These are cross appeals preferred on behalf of Taxpayer and Revenue relevant to the Tax year 2012, directed against order dated 30-6-2014, passed by the learned CIR(A), Zone-II, Lahore.
2. Briefly stated, the relevant facts are that the taxpayer in this case is a private limited company engaged in the business of manufacturing of artificial leather. Return for the year was filed declaring income at Rs,27,068,071 which was deemed to be treated as assessment in terms of section 120 of the Income Tax Ordinance, 2001. Subsequently, the case of the taxpayer was selected for audit in terms of section 177 of the Income Tax Ordinance, 2001, by the Federal Board of Revenue in exercise of powers conferred under section 214C of the Ordinance. An intimation letter for selection of case for audit was issued by the concerned Commissioner and later on statutory notices were issued by the concerned DCIR. After seeking explanation/documents from the taxpayer, the assessing authority come to the conclusion that the deemed assessment completed needs modification in terms of section 122(4)/(5). Accordingly, a show-cause notice under section 122(9) was issued to the taxpayer to make amendment of assessment 'by making certain additions as confronted in the notice. However, the taxpayer made no response to the show-cause notice 'and subsequent reminder notice. Accordingly, the assessing authority proceeded ex parte against the taxpayer and amended the assessment under section 122(4)/(5) by making following additions towards income for the year:--
(i) Addition under section 111(1)(d) suppress in sales 10,465,627
(ii) Addition under section 111(1)(d) suppression in production15,766,174
(iii) Addition under Section 67 allocation of income 51,169,311
(iv) Addition under section 111(1)(b) imports 68,938,492
(v) Addition under section 111(1)(b) Local Purchases 137,765,244
(vi) Addition under section 172(2) Local Purchases 9,410,873
(vii) Addition under section 39(3) Loan from directors 100,000,000 (viii)Addition 21 Lease finance charges 6,729,332
(ix) Addition under section 34(5) Trade Creditors 21,328,199
(x) Addition 21(1) cash expenses 36,461,279
(xi) Addition under section 28(1) financial expenses 2,037,543
(xii) Addition under section 21(c) Miscellaneous 5,983,243
(xiii) Addition under section 174(2) Miscellaneous Expenses7,503,518
3. Being aggrieved, the taxpayer went in appeal before the learned CIR(A) and assailed the impugned assessm ent order on a number of legal and factual grounds. The learned CIR(A) after detailed discussion in the impugned appellate order had allowed partial relief to the taxpayer. Both the parties being not satisfied with the impugned order of the learned CIR(A) have come up in appeal before this Tribunal 3A. We have heard the arguments of the learned representatives of both the sides and have carefully gone through the available record. After giving due consideration to the submissions made at the bar, the cross appeals are disposed of in the following manner:-- Additions made under section 111(1)(d) at Rs,10;465,627 and Rs,15,755,174.
4. During the course of amendment of assessment proceedings, the assessing authority had observed that as per sales tax returns, the taxpayer had shown purchases amounting to Rs,1,174,454,469 whereas in the income tax return the same were declared at Rs,1,163,988,824 and thus there is a difference of Rs,10,465,627 which was added under section 111(1)(d). Similarly, the difference of stock was also added as understated sales at Rs, 15,755,174 which was added under section 111(1)(d). The learned CIR(A) upheld the addition of Rs, 15,755,174 which was contested by the taxpayer as illegal whereas the addition of Rs,10,465,627 was remanded to the assessing authority which was assailed by both the parties as contrary to law.
5. It is submitted by the learned AR that there was no justification for the assessing authority to make the impugned additions as there was no difference of sales declared in the income tax/sales tax returns. Furthermore, the suppressed sales from the assumption of suppressed stocks is assailed by the taxpayer as contrary to the facts of the case. It is contended by the AR that the assessing authority has failed to appreciate the true facts of the case and made the addition merely on presumption. On the contrary, the learned DR supported the order of the assessing authority and prayed for maintenance of the same.
