FIVE STAR TEXTILE INDUSTRIES (PVT.) LTD., FAISALABAD VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 430 (2003)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 59(1) & 80-CC---C.B.R. Circular No. 7 of 2002, dated 15-6-2002 [Self-Assessment Scheme], para. 9(a)(ii)---C.B.R. Letter C. No.7(7)/S.Asstt/2002 dated 17-12-2002---C.B.R. Circular No.20 of 1992 dated 1-7-1992---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Self-assessment--Setting apart---Case was set apart by the Regional Commissioner of Income Tax for total audit on the ground that expenses claimed under various heads of accounts had not been properly prorated in accordance with the ratio of local processing and exports to find out the right figure of total taxable income and that sale of scrap/empties under the head of other income had been added to export income, whereas the same should have been included in local income---Validity---Separate accounts had been maintained for export business and for local processing---Relevant expenses under different heads relating to each segment were charged to relevant account i.e. exports or local sales---Accounts were certified by the practising chartered accountants and the financial statement reflected both the segments [export or local] separately---Since there was no overlapping or mixing up of expenses of export and local business and expenses pertaining to each account were being charged separately the principle of prorating the expenses towards export and local business would not apply---Local sales of goods as well as waste material, not constituting mere than 20% of such production, may also be treated as export sales if the assessee opts to pay tax one such sales at the rate applicable to export sales under S.80CC of the Income Tax Ordinance, 1979---Local sales formed 3.8% of total production for export sales---Sale of scrap/waste was rightly shown in the export sales---Workers a Welfare Fund was also rightly charged to normal business income which was offered for taxation---Law did not envisage charging of Workers Welfare Fund on presumptive income---Selection of case for total audit was arbitrary, baseless, contrary to law and based on irrelevant grounds---Federal Tax Ombudsman recommended that the Complainant's case be excluded from the list total audit cases and return for the assessment year 2002-2003 be accepted under Self-Assessment Scheme.

C.I.T. v. Messrs Kamran Model Factory 2002 PTD 14 ref.

Muhammad Anwar, Consultant, Dealing Officer.

Tahir Razzaque Khan, F.C.A. for the Complainant.

Javed Ahmad, DCIT for Respondent.

FINDINGS/DECISION

JUSTICE (RETD.) SALEEM AKHTAR (FEDERAL TAX OMBUDSMAN).---This complaint has been filed contesting the selection of the complainant's case for total audit under para 9(a)(ii) of the Self Assessment Scheme 2002-2003 is unjustified.

2. Brief facts of the case are that the complainant, a private limited company, derived income from processing of cloth. Return for the assessment year 2002-2003 was filed under SAS declaring an income of Rs.5,856,238. The RCIT, Southern Region, Lahore, vide his letter dated 25-2-2003 to the complainant expressed his intention to select the case for total audit on the following grounds--

"Perusal and analysis of your return for the assessment year 2002-2003 shows that the expenses claimed under various heads of accounts have not been properly prorated in accordance with the ratio of Local Processing and Exports to find out the right figure of total taxable income. Especially following heads need proper attention:

In addition to above, the sale of Scrap/Empties under the head of other Income amounting to Rs.1,418,622 have, been added to Export Income, whereas the same should have been included in Local income.

In the light of above discrepancies and discussed facts I have reasons to believe that you have suppressed true particulars of income, for which your case is intended to be set apart for total audit under para 9(a)(ii) of Self-Assessment Scheme, 2002-2003".

