ABDUL RAUF (ACCOUNTANT MEMBER).---Through these cross appeals for the tax years 2004 and 2005 both the Revenue and the taxpayer have assailed the orders of the CIR(Appeals) bearing Nos.51 and 52 both dated 25-2-2009, whereby the learned CIR(Appeals) disposed of the taxpayer's appeals against the orders of the taxation officer passed under section 122(1) of the Income Tax Ordinance, 2001 for the tax years 2004 and 2005 respectively.
2. Facts for the purpose of disposed of these appeals, in brief, are that the taxpayer which derives income from a steel industrial unit situated at Bhoghiwal Band Road, Lahore, filed returns, declaring income at Rs.22,50,000 and Rs.44,98,200 for the respective years which were treated as assessm ent orders in terms of section 120(1) of the Income Tax Ordinance, 2001. However, subsequently, the case of the taxpayer AOP for both the years was selected for audit by the CIT Division-II, RTO, Lahore and intimation to . This effect was communicated to the taxpayer vide Letters Nas.114 and 115 both dated 21-2-2008.
3. As a consequence of audit, taxpayer's declared version for both the years was not found credible for reasons recorded in the assessm ent order which are as under:-
(a) Complete manufacturing record was allegedly not produced by the taxpayer before the taxation officer and in the absence of this record it was not possible to co-relate the consumption of raw material with the finished products namely ingots and MS Bars.
(b) The declared, sale rate of billets and MS Bars was found to be understated in comparison with the rates of Pakistan Steel Mills and two other cases namely Messrs Bashir Sons Steel Casting near Sehar Cinema, Baghbanpura, Lahore, (NTN 2302652) and Messrs Haq Brothers, Medina Chowk, Kokhar Road, Badami Bagh, Lahore (NTN 0443488). The learned taxation officer, therefore, discarded the declared version of the taxpayer AOP and estimated the sales in both the years by applying the following sale rates:- Tax year Billets MS Bars 2004 Rs.18,550 P.M. Ton Rs.21,550 P.M. Ton 2005 Rs.24,000 P.M. Ton Rs.27,000 P.M. Ton The difference between the sales declared and the sales assessed in both the .Years amounting to Rs.3,76,92,976 and Rs.13,77,12,332 was treated as suppressed gross profit and added to the income of the AOP in both the respective years. Besides, 'disallowances out of profit and loss account expenses were also made at Rs.78,95,822 and Rs.1,51,80,747 in the respective years and in this way income of the AOP was determined at Rs.4,68,82,022 and Rs.15,42,43,453 in both the years under appeal.
4. Being aggrieved, the taxpayer filed appeal before the CIR(Appeals) and vehemently agitated against the rejection of the declared version as well as additions made in trading and profit and loss account at Rs.13,77,12,332 and Rs.1,51,80,747. For the both the years under appeal. It was pleaded before the learned CIR(Appeals) that the observation of the learned taxation officer that the taxpayer had failed to produce the original record of production before him along with complete books of account was patently incorrect. It was further asserted that the entire, record had been produced before the taxation officer on 27-11-2008 and in support of this assertion certified copy of the order sheet entry dated 27-11-2008 was produced before the learned first appellate authority wherein the taxation officer recorded the production of original production register. It was further argued that the learned taxation officer neither identified nor did he confront the taxpayer even with a single defect in the books of account to justify the rejection of declared trading results.
5. With regard to the application of sale rates the learned AR explained that although the taxation officer had quoted the cases of Messrs Bashir Sons Steel Casting near Sehar Cinema, Baghbanpura, Lahore, NTN.2302652 and Messrs Haq Brothers, Madina Chowk, Khokhar Road, Badami Bagh, Lahore NTN.0443488, he never confronted the appellant with the facts of the so called parallel cases, although it was not only a mandatary requirement of law but also of principles of natural justice. The learned AR further explained that the business of the so called parallel cases of Messrs Bashir Sons Steel Casting and Messrs Haq Brothers, was different from that of the taxpayer. Besides, in the latter case no sale rate had been declared. It was also pointed out by the learned AR that in another case of Messrs Power Steel assessed at NTN.0970068 the same taxation officer had accepted the sale rate of Rs.21,290 per M.Ton in the tax year 2006 whereas the appellant had disclosed Sale rate of Rs.18,661 per M.Ton to Rs.23,714 per M.Ton during the two years under appeal. It was further pointed out that there was no similarity between the taxpayer AOP and the alleged parallel cases as the turnover of the taxpayer was Rs.1,05,91,17,520, whereas in the so called parallel cases the turnover was nowhere near the declared turnover of the appellant. Plea of the acceptance of sales by the Sales Tax Department was also raised by the learned AR with full force to contend that the declared turnover merited acceptance as it had already been accepted by the Sales Tax. Department PTD which was as much part of the Federal Board of Revenue as Income Tax Administration.
