ZAHID SIKANDAR, JUDICIAL MEMBER .----The titled second appeal has been preferred by the CIR against the Order No.17 dated 30-11-2013 passed by the Learned Commissioner Inland Revenue (Appeals-II) wherein the learned Commissioner (Appeals) accepte d the appeal of the present respondent to certain extent and allowed the following treatment to the taxpayer company .
S. No.Head of account Expenses claimed Treatment accorded 1 Freight of government wheat Rs.475,125 Confirmed 2 Loading/unloading wheat Rs.203,625 Confirmed 3 Packing of finished goods Rs.314,616 Confirmed 4 Commission paid on wheat purchaseRs.7,204,000 Deleted 5 Mobil Oil consumed Rs.22,750 Deleted 6 Market fee Rs.245,103 Deleted
2. The grounds of the instant appeal as set forth in the memo of appeal and contested by the appellant are as under: i. That the order of the learned CIR (Appeals) is bad in law and contrary to the facts of the case. ii. That the learned CIR (Appeals) was not justified to delete the addition of Rs. 2,04,000/- made under the head of account "Commission paid on wheat purchase". iii. That the learned CIR (Appeals) was not justified to delete the addition of Rs. 22,750/- made under the head of account 'Mobile oil consumed' iv. That the learned CIR (Appeals) was not justified to delete the addition of Rs. 2,45,103/- made under the head of account "Market fee".
3. Brief facts of the case are that this is the second round of litigation between the parties. The respondent company is engaged in the business of running a flour mill. Initially , the return of the respondent tax payer company was selected for audit under section 177 of the Income Tax Ordinance for the tax year 2006 and the learned taxation officer amended the assessment under section 122(1) read with section 122(5) vide order dated 30-04- 2010 whereby the learned officer made certain additions in the assessment regarding the profit on sale of wheat stock, loss on sale of vehicles, inadmissible deductions and amended the total income. Feeling aggrieved of the aforesaid order , the respondent company filed an appeal before the learned CIR (Appeals). The learned commissioner (Appeals) vide order dated 18-10-201 1 reduced the addition made on account of loss claimed on sale of vehicles, deleted the addition made under section 174(2) of the income tax ordinance and remanded the case to the taxation officer to re-fix Gross profit (G.P) rate on sale of wheat stock and to verify the expenses incurred under heads "Freight on Govt. wheat, loading un-loading wheat, packing of finished goods, commission paid on wheat purchased, market fee and mobile oil consumed" after providing an opportunity of hearing to the tax payer company .
4. In the second round of litigation, the taxation officer, as per directions of the learned Commissioner (Appeals), proceeded with the matter again by issuing notices with regards to the issues as below: i. Declaration of GP rate at 10.21 per Kg and application of GP late of Rs.13 per Kg for sale of wheat of raw material. ii. Verification of expenses under the heads of freight of Govt. wheat, loading and unloading wheat, packing of finished goods, commission paid on wheat purchased, market fee and mobile oil consumed.
5. The tax payer company submitted its reply/contentions as follows: i. There is a mistake of fact in the order of the Learned CIR (Appeals II) Lahore to the extent and manner that tax rate on declare sales of wheat stock @Rs. 10.21 per Kg ii. The sale rate applied @ Rs. 13 per Kg resulted profit of Rs.2.89 per kg, margin of profit on bulk sales is impossible. Normally in bulk trading of wheat, profit is applied Rs 1 to Rs 1.5 per kg.
The profit @ 1% may please be determined on sale of wheat. iii. Details in respect of freight of Govt. wheat, loading and unloading, packing of finished goods and commission paid on wheat purchases are attached. iv. Keeping in view the explanation, documentary evidence produced, declared version may be accepted.
6. After hearing the taxpayer , the taxation officer observed that contention with regards to the profit of Rs.1.00 to Rs.1.5 per kg is without any supporting evidence. However , the officer Inland Revenue reduced the sale rate of wheat @ Rs. 12.25 per Kg instead of earlier rate applied @Rs. 13.00 per Kg considering it a fair market value of stock sold. The value of wheat stock was re-calculated as: Sales stock wheat Rs.18,177,660/- Sales stock in Kgs Rs.1,780,000 Average rate of wheat purchased Rs.10.25 per Kg Fair market value of wheat stock sold applied Rs.12.25 per Kg Value of sales stock sold adopted (1780000x12.25)Rs.21,805,000/- Addition (Rs.218050000-Rs.18,177,660) Rs.3, 627 ,340/- Whereas, the explanation offered by the taxpayer with regards to expenses under the heads of "Freight of Govt. wheat, loading/unloading wheat packing of finished goods and commission paid on wheat purchase was not accepted by the officer inland revenue as the same was not supported by any documentary evidence and only month wise details were provided. The learned OIR after giving effect of the appellate order amended/modified the amended assessment as under vide order dated 28-6-2013.
