(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 by the Regional Commissioner of Income‑tax under para. 9(a)(ii) of C.B.R. Circular No.4 of 2001 being 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‑‑‑Central Board of Revenue 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 26‑3‑2001‑‑‑Establishment of Office 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‑‑‑Net income of the assessee had not increased in proportion to the increase in turnover‑‑‑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‑‑‑Validity‑‑‑Despite improvement in turnover and history of the case in respect of G.P: rate as a normal indicator, the net income of the assessee had not increased in proportion to the increase in turnover even if the cost saving in terms of input of dyes and chemicals and other economies of scale were ignored‑‑ Proportionately, there was evident decline in income which was one of the specified factors in the guidelines circulated by Central Board of Revenue for selection of cases for audit‑‑‑Term "evident decline in income" as used in the guidelines could not be construed as decline per se because if it was so the return would not qualify under Self Assessment Scheme‑‑‑Such term was to be interpreted to mean a decline in proportion to turnover‑‑‑Selection of return for audit was justified‑‑ No maladministration was found in the ultimate decision as such the investigation was ordered to be closed by the Federal Tax Ombudsman.

Abrar Naqvi for the Complainant.

Shahid Jamil, Legal Adviser for Respondent.

FINDINGS/DECISION

Maladministration is alleged in the instant complaint on the part of the R.C.I.T., Eastern Region, Edward Road, 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 a dyeing unit blended fabrics, declared total income at Rs. 205,000 for assessment year 2001‑2002.

2. The R.C.I.T. 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:

"(1) The purchases made by you are mostly of various chemicals and colours used in the dyeing process. The other major inputs are power Sui Gas:

You have consumed raw material amounting to Rs.1,009,239 only against turn over of Rs.34,131,892 for assessment year 2001‑02 whereas raw material of Rs.2,595,482 had been used against a much lower turnover of Rs.27,050,101. This comparison exposes the unreliability of the figures declared by you.

(2) The following chart shows that whereas Sui‑Gas consumption increased by 47% turnover has registered an increase of 26% only.

The income declared by you is low even when compared to a case operating on much smaller scale under the name and style of Messrs Golden Industries at NTN 06‑03‑1452209.

You have claimed lease rental of Rs.2,195,853 and, rent of premises at Rs.1,080,000 in your P&L A/c but no evidence has been furnished alongwith return. These expenses have to be verified as per provisions of section 24(ff) of the Income Tax Ordinance, 1979.

The business capital declared by you in your wealth statement is a meager amount of Rs.585,000 which is insufficient to run business at such a scale."

3. It has been submitted before the R.C.I.T. on behalf of the complainant:

"(i) The assessee processed dark colours last year which was an expensive process, so this year the assessee changed the policy and processed only either very light colours or bleached the cloth which resulted in about 1/3rd use of Raw material.

(ii) Cost but not the consumption of gas increased by 47 % Increase in turn over by 26% is commensurate with consumption of gas; only charges have increased.

(iii) Golden Industries is not a parallel case. They deal in processing Dyeing of Tent‑fabrics and Canvas.

(iv) The lease rent has been paid to Orix Leasing on‑behalf of Asmy Dyeing and Printing Mills (Pvt.) Ltd. The lease agreement can be verified if required under sections 144/148 of the Ordinance, 1979 from the said leasing company.

(v) The assessee is employing only running capital which is Rs.663,600 as no capital assets are owned. Sundry debtors and creditors are beside the above amount to carry on smooth running of business."

4. However, the R.C.I.T found the foregoing explanation unsatisfactory and conveyed his decision through order, dated 15‑6‑2002 in following terms.

"The assessee was confronted that he has declared 26% higher receipts as compared to the previous year but as per trading account raw material utilized in more than double of the consumption for the previous year. The assessee has explained that last year he processed dark colour but for the current year he has changed his policy and processed only very light colour `which resulted in about 1/3rd of the use of raw material'. This explanation of the assessee is unsubstantiated from the record and is devoid of logic. The demand pattern for various colours of cloths is seasonal in nature. Light colour cloth/fabric is in demand and is produced accordingly for summer season only and darker colour cloth/fabric is in demand and is produced for rest of the year. The demand of light colour cloth/fabric is much less than that for darker cloth/fabric. The explanation tendered by the assessee is a mere afterthought.

