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I.T.As. Nos. 366 to 368/KB of 1983-84 and M.A.Nos. 15 to 17/KB of 1986-87, decided on 20th October, 1986.
---Ss.23(1)(xviii)--Income-tax Act (XI of 1922), S.10(2)--Claim of expenditure on repair and office expenses disallowed--No material on record available to show details furnished by assessee regarding all expenses--Disallowance upheld by Appellate Tribunal.
---S. 23(1)--Income-tax Act (XI of 1922), S. 10(2)--Entertainments- Huge receipts-- Claim of entertainment expenses--Allowance--Income-tax Officer not adopting any uniform formula for making disallowance- Assessee contending that entertainment claimed in view of huge receipts was negligible--Held, in view of huge receipts it would not mean that expenses should be allowed in their entirety without any supporting evidence--Since non-business use and personal element could not be completely overruled, 10% claim of each assessment year was disallowed.
---Ss. 23(1)(viii)--Claim of expenditure--Payment of bonus to Directors of Company who were also share-holders of the Company, held was rightly disallowed--Where an employee was entitled to receive profits or dividends, he could not be given bonus or commission for service rendered.
---S.23(1)(xviii)--Office expenses--Claim of expenditure--Considerable rise in receipts- -Income-tax Officer, held, was to keep into consideration the proportion of the claim made by assessee in view of rise in receipts ;
---S.23(i)(xviii)--Telephone expenses--Claim for expenditure Receipts having gone up tremendously--Increase in telephone expenses, held, was quite natural--No disallowance in earlier assessment year on account of personal element having been made addition made on that account was ordered to be deleted.
---S. 23(1)(iii)(v) read with Sched. III--Repairs and maintenance expenses--Claim for expenditures--- Amount spent on marble was not verifiable having spent through petty vouchers--Held, amount spent for marble and its fixation should be taken as capital expenditure I.T.O. should allow depreciation thereon.
---S.23(1)(xviii)--Telephone expenses--Claim for expenditure--Entire claim of such expenses having been allowed in previous years, there was, held, no reason to disallow such expenses in subsequent years without any evidence to the contrary on record.
---S. 23 (1)(xviii)--Conveyance expenses--Fact that expenses in relevant year shot up slightly, held, would not mean that such expenses should be disallowed.
---S. 23(1)(xviii)--Entertainment expenses--Claim for expenditure-- Receipts having gone appreciably, entertainment expenditure proportionate to such receipts cannot be disallowed.
---S.23(1)(xviii)--Postage and telephone expenses--Claim for expenditure--Claim in entirety having been allowed in previous years, idea of involvement of personal element in subsequent year, held, was unjustifiable--Amount disallowed was ordered to be deleted.
---S. 23(1)(xviii)--Office expenses--Claim for expenditure--Receipts in the relevant assessment year lesser than the receipts of immediately preceding assessment year--Reduction in claim of office expenses: held, was justified.
---Ss. 23(1)(vii) & (xviii)--Interest paid as business expenses--Claim of--Mere ground that assessee did not claim payment of interest at the time when he was filing the original return, held, was not enough to justify disallowance--Mere non-claim of an item of expenditure which was incurred in fact could not be disallowed for such reasons alone.
---S. 134--Appeal--Point not taken in grounds of appeal--Such point being point of law allowed to be taken before Tribunal in arguments in details.
---Ss. 73 & 25(c)--Predecessor and successor--Assessment--A predecessor is to be assessed in respect of the income of the income year in which the succession took place upto the date of succession and in the income year or years preceding that year--Successor is to be assessed in respect of income of such income year after the late of succession--Where the predecessor is not found out, assessment could be made on successor regarding income of income year in which succession took place upto the date of succession and of the income year or years preceding that year.
T.S. Baliah v. T. S. Ranga Ghari, I.T.O. (1969) 72 I T R 787; Tiwari Kanhaivalal v. Commissioner of Income-tax (S.C.) (1975) 100 ITR 39; H. G. Misra & Co. v. A.A.C.(1969) 72 I T R 489; C.I.T. v. Mazagaon Dock Co. Ltd. (1938) 6 I T R 124 and Commissioner of Income-tax, Madras v. Express Newspapers Ltd. (1960) 40 I T R 38 distinguished.
--Ss.25(c), 73 & 22--Scope and application of Ss.25 & 73--Income from business or profession--If a trading liability has been claimed in earlier assessment years regarding a business or profession, it would be deemed that assessee carried on such business or profession in that assessment year even though he might not have carried on such business or profession in fact.
---Ss.25(c), 73 & 22--Assessee obtained assets and liabilities of its predecessor with agreement deed dated 1-9-1975, allowing trading liability to predecessor of assessee before 1-9-1975 to be passed on to the assessee with all its incidence of law attached to it--If such liability remained unpaid in books of assessee it would be added back as trading liability under S.25(c) by extension of fiction of law that allowance of such liability was made to the assessee itself as it would be deemed to have carried on business--Provision of S.25(c) would therefore, apply to the case of assessee with all its force.
