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I.T.A. No. 1179/KB of 1981‑82, decided on 30th September, 1985.

‑‑S. 59(3)‑ ‑Central Board of Rovu1tue Circular No. 1(3) 1 T in 1VIii0/St. dated 30‑9‑1980, para. 200 Assessment‑‑Add backs‑‑Profit and loss account‑‑Permissible deductions either claimed excessively or disproportionately‑‑income‑tax Officer, held, was required not only to closely examine such claim but it had been further made incumbent upon him that not only amount of add backs out of such claim should be reasonable but consent of assessee should also be obtained through correspondence.

‑‑‑S. 59(3)‑‑Central Board of Revenue Circular No. 1(3) IT in IV/80/St, dated 30‑9‑1980, para. 2(ii)‑‑‑Add backs‑‑Term 'reasonable' in para. 200 of Circular, dated 30‑9‑1980‑‑Definition‑‑'Reasonableness' of a particular thing, held, depended on educational, social, political and economic backgrounds as well as idiosyncrasy of an individual‑‑Assessing Officer was not supposed to enter into area of Investigation and enquiry but was supposed to took into material as if he was looking for an error apparent on face of record‑‑In disallowing Items he would look into Income‑tax Ordinance but in case of excessive or proportionate claim regarding any admissible item he would have to look into such type of past history which needed no elaboration and required no argument‑‑When past history of an assesses supported an add back, it could be called reasonable and most likely assessee would agree to it‑‑Consent of assesses was to be sought in any case.

‑‑S. 59(3)‑‑Add backs‑‑Legislature has empowered an Assessing officer to make such adjustments as might be necessary apart from adjustment to be made under S. 59 (3) of Ordinance.

(d) Income‑tax Ordinance (XXXI of 1979)

‑‑‑S. 59(3)‑‑Central Board of Revenue Circular No. 18 of 1980 issued on 28‑7‑1980, para. 7(iii)‑‑Circular No. 1(3) I.T. in IV/80/St, date 30‑9‑1980, para. 2(ii)‑‑Assessment‑‑Adjustment‑‑When assessee fails or refuses to give his consent, use of word 'adjustment' in section 59(3) of Ordinance gives to Income‑tax Officer a clue to solution of problems, created by such refusal‑‑income‑tax Officer would be within his rights to make necessary adjustment even if assesses fails or refuses to accord his consent to resort to add backs provided it i5 reasonable and assessee had been given en opportunity of offering his explanation, and that too through correspondence, to proposed add backs.

‑‑‑'Adjustment'‑‑Meaning.

‑‑‑S. 59(3)‑‑Add backs‑‑Profit and loss account‑‑Income‑tax Officer, held, was entitled to make adjustment under section 59(3), only either regarding legally inadmissible items or regarding other expenses with consent of assessee.

Muhammad Farid, D.R. for Appellant.

A. A. M. Mohsin for Respondent.

Date of hearing: 23rd September, 1985.

.‑‑This departmental appeal is directed against the order of learned Commissioner Of Income‑tax (Appeals) recorded by him on 10th March. 1982 regarding assessment year 1980‑81. The only point agitated before the learned Commissioner of Income‑tax (Appeals) was regarding certain add backs.

2. From perusal of record it appears that the respondent had filed return under section 59 of the Income‑tax Ordinance, 1979. However, the Income‑tax Officer added back out of telephone expenses Rs.11,636, out of entertainment expenses Rs.13,555, out of general expenses Rs.7,636 out of travelling expenses 119.5,000, out of car expenses Ra.22.709 and out of fine and penalties Re.10,612. Relying upon sub‑para. (iii) of para. 7 of Central Board of Revenues Circular. 1980, dated 28th July, 1980, and sub‑para. (11) of para. 2 of Central Board of Revenues Circular No. 1(3) IT .in IV/80/St, dated 30th September, 1980, it was argued before learned Commissioner of Income‑tax (Appeals) that the income‑tax Officer was entitled to make adjustment under section 59(3) only either regarding legally inadmissible items or regarding other expenses with the consent of the assessee. The learned Commissioner of Income‑tax (Appeals) upheld the contention of the respondent and holding the add backs regarding fine and penalties as legally inadmissible allowed the appeal and deleted the rest of them. Mr. Muhammad Farid, the learned Departmental Representative supporting the appeal argued, though feebly, that the Income‑tax Officer was right in making adjustment under section 59(3) of the Income‑tax Ordinance, 1979. Mr. Mohsin, Advocate, appearing for the respondent, on the contrary, argued that the consent of the respondent was never obtained regarding making add backs from profit and load account. He, however, conceded that the disallowance of Rs.10,612 out of fine and penalties was legally inadmissible and was rightly added back. Otherwise he supported the impugned order.

