I.T.A. No.337/PB of 2005, decided on 30th July, 2005. VS I.T.A. No.337/PB of 2005, decided on 30th July, 2005., 2006 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1728 (2005)

(a) Income Tax Ordinance (XLIX of 2001),---

--S.39---Income Tax Ordinance (XXXI of 1979), S.30---Income fromother sources---Section 39 of the Income Tax Ordinance, 2001 was parallel to S.30 of the Income Tax Ordinance, 1979 and was a residual head of income but it was more elaborate to discuss certain new items which were to be charged under this head but subject to the limitation that it could be charged only when all the other heads of income as described in Income Tax Ordinance, 2001 were exhausted---Sub sections (1) to (3) of S.39 of the Income Tax Ordinance, 2001 enumerated the heads which were to be subjected to action under S.39, while subsections (4) and (5) of S.39 of the Income Tax Ordinance, 2001 described that the amount received as loan advances, deposits or gift by a person in a tax year from another person (not being a banking company or financial institution) otherwise than by a cross-cheque drawn on a bank, or through a banking channel from a person holding national tax card shall be treated as income chargeable to tax under the head income from other source for the tax year in which it was received---Section 39(4) of the Income Tax Ordinance, 2001 excluded the advance payment for the sale of goods or supply of services, while S.39(5) of the Income Tax Ordinance, 2001 restricted the entire section not to be applied to any income received by a person in a tax year i.e. chargeable to tax under any other head of income or subject to tax under Ss. 5, 6 & 7 of the Income Tax Ordinance, 2001---Words "chargeable to tax under any other head of income" were of great significance---If the income was taxable under any head of income of the Income Tax Ordinance, 2001, then it should not be added under the deeming provision of law as contained in S.39 of the Income Tax Ordinance, 2001.

1992 PTD 1141; 1992 PTD (Trib.) 1599 and 1992 PTD 798 ref.

(b) Income Tax Ordinance (XLIX of 2001)---

----Ss.177 & 124A---Audit---Tax year 2003---Selection of case for total audit---Assessee contended that selection of case for total audit was illegal which had been declared as such by the Federal Tax Ombudsman and the High Court---First Appellate Authority rejected assessee's plea on the ground that department had gone in appeal to Supreme Court and S.124A of the Income Tax Ordinance, 2001 had authorized the tax authority to modify the order---Validity---Order of rejection of assessee's plea by the First Appellate Authority for the reason that department had gone in appeal to Supreme Court was unjustified and not sustainable---Selection of the case for total audit had already been declared against the law by the High Court---Appellate Tribunal followed the same.

2005 PTD 11152 rel.

Shafi Jan for Appellant.

Yousaf Ghaffar, D.R. for Respondent.

ORDER

JAVID IQBAL (JUDICIAL MEMBER).---Through this appeal assessee has objected the impugned order recorded by L/C.1.T.(A) vide dated 13-4-2005 on the following grounds:

* "That the L/C.I.T.(A) has erred in understanding various case-law. Even has not given his own opinion about their applicability of valuable decision of Hon'ble Federal Tax Ombudsman and Lahore High Court, Lahore.

* That the C.I.T.(A) has erred in saying that "reportedly" the department has already filed appeal before the Hon'ble Supreme Court.

* That even a layman would know that when a principle has been laid down by the Hon'ble FTO and High Court, Lahore Bench, Lahore the judgments are in "rem" & not in "personam" & are binding on all subordinate Courts including C.I.T.(A).

* That even the C.B.R. has no powers to select a case for Audit under section 177 of the Income Tax Ordinance, 2001.

* That regarding selection of case for audit, C.I.T.(A), has failed to substantiate his point of view. Thus deserves to be vacated.

* That regarding Taxation of "an amount of Rs.32,00,000 under section 39(3) of the Income Tax Ordinance, 2001 received on account of Pagri/Goodwill/Security etc. the C.I.T.(A) has failed to understand the language of the legislature in its true letter and spirit.

* That the C.I.T.(A) despite of his findings that this is an "unadjustable advance on account of non-refundable pagril security against shops rented out, has maintained the subjection of the amount. According to law such receipts are assessable under section 16 and not under section 39(3) of the Income Tax Ordinance, 2001 and needs no cross-checks condition.

* That necessary clarification in this regard was sought for from C.B.R., who through RCIT Letter No. 50-1-3-(23) 122-/04/05/5113 of January, 2005 clarified this issue in favour of the appellant which remained uncomplied with by the department."

