SHAHEEN COURIER SERVICES, Proprietor Amir Ali Shroff, Karachi VS TAXATION OFFICER (I.A.C.) RANGE-II/COMPANIES-I, KARACHI, 2008 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 707 (2003)

(a) Income Tax Ordinance (XLIX of 2001)---

----S. 122---Income Tax Ordinance (XXXI of 1979), S.66-A & 59(1)---C.B.R. Circular No.9 of 1998, dated 15-7-1998---C.B.R. Circular No.14 of 1998, dated 9-10-1998---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Amendment of assessment---Self-assessment---Show-cause notice to make additional assessment by modifying or cancelling the assessment made under S.59(1) of the Income Tax Ordinance, 1979 on the ground that return was wrongly accepted under Self-Assessment Scheme as tax liability in the return was calculated less than the required calculation of tax to qualify for Self-Assessment Scheme---Complainant/assessee contended that observation of Inspecting Additional Commissioner was misconceived and tax was miscalculated---Tax already paid was more than the tax payable to qualify under Self-Assessment Scheme---Validity---Inspecting Additional Commissioner had no valid reason to consider that tax payable on the basis of return filed was calculated at an amount less than actually payable---Commissioner of Income Tax and all concerned officers above him should have been concerned that Taxation Officers did not apply their mind to appreciate the. facts---Initiation of such proceedings put the credibility of the entire Revenue Division at stake---Inspecting Additional Commissioner, firstly, miscalculated the tax liability of the complainant/assessee on declared income and secondly he failed to appreciate that even if there- was an error of calculation the tax withheld during the income year was much more than even the higher tax liability incorrectly calculated by him---Reasons of such acts of the Inspecting Additional Commissioner could be either incompetence or wilful harassment---Maladministration committed in issuing notice under S.122/66A by incorrectly considering the assessment under S.59 of the Income Tax Ordinance, 1979 to be erroneous and prejudicial to the interest of Revenue was proved.

(b) Income Tax Ordinance (XLIX of 2001)---

----S.122---Income Tax Ordinance (XXXI of 1979), S.66-A, 59(1), 24(c), 24(ff), 24(fff), 52, 86 & 139---C.B.R. Circular No.9 of 1998, dated 15-7-1998---C.B.R. Circular No.14 of 1998, dated 9-10-1998---Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)---Amendment of assessments---Self-assess ment---Issuance of show-cause notice to make additional assessment on the ground that audit had pointed out that no details of total receipts were obtained and proposed action under Ss.24(c), 24(ff), 24(fff), 52 & 86 of the Income Tax Ordinance, 1979 after calling for complete information and statement under S.139 of the Income Tax Ordinance, 1979---Validity---Basis of issuing the notice under Ss.122/66A was misconceived---Audit had proposed action under Ss.24(c), 24(ff), 24(fff), 52, 86 and 139 of the Income Tax Ordinance, 1979---Inspecting Additional Commissioner was supposed to forward a copy of the proposal to the Director of the Tax withholding to call for statutory statements under Ss.139 to 143A of the Income Tax Ordinance, 1979 that would have taken care of the compliance of the provisions 'of clause (c) of S.24, S.52 and S.86 of the Income Tax Ordinance, 1979---No prescribed procedure existed to verify the details of total receipts required under S.24(ff) and (fff) of the Income Tax Ordinance, 1979 in the Self-Assessment Scheme cases except where the assessee opts to avail rebate in tax for furnishing party wise details of receipt---Mode of payments envisaged under S.24(ff) and 24(fff) could only be verified during the course of assessment under total audit or under normal assessment procedure---Initiation of proceedings under Ss.122/66A on the basis of action proposed by audit was totally unwarranted in the case and amounted to maladministration---Assessing Officer committed no error in assessing the income under S.59(1) of the Income Tax Ordinance, 1979---Inspecting Additional Commissioner was demoraliz ing his own subordinates by undermining their valid performance---Federal Tax Ombudsman recommended that Commissioner of Income Tax ensures that proceedings initiated by issuance of the notices under S.122/66A of the Income Tax Ordinance, 2001/Income Tax Ordinance, 1979 were dropped; that the assessment finalized under Self-Assessment Scheme is maintained; that the tax withheld/collected from the complainant in excess of determined tax liability is refunded within seven days along with compensation due under the law for the period such refund has been delayed; that the counselling of the Inspecting Additional Commissioner is done by the commissioner to be careful in examination of records of assessment proceedings, in appreciation of audit observations, in calculation for determination of correct tax liability, in evaluating the reasons to invoke jurisdiction under Ss.66A/122 and in application of the provisions of law, rules and regulations relevant to the case and that the Regional Commissioner of Income Tax Southern Region ensures that written warnings are issued to the Inspecting Additional Commissioner concerned as well as the Audit Officer concerned against making telephone contact with assessees.