The assessee obtained assets and liabilities of its predecessor with the agreement deed dated 1st September, 1'975. It is thus clear that the trading liability which was allowed to the predecessor of the assessee before 1st September, 1975, was passed on to the assessee on transfer of assets and liabilities. It means that this liability came to the assessee with all its incidence of law attached to it. Obviously one of the disadvantages was that if it remained unpaid in the books of the appellant, it would be added back as trading liability under S.25(c) by extension of the fiction of law that the allowance of such liability was made to the assessee itself as it would be deemed to have carried on the business. Thus, if all the provisions are read together and if harmonious construction is to be given to them this appears to be the only interpretation available.
If the provisions of Ss. 73 and 25(c) are read together alongwith the deeming provision it emerges out very clearly that the provisions of section 25(c) would apply in the case of the assessee with all its force. It is true that section 23 has been mentioned in the opening part of section 25, but it becomes wholly redundant when it is read with section 73 of the Ordinance, or is examined in the context of section 25(c) itself.
T.S. Baliah v. T. S. Ranga Ghari, I.T.O. (1969) 72 I T R 787; Tiwari Kanhaivalal v. Commissioner of Income-tax (S.C.) (1975) 100 ITR 99; H. G. Misra & Co. v. A.A.C. (1969) 72 I T R 489; C.I.T. v. Mazagaon Dock Co. Ltd. (1938) 6 I T R 124 and Commissioner of Income-tax, Madras v. Express Newspapers Ltd. (1960) 40 I T R 38 distinguished.
---S.2(f)-- "Industrial establishment"--Definition--Workers Welfare Fund--Assessee who was not printing any publication by using electric mechanical, thermal nuclear or any other form, of energy transmitted mechanically, held, were --exempt from the application Workers Welfare Funds Ordinance, 1971 and no workers welfare fund could be charged from it.
Faruq Ali, F.C.A. for Appellant.
Muhammad Farid, D.R. for Respondent.
Dates of hearing: 1st and 13th October, 1986.
-- These appeals for assessment years 1976-77, 1978-79 and 1979-80 are filed to impugn the consolidated order of learned Commissioner of Income-tax (Appeals) recorded by him on 26th June, 1983. Generally the add-backs from various profit and loss expenses have been impugned but addition of deemed interest under Explanation 8 to section 4(1) of the repealed Income-tax Act, or under section 12(7) of the Income-tax Ordinance as well as addition of Rs.4,04,448 under section 25(c) of the Income-tax Ordinance, have further brought in dispute in these appeals. It is further contended that Workers' Welfare Fund Ordinance, 1971 was not applicable in the case of the appellant.
2. The appellant derived its income during the relevant assessment years from publication and sale of several Urdu and English newspapers together with an Urdu Weekly. Mr Faruq Ali, F.C.A. appeared for the appellant and Mr. Muhammad Fared-, the learned Departmental Representative has appeared for the Respondent. We have heard them at length and have also gone through both assessments as well as the impugned orders. For the sake of convenience we shall be disposing of these appeals taking each publication separately.
3. It appears that the appellant claimed Rs.83.329, Rs.1,75,174 and Rs.1,04,800 as repairs and maintenance expenses in assessment years 1976- 7, 1978-79 and 1979-80 respectively, and the Income-tax Officer disallowed Rs.73,112, Rs.22,833 and Rs.10,888 from each claim respectively. From perusal of the assessment orders it appears that he disallowed Rs.73,112 on the ground that the expenditure was capital in nature. Mr. Faruq Ali appearing for the appellant contended that the depreciation should be allowed on this amount. Mr. Muhammad Farid, the learned Departmental Representative has no objection. We, therefore, order that depreciation be allowed on this amount by the Income-tax Officer.
4. In assessment year 1978-79 the claim was to the tune of Rs.1,75,174 and Rs.22,833 were disallowed by the Income-tax officer for being unverifiable. The appellant has not filed any appeal against this disallowance, therefore, it is confirmed.
5. In assessment year 1979-80 the claim was to the extent of Rs.1,04,800 and Rs.10,485 were disallowed by the Income-tax Officer for being unverifiable, and the learned Commissioner of Income-tax (Appeals) confirmed the disallowance in his impugned order. Mr. Faruq Ali, the learned Authorised Representative, on the other hand submitted that they were verifiable. However, he could not invite our attention to any material on record which could nave shown the details furnished by him regarding all the expenses. We, therefore, confirm the order Income-tax officer regarding this disallowance of Rs.10,480.
6. The appellant claimed Rs.51,484, Rs.92,280 and Rs.93,352 as office expenses but the Income-tax Officer disallowed Rs.10,296, Rs.9,228 and Rs.18,670 in each assessment year respectively, on the ground that they were excessive and not open to proper verification. Referring to assessment year 1975-76 Mr. Faruq Ali, the learned Authorised Representative of the appellant submitted that Rs.30.211 were claimed as office expenses and the entire amount was allowed. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, pointed out that all the details of office expenses were called from the appellant but it failed to furnish them and under the facts and circumstances the Income-tax Officer was left with no alternative but to disallow the amounts mentioned above in each assessment year. According to the learned Departmental Representative, the Commissioner of Income-tax (Appeals) was very much justified in confirming it. Mr. Faruq Ali has not invited our attention to any material, which the appellant might have furnished to the Income-tax Officer to support the aforesaid expenditure. Under these circumstances we uphold the disallowance as mentioned above, in each assessment year.
