1990 PLP (Trib (PTD)

INAM ELLAHI SHAIKH (Accountant Member).‑‑‑A private limited company deriving income from manufacture and sale of wire rope and conductors has preferred these two further appeals, against two orders of the learned C.I.T.(A) one dated 27‑8‑1983 in the case of assessment under section 23(3) of the repealed Income Tax Act, 1922 (hereinafter referred to as repealed Act) and the second dated 7‑2‑1989 in the case of assessment under section 62/132 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) for the same assessment year.

2. While making the assessment for assessment year 1977‑78 under section 23(3) of the repealed Act the assessing officer accepted the declared trading results with the following observations:‑‑ "The scrutiny of the details of purchases of raw material and sales of manufactured items would reveal that out of total purchases of Rs.56,217,663 imported raw material amounts to Rs.46,305,904 and hence is verifiable. The purchases from local market are also from known and verifiable parties. Out of total sales effected at Rs.58,140,885 sales to WAPDA amounts to Rs.51,81U,765 and the balance to known and verifiable parties. Under the circumstances and in view of explanation' tendered by the assessee and past history of the case the declared trading results are accepted."

3. The following trading results were declared. 1977‑78 1976‑77 Sales Rs.58,140,885 Rs.44,519,183 G.P. Rs. 4,991,027 Rs. 5,108,924 G.P. rate 8.6% 9.3%

4. Certain add‑backs in P & L were made of which the following are in dispute before us. Claimed Disallowed Miscellaneous expenses Rs. 8,044 Rs. 2,000 Motor vehicle maintenance Rs.165,474 Rs.15,000 Bad debts Rs.14,675 Rs.11,887 Loss under section 10(2)(vii) Rs. 7,880 Rs. 7,880

5. The learned C.I.T.(A) reduced the disallowance in motor vehicles maintenance to Rs.10,000 but the other additions were upheld.

6. The above mentioned assessment was re‑opened under section 65 of the Ordinance on receipt of a complaint that the assessee had suppressed the income to the extent to Rs.868,063 by making the wrong provision of excise duty of that amount. The assessment was made under section 63/65 of the Ordinance in the following manner:‑‑??????? Sales??????????????????????????????????????? Rs.58,140,885 G.P. @ 15%??????????????????????????? Rs. 8,721,132? Less: G.P. shown????????????????????? Rs. 4.991.027 Balance addition?????????????????????? Rs.3,730,105 Addition on a/c of unpaid E/duty Rs. 868,063 Add income already assessed?? Rs. 860.528 Rs.5.458.696

7. This order under section 63/65 was set aside by the first appellate authority vide an order dated 14‑12‑1987 subsequent to which the impugned assessment was framed under section 62/132 in the following manner:‑‑ Sales estimated???????????????????????? ??????????? Rs.59,000,000 G.P. @ 11%??????????????????????????? ??????????????????????? Rs. 6,490,000 Less G.P. shown????????????????????? ??????????????????????? Rs. 4.991.027 Balance for addition????????????????? ??????????????????????? Rs.1,498,973 Less addition on account of E/duty??????????????????????? Rs. 868.910 Balance trading addition??????????? ??????????????????????? Rs. 630,910 Addition on a/c of excise duty?? ??????????? Rs. 868.063 Add trading addition as worked out above Rs. 630,910 Add income already assessed?? Rs. 860.528 Rs.2.359.501

8. The assessee challenged the re‑opening of the assessment before the learned C.I.T.(A) and also the quantum of assessment. The learned C.I.T.(A) upheld the re‑opening of assessment under section 65 of the Ordinance and also the addition made in respect of Excise Duty. The sales estimate was upheld whereas the G.P. rate was reduced to 10.5%.

