2005 PLP (Trib (PTD)

S. HASSAN IMAM (JUDICIAL MEMBER)

The Department has filed this appeal against the order of the learned CIT(A), dated 15-6-2002 on the following grounds:-- (1) That the learned CIT(A) was not justified in directing the Assessing Officer to recompute the non-presumptive income with certain specific directions without assigning any plausible explanation. (2) That the learned CIT(A) was not justified to restrict the disallowance under the heads-of travels and conveyance, postage and telephone, advertisement, vehicle running and printing and stationery without any cogent reason.

2. The facts leading to the instant appeal are that assessee is engaged in the business of imports/supplies and services, repair and maintenance of office equipments declared presumptive and non-presumptive income. So far as non-presumptive income is concerned, the assessee declared it at, Rs.808,585 showing loss from services at Rs.7,678,791 (net loss Rs.6,870,206). The break up of the miscellaneous revenue is given as under:-- Rental income Rs. 109,200 Other income Rs. 25,443 Interest income Rs. 229,669 Gain on sale of assets Rs. 283,944 Commission Rs. 160,329

3. The Assessing Officer keeping in view the history assessed rental income under section

19. The assessee also derives income from services in respect of repair and maintenance of office equipments assessable under normal law. The assessee declared services revenue at Rs.13,381,309 and also claimed expenses at Rs.21,059,884 whereby showed services related expenses more than income generated in the head service revenue. The comparative study shows that service expenses have been claimed at the ratio of Rs.157.38 to total service revenue as compared to 32 to 34% in the preceding years. On confrontation the assessee explained the situation that this year the cost of sales expenses have been attributed in the head service revenue. Since the assessee failed to corroborate its contention through its documentary evidence, the assessee was further confronted and from the reply thereof the Assessing Officer observed that assessee is engaged in the sales/supplies of machines, photocopier, fax, scanner etc. under one year warrantee and all expenses of warrantee period were meted out by the company but assessee for no reason thereof debited the expenses in this head instead of cost of sales account expenses. In view of the Assessing Officer, the assessee-Company included the cost of sales account expenses related to etc. income under the head of service revenue expenses to reduce the profits of service revenue, hence a fresh notice under section 62, dated 19-1-2002 was also served. The same is worded as under:-- "In the preceding assessment year i.e. 2000-2001, you have claimed expenses at Rs.4,536,986 against an income generated under the head service revenue at Rs.13,003,

803. However, this year a careful look at note 16 of your audit accounts shows that you have included approximately an amount of Rs.16,522,895 in this head whereas it was to be shown in the cost of sales account which falls under presumptive income covered by section 80-C. Giving you a fair opportunity of being heard, you are hereby required to bifurcate and separate cost of sales expenses from service revenue expenses as was done in preceding assessment years, failing which allocation of expenses shall be made in the light of C.B.R.'s Circular No.12 of 1991 Compliance of above should be made on or before 28-1-2002."

4. The assessee contended that due to peculiar nature of services, attributed expenses of costs of sale to service revenue instead of assigning a separate unit in this context. In the circumstances, the Assessing Officer prorated the expense in the light of C.B.R. Circular No.12 of 1991 with a view to compute income other than 80C income to which the A.R. of the assessee raised no objection vide order sheet entry, dated 16-2-2002. The Assessing Officer further relied upon the decision of the Tribunal cited as (1999) 79 Tax (Trib.) (sic).

5. The learned D.R. argued that the Assessing Officer asked the assessee to bifurcate the total sales into sales/supplies and local sales. The D.R. contended that assessee's business consist of import and local purchases and turnover comprises 100% supplies which are entirely from import and local purchases. Therefore, the Assessing Officer concluded that sales/supplies declared at Rs.140,313,368 are covered by section 80C and shall be treated as separate block of income.

