MEHRBAN KHAN VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2005 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 640 (2004)

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 62‑‑‑C.B.R. Circular No. 10 of 1975, dated 4‑7‑1975‑‑ Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Request for adjournment was turned down by writing words, "is rejected" at the end of the order sheet entry in the absence of complainant/assessee and assessment was finalized‑‑‑Validity‑‑‑Words "is rejected" had been written at the end of the order sheet entry and seemed to be in a different ink‑‑‑Said words did not seem to be in consonance with the earlier words‑‑‑No valid reason was available to reject a perfectly legitimate adjournment request and‑the refusal was a mala fide action for which no valid justification was provided‑‑‑Notice issued under S.62 of the Income Tax Ordinance, 1979 had also not given any indication of the Assessing Officer's intention to apply the Dandekar formula with a GP rate of 5% and assessment was framed without adequate opportunity‑‑‑Assessment was found to be based on maladministration arid thus could not be considered as plain assessment‑‑‑Federal Tax Ombudsman recommended that the income tax assessment for the assessment year, 2002‑2003, dated 15‑4‑2003 in the complainant's case be cancelled under S.122A of the Income Tax Ordinance, 2001 and a fresh assessment be made after allowing due opportunity of being heard to the complainant; that fresh assessment be made by an officer other than the officer who made the original assessment; that in the context of the maladministration pointed out a letter of warning be issued to the Income Tax Officer and placed on his personal file; that conduct of the Income Tax Officer in the context of his dealings as a customer with the complainant may also be examined by the relevant authorities.

Sufi M.A. Latif for the Complainant.

Ashraf Ali Marwat and Fayyaz Hussain, Taxation Officers for Respondent.

Mirza Muhammad Wasim, Advisor.

FINDINGS/DECISION

The complaint has been filed by a dealer in fertilizer. The main points in the complaint are as follows:‑

(i) The complainant is an existing income‑tax assessee of Circle 26, D.I. Khan. Return of income was filed for the assessment year 2002‑2003 at an income of Rs.20,000 on the basis of profit commission received from the principal company.

(ii) A notice under section ‑61 .of the repealed Income Tax Ordinance, 1979 was issued by the Assessing Officer alongwithnotice under section 62.

(iii) In violation of C.B.R. circular No. 10 of 1975, dated 4‑7‑1975 a pre‑printed/typed and hand written proforma (notice under section 62) was filled and certain obscure information available on record was communicated with mala fide intent stating that original commission certificate was not acceptable and the next date of hearing was fixed for 29‑3‑2003.

(iv) An assessment was subsequently made and as per the last para of the assessment order on page 2 the complainant personally attended the office on the due date and sought adjournment and the case was adjourned to 16‑4‑2003 on which date Sufi M.A. Latif, Advocate of the complainant attended., submitted power of attorney and requested for adjournment in writing for the reason that information regarding profit/price per bag etc. had been called for from Fauji Fertilizer Company, Lahore as the contents of the notice under section 62 were not acceptable.

(v) The Advocate's plea for adjournment was, however, rejected for mala fide reason and the assessment order was passed on 15‑4‑2003 retrospectively and with mala fide intention as the Assessing Officer (Mr. Fayyaz Hussain) had been obtaining fertilizer on loan from the complainant and the complainant had refused to supply any more fertilizer to him unless the amount of Rs.99,165 already outstanding against him had been cleared. An affidavit in this regard has been filed with the complaint.

(vi) The impugned assessment order is based on certain obscure information supplied by the Fauji Fertilizer Company and the total supply of 805 MT was rejected in the order without any solid proof.

(vii) The assessment reflects the mala fide intention of the Assessing Officer (Mr. Fayyaz Hussain) who had confirmed the value of the supply of fertilizer by the company at Rs.6,457,700 which was based on the fixed price of the company but the Assessing Officer applied the Dandekar formula and estimated sales at Rs.6,623,282 resulting in a GP rate of 5%.

(viii) The Assessing Officer never confronted the complainant before applying the Dandekar formula with the GP rate, of 5 % and did not mention this proposed treatment in the notice under section 62.

(ix) While computing the complainant's income the commission of Rs.40,250 at the rate of Rs.50 per ton was also added apart from applying the GP rate.

(x) The assessment order was passed retrospectively on 15‑4‑2003 with mala fide intention to blackmail the complainant for bargaining purposes and when asked in writing for delivery of demand notice and challan the same was not provided and was kept pending till 10‑5‑2003 on one pretext or the other.

(xi) The complainant's prayer is as under:‑‑

(a) The commission certificate of the fertilizer company be accepted as per the past history of the case as well as the latest decisions of the Tribunal.

(b) GP rate is not applicable in the complainant's case and may be struck down.

(c) The sales may be taken as per supply value of the company (which is fixed for customers) and not on the basis of the Dandekar formula.