PLD 1992 SC 549 = 1992 PTD 932; 2002 PTD 2734; 2001 PTD (Trib.) 3810 and (1992) 66 Tax 14(sic) ref.

(c) Income Tax Ordinance (XLIX of 2001)---

----S. 122---Income Tax Ordinance (XXXI of 1979), S.66-A, 139 & 3(bbb)---Income Tax Rules, 1982, R.53---C.B.R. Circular No.9 of 1998, dated 15-7-1998---C.B.R. Circular No.14 of 1998, dated 9-10-1998---C.B.R. Circular No.8 of 1999, dated 27-7-1999---Establishment of the Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.2(3)--Amendment of assessment---Assessment was finalized under Self-Assessment Scheme---Show-cause notice for additional assessment was issued requiring to furnish statement under S.139 of the Income Tax Ordinance, 1979 giving complete particulars of entire staff whom salary/wages claimed as expenses were disbursed and showed intention to treat the complainant as an assessee in default of failure to withhold tax on salary/wages if statement required under S.139 was not filed or complete details were nor reflected in it---Complainant/assessee pleaded that Inspecting Additional Commissioner, assumed jurisdiction of monitoring tax withholding in spite of the fact that the jurisdiction lies with the Director of Tax withholding as provided under S.3(bbb) of the Income Tax Ordinance, 1979---Validity---Reply was filed by the complainant/assessee that no statement was required to be filed because no employee was paid any taxable salary and the Inspecting Additional Commissioner was under misconception that the prescribed statement to be filed under S.139 of the Income Tax Ordinance, 1979 provides for a statement of all employees irrespective of the fact whether "on the basis of proportionate monthly amount of such salary, income tax was likely to be charged or not---Pro forma of the statement had been prescribed under R.53 of the Income Tax Rules,. 1982 under the caption "Monthly statement of deduction of tax on income chargeable under the head 'Salary'"-Caption itself suggests it was a statement of deduction of tax and not a statement of payment of salaries-Rule provides that "the person making the deduction shall send to the Income Tax Authority specified under S.51 a statement"---Inspecting Additional Commissioner was labouring, under a misconception, to persuade the complainant to file a complete employees-wise statement of salaries disbursed and it reflects Inspecting Additional Commissioner's incompetence rid inaptitude in performance of his duties---Inspecting Additional Commissioner Appeared and attended the hearings but did not file his affidavit or reply signed by him to controvert the allegations regarding mala fides and corrupt motives made against him---Mala fides and corrupt motive in initiating the proceedings leading to passing of impugned order was fully established.

S.M. Sibtain, Advisor, Dealing Officer.

Muhammad Raza Merchant for the Complainant.

Chaman Lal Oad, IAC for Respondent.

FINDINGS/DECISION

JUSTICE (RETD.) SALEEM AKHTAR, (FEDERAL TAX OMBUDSMAN).---Maladministration is alleged on the part of the Inspecting Additional Commissioner (IAC) /Taxation Officer for issuing notice dated 25-2-2003 under section 122 of the Income Tax Ordinance, 2001 (the Ordinance) read with section 66-A of the Income Tax Ordinance, 1979 (Repealed Ordinance) for the assessment year 1998-99 to make additional assessment by modifying or cancelling the assessment made under section 59(1) arbitrarily alleging that complainant's return was wrongly accepted under Self-Assessment Scheme (SAS) as his tax liability in the return was calculated at Rs.176,081 while in order to qualify for SAS, he was required to calculate tax at Rs.189,536.

