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I.T.As. Nos. 227/KB and 290/KB of 1983-84, decided on 30tt, August, 1986.

---Ss. 10 & 29(2), Third Sched., R.7--Sale of capital asset--Office equipment, furniture and motor car--Fair market value--Income-tax Officer observing that assets were sold by assessee at lower rate than what these items could have fetched; fixed fair market price thereof, deducted written down value and brought difference within orbit of taxation--Contention that Income-tax Officer could not estimate fair market value of assets without approval of Inspecting Assistant Commissioner--Income-tax Office" though justified in estimating price but his action in determination of such price was not in order so far as all items were concerned as he put no evidence while estimating fair price of different items-- Determination of price was not to be meant just a leap in dark and conjectural fixation or presumptuous determination--Order of Income-tax Officer was therefore, set aside with direction that after obtaining necessary information and evidence about all articles, fair price be fixed which goods could get in open market.

---S. 10 & 59--Levy of surcharge on difference of income returned and income assessed--Income-tax Officer levying surcharge on taxes paid or payable as well as on difference of declared and assessed income- Returned income exceeding taxes paid or payable--No surcharge, held, could be levied not only on taxes paid or payable but also on difference between returned and assessed income.

(1979) 40 Tax 47 (Trib.) rel.

Nasir Khan, D.R. for Appellant.

M. D. Gangat, I.T.P. for Respondent.

Date of hearing: 23rd August, 1986.

These are two appeals, one filed by the assessee against the order of the Commissioner of Income-tax (Appeals), recorded by him in I.T.A. No. C.I.T. Z-1/394/81, dated 1-6-1983 for assessment year 1979-80 and a counter-appeal by the department against the same order but only pertaining to restriction of levy of surcharge on the difference of declared income and assessed total income by the Commissioner of Income-tax (Appeals). The appeal of the assessee is taken first.

2. The grounds of appeal contained under para. 2 are that the Commissioner of Income-tax (Appeals) has not been correct in confirming the computation of profits under Rule 7 of the Third Schedule attached to the Income-tax Ordinance, 1979 by estimating the sales proceeds in respect of the following assets:-

3. The Income-tax Officer as for office equipment is concerned observed that the written down value of office equipment was Rs.18,404 while the assessee had sold it for Rs.10,000. He observed that the items comprised of photostat machines, calculators, typewriters, etc. and that the items could fetch more prices as compared to the disclosed sales price. He further observed that on the basis of prevailing market prices the fixation of price at Rs.20,000 was fair and accordingly added the difference of Rs.1,596 as profit. In furniture account also the written down value was Rs.12,113 and the sales price was Rs.5,000 which for the same (above mentioned) reasons was estimated at Rs.15,000 and balance was brought within the orbit of taxation. Lastly, as for motor car is concerned he mentioned that it was a Corolla 1200 CC Model of 1973-7 4 and the fair market price of the car ranged between Rs.45,000 to Rs.50,000 and he accordingly estimated the price at Rs.40,000 and by deduction of written down value of Rs.11,862 out of it treated the balance as profit liable to tax at Rs.28,138.

4. In appeal the learned Commissioner of Income-tax (Appeals) Zone-1. Karachi considered the contention of the assessee that approval of Inspecting Assistant Commissioner has not been obtained in estimating the fair market value of the assets as laid down in section 29(3) of the Ordinance and held that this contention was untenable. After incorporating the relevant subsections (1) and (2) and subsection (12) of section 12, tie further observed that the items under reference were of every day use and the current price of these items is always ascertainable in the open market and that the treatment given by the Income-tax Officer was in order calling for no interference.

5. Mr. M. D. Gangat, the learned counsel urges that clause (b) of subsection (3) of section 29 envisages that the prices referred to in clause (a) of subsection (3) of section 29 is not ascertainable in these three cases and, therefore, the determination by the Income-tax Officer should have been after obtaining the approval of the Inspecting Assistant Commissioner in writing. He urged that in the above cases of the assessee it is difficult to ascertain price of used and old assets. He further urged that this is not a case of setting aside and the Income-tax officer totally failed to comply with the legal requirements of obtaining approval and the Commissioner of Income-tax (Appeals) was not correct in upholding the action of the Income-tax Officer The learned counsel urged that the office furniture and office equipment were sold to limited concern which is a sister concern and that the motor car was sold to any employee of the company itself. He urged that the profit calculated should be as such deleted. The learned counsel further urged that section 29(2) speaks about transactions where there is no collusion with purchaser and there is connection directly or indirectly of the purchasers with the assessee and in this case furniture and equipments were sold to sister concern and the car was sold to an employee and as such the Income-tax Officer was not justified in estimating the fair price under clause (a) of section 29(3), the assets not having been transferred with the object of avoiding or reducing the liability of the assessee. He further urged that the decision cited as I.T.A. No. 56/KB of 1981-82 for 19%7-78 dated 14-11-1984 is not applicable in this case. He further urged that in case of office equipment, the photostat machine, calculators, lose their value very quickly in view of new designs or new models and that m case of furniture also they do not fetch higher prices. Regarding motor car also he urged that it was a car of 1973-74 model and not being in personal use but in the use of the company, it could not fetch higher price. These were his alternate arguments apart from failure to obtain the approval of the Inspecting Assistant Commissioner.

