2010 PTD (Trib (PLP)

RAJA LEHRASAB KHAN (JUDICIAL MEMBER).

By this order I propose to dispose of the above titled assessee appeal pertaining to Assessment year 2008 against the impugned order dated 14-11-2009 passed by Commissioner Inland Revenue (Appeals), Gujranwala. The appeal in question has been filed on as many as 12 grounds coupled with additional grounds which are reproduced as under:

(1) That the impugned amended assessment under section 122(1) of the Income Tax Ordinance, 2001 is unwarranted, illegal, without lawful authority, as the same is in consequences of an illegal selection for audit under section 177(4) of the Income Tax Ordinance, 2001. (2) That the hon'ble Lahore High Court, Lahore in identical cases has set at the naught the selection made by the CIT (Audit) under section 177(4)(d) of the Income Tax Ordinance, 2001. Reliance is placed on 2009 PTD 1507. Adhering to Article 25, of the Constitution of the Islamic Republic of Pakistan, 1973, this appellant/taxpayer is also entitled to the same relief as accorded to the taxpayers in the cases cited above. (3) That no selection for audit merely under clause (d) of sub-section (4) of section 177 of the Income Tax Ordinance, 2001 could be lawfully made by the learned CIT(Audit). Factors enumerated in clauses (a) to (d) of subsection (4) of section 177 (ibid) must co-exist for a valid selection, and that too is warranted only if the Federal Board of Revenue has first given a criteria for selection under section 177(1) (ibid). As the Federal Board of Revenue had not laid down any criteria for selection of any taxpayers under section 177(1) (ibid) for the tax year, 2008, the learned CIT (Audit) could not invoke his power under section 177(4) (ibid) in respect of this appellant/ taxpayer. (4) That without prejudice to the above:- (i) Though a notice under section 122(9) of the Income Tax Ordinance, 2001 was issued, yet it contained no specific reference to any clause of subsection (5) of section 122(ibid) , which rendered the same a nullity in the eye of law. No "definite information" within the meanings of subsection (5) of section 122 of the Income Tax Ordinance, 2001 was available with the learned Taxation Officer before embarking upon amended assessment. (ii) This appellant/taxpayer did maintain the books of account in the prescribed manner and did produce the same, but the learned taxation officer has wrongly observed that the appellant/taxpayer did not maintain the prescribed accounts. (iii) As there was no unexplained accretion in wealth (as admitted by the learned taxation officer in the impugned order), the case of this appellant/taxpayer could not be selected for audit in view of Federal Board of Revenue's letter C.No.4(36)ITP/2002, dated 5-10-2009. (iv) When the declared receipts are fully verifiable, and the same have been accepted as .such in the impugned order, no audit into tax affairs of this appellant/taxpayer was warranted at all. (v) When the learned taxation officer has raised no eye-brow to the wealth re-conciliation statement, how could he dispute the personal expenditure of this appellant/taxpayer. (vi) None of the expenditures claimed by the appellant/taxpayer was. hit by section 21(1) of the Income Tax Ordinance, 2001 is unwarranted, illegal and without lawful authority. The appellant/taxpayer furnished complete details of the children's educational expenses. (vii) An addition of Rs.70,000 under section 111(3) of the Income Tax Ordinance, 2001 is unwarranted, illegal and without lawful authority. The appellant/taxpayer furnished complete details of the children's educational expenses. (viii) An addition of Rs.243,147 under section 111(3) of the Income Tax Ordinance, 2001 is unwarranted, arbitrary, illegal and without lawful authority. The impugned addition on account of allegedly suppressed personal and house hold expenses has been made merely on the basis of conjectures and surmises, and no solid and cogent evidence has been brought on record to justify the impugned addition. The appellant/taxpayer's wife, Mrs. Farzana Asif is an independent taxpayer at NTN 2239623. She declared property income at Rs. 564,000 for the tax year, 2008, out of which she also contributed towards household expenses. In view of this fact too, the impugned addition of R.234,147 is uncalled for. An addition of Rs.30,000 under section 111(3)(ibid) on account of allegedly suppressed car expenses is unwarranted, illegal and without lawful authority, .as the same is arbitrary and based on conjectures and surmises. The appellant/taxpayer's wife, Mrs. Farzana Asif is an independent taxpayer at NTN 2239623, and the contributed Rs.25,000 towards car expenses, as she also used the same car. Additions made under section 210.) of the Income Tax Ordinance, 2001 under the following heads: (a) X-Rays Expenses Rs.336,316 (b) Ultrasound Expenses Rs.242,750 (c) Repairs Expenses Rs. 72,000 Total Rs.651,066 are ill-based, unwarranted, illegal and without lawful authority. Addition under section 21(1) (ibid) may be made only out of the expenses relating to profit and loss account. No addition under section 21(1)(ibid) can be made out of the cost of sales. Even otherwise, the appellant/taxpayer fully corroborated the payments in question with the withdrawals from the bank account, which have been whimsically ignored by the learned taxation officer. The documentary evidence produced by the appellant/taxpayer in support of the claimed expenses under the above heads has been brushed aside merely on the basis of whims and caprices, which is prohibited by the Qanun-e-Shahadat Order, 1984. (xi) That there is no material available on record to justify the impugned amended assessment. (xii) That the impugned amended assessment is tenable neither on the factual place, nor on the legal score.