2. Maladministration is further alleged for issuing another notice under sections 122/66A on issues other than the subject-matter of previous show-cause notice on the same date informing the complainant that the audit has pointed out that no detail of total receipts was obtained. Audit, therefore, has proposed action under section 24(c), 24(ff), 24(fff), 52 & 86 after calling for complete information and statement under section 139.

3. The facts briefly are that the complainant is an individual and assessed to tax in Circle-V, Companies-I, Karachi vide N.T.No.14-05-0517687. He is engaged in the business of domestic courier service and all the ancillary activities connected therewith including carrying out door to door delivery of letters and articles as well as carrying and delivering those letters and articles from one place to another within the country.

4. He filed return of income for the assessment year 1998-99 on 30-9-1998 in accordance with the C.B.R. Circular No.9 of 1998declaring income of Rs.951,275 on which tax payable including surcharge was worked out at Rs.174,081 while the tax paid by or withheld from the bills of the complainant during the income year amounted to Rs.381,761. The complainant, therefore, had claimed refund of Rs.207,680 in the return of income. He later revised the return on 23-10-1998, in the light of Circular No.14 of 1998 offering amnesty from selection for audit, declaring income of Rs.1, 108,275 on which tax payable including surcharge amounted to Rs.208;621. Since the tax already paid by the complainant amounted to Rs.381,761 the refundable balance remained Rs.173,140.

5. Assessment was finalized under section 59(1) of the repealed Ordinance, but the assessment order for the said year was never served on the complainant or on his Authorized Representative (AR) in spite of the repeated requests.

6. Compliance of the aforesaid first notice under sections 122/66A was made by the AR of the complainant vide letter dated 3-3-2003 stating that the tax liability for the assessment year 1997-1998 excluding surcharge was actually Rs.143,588 and the amount of surcharge was Rs.14,359. Thus the observation in the show-cause notice that the tax liability for the assessment year 1997-1998 excluding surcharge was Rs.157,947 is absolutely incorrect. The amount of Rs.157,947 was the aggregate of Rs.143,588+Rs.14,359. Consequently, the observation, that to qualify under Self-Assessment Scheme, the assessee was required to calculate tax at Rs.189,536 is misconceived. The assessee, in order to qualify under Self-Assessment Scheme was required to pay tax which is not less than the tax payable for the assessment year 1997-98, while to qualify for immunity from selection for audit, the assessee was required to pay 20% more tax in comparison with the tax payable for the assessment year 1997-98. Thus under both the circumstances, the return qualified for acceptance under the Self-Assessment Scheme.

7. It was further submitted before the respondent that the assessee has filed revised return to avail immunity from total audit and, accordingly, he was required to pay tax at Rs.172,306 excluding surcharge while the tax payable determined and paid on revised income in the return worked out at Rs.189,655 (excluding surcharge). The tax including surcharge on declared income payable on or before the date of filing of return under the scheme works-out at Rs.208,621 while the payment already made was Rs.381,761 which exceeded the required amount of tax payable by Rs.173,140.

8. Compliance of the aforesaid second notice under sections 122/66A was made by the AR of the Complainant vide letter dated 3-3-2003 stating that the crux of the matter was that the IAC intended to invoke actions under different sections merely as a tool of inspection and audit department without applying his own mind to the facts of the case available on record and in total disregard to the relevant provisions of law. Reliance was placed upon the decision of the Supreme Court of Pakistan reported as PLD 1992 SC 549 = 1992 PTD 932 in support of the view that it was a requirement of law that the IAC in order to assume jurisdiction under section 66A should have reason to consider the order passed by the DCIT to be erroneous in so far as it was prejudicial to the interest of Revenue. Mere presumption of the order being prejudicial to the interest of Revenue did not render it erroneous in law and did not justify action under section 66A of the Repealed Ordinance. It was further submitted before the respondent IAC that his action to proceed under sections 122/66A in pursuance of audit observation regarding action under sections 24(c), 24(ff), 24(fff), 52 and 86 of the repealed Ordinance, therefore, was misconceived and un-called for. The assessment in the case of complainant was finalized under Self-Assessment Scheme, which fell within the ambit of special provisions to be governed within the framework of Self-Assessment Scheme formulated by the C.B.R. for each assessment year separately. The contemplated action under sections 24(c), 52 and 86 or for calling-complete information of total receipts and statement under section 139 was not called for while proceeding under the scheme of Self-Assessment which was formulated by the C.B.R. under special provision of law. The Self-Assessment Scheme did not vest any powers in the Income-tax Authorities to seek complete information about receipts or to make any probe or enquiry other than processing of the return as required under the scheme.

