M.A. (AG) No.13/LB of 2007 and I.T.A. No. 5071/LB of 2005, decided on 29th March, 2007. VS M.A. (AG) No.13/LB of 2007 and I.T.A. No. 5071/LB of 2005, decided on 29th March, 2007., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 2021 (2007)

Income Tax Ordinance (XXXI of 1979)---

----Ss.59(1) & 62---C.B.R. Circular No.4 of 2001 dated 18-6-2001, para.9(a)(ii)---C.B.R. Circular No.7(7) S. Asstt. 2001 dated 26-3-2002--Self-assessment---Assessment year 2001-02---Selection of case for total audit for the reasons that yielding net profit rate was very low and overhead expenses seemed to be on the lower side---Validity---Guidelines issued by the Central Board of Revenue were suppression of income, evidence of revenue potential case, decline in income, creation of new assets or disparity in expenses on utilities---Such criteria was somehow not met by the Regional Commissioner of Income Tax---All the relevant parameters of the business had shown much better results as compared to the previous years---Order of First Appellate Authority was vacated and Assessing Officer was directed to accept the return under Self-Assessment Scheme.

2005 PTD 165; 2004 PTD 1719 and PLD 2006 SC 787 = 2006 PTD 2502 ref.

Younis Khalid for Appellant.

Anwar Ali Shah, D.R. for Respondent.

ORDER

The titled appeal has been Tiled, at the instance of the assessee, arising out of order passed by the learned C.I.T.(A), Zone-V, Lahore, dated 22-2-2005, for the assessment year 2001-02. The appellant also preferred a misc. application raising Additional Ground of Appeal. The appellant is allowed' to raise and argue the additional ground and, as per additional ground filed, it is the appellant's contention that:---

"The learned RCIT is not justified Co set apart the Income Tax Return filed by the assessee for assessment year 2001-02. The selection of the case for audit, under paragraph 9(a)(ii) of Circular No.4/2001 is beyond the guidelines and policy directions issued by the C.B.R. under its Circular letter dated 26th March, 2002."

2. Briefly stated, the relevant facts are that the assessee in this is an individual who continues to derive income from sale of readymade garments. Return for 2001-02, was filed declaring net income at Rs.1,503,204. The case of the appellant was set apart by the RCIT. Eastern Region, Lahore, vide order dated 17-6-2002 and in this regard, the assessee was duly informed. Statutory notices were issued by the Assessing Officer which were complied with by the A.R. of the assessee. To estimate quantum of business, the Assessing Officer conducted inquiry through a team of senior inspectors which were appointed by the IAC, Range-II, Zone-B, Lahore. A detailed enquiry report was prepared by the inspectors' team, including comprehensive inventory position based upon the physical stock taking conducted during the course of inquiry. In view of the inquiry conducted, the Assessing Officer confronted the assessee under section 62 and required the assessee to submit the following documents:---

1. Proof of declared salaries along with copies of ID cards.

2. Party-wise detail of purchase during the year. "

3. Personal expenditure statements.

4. Order book relating to receipts declared at Rs.14,000,000.

5. Copies of bank account.

6, Proof of payments made through crossed cheque.

3. The Assessing Officer intended to finalize the assessment for the year by five times rotating the available stocks worth Rs.4,450,000 plus the subsequent stock discovered at the godown, for adoption of sales al Rs.22,250,0.00 as well as making suitable addition out of P&L expenses claimed. The A.R. of the assessee submitted certain documents and contended before the Assessing Officer that the stock cannot be enhanced more than three times in the light of C.B.R. Circular instructions. The Assessing Officer being not convinced with the submissions made and the fact that no vouchers/original receipts were produced to support the declared version and expenses claimed. The Assessing Officer consequently rejected the declared version for the year and estimated sales at Rs.22,250,000 with application of GP rate @ 250. Certain P&L additions were also made by the Assessing Officer.

4. Being aggrieved, the assessee went in appeal before the learned CI.T.(A) and contested the treatment meted out by the Assessing Officer. Before the learned First Appellate Authority, it was argued by the learned A.R. that the RCIT has unlawfully set apart the case for total audit when the Hon'ble FTO disapproved the selection. It was further submitted by the A.R. that the Assessing Officer had unjustifiably enhanced the assessee sales from Rs.1,400,000 to Rs.22,250,000 without assigning any plausible reason. It was contended that the ITI's enquiry report on which the assessment was based, did not relate to the period tinder reference.