7. The appellant claimed Rs.24,345, Rs.22,748 and Rs.47,149 entertainment expenses in assessment years 1976-77, 1978-79 and 1979-8(I and the Income-tax Officer disallowed Rs.4,869, Rs.5,687 and Rs.7,067 on the ground that all the expenditure was open to verification. The learned Commissioner of Income-tax (Appeals) has confirmed all the disallowances for all three years. Mr. Faruq Ali, the learned Authorised Representative submitted that the expenditure claimed was very reasonable keeping into consideration the total receipts in each assessment year which went up to Rs.2,35,19,542, Rs.3,90,38,710 and Rs.5,06,79,155 in each assessment year. He argued that in view of such huge earnings, the entertainment as claimed was very reasonable. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, submitted that all the details of the expenditure were called from the appellant and they themselves failed to produce all of them. From perusal of the assessment orders of all the three assessment years it appears that the Income-tax Officer has not adopted any uniform formula for making disallowances. In assessment year 1978-79 when the claim was Rs.22,748 he had disallowed Rs.5,687 whereas in assessment year 1979-80 the claim amounted to Rs.47,149 and yet disallowance was Rs.7,067. Moreover, we have also found considerable force in submission of Mr. Faruq Ali that in view of huge receipts the entertainment expenses were almost negligible. However, it does not mean that these should be allowed in their entirety without any supporting evidence non-business use and the personal element could not be completely overruled, we, therefore, disallow 10% of the claim in each assessment year.
8. The appellant had claimed telephone expenses also in all the assessment years but at the time of argument Mr. Faruq Ali did not, press his appeal against the disallowances made by the Income-tax Officer in assessment years 1976-77 and 1979-80. The, appeal on this point is, therefore, rejected.
9. In assessment year 1979-80 only the appellant claimed payment of bonus to its Directors with the allegation that they were Managers as well. The Income-tax Officer, however, disallowed it and his order was confirmed in appeal. Mr. Faruq Ali, the learned Authorised Representative for the appellant vehemently argued that since Directors were also working as Managers, they were entitled to the bonus like any other employee of the appellant. Mr. Muhammad Farid, the learned Departmental Representative on the other hand, argued that in view of section 23(1) (viii) since all the Directors were share-holders also, therefore, they were entitled to receive not only the dividends but also the profits earned by the appellants. We have heard both Mr. Faruq Ali as well as Mr. Muhammad Farid, the learned Departmental Representative. In our view both the officers below are very much justified in disallowing the payment of bonus to the Directors of the appellant. The relevant provision of Section 23(1)(viii) is as under-
(1) In computing the income under the head "Income room -business or profession", the following allowances and deductions shall be made, namely:-
(viii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission:
Provided that the amount of the bonus or commission is of a reasonable amount with reference to:
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business or profession for the year in question; and
(c) the general practice in similar business or profession."
It is clear from its perusal that if an employee is entitled to receive profits nor dividends, he could not be given bonus or commission for services rendered. Since all the Directors are admittedly share-holders, the contention of Mr. Muhammad Farid is upheld. The appeal on this point is, therefore, rejected.
10. The last point involved regarding daily JANG of Karachi is about deemed interest. It appears that the income-tax Officer discovered Rs.3,92,895 as advances paid and wanted to subject it to deemed interest under section 12(7). In reply the appellant submitted that Rs.2,88,884 were paid by the appellant as advance to Messrs Combined Investments Ltd., against rent adjustable on yearly basis. Mr. Faruq Ali appearing for the appellant conceded that the deemed interest could be added on the difference of Rs.3,92,895, Rs.2,88,884 but not on Rs.2,88,884 for the simple reason that it was not an advance as envisaged by section 12 (7) of the Income-tax Ordinance. He argued that it was given to the Combined Investments Corporation Ltd., because it was agreed that the building after construction would be rented to the appellant and the amount advanced would be adjusted against the annual rent payable. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, argued that there was no proof on record to show that Rs.2,88,884 was given under some agreement that it would be adjustable against payment of annual rent.
11. We have heard both the learned Authorised Representative and the learned Departmental Representative at length and have also gone through the assessment order as well as the impugned order. It is clear from perusal of the assessment order itself that the Income-tax officer has not disputed the explanation offered by the appellant that the loan was given to Messrs Combined Investments Ltd. for the purposes of construction of a building which was intended to be occupied on completion for the purposes of office premises. It is true that there is no material on record to show that this advance was subject to adjustment against future rent. But, in our view, it makes no difference, for the simple reason that it is protected by S.R.O. 750(1)/79 dated August, 23, 1979. In our judgment the purpose for which the loan was given was to help in construction of a building so that appellant could occupy it for its own needs, it was not given for any business purposes. Had the appellant not given this loan, somebody might have advanced it and got the property on rent. Moreover, we are of the view that under the facts and circumstances of this case, it could not be said that Messrs Combined Investments Ltd., were carrying on any business of construction. We, therefore, direct the Income-tax Officer not to levy deemed interest on amount of Rs.2,88,884. This takes us to the next publication.
