I.T.A. NO. 122/KB OF 1996-97 VS I.T.A. NO. 122/KB OF 1996-97
1997 P T D (Trib.) 902
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Chairman and S.M. Sibtain, Accountant Member
I.T.A. No. 122/KB of 1996-97, decided on 19/12/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Powers of Inspecting Assistant Commissioner to revise Income Tax Officer's order---Scope---Essentials and requisites---Inspecting Assistant Commissioner while issuing notice under S.66-A, Income Tax Ordinance, 1979, neither had any material on record to consider that the assessment was erroneous and prejudicial to the interest of revenue nor after the issuance of such notice he could find any material on record to form such opinion-- Order of I.A.C. to the effect that assessment order was erroneous and prejudicial to the interest of revenue was not sustainable in circumstances.
Mrs. Zaibunnisa v. CIT 1982 PTD 36 and M/s. United Builders Corporation v. CIT 1984 PTD 137 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.66-A----Powers of Inspecting Assistant Commissioner to revise Income Tax Officer's order---Scope---Mere disagreement between officers on result of assessment, held, could not be a valid reason to resort to S.66-A of the Ordinance.
M/s. United Builders Corporation v. CIT 1984 PTD 137 fol.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.66-A---Power of Inspecting Assistant Commissioner to revise Income Tax Officer's order---Scope---If an assessment order is not found up to the mark in quality by I.A.C., that would not be sufficient ground for invoking S.66-A of the Ordinance since the condition precedent to invoke said section was that the assessment order should be found to be erroneous and at the same time prejudicial to the interest of revenue---Until and unless said two conditions were satisfied, mere poor quality of assessment order would not provide justification for invocation of S.66-A, Income Tax Ordinance, 1979,
(d) Income Tax Ordinance (XXXI of 1979)---
----S.66-A---Powers of Inspecting Assistant Commissioner to revise Income Tax Officer's order---Scope---Inspecting Assistant Commissioner has no authority to substitute assessing officer's conclusion with his own discretion and his own way of appreciating the facts for arriving at preconceived desired result.
Mrs. Zaibunnisa v. CIT 1982 PTD 36 and M/s. United Builders Corporation v. CIT 1984 PTD 137 ref.
Abid Sherazi and Javed Ahmad Siddiqui for Appellant.
Inayatullah Kashani, D.R. for Respondent.
Date of hearing: 17th December, 1996.
ORDER
MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).---The above appeal at the instance of assessee is directed against the order, dated 25-6-1996 by the learned I.A.C. of Income-tax, under section 66-A of the Income Tax Ordinance, 1979.
2. Briefly stated the relevant facts are that the appellant is a non resident company with its Head Office in France. The appellant derives income in Pakistan by way of drilling of oil well for M/s. P.G. Co. Ltd. The appellant's assessment order was completed under section 62 of the Income Tax Ordinance, 1979 on 23-4-1995. Subsequently the learned I.A.C. examined the record and observed that the assessment order, dated 23-4-1995 was erroneous and prejudicial to the interest of revenue. He, therefore, issued a notice under section 66-A of the Income Tax Ordinance, 1979 on 7-9-1995. The relevant portion of the notice has been reproduced in the order under section 66-A which reads as follows:---
"Perusal of your income-tax assessment order for the assessment year 1994-95 and the income-tax record reveals that you have been allowed an amount of Rs.7,640 millions on account of Head Office expenses under the impression that the same represents proportionate allowable Head Office expenses vis-a-vis your turnover in Pakistan. However, actually even the allowed expenses represent your world-wide administration expenses, part of which have been incorrectly allowed on proportionate basis under Rule 20. Your claim is prima facie in respect of your world-wide administration expenses and not to Head Office at 16 Bis, Vue Grange Dam Rose, B.P. 100, CEDEX 78143 VELIZY VILLACOUBLAY, as no details whatsoever is available on record. Under the law you are to be allowed only those expenses of general administration nature on proportionate basis as were incurred at Head Office and pertains exclusively to' the oil exploration operation. The claim appears to be highly distorted and exaggerated. Out of your total receipts for Rs.48,559 million your claim for Head Office overhead touches the figure of Rs.7,640 millions which is 16 % . Similarly, no details for transportation and clearing amounting to Rs.5,907 million and spare parts for Rs.4,023 millions (totalling Rs.9,930 millions) are available on record. It would be in the fitness of things to mention here that your auditor Messrs A.F. Ferguson & Co. vide audited accounts note I also stated that, they were not able to physically verify the existence of ... and spare parts value at Rs.2,881 millions located at Dharki...It appears that the assessing officer has not even bothered for the verification of these expenses. The assessing officer was bound to take cognizance of all these matters but he failed to do so. He did curtail your claim by few disallowances but even then he allowed a high inflated claim of 36% of your total receipts without appreciating the fact that expenses claimed as pertained to Head Office expenses could not possibly be actual Head Office expenses but world-wide expenses. The assessment order passed by the assessing officer is, therefore, erroneous in law and prejudicial to revenue which intend to revise in exercise of powers and functions conferred on me under section 66-A of the Income Tax Ordinance, 1979. You are requested to please state your view. You are requested to please furnish item wise printed accounts for the period for the whole corporation and related information such as copies of tax returns shall help crystallise the matter finalization of the same. Similarly, details and evidences for the transportation and clearing alongwith spare-parts expenses as required. "
