' These are four cross appeals, two by the assessee and two by the Revenue against consolidated order of Commissioner (Appeals) for assessment years 2000-2001 and 2001-2002.
2. Brief facts are that assessee is a public limited company incorporated under the Companies Ordinance, 1984. As stated, it was established to encourage and promote education in the Country and to run educational institutions. Normal returns were filed for the years 2000-2001 and 2001- 2002 and separate assessm ent orders, respectively dated 30-6-2003 and 31-10-2003, were passed under section 62 of the Income Tax Ordinance, 1979 (since Repealed). Being aggrieved of both the orders, the assessee filed two independent appeals before the Commissioner (Appeals), Zone-II, Lahore. Since grounds of both the appeals were identical, therefore, a consolidated order dated 20-11-2004 was passed by the Commissioner (Appeals), which is impugned before us by both the parties. Revenue has assailed the order for deleting addition made under the head 'deferred advance fee' and for curtailing the addition made under another head 'miscellaneous expenses'.
Whereas the assessee has assailed the order on various grounds but has pressed only two grounds. One is of 'exemption' under Clause 86 of Part-I of Second Schedule to Income Tax Ordinance, 1979. In the other ground, the assessee has assailed rejection of the books of accounts resulting into additions under the head 'profit and loss account', and has also challenged the notice under section 62 of the Repealed Ordinance claiming it to be defective.
3. The DR while arguing on departmental grounds has submitted that there is no provision for deferment of Income to subsequent accounting year. It is asserted that the assessee has employed Mercantile System of Accounting, therefore, the receipt can be taxed only in the year it was received. Learned counsel for the assessee has spoken in favour of the reasoning given by Commissioner (Appeals) and submits that the receipts in fact were an advance fee received for the next period because their semesters starts from May and ends in August. Not much has been said by the DR on other ground of curtailing the addition under miscellaneous expenses.
4. Learned counsel for the assessee, in support of his appeals has argued that assessee is entitled to exemption under Clause 86 of Part-I to Second Schedule of the Repealed Ordinance, because the assessee company has established the educational institution only for educational purpose.
Nothing was said on the distribution of profits amongst the shareholders. Learned counsel for the assessee had no answer to a specific question that the company being non-profit entity should have been registered under section 42 of the Companies Ordinance, 1984, which are formed and registered for such like purpose, on the condition of applying profits for the purpose it is incorporated and prohibits distribution of divided amongst its members. Learned counsel for the assessee could not deny, on another question, that the assessee has not claimed exemption in its return for both the years and that the claim of exemption was neither made nor discussed in both the assessm ent orders. The learned counsel has admitted that claim of the exemption was made for the first time before the CIT(A). On his second ground, though learned counsel has admitted the issuance of notice under section 62, but has vehemently argued on the defects in notice under section 62, claiming that the assessee was not confronted ban specific issues before rejecting the books of accounts and making additions in the claimed P&L expenses. Learned counsel has relied on the judgments by Lahore High Court in case of Shahroom International Private Ltd. v. Deputy Commissioner (2006 PTD 2654) and Mugal Technical Industries (Pvt.) Limited v. CIT (1996 PTD 263).
The DR, disagreeing with the contentions, read paragraph No, 13 from the notice under section 62 dated 16-6-2003 claiming that the assessee was specifically confronted after examining the books of accounts, however, the assessee in its reply to the notice dated 17-6-2003 has vaguely answered to the notice by submitting merely that '122 files with books of accounts are already submitted for verification purpose'. It was further said, as the explanation was unsatisfactory, therefore, some additions were made and the books of accounts were not rejected in to.
5. Heard the learned representatives of both the parties and record perused.
6. We are not convinced by departmental point of view that income received in a particular year cannot be deferred to be taxed in the following year. In our view, learned Commissioner (Appeals) has given a very pragmatic answer while observing that 'it is a simple question of revenue recognition of a particular payment, receipt of which at a particular point of time is not disputed by the parties'. We have also found the explanation of the assessee more convincing that the expenses relatable to those receipts fall in the following accounting period, therefore, the receipts are to be taxed proportionately in the following accounting period. Even perusal of section 32 of the Repealed Ordinance shows that to employ a particular method of accounting strictly is not a rule of thumb rather it envisages in subsection (2) that C.B.R. (now F.B.R.) can prescribe, for a particular class of business, profession or person, the manner in which payments of commercial nature shall be made or commercial transactions be recorded. Intention of the Legislature appears to work out a correct and just income, profit and gains. To achieve the intent, Legislature has given adequate powers to the Deputy Commissioner, in subsection (3) of the section 32. The Deputy Commissioner is authorized when, in his opinion, the assessee is not regularly employing a particular method of accounting and the income, profits and gains cannot be properly deducted therefrom, he may compute the same ' on such basis and in such manner as he thinks fit. The subsection (3) is reproduced hereunder:- "(3) Where no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the [Deputy Commissioner], the income, profits and gains cannot be properly deducted therefrom, or where, in any case to which subsection (2) applies, the assessee fails to maintain accounts, make payments or record transactions in the form or manner, as the case may be, prescribed under the said subsection, then, the income, profits and gains of the assessee shall, be computed on such basis and in such manner as the Deputy Commissioner thinks fit."
