SYED NADEEM SAQLAIN (CHAIRPERSON).---Vide these two appeals, the appellant as well as the Revenue has called into question the impugned order passed under section 122(1) of the Income Tax Ordinance, 2001 by the learned CIT(Appeals-II), Lahore dated 25-4-2011 pertaining to tax year 2009.
2. Facts giving rise to the instant case are that the taxpayer is a Private Limited company engaged in the business of manufacturing and sale of M.S. Pipe. Income Tax Return for the year under consideration was filed under SAS which had been treated as assessment order under section 120 of the Income Tax Ordinance, 2001. Thereafter, the case of the taxpayer was selected for audit under section 177 of the Income Tax Ordinance, 2001 and in this regard the revenue issued certain notices for production of record which was produced by the taxpayer and was examined by the Taxation Officer. A notice under section 122(9) of the Income Tax Ordinance, 2001 was also issued by the Taxation Officer to the taxpayer for 21-12-2010; however, the AR of the taxpayer filed reply through OCS which was examined by the Taxation Officer, whereas, the Taxation officer could not be satisfied the reply furnished by the taxpayer and amended the assessment 122(1) and assessed income at Rs.28,069,723. Being aggrieved by the assessment order, the taxpayer preferred appeal before the Commissioner Inland Revenue (Appeals-II), Lahore which was partially accepted by Commissioner Inland Revenue vide order dated 25-4-2011 and additions under various heads were held to be justified. This has compelled both the assessee appellant as well as the revenue to come up in cross appeal before this forum.
3. The learned counsel representing the appellant has vehemently contested the impugned orders of the authorities below on legal as well as on factual. Grounds. He has raised preliminary objection that initiating of proceeding under section 177 of the Income Tax Ordinance, 2001, selection of the case for audit and passing order under section 122(1) to be illegal. He has further contended that as far as not meeting with prerequisites as laid down for audit are concerned, glaring illegalities have been committed. As no pre-show cause as expressed under section 177 under the provisions of the Ordinance had been issued providing basis for selection for audit. In support of contention, the learned A.R. Of the taxpayer has placed reliance on the decision of the Income-tax Appellate Tribunal Pakistan reported as 2010 PTD (Trib.) 878, wherein the procedure for selection of cases for audit by the commissioner has been provided elaborating therein that the notices under section 177 are the basic requirement. It had been written in this decision that the scheme set out in section 177(4) has to be followed and the Commissioner himself should firstly confront the taxpayer regarding the ousting of the case for the total audit. He further agitated that basis of selection to be confronted should not be general in nature but should be solid and duly substantiated and the provisions of section 177 as a whole should be applied.
4. The learned A.R. Of the Taxpayer also made reliance on the latest judgments of this forum reported as (2011-PTD-2158 ) and (2011 PTD 1455) wherein it has categorically been held that non- issuance of pre-selection notice was against the norms of natural justice i.e., Audi Alteram Partam, Selection, in the facts and circumstances was illegal void and ab initio. It is pertinent to mention here that the preliminary objections raised by the A.R. Of the Taxpayer fully support his view.
Though, these cross appeals can be decided on this legal plain but, to make it clear, we propose to adjudge these appeals on merits. On the contrary, the learned D.R. Contended that the case of the appellant had rightly been selected for audit and all the required formalities were duly fulfilled by the department, hence, no further relief be allowed to the Taxpayer on this issue.
5. Having taken regard to the facts of the case in its entirety and after perusing the available relevant record and considering the arguments put forth before us by both the representatives, we deem it appropriate to modify the assessment as under:-- Addition on account of WPPF claimed on accrual basis under section 60B at Rs.687,632.
6. The Learned A.R. Of the Taxpayer has vehemently contented that amount of WPPF which is payable as on June 30, 2009 is paid in the next financial year. The provision on profit is always calculated after June, 30 each year and its provision was made by the auditors at the time of finalization of account in the month of September, 2009. The accounts are prepared on accrual basis and an expense is charged to the relevant year as per International Accounting Standard.
According to the Income Tax Ordinance, 2001, section 60B WPPF is explained "Seeks to allow Worker's Participation Fund as deduction against Company's Income", therefore, adding the said expenses in company's income is illegal which needs deletion thereof. Further the Taxation Officer has made reliance on unreported judgment of Income Tax Appellate Tribunal of Pakistan (I.T.A No.1217/LB/2008) without confronting the taxpayer through notice and merely mentioning ITA. No. Cited supra, the assessm ent order does not full fill the requirement of confrontation. In order to strengthen the contention, the learned A.R. Referred a reported Judgment of Honourable Karachi High Court, cited as 2008 PTD 647. Keeping in view the aforementioned facts and circumstances of, the case as well as after scrutinizing the reported a judgment cited above, we feel no hesitation to delete the addition on this score.
Addition on account of Donations claimed as straight deduction under section 61 of the Ordinance, amounting to Rs.155,000.
7. The next contention of the company/taxpayer relates to the claim i.e. Charity, Donations and Zakat at Rs.155,000 in 2009. The 'detail of charity and donation was duly filed during the course of proceedings, whereas; the disallowance was made on the basis that the claim of this expense is straight deduction which is wrong. In this regard, it is furnished, that the taxpayer has incurred this expense in accordance with the injunctions of Islam not given in the section. It is further stated that the taxpayer through his AR explained that the amount of Rs.60,740 is made against purchase of Printing and Stationery, whereas, it was duly explained before the A.C.I.R. That the Accountant had made a mistake in cash book while typing the description. The expense is properly recorded under correct head in the books of accounts. The taxpayer's counsel submitted the copies of ledger account of charity, Donation, Zakat and Printing and Stationery before the CIR (Appeals-II), Lahore, as well, hence, the addition made by the ACIR and confirmed by the CIR (A) by brushing aside the evidence produced before both the lower authorities, is unjustified and obviously merits deletion:-- Addition on account of Donations in terms of section 111(1)(c) of the Ordinance, at Rs.55, 740.