9. Mr. Zia H. Rizvi, the learned counsel of the assessee withdrew the appeal against the assessment under section 23(3) of the repealed Act on the issue of P & L expenses and that appeal is dismissed as withdrawn. However, the learned counsel of the assessee strongly attacked the re‑opening of assessment under section

65. The learned counsel argued that the department was barred from re‑opening the assessment under the provisions of section 166(1)(c)(ii) of the Ordinance. However, the learned counsel conceded that the assessment could be re‑opened under section 34 of the repealed Act on or before 1‑7‑1979. The other contention of the learned counsel of the assessee was that the department had no fresh material or evidence to re‑open the assessment and this was mere change of opinion. The learned counsel explained that the department had also re‑opened the assessment for the assessment year 1978‑79 on 27‑11‑1979 but the proceedings were filed on 29‑4‑1980. The learned counsel also filed copies of the order‑sheet in respect of re‑opening and filing of proceedings of assessment year 1978‑79 and certain other correspondence between the departmental officials. The learned counsel also attacked the estimate of sales and G.P. rate as without any basis.

10. We have considered the arguments of the learned counsel of the assessee and the facts of this case. The assessee is a supplier of wire ropes and aluminium conductors and the main customer is WAPDA. The goods purchased were liable to excise duty. The assessee made certain escalation claim due to increase in the cost of materials and wages, etc. At the end of the accounting year relevant to assessment year 1977‑78 a provision for excise duty amounting to Rs.868,063 relating to such escalation claim was made by deleting the excise duty expense account and crediting WAPDA account with the same amount. In the subsequent accounting year the assessee realised that WAPDA may not be willing to pay this amount of excise duty and, as a result, an entry of equivalent amount was made to the credit of L/C account on 31‑12‑1977, the last date of accounting year relating to assessment year 1978‑79 as a result of which the expenses for the assessment year 1978‑79 were reduced by that amount. Again in the accounting year ended on 31‑12‑1978 the entry was reinstated and the amount of excise duty liability paid off. As already mentioned‑above the assessment for the assessment year 1978‑79 .was re‑opened because of these entries in respect of amount of excise duty in question by issuance of a notice on 27‑11‑1979 but the proceedings were filed on 29‑4‑1980, as evidenced by an entry in the order‑sheet. Subsequently, there has been some correspondence between the departmental officials on this issue and the I.T.O. in his letter dated 5‑1‑1982 addressed to the C.I.T., Central Zone, Lahore, expressed his view on this issue in the following manner:‑‑ "As a matter of fact a very comprehensive report on all the relevant points has already been submitted by my predecessor vide No.43, dated 26‑7‑1980 (copy enclosed). However, the points raised in the C.I.T.'s Letter and factual position of the case is discussed as under‑‑ Excise duty account was debited with a sum of Rs.868,063 on 31‑12‑1976 and an equal amount was credited to the EHV, WAPDA A/c. On 31‑12‑1977 excise duty A/c was credited with a sum of Rs.868,063 and import a/c of L/C No.75-13085 was debited with the same amount. Since the excise duty was not actually paid on 31‑12‑1976 and was merely a provision. The same was not admissible as an expenditure. While completing the asstt the amount of Rs.868,063 does not appear to have been disallowed in view of the special circumstances of the case which are as under:‑‑ (i) The excise duty related to escalation bills submitted to WAPDA and credited to the sales account which remained unsettled by the end of the accounting period. (ii) WAPDA showed its reluctance to allow the claim in 1977 and the import a/c of L/C No.76‑13085 was credited with a sum of Rs.868,063 and EHV, WAPDA a/c debited with the same amount. (iii) Net effect of the entries relating to the Excise duty is that the income of the charge year 1977‑78 stands reduced by a sum of Rs.868,063 whereas income for 1978‑79 stands enhanced by an equal amount. Since rate of taxation in the case‑of companies remains the same, no loss of revenue is involved. There appears to be no mala fide intention behind the creation of this provision as the amount in question was ultimately paid as excise duty in 1979. DECLINE IN GROSS PROFIT RATE: As regards the decrease in G.P. rate from 20% in 1972‑73 to 9% in the assessment year 1977‑78 is concerned, this decrease has been discussed in each assessment order. For the assessment year 1977‑78 decrease in G.P. rate was from 9.3% to 8.6% only which was sufficiently explained by the grounds discussed in the assessment order. Moreover, the purchases as well as sales were found to be verifiable during the examination of the case at the time of assessment. ESCALATION RECEIPTS: Escalation bills have been duly accounted for in the books of a/c by crediting the same to the sales a/c. The bifurcation of the sales a/c has already been submitted and is reproduced as under:‑‑ 1977‑78 1978‑79 1979‑80 Excisable sales 31,319,840 54,142,57 60,473,541 Escalation 13,246,313 9,086,555 14,402,265 Non‑excisable sales 7,574.731 9,128,197 14,109,917 58,140,885 72,357,322 88,985,723 ??????????? The entire sales have been made to WAPDA properly declared and assessed:

