2010 PLP (Trib (PTD)

Above captioned appeal has been filed by the appellant/taxpayer against the impugned order dated, 16-2-2005, passed by the Commissioner of Income Tax (Appeals) Zone-I, Karachi on the grounds: " ....(3) That the Commissioner of Income Tax (Appeals) has erred in law and on facts in setting aside the addition made in the Trading and Manufacturing account, instead of deleting the same when neither any defect or discrepancy in the method of accounting employed was found nor in the details which were rejected on presumption without any verification and material brought on record. (4) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in setting aside the following items out of expenditure. (1) Salaries based on Performances Rs.887,154 (2) Repair and Maintenance Deep Freezers and Motor Vehicle Rs.976,827 (5) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the addition of following expenses. (1) Travelling and Conveyance Rs. 82,058 (2) Repair and Maintenance Motor Vehicle and Cost of Petrol (Admn) Rs. 398;620 Travelling and Conveyance Rs. 476,325 Sundry Expenses Rs. 22,132 (6) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in setting aside and confirming the additions made out of expenses when no notice under section 62 was issued. (7) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in not adjudicating the following points raised in Grounds and arguments before him. (1) Provision for WPPF Rs. 192.039 (2) Interest on WPPF Rs. 19,477 (3) Prior year adjustment Rs. 44,168 (4) Tax Credit under section 107AA Rs. 483,026 (8) That the computation of Income/loss is not in accordance with law.

2. Mr. Arshad Siraj, Advocate, appeared on behalf of the appellant/taxpayer, while Mr. Azhar Erum Memon, DR represented the department.

3. Mr. Arshad Siraj, Advocate, while arguing the case vehemently stated that the CIT(A) was not justified in setting aside the addition made in Trading and Manufacturing Account, he has also erred in law on facts in setting aside and confirming the addition made out of expenses when no notice under section 62 of the Income Tax Ordinance, 2001 was issued. He also challenged the CIT(A) action in confirming the addition out of travelling and repairing, maintenance, sundry expenses, etc. While arguing he has relied upon the various case-laws reported under: (i) 2002 PTD 407 (Karachi High Court) (ii) 1994 PTD 123 (Karachi High Court) (iii) 1974 PTD 200 (iv) 1984 PTD 239. (v) 2002 PTD 700 (Karachi High Court). (vi) 2006 PTD 2654 (vii) I.T.A. No. 1857/KB of 1999-2000 and I.T.A. No.2232/KB of 2001 of the ITAT, Karachi. (viii) 2006 PTD (Trib.) 2179).

4. The DR, however, has vehemently controverted the contention of the AR and has stated that the Assessing Officer was clothed with the powers to reject the declared G.P. of the appellant as he has failed to provide the necessary evidence as well as full particulars relating to these expenses. Trading and Manufacturing Accounts

5. Our observation on the above issue in the light of arguments advanced by both the representatives viz. the appellant as well as the department can be well judged if we go through the order of the CIT(A), which goes as follows: "The appellant even at the appellate stage did not controvert the said finding of the learned Taxation Officer with any documentary evidence as supporting material except submissions of a general nature. It is well established as he has been laid down 1994 PTD 713 CIT v. Champion Paint Industries that the rate of G.P. is relatable to the verifiability or otherwise of the expenses as the rate of profit is relatable more the expenses incurred in the manufacture of goods and their sale price rather than on the volume of sales. However, the learned Taxation Officer would have been on stronger ground had the said finding of the excessive claim of the stated debit side items been coupled with a discussion of the absence of quantitative tally of Purchases and Sales. It is true that as was held in Gangaram Balmokand v. CIT (1937) 5 ITR 464 (Lah.) that it is open to the Income' Tax Officer to invoke the Proviso to section 13 if after examining the accounts produced by the assessee or after recording the evidence led by the assessee, he still remained un convinced as to the reliability of the assessee's accounts and considered that they did not serve as a safe guide in calculating the assessee's taxable income. The aforesaid ratio in Gangaram's case is also reflectedIn the following decisions:- (1) (1941) 9 ITR 81 (All), Ganeshi Lal Chappen Lal v. CIT (2) (1970) 22 Tax 163 (Kar.), Sultan Textile Mills Ltd. v. CIT (3) 1981 PTD 213 Crescent Textile Mills Ltd. v. CIT (4) PLD 1979 SC 949 Miss Asia v. ITAT. However, in view of the submissions of the appellant that proper opportunity was not provided though complete addresses of the parties were available on the bills issued by the said parties as well as the contention that consumption and production are co-relatable, therefore, it will meet the ends of justice to set aside the impugned rejection of the trading version and consequent addition to the G.P. for fresh decision in accordance with law, after opportunity, and after calling for and examining the details in respect of consumption of raw material, electricity/gas used vis-a-vis the production, the past history of the case as well as the treatment meted out in parallel cases if so necessitated. It is set aside on the said issue accordingly."