6. We have looked into the matter and after due consideration, we find that there was no justification for the learned CIR(A) to remand the addition on account of difference of sales in sales tax/income returns to the assessing authority to revisit the issue in the light of the information/data available. The taxpayer has satisfactorily reconciled the matter and explained to the learned CIR(A) that there is no difference of declaration made in the income tax/sales tax side. The said reconciliation is duly incorporated in the body of the impugned order which clearly depicts the actual position. Under such circumstances, we find that the addition made under section 111(1)(d) amounting to Rs,10,465,627 is not maintainable in the eye of law which is hereby deleted. Order of the learned CIR(A) in this regard is vacated. Appeal of the taxpayer on the issue is accepted and departmental plea is rejected.
7.Similarly, the addition made under section 111(1)(d) is made purely on presumption and surmises as the department had failed to bring on record any concrete evidence or definite information gathered through the audit proceedings that there is difference in stocks of raw material. There is certain elements of wastage, work in progress, decay or theft which cannot be ruled and addition cannot be made on supposition. Therefore, we find no reason to maintain the addition amounting to Rs,15,755,174 which is hereby deleted. Order of the learned CIR(A) in this behalf is vacated.
Addition under section 67 - Allocation of incomes.
8.The assessing authority after perusal of the audited accounts and the return of income for the year 2012, has observed that the taxpayer had earned income from local sales/supplies and export sales but the income between NTR and PTR sales had not been apportioned properly. Therefore, the assessing authority proportioned the same and made the addition under section 67 at Rs,51,169,311.
The learned CIR(A) remanded the issue to the assessing authority to allocate specific expenses attributable to sales and exports.
9.Both the parties assailed the action of the assessing authority as contrary to law and facts of the case. It is submitted by the learned AR that the assessing authority has unjustifiably made the addition as he did not fully understand the computation of income made vis-a-vis tax liability. On the contrary, the learned DR says that the taxpayer had failed to properly apportion the income between NTR and PTR.
10.Perusal of the order of the learned CIR(A) reveals that taxpayer duly reconciled the matter to substantiate their claim that allocation of expenses was on the basis of percentage of sales between NTR and PTR. The learned CIR(A) was convinced with submissions of the learned AR but he remanded the case to the assessing authority which is not justified. Perusal of the reconciliation made in the body of the impugned appellate order reveals that the taxpayer had satisfactorily explained the position. Therefore, we find no reason to maintain the addition made under section 67 which is hereby deleted. Order of the learned CIR(A) is vacated and departmental appeal on the issue is rejected whereas taxpayer's is accepted.
Addition made under section 111(1)(b) on account of unexplained imports
11. The assessing authority on perusal of audited accounts, found that there is a difference of imports declared by the taxpayer vis-a-vis custom data available on the system. Hence, he made the addition of Rs,68,938,492 under section 111(1)(b) of the Income Tax Ordinance, 2001. On appeal filed, the learned CIR(A) reduced the addition to Rs,54,827,232.
12. It is contended by the learned DR that the learned CIR(A) was not justified to reduce the addition as the taxpayer had failed to reconcile the declaration made in the audited accounts and those available on the system, therefore, the additions so made is in accordance with law and facts of the case. On the contrary, the learned AR submitted that there is no difference between the declaration made by the taxpayer and that available with the department. It is contended by the AR that the assessing authority had wrongly taken up the figures available in the Annexure-H of the return of income. It is further submitted that the declaration so made also includes freight, transit cost etc.
13. We have looked into the matter and after due consideration, we find that no exception can be taken to the treatment as accorded by the learned CIR(A) which is found to be fair and reasonable in the ambient circumstances of the case. The learned CIR (A) has rightly reduced the addition to Rs,54,827,232 which is in accordance with the declaration made in the Annexure-H-I and summary of the sales tax return. Orders of the learned CIR(A) in this behalf is accordingly maintained.
Addition under section 111(1)(b) - unexplained local purchases.
14. On perusal of return of income and audited accounts, the assessing authority found that there is a difference between local purchases declared in the sales tax/income tax returns. Accordingly, he made addition of differential amount of Rs, 137,765,244 under section 111(1)(b) as unexplained investment. However, the learned CIR(A) reduced the addition to Rs,117,591,614. Both parties being not satisfied had assailed the finding of the learned CIR(A) as contrary to law and facts of the case.
