(a) Income Tax Ordinance (XLIX of 2001)‑‑‑

‑‑‑‑Ss. 122 & 239(4)‑‑‑Income Tax Rules, 2002, R.68‑‑‑Income Tax Ordinance (XXXI of 1979), S.66‑A‑‑‑Establishment of Officer of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Amendment of assessment‑‑‑Savings‑‑‑Proceedings initiated by the Inspecting Additional Commissioner under S.66‑A of the Income Tax Ordinance, 1979 on the basis of Inspection Report was dropped after considering the evidence produced and explanation offered by the assessee and a report was submitted to Additional Director Inspection‑‑‑Jurisdiction of case was transferred to Large Taxpayer Unit‑‑‑Taxation Officer issued notice under S.122 of the Income Tax Ordinance, 2001 being pending proceedings under S.66‑A of the Income Tax Ordinance, 1979 and the contents of the notices were identical to that as mentioned in the notices under S.66‑A of the Income Tax Ordinance, 1979‑‑‑Unsigned record of proceedings‑‑‑Validity‑‑‑Taxation Officer failed to prove that proceedings under S.66‑A of the Income Tax Ordinance, 1979 were pending before his predecessor on the commencement of the Income Tax Ordinance, 2001 because the authenticity of the order sheets found on the records produced by him on requisition was doubtful on the facts recorded‑‑‑Fact that his predecessor had dropped those proceedings was proved from communication of his decision to the Addition Director Inspection as well as the Commissioner under his own signature‑‑‑Copy of such report was also given to the complainant/assessee by the Inspecting Additional Commissioner‑‑‑Maladministration was proved‑‑ Federal Tax Ombudsman recommended that the then Taxation Officer and Inspecting Additional Commissioner were required to explain as to why the proceedings noted in the order sheet produced during investigation proceedings were not signed by them; that as to why the then Inspecting Additional Commissioner did not record the proceedings conducted and concluded under S.66‑A as reflected from the findings and decisions in respect thereof conveyed through his report to the Additional Director Inspection and that the proceedings initiated under S.122 of the Income Tax Ordinance, 2001 by the Taxation Officer were ab initio contrary to law, were not to be pursued by the Department.

(1999) 97 Tax (Trib.) (sic); (1992) 65 Tax 115 (H.C.) and Nos. 487 to 491‑K of 2003, dated 20‑6‑2003 ref.

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

‑‑‑‑S. 66‑A‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Direction of Additional Director Inspection to Inspecting Additional Commissioner to initiate proceedings under S.66‑A of the Income Tax Ordinance, 1979 on the basis of his report on Special Inspection amounted too Maladministration‑‑‑Additional Director Inspection had no jurisdiction to issue any direction or even to suggest to Inspecting Additional Commissioner to invoke his jurisdiction under S.66‑A of the Income Tax Ordinance, 1979; he could only recommend action against the concerned Assessing Officer or officers responsible for the alleged loss of Revenue.  

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

‑‑‑‑S.5‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Maladministration‑‑‑Failure of Assessing Officer to sign the proceedings recorded on the order sheets purportedly under his name amounted to maladministration.

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

‑‑‑‑S. 66‑A‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Failure to sign the observations/directions recorded on the order sheet by the Inspecting Additional Commissioner with regard to proceedings under S.66‑A of the Income Tax Ordinance, 1979 besides failing to record his decision to drop the proceedings initiated under S.66A of the Income Tax Ordinance, 1979 conveyed by him to Additional Director Inspection amounted to maladministration.  

(e) Income Tax Ordinance (XLIX of 2001)‑‑‑

‑‑‑‑S. 122(5)‑‑‑Income Tax Ordinance (XXXI of 1979), S. 66‑A & 135‑‑ Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Amendment of assessment‑‑‑"Definite information"‑‑ Audit‑‑‑Exercise of power by the Taxation Officer under S.122(5) of the income Tax Ordinance, 2001 firstly for invoking jurisdiction under the said section over assessment order issued under S. 135 and S.66‑A of the Income Tax Ordinance, 1979 which was contrary to law and secondly for treating the contents of Inspection Report of Additional Director Inspection to be the "definite information" acquired from an audit amounted to maladministration as the alleged errors pointed out in the, Inspection Report were based on presumptions and no definite conclusion could be deduced from the said report that order passed by the Assessing Officer was erroneous and prejudicial to the Revenue.  