* L/AR Mr. Shafi Jan, Advocate appeared on behalf of assessee, while department was represented by L/DR Mr. Yousaf Ghaffar.

Brief relevant facts of the case are that assessee filed his return of income in the individual capacity showing the income from the business in addition to share rental income from the property by declaring the net income at Rs.5,74,940 for the tax year 2003 which was selected for total audit. After processing the return declared net income at Rs.74,940 for the tax year 2003 was rejected and it was assessed at Rs.30,68,663. While arriving at the assessed income declared net rental income was accepted to which non-adjustable amount received by the assessee from the tenants of the two shops was added under deeming provision of section 39(3) of the Income Tax Ordinance, 2001. While the business income declared in the capacity or individuals was assessed as AOP and share income of business was clubbed to the property income for the rate purpose only. The assessee felt aggrieved and challenged the assessment order on the similar grounds, which are taken through this appeal against the rejection of first appeal by L/C.I.T.(A). The L/AR of assessee reiterated his contention as per grounds of appeal and stated that Assessing Officer and the L/C.I.T.(A) both have erred to understand the legal position of the statute. The L/AR of the assessee argued that from the language of subsection (1) and subsection (3) of the section 39 it is obvious that it would be applicable only where the taxpayer fails to explain the source of amount received, but when the source of receipts of amounts, the documents/persons from whom the amount received are verifiable, then there is little justification to invoke the provision of section 39(3), while in the instant matter both the authorities below categorically have admitted that as per agreement deeds executed between the landlord and tenants while the advance amount received by Mr. Abdul Waheed landlord of assessee has also offered to tax to the extent of 1/10th of the total received amounts under section 16 of the Income Tax Ordinance, 2001 for taxation for tax year 2003 under the head "income from property" while the Assessing Officer has failed to prove that the said amount is not against consideration of rental income but from the some other source which has not been shown by the taxpayer. Beside above it was also contended by the L/AR of the assessee that the Assessing Officer was not even certain to treat the amount under the specific head to treat it loan advance or security deposits. To support his this contention he referred the cases-law decided by the Hon'ble Higher Courts of the country decided under section 12(18) of the repealed Ordinance which according to him is para materia to section 39(3) of the Income Tax Ordinance, 2001. The L/AR of the assessee stated that only such amount should be added under this deeming provision of law if it is not included in any other head as prescribed in the Income Tax Ordinance, 2001. Non-adjustable advance security, goodwill, premium etc., with whatever nomenclature may be, should fall under the head income from property as per section 16 of the Income Tax Ordinance, 2001 and as such is assessable under this head. The L/AR of the assessee also expressed his view that even while making the interpretation .At statute the interpretation one favourable to assessee should be adopted. To this aspect he referred the cases-law reported as 1992 PTD 1141; 1992 PTD (Trib.) 1599 and 1992 PTD 798-E. On account of selection of case for total audit he stated that the selection was-illegal which has been declared as such by the F.T.O. and Hon'ble Lahore High Court while the order of rejection of assessee's on this plea by L/C.I.T.(A) for the reason that the department has gone in appeal to Supreme Court is unjustified and not sustainable. For this purpose he referred the section 124A of the Income Tax Ordinance, 2001 which authorized the tax authority to modify the order etc.:--

"(1) Where a question of law has been decided by a High Court or the Appellate Tribunal in the case of an assessee, on or after first day of July, 2002, the Commissioner may, notwithstanding that he has preferred an appeal against the decision of the High Court or made an application for reference against the order of the Appellate Tribunal, as the case may be, follow the said decision in the case of the said assessee insofar as it applies to said question of law arising in any assessment pending before the Commissioner until the decision of the High Court or of the Appellate Tribunal is reversed or modified.

(2) In case the decision of High Court or the Appellate Tribunal, referred to in subsection (1), is reversed or modified, the Commissioner may, notwithstanding the expiry of period of limitation prescribed for making any assessment or order, within a period of one year from the date of receipt of decision, modify the assessment or order in which the said decision was applied so that it conforms to the final decision."

