2010 PLP (Trib (PTD)

CH. NAZIR AHMAD (ACCOUNTANT MEMBER).

These cross appeals have arisen out of CIT(A)'s Order No. 365, dated 4-4-2009, whereby, he had upheld selection of the case for audit under section 177, but deleted the levy of additional tax under sections 161/205, as well as allowed partial relief by restricting the add backs ranging from 15% to 25% of the claim. The taxpayer has challenged such decision by the first appellate authority on the following grounds: -- "(i) That the selection, of the case of your appellant under clauses (b) and (d) of subsection (4) of section 177 was made without issuing show-cause notice is illegal and ab initio void. (ii) That the selection of the case of your appellant under clauses (b) and (d) of subsection (4) of section 177 of the Income Tax Ordinance, 2001 for the audit on February 27, 2008 is hit by limitation as held by learned Islamabad High Court in case reported at (2008) 98 Tax 178 (H.C. Isl.) = 2008 PTD 1440. (iii) That the selection of the case of your appellant under clauses (h) and (d) of subsection (4) of section 177 was made in the absence of selection of the cases to be made under subsection (2) of section 177 is illegal and ab initio void. (iv) That there is contradiction among section 120, section 12 and section 177, of the Income Tax Ordinance, 2001 as such the selection of the case of your appellant is illegal and against the basic theme of the Income Tax Ordinance, 2001. (v) That the said learned CIT(A) was also not at all justified in not allowing appropriate relief on account of the following add-backs made out of profit and loss expenses claimed which in view of the facts and circumstances of the case is illegal, un warranted and or alternatively still highly excessive: Add back Restricted to (a) Out of Chief Executive Current Account 2,044,602 143,608 (b) Out of Payment through Credit Card 323,460 161,730 (c) Out of continuing Medical Education 1,447,741 434,322 (d) Out of ESSO payments 234,219 140,531 (e) Out of General Packing 1,167,395 350,219 However, at the time of hearing ground at Serial No. (ii) of above paragraph was not pressed. The department on the other hand, has questioned the deletion of additional tax and curtailment of add-backs as mentioned above.

2. Facts of the case, in brief, are that the petitioner's case was selected for audit by the Commissioner, by invoking the provisions of section 177 of the Income Tax Ordinance, 2001. Subsequently, the Taxation Officer started assessment proceedings. The taxpayer was informed about selection of their case for audit. Various details/ documents and books of accounts were requisitioned through Information Document Requests (IDRs)/notice under section 122(9). After going through such information, the Assessing Officer made certain add-backs out of claimed expenses, to the declared income, and also charged additional tax, under sections 161/205 on the basis of observations as contained in his order. On appeal, the learned CIT(A) had upheld the selection under section 177(4) but allowed partial relief to the taxpayer by deleting the additional tax and curtailing the add-backs which was still considered to be inadequate by the taxpayer whereas the department had taken it as an excessive and unjustified relief, hence these petitions.

3. The learned counsel for the taxpayer Hafiz Muhammad Idrees, advocate and Mr. Abdul Basit, FCA have argued that selection of taxpayer's case for audit, in terms of section 177 of the Ordinance was illegal 'ab initio' and non-acceptance of their plea, thereagainst, at the first appeal stage, was tantamount to denial of justice. It was contended the selection of appellant's case for audit in terms of clauses (b) and (d) of subsection (4) of the section 177 of the Ordinance having been made without issuance of prior show-cause notice, was illegal and void. As per the learned AR's arguments selection of the case under clauses (b) and (d) of subsection (4) of section 177 was made in the absence. of criteria required to be laid down under subsection (2) of section