9. It was submitted that without prejudice to the view that the IAC could not assume jurisdiction under section 66A merely on the basis of the observations of Inspection and Audit Officers, the DCIT did not commit any error in accepting the return under S.A.S. because it did neither require the assessee to enclose complete details of receipts or statements under sections 24(c), 24(ff) and 24(ff) with the return nor require the DCIT to call for it. The observation of the Audit and Inspection in that regard therefore had been misconstrued by the IAC.

10. Another notice was issued by the respondent after lapse of about five months requiring to furnishing statement under section 139 of the repealed Ordinance showing complete particulars of entire staff whom salary/wages claimed as expenses were dispersed. He showed his intention to treat him as an assessee in default of failure VP withhold tax on salary/wages if statement required under section 139 `ibid was not filed or complete details were not reflected in it. The Office Manager of the A.R. of the complainant requested vide letter dated 14-7-2003 to allow 15 days time for compliance of the said show-cause notice on the plea that the A.R. was on "leave" for 10 days due to sad demise of the A.R.'s "Aunt" who was living with him and was suffering from Cancer. The respondent allowed only four-days time. However, a second letter of request was sent to the respondent on 22-7-2003, which was regretted. The third letter of request for, extension of time was sent to the Commissioner of Income Tax, Companies-I, Karachi on 23-7-2003, the fate of which is not known.

11. Despite compliance of every notice in time telephonic contacts were made by the respondent with the complainant and his AR. Malta fide is reflected, according to complainant, from the protracted proceedings with gaps of several months, from turning down the requests for allowing proper opportunity of being heard being turned down arbitrarily, from telephonic contacts made by the Audit and Inspection Directorate with the A.R. of the complainant offering to hush up the matter for illicit consideration and from the fact that the notices started coming from the respondent when the offer was declined by the complainant. The repeated show-cause notices allegedly indicated a desperate attempt to find faults in the case of the complainant one after another till the complainant was forced to oblige. It is yet another case of the kind reported in 2002 PTD 2734 where the Federal Tax Ombudsman has observed that in most of the cases, Department initiate proceedings under section 66A and under section 65 without any basis merely to create hindrance in the issuance of refunds.

12. The complainant has prayed for recommendation that proceeding initiated with the impugned notices issued under section 122 of the Ordinance read with section 66A of the Repealed Ordinance are dropped; that no order or assessment on the basis of impugned show-cause notices are passed; that the assessment order finalized under the Self-Assessment Scheme is maintained as lawful and final; that refund of Rs.173,140 due to the complainant along with 15% compensation for delay is issued forthwith and any other appropriate relief that the Federal Tax Ombudsman may deem fit and proper may be allowed.

13. Respondent submitted parawise comments on the complaint in response to notice served under section 10(4) of the Ordinance XXXV of 2000. He objected to the admissibility of the complaint on the ground that the assessee had not exhausted the normal avenues of adjudication provided under the Income Tax Ordinance. According to respondent, the contention that the first notice dated 25-2-2003 was full of legal and factual errors had no truth. However, it was conceded that the A.R's. reply dated 3-3-2003 was found correct and no further correspondence on that point was made with the assessee and/or the A.R.

14. Regarding second notice dated 25-2-2003 it was denied that the respondent had acted only as a tool of Audit Department, and the respondent had not applied his own mind to the facts available on record. Provisions of Clause (b) of subsection (5) warranted action under section 122 on the basis of audit report. It was also submitted that action under section 122 was initiated on the ground that assessee had violated the provisions of sections 50(1)/139/108 of Income Tax Ordinance 1979 and the case reported as 2001 PTD (Trib.) 3810, was not applicable to the actions initiated after 1-7-2002. Action on the basis of audit report had specifically been provided in section 122(5)(b) of the Income Tax Ordinance 2001 which was not available in section 66A of the Repealed Ordinance.