12. From the profit and loss account of this publication the appellant claimed miscellaneous office expenses of Rs.15,680 and Rs.20,414 in assessment years 1978-79 and 1979-80 and the Income-tax Officer disallowed Rs.3,136 and Rs.4,082 in each year respectively. The learned Commissioner of Income-tax (Appeals) confirmed the disallowance in appeal. Mr. Faruq Ali, the learned Authorised, Representative for the appellant submitted before us that in immediately preceding assessment year of 1976-77 the appellant had claimed Rs.13,536 as office expenses and the entire Claim was allowed. According to him, there was no justification for the Income-tax Officer to make disallowances in the relevant assessment years particularly when all the details were given to him. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, argued that it was the duty of the appellant to prove the expenses. We have heard both of them and have also perused both assessment as well as the impugned orders. It appears that in assessment year 1976-77 the total receipts from daily JANG, Rawalpindi amounted to Rs.84,59,823 whereas in the relevant assessment years ii shot up to Rs.1,26,47,481 and Rs.1,61,84,971. Had the Income-tax Officer kept into consideration this considerable rise in receipts, he would not have disallowed the claim of office expenses. In our view, it is in proportion to the claim made and allowed in the year 1976-77 and we, therefore, order the deletion of disallowances from both the assessment years.
13. The next item of expenses claimed by the appellant is regarding, telephone expenses confined only to assessment year 1979-80. It appear: that the appellant claimed Rs.1,64,986 as telephone expenses in this assessment year but the Income-tax Officer disallowed Rs.16,494. From perusal of the assessment order it appears that the Income-tax Office] disallowed 10% of the expenses claimed for involvement of persona element. His order was confirmed in appeal. Mr. Farid Ali, the learner Authorised Representative, however, submitted that had the Income-tax Officer kept into consideration the phenomenal rise in the receipt: which was almost double of the receipts of 1978-77 he would hav4 allowed the entire claim. Mr. Muhammad Farid, the learned Department Representative on the other hand, argued that since personal element in any case, was involved, both the officers below were very much justified. Mr. Faruq Ali, however, contended that there was no question of personal element, as all the Directors were living in Karachi. We think that the submission of Mr. Faruq Ali has considerable force. It appears that in assessment year 1976-77 the claim of telephone expenses amounted to Rs.54,261 and was allowed in its entirety. Similarly in assessment year 1978-79 the claim went up to Rs.96,320 and it was again allowed in full. As such, if the personal element is involved in this assessment year, there appears to be no reason to think that it was not involved in earlier years. Since the receipts have gone up tremendously, therefore, the increase in telephone expenses appears to be quite natural. Since there was no disallowance in earlier two assessment years on ground of personal element, we would not allow this disallowance to stand for this reason in this assessment year. We therefore, order the deletion of Rs.16,498.
14. In this assessment year the appellant claimed Rs.1,01,007 as repairs and maintenance expenses and the income-tax Officer disallowed Rs.46,457 out of the entire claim for the reason that Rs.41,004 were spent on fixing of marble and Rs.5,000 was not verifiable as it was spent through petty vouchers. This order was confirmed by the learned Commissioner of Income-tax (Appeals). Mr. Faruq Ali, supporting the appeal submitted that the amount spent on marble as a capital expenditure and depreciation should be allowed on it. He further submitted that Rs.5,000 were incurred on labour charges and the appellant could not have kept the proper record thereof except by making the payment through petty vouchers. Mr. Muhammad Farid, on the other hand, supported both the officers below. We have given our due consideration to the submissions of both the learned authorised representative as well as the Departmental Representative and we are of the view that the entire amount of Rs.40,457 should be taken as capital expenditure and the income-tax Officer should allow depreciation thereon.
15. Regarding this publication, the deemed interest was also involved in assessment years 1976-77 and 1979-80 but Mr. Faruq Ali did not press it. The appeal, therefore, on this point is rejected accordingly.
16. For this publication the appellant claimed Rs.60,290 and Rs.58,890 as telephone expenses in assessment years 1978-79 and 1979-80 and the Income-tax Officer disallowed Rs.6,029 and Rs.5,589 in each assessment year respectively, and the learned Commissioner of Income-tax (Appeals) confirmed the disallowance. Mr. Faruq Ali, the learned Authorised Representative submitted that in assessment year 1976-77 the telephone expenses claimed were to the tune of Rs.18,973 and nothing was disallowed. He argued that if the personal element was alleged to have been involved in assessment years 1978-79 and 1979-80, there was no reason to think that it was not available in assessment year 1975-76. But in assessment year 1976-77, added Mr. Faruq Ali, there was no disallowance for the involvement of personal element. He, therefore, argued that the disallowance for the same reason in assessment years 1978-79 and 1979-80 should not be allowed to stand without any supporting evidence. Mr. Muhammad Farid, the learned Departmental representative, however, supported both the officers below and contended that personal element could not be completely overruled. We have heard both of them and have also gone through both orders. It is true that the Income-tax officer has made the disallowances in both the assessment years for the involvement of personal element. However, in assessment year 1976-77 the entire claim was allowed. Since personal element was not involved in 1976-77, we fail to understand as to how it could crop up in subsequent assessment years without any evidence to the contrary available on record. We, therefore, order deletion of Rs.6,029 and Rs.5,889 in both the assessment years respectively.
