I.TA. NO. 548/LB OF 1994, DECIDED ON 12TH JULY, 1994. VS I.TA. NO. 548/LB OF 1994, DECIDED ON 12TH JULY, 1994.
1995 P T D (Trib.) 1152
[Income-tax Appellate Tribunal Pakistan]
Before Nasim Sikandar, Judicial Member and Muhammad Mushtaq, Accountant Member
I.TA. No. 548/LB of 1994, decided on 12/07/1994.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.59(1)---Self-Assessment Scheme (1992-93), para. 4(ii)---C.B.R. Circular No.16 of 1992, dated 1-7-1992---Selection of case for audit---Scope---Only such cases could be selected for audit with the approval of Regional Commissioner where gross under-statement of income was suspected on the basis of definite information based on material evidence.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.59(1)---Self-Assessment Scheme (1992-93), para.4(ii)---C.B.R. Circular No.16 of 1992, dated 1-7-1992---Selection of cases for audit---Scope---Definite information---Income Tax Officer did not have any information muchless the definite information based on any material evidence but simply indicated that assessee was running factory for manufacturing of steel almirah and steel furniture and that the assessee had a show-room in a local bazar---Such observation of the Income Tax Officer, held, did not constitute any definite information against the assessee and the income-tax return filed by the assessee was wrongly selected for audit under Self-Assessment Scheme (1992 93), para- 4(ii).
M/s. Spiceco International v. Regional Commissioner of Income Tax, Karachi 1993 PTD 1007; M/s. Muhammadi Oil Trading. Co. v. Regional Commissioner of Income Tax, Karachi 1994 PTD 494 and ITO and another v. M/s. Chappal Builders 1993 PTD 1108 (SC) ref.
Ch. Fayyaz Ahmed for Appellant.
Imtiaz Ali Khan, D.R. for Respondent.
Date of hearing: 8th June, 1994.
ORDER
MUHAMMAD MUSHTAQ (ACCOUNTANT MEMBER): --This appeal has been filed on behalf of M/s. Bhatti Steel. Furniture, Gujranwala (hereinafter also referred to as the assessee) challenging the order of learned CIT (Appeals), Gujranwala vide A.O. No.375, dated 14-12-1993.
2. The brief facts leading to this appeal are that the assessee in this case is an individual earning his income from manufacturing of steel almirahs and steel furniture. For the assessment year under consideration, the assessee filed his income-tax return under Self-Assessment Scheme declaring net income at Rs.30,600. The income declared by the assessee was not accepted under Self- Assessment Scheme because the Income Tax Return filed by the assessee was selected' for audit under para. 4(ii) of C.B.R. Circular No. 16 of 1992, dated 1-7-1992.
3. The I.T.O. issued notices under section 61/62 which were not complied by the assessee and assessment was completed by the I.T.O. under section 63 of the Income Tax Ordinance, 1979. The assessee declared sales at Rs.2,65,000. These were estimated by the I.T.O. at Rs.30,00,000. After making addition in the trading account as above and out of-profit and loss account expenses income in the case was estimated by the I.T.O. at Rs.3,20,000 as against declared income of Rs.30,600:
4. Aggrieved by this treatment the assessee went into first appeal and contended before the learned C.I.T. (Appeals) that this case was selected for audit by the I.T.O. incorrectly. The assessee also agitated completion of assessment under section 63 of Income Tax Ordinance to be unjustified and estimate of sales was contested to be excessive and unjustified. The learned C.I.T. (Appeals) reduced the sales of the assessee to Rs.11,00,000 otherwise the assessment made by the I.T.O. was maintained by the learned C.I.T. (Appeals).