3. The authorised representative for the appellant replied vide letter, dated 13-10-1995 as follows:---
"In the instant case the assessing officer has framed the assessment order under section 62 after verifying the details of expenses claimed by the assessee company only then he was to make certain add-backs. Your impugned show-cause notice is based on presumption as the word specifically used by you in the aforesaid notice is that 'Head Office Expenses could not possibly be actual Head Office Expense but world-wide expenses'. It is submitted that perhaps you are unable to comprehend/understand the issue but merely on the basis of presumption and looking the quantum of expenses you have issued the notice under reference. It is submitted that at page No.l in last paragraph the assessing officer has specifically mentioned that the claim of Head Office Expenses being 14.70 % is allowed. These expenses are allowed by the assessing officer after examining the details in the light of Rule 20 read with clause (E) of section 24 of the Income Tax Ordinance, 1979. Your presumption that the expenses claimed by the assessee Head Office Expenses would be World-wide Expenses is nothing but proves your narrow mindedness. The turnover of the instant company is not in thousands but in billions of Rupees. As is evident from the certificate of Mr. Louis Faure wherein he has certified that the Head Office Allowances for Pakistani Branch is 14.70% of the total Head Office Expenses on the basis of Formula as under:
HEAD OFFICE CHARGES X TURNOVER OF RESPECTIVE COUNTRY
-----------------------------------------------------------------------------------
COUNTRY TURNOVER
The total countries turnover in French Franc is 18,66,84,000.While the Head Office Expenses is French Franc 2,74,36,000. We enclosed herewith the copy of certificate and debit note of the foreign auditors and Head Office to your information. Therefore, the expenses claimed by the assessee company is absolutely within the four corners. The total Pakistani turnover represents 14.70% meaning thereby 85.30% receipts pertained to other country. The Head Office proportionate expenses claimed by the Pakistani Branch only Rs.7.64 millions which is the proportionate expenses of Pakistani Branch. It is further submitted that the Auditor's Certificate clearly postulate that they have debited an amount of Rs.7.64 millions to Pakistani Branch as proportionate expenses to the receipts of Pakistani Branch. Alongwith the Certificate the bifurcation have been furnished to the Assessing Officer. This is the reason that the Assessing Officer after having fully satisfied with the details have allowed the expenses.
Your second allegation is that the Assessing Officer has allowed the transportation and other expenses without having details is also incorrect. We apprehend that the aforesaid details which were submitted by us alongwith our Covering Letter being the consolidated. One for the assessment years 1993-94 and 1994-95 the same is not considered by you. You have referred the statement of Auditor's Report regarding the spare parts represents as Current Assets amounting to Rs.8,81,958 that they were not able to physically verify the existence of such spare-parts. In this respect we have to inform you these stocks are lying at various sites and even in the immediate past years the same have been shown continuously by the assessee company in their accounts and no depreciation whatsoever has beats charged nor any part thereof has been claimed as an expense as such your referring the report of auditors is incorrect. The spare-parts as stated above are lying at the sites and practically the auditors were unable to visit the site due to various reasons i.e. one Lack of time, the other one is security. Furthermore, this is a balance-sheet item and our client has shown the value as appearing in their books since last three years and you will appreciate that they have not created any provision against such assets as normally other company do for reducing their tax liability. As stated above that out of the aforesaid assets on expenses claimed either on account of provision. Parts consumed or depreciation, therefore, in no way it can be termed as losses to Government Revenue. We do not allege any specific allegation regarding the mishandling but at your part but are of the firmed view that the details furnished by us might have been placed in other miscellaneous covers for the assessment year 1993-94 etc. etc. We are very much confident that we have submitted the details to the assessing officer and at the time of assessment he has verified such details."