17. The next claim pertains to conveyance expenses incurred in assessment year 1979-80 to the tune of Rs.9,119 out of which the Income-tax Officer disallowed Rs:1,829 for the reason that the expenditure was on higher side. The learned Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer. Mr. Faruq Ali, the learned Authorised Representative for the appellant argued that in assessment year 1976-77 conveyance expenses amounted to Rs.12,178 and the entire amount was allowed. He conceded that in assessment year 1978-79 the expenses were only Rs.4,126 but argued that again the entire claim was allowed. He contended that the fact that the expenses in the relevant assessment year shot up slightly but it did not mean, he argued, that the disallowance should be made simply on the ground that the expenses were on higher side, because the expenses were still lesser than the expenses of 1976-77 which were allowed in their entirety. We find force in the submission of Mr. Faruq Ali. The order of Income-tax Officer cannot be allowed to stand simply on the ground that since expenses are on higher side, therefore, they should be disallowed. We, therefore, order the deletion of Rs.1,822.
18. In the same assessment year the entertainment expenses claimed amounted to Rs.6,127 and the Income-tax Officer disallowed Rs.919 on the ground that the expenses claimed in this assessment year were more than the expenses claimed in immediately preceding year. Mr. Faruq Ali submitted that the Income-tax Officer failed to note that the receipts in the relevant assessment year were more by Rs.5,00,000 that the receipts of immediately preceding year. Mr. Muhammad Farid the learned Departmental Representative, however, supported both the officers below. In our judgment, the submission of Mr. Faruq Ali, the learned Authorised Representative of the appellant has considerable force. Since the receipts have gone up appreciably, therefore, the expenses claimed do not appear to be disproportionate. Hence, the disallowance of Rs.919 simply on the ground "since the expenses in the relevant assessment year have gone up should be disallowed" cannot be allowed to stand. We, therefore, order the deletion of Rs.919 in this assessment year.
19. The Income-tax Officer had also made certain addition under section 12(7) of the Income-tax Ordinance but Mr. Faruq Ali did not press them. The appeal, therefore, on this ground stands rejected.
AKHBAR-E-JAHAN:
20. For this publication the appellant claimed Rs.16,366 as postage and telephonic expenses but the Income-tax Officer disallowed Rs.5,000 for the reason that personal element was involved in it. Mr. Faruq Ali the learned Authorised Representative of the appellant submitted that in subsequent assessment years 1978-79 and 1979-80 the amount claimed was as high as Rs.16,870 and Rs.29,414 but it was allowed in its entirety. According to him, the idea of involvement of personal element was far-fetched in the case of postage and telegram expenses. Mr. Muhammad Farid, the learned Departmental Representative supported both the officers below. We have heard both of them. In our judgment in this disallowance of Rs.5,000 out of the claim of postage and telegram of Rs.16,366 is unjustifiable particularly in view of the fact that much higher figure for the same item has been allowed in subsequent assessment years. We, therefore,. order the deletion of Rs.5,000.
21. In assessment year 1978-79 the appellant also claimed Rs.5,630 as car expenses and the Income-tax Officer disallowed Rs.1,126 which was confirmed in appeal by learned Commissioner of Income-tax (Appeals). Mr. Faruq Ali did not press it before us. The appeal, therefore, stands dismissed regarding this item.
22. In assessment year 1976-77 and 1979-80 the Income-tax Officer had made certain addition on account of deemed interest under Explanation 8 to section 4(1) of the repealed Income-tax Act, and section 12(7) of the Income-tax Ordinance. However, Mr. Faruq Ali, the learned Authorised Representative, did no press it before us. The appeal, therefore, stands rejected regarding this ground as well.
23. The appellant claimed Rs.2,019 as office expenses in assessment year 1979-80 and the Income-tax Officer disallowed Rs.402 on the ground for lack of proof." It was confirmed in appeal. Mr. Faruq Ali submitted that all the necessary, details were provided to the Income-tax Officer. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, submitted that the Income-tax Officer was very much justified in making the disallowance as the appellant itself failed to lead necessary evidence. We think that since the receipts of Rs.i1,62,i87 in the relevant assessment year are lesser than the receipts of immediately preceding assessment year amounting to Rs.12,95,841 when the claim for office expenses was Rs.1,394 only, the disallowance of Rs.402 appears to be quite justifiable. We, therefore, confirm it.