6. We find a lot of force in the contention of AR as he has brought before us sufficient evidence which he had already produced before the Assessing Officer. There were only two purchases on which the taxpayer was liable for deduction of tax. Rest of the list of the purchases were below the taxable limit. We feel that the onus lay on the Assessing Officer who should have conducted proper inquiries from the parties from whom the appellant has purchased the raw material and packing material. The Assessing Officer failed to fulfil his obligation of natural justice thereby making the case of the appellant strong one. We also feel that having failed in his duties to do the natural justice, he committed infirmity of law by making his own estimate of income and that too without any reasonable basis. The AR has cited the case reported as 2002 PTD 407 which is reproduced as under:-- " .In case the Assessing Officer finds the profit and loss expenses to be excessive, disproportionate, unvouched or unreasonable he can disallow the same under section 23 of the 1979 Ordinance, but of course after proper reasoning and after pointing out specific items which warrant disallowance. Accordingly, the first objection with regard to the rejection of the trading results is improper Full Bench of Hon'ble Supreme Court in CIT v. Krudd Sons Ltd. 1994 PTD 174, wherein Saleem Akhter J., as he then was, writing for Court has observed that the accounts cannot be rejected till such time specific defects are found in the accounts from where it can be seen that correct profits cannot be determined therefrom."

7. Apart from above we also find ourselves in line with the findings given in 1989 PTD 177 re: Dawood Corporation v. CIT their Lordships found that the Assessing Officer's estimate should be based upon facts and circumstances of the case as apparent from the record and not merely on the basis of his whims and desires. In yet another case re: Magna Industries, Gujranwala v. CIT Rawalpindi cited as 1980 PTD

35. The Court held that the Assessing Officer should evolve reasonable basis for making an estimate and that basis of estimate if he proceeds to reject the taxpayer account should be disclosed to the assessee.

8. Taxation Officer miserably defaulted in following the canon of justice. The CIT(A) also overlooked the aforementioned facts. We, therefore, hold that setting aside order of the CIT(A) was uncalled for; the same is, therefore, vacated on this count. Add-backs on Salary based on Performances, Repair and Maintenance & Deep Freezers and Motor Vehicle.

9. We take up the next issue regarding claim of expenditures. On the above captioned claim of taxpayer, the CIT(A) held as under:-- "The disallowance of salaries based on performance at 20% on the ground being claimed in addition to salaries paid and claimed, but being un-vouched and un verifiable it is set aside for fresh decision, with the direction to allow specific opportunity to the assessee to prove its claim with supporting evidence, and only the claim to the extent not proved should alone be disallowed. It is set aside accordingly. So also, the claim of Deep-freezers repairs and maintenance made at 20% of the claim is set aside with the direction to ascertain the factual position by opportunity to the assessee as to whether these are the Deep-freezers given to the customers but belonging to the assessee or only the Deep-freezers given in the factory/head office. As the factual position is not clear, it is, therefore, set aside for fresh decision in accordance with law after ascertainment of facts as above. It is set aside accordingly." "....the mere claim of incurring expenditure is not decisive; because if it is of capital nature, as in the case of Deep-freezers the ownership of which is retained as asset but free-use is allowed to the retailers of the assessee's products, then it cannot be admissible as revenue expenditure. So also; it cannot be said that even if the assessee does not produce any evidence in support of the claim for, deduction, despite opportunity, the Assessing Officer is still to allow it without proof as it is for the assessee to establish by evidence that a particular claim as an allowance is justified. Besides, it is also well-settled that irrespective of the assessee's view, the admissibility of a particular claim as a deduction will always depend on the provision of law relating thereto, and not on the view which the assessee might take of his rights. Therefore, where the assessee fails to place sufficient materials, he is not entitled to claim allowance under section 23(1)(xviii)."

10. We have gone through the, AR's contention on aforementioned findings of the CIT(A). We are fully convinced, of the arguments of the A.R. He has referred to judgment i.e. I.T.A. No. 493 of 1999 dated 12-8-2005. The Assessing Officer should have observed the principle of natural justice before proceeding to make disallowance. The rationale for disallowing these expenses was inadequately explained by the Assessing Officer. Apart from this he especially omitted to pinpoint the items through a notice under section 62 of the Income Tax Ordinance, 2001. We hold that the order of CIT(A) is liable to be vacated on this count. The declared version of the assessee should be accepted under this head.

11. Appeal succeeds as above.

12. Now, coming to the ground No. 7 of the appeal which the AR has given as under: - "The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in not adjudicating the following points raised in Grounds and arguments before him. (1) Provision for WPPF Rs.192,039 (2) Interest on WPPF Rs.19,477 (3) Prior year adjustment Rs.44,168 (4) Tax Credit under section 107AA Rs.483,026

13. We believe that the AR is justified in raising this point. Keeping in view a number of case-laws, we find that provisions for WPPF has been allowed by Appellate Forum in many other cases; the same may also be allowed in this case. Likewise, we feel that addition made on account of interest on WPPF should also be set aside. While making out the addition on this account the Assessing Officer never pointed out this issue to the taxpayer the same is hereby set aside for proper treatment in the law. 14 Tax Credited under section 107AA

15. As regards tax credited under section 107AA the same may be dealt with as per provisions of law meaning thereby that this issue is set aside for making proper inquiries and ascertaining the correct position.

16. The appeal succeeds to the above extent. H.B.T./146/Tax(Trib.) Appeal allowed.