Messrs HILAL TRAVEL SERVICES, KARACHI VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2004 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 673 (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‑‑ Return selected for total audit‑‑‑Setting apart of‑‑‑Allowing commission to customers‑‑‑History‑‑‑Setting apart the case on the ground that claim of payment of discount out of commission to the tune of 83.8% of the gross receipts was not acceptable without detailed verification, that percentage of commission paid out to the extent of 83% and to retain 17% of income was unusually high and not comparable with similar cases and that the claim could not be allowed merely on the basis that it was claimed/allowed in the past as there was no estoppel in law and every assessment was an independent assessment year‑‑‑Validity‑‑‑Department ignored the history of the case by merely referring to the principles of estoppel and res judicata without placing any evidence on record to justify the rejection of history of the case‑‑‑Percentage of discount allowed to the customers was accepted in the preceding years and was confirmed in appeals‑‑‑Much lower net profit rate at 4.22% was accepted in the past whereas in the year under consideration the declared net profit was 10.59%‑‑‑Contention that Department ignored the history of the case without proper justification thus was quite convincing ‑‑‑Para meters laid down by the Central Board of Revenue had not been followed‑‑‑No evidence, information or reason was available to believe that the true particulars of income had been suppressed‑‑‑Neither any decline in the income nor disparity in expenses on utilities vis‑a‑vis income declared was found‑‑‑Complainant/assessee did not acquire any new assets during the year or incurred liability of 50,000 or more through non‑institutional loan‑‑‑Present case was therefore that of maladministration and the allegation of the complainant that the return was selected for audit in disregard of the parameters laid down by the Central Board of Revenue stood established‑‑‑Federal Tax Ombudsman recommended the Central Board of Revenue to direct the Regional Commissioner of Income Tax to withdraw and cancel his letter bearing No.SO‑1/7(8)P.57/2002‑2003/3562, dated 22-5‑2003 and direct the concerned Taxation Officer to accept the return of the complainant/assessee for the year 2002‑2003 under the Self‑Assessment Scheme.

Mazharul Hasan for the Complainant.

Abdul Sattar, D.C.I.T. for the Department.

FINDINGS/DECISION

The complainant an individual derives income from sales of Air Line Tickets of PIAC and is an. existing assessee of Circle C‑09, Companies Zone‑I, Karachi on National Tax Number 14‑9‑0660418.

2. The complainant is, aggrieved by Regional Commissioner of Income Tax, Corporate Region Karachi's order bearing No.3562, dated 22‑5‑2003 whereby his return of income for the assessment year 2002‑2003 has been selected for total audit in terms of para. 9(a)(ii) of C.B.R.'s Circular No.7 of 2002. The facts of the case are briefly stated as under:‑‑

3. The complainant filed return of income for the assessment year 2002‑2003 on 26‑9‑2002 declaring income of Rs.11,40,000 which qualified for acceptance under the Self‑Assessment Scheme announced as per C.B.R. Circular No.7 of 2002, dated 15‑6‑2002. The RCIT Corporate Region, Karachi issued a show‑cause notice vide his Letter No.SO‑I/7(8)/P‑2/2002‑2003/2071, dated 23‑1‑2003 expressing his intention to select the return of income for total audit in the light of Board's Circular. No.7 referred above. The explanation furnished by the complainant was not found satisfactory and the RCIT, Corporate Region. Karachi vide his order, dated 18‑2‑2003 selected the return for total audit. The complainant challenged the decision of the RCIT and made a Complaint bearing No.150‑K/2003 before this forum.

4. During investigation of the complaint it was found that the complainant was not provided due opportunity of being heard as envisaged in para. 3 of C.B.R.'s Circular, dated 17‑12‑2002. Non -adherence to C.B.R.'s directions amounted to maladministration and it was therefore, recommended vide order, dated 2 3‑4‑2003 to withdraw the RCIT's order, dated 18‑2‑2002 and decide the issue afresh after providing opportunity of being heard to the complainant in the light of C.B.R.'s Circular No.7(7)/S. Asstt./2002, dated 17‑12‑2002.

5. The respondent following the aforesaid recommendations issued a fresh show‑cause notice to the complainant bearing No. 3238, dated 30th April, 2003 whereby the following quarries have been made:‑‑

(a) "Your claim to having been passed on commission to the tune of Rs.9,014,770 constituting 83.8% of the gross receipts, is not acceptable without detailed verification. The percentage of Commission pay‑out to the extent of 83% to return 17% of your income is unusually high and not comparable with similar cases.

