Income Tax Ordinance (XXXI of 1979)---

----S. 59(1)---C.B.R. Circular No.4 of 2001, dated 18-6-2001---Self Assessment Scheme, Para. 9(a)(ii)---C.B.R. Circular Letter No.7(7) S. Asstt/2001, dated 26-3-2002---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Self-assessment-- Setting apart of case for total audit on the ground that net profit of 6% of sales was very low in view of the line of business of the assessee-- Validity---Pre-conditions for total audit include suppression of income; evidence of Revenue potential of the case; clear evidence of decline in income; creation of new assets not covered by the declared income and disparity in expenses on utilities---None of the conditions/factors were found in the complainant's return of income, there was thus no valid reason or justification for selection of the case for total audit---Such infirmity had rendered the decision arbitrary, unreasonable and illegal-- Confronting with supposed deficiencies not covered by the ratio of guidelines would clearly tantamount to ".maladministration" and where "maladministration" was identifiable the matter fell in the jurisdiction of Federal Tax Ombudsman---Even if the allegation of `mala fides was discounted, the complainant/assessee's return deserved to be accepted under Self-Assessment Scheme especially when none of the criteria laid down for 'selection of cases for audit was identifiable---Federal Tax Ombudsman recommended that return be accepted under Self Assessment Scheme.

Siraj-ud-Din Khalid for the Complainant.

Aftab Fahim, Taxation Officer for Respondent.

DECISION/FINDINGS

The Complainant is a URF earning income as retail vendor of garments. It alleges "maladministration" and mala fide in the selection of their return for total audit by the R-CIT by resort to para. 9(a)(ii) of the Self-Assessment Scheme. It prays that:--

(i)Selection for total audit be declared to be without lawful authority and of no legal effect";

(ii)Direction be issued "not to proceed for total audit"; and

(iii)Accept the return for the assessment year 2001-2002 under Self Assessment Scheme.

2. R-CIT's para-wise comments, dated 7-8-2002 were forwarded under Respondent's letter, dated 10-8-2002. He denied "mal administration" or mala fide, questioned the competence of complaint for admission, and justified selection of Complainant's return for total audit.

3. The facts leading to the complaint are that return of income for the assessment year 2001-2002 was filed adhering to the requirements of. Self-Assessment Scheme and compared with the preceding years as under:--

4. The R-CIT issued a show-cause notice on 27-5-2002 conveying that Commissioner had recommended that Complainant's case be set apart for Total Audit by resort to para-9(a)(ii) of the C.B.R. Circular No.4 of 2001 because:--

(i)Net profit at Rs.0.9 (M) against sales disclosed at ks.1.4 (M) yield a net profit of 6% "which is very low in view of your line, of business,

(ii)It was indicative that overhead expenses were excessive and isproportionate, and

(iii)The declared Closing Stock at Rs.4.2(M) seems to be on the lower side.

5. It was submitted on behalf of the assessee that both pre-conditions as provided in the guidelines issued by the C.B.R. vide its Letter No.7(7)/S. Asstt/2001 had not been satisfied in the case of the assessee. Even the reasons stated by RCIT did not conform to the guidelines/factors provided by the Central Board of Revenue for selection of case for total audit. Neither there is any evident decline in the income nor any addition to the assets has been made.

7. There was neither any disagreement in the profile of survey and the return of total income filed by the assessee nor there was any disparity in the expenses on utilities.

8. Under para (9)(a) of the Scheme only 20% returns were to be selected for total audit and this percentage already stood selected under para (9)(a)(i).

9. The recommendations for selecting return for audit made by the CIT were mala fide as well because the department was constantly chasing the assessee. The case for the assessment year 2000-2001 was set apart for total audit which was contested before the Hon'ble High Court through Writ Petition No.12847 of 2001 and was decided in favour on 24-7-2001. The return for 2000-2001 was accepted under section 59-A on 10-11-2001. However, within a period of fifty, days action under section 66-A was taken on 30-12-2001 by the learned IAC canceling the assessment: The assessee filed appeal before the ITAT and got stay order against the re-assessment proceedings under section 62/66A.

10. However, it was submitted that on merits as well there was no decline in income declared by the assessee. For ready reference comparison of declared results with that of last year were submitted:--

2001-20022000-2001

Sales14,000,00013,500,000

G. P.2,100,0002,025,362

G. P. Rate15 %15%

Net Profit900,000800,000

Net Profit Rate6.42 %5.92%

Income declare1,503,2041,310,653

Percentage of income

Declare:10.74%9.71 %

Increase in N.P. rate8.4%

Increase in Income

Declared10.61 %

Thus, it was stated that there was an increase not only in the sales of the assessee but there was increase in the rate of net profit and in the declared income as well. Above all overhead expenses are claimed at Rs.1,200,000 only against Rs.1,225,362 claimed in 2000-2001 while turnover has increased.

11. Complainant's reply, dated 3-6-2002 was rejected by the R-CIT by an order passed on 17-6-2002; hence the instant complaint.

12. The Counsel of the Complainant as well as the representative of the Revenue Mr. Aftab Fahim have been heard. While the former reiterated the submissions recorded supra the later contended that it was not. fair to allege "maladministration" because selection was made adhering, to the procedure prescribed in para-9 of the Self-Assessment Scheme for the year 2001-2002 for which a proper show-cause notice, identifying the reasons for proposed action, was given allowing sufficient time for the reply. The reply was examined and, having not been found satisfactory, a speaking order was passed by the R-CIT on 27-5-2002 which clearly gives an assurance that the exercise is to "check whether the return filed complies with the provisions of law or not" and that total audit does not necessarily mean that income would be enhanced, it is only to put the income to test of verification.

14. The evaluation of-the arguments advanced by the two sides and investigation of facts emerging from these, reveal that none of the parameters prescribed in Policy Guidelines issued by the C.B.R. on 26-3-2001 were identified with any objectivity. The pre-conditions for a selection order by the R-CIT, inter alia, include suppression of income, evidence of Revenue potential of the case, clear evidence of decline in income, "creation of new assets not covered by the declared income and disparity in expenses on utilities. As none of the conditions/factors were found in complainants return of income, there was no valid reason or justification for the R-CIT to select the case for Total Audit. This infirmity has rendered his decision arbitrary, unreasonable and illegal. Therefore, merely confronting the Complainant with supposed deficiencies not covered by the ratio of guidelines, clearly tantamounts to .maladministration" and where 'maladministration, is identifiable the matter falls in the jurisdiction of Federal Tax Ombudsman. allegation of `inala fide' is discounted, the Complainant's return deserves to be accepted under Self-Assessment Scheme especially when none of the criteria laid down for selection of cases for Audit is identifiable.

15. It is consequently Recommended that return be accepted under Self-Assessment Scheme and compliance reported within 30 days of the receipt of this Order.

C.M.A./680/FTOOrder accordingly.