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I.T.As. Nos. 458 and 459/KB of 1981-83 decided on 30th October, 1985.

---S. 10 & First Schedule, Part III--Finance Ordinance (XXV of 1980), S. 6(51(c)- -Surcharge--Levy of surcharge for assessment years 1980-81 and 1981-82--Directions of Commissioner of Income-tax (Appeals) that ratio laid down in Tribunal's decision reported as (1979) 40 Tax 47 (Trill.) on issue of surcharge was applicable in respect of assessment year 1980-81 upheld--Amendments having been brought in First Schedule by Finance Ordinance, 1980, such ratio, however, was not applicable in assessment year 1981-82--Surcharge in assessment year 1:31-82, held, was to be levied with reference free reserves of company on last of income year and that Departmental Officers had committed an error in said regard--Orders of Departmental Officers vacated with directions that surcharge should be levied in accordance with law applicable in assessment year 1981-82.

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

---S. 59(1)(3)--Income-tax Act (XI of 1922), S.23(3)--Assessment- Self-Assessment Scheme--Disallowance under heads entertainments and car expenses--Income-tax Officer was empowered to make necessary adjustments in some expenses like entertainment, telephone and car expenses after disclosing his mind to assessee and if he fails to make such adjustments himself as laid down in C1. 7(iii) of C. B. Rs Circular No. 18 of 1980--Department itself not having made additions under said head, in normal assessments under S. 23(3), Income-tax Act, 1912, relating to assessment year 1978-79, Income-tax Officer, held, had no basis to disallow any such expenses and make adjustments as contemplated under S.59(3) of Ordinance--Order of Commissioner of Income-tax (Appeals) deleting additions made by Income-tax Officer confirmed.

Amin-e-Ajam, D.R. for Appellant.

Iqbal Naeem Pasha for Respondent.

Date of hearing: 16th September, 1985.

--In these two departmental appeals the department has disputed the directions of the learned Commissioner of Income-tax (Appeals) relating to the levy of surcharge. The other common ground disputes the disallowance made out of the claim of some expenses in the P & L account.

2 The respondent is a private limited company engaged in the business of manufacture and sale of speakers utilised in radio and television. The first objection relates to the directions of the learned; Commissioner of Income-tax (Appeals) that the surcharge should be levied keeping in view the Tribunal's decision reported as (1979) 40 Tax 47 (Trib.). These directions were given for both the assessment years under appeal. The learned Departmental Representative's case is that the department is fully aware of the Tribunal's decision on the issue but the department not being in agreement with the said decision has contented the same before the High Court. In this case also the facts being similar to numerous other cases, the department has disputed the directions of the learned Commissioner of Income-tax (Appeals) in this case as well. Mr. I. N. Pasha, the learned counsel of the respondent-assessee opposes the contention of the learned Departmental Representative but he is not pressing the issue for the reasons that the Tribunal has been consistently following the ratio laid down in its reported decision. In respect of the announcement year 1981-82, however, the learned counsel contends that the ratio laid down by the Tribunal is not applicable because of the change brought in the First Schedule, effective from the assessment year 1980-81. In regard to the directions of the learned Commissioner of Income-tax (Appeals) in the assessment year 1980-81 the ratio laid down by the Tribunal in its reported decision is applicable on the facts obtaining in this year. Since we have been consistently following the aforementioned ratio on this issue, we have no hesitation in upholding the directions of the learned Commissioner of Income-tax (Appeals). In respect of the assessment year 1981-82 we l agree with the opinion expressed by the learned counsel because the Finance Ordinance, 1980 brought a complete change for levy of surcharge. The surcharge in the assessment year 1981-82 is to be levied with reference to the free reserves of the company on the lastly day of the income year etc. The departmental officers thus, committed an error in regard to the levy of surcharge. In these circumstances we have no alternative except to vacate the orders of the departmental officers with the directions that the surcharge should be levied in accordance with the law applicable in this assessment year.

3. The other common objection disputes the disallowance of expenses claimed in the P & L account under the heads entertainment, telephone, sundry, travelling, car and conveyance expenses in the assessment year 1981-82. Both the assessments were made under section 59(1) of the Income-tax Ordinance, 1979. The Income-tax Officer accepted the trading results in both the years but he was of the opinion that some of the expenses were not fully allowable and as such the I.-T.O. issued an informal setter to the respondent-assessee asking for certain details including the details of expenses claimed in the P & L account. After obtaining the details be made partial additions out of the expenses mentioned above for in his opinion the expenses were not wholly verifiable and that under some heads the element of personal use was involved. In the assessment year 1982-82, however, it appears that the Income-tax Officer did not send any letter to obtain details etc. from the respondent but made the addition as in the preceding year. Feeling aggrieved with the order of the Income-tax Officer, the respondent took the matter before the learned C.I.T. (Appeals) who placed reliance on Circular No. 18 of 1980, dated 28-7-1980 and the C.B.R's Letter Circular No. 1(3) IT/IV/80, dated 30-9-1980 and deleted the additions in both the years. It is against this order of the learned Commissioner of Income-tax (Appeals) that the department had brought an appeal before the Tribunal. Mr. Amin-e-Ajam the learned D.R. contends that in making the disallowances the Income-tax Officer acted according to instructions contained in the C.B.R's Circular and the provisions contained under subsection (3) of section 59 and hence the learned Commissioner of Income-tax (Appeals) was not justified in deleting the additions. Mr. Pasha the learned counsel, on the other hand contends that the Income-tax Officer acted beyond his powers in making the disallowances because it could be done so only after obtaining the consent of the respondent. The learned counsel also brought to our notice the decisions of the Tribunal wherein under similar circumstances the disallowances were deleted. Mr. Pasha also brought to our notice the fact that in the assessment year 1979-80 also similar disallowances were made but the same were deleted in appeal by the learned A.A.C and the department did not file any appeal before the Tribunal. With these submissions he contends that the additions were rightly deleted by the learned Commissioner of Income-tax (Appeals) and the department should not have any grievance against that order.

4. We have carefully considered the facts of the case and we note' that in making the additions in the two years the Income-tax Officer relied on subsection (3) of section 59 of the Income-tax Ordinance, 1979 which authorises him to make such adjustments. We are clearly of C the view that under the provision, of section 59(3), the Income-tax Officer had the powers to make necessary adjustments in some expenses like, entertainment expenses, telephone expenses and car expenses as these admittedly involve the element of personal use, which are legally inadmissible. Before doing so he will no doubt, disclose his mind to the assessee if he fails to make the adjustments himself as is laid down under subclause (iii) of clause 7 of C.B.R's. Circular No.l8 of 1980. In the instant case, however the Income-tax Officer had no basis to disallow any expenses under these heads because the department had itself not made additions under these heads in the normal assessments made under section 23(3) relating to the assessment year 1978-79 and on this basis the Appellate Assistant Commissioner deleted the additions in the charge year 1979-80 for the simple reasons that no such add backs were made in the past (1978-79). In view of these facts we are clearly of the opinion that the Income-tax Officer did not have any basis to make the adjustments as contemplated under section 59(3) of the Income-tax Ordinance, 1979. Thus, in the two years under consideration also the Income-tax Officer had no basis wherever to make the disallowance even under the heads entertainment and car expenses. In these circumstances we are of the opinion that the Income-tax Officer could not make any disallowances and we accordingly confirm the order of the learned Commissioner of Income-tax (Appeals)

5. In the result the departmental appeals fail and are hereby dismissed.

S. Q. /357/T Appeal dismissed.

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