(b) The expenses cannot be claimed merely on the basis that it was so claimed/allowed in the past, as you are well aware that there is no estoppel in law and every assessment is an independent assessment year. We, therefore, intend to verify these commission payments. Further this is not discounting of the tickets allowed by Airlines as you have paid the entire amount of billed tickets to the said Airlines and have in fact parted away with your commission income. Any commission payment is also liable to deduction of tax: The Department would like to verify the payments and `deductions wherever applicable, and reconcile it with the statement of accounts/sale reports furnished on fortnightly basis to various Airlines.

(c) You have failed to provide details of your personal expenses. The claim of expenses at Rs.740,000 inclusive of taxes does not seem adequate and it .needs to be reconciled. Further out of your capital an amount of Rs.1,083,181 was deducted under section 50, leaving behind inadequate cash reserve for doing business to the volume of 14.10,757 (M) wherein you have to make payments to Airlines on fortnightly basis and your recoveries take much longer time.

(d) I have reasons to believe that true particulars of‑income has been deliberately suppressed in the sense that expenses have been inflated and thus this is a revenue potential case."

6. The complainant's A.R. made compliance of the aforesaid show- cause notice within the stipulated time vide his detailed explanation, dated 10‑5‑2003. It is alleged that in the letter dated 22‑5‑2003 the learned Regional Commissioner of Income Tax has created certain new issues for which no opportunity was provided which clearly proves that he had already decided to select the case for audit in violation of the directions of the C.B.R. conveyed through Circular No.7 of 2002. It is further alleged that the return of the complaint has not been selected on the basis of material evidence as envisaged by the C.B.R in its letter, dated 17‑12‑2002. The selection is based on presumption and conjecture. The return has been selected for audit simply because the complainant claimed refund of Rs.3.8,08,681. This is a case of misuse of power which falls within the ambit "maladministration".

7. The respondents have filed parawise comments stating therein that the recommendations made in order, dated 23‑4‑2003 on Complaint No. C‑150‑K/2003 have been implemented and the order bearing No. 2246, dated 18‑2‑2003 has been duly withdrawn. The matter has been decided in the light of C.B.R.'s Circular No. 7(7), dated 17‑12‑2002. It is stated that the complainant's claim of payment of discount out of commission to the tune of Rs.90,14,770 constituting 83.8% of the gross receipts, was not acceptable without detailed verification. The percentage of commission paid‑out to the extent of 83 and to retain 17% of income was unusually high and not comparable with similar cases. It is further stated that the claim cannot be allowed merely on the basis that it was claimed/allowed in the past as there is no estoppels in law and every assessment is an independent assessment year. Any commission payment is also liable to deduction of tax arid therefore the Department would like to verify the payments and deductions wherever applicable and reconcile it with the statement of accounts/sales reports furnished on fortnightly basis to various Airlines.

8. It is further stated that the complainant failed to provide details of this personal expenses. The claim of expenses at Rs.740,000 inclusive of taxes does not appear to be adequate and it needs to be reconciled. Further out of his capital an amount of Rs.1,083,181 was deducted under section 50 leaving behind inadequate cash reserve for doing business to the volume of Rs.10.757 (M) when he has to make payment to Airlines on fortnightly basis and his recoveries take much longer time. It is pleaded that the complainant's reply vide his letter, dated 10‑5‑2003 has been found totally unsatisfactory and the return of income has therefore been selected for total audit, The selection is made where there are indications of under reporting of income, short of evidence. In cases of definite evidence of concealment the return of income automatically falls outside the purview of. Self‑Assessment Scheme.

9. It is further pleaded that the return has been selected for audit due to certain discrepancies in wealth reconciliation statement which could not be explained properly. It is reiterated that the expenses claimed by the complainant require verification. The respondents have also stated that there is no estoppel or res judicata in the Income‑tax proceedings and therefore 'the complainant's reliance on past history is not well- founded. It is also pleaded that this is a revenue potential case and the whole exercise was in accordance with the law and within the parameters as prescribed by the Board. There is reason to believe that true particulars of income have been suppressed and therefore, the selection of the return for audit is fully justified.