6. With regard to the profit and loss account additions it was pleaded that the and backs had been made on the basis of stock phrases without identifying elements of un-verifiability. Carelessness on the part of the taxation officer was also pointed out by highlighting the fact that the aggregate disallowance in the tax year 2005 worked out to be Rs.88,99,025 whereas the total of disallowances had been taken at Rs.1,51,80,747.
7. The learned DR, in his turn, supported the orders of the taxation officer and contended that the learned first appellate authority had directed to accept the declared version of the taxpayer AOP without any justification. He stated that the taxpayer in spite of adequate opportunity allowed to it, did not produce the requisite manufacturing record to substantiate its declared version and under such circumstances, declared version of the taxpayer AOP did not warrant acceptance. He further argued that the taxpayer's declared sale rate of ingots and MS Bars did not inspire confidence because it was found abysmally low in comparison with the cases of Messrs Pakistan Steel Mills Limited as well as other two cases quoted in para.3 of this order. The taxation officer, the learned DR asserted, had not applied the sale rate in both the years in an arbitrary manner as the applied rate had been declared by the taxpayers referred to supra. He therefore prayed for the restoration of the order of the taxation officer as he had rejected the declared trading version of the taxpayer AOP on cogent grounds. The learned DR also assailed the deletion/curtailment of disallowances in the profit and loss account by the learned first appellate authority.
8. We have given due consideration to the rival arguments and also gone through the relevant record available on the file. At the very outset we are 'shocked to note that the taxation officer rejected the declared trading version of the AOP with the observation that complete record of production had not been produced before him. It is a matter of record that the taxpayer AOP produced record of production on 27-11-2008 and this fact is supported by the certified copy of the relevant order sheet about which the learned first appellate authority has recorded definite observation at page-7 of both the orders. Besides the taxpayer is also registered with the Sales Tax Department and the entire record of purchases and sales must be available in the form of sales tax returns. Had the taxation officer cared to look at the sales tax returns of the appellant, he could have recorded a fairly sound observation About the declared sales and purchases..
9. It is also fairly well settled by now that the principles of natural C justice underlie every provision of law and requirements of natural justice have to be fulfilled before saddling a subject with liability of tax. In this context the principle of audi alterm parterm which postulates that no person should be condemned unheard is of great significance. The departmental representative who appeared before the learned first appellate authority candidly admitted that the particulars of the cases on which the taxation officer had based his estimate of sales were never confronted to the taxpayer through notice under section 122(9) of the Income Tax Ordinance, 2001. The learned first appellate authority has dilated upon the fact of these cases and has rightly come to the conclusion that none of the them could be considered as a parallel for the purpose of the applied sale rate in both the years. Under these circumstances, we uphold the order of the learned first appellate authority as no material has been placed before us to controvert the findings of the first appellate authority regarding the declared trading version.
10. As far as profit and loss account additions are concerned, the learned first appellate authority did not approve of total disallowance of carriage expenses claimed at Rs.15,36,789 and Rs.55,29,550 in the tax years 2004 and 2005, respectively. The taxation officer disallowed the expense in toto with the observation that the expense had been claimed without any justification as entire sales had been made at the mill. However, the learned first appellate authority, on the basis of the evidence that the taxpayer AOP also maintained a godown situated at Beco Road Badami Bagh, Lahore, wherein the manufactured products were kept for the purpose of sale, directed to allow the carriage expense in both the years under appeal. We are of the view that the finding as well as direction of the learned first appellate authority are in consonance with the facts of the case and do not call for any interference by us.
11. The disallowance of mark up of Rs.14,32,030 and Rs.35,33,817 in both the years under appeal was made by the taxation officer with the observation that the said mark up was an expense of capital nature as it related to the. Creation of capital assets like building and machinery. The learned first appellate authority also upheld the treatment. We express our inability to subscribe to the finding of the authorities below because the mark up on loan utilized in the creation of capital assets could be treated as capital expense only at pre-commencement stage. The case of the taxpayer; on the contrary, is that of a running business concern if some amount of loan, in such concern and is utilized in the creation of capital assets for the purpose of expansion or modernization of the existing plant and machinery the same is to be treated as revenue expense. We, therefore, direct that the amount of mark up be allowed as admissible deduction in both the years under appeal.
12. As far as other disallowance are concerned, we are of the opinion that the treatment accorded by the learned first appellate authority is fairly reasonable, hence maintained.
13. All the cross appeals are disposed of as above.