2. Briefly stated that the taxpayer an individual, is a Consultant Radiologist and Ultra-Sound Specialist who derives income from diagnostic Centre where ultrasound and X-ray facilities are available. Return of the income for tax year, 2008 was filed declaring income of 540679 which was deemed to be assessed under section 120(1) of Income Tax Ordinance, 2001. Thereafter the case was selected for audit 177(4)(d) of the Income Tax Ordinance, 2001 by the Commissioner audit. Notice under section 176 was issued requiring to furnish various details/documents as well as books of accounts. However, compliance were made partially which led to the conclusion that income was under assessed which needed amendment under section 122(1) of the Income Tax Ordinance, 2001. The reply of the taxpayer was found unsatisfactory. Resultantly assessment was amended under section 122(1) of the Ordinance. Being aggrieved and dissatisfied with the treatment meted out by the Taxation Officer, the taxpayer filed appeal before first appellate forum who passed order dated 14-11-2009 which is impugned and assailed by the taxpayer here.

3. I have heard both the sides and perused the record. The following issues have been seriously/heartedly contested/argued by the both sides:

(a) Whether the Commissioner was competent to select a case for audit under section 177(4) of the Income Tax Ordinance, 2001 particularly in light of the contradictory judgment of the honorable High Courts? (b) Whether the Taxation Officer was justified to amend the assessment order under section 122(1) the Ordinance?

4. In support of their version the learned AR took shelter of the case reported as 2009 PTD 1507 Lahore High Court titled as "Mohsin Raza Versus Chairman F.B.R. and other and argued that the Commissioner was not justified to select a case for audit under section 177(4) of the Income Tax Ordinance, 2001 in absence of criteria laid down by the Board. He has further argued that under Income Tax Ordinance, 2001, scheme the Income Tax return furnished under section 120(1) of the Income Tax Ordinance, 2001 is treated to be deemed assessment order in- term of section 120(1) of the Ordinance, which cannot be further amended under section 122(1) of the Ordinance in the absence of definite information require within the meaning of subsection (5) of section 122 of the Ordinance. On the other hand the D.R. supported the impugned order with regard to upholding the selection of the case for audit under section 177(4) of the Ordinance. In support thereof he relied 2010 PTD 571 Lahore High Court titled as " Messrs Sadar Anjuman-e-Ahmedia through General Attorney v. CIT (Audit Division), Faisalabad and' 3 others which negate the version of the taxpayer. The DR has also supported the impugned order as well as amended assessment order under section 122(1) of the Income Tax Ordinance, 2001.

