Dr. MAHMUD ASGHAR VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 481 (2004)

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss.12(18),25(c) & 63---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Addition---Amounts subsequently recovered in respect of deductions, etc.---Assessment was finalized ex parte--Loss was ignored and addition was made under S.25(c) of the Income Tax Ordinance, 1979 on the ground 'that complainant/assessee did not undertake any business during the year and failed to produce the documents and books to support his claim for loss--Validity---Examination of assessment order and related document revealed that the Assessing Officer did not give any reason whatsoever for ignoring the declared loss---Addition was not discussed at all---Best judgment assessment places a heavy responsibility on the officer passing it---No arbitrary addition could be made under such an assessment---Both the actions of Assessing Officer in ignoring the declared loss and making addition were found to be arbitrary.

(b) Income Tax Ordinance (XXXI of 1979)---

----Ss.25(c), 12(18), 63 & 156---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Amounts subsequently recovered in respect of deductions, etc.---Addition was made on the ground that complainant/assessee did not raise any objection to the proposed treatment and notice issued under S.61 of the Income Tax Ordinance, 1979 remained uncompiled---Complainant/assessee claimed that liabilities were not trading liabilities, but loans---If at all, they could be considered under the provisions of S.12(18) of the Income Tax Ordinance, 1979---Most of the loans were carried over from the preceding years---Validity---Documents transpired that the claim of the complainant/assessee was correct and addition made under S.25(c) of the Income Tax Ordinance, 1979 was illegal and. arbitrary---Action of Assessing Officer in ignoring the loss without assigning any reason making addition under S.25(c) of the Income Tax Ordinance, 1979 of the sums which factually represented loans and the refusal to rectify the original orders were all arbitrary and contrary to law, rules and regulation---Maladministration was established---Federal Tax Ombudsman recommended that the Commissioner of Income Tax, exercising his powers under S.122A of the Income Tax Ordinance, 2001, to revise both the assessment orders for assessment year 1998-99 and 2001-2002 taking into consideration the facts of the case.

(c) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S.2(3)---Maladministration---Definition of maladministration is wide and inclusive in its nature and includes decisions, processes, act of omission or commission which are contrary to law, rules or regulations and are arbitrary.

(d) Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000)---

----S.9---Jurisdiction, functions and powers of the Federal Tax Ombudsman---Once a complaint is filed alleging maladministration it becomes cognizable by the Federal Tax Ombudsman and he is competent to investigate into the matter---Allegations by the complainant/assessee and denial by the Department are not sufficient to determine maladministration---Full investigation had to be made into the allegations of maladministration and parties are to be heard before determining, whether maladministration had occurred or not.

(e) Income Tax Ordinance (XXXI of 1979)---

----S.129---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Appeal to the Appellate Additional Commissioner---Withdrawal of appeal---Merger of order---First Appellate Authority merely allowed the complainant/assessee to withdraw his appeals but did not discuss the facts of the case at all---Had the First Appellate Authority considered them and given his findings, his order could be construed to hold the field, and the order of the Assessing Officer merged with it---Order which still holds the field is that of the Assessing Officer.

Glaxo Laboratories Limited v. IAC of Income Tax and others PLD 1992 SC 549 = 1992 PTD 932 rel.

(f) Income Tax Ordinance (XXXI of 1979)---

----Ss.156 & 25(c)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Rectification of mistakes---Addition made under S.25(c) of the Income Tax Ordinance, 1979 represented loans and were wrongly considered as trading liabilities---Most of the loans were carried over from preceding years and could not be considered in the years under consideration---Mistake was apparent from record---Decision of the Assessing Officer in rejecting the application for rectification was not legally correct.

Shamim Ahmad, Adviser, Dealing Officer.

Dr. Muhammad Asghar for the Complainant.

Mrs. Nafeesa Satti, DCIT, for Respondent.

FINDINGS/DECISION

JUSTICE (RETD.) SALEEM AKHTAR (FEDERAL TAX OMBUDSMAN).---The brief facts of the case are that the complainant, Messrs Fatherland International (Pvt.) Limited, is engaged in the business of coaching and consultancy services. Return of Income for assessment year 1998-99 was filed declaring loss of Rs.459,525. The notices under sections 61 & 62 of the repealed Ordinance (R.O.) were served by affixture on 18-6-2001 and 27-6-2001.

They remained uncomplied. The DCIT, Coys. Circle-05, Islamabad proceeded to finalize the assessment under section 63 of the R.O. The declared loss was ignored and addition under section 12(18) of the R.O. was made at Rs.955,382. No reason was given either for ignoring the declared loss or the addition made under the said section 12(18).

2. For assessment year 2001-2002, Return of Income was filed to declare loss of Rs.246,852. Notice under section 61 was issued which was complied by the complainant. During the hearing certain queries were made, specially regarding the proposed addition under section 25(c) of the R.O. On the next date of hearing, the complainant filed an application for adjournment which was rejected. The assessment was finalized under section 63 of the R.O. Loss was ignored and an addition of Rs.832,004 was made under section 25(c). The reason given for ignoring the loss was as follows. As the complainant did not undertake any business during the year and failed to produce the' documents and books to support his claim for loss, the DCIT did not find any justification for allowing the expenses. It was further stated in the assessment order that the Director of the Company did not raise any objection to the proposed treatment. Regarding the addition under section 25(c) of the R.O., the only reason given was that the notice under section 61 was issued which remained uncomplied. Hence the said addition.

