2013 PLP (Trib (PTD)

This order shall dispose of the titled appeals filed by the assessee against Order Nos. 9 and 10 dated 26-7-2012 relating to tax years 2010 and 2011 passed by CIR (Appeals-II), Lahore

2. Brief facts of the case are that the appellant a private limited company derives income from import and sale of readymade garments. The tax paid at import stage was taken as final discharge of tax liability hence statement under section 115 were filed for both the tax years under reference. The Additional Commissioner examined the accounts statements and observed that cost of sales declared by the taxpayer was much more than the sales declared by way of imports. He inferred that the taxpayer must had made local purchases and enjoyed, income by way of sale of locally purchased goods. He issued show cause notice to estimate the income from sale of locally purchased goods. Taxpayer filed detailed explanation that exaggerated figure of cost of sales was for the purpose of bank loan facilities which had no impact on the sales. It was also explained that not even a single outlet ever had locally purchased goods. The appellant strongly contested the initiation of proceedings under section 122(5A) with the arguments that nothing was on the record to establish the erroneousness and prejudice caused to the interest of revenue. The Additional Commissioner issued another notice asking for the submission of audited accounts for the tax years 2004 to 2009 and bank account statements for the tax years 2004 to 2011. No response was received from the side of appellant which resulted into estimation of income for both the tax years under consideration. The treatment given by the Additional Commissioner was upheld by the CIR (Appeals) against which the appeal is before this forum as per the following common grounds of appeal:-- (1) The order passed by the learned Commissioner (Appeals) is bad in law and against the facts. (2) The Commissioner (Appeals) erred in not quashing the order as Additional Commissioner assumed unlawful jurisdiction under section 122(5A). (3) The Assessment on the face of record was neither erroneous nor prejudice to the interest of revenue, therefore, Commissioner (Appeals) should have cancelled the amended assessment. (4) The Commissioner (Appeals) should have quashed the order as the Additional Commissioner entered into quashing the order because the Additional Commissioner estimated the income on the basis of assumption and guesswork. (6) The Commissioner (Appeals) erred in not quashing the order because figure of cost of sales was only for the purpose of bank loan. It has been argued by the learned AR that the Additional Commissioner unlawfully assumed jurisdiction under section 122(5A) as nothing to establish the erroneousness and prejudice to the interest of revenue was apparent on the face of record. The learned counsel stated that conclusion drawn by the Additional Commissioner was based upon inquiries, guesswork, presumptions and surmises which act neither finds place in the new Income Tax Ordinance, 2001 nor ever been approved by the superior courts. It has been stated that exaggerated cost of sales for the purpose of bank loans never gave any indication on the face of record that these represented local purchases. It has been stated that in the very first notice, as evident from page 2 of the impugned order, the Additional Commissioner on the basis of assumptions confronted for the estimation of local purchases and estimation of sales out of local purchases, he on his own basis and conclusions confronted for the estimation of concealed income. He showed his intention for inquiries by asking for documentary evidence. It has been argued that the action of the Additional Commissioner for entering into inquiries is evident from the second notice (page 5 of the impugned order) in which he asked for the submission of; (1) Final audited accounts for tax years 2004 to 2009 along with notes to the account. (2) The loan agreement made with the bank in the tax year 2004. (3) Detail of utilization of loan in the business along with the out put against the utilization of loan. (4) Bank Account statements for the tax year 2004 to tax year 2011. Learned counsel brought our attention to the reported judgment 2009 PTD (Trib.) 121, relevant extract of which is reproduced as under:-- "The Revising Authority issued show cause notice wherein at the very outset has taken the income tax returns / statements, documents as erroneous as well as prejudicial to the interest of revenue, therefore, confronted the issues needing further investigation so the issuance of notice was on presumptions. It is established law that taking as being erroneous and prejudicial to the revenue should not be based upon surmises and unsupported assertions. Such show cause notice is even nullity in the eyes of law. Here we would not be reluctant to hold that contents of provisions of section 122(5A) of the Income Tax Ordinance, 2001 do not empower the holding of enquires which is unlike the provision of section 66A of the repealed Ordinance, 1979. So the initiating and concluding the proceedings on this score cannot be lawful." It has been stated that since action of the revising authority was based upon presumptions and estimation, therefore, following the ratio settled by the above quoted judgments, order passed under section 122(5A) should have been cancelled by the Commissioner (Appeals). The learned A.R. continued to state that the two conditions i.e. erroneousness and prejudice did not co-exit at the time of initiation of provisional jurisdiction. There was nothing on the record to establish that the Action taken by the Additional Commissioner could make the original assessment as erroneous and prejudice to the interest of revenue. He referred to the judgment reported as 1999 PTD (Trib.) 700 where revision based upon surmises and assumptions resulted into cancellation of assessment. The learned A.R. of the appellant gave reference of the other judgments reported as 1999 PTD (Trib.) 2851, 2008 PTD (Trib.) 1491, 2010 PTD (Trib.) 111 and 2012 PTD (Trib.) 1593 to establish that revision made on the basis of assumption had not been approved by the appellate forums. The A.R of the taxpayer has also relied upon the reported judgment cited as 2008 PTD

