the High Court reported as 1984 PTD

150. In the end the learned counsel for the assessee prayed for acceptance of declared trading version.

6. After appraising the facts obtaining on record and after having given anxious thought to the arguments advanced as well as perusal of the documents including spinning master's report furnished before us and the case law referred to by the learned counsel for the assessee in support of the contentions, we cannot help but to reach the conclusion that the order passed by the Assessing Officer had not only suffered from legal but also on factual infirmity. Perusal of the assessment order reveals that the Assessing Officer could not pinpoint any sufficient defects in the books of accounts, maintained by the assessee in order to reject the declared trading version despite the fact that those were examined by him. Rather book version has been rejected by the Assessing Officer on general and flimsy grounds. Though cash sales are hard fact of life but in a case where books of accounts are being maintained on the same pattern as had been accepted by the department in the past, in such situation heavy duty casts upon the Assessing Officer to find out glaring discrepancies in the account books such as suppression in purchases or sales etc. to disbelieve the trading account. Mere, declaring low gross profit rate coupled with it variation in sale rates to the sales made to the verifiable and unverifiable parties do not render rejection of declared trading version. This view point is supportive of judicial pronouncements made by the higher appellate forums such as PLD 1975 Kar. 370, (1979) 39 Tax 76 (H.C. Kar.), (1984) 50 Tax 121 (H.C. Kar.) and 1984 PTD

197. It has also been observed that the so-called comparable cases referred to by the Assessing Officer, in his order, do not apply on all fours to the facts of the present case. Actually the treatment accorded in those cases revolves around altogether different set of facts, such as employment of different kind of machinery, non-production of export quality of yarn etc. There is no cavil to this proposition that each year is a separate assessable entity but this is an established law that departure from history cannot be made without pointing out existence of exceptional and extraordinary circumstances as well as glaring defects or discrepancies in the books of accounts. Hence, we hold that declared trading version cannot be discarded on flimsy reasonings as has been done in the present case.

7. Above all, the fact remains that the assessment order suffers from legal infirmity. Section 62(1) of the Income Tax Ordinance, 1979 vividly stipulates that prior to rejection of declared trading version, the Assessing Officer is obliged to confront the assessee with the defects noted by him in the books of accounts maintained by the assessee. In the present case the notice issued by the Assessing Officer under section 62 number and dated "Nil", for compliance to be made on 19-6-2000, merely spells out submissions of certain details by the assessee which according to the assessee had been complied with. In no way this notice comes at par or can be equated with the notice to be issued under section 62(1) of the Income Tax Ordinance, 1979. Issuance of notice under section 62(1) of the Income Tax Ordinance is sine qua non and non-observance thereof is fatal. Since no such notice has ever been issued in the present case which would ultimately result into acceptance of declared trading version of the assessee. Support in this regard has been sought from the reported decisions of the Supreme Court and the Tribunal, i.e., 1971 SCMR 681, 1985 PTD (Trib.) 170, (1999) 79 Tax 764 (Trib.), 1999 PTD (Trib.) 3896, 2001 PTD (Trib.) 2938 and 2002 PTD (Trib.) 1583 whereby in similar circumstances it was held that any addition made in the declared trading results is ab initio illegal and void. So far as this Tribunal is concerned, the point relating to issuance of notice under section 62(1) of the Income Tax Ordinance, 1979 first came under discussion before the Karachi Bench in a reported judgment 1999 PTD (Trib.) 3892 in which it was observed as under:-- "In view of the above facts and conclusions drawn, ITO 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 initio illegal and void. Even otherwise on fact I.T.O. was not justified to reject the trading results." Subsequently this point was adjudged by the Lahore Bench in another reported case cited as 2002 PTD (Trib.) 1583. The learned Accountant Member, who is sitting in the present Bench, was also signatory to that judgment. The operative part of which reads as under:-- "After hearing both the parties and going through the case law cited at the bar, 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 accounts 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 Income Tax Ordinance, 1979." Similar view was adhered to in some what identical circumstances in an unreported decision of the Tribunal bearing I.T.A. No.414/LB of 2002, dated 27-7-2002 which has been rendered by me the Judicial Member. In that case certain details and documents were requisitioned by the Assessing Officer prior to examination of books of accounts by issuing a notice on the top which section 62 was mentioned. Finally the declared version was disbelieved on the strength of the said notice. Anyhow the ratio and the principle laid down in this case was the same as had been settled in the reported cases cited supra. The concluding para. of which is being reproduced hereunder:-- "In fact philosophy for issuance of notice under section 62, after examination of books of accounts, is to seek evidence on specific points before disagreement with such accounts. But in the instant case the evidence has been sought prior to examination of books of accounts meaning thereby that no specific defects could be pointed out by the Assessing Officer from the books of accounts maintained by the assessee. It thus stands established that no notice as contemplated by law was issued which was sine qua none for discarding the returned version. We, therefore, hold that the notice issued prior to examination of books cannot be equated with the notice not be issued in terms of proviso to subsection (1) of section 62 which the law requires to be issued before disagreeing with the declared results. This being a mandatory provision of law the Assessing Officer is bound to follow such statutory obligations and violation thereof naturally render the assessment framed to be ab initio illegal void."

