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

‑‑‑‑S. 59(1)‑‑‑C.B.R. Circular No. 7 of 2002, dated 15‑6‑2002. para. 9(a)(ii) [Self Assessment Scheme] ‑‑‑C.B.R. Letter No. C. 7(7)S asstt/2002, dated 17‑12‑2002‑‑‑C.B.R. Letter No. C. 7(7)/S. asstt/2002 dated 5‑3‑2003‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Self assessment‑‑‑Setting apart‑‑ Cut off date‑‑‑Fact that Complainant/assessee had applied for extension of time will not operate as extension of the cut off date fixed by the Central Board of Revenue.

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

‑‑‑‑S. 59(1)‑‑‑C.B.R. Circular No. 7 of 2002, dated 15‑6‑2002 para. 9(a)(ii) [Self‑Assessment Scheme] ‑‑‑C.B.R. Letter No. C. 7(7)S asstt/2002 dated 17‑12‑2002‑‑‑C.B.R. Letter No. C.7(7)/S. asstt/2002 dated 5‑3‑‑2003‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Self‑assessment‑‑‑Setting apart‑‑ Time for reply of show‑cause notice‑ ‑‑‑Complainant was required to reply 16 queries from the department by specified date‑‑‑Validity‑‑‑Time given for reply was not judicious and was arbitrary, unreasonable and impracticable‑‑‑Circular of Central Board of Revenue had clearly stated that the selection of cases for total audit muse be carried out on judicious and transparent manner ‑‑‑Complainant/assessee was not given proper and reasonable time to reply the queries which amounted to maladministration.  

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

‑‑‑‑S. 59(1)‑‑‑C.B.R. Circular No. 7 of 2002, dated 15‑6‑2002, para. 9(a)(ii) [Self‑Assessment Scheme]‑‑‑C. B. R. Letter No. C. 7(7)S. asstt/2002, dated 17‑12‑2002‑‑‑C.B.R. Letter No. C.7(7)/S. asstt/2002, dated 5‑3‑2003‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Self‑assessment‑‑‑Setting apart of case for total audit without personal hearing as the same was not requested by the Complainant/assessee‑‑‑Validity‑‑‑Not necessary for the Complainant/assessee to have asked for a personal hearing because the Central Board of Revenue by its letter had directed "that the Regional Commissioner of Income Tax must confront the assessee provide them due opportunity of being heard and must indicate the basis of their proposed selection in the notices to be communicated to them"‑‑ Said requirements were to satisfy the principles of natural justice most important of them was to provide an opportunity for hearing‑‑‑Regional Commissioner of Income Tax was bound to provide an opportunity for hearing to the assessee irrespective of the fact whether he had demanded personal hearing or not‑‑‑Such principles of natural justice is so engrained in the jurisprudence that where‑any action is taken adverse to a party or affecting his right he must be heard before taking the action Violation of principles of natural justice rendered the decision, action and proceedings, taken in pursuance of any decision void, illegal and contrary to law‑‑‑Such selection could not stand the legal scrutiny and was contrary to law.

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

‑‑‑‑S. 59(1)‑‑‑C.B.R. Circular No. 7 of 2002, dated 15‑6‑2002, para. 9(a)(ii) [Self‑Assessment Scheme] ‑‑‑C.B.R Letter No. C.7(7)S. asstt/2002, dated 17-12‑2002‑‑‑C.B.R. Letter No. C.7(7)/S. asstt/2002, dated 5‑3‑2003‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Self assessment‑‑‑Setting apart of case on the ground that Gross Profit rate had fallen from 15% in 1999‑2000 to 6.6 % income turnover ratio 0.73 % and net profit rate at 4.3 % was extremely low etc.‑‑‑Objections were explained successfully but not considered by the Regional Commissioner of Income Tax and case Was Selected for total audit‑‑‑Validity‑‑‑Objections/discrepancies confronted to Complainant/assessee were fully explained with facts and figures‑‑‑None of the perameters laid down was applicable‑‑‑Case was neither of revenue potential nor there was any evidence, information or reason to establish that the true particulars of income had been suppressed‑‑‑No evidence of decline in income or disparity in expenses on utilities vis‑a‑vis income declared was available‑‑‑Source of addition of new assets had been explained which could have been examined through audited cash flow statement filed alongwith the return of income‑‑‑In the absence of any evidence to the contrary the explanation regarding sources of investment 'in new assets should have been accepted ‑‑‑Maladministration in the process of selection of the return for audit was thus established‑‑‑Federal Tax Ombudsman recommended that the Central Board of Revenue to direct the Regional Commissioner of Income Tax to withdraw his order and issue directions to the concerned Taxation Officer to accept the return of the complainant under Self -Assessment Scheme.

