2014 PLP (Trib (PTD)

This cross appeal has been filed by the taxpayer as well as by the department against the impugned order dated 28-1-2011 on the following grounds: TAXPAYER'S GROUNDS OF APPEAL (i) that the learned Commissioner Inland Revenue (Appeals) Lahore is not justified to hold the selection of case for audit under section 177 as legal. (ii) That the learned Commissioner Inland Revenue (Appeals) Lahore is not justified to hold, that selection for audit under section 177 was made through an independent order and against the said selection an independent appeal was required. (iii) That following additions out of P&L expenses as fixed by the learned Commissioner Inland Revenue(Appeals) Lahore are unjustified, arbitrary and without any basis. Head of Account Claimed Disallowed/fixed by CIR(A) Entertainment 25,880 15,000 Conveyance/travelling 26,120 1,5000 Office Repair 7,840 Upheld Misc. Expenses 14,270 10,000 Weighing charges 59,000 45,000 Stationery/Printing 12,511 Upheld DEPARTMENTAL GROUNDS OF APPEAL That the learned CIR(A) was not justified to delete/reduce addition of P&L expenses without giving cogent reason as under:-- Head of Account Claimed Disallowed/fixed by CIR(A) Entertainment 25,880 15,000 Misc. Expenses 14,270 10,000 Conveyance/travelling 26,120 1,5000 Weighing charges 59,000 45,000 Salaries 252,000 Deleted

2. Brief facts emanating from the record of the case are that the taxpayer is, an individual, deriving income from trading of steel products. The taxpayer filed return of income for the tax year 2008 declaring net income of Rs.400200 which was deemed to be an assessment order in terms of section 120 of the Income Tax Ordinance, 2001. Subsequently, the case of the taxpayer was selected by the Commissioner for audit under section 177 of the Income Tax Ordinance, 2001 and as a result of audit net income was amended at Rs.798,721 under section 122(1)(5) by making add backs out of P&L account by the Taxation Officer.

3. Being dissatisfied with the treatment meted out by the Taxation Officer, the taxpayer preferred an appeal before the first appellate authority who rejected the appeal of the taxpayer on the issue of selection of case under section 177 by the CIR in the following words:-- "The A.R. has argued that selection of the case of the appellant for audit was wrong, illegal and unjustified, I have considered the matter in the light of the submissions made by AR of the appellant and found not convincing on legal grounds. The case was selected by the Commissioner under section 177 of the Ordinance through a separate order against which appeal has neither been filed nor it is appealable under section 129 of the Ordinance. It is further added that Honourable Lahore High Court while adjudicating upon the Writ Petition No.11166 of 2009 decided on 7-12-2009 did not hold the order of Commissioner as illegal. In the situation when the order of Commissioner under section 177 of the Ordinance is not appealable before this court and that the Honourable High Court has not held such order as illegal, this court cannot entertain this ground of appeal, hence rejected and the proceedings taken up by the department are held to be legal." However CIR(A) had also reduced, upheld and deleted some of the add backs made out of P&L account being partly verifiable and lack of necessary proof/evidence in support of the same was not furnished. Consequently, the taxpayer has filed appeal before this forum.

4. At the very outset the AR of the appellant has raised two legal issues, which he stressed upon to be decided first.

5. The first legal issue raised by the AR is regarding selection of the case for audit by the CIR for the tax year 2008 under section 177 of the Income Tax Ordinance, 2001. It is found that the issue has already been decided by the Appellate Tribunal Inland Revenue in a judgment bearing I.T.A. No.1040/LB/2010 dated 2-8-2011 for the tax year 2008 in the case of Messrs S.K & S Trading Corporation. Respectfully following the decision noted supra made by the learned Tribunal we have left with no alternate, but to reject the appeal of the taxpayer on the issue on hand. 6(i) The second legal issue raised by the AR is arising from the order of learned CIR(A) that since decision of selection of case for audit by the CIR under section 177 of the Income Tax Ordinance, 2001 is an independent and separate order, which warranted that a separate and independent appeal is to be filed by the taxpayer. Learned CIR(A) has also held that no appeal against the order issued by the CIR under section 177 of the Ordinance lies before him. This being the main controversy will be analyzed and decided by us. (ii) Since main controversy revolves around section 177 of the Ordinance. Therefore, the same is reproduced for convenience hereunder:-

