I.T.A. NOS. '591/PB AND 592/PB OF 1981-82 AND 534/PB OF 1983-84, DECIDED ON 3RD JUNE;1984. Versus I.T.A. NOS. '591/PB AND 592/PB OF 1981-82 AND 534/PB OF 1983-84, DECIDED ON 3RD JUNE;1984.

ORDER

MUHAMMAD MAZHAR ALI (CHAIRMAN).‑‑ We propose to decide these three appeals two in respect of assessment orders for the charge years 1979‑80 and 1981‑82 and the third against the order of penalty under section 91(1) of the Income‑tax Ordinance, 1979 for 1979‑80.

2. We shall first take up the appeal against the assessment order for the charge year 1979‑80. The assessee‑appellant is a registered firm, which, inter alia, derives income from carriage contracts from M/s. Packages Limited. It disclosed receipts from carriage contracts at Rs.21,06,830 with 2.7$ G.P. rate. The Income‑tax Officer found the receipts to be verifiable and accordingly accepted them. The disclosed G.P. rate, according to assessing officer, was low and the assessee was also unable to furnish periodical comparative statements showing quantum of jobs finalized and Direct expenses incurred thereon. The expenses claimed were un vouched and unverifiable and hence it was not possible to ascertain whether the expenses debited to this account had been actually incurred in connection with the jobs for which payments' amounting to Rs.21,06,830 had been received. For these defects, the. Income‑tax Officer discarded the disclosed version and subjected the declared receipts to 8$ net profit rate. The assessee had, it may be mentioned here, claimed in the profit and loss account the loss of stores at Rs.1,22,141 which amount had been deducted by the Packages Ltd. from the bills of the assessee for damages, shortages and other claims in accordance with the terms' of contract. This amount of loss, according to the Income‑tax Officer, was covered by the application of 8$ net profit rate. The assessee carried appeal to the learned Commis sioner of Income‑tax (Appeals). Its stand before him was that deductions for such losses were only peculiar feature of Packages Ltd. because the goods transported for them, such as carton paper, card board boxes etc. are easily damageable and such deductions are not made normally‑ in the case of other carriage contractors. It was pleaded' on its behalf before the learned Commissioner of Income‑tax (Appeals) that .the rate of 8$ was applied keeping in view the treatment accorded to other cases where such claims are not there. The learned Commissioner of Income‑tax (Appeals) being of the view that the appellant before him must have made the bid fox the carriage contracts keeping in view the fact that such deductions are a normal feature of carriage contracts awarded by Packages Ltd. and that the appellant's plea to the effect that it could not envisage the possibility of such heavy deductions at the time of making the bid, was discarded as being of general nature and not convincing. The learned Commissioner of Income‑tax (Appeals) further observed that "net profit rate applied is supposed to take into account all these things and that there is no justification for further allowing this claim after the application of net profit of 8$. It may also be. added here that the learned Commissioner of Income‑tax (Appeals) found that the amount charged by the .Packages Ltd. was Rs.1,05,627 and not Rs.1,22,141. The learned Commissioner of Income‑tax (Appeals) further opined if this amount was allowed as claimed by the assessee the resulting net profit 'will be ridiculously low as compared to the treatment accorded to the other assessees. The assessee's appeal, therefore, failed and the impugned disallowance made by the Income‑tax Officer was confirmed. Hence this second appeal.

3. Haji E... H... learned counsel for the appellant raised two fold contentions before us. Firstly, he urged that the net profit rate of 8$ applied in the appellant's case is excessive inasmuch as much lesser rates have been applied in the cases of other carriage contractors. His next line of argument was that the sum of Rs.1,22,141 had been deducted by the Packages Ltd. from the assessee's bills on account of damages caused to the goods transported by the appellant and hence it was claimed in the profit and. loss account as damages. In his submission, this item could not be covered by the application of net profit rate. He placed before us photo copies of certain assessment orders passed in parallel cases bearing G . I . R . No. 01, 0001173 , and G . I . R . No.15 . U , Circle 1, Mardan, wherein 5.9% and 5% G.P. rate respectively was applied. The learned Departmental Representative, on the other hand, argued that if the amount of damages claimed is taken out then the resultant G . P . rate would be as low as 8.49% .