177. Furthermore, it was pointed out that, there was contradiction in the contents and substance of provisions of section 120 section 122 and section 177 of the Ordinance. Provisions of section 122(1) cannot be invoked in the absence of definite information and selection under section 177(4)(b)/(d) cannot be made in the absence of any criteria having been laid down under section 177(2). Hence, the selection as well as superstructure based thereon cannot be justified under the law. The learned counsel for the taxpayer have cited various case law in support of their contention. It was asserted that in the case of CIT v. Fatima Sharif Textile 2009 SCMR 344 = 2009 PTD 37 the Hon'ble Supreme Court had clearly laid down that issuance of notice prior to selection of cases for audit, was necessary. Therefore, respondent's cases were remanded back by the Supreme Court for issuance of fresh notices in terms of section 177 of the Ordinance. In the case of Mohsin Raza v. Chairman F.B.R. 2009 PTD 1507 the Hon'ble High Court, after placing reliance on the 'ratio decidendi' of the judgment in case of CIT v. Fatima Sharif Textile, [with regard to issuance of prior notice for selection of a case for audit], had struck down the departmental action for non-observance 'of norms of natural" justice. Further, by placing reliance on PLD 2008 SC 663, 2007 SCMR 330, 2005 SCMR 778, 2005 SCMR 1814 and PLD 2004 SC 441, the honourable Lahore High Court had, ultimately, opined that selection for audit under clause (d) of subsection (4) of the section 177 of the Ordinance cannot be made by the Commissioner, unless some criteria had duly been laid down in terms of subsections (1)/(2) of section 177, by the F.B.R. It was held that Commissioner could only select cases for audit in addition to selection referred to in subsections (1) and (2) of section 177 and could not act in substitution or in isolation thereof. Hence, the impugned orders passed by the Commissioner were declared to have been issued without any lawful authority and as such the same were of no legal effect. In various other judgments Hon'able Lahore High Court Rawalpindi Bench, while disposing of Writ Petitions Nos.1858/2008, 209/2009, 453/2009, 709/2009, 816/2009 and 1080/2009 vide order dated 17-6-2009, had disapproved the selection for audit in terms of section 177 (4) with the directions that the taxpayers should be allowed an opportunity of being heard prior to selection of their' cases for audit. The learned counsel further cited the honourable Lahore High Court's judgments in Writ Petitions No. 20340/2009 and 20339/9, dated 16-10-2009, as well as in Writ Petition 20306/2009 dated 18-10-2009, which were disposed of in line with judgment passed in Writ Petition No. 4630 of 2008 [now reported as 2009 PTD 1507 in case of Mohsin Raza v. Chairman Federal Board of Revenue and others, cited supra. Furthermore, it was contended on behalf of the appellant that in a number of subsequent judgments pronounced by the Tribunal [such as I.T.A. No.565/1B/09 dated 17-9-2009, I.T.A. No. 476-477/LB/09 dated 11-9-2009, I.T.As. Nos. 601 to 603/IB/2009 dated 17-10-2009 selection of cases under section 177(4) without prior notices to the taxpayers 'and without the F.B.R. having laid down any criteria for selection in terms of subsections (1) and (2) of section 177 was held to be void 'ab initio' and of no legal effect. Thus, concluded the learned ARs that, the instant appeal also be accepted by declaring the selection of their client's case ultra vires the law. On facts, it was pleaded by the learned counsel of the taxpayer that under the Ordinance, 2001, add-backs out of expenses claimed in the profit and loss account could not be made on estimate and percentage basis (varying from 50% to 25% of the claim) using stock phrases. The Assessing Officer had to be specific as to which amount under a particular head of expense did not qualify for allowance as deduction under a specific provision of law. Similarly, it was contended that, the restriction/reduction of such disallowances at first appeal forum from 25% to 15% of the claim was yet an estimate against another which was also not tenable under the law. However, deletion of additional tax per the impugned order was contended to have been ordered in accordance with law. The learned counsel for the taxpayer, in the end, prayed for declaration of selection for audit, of their client's case as well as additions out of the P&L account expenses as not tenable under the law. They also prayed for dismissal of departmental appeal on the issue of deletion of additional tax as well as with regard to add-backs.