177. Audit (1) The [Board], may lay down criteria for selection of any person for an audit of person's income tax affairs, by the Commissioner. (2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the [Board] under subsection (1). (3) The [Board] shall keep the criteria confidential. (4) In addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of the person's income tax affairs having regard to:-- (a) the person's history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter which in the opinion of Commissioner is material for determination of correct income. (5) [After] selection of a person for audit under subsection (2) or (4), the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that [person]. (6) After completion of the audit under subsection (5) or sub-section (8), the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment under subsection (1) or sub-section (4) of section 122, as the case may be. (7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits, particularly having regard to the factors. (8) The [Board] may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income tax affairs of any person and the scope of such audit shall be as determined by the [Board] on a case to case basis. (9) Any person employed by a firm referred to in subsection (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that subsection.] (iii) The issue as to whether CIR for the purposes of selection of affairs of a person is required to issue prior notice to the taxpayer and pass a speaking order under section 177 of the Ordinance? It is found that the said issue was come up before Honourable High Court as well as Honourable Supreme Court of Pakistan for decision and has been decided as under accordingly. (iv) The Honourable Supreme Court of Pakistan in a case reported as 2009 PTD 37 (S.C.Pak) has held that provisions of notice to a person against whom department proposed to proceed would be read in every statute irrespective of absence of such provision in that statute. (v) Honourable Karachi High Court on the issue has held that when provision of section 177 is read with section 24-A of the General Clauses Act, no Scintilla of doubt is left in our mind that an order under section 177 selecting a case for audit is required to be made within the parameters of the factors enumerated therein and the Commissioner while making the order is required to assign specific reasons having regard to the factors prescribed in section 177 read with provision contained in section 24A of the General Clauses Act, 1897, (vi) With reference to section 177, it has been observed by appellate authorities that the CIR did possess discretion of selecting any person for audit under the provisions subject to scrutiny of affairs of the person as wide worded powers. The Honourable Supreme Court graciously laid down seven principles for structuring discretion which may be enumerated as:- (i) Open plans. ii) Open policy statements iii) Open rules. (iv) Open findings. (v) Open reasons. (vi) Open precedents; and (vii) Fair informal procedure. (PLD 1990 SC 1092, 1997 SCMR 1804, PLD 2001 SC 1) Further through these orders the Honourable Supreme Court has held that discretionary decision has to be made according to rational reasons which means finding of primary facts based on good evidence and that whenever wide-worded powers conferring the discretion exists, there remaining always the need to structure the discretion which means regularizing of the so created discretion by organizing it, requiring the exercising authority to give reasons, so that decision may achieve the high quality of justice. (vii) Learned Tribunal in a case reported 2010 PTD (Trib.) 1705 has held that for all practical purposes section 177 of the Income Tax Ordinance, 2001 was a just process to reach to a conclusion as to from where the assessing officer could further modify an already assessed income for which law had very clearly provided the provision in terms of section 122(5) of the Income Tax Ordinance, 2001. (viii) In view of the above, we are inclined to hold that selection of tax affairs of a person by the CIR for the purposes of audit is a separate and independent order passed under section 177 of the Income Tax Ordinance, 2001. The analogy is derived from the bare reading of judgments supra which held that before selection of taxpayer's affairs for audit; (i) a notice should be issued to the taxpayer; (ii) a reasonable opportunity of being heard should also be provided to the taxpayer; and (iii) a speaking order should be issued by the Commissioner. It is observed that these are the essential ingredients for completion of assessment proceedings and passing of a judicial speaking order. Therefore, we hold that selection of case under section 177 by the Commissioner is an order independent and distinct from assessment order passed under sections 120 or 122 or 121 or 122C etc. as the case may be. (7)(i) Now we will analyze, the second part of the issue i.e. whether order passed by CIR under section 177 is an appealable order under section 127 of the Ordinance or not? Since the issue involved pertains to section 127 of the Ordinance, therefore for the purposes of convenience section 127(1) is reproduced hereunder: 127 Appeal to the Commissioner (Appeals.).