5. Considering the facts of case, assessment record, grounds of appeal, gist of impugned order and arguments put forth by the AR with regard to selection of case for audit, I do not find myself persuaded with the contention/arguments advanced by the AR. In support of my contention it is imperative to trace out the history of audit under the new Income Tax Ordinance, 2001. In fact selection for audit under section 177 was made under the new Ordinance for the first tie in tax year, 2003. It was challenged in different High Courts through writ petitions. Apart from so many other judgments, a judgment in case of Muhammad Hussain v. CIT was passed by the Lahore High Court reported as 2005 PTD

152. The said judgment along with many other judgments were assailed in Supreme Court of Pakistan through Civil Appeal Nos. 1962 to 2205 of 2005. The hon'ble Supreme Court of Pakistan had decided the above cited appeals on the basis of compromise vide judgment reported as 2009 SCMR 44 = 2009 PTD 37 titled as "Commissioner of Income Tax and other v. Fatima Sharif Textile, Kasur and others". While disposing the matter, the apex Court has however directed the department to issue fresh notice under section 177 of the Income Tax Ordinance, 2001. Relevant portion of this judgment may be read as under:-- "Let appellants issue fresh notices to the respondents in terms of section 177 of the Ordinance, as it was prevailing at the relevant time, disclosing criteria/reasons for selecting their cases for purpose of audit".

6. After tax year, 2003, the department did not select any case for audit for a few years. However, through Finance Act, 2004, section 177 was amended and subsections 1, 2, 3 and 4 were introduced, which are being reproduced as under:-- "

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 subsections (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. Therefore, on the basis of amendment; the department once again started selection of cases for audit.

7. On the point of selection of cases for audit, the hon'ble High Courts of Lahore, Sindh and the then Islamabad interpreted the issues differently. The hon'ble Islamabad High Court and Karachi High Court upheld the selection in accordance with law and rejected the writ petitions/references of the taxpayers in Writ Petition No.960 of 2008, 550 of 2009 99 of 2009 and 1006 of 2009 dated 14-7-2009 (Islamabad High Court) and 2009 PTD 284.

8. The Hon'ble Lahore High Court vide Writ Petition No.2663/2007 dated 5-3-2008 2010 PTD 395 i.e. Writ Petition No. 1858 of 2009, dated 8-6-2009, Writ Petition No. 20306 of 2009 dated 18-10-2009, Writ Petition No.20339 of 2009 dated 16-10-2009, Writ Petition No.20306 of 2009 dated 16-10-2009 and 2009 PTD 1507 titled Mohsin Raza v. Chairman, F.B.R. etc. accepted the writ petitions of the taxpayers by giving special reference to the judgment of Supreme Court (Fatima Sharif's case).

9. The Hon'ble Islamabad High Court in their order 29-6-2009 in Writ Petition' No.960 of 2008 and Hon'ble Lahore High Court in their order dated 22-10-2009 explicitly and unequivocally held that pre-selection show-cause notice was not required while selecting a case for audit and Commissioner could also select cases for audit, without issuance of audit selection criteria by F.B.R. It was also held in these judgments that mentioning of specific clause of subsection (4) of section 177 of the Income Tax Ordinance, 2001 was not necessarily required for the purpose of the selecting a case for audit. The Hon'ble Lahore High Court in their above referred judgment, dated 22-10-2009 specifically referred to the previous judgment of another single Bench of Hon'ble Lahore High Court, (Mohsin Raza's case) wherein selection of cases for audit was knocked out for non-issuance of pre-selection notice and non-issuance of audit criteria by F.B.R. It was held that intimation letter indicating reason/basis of selection for audit was sufficient legal formality. By holding so, reference/support of the Hon'ble Supreme Court of Pakistan judgment in Fatima Sharif Textile Mills, Kasur reported case 2009 SCMR 344 = 2009 PTD 37 was also taken wherein the Hon'ble Supreme Court have also directed the department to issue notice in terms of selection under section 177(4) as it was applicable at the relevant time, disclosing criteria/reasons of selecting the cases for audit. The Hon'ble Lahore High Court in their judgment dated 22-10-2009, while confirming the departmental action, also made reference to cases favouring the Department cited as (i) 2007 PTD 239 (H.C. Lahore), (ii) 2009 PTD 20 (H.C.Lhr.), (iii) 2009 PTD 284 (H.C. Kar.), (iv) 2007 ' PTD 2188 (H.C. Lhr.), (v) 2008 PTD 1440 (H.C.Ibd.), (vi) PLD 1963 Kar. 182, (vii) 2000 SCMR 1017, (viii) ICA No.125 of 2007 (unreported), (ix) Writ Petition No.7146 of 2008 (unreported) and (x) Writ Petition No.2928 of 2008 (unreported).

