Grameen Telecom Ltd. Vs. Commissioner of Taxes, Dhaka [4 LNJ (2015) 28]

Case No: I.T. Ref: Application No. 7 of 2006

Judge: A. F. M. Abdur Rahman,

Court: High Court Division,,

Advocate: Mr. Sarder Jinnat Ali,Mr. Md. Delwar Hossain,Mr. Abdur Rahim Bhuiyan,,

Citation: 4 LNJ (2015) 28

Appellant: Grameen Telecom Ltd.

Respondent: Commissioner of Taxes, Dhaka

Subject: Income Tax,

Delivery Date: 2012-07-10

HIGH COURT DIVISION
(SPECIAL ORIGINAL JURISDICTION)
 
A. F. M. Abdur Rahman, J.
And
F. R. M. Nazmul Ahsan, J

Judgment on
10.07.2012
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Grameen Telecom Ltd., represented by its Managing Director, Mr. M. Khalid Shams, Grameen Bank Bhaban, Section-2, Mirpur, Dhaka.
... Assesseee-Applicant
-Versus-
The Commissioner of Taxes, Zone-3, 35 Pioneer Road (Ayesa Manjil), Kakrail, Dhaka.
... Respondent
 
Income Tax Ordinance (XXXVI of 1984)
Section 35 (4)
In discarding the books of Account of the Company on the reasoning that such account was not verifiable without disputing the method of accounting was not correct when the company submitted all the relevant documents before the DCT concerned through which the entire accounts of the assessee was verifiable but the DCT concerned most arbitrarily assessed the income of the Company violating the provisions of Section 35(4) of the Ordinance of 1984.
In the instant I.T. References the concerned DCT discarded the book of account on the reasoning that the accounts of the company was not verifiable but did not dispute that the method of accounting was not correct. In the absence of such finding, the concerned DCT is not authorized to step into the estimation process. This court has found from the narration of the assessment that all relevant document were submitted before the concerned DCT through which the entire accounts of the assessee was verifiable by the documents as have been filed by the Assessee-applicant before the DCT and the DCT without resorting to those documents, which supported the total income and the GP of the company most arbitrarily assessed the income of the Assessee-applicant company along with the GP which is complete violation of the provisions of Section 35(4) of the Income tax ordinance 1984...(38)

Income  Tax Ordinance (XXXVI of 1984)
Section 35 (4)
The settlement being a mandatory exercise under the agreement dated 18.10.2001 executed in between the assessce and the Nokia HK Limited which is required to be taken into consideration by the DCT but it most arbitrarily ignored the supporting documents filed by the assessee regarding bad debt of its non-realization. The DCT was bound to take into consideration exercising his discretion available under section 35(4) of the Ordinance of 1984.
The  reason for such non action against the principal of the Assessee-applicant appears to be cogent as the Assessee-Applicant was required to continue with the business with his Principal Nokia Limited and all the dispute regarding the debt with his principal has to be settled by private negotiation in order to keep the business relation running with the principal and that settlement being a mandatory exercise under the agreement dated 18th October, 2001, executed in between the Assessee-Applicant and the Nokia HK Limited, the same is required to be taken into consideration by the DCT who most arbitrarily ignored the supporting documents as have been filed in respect of bad debt and its non-realization. These being the reality in the business world, the DCT was bound to take the matter into consideration upon exercising his discretion available under the provision of section 35(4) of the Income Tax Ordinance 1984.    . . . (42)

Titas gas (T & D) Company Limited Vs. Commissions of taxes, 53 DLR 209; Eastern Handware Store Vs. Commissioner of Taxes, 54 DLR 125: Commissioner of Taxes Vs. M/S Ata Hossain Khan Limited, 29 DLR (AD) 141, Mark Builder limited Vs. Commissioner of Taxes, 53 DLR 463 58 DLR 531 and 34 DLR (AD) 298 ref.

Mr. Sarder Jinnat Ali, Advocate with
Mr. Md. Delwar Hossain, Advocate
. . . For the Assessee-applicant
Mr. Abdur Rahim Bhuiyan, DAG with
Mrs. Mahfuza Begum, AAG
. . . For I. T. Department.

I.T. Ref: Application No. 7 of 2006 with
I.T. Ref: Application No. 62 of 2007 with
I.T. Ref: Application No. 248 of 2006 with
I.T. Ref: Application No. 490 of 2007 and
I.T. Ref: Application No. 417 of 2008
 
JUDGMENT
A. F. M. Abdur Rahman, J.
 
These Income Tax References under section 160 of the Income Tax Ordinance 1984, being I.T. Reference No. 7 of 2006, I.T. Reference No. 62 of 2007, I.T. Reference No. 248 of 2006, I.T. Reference No. 417 of 2008 and I.T. Reference No. 490 of 2007, having related to similar factual aspect and similar question of law, as formulated by the Assessee-Applicant under the Provisions of Section 160(1) of the Income Tax Ordinance 1984, have been heard one after another and now disposed off by this single judgment.
 