6. In appeal, the learned CIT(A) held that the Assessing Officer took exception to it as the expenses clearly relatable to presumptive income could not be allowed against non-presumptive income. The learned CIT(A) pointed out that on the principle of exclusion of an expense unequivocally identifiable to presumptive income, the learned ITAT upheld the disallowance whereas in the instant case, the Assessing Officer failed to identify any expenses which had an organic link with the imports trading receipts and were being claimed against services revenue i.e. non-presumptive income. Concluding his finding, the learned CIT(A) held that Assessing Officer has no justification to reject the book version in regard to services receipts and expenses thereof. The learned CIT(A) noted that C.B.R. Circular No.12 of 1991 was misapplied, ab initio as it could not be invoked at all while assessing services receipts under the normal law. The learned CIT(A) also observed that facts and circumstances of the instant case enjoy a strong affinity to Para. 5 of C.B.R. Circular No.7 of 1992, as the expense of non-presumptive income were clearly separable, while the Assessing Officer has made an excessive and harsh departure from the history of the case. by adopting a net profit of 67% as against gross profit of 30% assessed in assessment year 1998-99.

7. The learned CIT(A) in the light of above discussion directed the Assessing Officer to recompute the non-presumptive income comprising business rental income. Heard the learned representatives of the two patties and perused the Circular Nos.12 of 1991 and 7 of 1992. Circular No.12 of 1991 relates to tax of income of certain contractors, suppliers and commercial importers under section 80C of the Income Tax Ordinance, 1979 which together with paragraph CCC and substituted paragraph-F of para-1 of the First Schedule, provides for presumptive tax for contractors, suppliers, commercial importers. In the same Circular 12 of 1991 shall apply (a) to the amount representing the payments on which tax is deductible under subsection (4) of section 50 other than payments on account of services rendered and (b) the amount as computed for the purpose of collection of tax under subsection (5) of section 50 in respect of goods imported other than goods imported by an industrial undertaking as raw material for its own-consumption. Contrary to Circular No.12 of 1991, Circular No.7 of 1992 relates to application of section 80C of the Income Tax Ordinance, 1979 and clarify the situation to be dealt with under section 80-C in the light of Board's Circular No.12 of 1991 in respect of (i) cases with income years different from financial year, (ii) option to manufacturers, (iii) persons maintaining the mercantile system of accounting (iv) importers having opening and closing stocks (v) income from indenting commission and brokerage and (vi) payments to workshop etc.

8. Record reveals that in this year the cost of sales expenses are claimed at nil and all its attributed expenses are claimed under the head of service revenue in deviation from the past history of the assessee included cost of sales expenses in service revenue expenses. It is important to note that the assessee failed to bifurcate and separate the cost of sales expenses which are attributable to section 80C income from service revenue expenses. However, surrendered before the Assessing Officer vide order sheet entry, dated 16-2-2002 accepting the treatment prorating service expenses (inclusive of cost of sale account expense) with administrative, selling and financial expenses in the light of C.B.R. Circular No.12 of 1991 with a view to compute income other than 80C income. However, we find that consent order contrary to law cannot be given any heed and as para. No.5 of Circular No.7 of 1992 provides that where income from imports and supplies in inseparable from indenting commission or brokerage receipts and the assessee is unable to prove the extent of overhead expenses related to said receipts, allocation of expenses may be made on a pro rata basis .in the same ratio, as the commission receipts not covered by section 80C to the gross profit on sales and supplies. In the circumstances supra, the learned CIT(A) was justified to hold that Circular No.12 of 1991 could not be invoked ignoring assessee's service receipts under normal law and that circumstances of the case fall within the ambit of Para.5 of Circular No.7 of 1992. As a result thereof, finding of the learned CIT(A) does not warrant interference.

9. So far as disallowances are concerned, the relief has been A allowed by the learned CIT(A) keeping in view the history of the assessee, therefore, order restricting the disallowances under the heads of travelling and conveyance, postage and telephone, advertisement, vehicle running and printing and stationery does not warrant interference. Order accordingly. H.B.T./443/Tax (Trib.) Order accordingly.