Regarding the increased usage of consumption of Sui‑gas the assessee has attributed this exclusively to the rise in Sui‑gas tariff.

Regarding the parallel case the assessee has contested it as unsuitable for comparison purposes. The parallel case quoted is of exactly‑‑‑a dyeing unit engaged in dyeing of cloth.

The assessee has avoided to explain his position regarding the verification of lease rental as per provisions of section 24(ff) of the Income Tax Ordinance, 1979.

The capital to turnover ratio is 1:51. The assessee explained that the sundry debtors and creditors are beside the capital shown as Rs.663,600. Even then the paucity of declared capital, as evident from the capital to turnover ratio, has not been justified. Moreover, the explanation of the assessee calls for further probe into the nature of sundry debtors and creditors.

The audit is not necessarily intended to enhance the declared sales/income or to curtail the expenses claimed by the taxpayer. The objective is to determine as to whether the facts and figures declared by the assessee in the return are compatible with provisions of law and factually correct. The objections raised by the assessee can only be evaluated and examined during the audit for which a reasonable and valid case has been made out by the Commissioner of Income‑tax, Zone‑B, Lahore."

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

6. The R.C.I.T. responding to the notice under section 10(4) of the Ordinance (XXXV of 2000) raised following preliminary objections to the jurisdiction of this Office 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 R.C.I.T. and after due consideration it is found that neither the process employed by the R.C.I.T. 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.

8. Further, the view canvassed by the R.C.I.T. that no prejudice has so far been caused to the complainant is also misconvened. 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 a prejudice caused to the complainant.

9. The contention of the R.C.I.T. 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 R.C.I.T. are, therefore, overruled and the fourth objection would be considered at the appropriate stage.

10. It has been further submitted 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 viewpoint has been judiciously considered; hence case has been selected for total audit for valid reason.

11. The authorized representative of complainant, besides reiterating the submissions already made before the R.C.I.T. has further submitted that the worthy R.C.I.T. has unfortunately misconstrued the fact regarding the consumption of Chemicals as compared to last year. In fact the position is reverse; while output has increased by 26% over the output of last year, the input of chemicals is only 39% of input of the last year.

12. Further, explanation for disproportion of increase in input of gas in comparison to increase in production in terms of amount has not been controverted by the R.C.I.T. while his finding that Golden Industries is engaged in dyeing of cloth is contrary to facts: The A.R. has produced a certificate from All Pakistan Textile Processing Mills Association, Lahore that it is engaged in processing of canvas and tent fabrics etc.

13. With copy of lease agreement available with the D.C.I.T., the lease rental can be verified without subjecting complainant's return to audit. Operating with a leased plant, the equity required is low and no adverse inference can be drawn without valid reasons.

14. The view of R.C.I.T. that audit is not necessarily intended to enhance declared income is contrary to guidelines circulated by C. B. R.

15. Further, it has been submitted on behalf of the complainant that the reasons recorded by the learned R.C.I.T. 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.Asstt/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.

16. The submissions made on behalf of the two sides are considered. It is found that despite improvement in turnover and history of the case in respect of G.P. rate as a normal indicator, the net income of the assessee has not increased in proportion to the increase in turnover even if the cost saving in terms of input of dyes and chemicals and other economies of scale are ignored. Thus proportionately there is evident decline in income which is one of the specified factors in the guidelines circulated by C.B.R. for selection of cases for audit. It is pertinent to record here that the term "evident decline in income" as used in the guidelines cannot be construed as decline per se because if it was so the return would not qualify under Self‑Assessment Scheme. The term, therefore, is to be interpreted to mean a decline in proportion to turnover.

17. The selection of return for audit, therefore, is justified. No maladministration is found in the ultimate decision as such the investigation is closed.

C.M.A./546/FTO Order accordingly.