Messrs ELECTROMECH ENGINEERING SERVICES, ISLAMABAD VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2007 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 1158 (2004)

Income Tax Ordinance (XXXI of 1979)---

----Ss.50(4), 62, 80C & 96---Income Tax Ordinance (XLIX of 2001), Ss.122 & 171---C.B.R. Circular No.12 of 1991 dated 30-6-1991---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.2(3) & 9(2)(a)---Deduction of tax at source---Refund---Production of books of accounts---Tax on income of contractors---Maladministration---Jurisdiction---Complaint was that tax was deducted under section 50(4) of the Income Tax Ordinance, 1979 and after assessment refund was determined which was not paid even after repeated requests---Complainant also claimed additional payment for delayed refund---Regional Commissioner of Income Tax in reply denied maladministration and pleaded exclusion of the jurisdiction of Federal Tax Ombudsman and controverted the allegations---Validity---Issuance of refund was delayed for several months without any apparent reason---Federal Tax Ombudsman recommended that the refund for the assessment year concerned be issued without delay, payment of refund would not be a bar on rectification proceedings under section 122 of Income Tax Ordinance, 2001.

Nusrat Ali Malik for the Complainant.

Zar Khalil, IAC Range-I, Islamabad for Respondent.

FINDINGS/DECISION

This is a complaint filed by a member of an association of persons on behalf of the said AOP. The main points in the complaint are as under:

(i) Messrs Electromech Engineering Services, Islamabad is an existing income tax assessee carrying on the business of manufacture and sale of electric switch gears and allied items.

(ii) Income tax return for the assessment year 2002-2003 was filed under the self-assessment scheme at an income of Rs.550,000. The complainant also derived contract receipts of Rs.12,779,973 from the Air Weapons Complex, Wah Cantt. on which Rs.638,998 were deducted under section 50(4) of the repealed Income Tax Ordinance, 1979 which constituted the final discharge of tax liability under section 80C of the repealed Ordinance.

(iii) The assessment under section 62 of the repealed Ordinance was framed on 26-6-2003 at an income of Rs.794,696 other than income covered under section 80C,

(iv) As a result of the assessment a refund of Rs.562,504 was determined by the Assessing Officer.

(v) Application for issuance of refund was filed in the tax office on 7-7-2003 but no refund was issued despite the lapse of four months.

(vi) A request was then made to the Commissioner of Income Tax, Islamabad on 15-11-2003 in this regard.

(vii) Even after lapse of three months from the filing of the request with the Commissioner no refund has yet been paid to the complainant which obviously amounts .to maladministration.

It has been prayed that the Department be directed to issue refund of Rs.562,504 along with compensation under section 171 of the Income Tax Ordinance, 2001.

2. The respondent's reply consists of the comments of the RCIT, Northern Region, Islamabad. The preliminary objection has been raised that no act of maladministration is alleged/established and that the matter is at present pending before the Taxation Officer. It is contended that any intervention would be contrary to the spirit of section 9(2)(a) of the Ordinance XXXV of 2000. It is further stated that after scrutiny of assessment records it was found that the refund had not been correctly created as the expenses allowed against local sales were not admissible in the light of C.B.R. Circular No.12 of 1991, dated 30-6-1991. It is stated that according to this circular if business consisted of local sales as well as supplies taxable under section 80C, the total expenses claimed by the assessee would be prorated between the two types of income. It is stated that on this basis the refund would stand converted into demand of Rs.71,392. A working of the purported demand has been given in the reply and it is stated that a show-cause notice under section 122 of the Income Tax Ordinance, 2001 has, therefore, been issued by the Taxation Officer on 27-2-2004. It is thus stated that since the refund was created as a result of an erroneous assessment which was prejudicial to Revenue, the complaint may be dismissed.

3. The complainant has filed a rejoinder to the respondent's reply in which it is stated that the created refund of Rs.562,504 was kept pending by the Department and when it was noticed that a complaint had been filed before the Federal Tax Ombudsman a notice under section 122 of the Income Tax Ordinance, 2001, dated 27-2-2004 was served on the complainant on 4-3-2004. It is stated that the superior Courts have disapproved of such action in reported cases. It is also stated that the complainant's contract with the Director-General, Air Weapons 'Complex, Wah Cantt. for installation of electric system in the auditorium building was a separate composite contract which included material, labour, installation etc. and that the assessment was finalized by the taxation officer by applying his mind in a conscious and independent manner. It is stated that the action under section 122 is thus not justified.

4. During the hearing the complainant's representative reiterated the contentions in the complaint and the rejoinder while the respondent's representative stated that the assessment for the year, 2002-2003 framed in the complainant's case was quite erroneous and that the issuance of refund on the basis of such an erroneous assessment would be quite unjustified. Copy of an inspection note of the Commissioner of Income Tax, dated 7-1-2004 for the assessment years 2000-2001 to 2002-2003 was also furnished. In the portion of the note relating to the assessment year 2002-2003 it was pointed out by the Commissioner that the expenses claimed by the complainant against business income assessable under normal law should have been prorated between the business income and the income from contracts in the proportion of normal business sales and contract receipts. It was directed by the Commissioner that the assessment for the year, 2002-2003 framed under section 62 of the repealed Ordinance be amended under section 122 of the Income Tax Ordinance, 2001. It was contended by the complainant's AR, however, that the observations in the inspection note were quite incorrect because the expenses claimed against the normal business income had nothing to do with the complainant's contract receipts and that the prorating of the expenses envisaged in the Commissioner's inspection note would be quite uncalled for.

5. The contentions of the two sides have been considered and definite merit has been found in the contentions of the complainant. It is a matter of record that the issuance of refund to the complainant was delayed for several months without any apparent reason and it was only then that an inspection note was prepared by the Commissioner holding that the assessment was erroneous and prejudicial to Revenue because the complainant's expenses had not been prorated between normal business income and the contract receipts. The action of the Commissioner after the refund had been withheld for a considerable time can be construed as an attempt to deny the validly created refund to the complainant. There was also evidently nothing on the record to show that the expenses claimed by the complainant against its normal business income included expenses pertaining to the contract with the Air Weapons Complex, Wah Cantt. Thus the withholding of the refund on the basis of mere conjectures is again not justified. The Department can of course proceed with the action under section 122 of the Income Tax Ordinance, 2001 but in the meantime the refund already determined in the complainant's case has to be paid without any further delay.

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

(i) Refund for the assessment year 2002-2003 determined in the complainant's case be issued without delay.

(ii) Compliance be reported within 30 days.

M.I./286/FTOOrder accordingly.