(d) Adequate P&L expenses be allowed.

(e) The loan of Rs. 99,165 which was illegally retained/refused by the Assessing Officer is liable to be returned.

2. The respondent's reply consists of the comments of the RCIT furnished through the Revenue Division and it contains the following main points‑‑

(i) Remedy of appeal is available to the complainant and the matter thus falls outside the jurisdiction of the Honourable FTO.

(ii) The complainant was duly confronted with the information received from the principal company through a notice under section 62 of the repealed Income Tax Ordinance, 1979.

(iii) As is evident from the assessment order the case was adjourned to 15‑4‑2003 on the complainant's request but a further adjournment was sought by the complainant's AR which was turned own.

(iv) The figure of commission has been adopted by the Assessing Officer after obtaining information from the principal company viz. Messrs Fauji Fertilizer Ltd.

(v) Gross profit at the rate of 5% was applied in the case in the light of the order of the Income Tax Appellate Tribunal in I.T.A. No.222 (PB)/1988‑89. Furthermore the complainant failed to put forth any material to rebut the application of GP rate.

(vi) The payment of Rs.40,250 was added on the basis of the information obtained from Messrs Fauji Fertilizer Company.

(viii) The assessment was finalized on 15‑4‑2003 and the order was subsequently served on 10‑5‑2003.

(viii) As regards the affidavit filed by the complainant against Mr. Fayyaz Hussain, Income Tax Officer, the allegations had never been brought before any income tax authority till the filing of the complaint. The concerned officer has denied the allegations and the complaint appears to be the result of an unfavourable decision by the Assessing Officer.

3. The contentions of the two sides have been considered and the records examined. As regards the basis for the assessment framed by Mr. Fayyaz Hussain, Assessing Officer for the assessment year 2002‑2003 it appears that the Assessing Officer obtained information relating to various fertilizer dealers from Fauji Fertilizer Company together with copies of their ledger accounts. Subsequently the Assessing Officer, wrote a letter, dated 27‑12‑2002 to Fauji Fertilizer Company Ltd. that the information supplied by them indicated that commission had been allowed to all the fertilizer dealers but no income‑tax had been deducted at source in any of the cases. It was pointed out in the letter that this appeared to be a clear violation of section 50 of the repealed Income Tax Ordinance, 1979 and the company's clarification in this regard was requested. In the company's reply, dated 3‑1‑2003 regarding dealers' commission, marketing allowance and freight charges it was clarified that the company sold fertilizer to its dealers and on sale thereof received payments from the dealers net of trade discount allowed to the said dealers. It was stated that the company did not make any payments to the dealers on account of commission and the so‑called commission referred to in the Assessing Officer's letter actually represented trade discount. It was stated by the company that this position had been accepted by the Appellate Authorities in numerous decisions and that since no payment on account of commission had been made by the company to its dealers the provisions of. section 50 were not applicable in the case. Thereafter the Assessing Officer issued a notice under section 62, dated 18‑3‑2003 to the complainant (and to other dealers) pointing out that he had obtained 805 MT of fertilizer from the Fauji Fertilizer Company and giving an extract from the FFC letter, dated 3‑1‑2003 to the effect that no commission had been paid to the complainant but only a trade discount was given. The complainant was asked to explain in writing whether he agreed with the contents of the FFC letter and also to give details such as total purchases of fertilizer bags, total sales, closing stock, sale rate etc. The compliance date was 29‑3‑2003. As per the order sheet entry, dated 29‑3‑2003 Mr. Mehrbati Khan, the complainant attended on the said date and stated that in fact commission had been received on sales of urea and sought adjournment till 15‑4‑2003 for submission of a written reply. As per the order sheet entry, dated 15‑4‑2003 Sufi M.A. Latif (the advocate engaged by the complainant) attended and submitted a written letter stating that information called for from the principal company was awaited and adjournment be allowed till 30th April, 2003 which was rejected. The order sheet entry has been signed by Sufi M.A. Latif,. Advocate who during the heating stated that the words "is rejected" were added subsequently in the order sheet by the Assessing Officer and that at the time of hearing on 15‑4‑2003 the Advocate was given to understand that the case had been adjourned. In any case, the assessment order under section 62, dated 15‑4‑2003 was then passed in which the Dandekar formula with a GP rate of 5 % was applied to the purchases of Rs.6,457,700 and sales were thus worked out at Rs.6,623,282 against which the gross profit came to Rs.331,164 or 5 % . The GP rate of 5 % was statedly based on an ITAT decision, dated 13‑6‑1989 in I.T.A. No.222(PB)/1988‑89 for the assessment year, 1985‑86. P&L expenses at the rate of 25 % were allowed against the assessed gross profit and trade discount of Rs.40,250 was also added to arrive at the assessed income of Rs.288,623.