342. In the present case the return of the taxpayer was incomplete therefore the assessing officer should have issued the notice under section 114 or notice under section 12(3) of the Income Tax Ordinance, 2001 hence no proceedings under section 122(5A) of the Income Tax Ordinance, 2001 could be initiated.

3. The learned D.R, on the other hand, supported the order of the Additional Commissioner as well as that of the learned CIR (Appeals). He stated that declaration of cost of sales against which no sales had been declared was sufficient to conclude that local purchases had been made. According to the D.R only logical conclusion drawn could be that sales has been made out of these local purchases profit of which had not been offered for tax.

4. We have given due consideration to the facts of the case arguments given before us by the learned A.R as well as learned D.R. we have also considered the case-laws relied by the learned A.R. We are convinced that there was nothing available on record which could establish actual existence of local purchases and local sales. There was nothing on record to establish that the appellant earned income to the extent estimated by the Additional Commissioner. We feel no hesitation to hold that the revision resulting into estimation of income is based upon assumption and guesswork. Calling for the audited accounts for the tax years 2004 to 2009 and bank statements for the tax years 2004 to 2011 through second noticed is an act completely out of jurisdiction for the purposes of amendment under section 122(5A). It stands established that the Additional Commissioner wanted to make inquires for the amendment which act has already been held as illegal in the reported judgments quoted by the learned A.R. The first show cause notice issued was defective as it had no definite material to establish the co-existence of erroneousness and prejudice rather it needed further enquires. In number of judgments it has already been held that provisions of section 122(5A) of the Income Tax Ordinance, 2001 are different from the provisions of section 66A of repealed Ordinance, 1979. The officer authorized to make amendment under section 122(5A) has no authority/jurisdiction to enter into enquires or call for the documents/ record to arrive at some conclusion. It is well settled that definite information regarding erroneousness and prejudicial must be visible from the face of record. In this case there is no such information available on record that cost of sales actually represented local purchases. Similarly there is no information available on record to establish that the taxpayer has receipts/income from the sale of locally purchased goods. The Additional commissioner asked for the documents/record, he showed his intention or the estimation of receipts from the locally purchased goods. We without any hesitation hold that action was based on assumptions which is not allowable in proceedings under section 122(5A). We have also considered the judgment reported as 2008 PTD (Trib.) 342 and 2012 PTD (Trib.) 1593 in which discussion based upon case-law 2010 PTD 111 has been made in para. 19(F). Learned Tribunal did not approve the fishy enquiries for the invocation of section 122(5A), such approach, if allowed, would result into gross misuse of provisions of law and mere suspicion could not be a basis to invoke section 122(5A) of the Income Tax Ordinance, 2001. Tribunal in the above referred judgment has held that notices pointing out deficiencies and asking for explanations, documents, evidences are invalid. On the basis of discussion made supra we feel no hesitation in holding that action of the Additional Commissioner is ab initio illegal as there was no proper basis for invoking the provisions of section 122(5A). The action of Additional Commissioner is clear cut case of estimation of income which is out of purview of section 122(5A), we, therefore, hereby cancel the amended orders for the tax years, 2010 and 2011. Appeal allowed. CMA/22/Tax(Trib.) Appeal accepted.