S.M. Rehan, F.C.A. and Javed Panjwani for the Complainant.

Basharat Ahmed Qureshi, IAC and Badruddin Qureshi, DCIT for Respondents.

FINDINGS/DECISION

The complainant a Government owned Public Limited Company is an existing assessee of Circle‑4, Special Zone, Karachi on National Tax Number 32‑04‑0700874.

2. The complainant is aggrieved by the order of the Regional Commissioner of Income Tax, Corporate Region, Karachi, bearing No.2932, dated 8‑4‑200 whereby its return of income for the assessment year 2002‑2003 has been get apart for total audit in terms of para. 9(a)(ii) of Board's Circular No. 0.7 of 2002. The facts of the case are briefly stated as under: ‑‑

3. The company filed return of income for the assessment year 2002‑2003 declaring income 6f Rs.52,910,713 (before adjustment of determined brought forward loss) The declared income was arrived at after making voluntary add backs of Rs.21,008,518 to its declared profit as audited accounts at Rs.3l..902,195. It is stated that the case of the complainant was not selected for audit through computer ballot and was subsequently selected for audit by the Regional Commissioner of Income Tax, Corporate Region, Karachi in terms of para. 9(a)(ii) of Circular No.7 of 2002 referred above.

4. The Regional Commissioner of Income Tax, Corporate Region, Karachi, issued a Show‑Cause Notice bearing No.2672, dated 27‑3‑2003 stating therein the following reasons for setting apart the return of the complainant for audit:

"(a) Your GP rate has fallen from 15% in 1999-2000 to 6.6%.

(b) Income Turnover ratio is 0.73 % and net profit rate at, 4.3 % is extremely low.

(c) Your computation of income shows claim of Rs.5,009 (M) on account of optional retirement scheme as per Note 13.2 the nature and admissibility of this account has to be considered.

(d) Addition to assets amounting to Rs.28.021 (M) and source thereof are to be checked.

(e) Accrued mark up of Rs.298,967 (M) prior and up to 30‑6‑2001 has to be checked up with reference to section 25(c).

(f) Similarly Accrued Expenses, Royalty, Excise Duty, Sales Tax have also to be checked up with reference to section 25(c).

(g) Sale of Motor Vehicles amounting to Rs.2,036 (M) has to be checked up, as gain on sale of fixed assets has been shown at Rs.445,743. This seems inadequate.

(h) As per Note 25.1, the company has decided to convert loan of Rs.453 (M) into ordinary Shares of Rs.10 each to be given to the State Cement Corporation of Pakistan Under the circumstances mark‑up booked on this loan during the preceding years has to be examined.

(i) Similarly accrued mark‑up of Rs.298,967 as per Note No.9, transferred to current account has also to be examined.

(j) Long Term Loan to employees as per Note No. 14, constitute excess perquisites and hence the difference between the authorized mark‑up and concessional loan has to be added.

(k) The nature of provision of dead and slow moving items as per Note No. 15 has to be checked up.

(l) Provisions for doubtful debt has to be examined.

(m) Accounts such as Income Tax Refundable, Octri refundable, Insurance Claim and re‑payments have to be checked up.

(n) Sales Tax, Excise Duty and Rebate and Sales as per Note No.21, has to be reconciled with Sales Tax Returns.

(o) As per Note 23.3 since the Company has converted to Gas its cost per ton on Cement has been significantly reduced, but not reflected in GP and NP.

(p) Operating expenses including Admn. and Selling Expenses have to be checked."

5. The complainant was required to furnish reply by 29‑3‑2003. However on application by the complainant the time for reply was extended to 7-4-2003.

6. The complainant's Authorised Representative vide his letter, dated 7‑4‑2003 furnished a detailed and comprehensive reply covering all the queries made in the Show‑Cause Notice. As regards the main objections of decline in G.P. and Net Profit rates, the Authorised Representative in his above referred letter stated that in fact the G.P. rate increased to 6.6 % from gross loss of 3.27 % declared in the assessment year 1999‑2000. The factual position of the immediately preceding three years was provided in the explanation as under:‑‑

Thus the Gross profit rate declared at 6.6 % for the assessment year under consideration improved considerably and could not be made the basis for setting apart the case for total audit.

7. The ratio of declared income with turnover also improved for the assessment year under consideration. The net profit ratio compared with the immediately preceding year was as under:‑‑

The other, discrepancies pointed out in the Show‑Cause Notice were also explained and discussed at length in the aforesaid letter of the Authorised Representative; dated 7‑4‑2003.