3. We have heard both the learned Departmental Representative as well as learned counsel for the respondent. The relevant para of the circular, dated 30th September, 1980 has been reproduced in she impugned order by the learned Commissioner of 'Income‑tax (Appeals) However, it is fruitfully reproduced here and it reads:

"As to the scope of the adjustment under self‑assessment scheme, only legally inadmissible items can be added while processing the return under section 59(1) of the Income‑tax Ordinance, 1979. Other profit and loss add backs could also be made with the consent of the assessee which can be obtained through correspondence. The return where excessive and disproportionate profit and loss expenses are claimed may be examined closely and consent of the assessee may be obtained for making add hacks of the reasonable amount through correspondence."

From aforesaid paragraph it appears that Central Board of Revenue have categorised two types of add backs from profit and loss account, namely:‑‑

(a) the amount of inadmissible items claimed in profit and loss account, and

(b) excessive and disproportionate expenses claimed in the profit and loss expenses.

So far as the first category of permissible add backs under section 59(3) is concerned, it would suffice to observe that legally inadmissible expenses are those which are not allowed at all under the Income‑tax Ordinance had neither airy evidence nor argument can make them admissible. As far as the second category of expenses are concerned, they are those expenses which are though permissible deductions, yet, they have been either claimed excessively or disproportionately. The Income‑tax Officer is required not only to closely examine this category of claim, but it has been further made incumbent upon him that not only the amount of add backs out of such claim should be reasonable, but the consent of the respondent should also be obtained through correspondence. Now, as far as the term J reasonable' is concerned, it is very difficult to define it. In other words, we can say that it would be unreasonable to define what is reasonable. Indeed, what appears to be reasonable to one person, may not be found so by another person. In fact, 'reasonableness' of a particular thing depends on the educational social, political and economic background, as well as idiosyncrasy of an individual. The Central Board of Revenues have left it to the sense of reasonableness of an individual Assessing Officer. However, the rider of obtaining the consent of the assessee has been used to counter‑check and counterbalance it. In our judgment, in such cases the assessing officer is not supposed to enter into area of investigation and enquiry. He is supposed to look into the material as if he is looking for an error apparent on the face of record. Thus, in disallowing the legally inadmissible items he would look into the Income‑tax Ordinance, but in case of excessive or disproportionate claim regarding any admissible items he would have to look into such type of the past history, which needs no elaboration and requires no argument. If the past history of an assessee supports an add back, it could be called reasonable and most likely the assessee would agree to it. However, it is to be kept in mind that the consent of the assessee is to be sought in any case.

As far as subsection (3) of section 59 of the Income‑tax Ordinance is concerned, an assessing officer has been authorised by it to make adjustment in the relevant assessment year. It stands as under:‑‑

"3. In assessing the total income and determining the payable under subsection (1), the Income‑tax Officer may make such adjustments as may be necessary, including any adjustment under sections 39, 35, 36, 37, 38, 50, 53 or 59, the rules made under section 59 the First Schedule and the Third Schedule."

Thus, it is clear that the Legislature has empowered an assessing officer to make "such adjustment as may be necessary", apart from adjustment to be made under sections mentioned above. However, the Central Board of Revenues, firstly issued Circular 18 of 11480 on 28th June, 1980 and its sub‑paragraph (iii) of pare. 7 for the first time laid down what the Income‑tax Officer was supposed to do under section 59(3) of the Income‑tax Ordinance, 1979. Aforesaid sub‑para was as follows: ‑‑

"(iii)‑‑When the tax‑payer fails to make correct add backs or legally inadmissible expenses appear in profit and loss account, the Income‑‑tax Officer shall be authorised to make such adjustments while completing assessment under section 59(1) of the Income‑tax Ordinance, 1979."

However, subsequently by the circular, dated 30th September, 198u mentioned above: the requirement of natural justice was met by providing the obtaining of the consent of the assessee through correspondence before disallowing any allegedly excessive or disproportionate claim of expenses. However, it is not clear from the aforesaid circular as to what the Income‑tax Officer would do, when the assessee fails or refuses to give his consent. Nevertheless, we feel that the word 'adjustment' as used in subsection (3) of the section 59 provides as clue to the solution of the problem. The Stroud's Judicial Dictionary, 4^th Edition, at page 66 defines the 'Adjustment' as under:‑‑

"Adjustment is a word in common use. It is commonly applied to the settlement among various parties of their several shares in respect of claims, liabilities or payments relating to a Central Average claim. That is not its only application; it is word, which is applied to other matters in the same manner in which it is commonly applied in marine insurance. When there are matters which require re‑arranging regulating or equalising so as to restore the true balance the process of so re‑arranging setting right regulating or equalising may be described as 'adjusting'."

Thus 'adjustment' means re‑arranging, regulating or equalising so as to restore the true balance. The Income‑tax Officer therefore, would be within his rights to make necessary adjustment even if the assessee refuses or fails to accord his consent to the proposed add backs, provided it is reasonable and the assessee had been given an opportunity of offering his explanation and that too through correspondence to the proposed add backs.

In view of the discussions made above, we find no force in the departmental appeal and it is rejected accordingly. The order of the learned Commissioner of Income‑tax (Appeals) is hereby confirmed.

M.Y.H. Appeal rejected.

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