8. The learned A.R. Of the taxpayer has contended that the addition made under section 111(1)(c) is the consequence of addition made on account of Donations and Charity. Further argued that no separate notice under section 111(1)(c) of the Income-tax Ordinance 2001, was issued to the taxpayer, therefore, the addition made under section 1I1(1)(c) is not sustainable in the eye of law.
We find a lot of force in the contention raised by the learned counsel for the assessee-appellant and observed that without issuance of separate notice no addition can be made. Consequently, we are constrained to agree with the submission made by the learned A.R. And delete this addition too which has wrongly been made by the Taxation Officer:-- Addition on account of Medical expense of employee's under section 21(c) of the Ordinance at Rs.206,216.
9. Coming to this ground, the learned A.R. Has strongly agitated that medical expenses of employees were disallowed on the basis that the company/taxpayer never deducted tax while making the payment to recipient. In this respect, he submitted/stated that all the expenses were paid to one party namely Dr. Khawaja Javaid Yousaf (Eye and general Clinic). We have observed that the expenses are of petty cash nature and the payment is made through cash. Copy of ledger of "medical expenses" was duly presented by the learned A.R. Before the lower authorities which was not taken into account adequately which is against the natural justice. To meet the ends of 'justice and fair play, we have no option except to delete the addition made on this score which seems to be unjustified.
Addition on account of Salaries and Wages under section 21(c) of the. Ordinance, at Rs.29,98,608.
10. The Taxpayer has claimed salaries and wages in the profit and loss account amounting to Rs.29,98,608, whereas, the ACIR has totally disallowed and added back in the taxpayer's income with observation that the taxpayer has not deducted tax "as required by Division-IV of Part-V of Chapter X". The learned counsel for the appellant vociferously argued that the matter is of short deduction not of non-deduction, therefore, total disallowance of salaries of Directors and Manager under section 21(c) is void ab initio and illegal. The learned A.R. Has drawn our attention to the assessm ent order as well as CIR (A)'s order which explicitly reveals that it is matter of short deduction. Therefore, setting-aside of this, addition by the CIR(A), is not a proper solution and rather it is likely to drag the taxpayer in another in cumbersome chain of litigation. After giving due consideration to the facts and circumstances of the case as well as perusing the available record, we are fully convinced with the arguments advanced by the learned A.R. Of the Taxpayer that the section 21(c) is not applicable in this situation. Hence, the addition made by the Taxation Officer on this score is hereby deleted.
11. The learned A.R. Of the taxpayer also emphatically contested the following and backs which were made without any justification; hence, the same are liable for deletion.
S.No. Description Amount
1. Clearing and forwarding under section 21(I) Rs.3,96,670
2. Repair and Maintenance (Electric installation) under section 21(1)Rs.0,34,500
3. Lubricants under section 21(I) Rs.0,25,000
4. Repiar and Maintenance (Building) under section 21(I)Rs.2,05,451
5. Repiar and Maintenance (Machinery) under section 21(I)Rs.0,74,413
6. Vehicle running and maintenance under section 21(I)Rs.0,35,000
7. Printing and Stationery under section 21(I) Rs.2,25,855
12. He Submitted that these expenses are very crucial in the business of manufacturing which have been added back in the, income of taxpayer by the ACIR and confirmed by the CIR (A) on the basis that these were not supported with proper documentary evidence. In this regard, the Learned A.R.
Of the Taxpayer has placed reliance on a reported judgment of this forum (2011 PTD 901).
13. We have heard the arguments advanced by the rival parties and after having gone through the assessm ent record as well as the case-law, we came to the conclusion that these and backs are part and parcel to run any business. Further observed that no one can establish his business without these facilities, so we find that the contention raised by the learned counsel carry much weight and we feel no hesitation to delete the entire and backs tabulated above.
Professional Fee. Under section 174(2) of the Ordinance, amounting to Rs.694,700
14. Coming to the last contention, the learned counsel for the appellant contended that the expense was 'disallowed and added back in the income of taxpayer by the ACIR on the basis that this was not supported with proper documentary evidence, whereas, the taxpayer has paid all the fee to well known law firm Messrs Zaheer Babar and Co., 58-B, 62-Mozang Road, Near Safanwal Chowk, Lahore. He further stated that Professional fee is recorded on accrual basis and paid in the next financial year; therefore, disallowance of expenses claimed on accrual basis is void ab initio and illegal. In support of his contention, the learned A.R., has also made reliance on the reported Judgment of Honourable Karachi High Court, cited as 2008 PTD 647.
15. We have looked into the matter carefully and after perusing the relevant record as well as the reported judgment of the Hon'ble Karachi High Court cited supra, we have no doubt in our mind to state that the and back made by the Taxation Officer and confirmed by the CIR (Appeals-II), Lahore, under this head is also without any justification, hence deleted accordingly.
16. Now, coming to the departmental appeal, wherein the learned D.R has strongly contested the relief allowed by the CIR(A) to the taxpayer and requested for the restoration of the assessment made by the ACIR being justified. We have observed that the learned CIR(A) has applied his judicious mind while disposing of the appeal of the taxpayer and has obtained strength from the judgment of the Superior Courts. Consequently, we are of the Considered view that the departmental appeal has no legs to stand at this forum which is dismissed.
17. As a result, the appeal of the Taxpayer succeeds to the extent as indicated above, whereas, appeal of the department fails being devoid of any merits. .