24. The appellant also claimed Rs.10,231 as telephone expenses and the Income-tax Officer disallowed Rs.1,023 for involvement of personal element, which was confirmed in appeal by learned Commissioner of Income-tax (Appeals). Mr. Faruq Ali, learned Authorised Representative for the appellant, however, argued that in immediately preceding year the claim amounted to Rs.5 ,875 and no disallowance was made. He contended that if the personal element was involved in this assessment year, there was no 'reason why it should not have been involved in immediately preceding assessment year. His submission carries much force, particularly in view of the fact that no additional evidence was adduced before the Income-tax Officer. We, therefore, order the deletion of Rs.1,023.
25. The Income-tax Officer also made certain addition of deemed interest in assessment years 1976-77 and .1979-80, but Mr. Faruq Ali did not press it. The Workers Welfare Fund is not involved regarding this publication. The appeal regarding this publication stands disposed of accordingly.
26. Finally, we come to Head Office. It appears that in assessment year 1979-80 the appellant claimed Rs.4,48,128 as interest paid to Jang Publications Ltd., as business expenses. It was contended before the income-tax officer that appellant had purchased the assets and liabilities of Messrs Jang Publications for Rs.32,00,921 and since the purchase price was not paid to the seller, the appellant was paying interest thereon. Mr. Faruq Ali further submitted that the copy of the agreement was also given to the Income-tax Officer. The Income-tax Officer, however, was not satisfied with the explanation of the appellant for the reason that aforesaid amount of Rs.4,48,128 was not claimed at the time when the original return was filed. He, therefore, disallowed it. On appeal, aforesaid disallowance was confirmed. Mr. Faruq Ali, the learned Authorised Representative submitted before us that even if the item of Rs.4,48,128 was not claimed at the time of filing of original return, it did not mean that the appellant did not incur that expense. He submitted that the Income-tax Officer should have found defects in the accounts of the appellant as well as Jang Publications and then disallowed aforesaid amount. According to the Authorised Representative since there was overwhelming evidence on record to show that the appellant had purchased the assets and liabilities of Messrs Jang Publications for Rs.32,00,921 which remained unpaid the appellant was very much obliged to pay the interest to Messrs Jang Publications Limited. Mr. Muhammad Farid the learned Departmental Representative supported both the officers below. We have heard both the learned Authorised Representative and the Departmental Representative and have also perused the impugned order. In our judgment the mere ground that the appellant did not claim the payment of interest of Rs.4,48,128 at the time when he was filing the original return was not enough to justify the disallowance. The submission of Mr. Faruq Ali that the Income-tax- Officer examined the account books of both the appellant as well as Messrs Jang Publications to come to the conclusion that the aforesaid amount was paid in fact. A mere non-claim of an item of expenditure which is incurred in fact could not be disallowed for the reason mentioned by the Income-tax Officer we, therefore, allow it.
27. It, however, appears that the Income-tax Officer discovered a trading liability of Rs.4,04,448 which was found to be existing in account books for more than three years. The Income-tax Officer sought the explanation of the appellant as to why he should not add it under section 25(c) of the Income-tax Ordinance. The appellant explained that since the appellant had purchased assets and liabilities of Messrs Jang Publications with express exclusion of Income-tax liabilities, section 25(c) did not apply in its case. The Income-tax Officer, however, rejected the explanation and added Rs.4,04,448 and his order was confirmed in appeal. Mr. Faruq Ali, the learned Authorised Representative of the appellant submitted before us that section 25(c) was not applicable in the case of the appellant at all. According to Mr. Faruq Ali, since the words "section 23" have been- used in section 25, it, therefore, was clear that clause (c) of-section 25 applied regarding those trading liabilities only which were allowed under section 23. He, further argued that the word 'assessee' as used in section 25, mean' that assessee who had taken the advantage of any allowance under section 23 which was subsequently sought to be added back under clause (c) of section 25. Mr. Faruq Ali, conceded that though the Jang Publications Limited had taken advantage of trading liabilities of Rs.4,04,448 but he argued that since the appellant namely Independent Newspapers Corporation Limited, did not take advantage of the allowance aforesaid trading liability under section 23 of the Income-tax Ordinance 1979, therefore, section 25(c) was not applicable to them. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, vehemently argued that section 25(c) did apply with all its force in the case of the appellant. Appeals were originally heard on 1st October, 1986, however, Mr. Muhammad Farid, the learned Departmental Representative felt that he should address us on this issue in some details. He, therefore, moved three miscellaneous applications mentioned above with the prayer that he should be allowed to address us on this issue again. We fixed them for hearing after notice to Mr. Faruq Ali. On 13th October, 1986, when they came up for hearing before us Mr. Muhammad Farid, the learned Departmental Representative submitted that since in grounds of appeal Mr. Faruq Ali had not taken the ground regarding 25(c) in so many words, therefore, he could not know what arguments actually he had to meet in Court. We, however, allowed him to address us in details because the point to be argued was purely of legal nature.
