(a) Income Tax Ordinance (XXXI of 1979)‑‑‑-

‑‑‑‑S. 59‑‑‑C.B.R. Circular No. 4 of 2001, dated 18‑6‑2001, para. 9(a)(ii)‑‑‑C.B.R. Circular Letter No. 7(7)S. Asst/2001, dated 26‑3‑2002‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑Self‑assessment‑‑‑Department contended that setting apart of a case for total audit was a matter relating to assessment which was subject to appeal/revision‑‑‑Validity‑‑‑Selection of the case for audit made by the Regional Commissioner of Income Tax under para. 9(a)(ii) of C.B.R. Circular No.4 of 2001 was neither a matter relating to assessment of income nor any remedy in the shape of appeal/revision against his decision to select the case was available to the complainant.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑S. 59‑‑‑C.B.R. Circular No. 4 of 2001, dated 18‑6‑2001, para. 9(a)(ii)‑‑‑C.B.R. Circular Letter No. 7(7)S. Asst/2001, dated 26‑3‑2002‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9‑‑‑Self‑assessment‑‑‑Prejudice caused to assessee‑‑‑Denial of privilege available to assessee i.e. acceptance of return under Self‑Assessment Scheme, without valid reason, would be a prejudice caused to the complainant.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑-

‑‑‑S.59‑‑‑C.B.R. Circular No.4 of 2001, dated 18‑6‑2001, para.9(a)(ii)‑ C.B.R. Circular Letter No.7(7)S.Asst/2001, dated 26‑3‑2002‑‑ Establishment of Officer of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 9‑‑‑Self‑assessment‑‑‑Guidelines by the Central Board of Revenue for total audit‑‑‑Decline in income‑‑‑Assessment year 2001‑2002‑‑‑Basis for setting apart of case for total audit under para. 9(a)(ii) of the C.B.R. Circular No.4 of 2001, dated 18‑6‑2001 were exaggeration of expenses; filing of declaration under S.59‑D of the Income Tax Ordinance, 1979; purchase of assets by the family members of the assessee; non‑filing of statement under S.139 of the Income Tax Ordinance, 1979 and comparison of income with assessment year 1997‑98 in respect of decline in income‑‑‑Validity‑‑‑Complainant/ assessee had explained the issues that was confronted with by the Regional Commissioner of Income Tax through his notice and sufficient cause had been shown on its behalf as to why not to compare income declared in the present year with income assessed in assessment year 1997‑98‑‑‑Plea had the substance that such course would stretch the guidelines beyond the reasonable limits‑‑‑If the Assessing Officer had any evidence of suppression of receipts on the basis. of assessment made for assessment year 1997‑98 it would be equally applicable to the intervening assessment years‑‑‑Selection of return of income filed by the complainant/assessee for audit was arbitrary and alleged maladministration was established‑‑‑Federal Tax Ombudsman recommended that the Central Board of Revenue should direct exclusion of return from the list of cases selected under para. 9(a)(ii) for audit and for its acceptance under Self‑Assessment Scheme.

Chaudhry Muhammad Aslam for the Complainant.

Shahid Jamil Khan, Legal Adviser for Respondent.

FINDINGS/DECISION

Maladministration is alleged in the instant complaint on the part of the RCIT, Eastern Region, Lahore for arbitrarily setting apart the return filed by the complainant under Self‑Assessment Scheme, for total audit by invoking Para. 9(a)(ii) of C.B.R. Circular No. 4 of 2001, dated 18‑6‑2001. The complainant, an old assessee with the status of individual engaged in operating an Academy/School declared total income at Rs.227,200 for assessment year 2001‑2002.

2. The RCIT confronted the complainant, through a notice envisaged under Para. 9(a)(ii) of C.B.R. Circular No.4 of 2001, dated 18‑6‑2001, that return of income filed by the complainant, warranted audit for following reasons:

(i)You are running an Academy,/School and have declared total receipts at Rs.7,156,000 against which you have claimed expenses amounting to Rs.6,928,800 including staff salaries claimed at Rs.3,301,220 but no statement under section 130 has ever been filed.

(ii)Return for the charge year 1997‑98 declaring net income at Rs.102,730 was accepted under section 59(1) of the Income Tax Ordinance, 1979. Later the assessment was re‑opened under section 65 and a net income of Rs.1,060,000 was assessed in which the portion of business income amounted to Rs.990,000 against the total receipts of Rs.2,260,000. The receipts were confirmed by the learned AAC but a relief of Rs.150,000 was allowed from add backs out of overhead expenses and net business income was computed at Rs.840,000. You filed second appeal before the ITAT, where the order under section 65 was upheld but a minor relief in the estimate of receipts was allowed. You have also filed declaration under section 59D by declaring cash at Rs.136,500 and cost of a plot at 31‑Chinab Block. A.I.T., Lahore amounting to Rs.450,000. Those assets have been created out of undisclosed profit from this school in previous year.