3. The complainant filed appeals before the CIT (Appeals), Zone-I, Islamabad for the two assessment years under consideration. In his combined order for the two years the CIT stated that the Complainant requested for permission to withdraw the appeals for both the years. This request was allowed and the appeals were dismissed.

4. The complainant after the decision of the appeals, approached the DCIT for rectification of the original order under section 221 of the Income Tax Ordinance, 2001 (the Ordinance). In her order dated 20-10-2003, the ACIT rejected the application stating that no mistake was apparent from record in either of the two assessment orders. At this stage the complaint under consideration was filed.

5. In reply, the RCIT, Northern Region, Islamabad raised the preliminary objection stating that no act of maladministration was involved in the case. He further stated that the legal remedy for appeal was available to the complainant. Therefore, the case fell outside the jurisdiction of the FTO.

6. Dilating on the facts of the case, it was stated that the notices were properly served, the complainant himself withdrew the appeals filed before the CIT (Appeals) for both the years and that the application for rectification under section 221 of the Ordinance was rightly rejected because there was no mistake apparent from the record.

7. The complainant and the DR representing the respondent attended. They reiterated that their respective arguments as contained in the complaint and the reply of the RCIT. The case papers including the Returns of Income and the supporting documents filed by the complainant were examined in detail. The complainant was asked to explain his reason for withdrawing the appeals filed before the CIT (Appeals). He stated that he was advised by him that the contents of his appeals could be dealt in a better fashion by the DCIT if he filed an application under section 221 of the R.O. He pleaded that he was completely ignorant of law and its implications. He acted in good faith on the advice of the CIT (Appeals).

8. On examination of the assessment order and related documents, it transpired that the DCIT did not give any reason whatsoever for ignoring the declared loss of Rs.459,525 for assessment year 1998-99, The addition under section 12(18) was not discussed at all. The best judgment assessment places a heavy responsibility on the officer passing it. No arbitrary addition can be made under such an assessment. Both the actions of DCIT in ignoring the declared loss and making addition under section 12(18) were found to be arbitrary.

9. The assessment order for assessment year 2001-2002 did discuss the reason for ignoring the business loss. However, the complainant who represented the case denied in accepting the proposed treatment as stated by the DCIT.

10. The additions under section 25(c) of the R.O. were also examined. Under the said section "such trading liability or a portion thereof is found not to have been paid within 3 years of the expiration of the income year in which it was allowed...." Could be added. It was pointed out by the complainant that the liabilities were not trading liabilities, but loans. If at all, they could be considered under the provisions of section 12(18) of the R.O. It was further submitted that most of them were carried over from the preceding years, including the assessment year 1998-99. On examination of the relevant documents it transpired that the claim of the complainant was correct.

Therefore, the said addition under section 25(c) of the R.O. is illegal and arbitrary.

11. The preliminary objection of the RCIT that no maladministration was done was also considered. It is discussed as follows. The objective of the Establishment of Office of the Federal Tax Ombudsman Ordinance, 2000 is to eradicate maladministration and grant relief to the aggrieved parties. The definition of maladministration is wide and inclusive in its nature and includes decisions, processes, act of omission or commission which are contrary to law, rules or regulations and are arbitrary. Once a complaint is filed alleging maladministration it becomes cognizable by the Federal Tax Ombudsman and he is competent to investigate into the matter. The allegations by the complainant and denial by the Department are not sufficient to determine maladministration. A full investigation has to be made into the allegations of maladministration and parties are to be heard before determining, whether maladministration has occurred or not. The preliminary objection is misconceived and is rejected.

12. The facts of the case were examined. It is noted that the CIT (Appeals) merely allowed the complainant to withdraw his appeals but did not discuss the facts of the case at all. Had he considered them and given his findings, his order could be construed to told the field, and the order of the DCIT merged with it. Under the circumstances, the order which still holds the field is that of the DCIT. Reliance in this regard is placed on a case quoted as Glaxo Laboratories Limited v. IAC of Income Tax and others PLD 1992 SC 549 = 1992 PTD 932.

13. It is also observed that the decision of the DCIT in rejecting the application for rectification was not legally correct either. The facts, as discussed in para.10 supra do not justify it. The sums added under section 25(c) of the R.O. represented loans and were wrongly considered as trading liabilities. Moreover, most of them were carried over from preceding years and could not be considered in the years under consideration. The mistake was, therefore, apparent from record.

14. The action of the DCIT in ignoring the loss without assigning any reason, making addition under section 25 (c) of the sums which factually represented loans and the refusal to rectify the original orders are all arbitrary and contrary to law, rules and regulations. Therefore, maladministration is established.

15. In view of the above discussion, the following recommendations are made---

(i) The CIT, exercising his powers under section 122A of the Ordinance, to revise both the assessment orders for assessment years 1998-99 and 2001-2002 taking into consideration the facts of the case.

(ii) Compliance be reported within 45 days of the receipt of this order.

C.M.A./347/FTO(I)Order accordingly.