[1] Any person dissatisfied with any order passed by a Commissioner or a taxation officer under sections 121, 122, 143, 144, [162], 170, 182, 183, 184, 185, 186, 187, 188 or 189, or an order under subsection (1) of section 161 holding a person to be personally liable to pay an amount of tax, or an order under clause (f) of subsection (3) of section 172 [declaring] a person to be the representative of a non-resident person, or an order under section 221 refusing to rectify the mistake, either in full or in part, as claimed by the taxpayer or an order having the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the person, may prefer an appeal to the Commissioner (Appeals) against the order.] (ii) The bare reading of aforesaid provisions of section 127 specifically provided "Any person dissatisfied with any order passed by a Commissioner." may file appeal before the CIR(A) under the said section. A pertinent question may arise while conjointly reading the language of said section particularly with the expression" or a Taxation Officer under sections 121, 122, 143, 144, 162, 170, 182 or 205 or an order under subsection (1) of section 161 holding a person to be personally liable to pay an amount of tax .. "Whether the word "or" used between "Commissioner or Taxation Officer" is disjunctive or conjunctive. It is a settled proposition that word "or" is a disjunctive particle that marks an alternative, generally corresponding to "either" as "either is or that," a connective that marks an alternative as "you may read or may write that is, you may do one of the things at your pleasure, but not both. The word "or" is often used to express an alternative of terms, definitions or explanation of the same thing in different words, as wilful or malicious prosecution "or" is sometimes used as an explanation of the preceding term, as, intoxicating or malt liquors, in which case, it has been held equivalent to "to-wit", (the law Lexicon, Second Edition 2009, P 1369). Justice G.P. Singh in his book "principles of statutory interpretation 12th Edition 2010 Page 447 has explained "Conjunctive and Disjunctive words "and" and "or" in the following words:-- "The word "or" is normally disjunctive and "and" is normally conjunctive but at times they are read as vice versa to give effect to the manifest intention of the legislature as disclosed from the context. As stated by SCRUTTON L.J. "you do sometimes read "or" as "and" in a statute. But you do not do it unless you are obliged because "or" does not generally mean "and" and "and" does not generally mean "or". And as pointed out by LORD HALSBURY the reading of "or" as "and" is not to be resorted to, "unless some other part of the same statute or the clear intention of it requires that to be done". But if the literal reading of the words produces an unintelligible or absurd result "and" may be read for "or" and "or" for "and" even though the result of so modifying the words is less favourable to the subject provided if reading of "and" as "or" produces grammatical distortion and makes no sense of the portion following "and" "or" cannot be read in place of "and". The alternatives joined by "or" need not always to be mutually exclusive . speaking generally, a distinction may be made between positive and negative conditions prescribed by a statute for acquiring a right or benefit. Positive condition separated by "or" are read in the alternative but negative conditions connected by "or" re construed as cumulative and "or" is read as "nor" or "and".]". The word "or" must be read as used consistently in the section disjunctively (Super Agrotech Ltd. v. State of U.P. (2006) 9 SCC 203). The two parts are connected by the conjunction "or" which is capable of two constructions. In one sense, it is a particle co-ordinating the two parts of the clause and creating an alternative between them. In the other sense

which is akin to the sense of "and"