5. The learned C.I.T.(A) after hearing the arguments of the A.R., has held that the Assessing Officer had duly fulfilled the procedural requirements of conducting an inquiry through inspectors regarding the extent of assessee's business and confronting the contents of inquiry report but the assessee had failed to produce books of accounts and supporting documentation to support the declared version. In view of the above, the learned C.I.T.(A) confirmed the order of the Assessing Officer and rejected the appeal of the assessee.

6. We have heard the arguments of both sides. The learned A.R. of the assessee vehemently argued that the RCIT, Eastern Region, Lahore, was not competent to set apart the case of the assessee for "total audit" for the assessment year 2001-02. The above action, according to the learned A.R. was in violation of C.B.R.'s Circular No.7(7)S.Asstt 2001 dated 26-3-2002. The A.R. questioned the "legality" of the RCIT's action on the ground that the case of the assessee was set apart for "total audit" after the return had been filed for assessment year 2001-02, and thus was not sustainable in the eye of law. In fact, the A.K., described the action of the RCIT, for selection of the case of "total audit" was done beyond the guidelines issued by the C.B.R. for setting apart the case for "total audit". In this connection, he drew our attention to the notice issued by the RCIT, under para.9(a)(ii) of S.A.S. for 2001-02 dated 27-5-2002.

7. According to the A.R., the reasons cited by the RCIT, for setting apart the case of the assessee for "total audit" were not valid and in support of his contention, the learned AR furnished a copy of the order passed by the Hon'ble FTO, who had decided the matter in favour of the assessee as he did not agree with the selection criteria of the RCIT. Although, the learned AR conceded that later the order of the Hon'ble FTO, was washed by the President of Pakistan. According to the learned A.R., the RCIT, had cited two reasons for selection of the case for total audit. These reasons, inter alia, were; (1) net profit at Rs.0.9 (M) against sales disclosed at Rs.1.4(M) yielding net profit rate of 6.0%, which is very low, in view of assessee's line business; (2) it was indicative that overhead expenses, while declared closing stock at Rs.4.2(M) seems to be on the lower side. According to the A.R., the reasons cited supra, wire not in consonance with the policy guidelines issued by the C.B.R., in its above cited .circular which, inter alia, included, suppression of income, evidence of revenue potential case, decline in income, creation of new assets or disparity of expenses on utilities. At this stage; the A.R. of the assessee furnished the following comparative chart for, assessment years 2001-02 and 2000-01, in which he highlighted the various parameters of the assessee's business:---

8. The perusal of the above chart shows that net profit rate had registered an increase from 5.93 % in 2000-01 to 6.43 % in 2001-02. The percentage of income declared to sales had increased from 9.71 % in 2000-01, to 10.74% in 2001-02. Similarly, ratio of expenses to sales claimed in the assessment year 2001-02, is 8.57% as compared to ratio of expenses claimed for assessment year 2000-01 at 9.08 %. In fact, there has been a decrease in expenses claimed in 2001-02 at 5.51 %.

9. The A. R. argued that the assessee had declared better results for 2001-02, as compared to the immediately preceding year i.e. 2000-01, and expenses claimed were also on the lower side as compared to previous year. The A.R. further pointed out that the RCIT, did not cite any parallel case engaged in the same line of business as that of the assessee where the department was in possession of information that higher income or better trading results had been declared. The reference made by the RCIT, to the closing stocks at Rs.42(M) and his remarks that "it seems to be on the lower side" was not based on any concrete evidence but was a passing remark and it was certainly not a valid ground for setting apart the case of the assessee for "total audit" for the year.

10. The A.R. also was critical of the order passed by the C.I.T.(A) as being a `non-speaking order' and in this context, he was of the view that the Hon'ble FTO's order was not considered by the C.I.T.(A), who has confirmed the selection of the case for "total audit" for the year. Later on a rectification application was filed by the A.R, before the C.I.T.(A) who vide his order dated 10-5-2006, rejected the same.