The Facts of the Case:
 
The Assessee-applicant company Grameen Telecom Ltd. is a company incorporated under the Companies Act 1994 and deals in business of telecommunication development and modernization sector. It being the income tax Assessee of Company Circle No. 7, Taxes Zone 3, Dhaka, regularly files income tax return of its income and in course of such filing the dispute arose in respect of the  assessment of income for the assessment year 2003-2004, 2004-2005 and 2005-2006 in Deputy Commissioner of Taxes (DCT) level which prompted the Assessee-applicant to file two unsuccessful appeal firstly before the Commissioner of taxes (Appeal) and further to the Taxes Appellate Tribunal upon which the Assessee-Applicant formulated the question as mentioned later seeking an opinion of this court under the Provisions of Section 160 of the Income Tax Ordinance 1984.
 
The dispute involved in I.T. Reference Application No. 7 of 2006 relates to the assessment year 2003-2004 and arose out of the order dated 29.9.2005 passed in I.T. A. No. 748/2005-2006 by the Taxes Appellate Tribunal, Division Bench-2 Dhaka and I.T. Reference Application No. 248 of 2006 is also for the same assessment year 2003-2004 reassessed by the concerned DCT on the basis of the judgment dated 2.7.2005, passed by the Commissioner of Taxes (Appeal) in Appeal No. 942/coy-7/tax zone-3/2004-2005 arising out of the earlier assessment made by the DCT and ultimately preferred against the order dated 27.3.2006 passed in ITA No. 3015/2005-2006 by the Taxes Appellate Tribunal, Division Bench-1, Dhaka.
 
The dispute involved in I.T. Reference Application No. 62 of 2007 relates to the assessment year 2004-2005 and  arises out of the judgment dated 29.10.2006, passed by the Taxes Appellate Tribunal, Division Bench No. 1, Dhaka, in I.T. A. No. 233 of 2007.
 
The dispute involved in I.T. Reference Application No. 490 of 2007 relates to the assessment year 2005-2006 and arose out of the judgment dated 26.6.2007, passed by the Taxes Appellate Tribunal, Division Bench No. 3, Dhaka, in I.T. A. No. 5287 of 2006-2007.
 
The dispute involved in I.T. Reference application NO. 417 of 2008 arose out of the judgment passed by the Taxes Appellate Tribunal, Division Bench-3, Dhaka in ITA No.3680/2007-208 which was previously arose from the reassessment of income for the assessment year 2005-2006 by the concerned DCT on the basis of remand order passed in ITA No. 3680/2007-2008 by the aforesaid taxes Appellate Tribunal Bench.
 
In all these Income Tax reference applications question as to the legality of the judgment passed by the lower Appellate authorities have been raised seeking an opinion from this court. To that extent in I.T. reference application No. 7 of 2006 the following questions of law have been formulated by the Assessee-Applicant;
  1. whether on the facts and in the circumstances of the case the Tribunal was legally justified under Section 159(2)/35/29(1)(29)(1)(xxvi) of the Income Tax Ordinance 1984 except statutory disallowances in confirming/reducing expenses claimed in the profit and loss accounts, as reduced/confirmed by the commissioner (Appeals), instead of deleting the same in full in as much as the disallowances made without pin-pointing any defects in the accounts and without rejecting books of accounts.
  2. Whether in the facts and on the circumstances of the case the Tribunal was legally justified under Section 159(2)/35 of the Income Tax Ordinance 1984 in maintaining estimate of higher sales and higher GP resulting enhancement of income and further in maintaining estimate of other receipt and miscellaneous income, without rejecting the audited statement of accounts, the method of accounting regularly employed by the Applicant and without any finding, in particular, in that, income cannot be deduced from the accounts submitted and the Applicant having complied with the Provisions of Section 35(3) of the Income Tax Ordinance 1984.
 
The questions of law formulated in I.T. Reference Application No. 248 of 2006 are as follows;
  1. Whether in the facts and on the circumstances of the case the Tribunal under Section 159(2)/35 is judicious holding the opinion that CT(A) is justified in maintaining excess income charging gross profit on VAT and royalty charge payable to the government, as income of the Applicant.
 