5. The assessee still feels aggrieved and has contended that set apart of the case for audit was illegal and unjustified. The assessee has also contended that completion of assessment under section 63 was unjustified. Estimate of sales is excessive, G.P. rate applied was excessive and disallowances out of profit and loss expenses were unjustified. Mr. Fayyaz Ahmed, Advocate and Pana Khalid Saifullah, I.T.P. who attended on behalf of the assessee have repeated their assertions as indicated in the grounds of appeal. It has been contended by the learned counsel of the assessee, the I.T.O. was not justified in setting apart of this case for audit because the I.T.O. did not have any definite material for doing so. The learned counsel of the assessee also contended that in this case actually no inquiry was conducted and the report of the Income Tax Inspector was bogus. The learned counsel of the assessee pointed out that this case was selected for audit on the ground that assessee was running a factory for manufacturing of steel furniture and steel almirahs whereas actually the assessee has obtained the factory on rent.
6. The learned D.R. on the other hand supported the orders of the authorities below and contended that this case was correctly selected for audit because assessee had purchased property and income declared was not enough which could cover the purchase of property. The learned D.R. also pointed out that Income Tax Officer provided the assessee a large number of opportunities and issued notices under section 61/62 of Income Tax Ordinance a number of times but assessee did not attend and also did not furnish any information as requisitioned by the I.T.O.
We have carefully considered the facts of the case and arguments advanced from both the sides. A perusal of the assessment order indicates the reasons for selection of this case as under:---
"The case was recommended to set apart under para. 4(ii) of the Self- Assessment Scheme for normal assessment on the following grounds:---
The assessee filed the return for the first year as a new assessee for the assessment year 1987-88. The declared and assessed results from 1987-88 to 1991-92 are as under:---
| Asstt. year | Income declared /assessed |
| 1987-88 | Rs.24,200 | 59(1) |
| 1988-89 | Rs.30,300 | -do- |
| 1989-90 | Rs.30,300 | -do - |
| 1990-91 | Rs.30,400 | -do - |
| 1991-92 | Rs.30,500 | -do- |
`It reveals through local enquiries that assessee is running a factory of manufacturing of steel almirahs and steel furniture. It is further revealed that the assessee's show room is in Dal Bazar', Gujranwala which is the main market of sale of these products. The assessee has obtained a C.V.T. certificate for the purchase of property on 20-11-1991 relevant to assessment year 1992-93. The declared/assessed results of the assessee do not justify to purchase the property. This fact needs thorough probe. It is further revealed that the assessee's business is on the higher scale and declared results do not commensurate with the business extent. Under the circumstances it is a fit case to set apart for normal assessment':'
The case was set apart for normal assessment under para. 4(a) by the worthy Regional Commissioner of Income Tax, Northern Region, Islamabad of which the assessee was informed.
8. From a perusal of the above paragraph from the assessment order, it is evident that this case was selected for audit for following reasons:---
(i) That it was revealed from local enquiries that assessee is running a factory of manufacturing steel almirahs and steel furniture.
(ii) That it is further revealed that assessee's show room is in Dal Bazar, Gujranwala which is the main market of sale of these products.
(iii)That the assessee has obtained a C.V.T. certificate for the purchase of property on 20-11-1991 relevant to assessment year 1992-93.
(iv)That the declared/assessed results of the assessee do not justify to purchase the property.
It will be pertinent here to examine the Self-Assessment Scheme for the assessment year 1992-93. C.B.R. Circular No.16 of 1992 dated 1-7-1992 indicates that out of the returns filed under Self-Assessment Scheme, the returns can be selected for audit through the random ballot by computer or for understatement of income. The relevant para. 4 for selection of cases for audit in above Circular is reproduced as under:---
SELECTION OF CASES FOR AUDIT
4. From amongst those qualifying for the Self-Assessment Scheme, returns may be selected for audit,
(i) Through computer ballot up to five per cent.. of the returns received. However, from amongst the returns in which income declared for the assessment year 1992-93 is higher by 25% or more as compared with the last assessed income or the income assessed for the assessment year 1987-88, whichever is the higher, the selection shall be restricted up to a maximum of three per cent. These percentages may vary within a trade or income group or from Circle to Circle, and
(ii) With the approval of Regional Commissioner of Income tax where gross understatement of income is suspected on the basis of definite information based on material evidence."