He submitted that there is a foot note available on the office copy of the assessment order to the effect the 8$ net profit rate was applied in parallel cases.

4. We have given our earnest consideration to the submissions made at the bar and we are of the opinion that the learned Commissioner of Income‑tax (Appeals) was not justified in observing that the appellant trust have made a bid for this carriage contract keeping in view the fact that such deductions are a normal feature of carriage contract awarded by the Packages Limited. We do not find any force in this plea of the learned Commissioner of Income‑tax. It is not the case of the department that the assessee had not sustained the said loss on account of damages of goods or that the Packages Ltd. has not deducted this amount from the bills of the assessee on account of loss of damages caused to the goods transported. The only thing therefore, to be seen is whether the damages so recovered by Packages Ltd. are incidental to assessee's business or not. If these are incidental to assessee's business then there is no reason as to why they should not be allowed even if it is presumed for the sake of argument that the assessee had given a higher bid by visualizing such incidental. We are clearly of the view that the claim in question was of admissible nature and it should have been allowed if there was no dispute with regard to the of damages claimed. Moreover, what we find is that the assessee had maintained accounts and claimed profit and loss account expenses separately including the disputed claim. It was expected of the assessing officer to have examined each item separately and pass appropriate order in respect thereof. There was thus no justification for the application, of not profit rate.

6. For the reasons given hereinabove we would allow the appeal, set aside the impugned orders of both the officers below and 'remit the case to the Income‑tax Officer with a direction to pass fresh order in this behalf in the light of the observations made heretofore.

7. The appeal against the assessment order for the charge year 1981‑82 also seeks to call in question the disallowance of loss of stores and damages amounting to Rs.85,012. The assessee had, during this year, declared contract receipts from Packages Ltd. at Rs.30,28,393 with 7.24% G.P. rate. For the defects as pointed out while deciding the appeal for 1979‑80, the Income‑tax Officer discarded the disclosed results and computed the income by accepting the declared receipts but subjecting them to net profit rate of 8$. The loss of stores and damages claimed at Rs.85,012 was not separately allowed but was stated to be covered by the application of net profit rate. When the matter reached the Commissioner of Income‑tax (Appeals) Zone III, R..., he found that the appellant claim was duly established by the documentary evidence. He, however, set aside the order with a direction to Income tax Officer 'to reconsider the point in the light of appellant's contention and evidence'. The assessee's contention before the first appellate authority was that the amount of loss claimed was allowable as a revenue expenditure and that the loss of stores was a commercial expediency without which the business of carriage contracts with the Packages Ltd. could not be done. It was further pleaded on its behalf that without the allowance‑ of this claim the true profits of business could not be ascertained. The learned counsel for the appellant contended that the learned Commissioner of Income‑tax (Appeals) should have finally disposed of this matter at his end instead of remitting the case to the Income‑tax Officer for de novo orders more particularly when the extent of claim was held to be duly proved by documentary evidence. The learned Departmental Representative raised the same pleas before us which he did while making the submissions in respect of appeal for the charge year 1979‑80. We would hold the order of the learned Commissioner of Income‑tax, (Appeals) good in so far as setting aside of assessment order is concerned with this modification that the claim in question is a revenue expenditure and it should be allowed as such. The I.T. Officer, however, may apply appropriate G.P. rate to the declared and accepted contract receipts and allow the Profit and Loss account expenses claimed by the assessee after due scrutiny.

8. No other point was agitated in this appeal before us.

9. The appeal against the imposition of penalty would also succeed inasmuch as we have allowed the assessee's appeal with the result that the assessee cannot be held to be in default in making payment of. tax so as to justify the levy of penalty under section 91 of the I.T. Ordinance, 1979. This appeal also accordingly succeeds and the impugned penalty goes.

10. In the result, all the three appeals are allowed to the extent and in the manner indicated above.

M.B.A. Appeal accepted.