VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 927 (2008)

Income Tax Ordinance (XLIX OF 2001)---

---Ss. 177, 174(2), 120 & Chap. X, Part-VIII---Income Tax Rules, 2002, R.30(3)---Audit---On desk audit of tax return it was observed that assessee claimed profit and loss expenses at the rate of 65% of the gross private medical practice receipts---Case was selected for audit under S.177 of the Income Tax Ordinance, 2001---Books of account were not produced and evidence in support of expenses was not furnished by the assessee---Declared version was rejected and assessment was finalized by allowing expenses at the rate of 15% of the gross private medical practice receipts---First Appellate Authority observed that ex parte assessment was finalized without following the due process of law and assessee's claim of expenses was curtailed in total disregard of the facts and treatment meted out in other parallel cases---Selection of case for audit was upheld by the First Appellate Authority and ordered that profit and loss account expenses should be allowed at the rate of 60% of the receipts---Validity---First Appellate Authority had unrealistically directed to allow expenses @ 55% of the receipts---Assessing Officer, without following the procedure laid down in Part-VIII of Chapter X of the Income Tax Ordinance, 2001, disallowed/curtailed the expense under S.174(2) of the Income Tax Ordinance, 2001 claimed by the assessee under various heads---Spirit of changes with regard to audit proceedings brought about through Income Tax Ordinance, 2001 was altogether overlooked by the assessee, by the Taxation Officer and also by the First Appellate Authority---No taxpayer could now state that account books were not maintained by him because in the verification part of tax return form he testifies that account books were properly maintained---While carrying out audit, it was essential that such books were produced for examination of Taxation Officer---Taxation Officer had to examine these books and give a clear finding about admissibility as well as verifiability of every item of expenditure---Expenses had to be allowed only to the extent of admissibility and verifiability---Expenses, which failed to stand the test of admissibility and verifiability could be straightaway disallowed---Fixation of certain percentage of expenses by both the authorities below was against the spirit of law and such fixation could not be approved---Assessment order was remanded back to Assessing Officer with the directions that all the legal requirements should be strictly fulfilled and all the objections raised by the assessee should be judiciously considered--Detail of expenses should be first called for from the assessee and realistic comparison of the same with the information obtained from hospital should be carried in a judicious manner to find out discrepancy therein, if any---Expenses on those items, which were not provided by the hospital should be critically examined in order to ascertain their nexus with business/profession of the assessee and no disallowance should be made unless it was undoubtedly established that these items of expenditure were not actually incurred by the assessee---Assessee should also be provided with reasonable opportunity to put forth his explanation, which should be considered in accordance with the relevant provisions of law.

Mir Alam Khan, D.R. for Appellant.

Respondent in person.

ORDER

ISTATAAT ALI, (ACCOUNTANT MEMBER).---This appeal has been filed by the department against order dated 25-10-2007 passed by C.I.T. (A), Islamabad.

2. As per facts, the taxpayer, an individual, derives income from salary, property as well as private medical practice at Combined Military Hospital, Lahore Cantt. Income tax return for the tax year 2005 was filed declaring following results:--

3. The assessment stood finalized under section 120 of the Income Tax Ordinance, 2001 on the date of filing of the income tax return. Later on, desk audit of tax return for the Tax Year 2005 was conducted wherein it was observed that taxpayer claimed profit and loss expense at the rate of 65% of the gross private medical practice receipts. The case was, therefore, selected for audit under section 177 of the Income Tax Ordinance, 2001 by the Commissioner of Income Tax, and the taxpayer was duly informed by him.

4. The assessee while responding to different notices contested the legality of selection of his case for audit. However, on the final date of hearing, the account books were not produced and evidence in support of expenses was not furnished. For the reasons recorded in the assessment order under section 121 dated 30-6-2007 declared version was rejected and assessment was finalized in the following manner:--

5. The assessee filed appeal against this assessment and learned C.I.T.(A) vide his impugned order dated 25-10-2007 observed that ex paste assessment was finalized without following the due process of law. He also observed that assessee's claim of expenses was curtailed in total disregard of the facts and treatment meted out in other parallel cases. Learned C.I.T. (A) upheld the selection of the case for audit and also ordered that P&L account expenses should be allowed @ 60% of the receipts.

6. The department has filed second appeal against this order on the following grounds:--

(a) That the learned C.I.T. (A) was not justified in directing to allow the expenses to the extent of 60% of receipts instead of 15% allowed by the Taxation Officer.