8. Upon having perused the facts of the present case in its totality we find that the case law cited supra squarely applies to the case in hand. In view of foregoing discussion we hold that the declared trading results of the assessee have been discarded by the Assessing Officer without adhereing to the statutory obligation as has been stipulated in section 62(1) of the 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 or 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 yieldage account.

9. Before parting with this order we would also like to mention that the assessee has prima facie a good case in its favour even on factual grounds. We have noticed that neither the parallel cases mentioned in the assessment order are exactly parallel nor substantial material has been brought on record to have departure from established history of acceptance of the trading accounts. In the first case to which the Assessing Officer has alleged to be parallel i.e., bearing NTN 30-01-1718316; in this case yeildage adopted at the first instance at 85% was ultimately restricted in appeal to 80% while in the second case having NTN 30-21-0802773 yeildage was adopted by the revenue at 76.74%. While in the case in hand yeildage is being declared 80.03% since long which is certainly higher than the two cases relied upon by the Assessing Officer to discard the trading results. Adding to it the assessee has conceded higher G.P. rate in the year under appeal viz. the immediately preceding assessment year. For facility of reference the declared and assessed position of the G.P. rate in the three preceding assessment years is detailed below which supports the assessee's contention. A/year Yieldage G.P. rate Act of the DCIT 1994-95 80.06% 19.87% Accepted 1995-96 80.19% 22.20% -do- 1996-97 80.48% 7.96% -do- 1997-98 80.03% 15.65% Under appeal

10. Considering these facts in view we are of the considered view that the declared trading version cannot be rejected on the basis of so-called parallel cases until and unless some concrete material is not brought on record to do so. Thus no justifiable reasons could be adduced or in existence which may warrant departure from the history of the case at all in particular when the same method of accountancy has been followed in the year under appeal as was adopted in the past. In view of discussion made anti, we also hold that rejection of trading version was not sustainable in law and even on the facts and in the circumstances of the case. Corollary of the events is that the declared trading results merit acceptance.

11. Addition under the head commission. In the year under appeal, the assessee had claimed to have paid commission to the tune of Rs.11,32,876 to the selling agents. The Assessing Officer, however disallowed the claim in toto on the ground that since no tax under section 50(4) was deducted thereon by the assessee as such those expenses were not allowable in terms of section 24(c) of the Income Tax Ordinance, 1979. On appeal the learned CIT(A) held that since no confrontation before making the said addition was made to the assessee, hence in view of this situation the matter needs re-examination. Consequently, he set aside the assessment on this point.

12. The learned AR for the assessee contended that as the assessee was regularly submitting its monthly statements under section 139 to 143A of the Income Tax Ordinance and the tax wherever was liable to be deducted had duly been deducted and deposited in the Government Treasury, thus the action of the Assessing Officer in making addition without quoting any instance in this regard is not tenable in law. Also mentioned that no such addition in this head ever been made by the department in the past. The learned AR thus pleaded that setting aside the assessment on this point amounts to giving a fresh leverage in the hands of the department to hook the assessee once again.