Rehan Hasan Naqvi for the Complainant.

Imtiaz Ahmed Barakzai for Respondent.

DECISION/FINDINGS

Maladministration is alleged in the three instant complaints on the part of the Taxation Officer‑B (BS‑19), Audit Division, Large Tax Payer Unit, Karachi for invoking jurisdiction under section 122 of the Income Tax Ordinance, 2001 despite the fact that the assessment orders under section 62 of Income Tax Ordinance, 1979 for the assessment years 1997‑98 (Part II), 1998‑99 and 1999‑2000 not only had been the subject of action under section 66A of the repealed Ordinance, 1979 twice but also had been subject of appeal decided by the learned Income Tax Appellate Tribunal under section 135 of Income Tax Ordinance, 1979 according to which the orders modified under section 66A by Inspecting Additional Commissioner of Income Tax were held to be legally unsustainable and therefore vacated.

2. Briefly the facts are that the complainant, a private limited company, derives income from manufacturing and sale of cooking oil and Ghee with the trade names of Habib Banaspati, Nayab Banaspati, Mayar Banaspati, Habib Cooking Oil, Habib Corn Oil and Handi Banaspati etc. and presently is borne on NTN: 34‑01‑0710588 under the jurisdiction of Director General, Large Tax Payer Unit, Karachi.

3. The complainant filed income‑tax returns in the office of Deputy Commissioner of Income Tax, Circle C‑11, Companies‑I, Karachi for the periods ending on 30‑6‑1997; 30‑6‑1998 and 30‑6‑1999 corresponding to assessment years 1997‑98 (Part‑II), 1998‑99 and 1999‑2000 declaring incomes of Rs.37,853,000, Rs.85,549,000 and Rs.99,420,000.

4. The assessment orders under section 62 of the repealed Ordinance, 1979 were passed on 20‑3‑1998, 1‑4‑1999 and 28‑6‑2000 at incomes of Rs.47,940,963, Rs.92,910,883 and Rs.110,731,325. Orders under sections 52 and 86 of the repealed Ordinance were also passed simultaneously creating further tax demands of Rs.746,104, Rs.1,099,944 and Rs.2,249,131 for the three respective years.

5. Further, the learned Inspecting Additional Commissioner of Income Tax Range‑1, Companies‑I, Karachi, while exercising jurisdiction under section 66‑A of repealed Ordinance, 1979, modified the orders passed under section 62 of the repealed Ordinance, 1979 by making certain additions under section 24(c) of the repealed Ordinance, 1979 on 18‑10‑2001, enhancing the incomes to Rs.56,185,825, Rs.102,456,933 and Rs.137,055,561 respectively.

6. The complainant, being dissatisfied with the above orders, filed appeals before the Income Tax Appellate Tribunal who vide its combined order bearing I.T.As. Nos. 32, 33, 34 and 35/KB of 2002 (assessment years 1997‑98 (Part I), 1997‑98 (Part II), 1998‑99 and 1999-2000), dated 15‑5‑2002 vacated the orders passed under section 66‑A of repealed Ordinance, 1979 being not legally sustainable.

7. The Inspecting Additional Commissioner of Income‑tax Range‑II, Companies V, Karachi issued further show‑cause notices under section 66‑A of the repealed Ordinance, 1979, dated 11‑3‑2002 in respect of assessment years 1997‑98 (Part II) and 1998‑99 during the pendency of the appeal filed before the learned Income Tax Appellate Tribunal in respect of the aforesaid assessments years. The aforesaid notices were issued in pursuance of the directive of the Additional Director Inspection (D.T.) Range‑A, Southern Region Karachi given vide the "inspection report in respect of special inspection (Refund Cases) Report regarding Habib Oil Mills (Pvt.) Ltd. assessment years 1997‑98 to 1999‑2000". The issues raised in the aforesaid notices were, briefly, as mentioned hereunder:‑‑

1997‑98:

(a) Difference between amount of commission expenses claimed and the amount shown in the statement under section 141 of repealed Ordinance, 1979.

(b) Huge lease rental expenses amounting to Rs.6,509,000 allowed though inadmissible under section 23(1)(v) of the repealed Ordinance 1979.

(c) Ineorr6ct claim of depreciation on cars purchased during the period 1997‑98 (Part I).

1998‑99:

(a) Difference between amount of commission expenses claimed and the amount shown in the statement under section 141 of repealed Ordinance, 1979.

