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Income-tax Appeal No. 980/KB of 1982-83, decided on 29th January, 1986.

---S. 59(1)--Central Board of Revenue Circular No. 18, dated 27-7-1980 and 30-9-1980--Addition--Expenses disallowed--Procedure to be followed--Income-tax Officer giving reasons but no details, as prescribed by circular, reflected in order anywhere--Commissioner of Income-tax (Appeals) also making order without giving any reason excepting that addition of expenses were uncalled for and deleted--Held, it was incumbent upon Assessing Officer to obtain consent of assessee through correspondence before resorting to disallow expenses or adding any receipt and if assessee avoided or refused to give his consent for add-backs even after affording proper opportunity to him, Income-tax Officer was clothed with authority to make such adjustments as sanctioned by law.

----- Adjustment used in Circular No. 18, para. 7(iii)--Meaning--Position as to how and what adjustment were required to be made in accountancy stated.

---S. 10 & First Sched., Part III, para. A--Provision for liability for taxes, held, would not fall within purview of expression "income as retained meeting working capital requirements" as used in para. 'A' of Part III of First Sched. to Income-tax Ordinance, 1979 read with S .10 thereof.

Muhammad Farid, D.R. for Appellant.

I.M. Zuberi, I.T.P. for Respondent.

Date of hearing: 19th January, 1986.

-This is an appeal of the department against the order of the Commissioner of Income-tax (Appeals), Zone-2, Karachi, recorded by him in Income-tax Appeal No. CIT/Z-DD/3908/81, dated 27-11-1982. The appeal is against the additions made out of profit and loss account and deletion of the surcharge on taxes paid or payable.

2. The facts of the case are that assessee had filed a return of income declaring an income of Rs.50,88,849 which was in time and accompanied by the requirements as envisaged in Board's Circular No. 18 of 1980. The Income-tax Officer made certain additions and completed this assessment. The assessee went into appeal and agitated about making addition under section 59(1) instead of making addition under section 62. Besides, the assessee also agitated against the disallowance of Rs.10,682 out of publicity and sales promotion expenses and Rs.6,000 out of legal and professional charges. The Commissioner of Income-tax (Appeals) confirmed the action of the Income-tax officer as for assessment under section 59(1) is concerned but the two disallowances under the head publicity and legal and professional charges were deleted by him.

3. The Departmental Representative urges that they were rightly disallowed by the Income-tax Officer under Circular No. 18. The publicity expenses were of non-business nature and that Rs.6,000 were disallowed being professional charges paid to Shani and Company in connection with survey which was of a capital nature. The relevant para. of the Circular, dated 30th September, 1980 issued by the Board in this respect for the sake of facility is reproduced hereunder alongwith Circular No. 18 of 1980, dated 28-7-1980.

"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-backs of the reasonable amount through correspondence.

" Processing of cases under Self-Assessment Scheme:

Para. 7 of Circular 18--

(i) ......The tax-payer will not be called to office even where the requisite documents have not been filed alongwith the return. In such cases the documents will be obtained through correspondence by registered post.

(ii) If the tax-payer fails to furnish any of the documents including the evidence in support of his claim for investment allowance even after correspondence the assessment shall be completed by disallowing such claims. In cases he fails to furnish the trading, and profit and loss account and balance sheet and does not comply with it even on writing requisition in this behalf, the I.T.O. shall refer his case to the I.A.C. with the, recommendations that the case may be assessed under normal law, and on decision by the I.A.C. to this effect, the assessment shall be made under normal law.

(iii) Where the tax-payer fails to make correct added back or the legally inadmissible expenses appear in profit and loss account, the I.T.O. shall be authorised to make such adjustment while completing assessment under section 59(1), of the Income-tax Ordinance, 1979."

Now in view of the above directions of the Central Board of Revenue, it was incumbent upon the Assessing Officer to obtain the consent of the assessee through correspondence before resorting to disallow the expenses or adding any receipt. The Circular is conspicuously silent in case where the assessee does not co-operate and avoids or refuses to give his consent for such disallowances or additions or short receipt. In these circumstances we are forced to look into the meaning of the word adjustment, which has been defined in many dictionaries. We refer to the Stroud's Judicial Dictionary, 4th Edition at page 66 wherein it has been defined that:

"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 a 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'."

However, we may also refer with advantage that in accountancy how adjustments are made. When final accounts are prepared it becomes essential to consider the question of the period in respect of which an expense has been incurred. It is not at all difficult to visualize that at any given date an expense may have been made or charged. If an expense Day Book or Journal is used in respect of a period which is not co-extensive with the period of accounts either due to filing short of or on account of stretching beyond such period. Since the period for which accounts are prepared should bear the true expenditure and adjustment is usually necessary to give effect to this principle. In order to give effect to the expenses and gains attributable to a particular period the adjustments which are normally required should be enumerated as under:--

(1) Carry forward of payments in advance, e.g. Insurance, Rates, and in certain circumstances, Advertising.

(2) Charges for accrued or accruing expenses, e.g. rent, heating, lighting, telephone.

(3) Carry forward of income received but only partly earned or accrued, e.g. Subscriptions or rents received in advance: and its converse, entries for income earned or accrued, not yet wholly received.

(4) Incorporation of stock into the accounts, e.g. stationery stock.

5.8 (a) Depreciation.

(b) Bad and doubtful debts.

(c) Discounts.

(d) Loan interest.

In the light of the above discussion we are of the opinion that the Income-tax Officer is clothed with authority to make such adjustment sanctified by law if the assessee avoids or refuses to give his consent for the add backs even after affording proper opportunity to him through correspondence. The expenses under the head publicity and sales promotion do include certain miscellaneous expenses as well, to the tune of Rs.10,682 and out of professional legal charges disallowed at Rs.6,000 out of Rs.1,35,000 are the expenses under the caption "Survey fee" paid. The Income-tax Officer has given me reasons but no details as prescribed by the circular are reflected anywhere. The Commissioner of Income-tax (Appeals) also has made an order without giving any reason excepting that the addition of the expenses are uncalled for and deleted. In these circumstances we vacated the orders of both the officers below and direct that it should be added after giving proper opportunity in the light of the circular is discussed.

The appeal succeeds on this point as indicated above.

The other point in appeal before us is about deletion of surcharge by the Commissioner of Income-tax (Appeals). The income was declared at Rs.50,88,849 which was assessed at Rs.51,05,204 or the taxes thereon were Rs.27,69,060. The surcharge was levied at Rs.2,44,698. The assessee agitated this before the Commissioner of Income-tax (Appeals) who by placing reliance on the decision of the Tribunal cited as (1979) 40 Tax 47 (Trib.) held that no surcharge is leviable on taxes payable and deleted the same.

The Departmental Representative urges that since the department has filed numerous applications for reference to High Court, hence it is in appeal. The learned counsel Mr. Zuberi urged that the Commissioner of Income-tax (Appeals) has rightly deleted the surcharge by following the ratio laid down in the above-cited case. The facts of the case being identical his order should be confirmed.

Since the Tribunal is consistently following the ratio decided of the above case and the facts being exactly same we have no hesitation in holding that the provision or liability for taxes does fall within the purview of the expression "income as retained for meeting working capital requirements" as used in para. A of Part III of the First Schedule to the Income-tax Ordinance, 1979 read with section 10 of it and accordingly confirm the order of the Commissioner of Income-tax (Appeals).

The departmental appeal also fails on this issue and is dismissed.

M.Y.H. Appeals dismissed.

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