(b) That the taxpayer has failed to produce the documentary evidence as prescribed under sub-rule (3) to Rule 30 of Income Tax Rules, 2002 and required under section 174 of the Income Tax Ordinance, 2001.

7. During the course of hearing, it was stated by the assessee that information obtained by the Assessing Officer from Hospital did not contain head-wise details. Therefore, it cannot be treated as "definite" information. He contended that the return of income filed by him qualified to be accepted and "deemed assessment" was made under the provisions of section 120. He stated that for amendment of assessment specific/definite information was required to be brought on record. It was contended that Assessing Officer was not in possession of any definite information and amendment of assessment was carried out on the basis of presumptions. He also stated that he was not properly confronted with the so-called information about professional receipts or curtailment of expenses. It was also stated that Assessing Officer allowed expenses on estimate basis, which is against the relevant law. At this point learned DR responded by stating that assessee did not contest these points in appeal before Tribunal. Hence, these issues have attained finality and are settled.

8. The assessee stated that very limited facilities in the shape of clinic, clinical staff, stationery and telephone etc., were provided by the Hospital whereas in order to perform his functions he had to incur extra expenses, which were allowable under the law. It was contended that no expenses were claimed on account of those facilities, which were provided by the Hospital. Entire claim of expenses relates to those expenses, which were incurred out of personal pocket of the assessee. The assessee also claimed that all the expenses are genuine and fully verifiable and allowance viz-a-viz disallowance of expenses by the Assessing Officer on the basis of his personal estimate is absolutely unrealistic and unjustified. It was pressed that proper opportunity was not provided by the Assessing Officer and he jumped to the conclusion without judiciously appreciating the peculiar circumstances under which these expenses were incurred.

9. Learned DR stated that Assessing Officer fulfilled all the requirement of law before making the assessments. He confronted the assessee with the information obtained from Hospital. It was established from record that the assessee had inflated all the expenses and also claimed certain expenses in respect of those facilities, which were provided by the Hospital. The Assessing Officer was in possession of "definite information" to the effect that all expenses were not genuine/ realistic. Learned DR emphasized that assessee is a pathologist and utilizes the Hospital Laboratory, official chemicals, official telephone, and all other facilities provided by the employer. He contended that not even a single penny is required to be spent on any of the activities relating to assessee's professional receipts. In fact, the assessee gets his share from hospital, which is a separate net income. Learned DR stated that the Assessing Officer had already allowed expenses in a liberal manner and C.I.T. (A) was not justified to enhance the reduction on account of expenses.

10. We have considered arguments of both the parties in the light of relevant record and we are of the opinion that proper opportunity was not provided to the taxpayer of the Assessing Officer. The contention of the assessee that in addition to facilities provided by the Hospital, certain expenses had to be incurred for carrying out the profession, needs Judicious appreciation. However, at the same time, we are of the opinion that learned C.I.T. (A) has unrealistically directed to allow expenses @ 55% of the receipts. The Assessing Officer without properly following the procedure laid down in Part-VIII of Chapter X of the Ordinance, 2001 disallowed/curtailed the expenses under section 174(2) claimed by the assessee under various heads. In fact spirit of changes with regard to audit proceedings brought about through new Income Tax Ordinance, 2001 was altogether overlooked by the assessee, by the taxation Officer and also by C.I.T. (A). No taxpayer can now state that account books are not maintained by him because in the verification part of tax return form he testifies that account books are properly maintained. While parrying out audit, it is essential that these books are produced for examination of the Taxation Officer. He has to examine these books and give a clear finding about admissibility as well as verifiability of every Real of expenditure. Expenses have to be allowed only to the extent of admissibility and verifiability. Those expenses, which fail to stand the test of admissibility and verifiability can be straightway disallowed. Fixation of certain percentage of expenses by both the authorities below is against the spirit of law and such fixation cannot be approved by us.

11. Under the circumstances, the impugned assessment order is remanded back to the Assessing Officer with the direction that all the legal requirements should be strictly fulfilled and all the objections raised by the assessee should be judiciously considered. It is also directed that details of expenses for the year under appeal should be first called for from the assessee and realistic comparison of the same with the information obtained from hospital should be carried in a judicious manner to find out discrepancy therein, if any. Expenses on those items, which are not provided by the hospital should be critically examined in order to ascertain their nexus with business/profession of the assessee and no disallowance should be made unless it is undoubtedly established that these items of expenditure were not actually incurred by the assessee. The assessee should also be provided with reasonable opportunity to put forth his explanation, which should be considered in accordance with the relevant provisions of law.

12. Ordered accordingly.

C. M. A./29/Tax(Trib.)Order accordingly.