2025 PLP (Trib (PTD)

MIAN ABDUL BASIT, (JUDICIAL MEMBER).

The titled appeal has been filed by the appellant/taxpayer against the Order dated 29.04.2024 passed by the learned Commissioner Inland Revenue (Appeals), RTO, Sargodha [CIR(A)] whereby Order passed under section 161(1) of the Income Tax Ordinance, 2001 (The Ordinance, 2001) was modified.

2. Brief facts of the case as per record that the taxpayer an AOP deriving income from running a Rice Mill Being a prescribed person in terms of Section 153(7) of the Ordinance, 2001, the AOP taxpayer was under legal obligation to deduct/collect tax wherever applicable under various legal provisions of the Ordinance, 2001. The taxpayer was required not only to deduct/collect tax, but had to deposit it timely in terms of Section 160 of the Ordinance, 2001. Likewise, the deducted, collected and deposited tax was to be informed to the IRIS department via periodical withholding tax statement but the taxpayer failed to do so, therefore, the assessing officer issued notice on 23.02.2023 but no compliance was made, hence the assessing officer issued notice under sections 161/205 of the Ordinance on 17.04.2023. In response to show-cause notice the taxpayer submitted a reply on 26.04.2023. After examination of the reply the assessing officer was not satisfied and passed the impugned order under section 161 of the Ordinance in the following manner:-- Purchases liable to tax of Rs.182,677,919/- @1%: Rs.1,826,779 Direct Exp. liable to tax of Rs.892,100/- @10% Rs.89,210/- Indirect Exp. liable to tax Rs.9,930,998/- @ 10%: Rs.993100/- Total of tax under section 161 Rs.2,909,089/- Default surcharge under section 205 @ 12% Per Annum on above amount: Rs.290,749/- Total of Demand under section 161/205: Rs.3,199,838/- Aggrieved with the treatment of the assessing officer, the appellant filed an appeal before learned CIR(A), Islamabad, who vide order dated 29-04-2024 modified the order of the assessing officer. The learned CIR(A) The appellant has assailed the order of learned CIR(A) through the instant appeal, hence the present proceedings. In deciding the appeal, the learned CIR(A) upheld the assessing officer's decision regarding the estimation of commission and the determination of tax withholding default on the estimated commission amounting to Rs.1,826,

779. However, the CIR(A) deleted the rest of the tax demand, which was based on the alleged non-deduction of tax on other expenses. The tax department did not challenge the CIR(A)'s order concerning non-deduction on other manufacturing, administrative, and indirect expenses. Dissatisfied with the CIR(A)'s decision, the taxpayer, however, has filed an appeal before this forum to contest the CIR(A)'s finding on the issue of non-withholding of tax on the estimated commission, based on the grounds raised in the memorandum of appeal. Hence, these proceedings have been initiated.

3. Mr. Farhan Dawood, Advocate attended the proceedings on behalf of the appellant/taxpayer, whereas on the other hand Ms. Hira Nazir, DR appeared on behalf of the tax department

4. The learned Authorized Representative (AR) argued that the order passed by the learned CIR(A) under section 129(1) of the Ordinance, 2001, dated 29-4-2024, is ultra vires the Income Tax Ordinance, 2001. The AR contended that the order is illegal, void ab initio, without legal effect, and should be annutled and deleted. Furthermore, the learned AR argued that the decisions of both the CIR(A) and the assessing officer are legally flawed and contrary to the facts of the case, rendering them untenable in law. The AR further explained that the taxpayer operates a rice mill and derives income from agricultural produce, specifically paddy (Mungi). This produce is purchased through commission agents, and tax on such transactions was required to be charged under Section 233 of the Ordinance, 2001, not under Section 153(1)(a) as was done by the assessing officer. The AR stated that tax under Section 233 was duty deducted and deposited into the government treasury on commission payments, in compliance with the law. Therefore, the AR asserted that the assessing officer's action was illegal and contrary to the provisions of the Ordinance. Additionally, the AR highlighted a statement in paragraph 3, page 3 of the order passed by the Deputy Commissioner Inland Revenue (DCIR), which referred to the Local Market Committee's fixed commission rate of 0.75% to 1% of the total value of the commodity. The AR pointed out that the Local Market Committee has no role in determining the commission rate for commission agents and argued that the finding of the DCIR, based on this information, was illegal, unjustified, and unsupported by any credible evidence from the Local Market Committee. The AR further noted that the taxpayer's commission rate is 0.5%, and the CIR(A) should not have upheld the assessing officer's decision. The AR also referred to a similar case involving M/s. Roman Rice Mills, Registration No. 2569308-5, located in Quaidabad, District Khushab, where the DCIR had accepted a 0.5% commission rate in an order passed under Section 161(1) of the Ordinance, 2001 (Order No. 100000159004864, dated 06.06.2023, for Tax Year 2022). The AR argued that this decision should be consistent with the present case. In summary, the learned AR contended that the commission rate applied by the assessing officer was not in accordance with the law and failed to reflect the actual rate paid by the taxpayer In response, the learned Departmental Representative (DR) strongly supported the order passed by the CIR(A). The DR argued that the assessing officer had adopted the commission rate based on the market standards of the local market committee for the relevant area. According to the learned DR, the taxpayer had reported a commission rate in the return that was half of the rate prescribed by the local market committee. As a result, the assessing officer recalculated the withholding tax based on the commission rate implied by the local market committee. The DR concluded by requesting that the taxpayer's appeal be dismissed.