4. The learned departmental representatives Messrs Shahid Iqbal advocate and Sardar Ali Khawaja DR, on the other hand, took exception to the rival contentions by placing reliance on the Hon'able Karachi High Court's judgment reported as 2009 PTD 284 in which it was held that prior notice for selection under section 177(4) was not necessary. They have also placed reliance on Islamabad High Court Islamabad's judgment in Writ Petitions 960 of 2008, 550 of 2009, 999 of 2009 and 1006 of 2009 dated 14-7-2009, 2008 PTD 1440 whereby selection of cases for audit in terms of section 177 and subsequent amendment of assessments under section 122 of the Ordinance was upheld. Further, they have contended that leave to appeal filed by the taxpayers against above mentioned judgments of Hon'able Islamabad High Court were dismissed. By the Hon'ble Supreme Court vide Civil Petitions Nos. 1664-1665 of 2009 dated 17-10-2009. It was argued by the learned counsel for the department that before the Hon'able Supreme Court 'inter alia' following question of law was' also referred for seeking leave to appeal: "Whether on the facts and circumstances of the case, the Hon'able Division Bench of Islamabad High Court was justified to ignore the fact that selection of case for audit could not be done without the criteria to be laid down by Federal Board of Revenue as prescribed under section 177(2) of the Ordinance?" It was asserted and vehemently argued that leave to appeal was denied by the Supreme Court meaning thereby that departmental action of selection of case for audit under section 177(4) was vindicated Mr. Shahid Iqbal further mentioned that the controversy as to whether the Commissioner was empowered to select any case for audit has been laid to rest by Ordinance No. XXII of 2009 dated 28-10-2009. Now the Commissioner was made all powerful to select any case for audit without any criteria having been laid down by F.B.R. On merit, the learned representatives of the department took exception to the impugned order with regard to deletion of levy of additional tax under sections 161/205 as well as curtailment of the add-backs out of P&L account expenses which were made at the assessment stage giving detailed and cogent reasons.

5. At this juncture, Hafiz M. Idrees, advocate refuted Mr. Shahid Iqbal's point of view by asserting that leave to appeal had not been rejected by the Supreme Court. Instead, the honourable Court, in agreement with the counsel of the petitioners, disposed of the petitions with the observation that petitioners shall file reply to the show-cause notices before the Commissioner raising the legal objections", available and such objections shall be disposed of before proceeding on merit and thereafter if need be merits of the case shall also be considered. Hafiz M. Idrees asserted that the crux of 'ratio decidendi' in the above referred judgment of the Hon'ble Supreme Court was that prior notice for selection of a case for audit was a pre-requisite. With regard to the Ordinance XXII of 2009 promulgated on 28 October 2009, the learned AR of the taxpayer asserted that the Ordinance was not applicable retrospectively.

6. Finally, the learned counsel for the taxpayer pleaded that it was trite law that in case more than one interpretations were possible on the same provision of a fiscal law, the one favourable to the taxpayer was to be adopted. In this regard, reliance was placed on a case law reported as 1996 SCMR 1470 (Messrs Ebrahim Brothers Ltd. v. Wealth Tax Officer) in which it was held by the Supreme Court that in the matter of interpretation of fiscal statutes, when the language of such statute is ambiguous and several interpretations of the same provisions were possible, doubt should be resolved in favour of the citizen. He therefore, prayed for acceptance of his appeal.

7. After hearing the rival arguments and perusal of the case-law quoted by the learned representatives of both the parties we are of the opinion that the judicial tilt was in favour of the taxpayer and overwhelmingly against the Commissioner's action under section 177(4) specially in the absence of any criteria having been laid down under section 177(1)/(2) by the F.B.R. We are unable to subscribe to the learned Legal Advisor Mr. Shahid Iqbal's assertions that the honourable Supreme Court had rejected the leave to appeal against Islamabad High Court's judgment. For convenience the short order passed by the Supreme Court is reproduced below:-- "Learned counsel for the petitioner agreed for the disposal of the listed petitions if the observations are made that the petitioner shall file reply to the show-cause notices before the Commissioner, Income Tax, raising all legal objections available to him and the legal objections shall be disposed of preferably before proceeding on merit and thereafter if need be, merits of the case shall also be considered." Perusal of the above judgment vindicates Hafiz M. Idrees' point of view that leave to appeal was not rejected. Rather the petitioner's plea of issuance of notice prior to selection was accepted.

8. In our opinion, the legal objections raised against the impugned decision have already been answered (in taxpayer's favour) by the Tribunal in its judgment, I.T.As. Nos. 30 to 32/IB of 2009 dated 25-4-2009 delivered by full bench which was followed in number of subsequent judgment's such as I.T.As. Nos. 476-477/IB of 2009 dated 11-9-2009, No. 816/IB/2009 dated 23-10-2009, whereby selection under section 177(4) as well as subsequent amendment of an order under section 122 has been detested. With regard to the selection of a case for audit under section 177(4), relevant paragraphs viz Nos.2 and 5 of Tribunal's order I.T.As. Nos. 476-477/IB of 2009, (which also takes care of the decision of the honourable Islamabad High Court) read as follows: I.T.As. Nos. 476-477/IB of 2009 "(2) The, arguments put forth in support of the above points have already been duly considered and disposed of by the Lahore High Court in judgment reported as 2009 PTD 1507. In the said judgment the honourable High Court has ultimately held that the selection under the provisions of section 177(4) is illegal for various reasons. The reasons 'inter alia' include that neither a notice has been served prior to the selection of the case for audit nor a criterion was fixed by the F.B.R. to enable to Commissioner to select the case in addition to the, said criteria." "(5) The departmental point of view that in addition thereof has separately been interpreted by Islamabad High Court in a different manner is of no help specially in view of the other infirmity mentioned above. With full respect for the judgment of Islamabad High Court reported as 2008 PTD 1440 re: Messrs Amson Vaccines Pharma (Pvt.) Ltd. v. Commissioner of Income Tax and others since the judgment of Lahore High Court has decided the other issues also the ultimate effect shall remain the same. The decision is that notices issued neither fulfil the legal requirements in terms of criteria nor they contain the detail on the basis of which the case has been selected for audit."