The question of law formulated in I.T. Reference Application No. 62 of 2007 is as follows;
  1. Whether on the facts and in the circumstances of the case the Tribunal under Section 159(2)/35(3) of the Income Tax Ordinance 1984 in maintaining additions in excess of the income earned from sale of handsets applying a rate of gross profit on conjecture and surmise without pin-pointing defect in the audited accounts and in the regular method of accounting employed by the applicant and while the Applicant complied with the requirement of Section 35(3) of the Income Tax Ordinance 1984.
  2. Whether on the facts and in the circumstances of the case the Tribunal under Section 159(2)/35 of the Income Tax Ordinance 1984 in ignoring the books of accounts, is judicious in maintaining excess estimated receipts under the heads (a) Commission from Grameen Phone Limited (b) service charge from handset repairs (c) Itemized bill (d) reconnection fees (e) waste papers sale (f) Mobile Phone rent without having pointed out the defects in the method of accounting and without rejecting the accounts.
  3. Whether on the facts and in the circumstances of the case the Tribunal under Section 159(2)/29 of the Income tax Ordinance 1984 except statutory disallowances, is judicious in maintaining disallowances and that were made without notice under Section 30A and without pin pointing specific defect in the accounts.
 
The questions of law formulated in I.T. Reference Application No. 490 of 2007 are as follows;
  1. Whether on the facts and in the circumstances of the case the Tribunal under Section 159(2)/35(3)/29(1)(xxvi) was justified in upholding the disallowance of business expenditure except statutory disallowance and also the expenditure in the nature of commercial expediency spent wholly for the purpose of the business promotion and spent during the year.
  2. Whether on the facts and in the circumstances of the case the Tribunal under Section 159(2)/35(3)/29(1) was justified in maintaining application of higher GP resulting enhancement of income and further in maintaining estimate of other receipts without rejecting the audited statement of accounts, method of accounting regularly employed by the applicant and without any finding, in particular, in that, income cannot be deduced from the accounts submitted and the applicant having complied with the Provisions of Section 35(3) of the Income Tax Ordinance 1984.
 
The question of law formulated in I.T. Reference Application No. 417 of 2008 is as follows;
  1. Whether on the facts and in the circumstances of the case the tribunal under Section 159(2)/29 was justified in upholding the disallowance under the head “ Bad debt written off” simply on the ground that the applicant had to institute the suit despite of mutual settlement by and between the parties in dispute.
 
Upon service of notice, these I.T. References were contested by the Income Tax department through the learned Deputy Attorney General Mr. Abdur Rahim Bhuiyan who submitted affidavit-in-oppositions in all these I.T. References in more or less in similar assertions wherein it has been asserted that the questions which have been raised by the Assessee-Applicant are absolutely factual and involves no point of law for which those deserve no consideration by this bench; the grounds as have been taken by the Assessee-applicant are defective, misleading and misconceived and not related to the finding of the lower appellate authority and therefore not tenable in the eye of law; the Assessee-applicant having raised irrelevant, untenable and unnecessary contentions, the application in all these references are liable to be rejected and no answer need to be given to the question raised or if given may be given in favour of the tax department.
 
The learned Advocate Mr. Sarder Jinnat Ali, appeared on behalf of the Assessee-applicant while the learned Deputy Attorney General Mr. Abdur Rahim Bhuiyan represented the income tax department at the time of hearing.
 
The learned Advocate Mr. Sarder Jinnat Ali, appearing on behalf of the Assessee-applicant while explained the back grounds of these references taken us through the original assessment orders and the impugned appellate judgments and strenuously argued that the concerned DCT while making the basic assessment violated the Provisions of Section 29(1)27 and 35(3) of the income tax ordinance 1984 in as much as the amount of expenses which has been disallowed by the DCT concerned are business expenditure and that the Assessee-applicant being a company filed with the return the audited accounts certified by the chartered Accounts, but the commissioner of Taxes(Appeal) as well as the Taxes Appellate Tribunal did not pay any heed to it and reduced the amount of disallowance mechanically without entering into the legality of such assessment and as such committed gross illegality in confirming/reducing the disallowances made by the DCT in the profit and loss account, instead of deleting the same in full, in as much as the business of the Assessee-applicant comes from the sale of Air time of mobile phone and also the hand set of mobile phones and accessories which are being imported under an agreement with the principal abroad ‘The Nokia’
 
The leaned Advocate Mr. Sarder Jinnat Ali further argued that the Assessee-applicant company having maintains regular books of accounts under the admitted mercantile system of accounting, the concerned DCT without pin pointing any defect in the method of accounting ignored the book version of the accounts which being violative of the Provisions of section 35(4) of the Income Tax Ordinance 1984, is required to be considered by this court in answering the question in negative as has been formulated by the Assessee-applicant and in favour of the Assessee-Applicant. The learned Advocate Mr. Sarder Jinnat Ali contend that the method of accounting of the income of the Assessee-applicant  company, being audited by the statutory auditors and confirmed by the Board of Directors of the Assessee-applicant company, which conforms with the standard of accounting and accordingly the concerned DCT was bound to accept the same under the provision of section 35(2) of the Income Tax Ordinance 1984 and if the DCT disputes any item of the accounts he should at the time of assessment must pin point the same and shall attempt to be satisfied by observing the provision of section 43(2) of the Income Tax Ordinance 1984 and shall attempt to be satisfied by observing the provision of section 43(2) of the Income Tax Ordinance and cannot arbitrarily reject any of the item. But in the instant case the concerned DCT most illegally and arbitrarily rejected the books of accounts of the Assessee-Applicant in respect of the expenditure and the commissioner of Taxes (Appeal) though reduced some of the disallowances, but the Taxes Appellate Tribunal without rejecting the entire disallowances affirmed the decision of the Commissioner of Taxes (Appeal) and as such the same is required to be considered by this court and the question which has been formulated by the Assessee-applicant  in this respect is required to be answered in negative and in favour of the Assessee-applicant.
 