10. The Authorised Representative of the complainant has pointed out that the respondent has raised new issues in his letter, dated 22‑5‑2003 whereby return has been selected for total audit. These issues were not confronted to the complainant in the show‑cause notice and therefore, selection on the basis of these issues is absolutely unjustified. He has further, argued that the respondent's observations that the discount allowed to the customers @ 83% by the complainant was excessive when compared with similar cases is absolutely unfounded as no parallel case was confronted through the show‑cause notice. He has cited a number of decisions of the superior Courts in this behalf in, his rejoinder filed in reply to the parawise comments of the respondents. As regards the observations of the RCIT that verification of deduction of tax on commission payment was necessary, it is pleaded by the Authorised Representative of the complainant that the complainant is an individual and cannot be treated to be withholding agent and thus no question of verification of deductions was involved in his case. The learned Regional Commissioner of Income Tax did not go through the record of the complainant and has raised objections which are not relevant. He, has further, argued that the details of personal expenses had already been provided to the Department in response to their Letter No. SO- I/7(8)/P.2/2002‑2003/2071, dated 23-1‑2003. It was submitted that the complainant resided with his father who was a Director of Messrs Matchless Travels Pvt. Ltd. and therefore, the declared expenses at Rs.4,65,500 were quite reasonable.

11. The Authorised Representative has also pleaded that the deduction of tax shown at Rs.10,83,181 was fully explained in his reply, dated 10‑5‑2003. In the aforesaid total deduction, the tax for the year was only of Rs.2,74,500 and the rest of the amount at Rs.8,08,681 was refundable and after including this refund, the capital declared at Rs.26,30,000 was also quite reasonable. It is also pleaded that the wealth reconciliation statement, had already been furnished, but learned Regional Commissioner of Income Tax misguided himself while reconciling the figures in his letter, dated 22‑5‑2003. This issue had been elaborately explained in his reply, dated 10‑5‑2003.

12. The Departmental Representative has tried to justify the selection of the return for total audit and reiterated the pleas taken in the parawise comments. The examination of assessment records produced by the D.R. and various notices issued by the respondents shows that the main reason for setting apart the return of the complainant from the purview of Self‑Assessment Scheme was the claim of commission having been passed on the customers @ 83.8% of the gross commission receipt. This was considered to be very high and excessive when compared with parallel cases. The complainant explained time and again that the claim regarding discount paid to the customers was in accordance with the history of the case. The details of commission allowed to the customers in the preceding years while completing the assessment under section 62 of the repealed Income Tax Ordinance, 1979 were provided as under:‑‑

13. It was also stated by the complainant that the aforesaid claim of discount was upheld in appeal by the Commissioner (Appeals) and the Income Tax Appellate Tribunal particularly in the year 1991‑92 and 1994‑95. It was also explained in the explanation, dated 10‑5‑2003 that the discount was mostly paid/allowed to the passengers travelling abroad who furnished full particulars i.e. Passport numbers, NIC, Name and Address etc. The payment of discount was‑fully verifiable and therefore, the respondent's apprehension regarding its correctness is absolutely unfounded. As regards the reasonableness of the claim the complainant cited the decision of the. Honourable Supreme Court of Pakistan in the case of Mr. Atta Hussain Khan Limited v. CIT East Pakistan Dhaka reported at (1970) 21 Tax page 1 wherein the apex Court held "the question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the Income Tax Department to say that the expenditure is not reasonable".

14. The Regional Commissioner of Income Tax accepted the aforesaid explanations offered by the complainant as stated in paras. 5 and 8 of his letter bearing No.3562, dated 22‑5‑2003. It is surprising as to why he is keen to make verification of payments of discount when he has conceded that the sales are verifiable and the claim is also bona fide and on the ground of commercial expediency. The arguments of the Authorised 'Representative of the complainant that no parallel case was cited by the respondent in the show‑cause notice wherein it was observed that the claim was excessive and high when compared with parallel cases carries weight. Without confronting the complainant with parallel cases the conclusion drawn by the RCIT in this regard was not justifiable. Repetition, of quaries/objections already explained earlier regarding personal expenses and deduction of taxes etc. supports the contention of the authorized representative that the respondent had already made up his mind to select the return for total audit and the objections/queries were made by way of formality only.