9. Since, we are bound to follow the 'ratio decidendi' of the above referred judgments of the Tribunal, therefore, we hold that the departmental action with regard to selection of the case for audit as well as the passage of amended order under section 122, was ab initio void and of no legal effect. We are also in respectful agreement with honourable Supreme Court's findings that when the language of fiscal statute is ambiguous and several interpretations of the same provision are possible, doubt should be resolved in favour of the citizen (Taxpayer). This view is supported by case-law reported as 1996 SC MR 1470. In the instant case the taxpayer's counsel have supported their contentions by placing reliance on Lahore High Court's decision (2009 PTD 1507), whereas, the learned Legal Advisor and the DR have sought our indulgence in the matter by placing reliance on the Karachi as well as Islamabad High Court's judgments 2009 PTD 284 = (2008, PTD 1440) respectively. All the three honourable High Courts have interpreted the provisions of section 177 of the Ordinance, differently, one having disapproved the action taken under the, said section, while other had upheld the same. Such a situation is covered by the judgment of the honourable Supreme Court. Therefore, with due deference to all the three honourable Courts, we place reliance on the honourable Supreme Court's judgment (1996 SCMR 1470) and decide the matter in favour of the appellant taxpayer, disapproving the selection for audit under section 177(4) of the Ordinance.

10. On merits of the case as well, we are of the opinion that the scheme for disallowance of expenses claimed in the Profit and Loss account was different in Ordinance, 2001 from that provided under the repealed Ordinance, 1979. In this regard subsection (2) of section 174 of Income Tax Ordinance, 2001 stipulates Commissioner's authority as under:

"(2) The Commissioner may disallow or reduce a taxpayer's claim for a deduction if the taxpayer is unable without, reasonable cause, to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction."

11. While disallowing certain percentage of the claimed expenditure, the Taxation Officer has given following 'raison d'etre': Chief Executive Current Account: Payment of Rs.4,089,205 on this account was made on travel and tours of the chief executive of the company. Most of these were foreign tours and this fact was confronted to the taxpayer that these apparently are not business expenses. In reply the taxpayer has stated that the expenses were incurred on the foreign travelling of chief executive but he has attended seminar, meeting, exhibitions in order to procure machinery and to get other know-how of the industry. This argument has some weight but the element of incurrence of the expense for personal purpose cannot be ruled out. The procurement of machinery can be done without foreign visits in this era of technology. These kinds of services are available on net and other modes of communication (underlined for emphasis). In view of these facts 50% of the claimed expenses are being disallowed being personal and non-business in nature. Payment through Credit Card: The taxpayer has claimed expenses of Rs.646,921 on account of credit cards payments of the Chief Executive in the ledger accounts. It was confronted to the taxpayer that these are personal and non-business expenses. In the reply, taxpayer has stated that the payments were made by the chief executive during his tours abroad and those were business expenses. This viewpoint is not acceptable as the element of payments for personal and non-business expenses cannot be ruled out (underlined for emphasis). Thus '50% of the expenses claimed on this account are being added in taxable income for the year. Medical Education The taxpayer has claimed an amount of Rs.2,895,842 as expense on continuing Medical Education (CME). The contention of the taxpayer that the expenses were incurred on medical education and training of the employees through different workshops is purely a business expense cannot be accepted as there is no evidence that the expenses were wholly incurred on the attainment of medical education of employees. There is a strong possibility that the expenses are of non-business nature (underlined for emphasis) hence 50% of the claims are added back in taxable income for the year. ESSO payments An amount of Rs.1,171,099 has been claimed as expenses on account of ESSO payments. In reply to the show-cause notice the taxpayer has contended that ESSO is the major product of the company and sales of Rs.57,717,219 have been shown in the year under consideration. In view of this position the expenses on this account are justifiable but the fact that same are not supported by documentation renders them to be dealt with under provisions of section 174(2) (underlined for emphasis). Thus 20% of the claim i.e. 1,171,099 is added back in taxable income. General Packing The contention of the taxpayer that the expenses are for business promotion of products cannot be accepted in toto as the evidence for the same has not been provided. Thus, 50% of the claim is added back in taxable income.