13. Considering all these facts, we hold that the First Appellate Authority was not justified in setting aside the case on this score. Resultantly, the impugned order on this point stands vacated and the addition so made by the Assessing Officer is hereby deleted.

14. Export expenses.

The assessee, claimed expenses under this head of Rs.45,71312 which were disallowed by the Assessing Officer in its entirety with the observation that those were not allowable against the local sales being duly covered against the export sales in terms of section 80CC(2). The CIT(A) confirmed the action of the Assessing Officer in this regard. The learned AR reiterated that no confrontation was ever made with regard to the impugned addition by way of issuance of notice under section 62 and moreover right from the very beginning of the assessment years, 1994-95 to 1997-98, such expenses were being prorated by the department. Thus disallowance of such expenses in totality was not unjustified. After considering the submissions, we direct the Assessing Officer to follow the same methodology of allocating the export expenses proportionately in the year under appeal as well, as was being adopted in the past.

15. Financial charges.

The assessee claimed expenses under this head at Rs.2,22,61,

754. The Assessing Officer however observed that the assessee had declared other receivable to the tune of Rs.73,90,513 and no detail whatsoever of these receivable were furnished. Therefore, the Assessing Officer was of the view that the assessee might have charged interest on them and consequently made an addition of Rs.96,74,

364. On appeal the treatment meted out by the Assessing Officer was upheld by the learned CIT (A). The learned AR for the assessee contended that receivable shown by the assessee were from the associated companies and the amount so shown was actually arrived at after charging interest from them. Also submitted that such details had never been required by the Assessing Officer. Had those been requisitioned, the assessee would have replied satisfactorily. He mentioned that necessary details of this expense were also submitted before the CIT(A) along with the written arguments but he had failed to take cognizance of this fact. After hearing the learned AR we are of the considered view that the impugned addition has been made without requiring the details from the assessee. Accordingly, this point is set aside for de novo decision. The Assessing Officer shall proceed in accordance with law on reassessment.

16. Now this brings us to the disallowances made by the Assessing Officer in profit and loss account under various heads. The assessee has also challenged the add-backs made under the heads travelling and conveyance, entertainment, Motor vehicle operating, printing and stationery, repair and maintenance, general expenses, inland transportation and advertisement to be excessive and uncalled for. It was contended that in the year under appeal lesser expenses have been claimed viz. the immediately preceding assessment year while higher additions have been made by the assessing authority in these heads of expenses. We have perused the chart submitted by the learned AR in this regard and find that the add-backs under the head travelling and conveyance and inland transportation have excessively been made. These are, therefore, restricted to Rs.1,50,000 and Rs.2,00,000 respectively. Rest of the treatment accorded by the First Appellate Authority is hereby maintained.

17. Resultantly this appeal succeeds to the extent indicated above. AMJAD ALI RANJHA (ACCOUNTANT MEMBER)

I beg to differ with my learned brother regarding his finding that trading results declared by the assessee should be accepted. His arguments also show that he is of the view that perhaps notice under section 62 has not been issued or the assessee has not been given proper opportunity when it is not so in this case. Merely citing case law does not entitle an assessee for accepting his accounts as there is ample case law on the other side as well regarding rejection of accounts such as S.N. Namasi Vayam Cheitier v. CIT Madras (1960) 38 ITR 579 (SC) India, 1967 PTD 205, 1981 PTD 213, 1967 PTD