Amended total income as per order dated 30.04.2010 Rs.6,744,556 Less relief
1. Deletion made on a/o of loss on sale of vehicles. Rs.200,000/-
2. Deletion on a/o addition made under section 174(2)Rs.262,163/-
3. Relief on a/o revaluation of Wheat stock sold as discussed above (addition as per original Order Rs.4,962,340 - addition re- calculated Rs.3,627,340)Rs.1,335 000/-Rs.1,797,163/- Balance amended income Rs.4,947,393/- WWF @ Rs.98,948/- Taxable income Rs.4,848,445/- Tax payable @ 37% Rs.1,793,924/- Add WWF Rs.98,948/- Total Tax and WWF payable Rs.1,892,872/- Tax already paid Rs.2,61 1,984/- Balance refund (Rs.719,1 12/-)
7. The respondent taxpayer company filed an appeal under section 127 before the learned CW (Appeals) against the order dated 28-06-2013 passed by DCIR under section 124 read with section 122(1)(5). The learned commissioner (Appeals) after hearing the parties vide his order dated 30-11-2013 declared the applied sale rate of wheat of Rs. 12.25 per Kg as unjust and unwarranted and directed the taxation officer to accept the declared version of the taxpayer . As far as the second issue of additions under section 174(2) was concerned, the learned commissioner (Appeals) also did not fully agree with the findings of the DCIR and partially allowed the appeal of the taxpayer .
8. We have heard the learned representatives from both the sides and have also perused the impugned order as well as the order passed by the learned DCIR. Since this is the second round of litigation and in the first appeal before CIR (Appeals) in the first round of litigation, certain reductions and deletions were ordered by the learned CIR (Appeals) in the amended assessme nt. Nothing has been brought to the notice of this bench by any of the parties that the appellate order dated 18-10-201 1 was assailed further by any of the parties by way of any appeal before the Appellate Tribunal Inland Revenue and that appellate order to the extent of such reduction/deletion was given effect also by the DCIR. Therefore, all those reductions/deletions ordered by CIR (Appeals) have attained finality . Now there are only two issues before this bench which were sent back by the CIR (Appeals) for decision afresh by the DCIR one relates to the determination of fair market value of wheat stock and the second is the additions made under section 174(2) of the Income Tax Ordinance, 2001 in various heads of account as enumerated in the order . Both the DCIR and Commissioner (Appeals) below have given divergent views on these two issues. W e will deal with these two issues one by one.
Application of Sale Rate/Fair Market V alue:
9. Nothing in the order dated 28-06-2013 suggests that the learned DCIR conducted any sort of inquiry or investigation or any effort was made to determine a fair market value of wheat stock. At the time of original amendment sale rate per kg was adopted @ Rs.13.00 per kg against declared of Rs.10.25 per kg giving a difference of Rs.2.75. However , once the matter was remanded back by the commissioner (Appeals) for determination of fair market value the learned DCIR reduced the sale rate from Rs.13.00 to Rs.12.25 per kg. It is also not clear from the record that on the basis of which information the DCIR determined the sale rate of Rs 12.25 rather the valuation appears to be hypothetical and without any basis. The burden of assigning reason for determining the fair market value is on the assessing authority and it is not on the assesse to produce evidence to the effect that the valuation arrived by the assessing authority was not in accordance with the prevailing market value. In fiscal matters, it is for the assessing authority to establish that the declare d version of the tax payer is not correct and D that too based on substan ce and material satisfying the judicial conscience. Reliance is placed on 2002 PTD 700 .
10. Section 68 of the Income Tax Ordin ance, 2001 defines Fair market value and provides the mechanism to determine it. The relevant extract is reproduced as under:
68. Fair market value . - (1) For the purpose of this Ordinance, the fair market value of any property or rent asset, service, benefit or perquisite at a particular time shall be the price which the property or rent, asset, service, benefit or perquisite would ordinarily fetch on sale or supply in the open market at that time.
(2) The fair market value of any property or rent, asset, service, benefit or perqui site shall be determined without regard to any restriction on transfer or to the fact that it is not otherwise convertible to case.
(3) Where the price other than the price of immoveable property referred to in subsection (1) is not ordinarily ascertainable, such price may be determined by the Commissioner .
(4) ........................."
Section 68(1) and (3) provides two shades of the fair market value. The first is the price which the capital asset would ordinarily fetch on sale or supply in, the open market at that time. The other being where the price is not ordinarily ascertainable such price may be determined by commissioner . The two stages in-built in the definition are distinguishable. The second stage comes in operation only when first method does not work. In other words, the discretion available to commissioner to determine the fair market value only when price' fetchable in the open market is not ascertainable. In the instant case, the assessing officer proceeded to exercise his discretion but without bringing on record that the asset was not ascertainable. Mere confront ing an assessee the proposed valuation hardly means anything if it is not supported by any evidence. It appear s that the fair market value was determined on the basis 'of surmises and conjectures. In absence of a legal acceptable basis an estimation of value assigned by an assessing officer to any asset or property does not stand a better footing than the disclosed version. In 1989 PTD 177 re: Daud Corporation v. CIT, their Lordships held that an assessing officer has wide powers to make an assessment. Howeve r, the estimate of an assessing officer must be based F upon facts and circumstances as borne out from record and not on the b sis of whims and desires. In another case Magna Industries v. CIT reported as 1980 PTD 35, the Division Bench of the Lahore High Court held that after rejecting the version of the assesse, the assessing officer should have reasonable basis for making an estimate. Also that the base of estimate should be disclosed to the assesse. Which in the instant case was not done so by the DCIR.
