Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 59(1)‑‑‑C.B.R. Circular No.7 of 2002, dated 18‑6‑2002, para.9(a)(ii)‑‑‑Self‑Assessment Scheme, 2002‑2003‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)‑‑ Self‑assessment, setting apart of‑‑‑Assessment year 2002‑2003‑‑‑Setting apart of case for total audit because of the low profit rate declared‑ Validity‑‑‑Adequate evidence was available to show that the overall profit declared by the complainant/assessee was by no means low as compared to the net profit declared or applied in many other cases and in fact the complainant's/assessee's net profit rate was very reasonable even in the context of the Department's agreement with land developers‑ Since case selected for audit on the basis of gross profit rate of 25 % was otherwise distinguishable and resultant net profit rate worked out was also to a lower percentage than in the complainant's/assessee's case, selection of the complainant's/assessee's case for audit merely on the basis of that other case, was not valid‑‑‑Federal Tax Ombudsman recommended that the complainant's/assessee's return be excluded from the cases selected for total audit under para. (a)(ii) of the Self Assessment Scheme, 2002‑2003 and the‑declared income be accepted.

Aurang Zeb, ITP, A.R. for the Complainant.

Asem Iftikhar, DCIT, Circle 1 and Haq Nawaz, Taxation Officer, Rawalpindi for Respondent.

FINDINGS/DECISION

This is a complaint relating to the selection of the complainant's return for the assessment year 2002‑2003 for total audit under para. 9(a)(ii) of the Self‑Assessment Scheme for the year 2002‑2003.

2. The facts are that the complainant is an association of persons carrying on the business of land developers. The RCIT, Northern Region issued a notice expressing the intention to select complainant's case for total audit on the following grounds:‑‑

"For the assessment year 2002‑2003 you have declared sales of land at Rs.18,718,500 and gross profit at Rs.2,667,092 which yields GP rate of 14.25% whereas in other parallel cases i.e. being at NTN 29‑05 - 00710496 GP rate of 25 % is being applied. Thus by application of 25 % GP rate gross profit will be enhanced to Rs.4,679,625. You have not declared true particulars of income."

3. In the reply to the RCIT's show‑cause notice the complainant made the following main points‑

(i)According to the guidelines issued by the C.B.R. for the assessment year 2001‑2002 no case was to be selected for audit on the basis of gross profit rate.

(ii)In the case referred to by the RCIT, assessments were made on the basis of agreed formula up to the assessment year 1998‑99. For the assessment year 1999‑2000 assessment case made on the basis of a complaint and the GP rate of 25% was applied to cover all other elements involved in the complaint. In any case the net profit rate in the case came to 6.62 % against declared receipts of Rs.8,643,485.

(iii)The complainant, on the other hand, had declared total receipts of Rs.18,718,500 with net income of Rs. 1,291,786 which resulted in net profit rate of 6.90%.

(iv)According the agreement between the Colony Developers Association and the Income Tax Department, net income was assessed @ 3.50 % (actually 5 %) of the total turnover.

(v)In two comparable cases (quoted by name) GP rate of only 8% has been applied while in a third case the assessed GP rate is only 2.71 %.

It was thus contended before the RCIT that the case may not be selected for total audit but the contention was not accepted.

4. In the complaint it is stated that the selection was not in accordance with the criteria laid down by the Central Board of Revenue in the relevant guidelines. In addition to the three cases cited in the reply to the RCIT, cases assessed at NTN 02‑27‑0460173 and NTN 29‑09‑0200965 have also been quoted in which the GP rate is statedly 8.00% and 10% respectively. The case of Messrs Bahria Town, Rawalpindi (NTN 29‑21‑0070000) has also been quoted in which the net profit rate of 5 % has statedly been applied. It has thus been prayed that direction be issued for accepting the complainant's return under the self assessment scheme.

5. In the respondent's reply it is stated that the selection of the case s in accordance with the guidelines issued by the C.B.R. and that the case was rightly selected for total audit because of the low gross profit ate declared by the complainant.

6. During the hearing of the complaint it was admitted by the complainant that the three cases cited in the reply to the RCIT were not strictly parallel in nature because these belonged to plaza owners. It was, however, stated that during the personal appearance before the RCIT reference was made to the case of Bahria Foundation Limited in which income was being worked out to result in tax of 2.5 % of the receipts and that the net profit rate in the said case thus worked out to 5.81 % against 6.9% declared by the complainant. During the hearing of the complaint it was also pointed out that the GP rate of 25 % applied in the case quoted by the RCIT was based on an ex parte order of the year 1998‑99 and it could, therefore, hardly be considered as a comparable case. After seeking an adjournment the complainant's AR also produced assessment orders for the years 2001‑2002 and 2002‑2003 in the case of Messrs National House Building and Road Development Corporation, Rawalpindi (NTN 02‑04‑0734647) in which the incomes of Rs.4,50,000 and Rs.4,25,000 were assessed for the years 2001‑2002 and 2002‑2003 which resulted in the net profit rate of only 4.32 % and 4.56 for the two years respectively.

7. The facts of the case have been considered and there is adequate evidence to show that the overall profit declared by the complainant for the year 2002‑2003 is by no ‑means low as compared to the net profit declared or applied in many other cases and in fact the complainant's NP rate is very reasonable even in the context of the department's agreement with land developer. Since the complainant's, case was selected for audit only on the basis of GP rate of 25 % assessed in the assessment year 1999‑2000 in an otherwise distinguishable case assessed at NTN 29‑05‑00710496 and since even in that case the resultant net profit rate worked out to a lower percentage than in the complainant's case, selection of the complainant's case for audit merely on the basis of that other case is not found to be valid.

8. In the light of the above it is recommended that‑

(i)The complainant's return be excluded from the cases selected for total audit under para. 9(a)(ii) of the Self‑Assessment Scheme, 2002‑2003 and the declared income be accepted.

(ii)Compliance be reported within 30 days.

C.M.A./845/FTOOrder accordingly.