I.T.A. No. 284/LB of 2004, decided on 14th March, 2006. VS I.T.A. No. 284/LB of 2004, decided on 14th March, 2006., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 898 (2006)

Income Tax Ordinance (XXXI of 1979)---

----S. 59(1)---C.B.R. Circular No. 7 of 2002, dated 15-6-2002, Para. 9(a)(ii)---C.B.R. Circular No. 7(7)/S-Asstt/2002, dated 17-12-2002---Self-assessment---Selection of case for total audit on the grounds that income was quite low in view of the volume of business as well as the investment made in capital; that expenses claimed in Profit and Loss Account did not commensurate with the declared income; that genuineness of the such huge expenses was required to be checked and that it should be verified as to whom the amount of rent and salary had been paid and whether tax had been deducted under the provisions of law or not especially under the head rent and salary---Validity---Case was taken outside the scope of Self-Assessment Scheme for the three reasons viz. hefty amount of rent; huge amount of salaries and heavy amount spent on repair and maintenance---When assessment was finally framed after having sought explanation of the assessee/appellant major reasons for taking out the case from the purview of Self-Assessment Scheme were dropped and department was left with little justification to proceed under normal law instead of accepting the declared version under Self-Assessment Scheme which amounted to unnecessary tinkering---Case was set apart in an indiscriminate manner and against the instructions of Central Board of Revenue---Only those cases were to be set apart which were Revenue potential and where there was a sound basis for framing a normal law assessment---Application of higher gross profit rate and addition out of profit/loss account expenses were not in accordance with the provisions of Income Tax Ordinance, 1979 and direction of the higher appellate authorities---income computed by the Assessing Officer was disapproved---Case of the assessee was not a Revenue potential case and there was no bona fide reason to oust the same from the scope of Self-Assessment---Such kind of action did amount to sabotaging the Self-Assessment Scheme and confidence reposed by the State in the taxpayers---Department was directed to accept the returned version of the assessee under Self-Assessment Scheme.

2004 PTD 1719 ref.

Waheed Shahzad for Appellant.

Muzammal Hussain, D.R. along with Taqui Qureshi, D.C.I.T. for Respondent.

Date of hearing: 11th March, 2006.

JUDGMENT

NASEER AHMED, ACCOUNTANT (MEMBER).---The captioned appeal has been filed for the assessment year 2002-2003 against order, dated 16-10-2003 recorded by the learned CIT(A) Gujranwala. The assessee agitated the selection of case under para. 9(a)(ii) of the Circular No.7 of 2002 by the RCIT, application of GP rate and various additions made in the P&L expenses.

2. The learned AR of the assessee-appellant agitated against the action of the learned first appellate authority as per grounds and further stated that appellant's case was ousted from the scope of SAS for the following reasons.

Return was filed first with an investment in capital at Rs.10,780,133 by four members of AOP. Sales were shown at Rs.59,734,512. Total expenses claimed under various heads in P&L account are at Rs.7,999,678. The expenses claimed are alarmingly high. The income is quite low in view of the volume of business as well as the investment made in the capital. The expenses claimed in the P&L account do not commensurate with the declared income i.e.:

The genuineness of the said huge expenses is required to be checked. Moreover it should by verified to whore the amount of rent and salary has been paid. Whether the tax has been deducted under the provision of law or not. Especially under the head rent and salary. The case is fit for the selection under Para. 9 of the Circular No.7 of 2002.

3. The learned AR relied on reported decision of the Honourable Lahore High Court cited as 2004 PTD 1719, wherein it has been held that selection for total audit on the recommendations of RCIT can be done only where there is evidence, information or reason to believe that the particulars of income have been suppressed. The learned AR stated that when the case was processed under normal law no addition on account of rent and salary was made. However, routine addition on account of repair and maintenance was made. The learned AR stated that the department had no justification left with it firstly to set apart the case for total audit and then after having found out nothing proceeded to frame an assessment under normal law. On the other hand, the learned DR as well as the author of the order defended the action taken by the department.

4. We have heard both the sides and perused the orders of the authorities below and have also considered the submissions of the appellant's AR which shows that basis evolved by the Assessing Officer for disposal of assessment proceedings is not valid being contrary to the provisions of the repealed Income Tax Ordinance, 1979 and directions of the higher appellate authorities. Firstly we have observed that an unsigned communication was sent by the RCIT, Northern Region, Islamabad to the assessee-appellant without having considered the appellant's reply, which he tendered before the RCIT Northern Region Islamabad. We have observed that the selection of the case for total audit is not based on material evidence and a fair and just treatment has not been accorded to the assessee-appellant.

5. Secondly we have observed that unsigned communication sent by he RCIT Northern Region to the assessee-appellant shows three reasons for taking the case outside the scope of Self-Assessment Scheme, these are hefty amount of rent, huge amount of salaries and heavy amount spent on repair and maintenance. When finally assessment was framed after having sought explanation of the assessee-appellant major reasons for taking out the case from the purview of SAS were dropped and in this manner the department was left with little justification to proceed under normal law instead of accepting the declared version under Self-Assessment Scheme. This amounts to unnecessary tinkering. We have further observed that the case of the assessee-appellant was set apart in an indiscriminate manner and against the instructions of the C.B.R. as contained in its Circular No.7(7)/S. Asst/2002, dated 17-12-2002 whereby the Board had directed its field formation to set apart only those eases which are Revenue potential and where there is a sound basis for framing a normal law assessment. The application of higher gross profit rate and addition out of profit/loss account expenses are not in accordance with the provisions of the, late Income Tax Ordinance, 1979 and direction of the higher appellate authorities, hence, income computed by the Assessing Officer is disapproved. "The case or the assessee was not a Revenue potential case and there was, no bona fide reason to oust the same from the scope of the Self-Assessment Scheme. We may further observe that such kind of action by the department did amount to sabotaging the Se1C Assessment Scheme and confidence reposed by the State in the taxpayers."

5. As a result of' the above discussion the appeal of the assessee succeeds and the department is directed to accept the returned version of the assessee for the year under consideration under self-assessment scheme.

EHSAN-UR-REHMAN (JUDICIAL MEMBER).--I fully concur with the findings as recorded by the learned Accountant Member, but there is vital material, which is to be brought on record.

The author of this order Mr. Muhammad Taqi Qurashi was specifically summoned by this Bench who made his appearance and was kind enough to answer some of the questions, which were put to him. The author of the assessment order Mr. Muhammad Taqi Qureshi was firstly questioned about the reasons of unsigned communication for which he preferred to remain silent, so no reason was submitted. There was asked about the three reasons which were made the basis for selection of audit as to what extent these could be proved by him. In reply he submitted that none of the three basis could be proved during the proceedings by specifically mentioning that on the issues of rent and salaries these have been accepted on reaching to the conclusion that there was no justification for drawing any adverse inference whereas in respect of third i.e. repair and maintenance, only on stock phrases add backs have been made by him. Mr. Taqi Qureshi when was asked on his failure to substantiate the departmental claim why did not he refer the matter to the superior officers, there too he preferred to remain silent. The author was made aware that specifically he has been summoned to assist this Bench for forming a judicious view but here too he preferred silence. The author of the order on his appearance has not expressed anything to support the assessment order but has conceded his failure to prove the issues confronted to the assessee. After this we do not find that any justification was left with the department for processing the case under normal law by merely estimation, which was an arbitrary act, so cannot he approved at the appellate forums. It is the department's failure to prove even on facts, so the findings as recorded are the most apt, fit, fair and just in the circumstances of this case.

C.M.A./224/Tax (Trib.)Appeal accepted.