10. With the aforesaid background of the history with regard to the selection of Commissioner, it is generally seen/observed that in every case like the present one, when case has been selected for audit commonly the following issues are being raised on both, the department as well as the taxpayer's side: (i) Whether a notice was necessarily requirement to be issued before selecting a case for audit. (ii) Whether the Commissioner could select a case for audit under section 177(4) without issuance of "audit selection criteria" by the F.B.R.? (i.e) the interpretation of words "in addition to" appearing in the beginning to subsection of 177 of the Income Tax Ordinance, 2001 and (iii) Whether mentioning of specific clause of subsection (4) of section 177 of the Income Tax Ordinance, 2001 was necessarily required for the purpose of selecting a case for audit.

11. The Hon'ble Lahore High Court, in their judgment reported as 2009 PTD 1507 titled as "Mohsin Raza v. Chairman F.B.R. etc." decided these issues in favour of the taxpayers and held that selection of cases for audit will not be lawful, if a pre-selection show-cause notice is not given and if selection is made without issuance of audit selection criteria by F.B.R. and that mentioning of specific clause of section 177(4) is also necessary. In all other judgments of High Court level, especially the judgment of Hon'ble Islamabad High Court dated 14-7-2009 in Writ Petition No.960 etc., and the judgment of Hon'ble Karachi High Court reported as 2009 PTD 284, the issue in question was decided in department's favour where it was held that pre-selection show-cause notice under section 177(4) is not required. Moreover, the Commissioner can also select cases for audit irrespective of issuance of audit selection criteria by F.B.R. and mentioning of specific clause of section 177(4) was not necessarily required. In a recent judgment of Hon'ble. Lahore High Court dated 22-10-2009 in Writ Petition No.11166 of 2009, the aforesaid issues were clearly and unequivocally settled in favour of the Department.

12. This being the situation and to what has been discussed herein above, with special references to the judgments of Superior Courts, I am fully in agreement with the department's view that the judgment, dated 22-10-2009 in Writ Petition No. 11166 of 2009 being chronologically later in the order, holds the field and prevails at the present. The said views also find support from the .other judgments on the same issues decided by two Benches of Lahore High Court, coupled with the decisions of the Hon'ble Islamabad High Court and Karachi High Court. Moreover, latest judgment of Hon'ble Lahore High Court dated 22-10-2009 in Writ Petition No.11166 of 2009, being chronologically later in order, also has prevailing effect. In these circumstances, I am of the opinion that it is not necessary for the Department to issue a pre-selection show-cause notice: Moreover, the Commissioner is also competent to select cases for audit and mentioning of specific clause of 177(4) is not essentially required. Nevertheless, the judgment of Hon'ble Supreme Court of Pakistan reported as 2009 SCMR 344 = 2009 PTD 37 in the case of Commissioner of Income Tax and others 'v. Fatima Sharif Textile, Kasur and others has also a binding effect, where it was held that while selecting a case for audit, the Department should intimate the taxpayer about it and criteria/reasons of selection of the case for audit, should also be disclosed.