In this respect the learned Advocate Mr. Sarder Jinnat Ali relied upon the decision of the case of Titas Gas (T&D) Company Limited-Vs-Commissioner of Taxes reported in 53 DLR 209 and also relied on the case of Eastern Hardware Store-Vs-Commissioner of Taxes reported in 54 DLR 125. He further relied on the case of Commissioner of Taxes-Vs-M/S. Ata Hossain Khan Limited reported in 29 DLR(AD) 141.
 
The learned Advocate Mr. Sarder Jinnat Ali further argued that the discretion which can be exercised by the DCT in respect of disallowances must be exercised within the frame work of the legal sanction and in the instant case the DCT most arbitrarily rejected the expenses and assessed the income of the Assessee-Applicant company in a manner which prejudiced the Assessee-Applicant  not only in the finalization of its account to be placed before its share holders, but also in respect of payment of income tax by the company as the amount in arbitrary assessment of income goes beyond the actual income of the company for a particular year. The learned Advocate Mr. Sarder Jinnat Ali contended that the discretion of statutory authority, particularly in the taxation matter, is not a unlimited discretion but should be exercised within the periphery of the legal sanction. In this respect the learned Advocate Mr. Sarder Jinnat Ali relied on the case of Mark Builder Limited-Vs-Commissioner of Taxes reported in 59 DLR 463.
 
The learned Advocate Mr. Sarder Jinnat Ali finally argued that the DCT concerned most arbitrarily rejected the claim of the Assessee-Applicant regarding the written off bad debt in the books of accounts, which violated the Provisions of Section 29(1)(XV) of the Income Tax Ordinance 1984 and as such the question as has been formulated by the Assessee-Applicant in this respect is required to be answered in negative and in favour of the Assessee-applicant.
 
On the other hand the learned Deputy Attorney General Mr. Abdur Rahim Bhuiyan, appearing on behalf of the Taxes Department argued that the Taxes Appellate Tribunal was legally justified in not accepting the books of accounts submitted by the Assessee-applicant company as the concerned DCT pointed out specific and material defects in the accounts submitted by the Assessee-applicant Company, upon examination of the books of accounts, bills, vouchers and other related papers and the documents which the concerned DCT found unverifiable and tainted with excessive claim with lack of details of the expenses claimed in the Profit & loss Account, sales or receipt of trading expenses.
 
The learned Deputy Attorney General argued that the gross profit disclosed in the account can be accepted only where books of accounts are found proper, regular and verifiable in accordance with the accounting principal as per Provisions of Section 35(2) of the Income Tax Ordinance 1984. But if the true and correct picture of income profit and gains cannot be ascertained on the basis of the produced materials, it would be the duty of the concerned DCT to discard the accounting method wholly or in part and to adopt the method of his own as per provisions laid down in clause-C sub-Section 4 of the Section 35 of the Income Tax Ordinance 1984.
 
The learned Deputy Attorney General Mr. Abdur Rahim Bhuiyan finally argued that the Taxes Appellate Tribunal was legally justified in upholding the disallowance made by the concerned DCT under the head of written off bad debt, since the DCT after examination of the bad debt allowed partial amount which were found authentic and verifiable as against total bad and not receivable debts claimed by the Assessee-applicant and therefore the order passed by the tribunal is really in accordance with law.
 
In support of his arguments the learned Deputy Attorney General referred the decisions reported in 58DLR 531, 34DLR(AD) 298 and submitted that those decision established the law as to the point raised in these Income Tax References.
 
We have heard the learned Advocate, perused the materials on record and the impugned judgments.
 
In all these I T Reference applications one most pertinent question has been raised as to the legality or to extent of latitude available to the DCT as to ignoring the book version of the accounts maintained by the Assessee-applicant when no dispute as to the method of accounts was raised by the assessing officer.
 
