Messrs KHYBER GALVANIZED ENGINEERING (PVT.) LTD. VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2006 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1822 (2004)

Income Tax Ordinance (XXXI of 1979)---

----S. 24(c), 50 & 156---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Deduction not admissible---Assessee a private limited company---Salary of Director was disallowed which was subsequently allowed in full for the reason that the . same had already been assessed in his own hands---Again another show-cause notice was issued to make another rectification on the plea that tax had not been deducted from the salary and the same was not allowable as an expense in the light of S.24(c) of the Income Tax Ordinance, 1979---Validity---Addition could be made if the tax on salary had not been paid or had not been deducted and paid under S.50 of the Income Tax Ordinance, 1979---If the tax had been paid by the recipient of the salary the mere failure of the payer to deduct tax could not be the basis for an addition---Question whether tax had been paid by the Managing Director in his individual capacity was a question requiring consideration of fresh facts which was outside the scope of a rectification---Complainant/ company had been unduly harassed by making a second rectification on totally new grounds after its original rectification application had been accepted and by refusing to accept the complainant's plea in the context of second rectification made by the Assessing Officer---Maladministra tion was thus proved---Federal Tax Ombudsman recommended that the second rectification order under S.156 of the Income Tax Ordinance, 1979 as well as the order under 5.221 of the Income Tax Ordinance, 2001 rejecting the complainant's subsequent rectification application be cancelled under S. 122A of the Income Tax Ordinance, 2001.

Maqbool Saigal, AR for the Complainant.

Faheem Muhammad, DCIT for Respondent.

FINDINGS/DECISION

JUSTICE (RETD.) SALEEM AKHTAR, FEDERAL TAX OMBUDSMAN.---The complaint filed by a private limited company contains the following main points:---

(i) The Assessing Officer disallowed salary of Managing Director amounting to Rs.523,800 out of a claim of Rs.543,000 in the income tax assessment for the year, 1999-2000. On an application by the complainant the assessment was rectified under section 156 of the repealed Income Tax Ordinance, 1979 and the salary of the Managing Director was allowed in full for the reason that the same had already been assessed in his own A hands. As a result, the complainant company was assessed at a loss of Rs.56,304.

(ii) Another show-cause notice, dated 7-6-2002 was, however, subsequently received from the Assessing Officer showing his intention to make another rectification on the plea that tax had not been deducted from the salary and it was, therefore, not allowable as an expense in the light of section 24(c) of the repealed Ordinance.

(iii) The complainant made due compliance of the show-cause notice of 13-6-2002.

(iv) The fate of the proposed rectification was not known till a recovery notice, dated 7-11-2003 was received by the complainant.

(v) The complainant filed another rectification application on 1-1-2003 on the ground that the same income could not be assessed to tax twice viz, firstly in the hands of the Managing Director of the company and secondly in the hands of the company and also that the income declared by the complainant as lease money amounting to Rs.540,000 was under dispute and was ultimately not paid by the Sarhad Development Authority and it may, therefore, be excluded from the complainant's income to assess the company at a loss of Rs.595,304.

(vi) After several reminders the complainant's plea was turned down on 7-3-2003.

It has been prayed that the taxation officer be directed to pass an order assessing the complainant at a loss of Rs.596,304 for the assessment year 1999-2000.

2. In the respondent's reply it is stated that the remedy of appeal is available to the complainant and the matter, therefore, falls outside the jurisdiction of the Federal Tax Ombudsman in the light of section 9(2)(b) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000. On the facts of the case it has been further stated in the reply as follows:--

(i) The complainant's claim that the salary of the MD amounting to Rs.543,000 was allowable as the same had been assessed in the hands of the MD was not correct as the complainant was bound to deduct tax under section 50(1) of the repealed Ordinance from the salary of the Director. As the company failed to discharge this legal obligation the salary was rightly disallowed under section 24(c). The company and the Director are two separate entities in the eyes of law and tax was payable by the Director in his individual capacity while an addition was made in the hands of the company on account of an established default.

(ii) The complainant's plea regarding lease money is not correct as the complainant had itself declared the lease money in the statement of accounts accompanying the return for the assessment year 1999-2000.

