Dr. ARJUMAND FAISEL VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2004 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1487 (2003)

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

‑‑‑‑S. 59(1)‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑C.B.R. Circular No.7 of 2002, dated 15‑6‑2002 (Self‑Assessment Scheme), Para. 9(a)(ii)‑‑‑Self- assessment‑‑‑Assessment year 2002‑2003‑‑‑Setting apart of case for total audit on the ground of inflation of expenses by comparison with the assessment year 2000‑2001‑‑‑Validity‑‑‑Department had no valid criterion to show that the expenses were inflated‑‑‑No justifiable reason existed to make a comparison with the year 2000‑2001‑‑‑Same was the case with salary of office assistant and office cleaner which were absolutely valid expenses and comparison with the year 2000‑2001 was quite unjustified.

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

‑‑-‑S. 59(1)‑‑‑Establishment of Office of Federal 'fax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑C.B.R. Circular No.7 of 2002, dated 45‑6‑2002 (Self‑Assessment Scheme), para. 9(a)(ii)‑‑‑Self -assessment‑‑‑Setting apart of case for total audit on the ground of un-verifiability of declared, receipts ‑‑‑ Validity ‑‑‑ Complainant/assessee had given details of each payment together with tax deduction which was the only source of the Complainant's receipts‑‑‑Nothing had been stated in the Department's reply or during the hearing to rebut the obvious verifiability of the receipts‑‑‑Federal Tax Ombudsman recommended that the Complainant's return for assessment year 2002‑2003 be excluded from total audit and the return be accepted under the Self‑Assessment Scheme.

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

‑‑‑‑S. 59(1)‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑C.B.R. Circular No.7 of 2002, dated 15‑6‑2002 (Self‑Assessment Scheme), para. 9(a)(ii)‑‑‑Self- assessment‑‑‑Setting apart of case for total audit on the ground that declared price of house was on lower side keeping in view the prevailing rates of residential properties‑‑‑Validity‑‑‑Such was a subjective view for which no specific reason was given‑‑‑Word "lower side" seemed to reflect the opinion that the price could have been marginally higher but did not express a definite view that the price had actually been understated‑‑‑Department had no doubt regarding the genuineness of the source of investment‑‑‑No information or valid reason existed to believe that the purchase price of the house had been suppressed‑‑‑Selection of case for total audit was not justified‑‑‑Federal Tax Ombudsman recommended that the Complainant's return for assessment year 2002‑2003 be excluded from total audit and the return be accepted under the Self‑Assessment Scheme.

Nadeem Ahmad for the Complainant.

Altaf Muhammad Khan, DCIT for Respondent.

FINDINGS/DECISION

This is a complaint against the selection of the complainant's income‑tax return for the assessment year 2002‑2003 under para. 9(a)(ii) of the Self‑Assessment Scheme for 2002‑2003.

2. The facts are that the complainant statedly derives professional income as a consultant for an AIDS awareness program. Return of income was filed to declare income of Rs.616,948 for the year 2002‑2003. The RCIT issued a show‑cause notice expressing his intention to select the complainant's return for total audit on the following grounds:‑‑‑

"(i) Claim of expenses to the tune of Rs.408,004 against declared receipt of Rs.958,976 are highly excessive keeping in view the nature of business.

(ii) Receipt as well as expenses is totally unverifiable.

(iii) House No. 116, St. No. 20, F‑10/2, Islamabad has been purchased for US $ 112,000. The declared price is on the lower side keeping in view the prevailing rates of residential properties."

3. In reply the complainant pointed out that the expenses claimed at Rs.338476 against receipts declared at Rs.958,976 were absolutely genuine and verifiable. With regard to the receipts it was stated that these were 100% verifiable having been received through normal banking channel from Dataline Services (Pvt.) Ltd. in connection with the project of the Ministry of Health. Complete details of each payment received alongwith details of tax, deducted at resource were also provided. With regard to the purchase of the house, the complainant in his reply to the RCIT stated as under:‑‑

"Whereas 'the question of purchase of house is concerned, it is stated that the plot size of house is 500 Sq. Yds. and the assessee had purchased it at US$ 112,000 on September 11,2001. At that time the rate of per US$ was rounding Rs.66 to Rs.67. The then market value of that house was around Rs.6,500,000 to Rs. 7000,000. However in view of the scheme of the house which was solving purpose of the assessee for establishing the personal office as well as residence, the value of the house was agreed upon as US$ 112,000 (around Rs.7,500,000). The amount was paid in US$ on the demand of seller. The said amount was arranged from conversion of US$ Bonds already declared in the Wealth Statement as on 30‑6‑2001. "

4. The case was later selected for total audit by the RCIT and in the complaint the contentions in the reply to the RCIT have been reiterated. With regard to the purchase of the house it is again stated in the complaint that the necessary documents were submitted and that the price declared represented the actual price paid for the property.