The power of the Deputy Commissioner of Taxes (DCT) to ignore the book of accounts of the Assessee-applicant comes from the provision of section 35(4) of the Income Tax Ordinance 1984, which runs as follows; 
 
Income Tax Ordinance 1984
Section 35: Method of accounting
  1. All income classifiable under the head “Income from business or profession” or “Income from other sources” shall be computed in accordance with the method of accounting regularly employed by the Assessee.
  2. Notwithstanding anything contained in sub-section (1), the Board may, in the case of any business or profession, or class of business or profession, or any other source of income, or any class of persons, by a general or special order, direct that the accounts and other documents shall be maintained in such manner and form, and that payments of commercial transactions recorded in such manner, as may be prescribed or as may be specified in such direction; and thereupon the income of the Assessee shall computed on the basis of the accounts maintained, payments made and transactions recorded accordingly.
  3. Without prejudice to the preceding sub-sections, every public or private company as defined in [the Companies Act, 1913 (VII of 1913) or ­L¡Çf¡e£ BCe, 1994 (1994 p­el 18 ew BCe)] shall, with the return of income required to be filed under this Ordinance for any income year, furnish a copy of the trading account, profit and loss account and the balance sheet in respect of that income year certified by a chartered accountant.
Where— 
 (a) no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Deputy Commissioner of Taxes, the income of the Assessee cannot be properly deduced therefrom; or
(b) in any case to which sub-Section (2) applies, the Assessee fails to maintain accounts, make payments or record transactions in the manner directed under that sub-Section; or
(c) a company has not complied with the requirements of sub-Section (3);
the income of the Assessee shall be computed on such basis and in such manner as the Deputy Commissioner of Taxes may think fit.

Sub-section 3 or Section 35 in particular provides as follows;
“without prejudice to the preceding sub-Sections, every public or private company as defined in the Companies Act 1913 (VII of 1913) or ­L¡Çf¡e£ BCe, 1994 (1944 p¡­ml 18 ew BCe) shall, with the return of income required to be filed under this Ordinance for any income year, furnish a copy of the trading account, profit and loss account and the balance sheet in respect of that income year certified by a chartered accountant.”
 
It appears that several disput upon such power of the DCT, exercised erroneously, were raised before this court and the question as has been formulated in this I.T. References, has already been answered in many other previous cases by this Division and also by the apex court of the country one of which is the case of Titas Gas (T&D) Company Limited-Vs-Commissioner of Taxes, decided by the High Court Division and reported in 53 DLR 209, wherein his lordship Mr. Justice Syed Amirul Islam, in a bunch I.T. References applications, decided the similar points where his lordship expressed that;
“The legal position is that in the computation of income profit and gains of a company, the DCT is entitled to reject the books of account if he is of the opinion that no method of accounting has been regularly employed by the assessee or if the method employed is such that the income of the assessee cannot be properly deduced there from or that a company has not complied with the requirement of sub-section (3) of Section 35 of the Ordinance.”
 
Similarly in the case of Eastern Hardware Store-Vs-Commissioner of Taxes reported in 54 DLR 125 his lordship Mr. Justice Syed Amirul Islam again on a similar point in an I. T. reference application held as under;
“As the Appellate Additional Commissioner of Taxes did not find any defect either with the method of accounting or in the accounts, neither of them can resort to estimation under Section 35(4)(a) of the Ordinance (1984) and thereby both of them acted illegally and that illegal order has been mechanically affirmed by the Appellate Tribunal which cannot be sustained in law.”
 
Further in the case of Mark Builders Limited-Vs-Commissioner of Taxes reported in 53 DLR 463, his lordship Mr. Justice Md. Abdur Rashid in a similar question upon the provision of section 35(4) of the Income Tax ordinance 1984 raised in I.T. Reference applications, very eloquently decided the point as to the discretion of the assessment officer in rejecting the book version of the accounts of an assessee and held as under;
Under sub-Section (4) of Section 35 of the Ordinance, the Deputy Commissioner of taxes has got power to compute the income on such basis and in such manner as he thinks fit only where (a) no method of accounting has been regularly employed by an assessee being a company or (b) if the method employed is such that in the opinion of Deputy commissioner of taxes the income of the assessee cannot be deduced or (c) a company has not complied with the requirements of sub-Section (3). So, in the absence of any of the above grounds the Deputy commissioner of taxes has got no power to compute the income on any basis or in any manner he thought best.  
 