(b) Liabilities allowed without verification.

(c) Incorrect claim of depreciation on vehicles.

1999‑00:

A letter, dated 15‑3‑2002 was also issued by the learned Deputy Commissioner of Income Tax Circle C‑05, Companies‑V, Karachi on identical points and served on the complainant, the subject of which was "Explanation/Clarification regarding certain issues for the assessment year(s) 1997‑98‑1999‑2000. While the IAC did not issue any notice under section 66‑A for assessment year 1999-2000 the DCIT, through the combined letter for three years, requested the complainant to furnish Explanation/Clarification supported by documentary evidence against the above observations/findings on or before 22‑3‑2002." The DCIT warned that in case of non‑compliance it shall be presumed that the above mentioned observations are correct and necessary action under the law shall be taken. "

8. Reply to the aforementioned notices was submitted alongwith details vide letter, dated 15‑3‑2002. The Inspecting Additional Commissioner of Income Tax Range‑II, Companies‑V, Karachi, being satisfied with the reply, addressed a letter to Additional Director Inspection (D.T.) Range‑A, Southern Region Karachi vide report, dated 18‑4‑2002 in reference to the said "inspection report" and marked a copy of the report to the CIT. The said report concluded as under:‑‑

"Finally I would say that this is not a fit case for invoking 66A because order of the Assessing Officer for both the years i.e. 1997‑98 and 1998‑99 is neither erroneous nor prejudicial to the interest of Revenue. So the matter has been dropped from my side on all score".

9. The respondent, Taxation Officer‑B (BS‑19), Audit Division, Large Tax Payer Unit, Karachi, after a lapse of 14 months, served on the complainant notices under section 122 of the Income Tax Ordinance, 2001, dated 26‑6‑2003 alongwith notices under rule 68 of Income Tax Rules 2002, dated 28‑6‑2003 on 14‑7‑2003 although the compliance was desired on 7‑7‑2003. The contents of the said notices were identical to that as mentioned in the notices under section 66A of the repealed Ordinance, 1979, dated 11‑3‑2002 issued by learned Inspecting Additional Commissioner of Income Tax Range‑II, Companies‑V, Karachi and notice, dated 15‑3‑2003 issued by learned Deputy Commissioner of Income‑tax Circle C-05, Companies‑V, Karachi.

10. It is submitted on behalf of the complainant that a reference to section 122(1) of Income Tax Ordinance, 2001 would show that there is no mention of sections 66‑A and 135 of the repealed Ordinance, 1979 hence the invoking of section 122 of Income Tax Ordinance, 2001 is not only without jurisdiction but also is arbitrary, biased, perverse, unjust and oppressive.

11. Responding to the notice served under section 10(4) of Ordinance XXXV of 2000, the respondent admitted the foregoing facts but submitted that the report given by the IAC to the Additional Director Inspection (ADI) did not create a vested right for the tax payer and did not, legally, debar exercise of jurisdiction under section 122 of the Income Tax Ordinance, 2001.

12. Further, the said report being part of internal communication of the department, called for cognizance of the fact that as to how the said document reached the complainant's hands, was a proper request for the copy of the said report made and was the said copy officially issued? It was further submitted that the fact that notice under section 122, dated 26‑6‑2003 was issued 14 months after the IAC had written to the ADI that the proceedings under section 66A initiated by the IAC on the basis of Inspection Report of the ADI had been dropped by him after considering the evidence produced and explanation offered by the assessee/complainant does not vitiate the validity of the notice. According to the respondent even the fact that notice under section 122 had been issued by the Taxation Officer despite being fully aware with the explanation offered by assessee's counsel in response to the notice under section 66A, dated 11‑3‑2002 and the decision of the IAC to drop the said proceedings did not vitiate the legality of the notice ab initio, The fact that orders passed under section 66A in pursuance of proceedings initiated under the said section for the first time had been held unsustainable by the Tribunal also did not vitiate the notice under section 122 issued on 26‑6‑2003, according to respondent. Reliance was placed on the decisions reported as (1999) 97 Tax (Trib.) (sic) and (1992) 65 Tax 115 (H.C.). The respondent also disagreed with the contention that invoking of jurisdiction under section 122 was not only without jurisdiction but also was arbitrary, biased, perverse, unjust and oppressive because there was no mention of sections 66‑A and 135 of the repealed Ordinance in subsection (1) of section 122 ibid. However, he did not offer any basis for his disagreement in the parawise comments.