5. We have carefully considered the submissions made by the learned AR and the learned DR, and thoroughly reviewed the available records in the appeal file and those presented during the hearing proceedings. The key issue for this court's consideration is whether the adjudicating officer/an Inland Revenue officer has the authority to increase the reported expenses (the disbursement of commission) from those documented in the income tax return while conducting proceedings under Section 161 of the Income Tax Ordinance, 2001. Section 161 of the Income Tax Ordinance, 2001, governs the proceedings related to the recovery of tax that has not been withheld or deducted on payments made for expenses incurred. However, the scope of Section 161 is limited to addressing the failure to withhold or deduct the appropriate tax at time of making the payments towards the expenses. It does not provide authority to either increase or decrease the reported expenses, nor does it permit the adjustment of the value of purchases or other related figures. The primary mandate of Section 161 is to ensure that the prescribed person complies with the requirement to withhold or deduct tax on payments made, and to recover any tax that should have been withheld or deducted but was not. It does not extend to revising the underlying financial figures such as the expenses or the values reported in the tax return. during the course of the proceedings. Therefore, the adjudicating officer or an inland Revenue officer can only focus on the withholding or deduction of tax on payments and cannot alter the expense amounts disclosed in the return. During proceedings under Section 161 of the Ordinance, 2001, the assessing officer's role is limited to verifying whether the taxpayer has property withheld ar deducted the required tax on payments made for expenses. The officer is not authorized to increase the amount of expenses reported by the taxpayer or alter the figures provided in the income tax return or financial statements. The core function of Section 161 is to examine whether the taxpayer has complied with the obligation to withhold or deduct tax at the prescribed rate on payments for expenses. It does not empower the assessing officer to reassess or determine the quantum of those expenses for the purpose of recalculating the tax to be withheld or deducted. In other words, the officer can only review the taxpayer's actions concerning the withholding or deduction of tax but cannot adjust or re-quantify the reported expenses. The assessing officer's mandate under Section 161 is strictly confined to ensuring that tax has been withheld or deducted in accordance with the law on the expenses reported by the taxpayer. The officer cannot re-evaluate the amount of those expenses or alter the financial figures provided by the taxpayer.

6. In the present case, the appellant paid a commission at a rate of 0.5% and duly reported this in their return. This fact is acknowledged by the assessing officer in the order passed under Section 161 of the Income Tax Ordinance, 2001, making it an admitted position. Additionally, the appellant withheld and paid tax at the rate of 1%, as prescribed under Section 233 read with Division II of Part IV of the First Schedule of the Income Tax Ordinance, 2001. However, during the course of the proceedings, the assessing officer determined the commission paid to be at a rate of 1% citing the market committee rate, and asserted that tax should have been withheld on the commission calculated at 1% of the transaction value. This approach taken by the assessing officer is flawed, as it involves determining the commission amount first and then calculating the tax payable. However, such an approach is not consistent with the mandate of Section 161 of the Income Tax Ordinance, 2001. Section 161 deals with the obligation of a person to deduct tax at the time of making the payment, and does not grant the assessing officer the authority to re-determine the quantum or percentage of commission paid. The provision specifically pertains to the collection or recovery of tax from the payer, not to the determination of the underlying expenses or commission payments. If the assessing officer had a legitimate concern that the appellant had reported a lower commission than was actually paid, the correct course of action would have been to invoke Section 122 of the Ordinance, 2001, to amend the assessment and make adjustments accordingly. Section 122 allows for the amendment of an assessment where there is reason to believe that the reported figures are incorrect or incomplete. However, the assessing officer cannot, under the framework of Section 161, unilaterally alter the commission rate or the expense figure. Thus, the action taken by the assessing officer to adjust the commission rate and withhold tax on a higher amount was outside the scope of his authority under Section 161 and does not align with the procedural and substantive requirements of the Ordinance.