15. We have looked into the matter and after due consideration, we find that the assessing authority had failed to take into consideration the declaration made in the relevant columns of the returns of income and the learned CIR(A) had duly noticed the same while according relief to the taxpayer but the learned CIR(A) had failed to take into consideration the payments made to WAPDA by way of payments of electricity bills. The learned AR of the taxpayer duly produced before us the relevant electricity bills and bifurcation of local purchases made during the year. After considering all aspects of the case, we are satisfied that there is no difference of purchases as declared in the return of income vis-a-vis sales tax returns. The impugned addition under section 111(1)(b) being made purely on presumption/supposition is not maintainable in the eye of law which is hereby deleted. Order of the learned CIR(A) in this behalf is accordingly vacated.
Departmental appeal is rejected whereas taxpayer's appeal on the issue is accepted.
Addition made under section 174(2) - unverifiable purchases.
15. An addition under section 174(2) was made at Rs,49,410,873 on account of local purchases as the taxpayer had not provided purchase ledgers etc. To the assessing authority. The learned CIR(A) remanded the issue to the assessing authority for reconsideration.
16. Perusal of orders passed by the authorities itself clearly depicts the clear-cut position that the addition is made on supposition and there was no definite information available with the department to make such addition. The taxpayer duly provided the party-wise ledgers and invoices along with detail of purchases and tax deducted thereupon under section 153 of the Ordinance. The declaration so made in the return of income duly commensurate with the declaration made in the sales tax return. Therefore, there was no justification for making the addition under section 174(2) which is hereby deleted being not maintainable in the eye of law.
Addition under section 39(3) - loan from Director
17. As per balance sheet for the year under consideration, a loan amounting to Rs,100,000,000 had shown by the taxpayer to be received from the Director which was disallowed by the assessing authority on the plea that no entry in the bank statement is available. The learned CIR(A) upheld the addition being made in accordance with law.
18. It is explained by the learned AR that the loan was advanced by the Director to import machinery from abroad which was ultimately imported at installed at the business premises of the taxpayer. In this behalf, the learned AR produced before us agreement between the Chief Executive and the Company to lend money of Rs,100,000,000 which was paid outside Pakistan for the purchase of plant and machinery therefore, there was no justification for the assessing authority to make the addition.
19. We have looked into the matter and after due consideration, we find no justification to make such addition as the learned AR has duly explained the position and the agreement between the parties is available on record which is also submitted before the authorities below. The payment was made outside Pakistan to make investment in Pakistan in purchase of plant and machinery which was so imported and installed at the business premises of the taxpayer. The loan advanced was duly incorporated the books of accounts of the company. There is no corroborative explanation available with the department to discard the loan agreement available with the parties. Under such circumstances, we find no reason to maintain the addition made under section 39(3) which is hereby deleted being not maintainable in the eye of law. Order the learned CIR(A) in this regard is vacated.
Addition under section 21 - Lease Finance Charges.
20. The assessing authority on perusal of audited accounts had noticed that the taxpayer had claimed expenses of Rs,6,729,332 under the head "lease finance charges" which was disallowed being inadmissible in terms of section 21 of the Ordinance. The learned CIR(A) remanded the issue to the assessing authority for de novo decision.
21. Perusal of the computation chart produced before us, which was also submitted before the first appellate authority, reveals that the taxpayer had itself added back the lease finance expenses while arriving at the net profit for the year. Therefore, we are of the firm opinion that the impugned addition is a double jeopardy when the taxpayer-company had already added back the expenses.
Therefore, the addition made under section 21 is hereby deleted. Cross appeal on the issue is disposed of accordingly.
Addition under section 34 (5) - Trade creditors
22. The assessing authority made addition under section 34(5) at Rs,21,328,199 on the ground that the taxpayer had failed to provide aging composition of creditors for the last four years. The learned CIR(A) deleted the addition being not made in accordance with the provision of section 34(5) of the Ordinance.
23. Perusal of the record reveals that the assessing authority just picked the difference of tax creditors declared in tax year 2009 and tax year 2012 and made the addition without taking into consideration the provision of section 24 (5) which provides that a liability is chargeable to tax in the first year following the end of the three years which in the instant case becomes tax year 2013 and not tax year 2012 as wrongly done by the assessing authority. Under such circumstances, we find that H the learned CIR(A) has rightly deleted the addition which action is hereby maintained and departmental appeal on the issue is rejected.
Addition on account of cash expenses.