The aforesaid decision although have settled the point and we found no reason to disagree, yet for our self when we further examined the matter found that the  aforesaid provision of section 35(3) of the Income Tax Ordinance 1984 mentioned about the limited company’s account for which we examined the provision of accounts affair of a limited company as provided in companies Act 1994. In the instant case it has not been disputed that the Assessee-applicant has not filed its audited account regarding trading account, profit and loss account and the balance sheet before the concerned DCT which proves that Assessee-applicant maintaining it account in Mercantile system of accounts. Such method of account of limited company, incorporated under companies Act 1994, is being mandatorily employed under the Provisions of Section 181 of the Companies Act 1994 which mandates a limited company to maintain its books of accounts in certain manner. The provision of section 181 of the companies Act 1994 reads as follows;

Companies Act 1994 
Section 181: Books to be kept by company and penalty for not keeping them:--
(1)Every company shall keep proper books of account with respect to—
(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;
(b) all sales and purchases of goods by the company;
(c) the assets and liabilities of the company; and
(d) in the case of a company engaged in production, distribution, marketing, transportation, processing, manufacturing, milling, extraction and mining activities, such particulars relating to utilization of material, labour and other items of overhead cost.
(2) For the purpose of sub-section (1), proper books of account shall not be deemed to be kept with respect to the matters specified therein if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company and to explain its transactions.
(3) The books of account shall be kept at the registered office of the company and shall at all times be open to inspection by directors during business hours;
Provided that all or any of the books of account may, for a period not exceeding six months, be kept at such other place in Bangladesh the board of Directors may decide and when the board of Directors so decides, the company shall within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.
(4) Where a company has a branch office, whether in or outside Bangladesh, the company shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns, made up to date at intervals of not more than three months, are sent by the branch office to the company at its registered office of the other place referred to in sub-section (3).
(5) The books of account of every company relating to a period of not less than twelve years immediately proceeding the current year together with vouchers relevant to any entry in such books of account shall be preserved in good order:
Provided that in the case of a company incorporated less than twelve years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account shall be so preserved.
(6) if any of the persons referred to in sub-section (7) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has, by his own willful act, been the cause of any default by the company there under, he shall, in respect of each offence, be punishable with imprisonment for term which may extend to six months or with fine which may extend to five thousand taka or with both.
 
The company, so maintaining its books of account, is required to place the same before the Board of Director at its Annual General Meeting as provided under Section 183 of the Companies Act 1984, which runs as follows;

Companies Act 1994
Section 183: Annual balance sheet: (1) The Board of Directors of every company shall, at every annual general meeting held in pursuance of section 81, lay before the company a balance sheet together with the profit and loss account or in the case of a company not trading for profit an income and expenditure account for the period specified in sub-section (2) of the Section.
The said profit and loss account or the income and expenditure account shall be prepared for the following period, namely:--
in the case of the first annual general meeting for the period beginning with the late of incorporation of the company and ending on a date which is within nine months preceding the date of the meeting; and
in the case of any subsequent annual general meeting, for the period beginning with the date immediately after last account and ending on a date which is-
a date within nine months preceding such meeting: or in the case of a company carrying or business or having interest outside Bangladesh, a date within twelve months preceding the date of such meeting: or
in a case where and extension of time has been granted for holding the meeting under section 81, a date within the said nine or twelve months, as the case may be, preceding the date of holding such meeting under that section.
 
Section 184 of the companies Act 1994 further provides that there shall be attached to every balance sheet of the company, laid before the company in general meeting, a report by its Board of Directors with respect to (a) the state of the companies affairs, (b) the amount, if any, which the Board proposes to carry to any reserve in such balance sheet (c) the amount, if any, which the Board recommends should be paid by way of dividend, (d)  material change and commitments if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet related and the date of the report.
 
Section 185(1) of the Companies Act 1994 further provides that the balance sheet of a company shall contain a summary of the property and assets and liabilities of the company giving a true and fare view of the affairs at the end of the financial year and it shall subject to the provision of Section 185 of the companies Act 1994 of the companies Act 1994, be in the form provided in part one of the schedule 1 of the Companies Act 1994 which will give a true picture of profit and loss account of a company and the said balance sheet, profit and loss account of a company shall not be treated as not disclosing a true and fare view of the state of affairs of the company.
 
It appears that the balance sheet, loss and profit accounts and the trading accounts of a company is further required to be submitted before the Registrar of Joint Stock Companies and Firms under the provisions of Section 190 of the companies Act 1994 which provides as follows;

Companies Act 1994
Section 190: Copy of balance-sheet, etc. to be filed with Registrar: (1) After the balance sheet and profit and loss account or the income and expenditure account, as the case may be, have been laid before a company at an annual general meeting as aforesaid, there shall be filed with the Registrar, within thirty days from the date on which the balance sheet and the profit and loss accounts were so laid, or where the annual general meeting of a company for any year has not been held, there shall be filed with the Registrar within thirty days from the last day on which that meeting should have been held in accordance with the provisions of this Act three copies of the balance-sheet, and of the profit and loss account or the income and expenditure account, as the case may be signed by the managing director, managing agent, manager or secretary of the company or if there be none of these, by a director of the company, together with three copies of all documents which are required by this act to be annexed or attached to such balance-sheet or profit and loss account or income and expenditure account:
Provided that in the case of a private company, copies of the balance-sheet and copies of the profit and loss account shall be filed with the Registrar separately:
Provided further that in the case of a private company which is not an subsidiary of a public company, no person other than a member of the company shall be entitled to inspect or to obtain copies of the profit and loss account of that company.
  • If the annual general meeting of a company before which a balance-sheet is laid as aforesaid does not adopt the balance-sheet or, if the annual general meeting of a company for any year has not been held a statement of that fact and of the reasons therefore shall be annexed to the balance-sheet and to the copies thereof required to be filed with the Registrar.
  • If a company makes default in complying with the requirements of this section, it shall be liable to a fine not exceeding one hundred taka for every day during which the default continues, and every office of the company who knowingly and willfully authorizes or permits the default shall be liable to the like penalty.
 