7. Upon reviewing the first appellate order, it becomes apparent that the learned CIR(A) acknowledged that the assessing officer had estimated the figures for commission and purchases. However, there is no provision under the law that allows for the estimation of expenses when determining the withholding tax obligations. This approach fundamentally contradicts the nature and purpose of proceedings under Section 161 of the Income Tax Ordinance, 2001, which is concerned with the collection of tax at source, not the estimation of expenses. Furthermore, increasing the reported commission (or any other expense) would ultimately reduce the appellant's profit, which in turn would distort the tax assessment process. This renders the entire approach taken by the assessing officer and upheld by the CIR(A) in violation of the core principles of income tax law. The objective of the proceeding under section 161 of the Ordinance, 2001 is to reflect the accurate financial position of the taxpayer, not to artificially adjust expenses to alter the taxable income. The process of altering the quantum of expenses, whether by increasing or decreasing them, falls outside the scope of proceedings under Section 161 of the Ordinance, 2001 Section 161 specifically deals with the obligation to deduct and pay tax at source, and does not grant the assessing officer the authority to make adjustments to the underlying figures of income or expenses. If the assessing officer had reason to believe that the expenses reported by the appellant were incorrect, the correct course of action would have been to invoke Section 122 of the Ordinance, 2001, which provides the mechanism for revising or amending the assessment based on an actual review of the facts. Moreover, it is important to note that the Income Tax Ordinance does not allow for the estimation of tax liabilities based on presumptions or assumptions. A consistent line of judicial precedents has firmly established that tax cannot be imposed based on conjecture or hypothetical scenarios. Tax assessments must be based on concrete, verifiable facts, and there is no room for arbitrary or speculative determinations. Thus, any attempt to adjust the expenses or the tax liability without proper factual basis is legally unsustainable and contrary to established tax principles.

8. During the hearing, the learned AR referred to an order passed by the same assessing authority in the case of M/s. Roman Rice Mills, Quaidabad, District Khushab, where the assessing officer accepted a commission rate of 0.5% for the Tax Year 2022, as per the order under Section 161(1) of the Ordinance, 2001, dated 06.06.2023 (Bar Code No. 100000159004864). However, in the appellant's case, the assessing officer adopted a higher commission rate of 1%, merely stating that "each case has its own facts and circumstances." This reasoning is not convincing, as both the appellant and M/s. Roman Rice Mills are engaged in the same rice milling business in the same region under the same tax jurisdiction Therefore, the facts and circumstances of both cases are virtually identical. The inconsistency in treatment raises concerns of unequal and discriminatory treatment. Such arbitrary differentiation without justifiable grounds violates the principles of fairness and consistency in tax assessments. The tax authority must apply the law equitably, especially when the facts of both cases are essentially the same. The disparate treatment of the appellant compared to M/s. Roman Rice Mills is not only unjustifiable but also amounts to an arbitrary exercise of discretion, which is impermissible under the law. This discriminatory approach is in violation of Article 25 of the Constitution of The Islamic Republic of Pakistan, 1973, which ensures equality before the law. While Article 25 allows for reasonable classification, it must be based on intelligible differentia with a rational nexus to the object sought to be achieved. In this case, no such difference exists between the two situations, making the differential treatment both illegal and unjustifiable. The tax department's acceptance of the same evidence in one case and rejection in the other constitutes a clear violation of Article 25 and should be deemed unlawful.

9. In light of the foregoing legal reasoning, it is hereby concluded that both the order of the assessing officer dated 08.08.2023 and the order of the CIR(A) dated 29.04.2024 are fundamentally flawed and beset with substantial legal defects. These orders are found to be without jurisdiction, rendering them unsustainable. Consequently, both orders are annulled, and the appellant's appeal is hereby accepted.

10. This order consists of nine (09) pages, and I have affixed my signature on each page MQ/10/Tax(Trib) Appeal allowed.