11. The A.R. also questioned the estimation of sales by the DCIT at Rs.2,22,50,000 as being highly excessive. The report of the ITI, which was made the basis for estimation of closing stocks at Rs.44, lacs and rotated at 5 times to arrive at the sales estimated by the DCIT, at Rs.2,22,50,000. In this context, the A.R. was of the view that the rotation of stocks as done by the DCIT, was unjustified and in violation of the normal practice in the department where in such a situation the "average stocks" held by a business is rotated in order to arrive at the turnover for a period rather than the closing stocks, as done by the DCIT, in the case of the assessee. The learned A.R, also contested the additions made by the DCIT, from the P&L a/c for the year, as according to him, the assessed had already made suitable additions on its, own to avail the "benefit" of the SAS for the year. According to the A.R., an amount of Rs.6 lacs was added `twice' in the income of the assessee by the DICT. The A.R. furnished a copy of the order passed by the FTO, and also cited number of reported judgments to support his arguments which are cites as;

2005 PTD 165, 2004 PTD 1719 and PLD 2006 SC 787 = 2006 PTD 2502

12. The learned D.R, of the department argued before us and drew our attention to the "guidelines" issued by the C.B.R. vide its Circular dated 26-3-2002, to justify the selection of the case of the assessee for "total audit" for assessment year 2001-02. According to the D. R, the shop of the assessee was located in an area which is the commercial "hub": of the Lahore city. "The Mall Road". According to the D.R., the sales of the assessee were estimated on the basis of an enquiry conducted by the Inspectors, of the department and according to the D.R., all the parameters in the guidelines issued by the C.B.R., were met when the case was selected for "total audit". He also rejected the assertion made by the A.R. of the assessee that C.B.R., was not competent to issue guidelines after the return had been filed. According to the D.R., the above practice has also been upheld by the apex Court of the country. The D.R, also strongly argued that the assessee was not maintaining accounts and no "sanctity" could be assigned to the declared trading results of the assessee. The D.R. stated there is a "yawning gap" between the declared trading results of the assessee and the real income of the assessee. According to the D.R., the purpose of total audit was to check tax evasion wherever it was detected.

13. We have given anxious considerations to the submissions made by the assessee's A.R. and representative of the department and we are of the considered view that the case of the assessee was selected by the RCIT, Eastern Region, Lahore, on surmises and "conjectures", as there was nothing concrete in the hands of the department to justify the selection.

14. In this context, we would like to here refer to the guidelines issued by the C.B.R. that there was suppression of income, evidence of revenue potential case, decline in income, creation of new assets or disparity in expenses on utilities. In our considered view; the above criteria was somehow not met in the case, of the assessee. At this stage, we would like to take benefit from the observations of the Hon'ble FTO who has dealt with the case in a exhaustive manner and in this context, we refer to his observations at page 5 of his order in which he has observed that there was an increase in sales, net profit rate and the overall income declared had also increased and there was no force in the grounds of the RCIT, for selection of the case for total audit as there was no reason to believe that income had been suppressed, the mere contention that it was a revenue potential case has no validity. The Hon'ble FTO also made a very pertinent observation that the RCIT, in his letter dated 27-5-2002, addressed to the assessee clearly gives an assurance that the exercise of "total audit" is only to check the facts and figures provided by the assessee and to check the return filed .complies with the provisions of law or not and that the "total audit" does not necessarily means that the declared income is put to test of verification.

15. It was held by the Hon'ble FTO that the parameters prescribed in policy guidelines issued by C.B.R. vide letter dated 26-3-2002, were not identified with any objectivity and there was no valid reason or justification for the RCIT, to select the case for total audit. In fact, this infirmity was described by the Hon'ble FTO as arbitrary, unreasonable and illegal.

16. We are also not satisfied with the reasons recorded by the learned RCIT, for selection of the case for total audit as in our view all the relevant parameters of the business during the assessment year 2001-02, had shown much better results as compared to the previous year., in view of which, we are not inclined to maintain the order passed by the learned C.I.T.(A) in this regard. Order of the C.I.T.(A) is accordingly vacated and the Assessing Officer is directed to accept the return riled for assessment year 2001-02, under Self-Assessment Scheme, announced for the year under appeal.

17. Resultantly, appeal of the assessee succeeds in the manner as stipulated supra.

C.M.A./70/Tax(Trib.)Appeal accepted.