ORDER KHAWAJA FAROOQ SAEED, JUDICIAL MEMBER - The appellant, a private limited company, is engaged in formulation, repackaging and sale of pesticides. F.M.C. Corporation U.S.A, helds 60% shares of the company while United Distributors Limited (Pak) are holding 40%. The business of manufacturing pesticide have been started this year-for which necessary ingredients are imported.
2. The company filed its return of income declaring Rs.6,609,234/-. The audited statement of accounts comprising of. Balance sheet, profit and loss account and noted thereto was also enclosed with the return. While framing assessment under Section 62 of the Income Tax Ordinance, 1979, the Assessing Officer:-
(i) Estimated sales at Rs. 10,34,00,000/- as against declared sales of Rs.9,87,65,086/- on the ground that addresses of the parties to whom sales have been effected are incomplete.
(ii) He also considered the income from scrap sales amounting to Rs.226,604/- to be unverifiable and estimated the same at Rs.450,000/-.
(iii) Add-back in P&L amounting to Rs.2,997,312/- were also made.
3. The assessee filed an appeal before the CIT(A) wherein the appellant claimed that his accounts were totally verifiable and that the estimate of the Assessing Officer were not justified. The first appellate authority partially appreciated the arguments but, however, did not accept the declared version. He however, reduced the estimate of sales partially.
4. Before us the learned A.R. While arguing his case brought our attention to page-3 of the order of the 1TO. He pointed out that the Assessing Officer has accepted the G.P. As well as purchases of the assessee. As a result the debit side of the assessee has been accepted as a whole. He argued that without prejudice to the other arguments which he has yet to advance, any addition in sales under the above situation is impossible even arithmatically.
5. Coming to the other grounds he said that the 1TO have failed to bring on record any material for rejection of the books. The A.R. Was confronted page-2, wherein the 1TO have mentioned some instances, In reply the learned A.R. Produced before us, the addresses with the statement that the same have been produced to the Assessing Officer also.
6. The learned A.R. Added that the assessee is maintaining regular books which are being audited hence its sanctity also should not have been simply thrown away.
7. The A.R. Of the assessee produced a Plethora of judgments before us to say that accounts cannot be rejected without first pointing out defects in the books of the assessee which are as follows:- Mere failure of the assessee to furnish a daily stock register showing purchase and consumption of raw material was not a ground for rejection of accounts and that before any conclusion could be arrived at that the gross profit disclosed by the assessee was too low, the conclusion of the 1TO must be based on sufficient material.
Indus Textile Mills Ltd. Vs. CIT 1989 (PTDI 56 (K.H.CI.
Accounts of assessee cannot be rejected if maintained properly and in the similar manner as in the past which were accepted. Pointing out to any defect, fault or incorrectness in the accounts is necessary for rejection of accounts.
Tanvir, Textile Mills Lid, Vs, CIT 1S9Q-PTD 253IKHGL Accounts maintained by assessee can be rejected if there are substantial mistakes and discrepancies due to which it was not possible for the Assessing Officer to correctly and clearly determine the income of the assessee.
Coronett Paints and Chemicals Ltd. Vs, CIT '50 Tax-115 IKHC).
Assessee's account books are to be accepted unless on verification such books disclose some fault or defect which could not be reasonably or satisfactorily explained.
Karachi Dveina & Printing Works. Karachi Vs< CIT 40 Tax 18 (KHC).
The Income Tax Act does not provide any form or method for maintaining accounts. The assessee is free to choose any method for maintaining' accounts provided it is regularly maintained and from such accounts proper gains and profits can be deduced. If the accounts satisfy these ingredients, the Assessing Officer can reject it only if he is able to point out the falsities, discrepancies and faults which may render such account untrue and from which proper profits and gains cannot be deducted.
8. Regarding estimate of scrap he said that this is a very minor element of the production of the assessee. He admitted that details of these sales were not furnished but the same, he added were never even demanded by the Assessing Officer otherwise he had complete detail of the same. He further said that the same have been produced before the first appellate authority and that they are ready for inspection of the ITAT if so desire^.