4. The learned I.A.C. was not satisfied with the explanation furnished and directed the appellant to produce the required evidences such as item wise print out copies of income return, complete evidence for transportation/clearing and spare-parts expenses. The appellant replied that all the relevant details were furnished to the assessing officer who had framed the assessment order and instead of verifying the same the learned I.A.C. was issuing letters based on presumption. It was stated that there is nothing on the record to justify the intended action under section 66-A. It was further stated that all the details were available on record and references have been made to these details in the assessment order. The learned I.A.C. again feeling dissatisfied asked the appellant to produce statement of global account statement and copies of return of income filed by the parent company in order to substantiate the claim of Head Office expenses. The clarification/justification and copies of original bills/vouchers in respect of claim of transportation and clearing charges of Rs.4,150 millions for movement of right and expenditure of Rs.4,023 million on spare parts account were also required to be produced. The appellant thereafter filed a writ petition in the Honourable High Court and Honourable High Court while dismissing the writ petition desired that the further proceeding may be conducted by some other I.A.C. The proceedings were, therefore, transferred to another I.A.C. The appellant, however, could not produce, the copy of global accounts and return filed by the parent company in France and other books maintained in the Head Office. The learned I.A.C., therefore, held that as the assessee was not able to produce the required documents, therefore, the assessment was being modified on the basis of whatever evidences/explanations furnished and available on record. The learned I.A.C. held that as the assessee failed to furnish the required documents maintained in France therefore, expenses under the Head of Head Office expenses were curtailed to 50% and thus an amount of Rs.36,28,139 was added back to the total income. Likewise an amount of Rs.44,75,308 was added back by making disallowance under the head transportation and clearing expenses for want of evidence. An amount of Rs.31,14,897 was added back by making disallowance under the head spare-parts expenses. Thus, a total amount of Rs.1,14,10,344 was added to the original income at Rs.85,37,650. The appellant being dissatisfied has preferred this appeal.
5. Heard Mr. Javed Ahmed Siddiqui, learned counsel for the appellant and Mr. Inayatullah Kashani, learned representative for the department. Mr. Javed Ahmed Siddiqui has submitted that the learned I.A.C. was not justified in invoking the provisions contained in section 66-A as the conditions precedent were not satisfied. Mr. Javed Ahmed Siddiqui has contended that the powers under section 66-A can be exercised by the learned I.A.C. after calling for and examining of record and considering any order passed in said proceeding by the Deputy Commissioner is erroneous in so far as it is prejudicial to the interest of revenue. He may make such finding as he deems necessary and passed such order thereon as the circumstances of case justify including enhancing or modifying of assessment or cancelling the assessment and directing afresh assessment to be made. He has submitted that a bare reading of section 66-A shows that the condition precedent is that after examining the record the I.A.C. should consider the order to be erroneous and prejudicial to the interest of revenue. It means that there should be something on the record from which the learned I.A.C. may consider an assessment order to be erroneous and prejudicial to the interest of revenue and mere observation without any material on record in this behalf is not sufficient. In support of his contention Mr. Javed Ahmed Siddiqui has placed reliance on a judgment of Bangladesh Supreme Court in the case of Mrs. Zaibunissa v. C.I.T. reported as 1982 PTD 36 it has been held by the Bangladesh Supreme Court as follows:---
"For answering the reference the High Court Division was required to consider whether the order of the Income Tax Officer, dated 27-1-1975 was erroneous and prejudicial to the interests of revenue, so as to empower the Joint Commissioner to assume jurisdiction under section 34-A and whether bona fide annual value was determined by him in accordance with the provisions of section 9 of the Income Tax Act. The High Court Division answered the question without properly applying its mind to this aspect of the matter. As regards section 34-A, it simply held that Inspecting Joint Commissioner had wide powers to pass any order as the circumstances of the case may justify including an order enhancing the assessment. The learned Judges did not at all consider whether there were materials to justify the application of section 34-A. They failed to notice that power under section 34-A can be exercised only when it is found that assessment was erroneous and prejudicial to the interests of revenue. There must be some material before the Joint Commissioner for finding that the order of the Income Tax Officer was erroneous and prejudicial to the interests of revenue and mere observation to that effect is not sufficient to assume jurisdiction. "
6. Mr. Javed Siddiqi has next placed reliance on the judgment of Azad J&K High Court in the case of M/s. United Builders Corporation v. C.I.T. reported as 1984 PTD 137 wherein it has been held that "provision of section 34-A of the Income-tax Act, 1922 was supervisory in nature. Determination that order passed by I.T.O. was erroneous and prejudicial to interest of revenue was a necessary condition to be satisfied before learned I. A. C. could exercise power under section 34-A." It has been further held that the "learned I.A.C. cannot invoke jurisdiction under section 34-A of the Income-tax Act, 1922 on arbitrary, vague and fanciful assumption based on hypothesis of personal knowledge. The jurisdiction under section 34-A can be invoked on the basis of sound facts leading to inference that assessment made by the I.T.O. was in any manner erroneous and prejudicial to the interests of revenues. It has been further held as follows:---
"It was noticed that I.A.C., felt advised to discard the assessment order of I.T.O., as in his estimation, I.T.O. accepted low income of the assessee and allowed concession on various items. It is well accepted that provisions of section 34-A were not available on the ground of mere disagreement in assessment. Such powers can be invoked only when an order of Income Tax Officer is found deviating from law. Thus, only that I.A.C. was not in agreement with the result of assessment made by the I.T.O., was not a genuine reason for resort to section 34-A. The other aspect of the case is that power conferred on I.A.C. under section 34-A, is just in the nature of supervisory power. In exercise of supervisory authority, I.A.C. was not expected to indulge in deep inquiry by assuming the role of I.T.O. The distinction between their positions was obvious."