9. The assessee's case has been selected for audit under para. 4(ii) of above circular of C.B.R. Under this sub-para only such cases can be selected with the approval of the Regional Commissioner where "gross understatement of income is suspected on the basis of definite information based on material evidence".
10. From the perusal of relevant paragraphs of the assessment order, which have been reproduced above, it is quite evident that the I.T.O. did not have any information muchless the definite information based on any material evidence. The I.T.O. simply indicated that assessee was running factory for manufacturing of steel almirahs and steel furniture and that the assessee had a show-room in Dal Bazar, Gujranwala but these observations do not constitute any definite information against the assessee. The ITO. has referred that assessee purchased a property on 20-11-1991, the purchased price of the property and the reason why the property purchased by the assessee was not covered by the income declared or assessed, has not been indicated. In fact in the entire assessment order, the property purchased by the assessee' has not been discussed. The question of selection of the case under para. 4(ii) of the Self-Assessment Scheme on the basis of definite information based on material evidence came under consideration of honourable Karachi High Court in the case reported as 1993 PTD 1007 M/s. Spiceco International v. Regional Commissioner of Income Tax, Karachi and 1994 PTD 494. M/s. Muhammadi Oil Trading Co. v. Regional Commissioner of Income Tax, Karachi. The relevant extract from the case reported as 1993 PTD 1007 is reproduced below:---
"The provisions of subsection (1) of section 59 of the Income Tax' Ordinance indicate that the Central Board of Revenue .has been authorised to make a scheme of self-assessment and the said subsection further indicates that where any return of total income for an income year furnished by the assessee under section 55 of the Ordinance qualifies for acceptance in accordance with the provisions of such scheme, the Income Tax Officer shall assess the total income of the assessee on the basis of such return and determine the tax payable on the basis of such assessment.
It clearly follows from the definition of the expressions `information', `definite information' and `material evidence' that information must be substantial which may lead to discovery. Such information, therefore, should not be based on mere guess, gossip or rumour but it should be based on material evidence against the assessee. The Income Tax Officer, therefore, should form an honest belief upon material, which should reasonably support such belief.
The word `suspected' has been used in the said paragraph alongwith the words `gross under statement of income' and `definite information based on material evidence'. A plain reading of the said paragraph makes it abundantly clear that the Income Tax Officer or the Regional Commissioner of Income tax can proceed against an assessee or grant approval as the case may be, only on the ground of definite information which must be based on material evidence. Therefore, such action cannot be based on mere suspicion. Suspicion, in contradistinction to definite information, means partial or unconfirmed belief. The use of the word `gross' in the said paragraph further indicates that it is not in case of every understatement in regard to income that empowers the Income Tax Officer to take action against an assessee under the said paragraph, but only when gross under statement appears to have been made by him.
The Income Tax Officer in case any information is received by him is obliged to hold an inquiry and in case the assessee feels aggrieved he will have the departmental remedies as provided in the Ordinance available to him."
11. Precisely this question came under consideration of Honourable Supreme Court of Pakistan in a case reported as 1993 PTD 1108(SC), I.T.O. and another v. M/s. Chappal Builders.
12. Respectfully following the observations of their Lordships of Karachi High Court in the case cited above 1993 PTD 1007, we hold that the income-tax return filed by the assessee under Self-Assessment Scheme has been wrongly selected for audit under para. 4(ii), C.B.R. Circular referred to above, and direct that income declared by the assessee should be accepted. However, the I.T.O. can invoke any other provisions of law available to him for assessing the concealed income, if any.
13. Since we have accepted the appeal of the assessee on the above grounds of appeal, we do not feel it necessary to discuss other contentions made by the assessee.
14. The appeal is allowed as above.
M.B.A./109/TAppeal allowed.