9. Regarding P&L expenses the learned A.R. Referred before us the latest judgment reported as (1996) PTD 890 wherein he said that the learned Tribunal have given the guideline to determine the unverifiability of the expenses. He said that normal method of add-backs as used in domestic companies is not applicable on such business which are being run by professional managers and are in strict financial management besides under audit control on regular basis. He said that the claim of the assessee in respect of all the heads is1 100% vouched and verifiable. The add-backs, therefore, were not to be made in such circumstances, he urged.
10. The learned D.R. Argued that the assessee company could not satisfy the Assessing Officer regarding verifiability of the sales hence he was fully justified in rejection of the accounts. He however, could not convince us as to how after accepting that the debit side is fully verifiable sales could be estimated other than one declared by the assessee itself. Moreover, the sales referred to be unverifiable by the Assessing Officer have also been proved to be vouched and verifiable by the assessee. In the presence of this uncontroverted position we fail to understand as to how the provisions regarding rejection of accounts could be applied in this case. Besides, the assessee have submitted audited accounts as well as have a history of acceptance. The audited accounts also have same sanctity which should not be ignored on personal whims without pointing out any defects in the books, In view of this accepted position we are inclined to hold that rejection of accounts is not justified and directed for acceptance of the manufacturing results of the assessee.
11. Regarding estimate of scrap sales, we also handicapped for the reason that the assessee has not produced before the Assessing Officer the relevant document hence we cannot accept assessee version but reduce the estimate to Rs.300,000/-.
12. Regarding add-backs in P&L account we agree with the assessee that the same should not be on the basis of stock phrases and without making reference to the unverifiable part. However, this is not actual case before us. The 1TO has given some reasons for the additions in each case separately. Therefore, we shall also give finding separately in respect of each of them.
(i) Telephone.
The dis-allowance is normal and at par with the director of the ITAT in various cases, hence confirmed.
(ii) Conveyance and Travelling.
The 1TO says that for this head no vouchers were produced. He dis-allowed the same to 1/3 of the claim which comes to Rs.396914/- while the arguments nature and size of the business, the add- back as reduced, is justified, hence confirmed.
(iii) General expenses.
The addition is on the basis of general presumption hence deleted.
(iv) Repair and maintenance.
The addition is excessive hence is reduced to Rs.20,000/-.
(v) Advertisement.
The A.R. Has claimed that the claim is fully verifiable and that the assessee has not properly rejected the claim. He added that each and every part of the claim is supported by relevant documents. We have seen the orders of the two subordinate officers, In our opinion this account needs reexamination. The 1TO shall consider relevant details furnished by the assessee in this support and then adjudicated this issues. For this purpose the issue is set aside.
13. Sales Incentive.
The assessee claim of sales incentive at Rs.21,88,965/- is in addition to advertisement expenses at Rs.45,24,168/- which has been considered as excessive by the Department. This expense has not been found as completely verifiable by the Assessing Officer. He made addition of 1/3 which has been confirmed by the first appellate authority. The A.R. Of the assessee has produced before us certain documents on which we cannot consider at this stage. We, therefore, deem it more appropriate to set aside this claim also for verification by the Assessing Officer.
Conference and Meeting and Distribution of Eklaux.
The addition made in conference and meeting account by the Assessing Officer was under a wrong presumption while the learned CIT(A) has also made just an estimate without going through the accounts of the assessee. Similarly the confirmation of Eklaux account also needs reexamination, we, therefore, consider it more appropriate to set aside these two claims also.
14. We have made a clear direction for acceptance of the accounts of the assessee so far as its manufacturer results are concerned and have made partial modification in scrap sales. We, however, have set aside some add-backs in P&L account for which we direct the Assessing Officer that while re-examination of accounts of the assessee, he should keep in mind the directions given in the judgment reported as 1996 PTD 890 and make add-backs only if the accounts of the assessee so permit. This is a case of a private limited company wherein the accounts have been prepared by in an appropriate manner.
15. The appeal, therefore, stands decided in the manner and to the extent as mentioned above. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.