All these provisions relating to accounts of a limited company have been made with a view to safe guarding the share holders of a limited company from being defrauded by the directors of the company where all these provisions were strictly absurd there the share holders of the limited companies are safe guarded from any such fraudance which practically mandates a company to make true and genuine account. In all these provisions of the companies Act 1994 is allowed to be ignored by the DCT on its latitude to exercise discretion available in section 35(4) of the Income Tax Ordinance 1984, then one set of provision of law will be frustrated which can not be the intention of the legislature which formulating the provision of subsection (4)c.
 
Admittedly the Assessee-Applicant is a private limited company. It has submitted its audited accounts made by the charted accountant pursuant to the requirement of the companies Act 1994 on the basis of the books of account, profit and loss account, trading account and the balance sheet and all these documents were submitted before the concerned DCT. As to the acceptability of Book of account of a company, it has been mentioned by their lordship in the case of Mark Builders Limited-Vs-Commissioner of Taxes reported in 59 DLR 463, upon perusing the case of Appollo tyres Ltd. –vs- Commissioner of Income Tax reported in (2003) 255 ITR No. 273, that the Supreme Court of  India enunciated the principal regarding the acceptability of Books of accounts of a company under the provision of section 115 of the (Indian) Income Tax Act 1961, prevailing in India, in the following manner;

“While so looking into the accounts of the company, an Assessing officer under the Income Tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by the statutory auditor and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of company who has statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirement of Companies Act.” 

 
It has been further stated in the said judgment that under Section 115(j) (1) the (Indian) Income Tax Act 1961, the income tax official shall accept the book profit in the case of an assessee, being a company if such company (i) maintains the accounts in accordance with the Provisions of the Companies Act (ii) scrutinized and certified by statutory auditors and (iii) approved in the general meeting of the company and (iv) examined and certified by the Registrar of companies. It has been further stated;

“that under the Indian Law there cannot be two incomes, one for the purpose of the Companies Act and the other for the income tax since both are maintained under the same Act; the Assessee officer has only power to examine whether the books of accounts are certified by the statutory authority to have been properly maintained under the Companies Act then, the assessing officer has limited power to increase or decrease under the explanation supplied in this Section; In view of such statutory scrutiny, examination and approval of the income at different stages, the assessing officer there enjoys little or no discretion in the assessment of income of a company”.
 
His lordship Mr. Abdur Rashid in the aforesaid Mark Builders case although found that the such principal as stated by the Supreme Court of India regarding the acceptability of books of account, profit and loss account by the assessing officer cannot be applicable in our law of income tax for lack of aforesaid stated scrutiny, examination and approval, yet the procedure as has been laid down in Companies Act 1994 to follow as to the approval of company accounts is not a futile exercise. The account which has been approved by the Board of the company, as the legislator in the provision of section 35(3) of the Income Tax Ordinance made provisions  for submission of such audited account along with the Income Tax return, cannot be brushed aside and ignored altogether by the Income Tax Authority unless the DCT concerned leave no stone unturned to satisfy itself, specially after serving notice under the provision of section 43(2) of the income tax ordinance, as to the explanation of the account supported by proper document. This satisfaction at the DCT concerned must be made apparent on the assessment clearly and not by making vague statement that the account is not verifiable.  It has been said by his lordship, to which we do also concur, that the latitude available to the DCT under section 35 of the Income Tax Ordinance 1984 is no doubt very wide, but can not be thought to be without any restraint in the process of assessment of the total income of an assessee under section 83(2) of the Income Tax Ordinance 1984. Discretion available to statutory authority under the statute allowing exercise of statutory power, particularly in the fiscal matter, if thought to be unlimited, then exercise of such discretion may result in arbitrariness and selectively. This discretion can only be applied if not only when the accounts itself is of such nature that the DCT is unable to deduce the actual income of the assessee, but also that the affairs surrounding the accounts of the company does not support the accounts as true as prepared by the company. Unless the DCT found any defect in the method of the accounting it can not discard the account on his own surmise and conjecture. The defect must be clearing described in particular term and not vague.
 
