1998 PLP (Trib (PTD)

18. Assessment Year 1989-90: As against declared income of Rs.41,71,659, the following income was assessed:- Sales declared. Rs.13,71,06,944 Estimated. Rs.14,35,00,000 GP @ 15.47% as against declared GP rate of 8.44 Rs.2,21,99,450 Less GP shown before depreciation. Balance for addition. Rs.1,32,72,692 Additions out of P&L Claims: Rs.1,80,000 Add income declared. Income assessed:- Rs.1,76,24,

351. The assessee was confronted with the low yield of 94.19% and required to explain as to why GP rate as per history should not be applied. In his reply of 24-2-1992, the following submissions were made:-- "(1) Almost all purchases as per previous year, consist of imports made through banks and are fully vouched. (2) Sales have been made as usual through commission agents and are fully verifiable. (3) As regards fluctuation in GP rate it has been argued that all along the years it has been fluctuating depending upon various factors. (4) In support of acceptance of low GP rate, a copy of the order of another Woollen Mills assessed at NTN 07-09-1700251 is provided to wherein against declared GP rate of 7.24 % round addition of Rs.3,00,000 was made resulting into assessed GP rate of 9.33%. It was argued by the Accountant of the firm that for-the year under consideration the other cases were assessed between the GP rate of 9 % to 10 % and therefore, it would not be fair to apply GP rate or 15.47 % during the assessment year 1987-88 and 1988-89. " , The explanation was rejected with the following defects otherwise not confronted to the appellant/assessee:-- "(1) The case has established history of rejection of trading results and similar circumstances exist for the year under consideration as discussed above, sales version is not fully verifiable. Average rate of sales varies in the case of credit and cash sales for which the company has failed to give any plausible explanation. (2) The perusal of cost of sales above, shows that this year expenses under the head salary, wages, fuel and power, stores consumed increased. The details examined in respect of power and fuel consumed at Rs.3,631,393 and packing material consumed at Rs.9,98,340 shows that-these are not fully vouched and verifiable. (3) Day to day manufacturing record has not been produced on the plea that the same is not being maintained. (4) The sales on cash are not reliable as complete identifying particulars have not been recorded on such sales. (5) When confronted with all these facts, the accountant of the firm did not contest the rejection of accounts as per history of the case."

19. The assessee went in appeal and the learned CIT(A) considered the following arguments of the assessee's AR:-- (i) The purchases are fully verifiable, the same being imports from abroad through normal banking channels. (ii) The ITO failed to mention even a single instance of variation in the rates of cash and credit sales. (iii) the expenses incurred under the head 'salaries', 'wastage' 'fuel power' and 'stored consumed' are fully verifiable and the details were filed without pin-pointing any defect or deficiency by the assessing officer. (iv) The production record elaborately maintained for the Excise Department was produced before the ITO. (v) The sales are made through commission agents at reasonable rates and fully verifiable. (vi) Rejection of book-version was never considered nor past history was agreed to be followed. He gave the following finding:- "I have considered the arguments advanced by the AR of the assessee and feel that the learned ITO has not applied his mind to the facts and circumstances and objections taken by him are not substantiated by any details. No instance of unvouched purchases and expenses have been pointed out."

20. The AR appearing before the learned CIT(A) also explained his past history when declared GP rate of 3.2% in 1985-86 was assessed by making ad hoc additions which evolved GP rate of 4.5 % . Similarly, declared GP rate of 4.45 % during 1986-87 after assessment evolved to GP rate of 5.1 %. Even GP during 1987-88 when created in line with the other years, evolved to 8%. The CIT(A) also found the sale rates reasonable and observed that it deserves acceptance on merits. He also observed that the rejection of sales and estimate of GP rate is without any basis or material and is as such unsustainable. According to the learned CIT (A) GP rate of 7 to 10% was being applied in parallel cases but still he fixed GP rate of 10%, the upper slab of the rate prevalent in the market.

21. The learned AR repeated his arguments as advanced for the earlier years i.e. 1988-89 and challenged the treatment in the light of provisions of section 32-A of the Income Tax Ordinance.

22. Considering the audited accounts duly certified by the company of Chartered Accountant, the defects pointed out by the Assessing Officer and the findings given by the learned CIT(A), we do not find any reason to reject the trading account of the appellant/assessee. The DC (IT)s action was not justified and the same cannot be allowed.

23. Assessment Years 1990-91 and 1991-92: Both the parties are in appeal against the combined order dated 9-3-1995 of the learned CIT(A), Zone-I, Lahore passed in ITAs Nos. 1722 and 1723. The assessee is aggrieved with the rejection of his accounts in the absence of notice under section 62 of the Income Tax Ordinance, estimate of sales as modified in appeal, GP rate fixed by the Appellate Commissioner and the additions made out of 'travelling and conveyance', 'commission', motor vehicle expenses', 'general expenses' and 'entertainment'. On the other hand, the Department is aggrieved in reduction of sales, GP rate and the add-backs out of P&L claims.