6. Mr. Nasir Khan, on the other hand, urged that approval of the Inspecting Assistant Commissioner was not necessary as price was ascertainable and these assets were ordinarily sold in open market and fetched their price and hence clause (b) of subsection (3) of section 29 was inoperative.

7 After hearing both the learned representatives we feel advisable to incorporate the relevant clauses below:

"(2) Where the person who acquires a capital assets from an assessee is directly or indirectly connected with him and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoiding or reducing the liability of the assessee, the fair market value of the capital assets, as on the date of the transfer,, shall be deemed to be the consideration received by the assessee for its transfer.

(3) For the purposes of subsections (1) and (2) and subsection (12) of section 12, "Fair market value" means--

(a) the price which the capital asset would ordinarily fetch on sale in the open market on the relevant date, and

(b) where the price referred to in clause (b) is not ascertainable, such price as may be determined by the Income-tax Officer after obtaining the approval of the Inspecting Assistant Commissioner in writing."

8. After considering the words "ordinarily fetch on sale in open market" we are of the opinion that the Income-tax Officer was not unjustified in estimating the price but his action in determination of such price is not in order as for all these items are concerned. In the case of office equipment he should have put on record some evidence about the fair price of the different items which have been jumbled up by him like photostat machine, typewriters etc. He should have estimated the fair value of every item on the basis of some evidence. Determination of price never means just a leap in the dark and conjectural fixation or presumptuous determination. Similarly for furniture as well he should have given reasons for the fixation or determination of the price at Rs.15,000 as the price of furniture. Lastly as for the motor car also is concerned, he should have put on record the evidence about the fair price of the car of 1973-74 Toyota Model considering the condition. In these circumstances the order is set aside with the direction that after obtaining necessary information and evidence about all the articles, fair price should be determined which the goods could fetch in the open market.

9. Next we come to the question of upholding the levy of surcharge on the difference of income returned and income assessed by the learned Commissioner of Income-tax (Appeals). The counter-appeal of the department is that the learned Commissioner of Income-tax (Appeals) should not have deleted the surcharge on the taxes paid or payable and in restricting the levy of surcharge only on the difference of declared income and assessed total income. The relevant figures in the year under reference are these. The assessee had declared income of Rs.2,62,424 and was assessed at Rs.3,14,234. The tax imposed was Rs.94,270. The Income-tax Officer had levied surcharge on the taxes paid or payable as well as on the difference of declared and assessed income. The learned Commissioner of Income-tax (Appeals) deleted the surcharge on the taxes paid put retained surcharge on the difference of the declared and assessed income.

10. Mr. M.D. Gangat, the learned counsel urges that the Commissioner of Income-tax (Appeals) is incorrect in confirming the levy of surcharge as for this difference is concerned: whereas Mr. Nasir Khan, the learned Departmental Representative urges that the Commissioner of Income-tax (Appeals) was correct in confirming the order of the Income-tax Officer as for the levy of surcharge on the difference is concerned, and that the deletion of surcharge on taxes paid or payable is incorrect. He further urged that the department being in reference on the issue of levy of surcharge on the taxes paid or payable, the same has been agitated.

11. After hearing both the learned representatives we hold that since the returned income exceeds the taxes paid or payable hence there could be no levy of surcharge not only on the taxes paid or payable in the light of the ratio laid down in (1979) 40 Tax 47 (Trib.) but also on tax the difference between returned and assessed income.

12. The appeal of the assessee succeeds on the first ground as indicated above as well as on the issue of surcharge. The departmental appeal being devoid of any merit fails and is dismissed.

M.Y.H, Appeal accepted.

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