15. The respondent submitted that as the returns qualifying for assessment under section 59 could be subjected to the provision of subsection (3) of section 59 of the Repealed Ordinance, likewise assessees qualifying for SAS were also under obligation to observe withholding tax provisions of section 50(1) failing which provisions of sections 52/86 of the Repealed Ordinance could be invoked against them. Respondent stated that substantial loss of revenue was likely to be worked out for the year under consideration against the complainant which could extend to a few lacs of rupees provided the assessee furnished figures of salaries paid. Accordingly it was notified to the assessee that such figures of salaries would be estimated on the pattern in the order for assessment year 2000-01. The action under sections 52/86 read with sections 139/108 of the Repealed Ordinance therefore was fully justified because the complainant had apparently failed to withhold tax under section 50(1) of the repealed Ordinance. The respondent had issued the reminder dated 10-7-2003 to give further chance and opportunity to the assessee requesting him only to furnish statement under section 139 and also the figures of the salaries. The complaint, according to respondent, was filed only to avert difficulty of the assessee in furnishing the statement under section 139 of the Repealed Ordinance because the assessee allegedly had failed to withhold tax under section 50(1). The complainant did not claim at any stage that tax under section 50(1) was ever withheld and/or statement under section 139 was filed. The complainant was intended to forestall the retrieval of the loss of revenue and the action under section 108.

16. The respondent had no cavil to the principle laid down by Honourable Supreme Court of Pakistan (1992) 66 Tax 14 (sic) (SC Pak). However, according to him, necessary ingredients were present in the case due to omission by the Assessing Officer to take action under sections 52/86/108 and that it was one of the main Junctions of an IAC to retrieve the loss of Revenue caused by the Assessing Officer.

17. The complainant's AR submitted during the hearing that the IAC had not examined the case-record which was evident from the fact that it was specifically mentioned in the complainant's letters filed in response to notices issued from Circle C-12, Companies-I from time to time for filing of statement under section 139 of the repealed Ordinance that the salaries paid to their employees were below the taxable limit, hence no deduction of. tax was made from the salaries paid. The respondent/IAC had intentionally avoided to comment on the compliance made on 31-7-2003 vide letter dated 30-7-2003.

18. Complainant's A.R. further submitted that the IAC had assumed the jurisdiction of monitoring tax withholding in the case of the complainant, in spite of the fact that the jurisdiction lies with the Director of Tax Withholding as provided under section 3(bbb) of the repealed Ordinance. In this regard the C.B.R. had issued Circular No.8 of 1999 dated 27-7-1999, which reads as under:--

"A new Income Tax Authority designated as the Director-General of Tax Withholding has been created to monitor tax withholding. In order to enable the authority and its subordinates to discharge the assigned functions, the definitions of various income tax authorities have been modified. Sections 3 and 4 of the Ordinance have also been appropriately amended."

19. It is further averred that although the I.A.C. was asking to file details of receipts without jurisdiction and showing his intention to initiate arbitrary action under different sections of the Income Tax Ordinance, 1979, compliance of even the said notice was made within seven days vide letter dated 3-3-2003 in comprehensive manner. Thereafter there was no correspondence on the said "issues" for about four and a half months except some telephonic-calls in which the IAC had insisted to attend his office in person. The respondent/IAC had also informed on "telephone" that the "reply" filed on the said "issue' was satisfactory and will be accepted if the AR or the "assessee" attends his office in person. Since neither the "assessee" nor the AR attended IAC's office in person, the IAC after lapse of four and half months issued another notice for compliance on 18-7-2003 with a telephonic call that on the second day of the compliance date, the assessee would get an "order" on his table at 9-00 a.m. The AR of the complainant due to circumstances beyond control, requested for time, which was refused. The complainant, therefore, approached the learned CIT, who intervened and the date of hearing was fixed for 31-7-2003. However, the complainant felt, after mental torture of about 8 months starting from first notice served on 12-12-2002 till filing of the Complaint on 25-7-2003, that the IAC had made up his mind to create arbitrary tax demand and thereafter invoke coercive action to recover it; hence the complaint. The complainant and his AR have enclosed affidavits regarding telephonic calls from the IAC.

20. As far the objection taken by the respondent to the jurisdiction of this forum over the complaint against issuing repeated `frivolous' notices, the view that his action is appealable is misconceived; hence objection overruled.

