2010 PLP (Trib (PTD)

This appeal is filed by the Department against the order of CIT(A) dated 15-7-2009 for the tax year 2009 on the following grounds of appeal:

"(2) That the relief allowed on issue of AOP by the learned C.I.T. (Appeals) is against the provisions of sections 85 and 80 (2) of the Income Tax Ordinance, 2001. (3) Thus the learned C.I.T. (Appeals) has ignored the provisions of sections 85 and 80(2)(a) of the Income Tax Ordinance, 2001 as discussed in detail in the order of the Taxation Officer, while allowing relief on issue of A.O.P. (4) That the learned CIT (Appeals) was not justified to hold status of taxpayer as an individual when the taxpayer was treated as AOP after considering section 85, facts are discussed in detail at pages Nos.4, 5, 9 and 10 of the Taxation Officer. (5) That the learned C.I.T. (Appeals) had ignored the facts that taxpayer had been confronted through notice under section 122(9) of the Income Tax Ordinance, 2001 on issue of Associates and Association of Persons as per sections 85 and 80(2)(a) of the Income Tax Ordinance, 2001 discussed at pages Nos.4, 5, 9 and 10 of the order."

2. The Department in this appeal has agitated the order of the learned CIT (Appeals) who has restored the status of the taxpayer/ assessee as Sole Proprietor which was earlier assigned by the Taxation Officer as an Association of Person (AOP) vide his order under section 122(1) of the Income Tax Ordinance, 2001.

3. While supporting the order of the Taxation Officer, the learned DR has stated that the Taxation Officer rightly assigned the status of an Association of Persons to the taxpayer/assessee. He argued that the taxpayer/assessee has been involved in the business of providing education to children by running a school in the name and style of M/s Generations School. According to learned DR, the Taxation Officer rightly held that due to the following reasons he (the Taxation Officer) was of the view that the taxpayer 'and her husband namely Mr. Irfan Siddiqui, are associates within the meaning of subsections (1), (3)(a) and (5)(b) of section 85 of the Income Tax Ordinance, 2001 with respect to the said business. (i) The taxpayer has been dedicating her time and talent, on a full-time basis, to the active management of the said business. In addition to this, the taxpayer has also been plowing(sic) back a major portion of her profit every year into the said business. The sum total time-value, contribution of skills' set and earning retained defines her interest in the ownership of the business. (ii) The history of the assessee reveals that the said business was initially launched from a single property in North Nazimabad, Karachi. However, with the passage of time and success of the said business, Mr. Irfan Siddiqui purchased the other adjoining properties and contributed them to the said business to expand upon the existing infrastructure. Thus, the cost of the said premises defines the capital-interest of the investigating partner in the ownership of the said business. Cognizance has also been taken of the fact that the investing partner, being the President of M/s. Meezan Bank Ltd., is not in a position to actively participate, with his time and skills, in the day-to-day affairs of the said business. Therefore, what he may have lacked in terms of time and skill to bring to the said business has been adequately and, perhaps, equitably, compensated for by his providing the said premises for the operation of the said business. (iii) Examination of the said business's bank account reveals that a considerable amount of money is claimed to have been handed to the investing partner. The said loans seem to have been sanctioned to the investing partner in a liberal (as and when required by the investing partner to settle his personal obligations) and indiscriminate (without collateral, profit, specific tenure for repayment etc.) manner. Also, payable/ receivables between the partners and the business do not seem to be properly recorded. The fact that the investing partner has been making use of the positive cash-flow of the said business for personal investment and commitments, without having to fulfil any obligation incidental to obtaining such a loan, not only further establishes the extent of his authority and control over the assets of the said business but also testifies to this status of being a partner/member of the said business.

4. The learned. DR has further argued that the above reasons are only indicative and not exhaustive. Thus, according to the learned DR, in the light of the above, the Taxation Officer rightly treated the business of the taxpayer/assessee as an association of persons comprising of two associates under section 85 of the Income Tax Ordinance, 2001 and taxed accordingly under section 92(1) of the Ordinance. In view of this, the learned DR has prayed that the order of the learned CIT(A) is not justifiable under the law and may be cancelled restoring that of the Taxation Officer.

5. While rebutting the contentions of the learned DR, the learned AR of the taxpayer/assessee has stated that in respect of treating the husband of the taxpayer/assessee as an associate in terms of section 85 of the Income Tax Ordinance, 2001, the Taxation Officer has failed to pinpoint any transaction between them to arrive at the conclusion that the same was meant for the purpose of avoidance of tax. He was of the view that the change of status of sole proprietorship into a deemed association of persons based on personal incharge without any concrete and plausible evidence does not justify the action of the Taxation Officer in view of the provisions of sections 85, 92, 93 and other relevant provisions of Income Tax Ordinance, 2001. According to him, the intention of legislature as envisaged in section 85 of the Ordinance is to apply the anti-avoidance provisions and it has nowhere empowered the Department to change the status of the taxpayer/assessee.

6. We have heard the learned representatives from both the parties and have also perused the impugned order of the learned CIT(A), the amended order under section 122(1) and the relevant record of the case. The learned C.I.T.(A) while adjudicating upon the issue has held:

Further, in respect of treating the husband of appellant as associate in terms of section 85 of the Income Tax Ordinance, 2001, it is noted that the Taxation Officer failed to identify any transaction between them to lead to the conclusion that it was meant for the purpose of avoidance of tax. The change of status of Sole Proprietorship into a deemed Association of persons based on personal incharge without any concrete evidence to justify the action in view of the provisions of sections 85, 92, 93 and other relevant provisions of Income Tax Ordinance, 2001. The intention of the legislature as envisaged in section 85 of the Income Tax Ordinance, 2001, is to apply the anti-avoidance provisions. It has nowhere empowered the department to change the status of the appellant. In view of the above discussion, I am inclined to agree with the submission of the learned AR of the appellant that the Taxation Officer was not justified to assign status of A.O.P. instead of sole proprietorship of the appellant and for the reasons recorded above the action of the Taxation Officer in the absence of any concrete evidence to the contrary is not tenable. Therefore, the status declared by the appellant as sole proprietor is restored."

8. After careful consideration of the finding of the learned CIT(A) on the issue, we are convinced with the views taken by the learned CIT(A) that the Taxation Officer had no justification whatsoever to assign the status of an AOP instead of sole proprietorship of the taxpayer/assessee, therefore, his action, in the absence of any concrete evidence to the contrary is not tenable, hence unlawful. We are further of the considered view that as per provisions of section 85 of the Income Tax Ordinance, 2001, the Department or for that matter the Taxation Officer is not empowered to change the status of the assessee from sole proprietorship to association of persons. In view of the facts and circumstances of the case, we confirm the order of the learnedly CIT(A).

9. As a result, the appeal filed by the Department stands dismissed. C.M.A./114/Tax (Trib.) Appeal dismissed.