7. In our opinion the Assessing. Officer should have invoked the above quoted provision of law to recognize the receipt of advance fee in a requested accounting period. Hence, the appeal of the Department fails on this ground and Commissioner (Appeals) order is maintained.
8. Revenue's other ground of curtailing the addition under miscellaneous expenses is dealt along with the assessee's ground on addition under profit and loss account.
9. So far assessee's appeal on the ground of Exemption is concerned, it is an admitted position that the ground was first time raised before Commissioner (Appeals) and the exemption was not claimed in the returns for both the years. In our opinion, raising this ground at ,a belated stage is an afterthought. An exemption not claimed in return cannot be allowed at appellate stage or during the assessm ent proceeding. Even on merits, assessee has nowhere asserted that it is not meant for gaining profits. Had the assessee company been incorporated for promotion of the education and had intended not to distribute profits F amongst its members/ shareholders, it should have got itself registered under section 42 of the Companies Ordinance 1984. In our opinion, the purpose of educational promotion alone is not enough granting exemption. Non distribution of profits and to apply its profits solely for promotion of the education is sine qua non for claiming and granting exemption under the clause 86, which is reproduce hereunder:- "(86) Any income of any university or other educational institution established solely for educational purposes and not for purposes of profit."
' Appeal of the assessee on this ground is dismissed.
10. We now advert to the ground of assessee on defects in the notice under section 62, by which, it has challenged the additions made in Profit and Loss Account and revenue's ground on curtailing of such additions. Learned counsel for assessee, in, support of his arguments, has relied on the judgments by Lahore High Court in case of Shahroom International Private Ltd. v. Deputy Commissioner (2006 PTD 2654). Hon'ble High Court, in its advisory jurisdiction under the Income Tax Ordinance, while answering a specific question on non-issuance of notice under section 62, has traced history of the relevant proviso to subsection (1) of section 62. It was found to have been inserted through Finance Act 1993 and also discussed the reason for insertion of proviso in as explained in Circular No, 11 of 1993. As per the facts of the reported case, notice under section 62 was not issued in all the relevant years therefore it was observed:-- "(9) After the insertion of the proviso to subsection (1) of section 62 no doubt whatsoever was left regarding the procedure for rejection of the declared version where proper books of accounts were maintained and produced by the assessee for examination. Even though the proviso which clarified and explained the procedure to be followed by the Assessing Officer for rejecting the declared version was inserted through Finance Act, 1993, it applied even to prior assessment years where assessm ents were framed after the insertion of the proviso. In the case of the appellant even the impugned assessm ent for the assessment years 1988-89, 1989-90 and 1990-91 were framed after the insertion of the proviso it applied even to those assessments; and as all the impugned assessm ents were framed in violation of mandatory provision of law as contained in section 62 of the Ordinance. The CIT (Appeals) as well as the learned ITAT were clearly in error in not vacating the same."
' The other relied upon by learned counsel for the assessee is, Mugal Technical Industries (Pvt.)
Limited v. CIT (1996 PTD 263), the Hon'ble High Court, though held that issuance of notice under section 62 is mandatory but has held that it shall not be applicable to the assessments prior to July, 1993. Relevant part is reproduced:-- "(9) It is manifest from bare reading of substituted section 62 and the original section that there was no provision to issue notice under section 62 to the assessee before disagreeing with his accounts and to provide an opportunity to the assessee to explain his point of view prior to finalizing the assessm ent order. The provisions of section (61) to section 62 of the Ordinance to the effect that whether the assessee produces books of accounts as evidence in support of his version; the Assessing Officer shall, before discarding such accounts, give a notice to the assessee of the defects noted in the accounts book to provide an opportunity to the assessee to explain his point of view and record such explanation in the assessment order, was added by Finance Act, 1993. With the introduction of this provision following such a practice has become mandatory with effect from the amendment i,e, July, 1993 and such mandatory notice was neither necessary nor required during the assessm ent year under consideration, therefore, the Tribunal was justified that notice under section 62 was not necessary and confirmed the estimate of sales and application of G.P.
Rate keeping in view the previous history of the petitioner and the statement recorded on the order sheet of the learned A.R."
' In our considered opinion, the facts of this appeal are distinguished from the facts of the cases referred. In the referred cases notice under section 62 was not issued whereas, in the instant case, the notice was issued but is asserted to be defective. The ratio of referred cases is not attracted on facts of the case in hand.
11. Before dilating upon the issue it is advantageous to reproduce the relevant portion of the notice under section 62 and corresponding portion of reply by the assessee.