3. In reply to the RCIT's notice, it was stated by the complainant that the proposed selection of his case was unfounded as income declared for the year under consideration at Rs.5,856,238 was higher than the income declared in the preceding year at Rs.5,305,200 and there was no decline in income; no disparity in expenses on utilities vis-a-vis income declared; no such asset was created which was not covered by the declared income; no liability of Rs.50,000/- or more from non-institutional loans was incurred and that the department had no proof of concealment or inaccurate particulars of income as envisaged in the CBR's guidelines. It was also stated that the RCIT's objection that accounts were not prorated in accordance with the ratio of local processing and export was baseless for the reason that the complainant's business was based on processing receipts from other parties as well as export processing of cloth of small width whereas he exported the cloth of mostly wider width which was got processed from other parties and only a small quantity of export cloth was processed at his own unit and the expenses relating to export cloth were duly transferred and debited in the export account. The gross profit rate of 16% in export account vis-a-vis G.P rate of 22.3% in local processing account clearly showed that expenses incurred on exports were more that those incurred on local processing and as such the presumption that expenses had not been prorated was unfair. As regards administration expenses it was stated that the expenses claimed were factual and based on the books/record maintained by the complainant. Regarding Workers Welfare Fund it was stated that charging of the amount of Fund either on the income earned out of local processing receipts or on export did not affect the taxable income. In respect of other income it was explained that the company had earned a sum of Rs.1903742 as other income from sale of scrap, empty drums etc. which was credited to processing section at Rs.485120 and to export section at Rs.1418,622 on actual basis and no income had been suppressed on this account also. The RCIT however, proceeded to select the case for total audit after rejecting the complainant's explanation, hence this complaint.

4. In reply the respondent has defended the selection of, the case to be on valid basis and in accordance with the C.B.R.'s guidelines. It is contended that the case was outside the jurisdiction of the F.T.O. as defined under section 9 of the Ordinance, 2000. It is further stated that main business of the company was export of cloth as it covered 70% of total turnover and the expenses claimed were not prorated. It is further stated that in terms of section 80CC where the exports were less than 80%, the sales of empty drums, yarn bags, empty yarn cones and rags cuttings were to be included in local sales but the complainant had included sales of such items in export sales. It is also stated that Workers Welfare Fund was to be calculated on total profit before taxation irrespective of local and export business whereas the complainant had charged entire amount of WWF to the local business and resultantly offered less profit for taxation.

5. The representatives of the both sides were heard and relevant record" was examined. The preliminary objection of the respondent regarding F.T.O.s, jurisdiction is overruled on the basis of decision dated 15-2-2003 in Complaint No.743-L of 2003. It may be pointed out that the main question is whether the, case of the complainant could be selected for total audit. An order in this regard is not appealable and hence bar of jurisdiction is not attracted. The perusal of relevant record and the documents produced showed that the complainant had maintained separate accounts for export business and for local processing. The relevant expenses under different heads relating to each segment were charged to the relevant account i.e. exports or local sales. The accounts were certified by the practicing chartered accountants and the financial statements reflected both the segments (export or local) separately. Since there was no overlapping or mixing up of expenses of export and local business and expenses pertaining to each account were being charged separately the principle of prorating the expenses towards export and local business did not apply in this case. As regard sales of empties and waste material para 2(i) of the C.B.R.'s Circular No.20 of 1992 dated 1-7-1992 stated that "local sales of goods (manufactured for export) as well as waste material, not constituting more than 20% of such production, may also be treated as export sales if the assessee opts to pay tax on such sales at the rate applicable to the export sales under section 8000". The record showed that the complainant had shown local sales of goods manufactured for export at Rs.7,309,183 which formed 3.8% of total production for export sales declared at Rs.189,395,810. The complainant had therefore rightly shown the sale of scrap/waste etc. in the export sales as envisaged in the said circular of the CBR. As regards, WWF, it was rightly charged to the normal business income which was offered for taxation. The law does not envisage charging of WWF on presumptive income as held by Karachi High Court in case of C.I.T. v. Messrs Kamran Model Factory (2002 PTD 14). In view of the foregoing, the selection of the case for total audit is arbitrary, baseless, contrary to law and based on irrelevant grounds. Maladministration is thus established.

6. It is therefore recommended that---

(i) The complainant's case be excluded from the list of total audit cases and return for the assessment year 2002-2003 be accepted under SAS.

(ii) Compliance be reported within 30 days.

C.M.A./31/FTOOrder accordingly.