Messrs FRIENDS VENEER CO., PESHAWAR VS SECRETARY, REVENUE DIVISION, ISLAMABAD
2004 P T D 1850
[Federal Tax Ombudsman]
Before Justice (Retd.) Saleem Akhtar, Federal Tax Ombudsman
Messrs FRIENDS VENEER CO., PESHAWAR
Versus
SECRETARY, REVENUE DIVISION, ISLAMABAD
Complaint No.274 of 2003, decided on /01/.
rd
July, 2003. 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 Para. 9(a)(ii)‑‑‑C.B.R. Circular No.7 (7)/S. Asstt/2002, dated 17‑12‑2002‑‑‑Assessment year 2002‑2003‑‑‑Gross profit rate‑‑ Setting apart of return for total audit on the ground that in the assessment year 1996‑97 gross profit rate was declared 23 % whereas in the current year it had been declared 18% and being a manufacturer gross profit rate of 25% was normally applied‑‑‑Validity‑‑‑Was not reasonable to pick a particular year for comparison when in all the subsequent years the declared gross profit rate had been considerably lower and the declared gross profit in the year under consideration was better than in almost all the intervening years ‑‑‑Complainant/assessee's declared sales were also higher as compared to the assessment year 1996‑97‑‑‑Selection of case for audit was not fund to be based on any valid reason‑‑‑Federal Tax Ombudsman recommended that the complainant's return be excluded from the cases selected for total audit under para. 9(a)(ii) of the Self Assessment Scheme 2002‑2003 and the declared income be accepted.
Abdul Basit, F.C.A., A.R. for the Complainant.
Mansoor Ahmad Bajwa, I.A.C. for Respondent.
FINDINGS/DECISION
This is a complaint relating to the selection of the complainant's income tax return for the assessment year 2002‑2003 for total audit under para. 9(a)(ii) of the Self‑Assessment Scheme for the year 2002‑2003.
2. The facts are that the complainant is an individual who statedly derives income from sale of timber (saw machine) and from sale of wooden doors/flush doors. Return of income for the assessment year 2002‑2003 was filed to show income of Rs.305,189. The RCIT, Northern Region in his notice, dated 22‑1‑2003 intimated his intention to select the case for total audit for the following reasons:‑‑
"The assessee had declared GP rate of 23 % in the assessment year 1996‑97 whereas in the current year it has been declared at 18%. Being a manufacturer GP rate of 25 % is normally applied. Therefore, the declared GP rate is quite low. "
2. In the respondent's reply to the RCIT's notice it was stated that there was no information, evidence or reason to believe that the complainant's income had been suppressed. It was also pointed out that the RCIT had not quoted any parallel case in which the GP rate of 25% has been applied. It was also stated that the GP rate had declined in comparison with the GP rate in the assessment year 1996‑97 due to increased cost of inputs. It was further stated that the complainant was registered sales taxpayer and complete sales tax returns were available on record which added to the authenticity of the declared trading results. The complainant's return was, however, selected for total audit against which this complaint has been filed.
3. It is stated in the complaint that the RCIT was not justified in disregarding the arguments contained in the complainant's response to the show‑cause notice. It is stated that in fact there is no valid basis for the selection and that directions may, therefore, be issued for acceptance of the complainant's return under the Self‑Assessment Scheme. In the respondent's reply it has been reiterated that the gross profit of 18% declared by the complainant was low when in other comparable cases a GP rate of 25 % was being applied and that the complainant had himself declared the GP rate of 23 % in assessment year 1996‑97.
4. During the hearing both sides reiterated their positions. The respondent's representative could, however, not even at this stage cite any comparable case in which a GP rate of 25 % had been declared/applied. With, regard to the GP rate of 23% declared by the complainant himself in the assessment year 1996‑97 it was contended by the AR that the complainant had three trading accounts viz. trading account of dealing in wood, trading account of sawing receipts and trading account of manufactured items. It was pointed out that the consolidated gross profit has all along shown variation and later the AR provided figures to show that while in the assessment year 1996‑97 the consolidated GP rate was 22.61 % against total sales/receipts of Rs.1,527,616 it was 12.48%, 13.93%, 18.33%, 19.25%, 17.88% and 18.59% against total sales/ receipts of Rs.7,639,767, Rs.5,002,045, Rs.3,894,710, Rs.3,509,058, Rs.4,005,162 and Rs.4,742,351 .in the assessment years 1997‑98 to 2002‑2003 respectively. It was thus pointed out that with this history it was not reasonable to pick up a single year viz. 1996‑97 for comparison and to treat the complainant's GP rate of 18.59 % shown in the assessment year 2002‑2003 as low when during the intervening period there was considerable variation in the GP rate which had mostly been lower than the declared GP rate in the year 2002‑2003.
5. The contentions of the two sides have been considered and it is evident that neither in the respondent's reply nor during the hearing was any parallel case cited on behalf of Revenue in which the GP rate of 25 % (or any rate higher than that declared by the complainant) had been declared or applied. As regards the complainant's declared GP for the assessment year 1996‑97 the complainant is right in stating that it is not reasonable to pick this particular year for comparison when in all the subsequent years the declared GP rate has been considerably lower and the declared GP in the year 2002‑2003 is better than in almost all the intervening years. It is also to be noted that in the assessment year 1996‑97 the complainant's declared sales were only Rs.1,527,616 while in the assessment year 2002‑2003 these were Rs.4,742,351.
6. In the light of the above, the selection of the case for audit has been found not to be based on any valid reason. It is, therefore, recommended that:‑‑
(i)The complainant's return be excluded from the cases selected for total audit under para. 9(a)(ii) of the Self‑Assessment Scheme, 2002‑2003 and the declared income be accepted.
(ii)Compliance be reported within 30 days.
C.M.A./978/FTOOrder accordingly.