11. The learned Commissioner of Income Tax, Central Zone, Lahore in his letter dated September 6, 1985 addressed to the C.I.T., Central Zone, Lahore again expressed its view that the assessee was fully justified in making the provision of excise duty in the year in which it was relevant as the accounts were kept on mercantile basis. In this letter the learned C.I.T. discussed the amount of excise duty provided for during the assessment year 1977‑78 at length and the subsequent treatment. However, we find that the C.I.T. has endorsed a copy to the I.T.O. of Central Circle‑V, Lahore with the remarks that the feasibility of reopening the assessment for 1977‑78 may be examined and report submitted.

12. After perusal of the order and the relevant correspondence and considering the arguments put forth by the learned counsel of the assessee we are left in no doubt that the proceedings initiated under section 65 were illegal and amounted to mere change of opinion. While making the assessment under section 23(3) of the repealed Act the trading results were accepted as the sales and purchases were found to be properly verifiable. The assessee was confronted on the issue of decline in G.P. rate and the explanation was found to be satisfactory. While making the assessment under section 63/65 of the Ordinance the sales declared were accepted but G.P. rate was applied at 15% and also the amount of excise duty was added to the income whereas in the assessment made under section 62/132, impugned before us, the declared sales have been rejected whereas the G.P. rate of 11% (as against 15% under section 65/63) has been applied and also the trading addition has been applied and also the trading addition has been arrived at by giving the disputed amount of excise duty a different treatment. Firstly, the amount of excise duty has been reduced to arrive at the balance for addition and then again adding the same, which in fact means no addition on account of excise duty separately. The aforementioned three assessments made on three different bases, clearly indicate the change of opinion. The first original assessment under section 23(3) of the repealed Act was made after detailed examination of the records and trading results were accepted. In the second assessment under section 65/63 of the Ordinance the sales were accepted but the G.P. rate of 15% was applied whereas in the assessment impugned before us the sales have been estimated and the G.P. rate of 11% has been applied. On top of that the departmental officials have been giving this opinion, after discussing the matter at length, that there was no concealment and no justification for re‑opening the assessment under section 65 of the Ordinance. If this is not the change of opinion, then what could it be. Thus, we are of the firm view that this assessment cannot be upheld as this amounts to mere change of opinion and is liable to be cancelled. The assessee's appeal is, thus, accepted and the assessment is cancelled. Before parting we would, however, like to deal with she objection of the learned counsel of the assessee that the initiation of proceedings under section 65 of the Ordinance was barred by time. This contention of the assessee cannot be accepted, firstly, because the assessee did not come up in second appeal against the order of the first appellate authority dated 14‑12‑1987 when the assessment was set aside for de novo consideration. Secondly section 166(1)(c)(ii) empowers the assessing officer to issue a notice under section 65 of the Ordinance in a case where the income had been under assessed and no proceedings under section 34 of the repealed Act were pending at the commencement of the Ordinance. Admittedly no proceedings under section 34 of the repealed Act had been initiated and the notice under section 65 of the Ordinance was issued in January, 1986. On the date of issuance of the said notice, the assessing officer had the power to reopen the assessment by issuing notice within 10 years from the end of assessment year in which the total income of the said income year was first assessable. Thus, it is quite clear that the assessing officer had the power to reopen the assessment on the relevant date. The learned counsel has also argued that the assessment for the year 1978‑79 had already been reopened for the same amount of alleged concealment. Again this objection of the learned counsel is devoid of any merit as there is no bar in section 65 of the Ordinance in reopening an assessment on the basis of an information on the basis of which assessment for another year has been reopened. However, we have already accepted the assessee's appeal and cancelled the assessment as in our view this is mere change of opinion. As a result the assessee's appeal against the assessment under section 63/132 succeeds whereas that against the order under section 23(3) of the repealed Act is dismissed as withdrawn. M.BA./914/T?? Appeal allowed.