12. While curtailing downward the above add-backs, the learned CIT(A), in the impugned order has observed as under:-- "I have considered the arguments of the AR and perused the record. I agree with the contention of the learned AR that add backs were made on the basis of stock phrases without pointing out a single instance of personal and non-business element, yet one cannot rule the existence of personal element particularly in case of a Private Limited Company. The add backs made under the following heads are restricted to amount mentioned against each head of account: Head of account Rupees (a) Out of Chief Executive Current Account-25% 143,608 (b) Out of Payment through Credit Card-25 % 161,730 (c) Out of continuing Medical Education-15% 434,322 (d) Out of ESSO payments-15% 140,531 (e) Out of General Packing-15% 350,219

13. Perusal of the assessment order with regard the reason for add-backs given by the Taxation Officer shows that he had done so on the basis of conjectures/surmises using stock phrases such as: "W... the element of incurrence of the expense for personal purposes cannot be ruled out.... `; (ii)...This view point is not acceptable as the element of payments for personal and non-business expense cannot be ruled out...(iii), "There is strong possibility that the expenses are of non-business nature...' (iv) ".... In view of this position the expenses on this account are justified but the fact that same are not supported by documentation renders them to be dealt with under provisions of section 174(2) "; and (v) "...The contention of the taxpayer that expenses are for business promotion products cannot be accepted in toto as the evidence has not been provided.... "These assertions at assessment stage indicate that the add backs were made on conjectures and suppositions. The Taxation Officer has also opined that the Chief Executive need not undertake foreign tours for procurement of machinery and should have done so using modern technology or internet. Such observations are tantamount to suggesting the Taxpayer to do business as department perceives. In our opinion this is not within the domain of the department. No instances have been given where evidence was lacking. Similarly, the observations made by the learned CIT(A) that "...I agree with the contention of the learned AR that add-backs were made on the basis of stock phrases without pointing out a single instance of personal and non-business element, yet one cannot rule the existence of personal element particularly in case of a private limited Company ... are not tenable under the law. Such findings are also based on whims/ conjectures/surmises and are contrary to the relevant provisions of law as contained in subsection (2) of section 172 reproduced supra. In view of above discussion the impugned add-backs cannot be endorsed on legal as well as factual premises.

14. While, ordering deletion of additional tax levied under sections 161/205, the learned CIT(A) had given following reasons:-- "I have examined the above referred jurisdiction and delegation orders as well as case law relied and the relevant provisions of law. In my opinion, the contention of the learned AR is correct that as per the jurisdiction order C.No. 1(14)IT-Jud/2007 dated 28th March, 2008 it is the powers and functions of the Commissioner of Income Tax (Enforcement and Collection Division) to charge tax on defaulting withholding agents and to charge additional tax under Part XII of Chapter X Tax of Rupees 883,

829. Additional tax of Rupees 212,119 levied under section 161 and section 205 in this context in the impugned order is therefore, deleted being illegal and without jurisdiction. Since the levy of tax and additional tax under sections 161/205 is deleted on legal grounds, other grounds on this issue are not adjudicated upon." Perusal of the above findings given by the first appellate authority shows that, he had done so as the Taxation Officer had travelled beyond his jurisdiction by assuming the additional role of enforcement wing as well. In our opinion, the learned CIT(A)'s observations on the issue are unexceptionable, hence upheld.

15. Resultantly, the CIT(A)'s decision on the issue of selection of case for audit under section 177 and restriction of add-backs is vacated. Add-backs stand deleted in toto. The impugned finding with regard to deletion of additional tax under sections 161/205 is upheld. In a nutshell the appeal of the taxpayer is accepted and that filed by the department is dismissed being devoid of any merit. C.M.A./128/Tax (Trib.) Appeal accepted.