8. It is alleged that the time allowed for submission of reply to the Show‑Cause Notice was very short as the notice was received at 4‑30 p.m. on 27‑3‑2003 for compliance by 29‑3‑2003. Time was however, extended to 7‑4‑2003 on the application of the complainant, but the personal hearing was not provided as per directions of the C.B.R. contained in Letter No. C. No.7(7)S.asstt/2002, dated 17‑12‑2002. It is also alleged that as per policy guidelines provided by the Board in the letter referred above two "Notices" were to be issued before the final selection but in the case of the complainant only one Show‑Cause Notice was issued. It is vehemently alleged that the selection of the return for audit was made in utter disregard of the instructions of the C.B.R. vide letter, dated 17th December, 2002 referred above. The return was selected for audit on 8‑4‑2003 whereas the last date stipulated by the C.B.R. in this regard was 10‑1‑2003.

9. The complainant has therefore, prayed that the selection of the return for audit be declared without jurisdiction as the same was made after the expiry of the last date fixed by the C.B.R. in this regard i.e. 10‑1‑2003. It is also prayed that the respondents may be asked to accept the return of the complainant filed for the assessment year 2002‑2003 under the Self‑Assessment Scheme.

10. The respondents have filed parawise comments stating therein that the case of the complainant was selected for audit after issuance of show‑cause notice, dated 27‑3‑2003 and considering its explanation, dated 7‑4‑2003 very carefully. The selection was made strictly in accordance with the guidelines issued by the C.B.R. through Circular 7 of 2002 read with Letter C. No. 7(7) S. Asstt/2002, dated 17‑12‑2002. It is pleaded that it is a revenue potential case and there is reason to believe that true particulars of income have been suppressed and menses are disproportionate to the income declared. It is also emphasized that the decrease of G. P. rate from 15 % in the assessment year 1999‑2000 to 6.6% declared for the year under consideration is extremely low as compared to parallel cases of the same nature. It is further, stated that the C.B.R. vide letters, dated 31‑1‑2003 and 5‑3‑2003 required the RCIT to select the company cases for audit in terms of para. 9(a)(ii) of SAS Circular 7 of 2002 as there would be no random ballot. It is also stated that for the assessment year 1999‑2000 the complainant's trading version was rejected and a G.P. rate of 15% was applied which was set aside by the CIT Appeal. The reassessment was made by applying the same rate again and the appeal filed by the complainant is pending at the first appellate stage. It is also pleaded that the Authorised Representative of the assessee had never requested for personal hearing and therefore, the allegation in this regard is unfounded. It is argued that in none of the letters issued by the C.B.R. referred above any instruction was issued regarding the number of notices to be issued to the assessee.

11. The respondents have further, stated that the C.B.R. had extended the date for final selection vide its Letter C. No. 7(7)/S. Asstt/2002, dated 5‑3‑2003. It is reiterated that the selection was made for valid reasons and in accordance with the procedure, parameters and guidelines issued by the C.B.R. It is prayed that the complaint needs to be dismissed being ab initio without jurisdiction.

12. The instructions and Circulars of the Central Board of Revenue for selection of cases for total audit under the Self‑Assessment Scheme for assessment year 2002‑2003 have been examined. In letter, dated 17‑12‑2002 it was stated that "Board desires that the process of the selection of cases for total audit must be finalized by 10th January 2003 and thereafter be favoured with Zone‑wise list of cases so selected. It may be reiterated that the selection of cases for total audit must be carried out in a judicious and transparent manner". Thereafter by letter, dated 31‑10‑2003 the process for selection of cases or total audit was to be completed up to 5‑2‑2003. Again by letter No.7(7)S. Asstt/2002, dated 5th March 2003, the Board "decided to extend the final date for selection of cases for total audit up to 31st March 2003." Therefore, any selection made up to 31st March 2003 would be valid in law. In the present case this situation is some what different. In this case show‑cause notice, dated 27‑3‑2003 was issued by the department giving 16 reasons to set apart the case for total audit. The complainant was requested to reply to the queries alongwith the supporting documents so that the RCIT could take decision whether the case is fit to be taken up for total audit and time up to 29‑3‑2003 was given to the complainant for compliance. It seems that the complainant sought extension of time for submitting the reply because time given was too short. The department by letter, dated 29‑3‑2003 allowed time for submission of reply up to 7‑4‑2003. The complainant complied and submitted a reply. In these facts it is to be considered whether the selection is proper and according to law. The directive of the Central Board of Revenue was to select the cases for total audit which should be finalized up to 31‑3‑2003. Therefore, any selection made beyond 31‑3‑2003 cannot be in accordance with the instructions of the Central Board of Revenue. The fact that the complainant had applied for extension of time will not operate as extension of the cut off date fixed by the C.B.R. Furthermore, it can be seen that the complainant by letter, dated 27‑3‑2003 was required to reply 16 queries by 29‑3‑2003. The time given for reply was not judicious. It was arbitrary, unreasonable and impracticable. The Circular of the Central Board of Revenue had clearly stated in letter, dated 17‑12‑2002 that the selection of cases for total audit must be carried out on judicious and transparent manner. The complainant was not given proper and reasonable time to reply the queries and therefore, amounted to maladministration.