4. The assessment order has been examined and other related factors considered. The order is found to suffer from the following major defects‑‑‑

(i) As per the order sheet entry, dated 15‑4‑2003 the complainant's advocate had made a wiitten request for adjournment so that the further information requested from FFC by the complainant could be furnished. As per the order sheet entry only a couple of week's adjournment viz up to 30‑4‑2003 had been sought and there was absolutely no reason why the request should have been rejected particularly when the Assessing Officer intended to use a letter from FFC as the basis for the assessment and the complainant's plea was that he also wanted to obtain further information from FFC. In fact the contention of the advocate during the hearing was that at the time of his appearance he. Has not been informed of the rejection of the request for adjournment and that he signed the order sheet entry which indicated that the case had been adjourned to 30‑4‑2003. This contention seems to have substance as the words "is rejected" have been written at the end of the order sheet entry, dated 15‑4‑2003 and seem to be in a different ink. Furthermore the words do not seem to be in consonance with the earlier words which are as follows:‑‑

"present Sufi M.A. Latif. Written letter submitted stating the causes that information called from Company is awaited. Requested for adj till 30th April, 2003..."

After the above, the words "is rejected" appear to be quite disjointed and an apparent interpolation. Below this order sheet entry a note has also been given stating that there was no need for allowing further adjournment as sufficient time had been given. As already noted above, however, there was no valid reason to reject a perfectly legitimate adjournment request and the refusal was thus a mala fide action for which no valid justification was provided during the hearing.

(ii) Apart from the above, it is evident from the notice under section 62 that the complainant had not been given any indication of the Assessing Officer's intention to apply the Dandekar formula in the complainant's case with a GP rate of 5 % and thus the assessment was framed without adequate opportunity.

In the light of the above, the assessment is found to be based on maladministration as defined in section 2(3)(i)(a), (b) and (d) of the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000 and it can, therefore, by no means be considered as a plain assessment.

5. Coming to the allegation of personal motive of the Assessing Officer, it can be said in his favour that no ulterior motive was apparently involved in the initiation of the proceedings in so far as initially it was the FFC which had been confronted by the Assessing Officer with their apparent failure to deduct income‑tax from commission paid to various fertilizer dealers and it was FFC's reply which was the basis of further action in the cases of the fertilizer dealers including the complainant to whom notices under section 62 were issued. The fact, however, also is that the Assessing Officer had been obtaining fertilizer from various dealers for agricultural activity. In his written statement recorded during the hearing, Mr. Fayyaz Hussain, the Assessing Officer, stated that the fertilizer had been obtained by his son for his agricultural activity and that Mr. Fayyaz Hussain had nothing to do with the matter. It was also stated that the outstanding dues of the complainant had now been cleared which fact was also confirmed by the complainant in an affidavit. It is, however, not possible to accept that the Income‑tax Officer had no knowledge of the fertilizer obtained from the complainant, statedly by his son. The relevant ledger account in the books of the complainant in fact gives the name of Fayyaz Hussain and also his son, Pappu Khan. It is a running account and the first entry made available by the complainant is, dated 11‑12‑2000 viz about three years prior to the initiation of enquiry from FFC. According to this account, fertilizer had been obtained periodically on credit and certain payments had also been received from time to time by the complainant in the account. As the running ledger has been operative since at least 11‑12‑2000, no direct link could be established between it and the assessment proceedings in the complainant's case. It is, however, true that at the time of assessment, Rs.99,165 were owing to the complainant but even subsequently the complainant has been supplying more fertilizer to the Assessing Officer or his son and has also been receiving payment. Thus while no nexus has been established between the Income Tax Officer's (or his son's) dealings with the complainant and the assessment framed by him the propriety of such dealings on the part of the Assessing Officer who was entrusted with the tax assessments of the complainant (and other fertilizer dealers, three more of whom have levelled similar allegations) is a matter which needs to be considered by the concerned authorities under the Revenue Division.

6. In the light of the above, it is recommended that:‑‑

(i) The income‑tax assessment for the assessment year, 2002‑2003, dated 15‑4‑2003 in the complainant's case be cancelled under section 122A of the Income Tax Ordinance, 2001 and a fresh assessment be made after allowing due opportunity of being heard to the complainant.

(ii) The fresh assessment be made by an officer other than the officer who made the original assessment.

(iii) In the context of the maladministration pointed out in para. 5 above a letter of warning be issued to Mr. Fayyaz Khan, Income Tax Officer and placed on his personal file.

(iv) The conduct of Mr. Fayyaz Hussain, Income Tax Officer in the context of his dealings as a customer with the complainant may also be examined by the relevant authorities.

(v) Compliance report be furnished within 60 days.

C.M.A./105/FTOOrder accordingly.