(iii)The expenses in the profit and loss account are exaggerated.

3. It has been submitted before the RCIT on behalf of the complainant that the assessee was not obliged to furnish we statement under section 139 as none of his employees was getting taxable salary. Details of salary are enclosed. It was further submitted that every year in an independent year and business results of the current year cannot be compared with 1997‑98. The comparison can be made with the immediate preceding year and where there is no such discrepancy. The assessee filed declaration under section 59D of cash amounting to Rs.136,500 to avoid prosecution proceedings because the Department lead issued the show‑cause notice under section 13 of the Income Tax Ordinance, 1979. The facility accorded by the C.B.R. was thus availed of to avoid litigation. The entire expenditure claimed in the profit and loss A/c is incidental to business.

4. However, the RCIT, found the foregoing explanation unsatisfactory and conveyed his decision through letter, dated 17‑6‑2002. The explanation tendered was rejected because the contention of the taxpayer regarding verifiability of salary expenses can only be verified at the stage of assessment. There was an evident decline iii income because the declared income was Rs.227,200 only as compared to last assessed income of Rs.810,000 under sections 65/62 in assessment year 1997‑98 which was upheld at all the Appellate Forums. The claim of salaries of Rs.3,301,200 also needed to be examined vis‑a‑vis the number of students enrolled because according to the list produced there were as many as 60 teachers employed. Purchase of immovable properties in the names of family members who apparently did not have any other source of income was offered as a reason for selection of return for audit.

5. Hence the instant complaint, alleging maladministration on the ground that the decision of the RCIT is arbitrary, unreasonable, unjust, biased, contrary to law, rules and regulations because no reasons are recorded at ail for being dissatisfied with the explanation offered by the complainant in response to the show‑cause notice issued by him.

6. The RCIT, responding to the notice under section 10(4) of the Ordinance XXXV of 2000 raised following preliminary objections to the jurisdiction of this Officer over the complaint:

"(i)Matter relates to assessment; hence falls outside jurisdiction of Federal Tax Ombudsman in light of provisions of section 9(2)(b of Establishment of Office of Federal Tax Ombudsman.

(ii)No prejudice has so far been caused to assessee.

(iii)Remedy in shape of appeal/revision against assessment is available to complainant.

(iv)No maladministration has been, caused in this case."

7. Representatives of the parties have been heard on the preliminary objections raised by the RCIT. Mr. Shahid Jamil Khan, the Legal Adviser of the Department has cited the order of the President of Islamic Republic of Pakistan on Representation in Complaint No.979‑K of 2001 wherein it is held that "a derision which is bona fide or is reached for valid reasons does not amount to maladministration".

8. It is found after due consideration that neither the process employed by the RCIT under Para. 9(a)(ii) of C.B.R. Circular No.4 of 2001 nor his decision to select the case for audit is a matter relating to assessment of income nor any remedy in the shape of appeal/revision against his decision to select the case is available to the complainant.

9. Further, the view canvassed by the RCIT that no prejudice has so far been caused to the complainant is also misconceived. It is a privilege already earned by the complainant where his return of income qualifies for acceptance under Self‑Assessment Scheme. Denial of such privilege without valid reason would be prejudice caused to the complainant.

10. The contention of the RCIT and the Legal Adviser of the Department that no maladministration is committed in arriving at the, decision to select the case for audit is subject‑matter of investigation that will be dealt with hereinafter. Three of the four preliminary objections supra raised by the RCIT are, therefore, overruled and the fourth objection would be considered at the appropriate stage.

11. It has been further submitted by the RCIT that the case of the assessee is selected for total Audit on genuine grounds. Procedure prescribed in this behalf has been duly followed. The matter has been thoroughly discussed with the tax advisor of assessee and his view point has been judiciously considered; hence case has been selected for total audit for valid reasons.

12. The authorized representative of complainant, besides reiterating the submissions already made before the RCIT has further submitted that in show‑cause notice the learned Regional Commissioner of Income‑tax confronted the complainant with non‑deduction of tax under section 50(1) and non‑filed of statement under section 139 of the Income Tax Ordinance, 1979. After considering the reply satisfactory on this point the learned Regional Commissioner of Income‑tax jumped over to sections 24(ff) and 24(fff) in his decision to select the return for audit and advanced a fresh reason that there was suppression of receipts as compared to expenses claimed and verifiability thereof. The fresh reason offered in the order of the Regional Commissioner of Income‑tax was not confronted to the assessee. Besides these provisions were not applicable under clauses (34) and (35) of Part‑IV of Second Schedule of the Income Tax Ordinance, 1979. Further, if the Assessing Officer subsequently found any illegality in this regard, he could take action under sections 52, 52A and 108 of the Income‑tax Ordinance, 1979 against the assessee as well as the employees according to the list filed in reply of show‑cause notice instead of selecting the return for total audit.