5. In the respondent's reply it is stated that the point relating to P&L expenses was valid, as the expenses claimed came to 35.20% of the declared receipts while these were shown at 33.74% in the assessment year 2000‑2001. It was also stated that in the assessment year 2002‑2003 salaries of office assistant and office cleaner were claimed at Rs.48,000 and Rs.7,800 respectively, whereas no such expenses were claimed in the assessment year 2000‑2001. It was also stated that the gross receipts were lower as compared to the receipts of Rs.1,109,641 declared for the assessment, year 2002‑2003. With regard to the purchase of house, the respondent's reply reads as under:‑‑

"During the period relevant to the assessment year 2002‑2003 the complainant also purchased House No. 116, St. No. 20, F‑11/2, Islamabad, whose declared price has been found understated in comparison with prevailing market rates.

The house has been purchased for Rs.7,392,000 (declared equivalent of $ 112,000) in September, 2001. The area of the plot on which house has been constructed is 500 Sq. Yds. Cost of the house workout at Rs.14,780 per Sq. Yd. House No.121, St. 23, F‑10/2, Islamabad measuring 1125 Sq. Yds has been purchased back in August, 1998 for a consideration of Rs.18,600,000 or Rs.16,580 per Sq. Yds. Although the complainant purchased property after a lapse of about 3 years in view of which price declared has been found all the more suppressed in comparison with above referred property."

6. During the hearing both sides reiterated their contentions regarding the RCIT's ground for selection. With regard to the purchase price of the house it was stated by the complainant's A.R. that this was as per the attested agreement to sell and the price was also duly shown in the CDA records. A list of five houses with similar plot sizes located in Sector F‑10/2, Islamabad was also provided by the A.R. showing the stated sale prices as under:‑‑

It was contended by the A.R. that the above data confirmed that the purchase price declared by the complainant represented the actual market value of the house. The representative, of the respondent however, reiterated that the declared purchase price was very low particularly in the light of the price of the property mentioned in the respondent's reply. The other grounds of selection were also defended by the respondent's representative.

7. The contentions of the two sides have been considered and as regards the RCIT's ground No. 1 relating to excessive claim of expenses it has been found to be without substance as there is no valid criterion with the department for show that the expenses were inflated. In this context it is also noted that there was no justifiable reason to make a comparison with the year of 2000‑2001 (i.e. the year before last) in this regard. Same is the case with salary of office assistant and office cleaner which are absolutely valid expenses and the comparison with the year 2000‑2001 in this connection is again quite unjustified. As regards the receipts, the complainant had given details of each payment (together with tax deduction) from Messrs Dataline which was the only source of the complainant's receipts. Nothing has been stated in the respondent's reply or during the hearing to rebut the obvious verifiability of the receipts.

8. As regards to the purchase price of the house as declared by the complainant it can be seen that according to the RCIT's show‑cause notice the declared price was "on the lower side keeping in view the prevailing rates of residential properties". It is evident that this was a subjective view for which no specific reason was given. In fact the words "lower side" seem to reflect the opinion that the price could have been marginally higher but do not express a definite view that the price hall actually been understated. As for the single instance of a property quoted in the respondent's reply the reference is hardly valid because dividing the price of a house with the size of the plot ignores various factors such as built‑up area and the actual location etc. Thus if the respondent's view regarding understatement of purchase price is based on such an example it can hardly be considered as reasonable. As already noted the complainant's A.R. has also given particulars of statedly comparable properties with similar prices. Of course, the actual details of these properties are also not known but as far as the respondent's view is concerned, neither in the show‑cause notice nor in the respondent's reply nor even during the hearing was any valid basis given for considering that the price of the house had been understated. Needless to say, as far as the declared price is concerned the department has no doubts regarding the genuineness of the source of investment. There was thus no information or valid reason for the RCIT to believe that the purchase price of the house (and consequently the income) had been suppressed.

9. In the light, of the above; the selection of the case for audit has not been found to be justified and it is, therefore, recommended that:‑‑

(i) The complainant's return for assessment year 2002‑2003 be excluded from total audit and the return be accepted under the Self-Assessment Scheme.

(ii) Compliance be reported within 30 days.

C.M.A./1023/FTOOrder accordingly.