1. Therefore, as it is only the driver who knows as the car being driven is faultless or not, or only the wearer knows, where the shoe pinches, hence on the same corollary only the officer who has examined the accounts, knows as to whether they are worth reliance or not. I have looked into the facts of the case and I feel that the department has given fairly reasonable reasons for rejecting the accounts as the sales are unverifiable and sale rate is differing to the extent of Rs.1185 to 1280 per bag between verifiable and unverifiable parties as is apparent from the examples cited by departmental officer. When confronted, assessee has failed to respond. Hence, additions made on the basis of yield, GP rate and such other factors, cannot be ignored in the manner, as my learned brother has done in this case. So I am fully convinced that the additions have rightly been made by the department and CIT(A)'s order is quite judicious. I agree with the findings of the CIT(A) instead of agreeing with my learned brother, the judicial Member. As the difference of opinion has arisen between the two learned Members, hence the case is referred to the Hon'ble Chairman for referring it to the third Member or to a larger Bench on the following question:-- "Whether in view of the facts and circumstances of the case, the accounts of the assessee should be accepted or rejected and therefore, CIT(A)'s order should be confirmed or not." MUHAMMAD TAUQIR AFZAL MALIK (JUDICIAL MEMBER).

A difference of opinion has arisen between my learned Judicial and Accountant Members in the above said case and the following questions has been referred to me by the Honourable Chairman to be answered. "Whether in view of the facts and circumstances of the case, the accounts of the assessee should be accepted or rejected and therefore, CIT(A)'s order should be confirmed or not." After hearing the arguments from both the sides and going through the order of my learned brothers, my findings on the question referred to above are as under:-- The perusal of the order of this Honourable Tribunal before me shows that in para. No.1 the order of CIT(A) has been impugned in paras. Nos. 2, 3 and 4 shows the factual ground on which the appellate order has been challenged. In para No.5 legal plane has been advanced and from para. 6 onwards to para. 16 the finding of my learned brother Judicial Member has been given. In para.6 there is a typographical mistake instead of officer the word office has been typed. (The underlining is mine.) In view of paras. 6, 7, 8, 9 &

10. I totally agree with the findings recorded by the my learned Judicial Member and concur them on the same reasoning which was advance by my learned brother. The repetition of the same will be of no avail. As far as addition under the head commission is concerned, the finding is in para. No.

13. I also endorse the same. As far as the export expenses are concerned, it will not be out of place to mention that at page. 10 in line No.6 the word "unjustified" has been typed which should have been "justified". (The underlining is mine). As far as the disposal of this issue is concerned, I very humbly and respectfully disagree with my learned brother. I will like to take support from his own language on page 5: "There is no cavil to the proposition that each year is a separate assessable entity but this is an established law that departure from history cannot be made without pointing out existence of exceptional and extraordinary circumstances as well as glaring defects or discrepancies in the books of accounts." According to me, a wrong method was being adopted for allocating the export expenses proportionately. The provision of section 80CC tax on income of certain exporters is in the manner of presumptive tax on exporters in which the exporters are obliged to pay tax as per rates specified in the 1st Schedule. This liability is final for all intents and purposes. They have to file a statement under section 143B and not a return. The law has given them a special concession that whatever amounts of export they show that is to be taken as granted to be a gospel truth (being verifiable, having been routed through Bank). In this case though the unit is export oriented yet for the year under appeal there is a sale in the local market more than in the earlier years. Therefore, I will like to point it out that the Assessing Officer in this case can only see that the expenses which have been allocated to export are the expenses which actually have been expended for the goods exported, or not are to be allocated on the export sales and any expense which has not been made on export oriented sales, has not been wrongly claimed. If all the expenses incurred are on the goods which have been exported then total export expenses are to be allowed. If not then those expenses which have not been incurred for exported goods are to be disallowed. The allocation of export expenses proportionately to the export and local sales is not approved by me. Financial Charges: Para. 15 of the order of my learned brother deals with this and his finding of setting aside for de novo decision by the Assessing Officer in view of the reasons given by him, I endorse the same. The last issue in para. 6 is about the P&L expenses. It has been taken lightly. Technically speaking the issuance of notice under section 62 is also mandatory in disallowing the P&L expenses but this being a peanut keeping in view the totality of the case, I also agree to it. The nutshell of the above said discussion is that in view of the facts and circumstances of the case, the accounts of the assessee should be accepted but the order of CIT(A) should not be confirmed but modified on different scores as given above. To this extent, I agree with my learned Judicial Member. In view of what has been stated above, the appeal of the assessee is partially accepted by majority decision. C.M.A./294/Tax(Trib.) Appeal partly accepted.