13. It has now crystallized that Hon'ble Supreme Court in their judgment in the case of Commissioner of Income Tax and Others v. Fatima Sharif Textile, Kasur and others settled that while selecting a taxpayer's case for audit, the Department should intimate about it and also disclose the criteria/reasons of selection of the case for audit. In my opinion, this condition is still obligatory in nature in the present scenario. It is incumbent upon the Department that if the case of any taxpayer is selected and criteria/reasons of such selection should also be communicated to the taxpayer.

14. While reverting to the fate of the case in hand, such requirement was duly fulfilled as indicated in the assessment order. An intimation letter was duly issued through which the taxpayer was informed that his case was selected for audit. In this manner, legal requirements for selection of the case for audit as spelled out by the Hon'ble Supreme Court of Pakistan in their judgment in the case of Commissioner of Income Tax and others Fatima Sharif Textile, Kasur and others was duly fulfilled by the Department. The instant matter the case was, therefore, rightly selected for audit and objections raised thereof are not maintained. My views get support from the decision of this Tribunal Divisional Bench order No. I.T.A. No.946/IB of 2009 for the Tax year, 2008 titled as Mr. Marius Bercea Sorin v. Commissioner of Income Tax (Legal), Islamabad.

15. Under the foregoing reasons, circumstances and precedents of the Superior Courts discussed in proceedings paras, the case was rightly selected by the Commissioner for audit and findings to this effect recorded by the CIR(A) in impugned order are upheld which do not need to be interfered with.

16. As regard the amended assessment order dated 15-6-2009 under section 122(1) of the Income Tax Ordinance, 2001 passed by the Taxation Officer and action upheld by the CIR(A). I am not in agreement with the findings and its basis incorporated by the Taxation Officer in his order dated 16-6-2009. Admittedly the return filed by the respondent/assessee under section 120 of the Ordinance is being treated as deemed assessment order which cannot be further amended unless department posses definite information. Law permit for such amendment under subsection (5) of section 122 of the Ordinance on the basis of definite information. It is observed that taxation officer failed to make out his case properly. He amended the order under section 122(1) of Income Tax Ordinance, 2001 without any definite information. A bare reading of the amended as well impugned assessment order demonstrate that in response to notice under section 176, the taxpayer made compliance partially and did not produce accounts required to be maintained under sub-rule (3) of Rule 30 of Income Tax Rules, 2002. The deemed assessment order could only be amended further on the basis of definite information under section 122(5) of the Income Tax Ordinance, 2001 on the basis of definite information. In fact Taxation Officer was not in possession of tangible information which could be termed as definite information. In this regard, law requires that proceedings which culminate in amendment under section 122(1) should only be undertaken if definite information is in possession. Reliance can be made on judgment of Supreme Court in a reported case 1993 PTD 766 1993 SCMR 1232 whereby the honourable Supreme Court held "Whereas the word 'definite' carries inter alia meaning, defined having distinct limit, fixed, exact clear, bounded Every information cannot be treated as the basis for reopening of the assessment, but the information should be of the nature which should qualify, as a definite information. In other words, mere guesses gossip or rumors cannot be treated as definite information".

17. The upshot result of the aforesaid discussion is that unless any definite information within meaning of subsection (5) of section 122 of the Income Tax Ordinance, 2001 comes in the hands of the Assessing Officer, no proceedings for the purpose of amendment of order under section 122(5) of the Income Tax Ordinance, 2001 could be initiated. The action of the taxation officer was therefore, illegal ab initio void.

18. Since the initial amendment order under section 122(5) of the Income Tax Ordinance, 2001 passed by the taxation officer was illegal ab initio void, therefore, the subsequent proceedings whatsoever in this case including that of impugned order were also illegal and the same have no legal consequences whatsoever.

19. Under the foregoing reasons and circumstances appeal filed by the assessee succeeds and is allowed. C.M.A./119/Tax(Trib.) Appeal accepted.