21. Maladministration committed in issuing notice under sec tions 122/66A ibid by incorrectly considering the assessment under section 59 of the Repealed Ordinance to be erroneous and prejudicial to the interest of Revenue has been proved. The IAC had no reason to consider that tax payable on the basis of return filed was calculated at an amount less than actually payable as conceded by him. It should be a matter of concern for the concerned CIT and all concerned officers above him that Taxation Officers at the level of BS-19 do not apply their mind to appreciate facts of the case correctly. Consequently they initiate proceedings that put the credibility of the entire Revenue Division at stake. The IAC in the instant case firstly miscalculated the tax liability of the complainant on declared income and secondly he failed to appreciate that even if there was an error of calculation the tax withheld during the income year was much more than even the higher tax liability incorrectly calculated by him. The only possible reasons of aforesaid acts of the I.A.C. could be either incompetence or wilful harassment as alleged by the complainant.

22. The basis of issuing the next notice under sections 122/66A too was misconceived by the IAC. As admitted by the respondent, Audit had proposed action under section 24(c), 24(ff), 24(fff), 52, 86 and 139 of the Repealed Ordinance. The IAC was supposed, under the law, to forward a copy of the proposal to Director of the Tax Withholding to call for statutory statements under sections 139 to 143A that would have taken care of compliance of provisions of clauses (c) of section 24, section 52 and section 86. As far as details of total receipts and verifications required under section 24(ff) and (fff) are concerned there is no prescribed procedure to do it except where the assessee opts to avail rebate in tax for furnishing party-wise details of receipt as offered in sub-para (2c) of Para `A' of Part IV of the First Schedule to the Income Tax Ordinance. However, the mode of payments envisaged under sections 24(ff) and 24(fff) can only be verified during the course of assessment under total audit or under normal assessment procedure. Initiation of proceedings under sections 122/66A on the basis of action proposed by audit was totally unwarranted in the instant case and amounted to maladministration. The Assessing Officer committed no error in assessing the income as per return under section 59(1) of the repealed Ordinance. The IAC was demoralizing his own subordinates by undermining their valid performance.

23. Regarding the submission of complainant's AR that notice issued by the DCIT Circle C-12 Companies-I, Karachi under section 139 had already been responded saying that no statement was required to be filed because no employee was paid any taxable salary, the IAC was under the misconception that the prescribed statement to be filed under section 139 provides for a statement of all employees irrespective of the fact whether "on the basis of proportionate monthly amount of such salary, income tax is likely to be charged" or not. A pro forma of the statement has been prescribed under Rule 53 of the Income Tax Rules 1982 under the caption "monthly statement of deduction of tax on income chargeable under the head `salary"'. As the caption itself suggests it is a statement of deduction of tax and not a statement of payment of salaries. Further, the rule provides that "the person making the deduction shall send to the Income Tax Authority specified under rule 51 a statement". The IAC was thus labouring, under a misconception, to persuade the complainant to file a complete employee-wise statement of salaries disbursed. It reflects respondent's incompetence and inaptitude in performance of his duties. The IAC appeared and attended the hearing but did not file his affidavit or reply signed by him to controvert the allegations regarding mala fides and corrupt motives made against him. From the foregoing discussion the mala fides and corrupt motive in initiating the proceeding leading to passing of impugned order is fully established.

24. The alleged maladministration having been proved, it is now recommended that the CIT concerned ensures:

(a) That proceedings initiated by issuance of the notices under sections 122/66A of the Ordinance/repealed Ordinance are dropped.

(b) That the assessment finalized under S.A.S. is maintained. .

(c) That the tax withheld /collected from the complainant in excess of determined tax liability is refunded within seven days along with compensation due under the law for the period such refund has been delayed.

(d) That counselling of the I.A.C. is done by the Commissioner to be careful in examination of records of assessment proceedings, in appreciation of audit observations, in calculation for determination of correct tax liability, in evaluating the reasons to invoke jurisdiction under sections 66A/122 and in application of the provision of law, rules and regulations relevant to the case.

(e) That the RCIT Southern Region ensures that written warnings are issued to the I.A.C. concerned as well as the Audit Officer concerned against making telephone contacts, with assessees.

(f) That compliance is reported within 45 days.

C.M.A./30/FTOOrder accordingly.