it can be construed as conjoining and combining the first part of the clause with the second (Razik Ram V. J.S. Chauhan, (1975) 4 SCC 769.) (iii) "The Honourable High Court Karachi in a reported case PLD 1988 Karachi 338 has discussed the issue as under:-- "In the case of C.E. Gibbar v. Pakistan and other (PLD 1957 Karachi 956), it is held that word "or" has prima facie an alternative significance but not that it never means "and". In the case of Muhammad Hussain v. The Additional District Judge Lahore (PLD 1966 Lahore 128) it is held that word "and is used in that case is in disjunctive sense. It is held in the case of Kala Ghazi v. Abdul Ghafoor Bhaiyan and others (PLD 1960 Dacca 808) that word "or" does not necessarily always signify the disjunctive sense and it may also be read conjunctively. In the case of Salhon and others v. State (PLD 1969 SC 267 at 268) Supreme Court has held that it may be found necessary to read the conjunctions "or" and "and" one for the other depending on the consequences intended by the legislature. In view of the legal position enunciated in the reported cases mentioned above, I would say that words "or" and "and" are interchangeable and much depends on the context in which these words are used and the intention with which they are used. This intention can be gathered from the document and as already stated by me above after perusal of whole relevant clause, I am of the view that word "or" is used in conjunctive sense and notice is necessary in case where rent is found in arrears as well as in other case." (Pages 334-335). (iv) Similar views have been expressed by Honourable Supreme Court of Pakistan in the case Khadim Hussain and others v. The Additional District Judge, Faisalabad reported as PLD 1990 Supreme Court 632.

8. The upshot of the above discussion is that the word "or" used in section 127 of the Ordinance is disjunctive and it cannot be construed as Conjunctive. Because while construing the word "or" as Conjunctive it will result into absurdity, meaning thereby that it will restrict the benefit/right of the taxpayer to file appeal against "any order passed" by the Commissioner, to only the orders passed under sections mentioned in section 127 of the Ordinance. It will be deemed to be a narrow interpretation of the provisions of law which is not the purpose of the legislature. It is a settled principle of interpretation of law that interpretation that advances the object and purpose of legislation shall be accepted. Since right of appeal is a substantive and valuable right of any appellant, who is normally a person aggrieved by the impugned decision, the central idea behind filing of an appeal revolves round the right as contra distinguished from the procedure laid down in C.P.C. 1908. A right of appeal under the code is statutory right of appeal, where it exists, is a matter of substance and not of procedure. Since it is a settled proposition that the intention of the legislature can be gathered from the document and as already stated above, after perusal of whole relevant provision of law. We are of the view that word "or" used in section 127(1) of the Ordinance is used in disjunctive sense and appeal against the order passed by the Commissioner under section 177 of the Ordinance is appealable before the Commissioner (A) under section 127 of the Ordinance. Since the language of the section 127 is unambiguous and very clear. Therefore following the principle of literal interpretation of the statute in the instant case, we hold that the order passed under section 177 by the CIR for selection of tax affairs of a person is an independent order, which is appeal before the CIR(A) under section 127 of the Income Tax Ordinance, 2001.

9. The contention raised by the AR of the taxpayer regarding the addition, deletion and confirmation made by the CIR(A) on the issue of add backs made by the Assessing Officer has been given due consideration. It is found that the AR could not be able to make out a case that additions out of P&L account made by the assessing officer as well as the decision of the CIR(A) have any infirmity or error. The AR also failed to produce any documentary evidence before this forum to substantiate his plea that expenses claimed are supported by documents/ receipts and are completely verifiable. In the absence of such material evidence we are constrained to dismiss the appeal of the taxpayer and uphold the order of the CIR(A) on this issue.

10. The DR also failed to convince us, how the order of CIR(A) is against the spirit of law and facts of the case. It is an estimate against another estimate which do not warrant any interference by this forum. The departmental appeal being devoid of any merit is also dismissed and order of the CIR(A) on this score is confirmed. CMA/30/Tax(Trib.) Order accordingly.