2013 PLP 232 (PTD)

FINDINGS/RECOMMENDATIONS DR. MUHAMMAD SHOAIB SUDDLE, FEDERAL TAX OMBUDSMAN.

This complaint is against illegal assessment under section 122(4) of the Income Tax Ordinance, 2001 (the Ordinance).

2. The complainant's income tax Return for Tax Year 2007 was selected for audit by the Commissioner IR, Audit Division, RTO, Sialkot, vide Letter No.1223 dated 27-6-2008. The complainant revised the Return for Tax Year 2007 twice. However, the Assessing Officer continued with the original audit proceedings, as if no revision of Return had taken place. The audit was concluded on 28-6-2012, after a lapse of 4 odd years. The complainant's Total Income for Tax Year 2007 was determined at Rs.3,657,737 as against declared Rs.272,513 and an additional tax liability of Rs.914,434 was raised.

3. The complainant assails the treatment accorded by the Deptt. as harsh, illegal, oppressive and whimsical. He takes strong exception to the conduct of audit with reference to the original Return, ignoring the revised Returns. He says that when the revised Returns were admitted by the Deptt. and taken on record, for the audit proceedings to continue legally a fresh audit selection order was required to be made after each revision. The complainant has also pointed out that stay against arbitrary selection of his Return was granted by the LHC but the Deptt. continued the audit proceedings after expiry of six months on the ground that this being a revenue matter stay could continue only for a six-month period.

4. The complainant further draws attention to the fact that the Deptt. having accepted declared turnover and gross profit as per the second revised Return was not justified to make arbitrary additions in the manner done by the Assessing Officer. According to him, the profit and loss expenses as per the revised Return were discarded and the expenses claimed as per the original Return adopted - when that Return was not in the field and could not be referred to in the presence of the revised Return. The major additions were made on account of: (i) receipt of gift amount of Rs.9 lacs from a person not borne on the tax rolls, (ii) purchase of motor vehicle for Rs.510,000 out of alleged unexplained sources, (iii) alleged unexplained accretion in business capital (Rs.433,933), and (iv) unexplained increase in value of opening stocks (Rs.1,978,942). The complainant assails the entire amount aggregating to Rs.2,022,935 as arbitrary and therefore unjustified.

5. When confronted, the Deptt. filed a reply affirming the legality of the assessment made under section 122(4) of the Ordinance. A preliminary objection was made that the case involved assessment of income and interpretation of law and the issues arising out of the assessment were appealable before appellate fora. The Hon'ble FTO's jurisdiction in these matters was claimed to be ousted by the provisions of section 9(2)(b) of the FTO Ordinance. On merits, the Deptt. contended that the complainant had an opportunity to substantiate the declared version over a four-year period but was unable to do so as the required evidence and documentation could not be produced before the Assessing Officer. The add-backs made under various Heads were statedly fully justified by the operative facts and circumstances of the case. The Deptt. denied that the High Court stay was violated and affirmed that action was only taken after the six-month period had expired after which the stay was no longer deemed to be in force.

6. Both sides have been heard and the record examined.

7. The preliminary departmental objection has been examined and found to be misconceived. Assessment per se is not the moot point in the complaint. Rather, issues involving patent illegality in the conduct of audit such as ignoring the revised Returns by way of obtaining specific statutory sanction for their audit and the protracted delay of more than four years in the finalization of audit proceedings against the complainant figure prominently in the complaint against the Deptt. These are significant maladministration issues and fully justify the Hon'ble FTO's intervention, as held by the Hon'ble Lahore High Court in Writ Petition No.11545 of 2012 on 13-9-2012. On merits, the unusual delay in the finalization of complainant's audit is a matter of considerable significance. Notwithstanding the extended delay, the Deptt. completely overlooked the fact that the complainant filed revised the Returns twice and yet the Deptt. felt no need to select the latest Return for audit. Rather, it relied on the selection that was with regard to original Return that was no longer in the field after the revised Returns were admitted and deemed assessed under section 122(3) of the Ordinance. Even in the appraisal of Profit and Loss Account expenses during audit, the Deptt. referred to the original Return selected for audit and scaled down the expenses claim in the second revised Return to be consistent with the level of expenditure cited in the original Return. The upshot of the discussion is that the Deptt. never formally selected the second revised Return for conduct of audit. Findings:

8. The audit of a Return not formally selected by the competent authority is contrary to law and tantamount to maladministration under section 2(3) of the FTO Ordinance. The protracted delay in finalization of audit was also tantamount to maladministration. Recommendations:

9. FBR to direct the Commissioner to - (i) invoke revisionary jurisdiction under section 122A of the Ordinance to revisit the assessment made under section 122(4) of the Ordinance, as per law; and (ii) submit compliance report within 30 days. SAK/197/FTO Order accordingl