In the instant I.T. References the concerned DCT discarded the book of account on the reasoning that the accounts of the company was not verifiable but did not dispute that the method of accounting was not correct. In the absence of such finding, the concerned DCT is not authorized to step into the estimation process. This court has found from the narration of the assessment that all relevant document were submitted before the concerned DCT through which the entire accounts of the assessee was verifiable by the documents as have been filed by the Assessee-applicant before the DCT and the DCT without resorting to those documents, which supported the total income and the GP of the company most arbitrarily assessed the income of the Assessee-applicant company along with the GP which is complete violation of the provisions of Section 35(4) of the Income tax ordinance 1984.
 
We have found that the parameter of discretion to be exercised by the DCT has already been decided by the different decisions of this court and therefore the question as has been raised before this court in these references, excepting the I.T. Reference No. 417 of 2008, is required to be answered in negative and in favour of the Assessee-applicant.
 
So far the question formulated in I.T. Reference No. 417 of 2008 it appears that the DCT has stated a reason for not allowing a part of the bad debt written off from the companies books of account as deduction in the following context:
“কোম্পানীর ক্ষমতাপ্রাপ্ত প্রতিনিধি জনাব জে, আর, চৌধুরী, এফ, সি, এ, হাজির হইয়া বিবেচ্য বর্ষে মন্দ ও কুঋণের সৃষ্ট সঞ্চিতি এবং মন্দ ও কুঋণ অবলোপনের সমর্থনে একটি বিবরনী এবং তৎসমর্থনে কিছু প্রমানাদী দাখিল করেন। দাখিলকৃত তথ্য/ প্রমানাদী পরীক্ষা দেখা যায় যে, এস, আর, কে, এন্টারপ্রাইজ কে =১,০৮,৭৪৫/- টাকার জন্য, বুশরা ইন্টারন্যাশনাল কে =২১,৫০০/- ঢ~াকার জন্য, ওয়ান স্টপ সপ কে =৮৪,৮৩৮/- ঢ~াকার জন্য এবং বি,আই,টি,এস,লিমিটেড কে =১,১৪,৭২৫/- টাকার জন্য লিগ্যাল নোটিশ প্রদান করা হইয়াছে। এছাড়া অন্যান্য দেনাদারদের বির্রদ্বে কোন আইনি পদক্ষেপ গ্রহনের প্রমান বিদ্যমান নাই। ফলে এস, আর, কে, এন্টারপ্রাইজ এর বিপরীতে অবলোপনকৃত =১,০৮,৭৪৫/- টাকা, বুশরা ইন্টারন্যাশনাল এর বিপরীতে অবলোপনকৃত =২১,৫০০/-, ওয়ান ষ্টপ সপ এর বিবরনীতে অবলোপনকৃত =৮৪,৮৩৮/- এবং বি,আই,টি,এস, এর বিপরীতে অবলোপনকৃত =১,১৪,৭২৫/- টাকা।মোট অবলোপনকৃত ৩,২৯,৮০৮ টাকা প্রকৃত খরচ হিসাবে অনুমোদন করা হইল”

But in the same assessment the DCT ignored the other part of written off bad debt on the ground that since the Assessee-Applicant has not taken any legal step for realizing the debt from his principal Nokia, the same cannot be taken into consideration as a bad debt and accordingly the same has been added to the income of the Assessee-Applicant.
 
But this court finds that the  reason for such non action against the principal of the Assessee-applicant appears to be cogent as the Assessee-Applicant was required to continue with the business with his Principal Nokia Limited and all the dispute regarding the debt with his principal has to be settled by private negotiation in order to keep the business relation running with the principal and that settlement being a mandatory exercise under the agreement dated 18th October, 2001, executed in between the Assessee-Applicant and the Nokia HK Limited, the same is required to be taken into consideration by the DCT who most arbitrarily ignored the supporting documents as have been filed in respect of bad debt and its non-realization. These being the reality in the business world, the DCT was bound to take the matter into consideration upon exercising his discretion available under the provision of section 35(4) of the Income Tax Ordinance 1984.
 
It appears that the two appellate authority did not resort to the provision of law, rather on mere mercy reduced disallowance as made by the DCT concerned as such this court finds that the judgment passed by the lower appellate authority can not be sustained.
 
Upon the discussion and reasoning as above, this court finds merit in the I.T. References and the question as have been formulated in these references for answering in negative.
 
Therefore, the questions as have been formulated in all these I.T. References are answered in negative and in favour of the Assessee-Applicant. The taxes appellate Tribunal shall take step in accordance with the provision of section 161(2) of the Income Tax Ordinance 1984 and dispose of the impugned cases in the light of the instant judgment.

Accordingly, the References succeeds. However there shall be no order as to costs.

Ed.

Reference: 4 LNJ (2015) 28