Para 13 of Notice under section 62 "The examination of books of accounts and allied details has revealed that P&L expenses are not open to complete verification and do involve elements of personal, non-business and unvouchedness. Therefore, suitable add backs are to be made.
"Books of Account. Complete books of account with 120 files of vouchers, bank statements and salary sheets are hereby submitted again for verification purposes."
' It appears, if the notice does not elaborate the defects, the reply too vaguely refers to the whole books of accounts comprising 120 files. Neither Assessing Officer nor the assessee has acted in accordance with the spirit of proviso to subsection (1) to the section 62. At this stage, it is necessary to ascertain the object of inserting the proviso, so the same is reproduced:--
62. Assessm ent on production of accounts, evidence, etc.---(1) The Deputy Commissioner, after considering the evidence on record (including evidence, if any, produced under section 61 and such other evidence as the Deputy Commissioner may require, on specific points, shall, by an order in writing, assess the total income of the assessee and determine the tax payable by him on the basis of such assessm ent: ' Provided that the assessee produces books of accounts as evidence in support of the return, the Deputy. Commissioner shall, before disagreeing with such accounts, give a notice to the assessee of the defects in the accounts and provide an opportunity to the assessee to explain his point of view about such defects and record such explanation and the basis of computation of total income of the assessee in the assessment order.
Examination of the reproduced part of the section 62 reveals that First it enjoins a duty upon the Assessing Officer to assess total income and determine tax payable by considering the evidence on record and evidence produced in support of the return. Secondly, the Assessing Officer, before disagreeing with the books of accounts produced, shall identify the defects in the books of account through a notice, to give an opportunity to the assessee to explain his point of view on the identified defects. Thirdly, it is incumbent upon the Assessing Officer to record the explanation and basis of computation of total income, in the assessment order. Obviously, the principles of natural justice are ensured which, even otherwise, are to be read in every statute by dint of section 24-A of the General Clauses Act 1897. Section 24-A casts unabridged responsibility on authorities of exercise power reasonably, fairly and justly by giving reason for the order. Violation of the principles of natural justice, normally, calls for the annulment of the orders. Its specific mention, in a provision of law, for completion of any proceedings, makes it mandatory and departure wherefrom should result in quashing of the proceedings and the consequential order too.
12. However, the other facet, lying between the lines of the reproduce part of the section 62, cannot be ignored. Under section 1(2) of Qanun-e-Shahadat' Order 1984, it is applicable to the quasi- judicial proceedings under Income Tax Ordinance therefore, the declarations, including claim of expenses, in the return are to be supported by evidence. The onus to prove that a part of receipt is not taxable under a particular provision of law is on the assessee. For this settled law strength can be derived from the verdict of Supreme Court in the case CIT v. Messrs Smith Kline and French of Pakistan (1991 PTD 999). Mere submission of 120 files of books of account, in evidence, without specifically pointing out the supportive documents for each claim is not sufficient discharge of the burden of proof by assessee. By producing huge record, the assessing authority is expected to relate each evidence with the relevant claim and then find out defects. Conversely, the assessing authority avoid such a cumbersome exercise and prefers to raise vague objections/defects while disagreeing with the books of account. This weakness on the part of the department, is exploited in appeals urging the flaws in exercise of jurisdiction by assessing authority. It is settled principle of the law of evidence, encoded in Art.117 of the Qanun-e-Shahadat Order 1984, that 'one who asserts existence of a fact must prove that the fact exist'. It is also settled law that 'no one can be benefited for weakness of other and he has to prove on the basis of his own evidence', support can be gathered from the K verdict by Hon'ble Sindh High Court in Talat Hussain v. Rado Builders Developers (2009 YLR 414) and Hon'ble Lahore High Court in Mst. Safia v. Mst. Bibi and 14 others (2005 MLD 646). Another principle of the law of evidence is laid down by Hon'ble Lahore High Court in Mst. Azim Bibi v. Rashida Begum and others (2008 CLC 258) and by Sindh High Court in Khalil-ur- Rehman and others v. Mst. Vakeelan and another (PLD 2006 Karachi 267) that the 'onus shifts on IL the other side only when the burden of proof is sufficiently discharge'.
' After giving anxious consideration on the facts in hand, we hold that by merely placing books of accounts, consisting of 120 files, without identifying the evidence for each claim, the assessee could not sufficiently discharge the burden of proof for the expenses claimed, therefore, the onus did not shift on the department/Assessing Officer. The Assessing Officer's bald disagreement with the books of accounts is also disapproved. Since the lapses are made by both, the department as well as assessee, therefore the assessme nt order and CIT(A)'s order, to the extent of add backs of expenses under the head Profit and Loss Account are set aside and to this extent case is remanded to the Assessing Officer/taxation officer with the direction to the assessee to produce books of accounts with specific correlation of each evidence with the claimed expense and taxation officer is directed to undertake the proceeding strictly in accordance with the law as discussed above and pass a speaking order with reasons.
' The cross appeals on this issue are disposed of accordingly.