13. The respondent submitted by way of conclusion that the jurisdiction under, section 122 had been exercised properly. Internal communication of the department containing opinion of an officer did not debar the impugned action. There was no harassment to the taxpayers, as issuance of a proper notice under the provisions of law could not be allowed to be termed as "harassment". The complainant had not made any reference to the fact and merits of issues confronted to them through a valid notice, which made it clear that the complainant sought to avoid the said action by raising flimsy technical objections rather than defending its case on merits properly before the concerned Taxation Officer.

14. Mr. Rehan Hasan Naqvi the learned counsel for the complainant submitted that the Federal. Tax Ombudsman has observed in his decision on Complaint Nos. 487 to 491‑K of 2003, dated 20‑6‑2003 that a "reading of the provisions of section 122 makes it clear that it does not authorize the Commissioner or any authority to amend the assessments under section 122 which have been framed under section 66A of the repealed Ordinance. It specifically provides that only assessment made or treated to be issued under section 120 or issued under section 121 of the Ordinance or issued under section 59, 59A, 62, 63 or 65 of the repealed Ordinance can be amended. There is no mention of section 66A, which means that the legislatures have specifically excluded the assessment made under section 66A of the repealed Ordinance from the ambit of section 122 of the Ordinance."

15. Mr. Imtiaz Ahmed Barakzai, the Taxation Officer concerned (BS‑19) attended the proceedings. Besides reiterating the written submission recorded supra he submitted that this jurisdiction over the proceedings taken up by him under section 122 is saved under sub section (4) of section 239 of the Income Tax Ordinance, 2001. Sub section (4) provides that any proceeding under the repealed Ordinance pending on the commencement of this Ordinance before any income‑tax authority, the Appellate Tribunal or any Court by way of appeal, reference, revision or prosecution shall be continued and disposed of as if this Ordinance has not come into force. He submitted that the proceedings under section 66A of the repealed Ordinance were pending before his predecessor on the commencement, of the Income Tax Ordinance, 2001 because he had never dropped those proceedings, he had only expressed his intention to do so in a Departmental communication. When asked to produce evidence in support of his contention supra Mr. Barakzai submitted that the record of proceedings under section 66A conducted by his predecessor IAC was not with him but he would produce if time was allowed.

16. Three days later Mr. Barakzai produced the record bearing three order sheets. There were following unsigned notes on the two sides of first order sheet:‑‑

17. According to Mr. Barakzai, the jurisdiction over the case was transferred to LTU at this stage. The following next two entries on the second Order Sheet (Page III) were also unsigned:

18. There were another three notes on the same order sheet (Page IV). Whereas the note, dated 29‑6‑2003 was signed by the IAC, the later two notes written in the same handwriting as the former one was unsigned and purportedly written by DCIT. The three notes were as under:‑‑

19. The last note on the third order sheet (Page IV) duly signed by Z was as under:‑

20. The letter of Director, Inspection and Audit (DT), Southern Region, Karachi, dated 25‑11‑2002 which is referred to in the Order Sheet note of the even date is relevant to the issue being investigated. It is also being reproduced hereunder for convenience of reference:

"The Director General(By Name)

Inspection & Audit (D.T.)

Islamabad.

SUBJECT: FOLLOW UP ACTION‑DIRECTIVE NO. 4 OF 1993 MESSRS HABIB OIL MILLS (PVT.) LIMITED, KARACHI ASSESSMENT YEAR 1997‑98 TO 1999‑2000.

I have the honour to refer to your officer letter No. 22(04)Pt‑13/Insp/1‑2 dated 5th November 2002 on the above noted subject and to submit that Special Inspection Note was delivered on 18‑2‑2002, in the office of the CI'C Cos‑I, Karachi. On point of jurisdiction the case was transferred to Cos‑V, Karachi and therefore, the IAC Range‑II, Cos‑V, Karachi (Mr. Muhammad Umer Farooq) through his office Letter No. IAC/R‑II/COS‑V/2001‑2002/191, dated April 18, 2002 intimated that the Note does not warrant action under section 66A in any of the assessment years under review. The comments of the IAC were rebutted by this office Letter No. DIA (DT)/ADI(RA)/SR/2001 2002/124, dated 4‑6‑2002. Again on point of jurisdiction the case was transferred to LTU Karachi, CIT Audit LTU through his office letter No. CIT(AUDIT)/LTU/2002‑2003/9822, dated 31‑10‑2002 has informed that show‑cause notice under section 122 has been issued by the IAC. No further information regarding finalization of Amended Assessment and tax retrieval is sent so far.