15. The respondents have laid extraordinary emphasis on the decisions of superior Courts that no estoppel or res judicata is applicable in Income Tax proceedings and have cited the decision of the Honourable Supreme Court of Pakistan in the case of CIT v. Krudd Sons Limited 1994 SCMR 220 = 1994 PTD 174. The perusal of the decision however, shows that the reliance is misplaced as the appeal filed by the Department was, dismissed by the Honourable Supreme Court. The facts of the case are briefly stated as under:‑‑

16. In the assessment years 1971‑72 and 1972‑73 the Income Tax Officer rejected the book version of the assessee and estimated the sales and applied G.P. rate thereon which resulted in additions in the trading account. The assessee filed appeal against these assessments which was allowed by the Appellate Assistant Commissioner with the directions to the Income Tax Officer to accept the book results as disclosed in both the years under consideration. The Department challenged this order before the Income Tax Appellate Tribunal which by a consolidated order, dated 30th July, 1976 allowed the appeal and upheld the order of the Income Tax Officer. The assessee filed an application under section 66(1) of the Income Tax Act, 1922 to consider the following question:‑‑

"Whether on the facts and in the circumstances of the case the learned Appellant Tribunal was correct in holding that proviso to section 13 of the Income Tax Act was applicable".

This application was dismissed on the ground that the Tribunal's order did not give rise to any question of law. The assessee then filed an application under section 66(2) of the Income Tax Act, 1922 in the High Court which answered the question in the negative.

Leave was granted to consider the question "whether acceptance of account in earlier years does not give rise to any vested right as income tax proceedings for each assessment year is a separate unit and has to be judged in view of the special facts arid circumstance's of the year in question and the principles of estoppel and res judicata do not apply to these proceedings."

The Honourable apex Court held as under:‑‑‑

"It is the duty of the Income Tax Officer to determine whether the assessee has adopted method of accounting from which income, profits and gains can properly be deduced. In this case the Assessing Officer did not proceed in the indicated manner although from the accounts laid and on its examination true income and profit could be deduced. This judgment is of no help to the appellant. There can be no cavil that a regular method of accounting in the past cannot be accepted as a matter of routine without examining it and if the Assessing Authority comes to the conclusion that it is defective and true income, profit and gain cannot be deduced from it then on the principle, stated above it can be rejected. In the present case the reasons given for rejecting the accounts are not proper, sufficient and valid.

We, therefore, dismiss the appeals with no order as to cost."

17. It is evident from the decision of the above cited case that the Assessing Officer has to place on record material evidence to justify deviation from the history of the case. He cannot ignore the history of the case as a matter of routine without examining it and establishing that it is defective and trice income, profit and gain cannot be deduced from it.

18. In the case of the complainant also the respondents have ignored the history of the case by merely referring to the principles of estoppel and res judicata without placing any evidence on record to justify the rejection of history of the case. The complainant has been reiterating that much higher percentage of discount allowed to the customers was accepted in the preceding years and was confirmed in appeals as well. Similarly much lower net profit rate at 4.22% was accepted in the past whereas in the year under consideration the declared net profit was 10.59%. His contention that the respondents have ignored the history of his case without proper justification is quite convincing and well founded. It is also apparent from the show‑cause notice issued by the RCIT that the para meters laid down by the C.B.R. through Letter No.7(7)/2/S.Asstt./2002, dated 17‑12‑2002 have not been followed. There was no evidence, information or reason to believe that the true particulars of income had been suppressed. There was neither any evident decline in income nor disparity in expenses on utilities vis‑a‑vis income declared. The complainant did not acquire any new assets during the year or incurred liability of 50,000 or more through non‑institutional loan. This is a case of maladministration and the allegation of the complainant that the return was selected for audit in total disregard of the parameters laid down by the C.B.R. in various Circulars on Self Assessment Scheme referred above stands established. It is therefore, recommended as under:‑‑

(i) The C.B.R. to direct the RCIT to withdraw and cancel his Letter bearing No.SO‑I/7(8)/P.57/2002‑2003/3562, dated 22‑5‑2003 and direct the concerned Taxation Officer to accept the return of the complainant for the year 2002‑2003 under the Self-Assessment Scheme.

(ii) The compliance be made within 30 days of, the receipt of this order and reported within a week thereafter.

C.M.A./1037/FTO Order accordingly.