28. Consequently, Mr. Muhammad Farid, the learned departmental Representative invited our attention to several rulings from Indian jurisdiction. First of all, he cited T.S. Balian v. T. S. Ranga Chari I.T.0. (1969) 72 1 T R 787. In this case the assessee allegedly had given false statement, which was punishable under section 52 of the Income-tax Act, 1922. The proceedings were pending for launching prosecution against the assessee when Income-tax Act, 1922 was repealed. The question arose whether the assessee could still be prosecuted. Their Lordships of Indian Supreme Court answered the question in the affirmative and held that in view of section 6 of the General Clauses Act the prosecution could be launched against the assessee. The next case relied upon by Mr. Muhammad Farid, the learned Departmental Representative is reported as Tiwari Kanhaivalal v. Commissioner of Income-tax 1975 100 I.T.R. 99- (S C). In this case, their Lordships of Indian Supreme Court have re-affirmed their view propounded in Ballars case (Supra). Mr. Muhammad Farid, then cited H.G. Misra Co. v. A.A.C. (1969) 72 I.T.R. 489. In this case default under section 18-A(3) was committed but before penalty could be imposed the Income-tax Act, 1922 was repealed. In the new Act section 273(b) mentioned section 212(3) which was equivalent of section 18-A(3) of the repealed Act. It was argued that unless the default was made under section 212(3) of the Act in force penalty cannot be imposed under section 273(b). In other words, it was contended that a default committed under section 18-A(3) of the repealed Act was not enough to justify an order of imposing penalty under section 273(b). However, it was held that since the Removal of Difficulties Order No.2 of 1963 had been promulgated, which provided that the reference to section 212 of the new Act should be treated as reference to the corresponding provision of section 18-A of the old Act, the penalty could be imposed. Mr. Muhammad Farid, the learned Departmental Representative, then referred to C.I.T. v. Mazagaon Dock Co. Ltd. (1938) 6 I T R 124. In this case, a firm was converted into a limited company. Section 10(2) of the Income-tax Act, 1922, allowed depreciation on the original cost to the assessee. The company claimed depreciation of original cost as it was in the hands of the firm. On top of it, it also claimed unabsorbed depreciation due to the firm. The Income-tax Officer disallowed it and the order was confirmed by Commissioner of Income-tax (Appeals). However, the majority of the Judges of Bombay High Court held that where a person carrying on a business, profession or vocation had been succeeded in such capacity by another person and an assessment was made on the successor under section 26(2) of the Indian Income-tax Act, on the profits of the predecessor the word "assessee" in section 10(2)(iv) of the Act must be construed as referring to such predecessor, and depreciation allowance should be calculated on the original cost to the predecessor and not to the successor. Mr. Muhammad Farid, the learned Departmental Representative finally referred to Commissioner of Income-tax, Madras v. Express Newspapers Limited (1960) 40 I T R 38. In this case, a company was succeeded by another company and the question arose about the successor's liability under section 26(1) of the Income-tax Act, 1922, on the disappearance of the person succeeded. It was held that proceedings under section 34 of the Income-tax Act could be initiated against the successor if it was necessary. This case also decided some other points but all of them appear to be irrelevant. Be it as it may, Mr. Muhammad Farid, the learned Departmental Representative concluded that the Income-tax Officer was very much justified in adding Rs.4,04,448.
29. We have heard both Mr. Faruq Ali and Mr. Muhammad Farid at length and have also gone through the cases cited at Bar. In our judgment the relevant provisions are contained in section 73 and section 25 of the Income-tax Ordinance, 1979. Section 73 deals with the situation where one company is succeeded by another company. It reads:-
"
-- (1) Where a -person carrying on any business or profession has been succeeded in any income year by any other person (hereinafter in this section referred to as the "predecessor" and "successor" respectively), otherwise than on the death of the predecessor and the successor continues to carry on that business or profession:
(a) the predecessor shall be assessed in respect of the income of the income year in which the successor took place up to the date of succession and of the income year or years preceding that year; and
(b) the successor shall be assessed in respect of the income of such income year after the date of succession.
(2) Notwithstanding anything contained in subsection (1) where the predecessor cannot be found, the assessment of the income of the income year in which the succession took place up to the date of succession and of the income year or years preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Ordinance shall, so far as may be, apply accordingly.
(3) Where any tax payable under this section in respect of such business or profession cannot be recovered from the predecessor, it shall be recoverable from the successor, who shall be entitled to recover it from the predecessor."