24. As against declared loss of Rs.53,49,398 revised to loss of Rs.74,63,095 during 1990-91 and loss of Rs.50,56,257 during 1991-92, the following income was assessed under section 62/132 of the Income Tax Ordinance:-- 1990-91 1991-92 Sales declared Rs.13,48,23,201 Rs.12,30,67,692 GP rate declared Rs.1.42% Rs.4.35% Sales estimated Rs.14,50,00,000 Rs.13,50,00,000 GP @ 15.47% Rs.2,24,31,500 Rs.2,08,84,500 Loss GP shown Nil. Rs.24,96,523 Balance for additions Rs.2,24,31,500 Rs.1,83,87,977 Additions out of P&L Claims Rs.4,21,000 Rs.4,25,000 Total: Rs.2,28,52,500 Rs.1,88,12,977 Less loss declared. Rs.50,56,257 Income assessed Rs.1,53,89,405 Rs.1,37,56,720 The DCIT gave the following reasons for his above order:-- (i) Sales are partly vouched and purchases are fully verifiable.

25. The assessee argued that fall in GP rate was direct results of various concessions granted to the competitor industry set up in Gadoon Amazai which directly effected the assessee's margin of profit. The explanation was rejected on the plea that concessions were granted on 3-6-1989 whereas the assessee's accounts for the year 1990-91 were closed on 31-12-1989. However, no notice under section 62 was issued specifically pin-pointing the defects in the book-version or the reasons why the assessee's explanation is not accepted.

26. In appeal, the learned CIT(A) reduced the sales as well as GP rate simply following the past history and without discussing, the two assessment orders before him. In this case, the purchases have nowhere been attacked. No specific defects had been pointed out in the books-of-accounts. Notice under section 62 has not been issued and, in spite of all this, rejecting the book-version duly audited by a company of Chartered Accountant was against the spirit of section 32-A of the Income Tax Ordinance. If the sales are admittedly made through commission agents in whose hands the purchases have been accepted by the Department then there is hardly anything left with the Department to interfere with the declared results in the light of detailed audited report in line with the prescribed procedure. The assessee has nowhere been blamed for inflating cost of sales and the two sides of the trading account being verifiable have been accepted by the Department. The concept of estimate of sales and application of GP rate does not arise. The audited trading account is, therefore, ordered to be accepted. However, the additions made out of P&L claims as modified in appeal stand confirmed.

27. Assessment Year 1992-93: The Department is aggrieved with the appellate orders dated 16-1-1996 passed in ITA No.3209 alleging that the learned CIT(A) was not justified-- (i) in accepting the declared trading results; (ii) in setting aside the assessment regarding additions out of P&L Claims.

28. The declared loss of Rs.64,72,232 was rejected and the following income was assessed after examining the books-of-account accounts and list of details totalling 39 in number as per body of the order:

Sales declared. Rs.12,61,87,279 Estimated. Rs.13,00,00,000 GP @ 15.47% as against declared rate of 4.80%. Rs.2,01,00,000 Less GP as declared. Rs.60,66,403 Balance far trading addition. Rs.1,40,44,597 Additions out of P&L Claims Rs.7,42,815 Total: Less loss declared Rs.64,72,232 Income assessed Rs.83,15,180 The DCIT gave the following reasons for his estimate:

(i) Better trading results toad been declared as compared to preceding year with the higher GP rate. (ii) Sales had been made through commission agents as before which are partly unvouched. (iii) The assessee has a history of rejection of trading results. The explanation was rejected again relying on the past history without pin-pointing any instances of unverifiable sales or any expense claims. It was nowhere mention as to why the audited accounts properly certified as required under the law were being rejected.

29. In appeal, the learned CIT(A) accepted the trading account with the following findings:

(i) The assessing officer did not question the debt side of the manufacturing. account which was entirely documented and verifiable. He attacked the sales only and thus, resorted to estimate of sales and application of GP rate which is arithmetically incorrect. (ii) The appellant's case was covered under section 32-A of the Ordinance and not under section 32 wrongly employed. The rejection of audited accounts just on the basis of suspicions and allegations was not justified. (iii) The method of accounting adopted by the assessee/appellant could not be questioned being duly certified by renowned company of Chartered Accountant. (iv) Notice under section 62 of the Income Tax Ordinance was not issued which was a legal obligation in the absence of which the orders were illegal. Case relied upon 1971 SCMR 681 in the case of Collector, Sahiwal v. Muhammad Akhtar. The explanation filed by the appellant was not considered properly. (v) The cash sales rates compared favourably with the verifiable sales, and the cash sales only accounted for 6.22% of the total sales. Case relied upon 1971 PTD 108. (vi) The allegations levelled by the assessing officer have no nexus with the treatment in the assessment order.

30. He, finally, held that appellant's case is covered under section 32-A of the Ordinance and the method of accounting was, therefore, rejected without lawful authority as if the case was covered under section 32 of the Ordinance.

31. We find ourselves in agreement with the learned CIT(A). In the presence of properly audited accounts in accordance with the relevant provisions of law, the Department cannot be allowed the liberty to reject it without sound reasoning. No defects had been found in the books of accounts and the common phrases like unverifiable sales and various expenses was against the facts of the case. The purchases were admittedly verifiable. No charge has been levelled regarding inflated debt side of the trading account. The sales have been made through Commission Agents in whose hands the same had been accepted by the Department. With all these facts before the Assessing Officer there was no reason to resort his own estimates blindly following the alleged past history of one year. It was unfair to ignore the Gadoon Amazai effect on the appellant's business in view of the heavy duties charge over the assessee as against free imports and production in Gadoon Amazai of the same products. Even otherwise, the law is very clear on the subject and the Department was to proceed under section 32-A of the Income Tax Ordinance wherever accounts had been audited by a Chartered Accountant duly certified in the prescribed proforma.

32. The Departmental appeals fail and are dismissed for want of merit whereas assessee's appeals partly succeed. M.B.A./461/Trib. Appeals dismissed.