7. Mr. Javed Ahmed Siddiqi has proceeded on to argue that the learned I. A. C. issued notice under section 66-A on mere presumption and assumptions without any material on the record for considering that the assessment order was erroneous and resulted in loss of revenue to the exchequer. He has drawn our attention to the notice issued by the learned I.A.C., dated 7-9-1995 in which the learned I.A.C. has stated that Your claim is prima facie in respect of your world-wide administration expenses and not to Head Office as no details whatsoever is available on record. The learned I.A.C. has further stated in the show-cause notice that 'the claim appears to be highly distorted and exaggerated.' The learned I.A.C. has proceeded on to observe that, it appears that the assessing officer has not even bothered for the verification of these expenses'. The learned I.A.C. has further observed that, 'the assessing officer was bound to take cognizance of all these matters but he failed to do so. He did curtail your claim by few disallowances but even then he allowed a high inflated claim of 36% of your total receipts without appreciating the fact that expenses claimed as pertained to Head Office expenses could not possibly be actual Head Office expenses but world-wide expenses. The assessment order passed by the assessing officer is, therefore, erroneous in law and prejudicial to revenue'.
8. Mr. Javed Siddiqi has submitted that all the above statements in the show-cause notice amply prove that the learned I.A.C. had no material whatsoever to consider the assessment order to be erroneous and prejudicial to the interests of revenue. Instead of giving any specific instances the learned I.A.C. has time and again observed that the claim appears to be highly distorted, it appears that the assessing officer has not bothered to verify the expenses the Head Office expenses could not possibly be actual Head Office expenses. Mr. Javed Siddiqi has submitted that all these observations which are not based on any material or basis are arbitrary and capricious. Mr. Javed Siddiqi has finally submitted that the learned I.A.C. incorrectly invoked jurisdiction under section 66-A without assigning any reason or showing any material as to why he considered the assessment order to be erroneous and prejudicial to the interest of revenue except that he did not agree with the treatment meted out by the assessing officer and, therefore, the order under section 66-A is not sustainable in fact and law.
9. The learned D.R. has supported the impugned order. However, when asked to show any basis or material for considering the assessment order to be erroneous and prejudicial to the interest of revenue, the learned D.R. has submitted that no tangible material is available on record. He had no option but to concede that the observations made by the learned I.A.C. that the assessing officer has not verified the expenses or the claim submitted by the assessee was distorted and exaggerated was result of mere presumption and is not substantiated with any material on record.
10. We have carefully considered the contentions raised by the learned representatives for the parties. We are persuaded to agree with the submission of Mr. Javed Ahmad Siddiqui that neither before issuance of notice under section 66-A the learned I.A.C. had any material on record to consider that the assessment was erroneous and prejudicial to the interest of revenue nor after issuance of notice the learned I.A.C. could find any material on record to form such opinion. The Azad J & K High Court in the judgment reported as 1984 PTD 137 has made a distinction in the jurisdiction between an I.T.O. and I.A.C. as a supervisory officer. We are in respectful agreement with the observation of Azad J & K High Court that mere disagreement between officers on result of assessment could not be genuine reason to resort to the provision contained in section 66-A of the Income Tax Ordinance, 1979 which contains similar provision as in section 34-A of the (Repealed) Income-tax Act, 1922. It is further held that if an assessment order is not found up to mark in quality by an I.A.C. it is not sufficient ground for invoking section 66-A as a condition precedent is to arrive at an objective conclusion to the effect that the assessment order is erroneous and at the same time prejudicial to the interest of revenue. Until and unless these two conditions are satisfied mere poor quality of an assessment would not provide justification for invocation of jurisdiction under section 66-A. We further agree with the contention of learned counsel for the appellant that under section 66-A of the Income Tax Ordinance, 1979 an I.A.C. has no authority to substitute his own discretion and his own way of appreciating the facts for arriving at preconceived desired result. Consequent to our finding that there was no material on record with the learned I.A.C. for holding that the assessment order was erroneous and prejudicial to the interest of revenue it is held that the order under section 66-A is not sustinable in law and is hereby vacated.
11. The appeal is allowed accordingly and original assessment order is hereby restored.
M.B.A./306-A/Trib. Appeal allowed.