1990 PLP (Trib (PTD)

This appeal has been filed at the instance of the Department to assail order dated 17‑10‑1987, passed by the learned CIT (Appeals), Peshawar, in respect of the assessment year 1986‑

87. The respondent, Registered Firm is a Contractor for excavation of canal.

2. None was present for the respondent when called out. The appeal is therefore, taken up for decision by resort to rule 20 of the Income‑tax Appellate Tribunal Rules.

3. The scrutiny of the record and the discussion with the learned D. R, showed that Receipts declared at Rs. 3,250.749 were accepted, declared being verifiable. However, the learned officer resorted to apply net profit rate of 15% though the respondent had declared a G. P. which worked out to 14%. On appeal, the learned Commissioner maintained the application of a net profit rate but reduced it to 12.5%. With this, the Department is not satisfied. We find that in the preceding year also a net profit rate. of 12.5% was applied by the Department itself. Therefore, the relief by the learned Commissioner is in line with the past record and the treatment meted out by the Department. It, therefore, needs NO INTERFERENCE.

4. During the course of the discussion our attention was drawn by the learned D.R. to several decisions by this Tribunal, where it has been held that a duty is cast upon the assessing officer to examine the books of accounts and if these are found as not reflective of true income, profits and gains, or, if from the accounts (as maintained) it is not possible to deduce correct income, profits and gains; the assessing officer may compute income on such basis and in such manner as he thinks fit. However, while proceeding under this authority, vested in him by sub‑section (3) of section 32 of the Income‑tax Ordinance, the assessing officer must make an honest endeavour so as to compete the income as near to the correct figure as possible. To this end, the extent and volume of business is to be found out, as also the generally obtaining G.P. rate in a particular trade. Thereafter, adhering to the requirements of section 23 and section 24 of the Income‑tax Ordinance deduction is to be allowed for overhead expenses to arrive at the resultant income (say: a net profit). It is well‑recognised that overhead expenses may be higher or lower depending on the circumstances obtaining in different situations, (such as the extent of Depreciation, etc.) but the G.P. emerging as a result of trading activity, is expected to be uniform because in order to remain in competition, the trading expenses are economised to the, maximum, attention being all the time focussed to utilize men and material to best advantage. This is all the more necessary in the case of contractors who are awarded jobs through competitive bidding. Therefore, a better (and widely accepted) yardstick to judge the fairness of the declared results, or for determining the profits arising out of trading activity, is the reasonableness and the comparability of the G.P. rate normally obtaining in that line of business. The application of such a rate to compute the trading profit automatically entails an estimate of the cost of sales/services (etc.) because (for example) a 15% G.P. means 85 cost of sales (etc.). addbacks (if any) may then be made out of the overhead expenses debited to the Profit and Loss Account adhering to the requirements of section 23 and section 24 of the Ordinance, or, if necessary these i also be separately estimated. However, m account cases their factum and' quantum can be easily ascertained/verified. In view of these legal and procedural requirements this Tribunal has always emphasised that a G.P. rate should be preferred to work out the trading profit and, therefore, consistently deprecated, the slipshod (and easy) method of determining income by applying a net profit rate, or resorting to a pure guess of income or to make simple ad‑hoc additions. All these methods, though quick and easy are not strictly legal or regular. However, through acquiescence of tax‑payers, tax‑advisors and the Department, the practice of applying net profit rate has gained such currency in the past and in such a large number of assessments, that uncertainty and confusion would follow if all such assessments in which income has not been determined on the lines discussed hereinabove are set aside for treatment de novo. The agony of the tax payers would prolong and the Department burdened with heavy workload if the entente cordiale is suddenly disturbed. This anxiety when tempered with pragmatism compels us to condone, for the intervollum ulene, the present lapse for which the tax‑payers and the tax‑collectors are almost equally responsible, but we do hope that the higher authorities of the Revenue would ensure avoidance of this irregularity in future.

5. The Assistant Registrar is ordered to send a copy of this order directly to the Chairman, CBR, Islamabad as also to the Commissioner of Income‑tax Peshawar Zone, who may like to issue necessary instructions to the functionaries working under him.

6. As for the present appeal for the reasons recorded hereinabove, it FAILS and is hereby DISMISSED. M.B.A./898/T Appeal dismissed.