From its bare perusal it is clear that a predecessor is to be assessed according to the provisions of the Income-tax Ordinance in respect of the income of the income year in which the succession took place up to the date of succession and in the income year or years preceding that year. Similarly, a successor is to be assessed again in accordance with provisions of the Ordinance, which includes section 25(c) as well in respect of the income of such income year after the date of succession. Subsection (2) deals with the situation where predecessor is not found out, and laid down that in such case the assessment could be made on the successor regarding income of the income year in which the succession took place upto the date of succession and of the income year or years preceding that year. Now we turn to section 25; it reads:-
-- Notwithstanding anything contained in this Ordinance, where an allowance or deduction has been made under section 23 for any year in respect of any loss, bad debt, expenditure or trading liability incurred by the assessee, and subsequently,
(a) during any income year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, the amount so received shall be deemed to ,e income from business or profession of that income year;
(aa) during any income year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such bad debt,
(i) where the said amount is greater than the difference between the whole of such bad debt and the amount of bad debt allowed as deduction under section 23, the excess shall be deemed to be income from business or profession of that income year; and
(ii) where the said amount is less than the difference between the whole of such bad debt and the amount of bad debt allowed as deduction under section 23, 'the deficiency shall be deemed to be a business expense of that year;
(b) during any income year, the assessee has derived any benefit in respect of such trading liability, the value of such benefit shall be deemed to be income from business or profession of that income year;
(c) such trading liability or a portion thereof is found not to have been paid within three years of the expiration of the income year in which it was allowed, such liability or portion thereof, as the case may be, shall be deemed to be income from business or profession of the year in which such finding is made or any other year (not being a year commencing after the expiration of five years from the end of the said three years) as the Income-tax Officer may think fit,
and the business or profession in respect of which such allowance or deduction was made shall, for the purposes of section 22, be deemed to be carried on by the assessee in that year:
Provided that where a trading liability referred to in clause (c) is paid in a subsequent year, the amount so paid shall be deducted in computing the income in respect of that year."
From perusal of this section it appears that its provisions have to override other provisions of the Ordinance including section 73 if it is in conflict with section 25(c). Moreover, it also appears from the concluding part of subsection (c) of section 25 of the Ordinance that it consists of a deeming, provision as well. In other words, if a trading liability has been claimed in earlier assessment years regarding a business or profession, it would be deemed that the assessee carried on such business or profession in that assessment year even though he might not have carried on such business or profession in fact. However, it is to be kept into consideration that this deeming provision is regarding section 22 which deals with the income from business or profession.
30. Now, if the provisions of sections 73 and 25(c) are read together alongwith the deeming provision as mentioned above, it emerges out very clearly that the provisions of section 25(c) would apply in the case of the appellant with all its force. It is true that section 23 has been mentioned in the opening part of section 25, but it becomes wholly redundant when it is read with section 73 of the Ordinance, or is examined in the context of section 25(c) itself. It is admitted position that the appellant obtained assets and liabilities of its predecessor with the agreement deed dated 1st September, 1975. It is thus, clear that the trading liability, which was allowed to the predecessor of the assessee before 1st September, 1975, was passed on to the assessee on transfer of assets and liabilities. It means that this liability came to the assessee with all its incidence of law attached to it. Obviously one of the disadvantages was that if it remained unpaid in the books of the appellant, it would be added back as trading liability under section 25(c) by extension of the fiction of law that the allowance of such liability was made to the assessee itself as it would be deemed to have carried on the business. Thus if all the provisions are read together and if harmonious construction is to be given to them this appears to be the only interpretation available. We, therefore, confirm the order of learned Commissioner of Income-tax (Appeals) on this point. Now, as far as cases relied upon by Mr. Farid are concerned, they revolve) around their own facts and are distinguishable in one reason or other which is discernable from the facts reproduced by us. We have, therefore, refrained ourselves from dilating on them for sake of brevity.
31. Lastly, we come to the item of Workers' Welfare Fund. It appears that in assessment year 1979-80 the Income-tax Officer charged Workers' Welfare Fund, which was confirmed in appeal by learned Commissioner of Income-tax (Appeals). Mr. Faruq Ali, the learned Authorised Representative of the appellant, however, submitted before us that in view of definition of industrial establishment, as given in Workers' Welfare Fund Ordinance, 1971, the appellant was not fallen within the mischief of aforesaid Ordinance and no Workers' Welfare Fund could be charged. Mr. Muhammad Farid, the learned Departmental Representative, on the other hand, supported both the officers below. The definition of industrial establishment as given in Workers' -Welfare Fund Ordinance, 1971 is as under:-
"(f) "industrial establishment" means:
(i) any concern owning or managing a factory, workshop or other establishment in which articles are produced, adapted or manufactured with the aid of electrical, mechanical, thermal, nuclear or any other form of energy transmitted mechanically and not generated by human or animal agency;
(ii) any concern working a mine or quarry or natural gas or oilfield;
(iii) any concern running a tramway or motor omnibus service;
(iv) any concern engaged in the carriage of men and goods by inland mechanically propelled vessels;
(v) any concern engaged in the growing of tea, coffee, rubber or cinchona; and
(vi) any other concern or establishment which the Federal Government may, by notification in the Official Gazettee, declare to be an industrial establishment for the purposes of this Ordinance;
but does not include any concern or establishment which is owned by Government or by a Corporation established by Government or by a Corporation the majority of the shares of which is owned by Government;"
From its bare perusal it appears that the appellants who are not printing any of the publications mentioned above by using electrical, mechanical, thermal, nuclear or any other form of energy transmitted mechanically, they, therefore, fall within this definition. Now, if they are excluded from the folds of this definition, the Ordinance undoubtedly would not apply to them. We, therefore, find considerable force in submission of Mr. Faruq Ali and order that no Workers' Welfare Fund can be charged from the appellant in assessment year 1979-80.
31. In view of discussion made above, all the three appeals stand disposed of in the manner and to the extent as discussed above;
M.B.A./371/T Order accordingly.
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