(iii) The complainant's earlier rectification application, dated 25-5-2001 had been accepted by the Assessing Officer but later an external audit party while examining the records observed that since the company failed to deduct tax under section 50(1) from the salary of the Managing Director who had only paid tax of Rs.15,250 with the return (against Rs.50,150 actually payable) the provisions of section 24(c) were attracted. On this

basis the assessment was again rightly rectified through an order, dated 29-6-2002.

(iv) On receipt of the rectification order the complainant . again applied for a rectification which was rejected vide an order, dated 18-12-2002 served on the complainant the same day.

(v) The refusal to make a rectification was appealable but the complainant failed to file an appeal and in this way accepted the order of refusal.

It has been prayed that in the light of the above, the complaint be rejected.

3. The contentions of the two sides have been considered and their representatives heard. It is evident from the record that in the original assessment there was no reference to section 24(c) of the repealed Income Tax Ordinance and the Director's salary was disallowed to the extent of Rs.523,800 out of the claim of Rs.543,000 with the following observations:--

"ADD BACK OUT OF P&L 1998-991999-2000

EXPENSES

Director's Salary

For A/Y 99-00 the Director's salary523,800

has been increased from Rs.19,200 as

declared on 30-6-1998 to Rs.543,000.

Neither proper salary register nor

proof of tax deduction under section

50(1) has been produced, hence the

claim is restricted to Rs.19,200 and

rest of the amount is added back."

It is evident from the above that the claim was disallowed only to the extent of the increase over last year's claim and on account of unverifiability. The reference to section 50(1) was also made in this context of unverifiability of expense. Obviously if the Assessing Officer had the provisions of section 24(c) in mind the entire salary would have been disallowed. Subsequently in his order under section 156, dated 30-6-2001 the Assessing Officer observed that the complainant had filed a rectification application stating that the salary paid to the Managing Director at Rs.543,000 had been assessed in the MD's individual capacity at NTN 17-11-TR-173 in the same circle and should not be taxed twice. According to the rectification order a resolution passed by the Board of Directors regarding increase in salary of the Managing Director was also furnished together with a copy of IT30 and demand notice issued by the Assessing Officer's predecessor in the case of the Managing Director. It was observed in the order under section 156 that in view of the documents filed, the plea of the complainant was found to be genuine and assessment was, therefore, made deleting the addition of Rs.523,800 on account of MD's salary.

4. It is evident from the above that neither at the time of the original assessment nor at the time of the rectification order, dated 30-6-2001 was there any indication that section 24(c) was attracted in the case. Thus a subsequent view statedly based on an audit report that section 24(c) was applicable in the case amounted to a change of opinion and it also involved a consideration or verification of new facts which could not be considered as floating on the surface. In this context section 24(c) of the repealed Income Tax Ordinance, 1979 is reproduced .as under:

"(24) Deductions not admissible.---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of--

(c) any sum paid to any person on account of salary, interest or profit, services rendered, brokerage or commission or rent of house property on which tax is deductible under section 50, unless such tax has been paid or deducted and paid under section 50, as the case may be."

It is evident from the above that an addition under section 24(c) could be -made if the tax on the salary had not been paid or had not been deducted and paid under section 50. This obviously means that if the tax had been paid by the recipient of the salary the mere failure of the payer to deduct tax under section 50 could not be the basis for an addition. Now the question whether tax had been paid by the Managing Director in his individual capacity was a question requiring consideration of fresh facts which was outside the scope of a rectification in the case of the complainant company. It is thus evident that the complainant has been unduly harassed by making a second rectification on totally new grounds after its original rectification application had been accepted and by refusing to accept the complainant's plea in the context of the second rectification made by the Assessing Officer. The matter is thus covered by the definition of maladministration at (a), (b), (c) and (d) of section 2(3)(i) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000 and falls within the jurisdiction of this office. There is, however, no substance in the complainant's plea regarding lease money which had been declared by the complainant itself in its return.

5. In the light of the above it is recommended that:--

(i) The second rectification order under section 156 of the repealed Income Tax Ordinance, dated 29-6-2002 (as per demand notice) as well as the order under section 221 of the Income Tax Ordinance, 2001, dated 24-3-2003 rejecting the complainant's subsequent rectification application be cancelled under section 122A of the Income Tax Ordinance, 2001.

(ii) Compliance be reported within 30 days.

C.M.A./275/FTOOrder accordingly.