24. The assessing authority after perusal of Annexure-C of the return of income found that the taxpayer had made cash payments to the tune of Rs,168,095,667 and expenses so incurred might have paid in violation of section 21. Accordingly, he made the addition under section 21(1) amounting to Rs,36,461,279. The learned CIR(A) remanded the matter back to the assessing authority to revisit the issue.
25. Perusal of order of the learned CIR(A) reveals that after detailed deliberation he observed in the body of the order that "the action of the I OIR in making the impugned addition of Rs,36,461,279 under section 21(i) of the Ordinance, is found to be unjust and unwarranted.". In view of this categorical finding of the learned CIR(A) there was no justification to remand the matter to the assessing authority. The impugned addition is purely made on presumption and supposition which is evident from the observation of the assessing authority that "the expenses to the tune of Rs,36,461,279 might have been incurred in violation of section 21(1)". Under such circumstances, the addition made under section 21(1) is hereby deleted and order of the learned CIR(A) in this regard is vacated.
Addition under section 28 (i) - financial charges.
26. The taxpayer-company availed short terms loan facility of Rs,222,495,365 against which it claimed financial charges of Rs,33,959,035 but the assessing authority curtailed the financial charges on the ground that the taxpayer advanced loan to associated concerns so the company has borne lesser financial charges. An addition of Rs,2,037,543 was made towards income for the year. The learned CIR(A) upheld the addition as made by the assessing authority.
27. We find that the Assessing Officer had illegally apportioned financial charges between receivables from associated concern and the company. This apportionment has been made on the basis of assumption and surmises whereas the same had to be based on evidence. It was the assessing officer who had to prove that borrowed funds were utilized for non business advances.
Here, we also feel necessary to refer to the judgment of the honourable Sindh High Court reported as 2006 PTD 1343 which is 'on all fours' applicable in the instant issue.
In view of the above, we find that no reason to maintain the impugned addition which is hereby deleted. Order of the learned CIR(A) I j in this behalf is vacated.
Addition under section 21(c)
28. During the course of re-assessm ent proceedings, it was found by the assessing authority that the taxpayer-company had made payments under the heads "rent, rates and taxes, legal and professional charges, freight and forwarding and auditors remuneration but as statements filed under section 165 no tax was shown to have been deducted while making such payments.
Accordingly, the assessing authority made addition under section 21(c) amounting to Rs,5,983,243.
The learned CIR(A) being satisfied with the submissions of the AR, however, he proceeded to remanded the issue to the assessing authority with the observation that though CPR Nos. Of tax deducted and paid were provided but CPR Nos. Were not provided.
29. We have looked into the matter and we find that no exception can be taken to the action of the learned CIR(A) which is found to be reasonable in the circumstances of the case. No serious prejudice is caused to both the parties with the direction of the learned CIR(A), therefore, we find no reason to disturb his finding on the issue which is hereby maintained.
Addition under section 174 (2) on account of Miscellaneous Expenses
28. During the course of audit proceedings, it was found by the assessing authority that the taxpayer-company had payments under the heads "repair and maintenance (machinery), repair and maintenance (vehicle), printing and stationery, travelling and conveyance, Misc. And packing material but the company had not provided requisite record to prove that the payments were made in accordance with law. The assessing authority accordingly disallowed the expenses to the extent of 30% of the total claim and added back the same at Rs,7,503,618 under section 17(2). In the first appeal, the learned CIR(A) upheld the action of the assessing authority.
29. We have observed that the whole addition was made out by the assessing officer on conjectures and surmises and no instances were pointed out where payment was not made in accordance with law or due tax was not paid in the government exchequer. The assessing authority had acted in a lumpsum manner by disallowing the expenses under the head to the extent of 30% of the total claim. There is no scope of making such addition in the new scheme of Income Tax Ordinance, 2001. It seems that the assessing officer was in the old frame of mind and could not bring on record anything to justify his action that the payments were not made in accordance with law. Since, the action of the assessing authority is not I accordance with the law, therefore, there is no justification to upheld the addition made under section 172(2) under the head "Miscellaneous Expenses" which is hereby deleted. Order of the learned CIR(A) in this regard is accordingly vacated.
30. Resultantly, the cross appeals are disposed of in the above manner.