Messrs BRISTAL FLOUR MILLS (PVT.) LIMITED, FAISALABAD VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2002 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 2938 (2002)

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 62‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXV of 2000), S.9‑‑‑Assessment‑‑‑Complainant/assessee leased out its flour mill‑‑‑Lease Agreement‑‑‑Authenticity of the lease agreement was rejected by the Assessing Officer on the ground that agreements for purchase of wheat with District Food Controller were executed by the complainant Company itself through its Managing Director in spite of explanation that under lease agreement, the lessee was permitted to use the name of the complainant/assessee for the purpose of obtaining wheat quota etc. and assessment proceedings had also been completed under section 62 in the hands of lessee in which the same basis for determination of income (viz. production per electricity units consumed) was being adopted as in the case of the complainant‑‑ Validity‑‑‑Genuineness of a lease arrangement was a question of fact which had to be verified with reference to the situation on the ground‑‑ Assessment order for the two years showed no mention anywhere that the Assessing Officer had made any inquiries to ascertain whether the lease arrangement was genuine and whether the business was in fact being carried on by the complainant Company or by the lessee‑‑ Assessing Officer had, on the other hand, based the assessments entirely on the inference drawn from the fact that the wheat purchase agreements had been signed by the complainant Company although the complainant had pointed out that such an arrangement was quite in accordance with the terms of the lease agreements‑‑‑Assessments based on a mere inference could not be considered as valid‑‑‑Federal Tax Ombudsman recommended. that the income tax assessment for the years 1999‑2000 and 2000‑2001 be set aside by the Commissioner under S. 138 of the Income Tax Ordinance, 1979 with the directions that fresh assessments be made after making proper inquiries in the case, particularly with regard to the leasing arrangement and after confronting the complainant with the result of the inquiries.

Muhammad Bashir Malik. A.R. for the Complainant.

Rajabuddin, I.A.C. Range‑I, Companies Zone for Respondent.

FINDINGS/DECISION

This is a complaint relating to income tax assessment proceedings in the complainant's case for the assessment years 1999‑2000 and 200‑2001. The main points in the complaint are as follows:‑

(i) During the assessment years 1999‑2000 and 2000‑2001 the complainant had leased out its flour mill to an existing income tax assessee holding an NTN.

(ii) For the assessment years 1999‑2000 and 2000‑2001 the complainant declared income of Rs.98,971 and Rs.15,254 and after adjusting brought forward losses net losses for the two years were shown at Rs.606,186 and Rs.771,950 respectively.

(iii) The Assessing Officer has issued letters dated 17‑5‑2002 and 25‑2‑2002 in which he has expressed the intention to reject the authenticity of the leasing arrangement and to assess business income for the two years in the complainant's hands.

(iv) This proposed action is quite unjustified. For the assessment years 1991‑92 to 1996‑97 also the agreement with the then lessee was rejected but was fatally accepted by the Income Tax Appellate Tribunal. Similarly for the assessment years 1997‑98 and 1998‑99 also leasing arrangement has been accepted by CIT (Appeals).

(v) The complainant, however, apprehends that despite this history of the case the assessment for the years 1999-2000 and 2001-20002 will be made after rejecting the leasing arrangement.

In the light of the above it has been prayed that directions he issued to the Assessing Officer to accept the leasing arrangement.

2. The respondent's reply has been received and the representatives of the complainant and the respondent have attended. In the respondent's reply it is stated that the mill was claimed to have been leased out during the assessment years 1999‑2000 and 2000‑2001 but information collected from the District Food Controller, Faisalabad showed that the agreements for purchase of wheat with District Food Controller dated 7‑8‑1998 and 18‑8‑1999 were executed by the complainant Company itself through its Managing Director, Mr. Muhammad Akhtar. It was thus contended that since purchase of wheat had been made by the complainant Company, the so‑called lease arrangement was not genuine and has accordingly been rejected. It was also contended by the respondent that the facts relating to the lease arrangements for earlier years were different and have no relevance to the facts in the assessment years 1999‑2000 and 2000‑2001. It is further stated that assessments for the two years have been made and the assessments are quite valid being based on definite information from the District Food Controller, Faisalabad. It is thus contended that no maladministration is involved in the case.

2. During the hearing the assessment orders under section 62 for the assessment years 1999‑2000 and 200:‑2002 were produced in which income has been assessed at Rs.2,126,400 and Rs.16,05,718 respectively. In the assessment orders it was noted that the complainant had taken the plea that in para. 13 of the lease agreement with the lessees it was clearly stated that the lessee was permitted to use the name of Bristal Flour Mills (Pvt.) Limited for the purpose of obtaining wheat quota etc. and that, therefore, the fact that in the agreement with the District Food Controller, Faisalabad, the name of the complainant was mentioned did not mean that the lease agreement was not genuine. In the assessment orders, however, the Assessing Officer did not accept this explanation and referred to three other cases in which wheat purchase agreements with the Government had been signed by the lessee and not by the owners of the units. It was also observed in the assessment order that the complainant had been confronted in the matter but was unable to further substantiate its case. The complainant, however, reiterated during the hearing that the lease agreements with Muhammad Tufail, the lessee were absolutely genuine and there was no valid reason to doubt the authenticity of the agreements. It was also pointed out that the lessee Muhammad Tufail had been assessed under section 59(1) of the Income Tax Ordinance for the assessment year 1999‑2000 while assessment proceedings for the year 2000‑2001 had also been completed under section 62 in which the same basis for determination of income (viz. production per electricity unit consumed) was apparently being adopted as in the case of the complainant. It was further pointed out that the physical leasing out of the mills was an easily verifiable fact since the lessee was conducting the business on a regular basis and could be contacted at the premises at any time. The respondent's representative, on the other hand, merely reiterated the observations in the assessment orders.

4. The contentions of the two sides have been considered and it is found to be quite obvious that the genuineness of a lease arrangement is a question of fact which has to be verified with reference to the situation on the ground. In the assessment orders for the two years it has not been mentioned anywhere that the Assessing Officer had made any inquiries to ascertain whether the lease arrangement was genuine and whether the business was in fact being carried on by the complainant Company or by the lessee. The Assessing Officer has, on the other hand, based the assessments entirely on the inference drawn from the fact that the wheat purchase agreements had been signed by the complainant Company although the complainant had pointed out that such an arrangement was quite in accordance with the terms of the lease agreements. The assessments based on a mere inference can obviously not be considered as valid.

5. In the light of the above it is recommended that;

(i) The income tax assessments for the years 1999‑2000 and 2000‑2001 be set aside by the Commissioner under section 138 of the Income Tax Ordinance with the directions that fresh assessments be made after making proper inquiries in the case, particularly with regard to the leasing arrangement and after confronting the complainant with the result of the inquiries.

(ii) Compliance be reported within 30 days

C.M.A./M.A.K./433/FTOOrder accordingly.