The learned commissioner (Appeals) has rightly held that the learned OIR without making any effort arrived at a G fair market value which is unjust and unwarranted. This issue is decided against the appellant department.
Allowance/Disallowance of expenses, Additions under section 174(2) of IT O, 2001: Originally addition under section 174(2) of the ITO was made at Rs.17,54,082/- by the learned DCIR which in the first round of litigation was deleted by the learned CIR (Appeals) to the extent of Rs.2,62,163/- and the matter with regards to the rest of the additions was remanded back to DCIR for re-examination. The matter was re-examined by the DCIR and it was observed that the contentions of the taxpayer were not supported by any cogent documentary evidence and the DCIR rejected the explanation offered by the taxpayer. Whereas the learned CIR (Appeals) vide his order dated 30-11-2013 modified the allowance of expenses. The learned commissioner (Appeals) confirmed the additions in respect of Freight of Govt wheat, Loading/unloading wheat and packing of finished goods to the tune of Rs.4,75,125/-, Rs.2,03,625/- and Rs.3,14,616/- respectively . The AR on behalf of respondent has not pleaded that any cross appeal against the aforesaid confirmation of additions by the DCIR upheld by learned Commissioner (Appeals) has been filed. Since this appeal of department is against the deletion of additions under the heads of account 'Commission paid on wheat purchase', 'Mobile oil consumed', and 'Market fee' therefore the confirmation of additions by the learned CIR (Appeals) in the above state heads of account do not require any adjudication by this bench. As far as the deletion of additions by the learned, CIR (Appeal) are concerned, suffice it to note that the perusal of order of DCIR depicts that the taxpayer did not submit any evidence with regards to the expenses claimed under these heads of account. Rather , the Learned DCIR went on to observe that the taxpayer did not even offer any explanation with regards to the expenses claimed under heads of account 'Mobile oil consumed' and 'market fee'. The income tax ordinance empowers the commissioner to disallow any claim of the taxpayer if the taxpayer does not provide receipts, record or evidence with regards to such deductions without any reasonable cause. Section 174(2) of IT O, 2001 is reproduced as under:
174. (2) "The Commissioner may disallow or reduce a taxpayer's claim for a deduction if the taxpayer is unable, without reasonable cause, to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction."
11. The spirit of this section is that the taxpayer under the law is required to corroborate his expenses/deductions claimed in the return with some sort of evidence and in the absence of such provision of evidence without any justified reason the deductions claimed by the taxpayer cannot be allowed. In the instant case neither any evidence was tendered nor any reasonable cause was given by the taxpayer for not providing such record or evidence therefore the learned DCIR was justified in disallowing the expenses claimed by the taxpayer as the expenses claimed were not verified. The learned CIR (Appeals) while K deleting such addit ions in appeal has not given any reason or discussed any evidence on record on the basis of which such deletions were made. The observation of the learned CIR (Appeals) was not correct that the DCIR without confronting the expenses has passed the order .
The learned CIR (Appeals) has not taken note of the fact that the taxpayer did not offer any sort or explanation in two heads of accounts and not provided any documentary evidence in other heads. Secondly , it is the second round of litigation, the matter was remanded back by the learned CIR (Appeals) to DCIR to verify expenses in particular claimed by the taxpayer in the heads of account under discussion, notice was sent by DCIR and reply was also filed so it cannot be said that the taxpayer was not confronted with the additions by the DCIR. Moreover , the taxpayer or AR has not provided or shown any evidence to this bench to counter the observation passed by the learned DCIR regarding provision of no explanation / evidence for the expenses claimed. Therefore, we are of the considered view that the learned CIR (Appeals) was not justified to L delete the additions made in the Heads of account 'commission paid on wheat purchase' , Mobile oil consumed' and 'market fee' therefore the instant appeal of the department is allowed to such extent and the order of the CIR (Appeals) with to deletion of additions in the above three heads of account is set aside.
As a result of above discussion, the instant appeal is decided on the following terms.
12. The order of the CIR (Appeals) directing the DCIR to accept the declared version of the sale rate of wheat @ Rs.10.21 per kg is upheld.
13. The order of CIR (Appeals) deleting the additions made by the DCIR in the expenses claimed in the Heads of account 'Commission paid on wheat purchase', 'Mobile oil consumed', 'market fee' is vacated and additions made by the DCIR in these heads are hereby confirmed.