13. With regard to "decline in income" it was submitted that the comparison for this purpose cannot be made with the preceding years as the guidelines say that "such selection may be based on factors including an evident decline in income, any addition to the assets which is not covered by the income declared" which clearly speaks about `any addition' relevant to the assessment year 2001‑2002 and not any other years. Even otherwise, there is no decline in income as evident from the declared incomes for the last 6 years as under:‑‑‑

Assessment YearDeclared Income

1995‑1996Rs. 86,000

1996‑1997Rs.94,000

1997‑1998Rs.102,730

1998‑1999Rs.151,850

1999‑2000Rs.153,000

2000‑2001Rs.204,240

2001‑2002Rs.227,250

The assessed income for the assessment year 1997‑98 by the Department cannot be adopted as the basis for comparison to determine the factor of decline in income. Further, to compare the declared income for the assessment year 2001‑2002 with the assessed income for the assessment year 1997‑1998, ignoring the immediately preceding three years i.e. 1998‑99, 1999‑2000 and 2000‑2001, is unjustified.

14. The next factor in the opinion of the Regional Commissioner of Income Tax was that the expenses in P&L account were exaggerated to reduce income. It is submitted by the authorized representative that the expenses for this year amounting to Rs.928,800 cannot be said to be exaggerated while the expenses for the assessment year 2000‑2001 amounting to Rs.6,995,760 were found by the Department quite reasonable.

15. Regarding Regional Commissioner's observation that immovable properties were acquired in the names of family members who apparently did not have any other source of income, it is submitted that the liability of any family member cannot be shifted to the shoulder of the assessee; instead the department should issue notice to the person who acquired such properties, if any. Besides, no evidence is provided by the department in this regard.

16. It has been further submitted on behalf of the complainant‑ that the reasons recorded by the learned RCIT do not conform to any of the guidelines for selection of cases, circulated by the Central Board of Revenue (C.B.R.) vide Circular Letter No 7(7)S.Assett/2001, dated 26th March, 2002, which are as under:‑‑‑

(i)Evidence, information or reason to believe that true particulars of income have been suppressed and it is a revenue potential case.

(ii)Such selection may be based upon factors including:

(a)Evident decline in income.

(b)Any addition to the assets that is not covered by income declared. (Tax profiles of Survey and Registration may be consulted to identify such cases).

(c)Disparity in expenses on utilities vis‑a‑vis income declared.

17. The counsel of the complainant has submitted that there is neither any evidence of decline in income, nor there is any evidence that addition to assets during the year is not covered by the known sources of the complainant nor there is any evidence or information that true particulars of income have been suppressed. All the reasons that the complainant was confronted with by the RCIT through his notice and on the basis of which he believed that the potential of revenue could be more than what was declared, have been 'fully explained, according to the learned counsel. He submits that sufficient cause has been duly shown that the reasons were invalid and unfounded. Attention is invited to the decision of the RCIT reproduced supra where no reasons have been recorded by the RCIT for his dissatisfaction with the causes shown why the return does not warrant selection for audit.

18. Finally it is submitted on behalf of the complainant that on the foregoing facts there was no valid reason for the RCIT to believe that true particulars of income had been suppressed or that the revenue potential of the case in assessment year 2001‑2002 was more than what had been already declared.

19. Submissions made on behalf of each side have been considered. It is found that the complainant has explained the issues that it was' confronted with by the RCIT through his notice and sufficient cause has been shown on its behalf as to why not to compare income declared in the instant year with income assessed in 1997‑98. There is substance in the plea that it will stretch the guidelines beyond the reasonable limits. In case the Assessing Officer had any evidence of suppression of receipts on the basis of assessment made for assessment year 1997‑98 it would be C equally applicable to the intervening assessment years as well.

20. Selection of return of income filed by the complainant for audit, therefore, is arbitrary. The alleged maladministration is established.

21. It is recommended that:

(i)The C.B.R. direct exclusion of return from the list of cases selected under Para. 9(a)(ii) for audit and for its acceptance under Self‑Assessment Scheme.

(ii)Compliance to be reported within thirty days of this order.

C.M.A./578/FTOOrder accordingly.