We have heard the contention of the parties and have perused the relevant orders, the case-law and the relevant provision of law as embodied in section 39 and the other relevant provisions of the Ordinance. The main crux and the gist of the arguments of the appellant is that the selection of the 2001 cases for total audit and the addition of amount received as unadjustable advance from the tenant under section 39(3) of the Income Tax Ordinance, 2001 is illegal as the amount received is non-adjustable security deposit and is covered under the head property income as per provision of law contained in section 16(1) of the Income Tax Ordinance, 2001. To this context he also referred a letter by RCIT vide which it has been clarified that unadjustable advances received against the property to be let out do not fall within the ambit of section 39. While regarding the status of AOP it was contested by the L/AR that it is to be assigned only where the profit and loss are shared among the members, whereas in the present case it is not so the matter, all the three individuals are carrying on their own business at three different places but under the name and title of Gulf Color Laboratories. . While for this reason of nomenclature the status of AOP could not be assigned.

As regards the addition under section 39(3) of the Income Tax Ordinance, 2001, we are of the opinion that section 39 is parallel to section 30 of the repealed Ordinance and is a residual head of income but it is more elaborate to discuss certain new items which are to be charged under this head but subject to the limitation that it could be charged only when all the other heads of income as described in the Ordinance 2001 are exhausted. Subsections (1) to (3) of section 39 enumerate the heads which are to be subjected to action under section 39, while subsection (4) and (5) describes the exclusions from this section. Section 39(3) describes that the amount received as loan, advances, deposits or gifts by a person in a tax year from another person (not being a banking company or financial institution) otherwise than by a cross-cheque drawn on a bank, or through a banking channel from a person holding national tax card shall be treated as income chargeable to tax under the head income from other source for the tax year in which it was received. Subsection (4) excludes the advance payment for the sale of goods or supply or services, while subsection (5) of section 39 restricts the entire section not be applied to any income received by a person in a tax year i.e. chargeable to tax under any other head of income or subject to tax under sections 5, 6 and 7 of the Ordinance, 2001. In the above provision of law "chargeable to tax under any other head of income" is of great significance. According to this provision if the income is taxable under any head of income of the Income Tax Ordinance, 2001, then it should not be added under the deeming provision of law as contained in section 39.

While regarding the objection about selection of the case for total audit the LIAR of the assessee referred the judgment of Hon'ble Lahore High Court in a case reported as 2005 PTD 1152 the relevant portion of which is reproduced as under:

"Adverting to the parameters given by the C.B.R. for audit, it is an open secret that the press release in this behalf was issued on 13-5-2004 conveying the parameters for corporate/non-corporate returns though these parameters were also not mentioned in the impugned order yet the claim of the respondents that the writ petitioners were selected for audit on the basis of those parameters given by the C.B.R., in itself shows that the C.I.T. selected the cases without applying his own independent mind, through a mechanical process, being oblivious of his own powers under section 177 of the Ordinance, 2001. It goes without saying that non-mentioning of the basis for selection, the reasons or parameters in the impugned order, is not only an attempt to trap the unwary assessee but has also a tint of discrimination in it which is prohibited under the provisions of the Constitution of this country. The press release, dated 13-5-2004 issued by the C.B.R. subsequent to the filing of the returns by the assessees is of no legal consequence as it could not work retrospectively, as those were not in the knowledge of the assessees the time of filing of their returns. Reference in this behalf can be made to the judgments of this Court in the case of Sadiq Brothers Poultry, Rawalpindi v. A.C. of I.T./W.T., Rawalpindi 2004 PTD 122 and 2003 PTD 1780. In both these cases, the circular issued by the C.B.R. specifying certain categories of the assessees whose cases were selected for special audit for the assessment year 1998-99 were held to be unjustified and it was ruled that all the categories of assessees should have been given information well before filing of their returns under the "Self-Assessment Scheme" with an added finding that such circular after filing of self-assessment returns are illegal exercise of discretion vesting in the Revenue Authorities. For the reason noted above, I have no hesitation to hold that the impugned order/notice is defective as the same lacks the essentials required by law to be noted therein which at the same time is abuse of exercise of the vested discretion and thus, the same is not sustainable at law and is declared to be illegal/void and non-existent. Before parting with the judgment, I must observe that the C.I.T. can initiate' fresh proceedings of audit strictly in accordance with law and according to the observations made above. Resultantly, all the writ petitions mentioned in the schedule appended herewith, are accepted and writ, as prayed is issued, with no order as to costs."

The above quoted case-law in all four corners is applicable to present case in hand, therefore, having identical facts of the present case the orders of the lower authorities are vacated in the same manner. While in the issue the AOP separate appeal has also been filed which has been heard, however, as the selection of case for total audit has already been declared against law, therefore, it will be needless to discuss this concept of the case.

In these circumstances and the light of above discussion, the appeal on behalf of assessee succeeds..

C . M . A . /49/Tax(Trib . )Appeal accepted.