(NAWAL RAI N. OAD)

DIRECTOR OF INSPECTION & AUDIT (D.T.)

SOUTHER REGION‑KARACHI.

Copy to

1. D.G.LTU. Karachi.

2. The, Commissioner of Income‑tax LTU, Audit for information and with the request that copy of Amended Assessment may please be sent to the office of the DG Inspection and Audit and this Directorate, hopefully by the end of this month. If the Amended Assessment could not be made, as expected, such reasons may please be submitted to the D.G. and also to this Directorate."

21. Regarding the contention of the Taxation Officer that his jurisdiction over the proceedings taken up by him under section 122 is saved under subsection (4) of section 239 of the Income Tax Ordinance, 2001 suffice it to observe that subsection (4) provides that any proceeding under the repealed Ordinance pending on the commencement of this Ordinance before any income‑tax authority, the Appellate Tribunal or any Court by way of appeal, reference, revision or prosecution shall be continued and disposed of as if this Ordinance has not come into force. Firstly he has failed to prove that the proceedings under section 66A of the repealed Ordinance were pending before his predecessor on the commencement of the Income Tax Ordinance, 2001 because the authenticity of the order sheets found on the, records produced by him on requisition is doubtful on facts recorded supra. The fact that his predecessor had dropped those proceedings is proved from communication of his decision to the Additional Director Inspection as well as his own Commissioner under his own signature. He had himself given a copy of the said report to the counsel of the assessee as stated by the counsel of the complainant at the bar. Thus it cannot be said that he had only expressed his intention to do so in a Departmental communication.

22. Maladministration is found after the foregoing investigations and enquiries:

(a) On the part of Additional Director Inspection for directing the IAC concerned to initiate proceedings under section 66A on the basis of his report on Special Inspection conducted into refund cases of complainant. The Additional Director Inspection had no jurisdiction to issue any direction or even to suggest to the IAC to invoke his jurisdiction under section 66A. He could only recommend action against the concerned Assessing Officer or officers, responsible for the alleged loss of revenue.

(b) On the part of the DCIT, Circle C‑5, Companies V, Karachi for failing to sign the proceedings recorded on the order sheets purportedly under his name, as per findings recorded at Para.16 supra.

(c) On the part of IAC, Range II, Companies V, Karachi for failure to sign the observations/directions recorded on the order sheet with regard to proceedings under section 66‑A besides failing to record his decision to drop the proceedings initiated under section 66‑A conveyed by him to the Additional Director Inspection vide his letter, dated 18‑4‑2002 a copy whereof was also endorsed by him to the CIT, Companies V, Karachi as per findings recorded at para. 8 supra.

(d) On the part of Taxation Officer exercising powers delegated by the Commissioner under section 122 (5) firstly for invoking jurisdiction under the said section over assessment order issued under section 135 and under section 66‑A of the repealed Ordinance which is contrary to law and secondly, without, prejudice to the foregoing, for treating the contents or Inspection Report ibid to be the definite information acquired from an audit. The alleged errors pointed out in the Inspection Report are based on presumptions and no definite conclusion can be deduced from the said report that the orders passed by the DCIT are erroneous and prejudicial to the Revenue.

23. It is recommended that:‑‑

(a) The then DCIT, Circle C‑5, Companies‑V and the then IAC, Range II, Companies V, Karachi are required to explain as to why the proceedings noted in the order sheets produced during investigation proceedings were not signed by them.

(b) That why the then IAC, Range II, Companies V, Karachi did not record the proceedings conducted and concluded under section 66‑A as reflected from the findings and decisions in respect thereof conveyed through his report, dated April 18, 2002 to the Additional Director Inspection, Southern Region Karachi.

(c) That the proceedings initiated under section 122 by the Taxation Officer‑B, Audit Division, LTU, Karachi, are ab initio contrary to law, are not pursued by the respondent.

(d) Compliance of recommendation (c) is reported within 30 days and compliance of recommendation (a) and (b) is reported within 45 days.

C.M.A./1005/FTO Order accordingly.