13. Further, it has been contended that no hearing was afforded to the complainant before selecting the case for total audit. The department in its reply has not denied this fact but has pleaded that the complainant never requested for personal hearing. It was not necessary for the complainant to have asked for a personal, hearing because the Central Board of Revenue by its letter, dated 17th December, 2002 had directed that the "RCIT must confront the assessee, provide them due opportunity of being heard end must indicate the basis of their proposed selection in the notices to be communicated to them." These requirements satisfy the principles of natural justice. The most important of them is to provide an opportunity for hearing. It was the duty of the Regional Commissioner of Income Tax to provide an opportunity for hearing to the assessee irrespective of the fact whether he had demanded' personal hearing or not. This principle of natural justice is so engrained in the jurisprudence of our country that where any action is taken adverse to a party or affecting his right he must be heard before taking any decision. Violation of principles of natural justice renders the decision, action and proceedings taken in pursuance of decision void, illegal and contrary to law. In view of the above discussion with regards to this aspect of the case tile selection cannot stand the legal scrutiny and is contrary to law.

14. He further, pleaded that this was not a revenue potential case as incorrectly pointed out by the learned Regional Commissioner of Income Tax in the parawise comments. The complainant is a State owned enterprise in cement industry which had been in difficult situations and suffered heavy losses in the preceding years. There is no evidence with the department to establish suppression of true particulars of income. Similarly the leaned RCIT did not cite parallel cases in the show‑cause notice to establish that the expenses were disproportionate to the income declared. As regards the decrease in G.P. rate from 15% for the year 1999‑2000 to 6.6% during the year under, consideration, it is pleaded by the AR that G. P. rate of 15 % was applied by the department in the assessment year 1999‑2000 which was set aside by the Commissioner of Income Tax Appeals. The department while completing the reassessment again applied the G.P. rate of 15% against which the complainant has filed appeal the matter is still sub judice. He has also pleaded that prior to the assessment year 1999‑2000 the G.P. rates declared by the complainant had always been accepted. He cited the factual position of the preceding three years as under:‑‑

15. The Authorised Representative of the complainant also stated that no parallel case was confronted to the complainant regarding income turn over ratio or low net profit rate. The A.R. concluded his arguments by stating that all the discrepancies pointed out in the show‑cause notice were fully explained/controverted in a detailed reply furnished by him vide his letter, dated 7‑4‑2003.

16. The learned RCIT found his explanation satisfactory as he failed to point out any deficiency therein in his final letter, dated 8‑4‑2003. He however, selected the return for audit with the following observations:‑‑

"I have examined your reply and there are several legal' issues with regard to accrued mark‑up, share capital, loans and advances to employees, terms and conditions thereof and treatment for the purposes of taxes, conversion from electricity to Gas."

17. The Authorised Representative of the complainant has pleaded that the aforesaid reasons have also been explained and controverted in the reply, dated 7‑4‑2003. The Departmental Representatives have reiterated the pleas and arguments taken in the parawise comments filed by the respondents.

18. The facts stated above also establish tae objections/discrepancies confronted to the complainant through show‑cause notice were fully explained with facts and figures in complainant's A.R.'s reply, dated 7‑4‑2003. None of the para meters laid down by the C.B.R. in C.No. 7(7)/S.Asstt/2002, dated 17‑12‑2002 was applicable in the case of the complainant as discussed in the preceding paras. The arguments of the complainant's A.R. are well founded that it was neither revenue potential case nor there was any evidence, information or reason to establish that the true particulars of income had been suppressed.

19. There was no evidence of decline to income or disparity in expenses on utilities vis‑a‑vis income declared Similarly the sources of additions of new assets have been explained in para. (d) of complainant's reply, dated 7th April, 2003. It has also been stated that sources could have been examined through audited cash flow statement filed alongwith, the return of income. This is a State owned enterprise and therefore, in. the absence of any evidence to the contrary the explanation regarding: sources of investment in new assets should be accepted.

20. The above facts clearly establish maladministration in the process of selection of the return for audit and therefore, it is recommended as under:‑‑

(i) The C.B.R. to direct, the Regional Commissioner of Income Tax, Corporate Region, Karachi to withdraw his order No. SO -I/7(8)/P/2002-2003/2932, dated April 8, 2003 and issue directions to the concerned taxation officer to accept the return of the complainant under tae Self Assessment Scheme.

(ii) Compliance be reported within 30 days of the receipt of order by the Revenue Division.

C.M.A./1000/FTO Order accordingly.