2010 PTD 111
[Income-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Zareen Saleem Ansari, Accountant Member
I.T.As. Nos. 448/KB and 420/KB of 2008, decided on 23/06/2009.
(a) Income Tax Ordinance (XLIX of 2001)---
----S.122(5A)---Amendment of assessment---Fishing enquiries--Issuance of three repeated notices---Validity---Taxation Officer through second notice had claimed to have elaborately highlighted errors that caused prejudice to the Revenue---Second notice was an admission on the part of Taxation Officer that he could not point out any error in his first notice under S.122(9) to invoke S.122(5A) of the Income Tax Ordinance, 2001 and it had also not been mentioned as to under what legal provision the second notice was issued---Third notice under S.122(9) of the Income Tax Ordinance, 2001 was again sent to the taxpayer which showed that first two notices were deficient on legal grounds---Taxation Officer had repeatedly issued notices on the same issues which showed that he was not sure on the issues which were confronted to the assessee through first notice---Such type of fishy inquiries could not be approved to make basis for invocation of S.122(5A) of the Income Tax Ordinance, 2001 as such an approach, if allowed, would result in gross misuse of provision of law---Mere suspicion could not be allowed to be a basis to invoke S.122(5A) of the Income Tax Ordinance, 2001.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.21(f) & (e)---Deduction not allowed---Payment of gratuity---Ascertained liability---Disallowance of deduction on the ground that expense was to be allowed when it was incurred and not when paid---Validity---Taxpayer had actually paid the gratuity during the year and had deducted tax thereon fulfilling the condition of S.21(f) of the Income Tax Ordinance, 2001---Claim of expense on account of gratuity paid was an admissible expense being a lawful business expense---Argument of the Department that being an ascertained liability the gratuity expense was to. be allowed when it was incurred and not when Paid was repelled as the provision of gratuity was admissible expenditure for the reason that it pertained to ascertained liability---Department could not be allowed to use a double-edged sword against the taxpayer first by not allowing the expenses in previous years being a provision and again by not allowing the same in the year of payment on the basis of accrual basis---No legal or moral justification existed to deviate from the treatment meted out to the actual payment and provision of gratuity in the immediately preceding year without actual payment on account of gratuity was allowed as a genuine and lawful business expenditure by the Department and provision thereon was allowed and rightly so being inadmissible under S.21(e) of the Income Tax Ordinance, 2001---Under the law of consistency, the identical treatment this year could meet the ends of justice---Taxpayer had also not claimed the entire expense of gratuity paid against non-PTR income, the same had been included in the total expenses that had been apportioned between PTR and non-PTR income.
1999 PTD 3899; 1992 SCMR 763, 1981 PTD (Trib.) 168; 2006 PTD 460 and 1985 PTD 413 ref.
(c) Income Tax Ordinance (XLIX of 2001)---
----Ss. 40 & 67---Income Tax Rules, 2002, R.13---C.B.R. Circular No.5 of 2002, dated 6-3-2000---Deduction in computing income chargeable under the head "income from other sources "---Apportionment of deduction---Inclusion of other income for apportionment---Disallowance of expenses---Validity---Income from other sources could not be earned without incurring certain expenses including administrative expenses---Expenses disallowed as a result of direct addition of "other income" to provide attributable to local sales constituted 0.822% of the expenses claimed---Taxpayer could not be said to have not incurred expenditure to the tune of 0.822% in earning income of over Rs.7.6(m) particularly when provisions of law in the shape of Ss.40 and 67 of the Income Tax Ordinance, 2001 read with R.13, Income Tax Rules, 2002, were there to cater to the allowance allocation of admissible deductions.
(d) Income Tax Ordinance (XLIX of 2001)---
----S.122(5A)---Amendment of assessment---Non-confrontation of issues---Issuance of notice which merely pointed out certain deficiencies in the return while seeking information, explanations and evidence raising apprehensions---Validity---Order was passed on the issues which were not confronted through notice and order passed also did not fulfil the twin prerequisites of being erroneous and prejudicial which were. essential conditions to invoke the provisions under S.122(5A) of the Income Tax Ordinance, 2001---Notice, on the basis whereof the action under S.122(5A) of the Income Tax Ordinance, 2001 had been upheld by the First Appellate Authority, merely pointed out certain deficiencies in the return while seeking information, explanation and evidence raising apprehensions---Initial notice being void, all subsequent proceedings/orders or the superstructures built thereon had become void and order passed by the Taxation Officer was not sustainable in the eyes of law---Order of First Appellate Authority was vacated and the order passed by the Taxation Officer under S.122(5A) was annulled and the deemed amended assessment under S.122(3) of the Income Tax Ordinance, 2001 was restored by the Appellate Tribunal.
1999 PTD 3899; 2004 PTD 244; 2004 PTD 422; 2008 PTD 1491 and (1995) 72 Tax 233 ref.
S. Riazuddin for the Appellant (in I.T.A. No.448/KB of 2008).
Farooq Ansari, DR and Rehmatullah Khan Wazir DR for Respondents (in I.T.A. No.448/KB of 2008).
Farooq Ansari, DR and Rehmatullah Khan Wazir DR for Appellants (in I.T.A. No.420/KB of 2008).
S. Riazuddin for Respondent (in I.T.A. No.420/KB of 2008).
ORDER
Through these two cross-appeals for the tax year, 2006, the impugned order of learned CIT(A), dated 6-5-2008 has been objected. The Department has objected on the following grounds:--
"(2) That the learned CIT(A) has erred in confirming the action under section 122(5A) by holding that the order under section 122(3) of the Income Tax Ordinance, 2001 'was erroneous and prejudicial to the interest of Revenue.
(3) That the learned CIT(A) has erred in not considering the fact that order under section 122(5A) had been passed in complete deviation and utter disregard of the notice under section 122(9) issued by the IAC to assume jurisdiction in terms of section 122(5A) of the Income Tax Ordinance, 2001.
(4) That the learned CIT(A) has erred in accepting the Departmental contention regarding apportionment of expenses in the appellant's case as per the provisions of section 67 of the Income Tax Ordinance, 2001, read Rule 13 of the Income Tax Ordinance, 2002, instead of Rule 231.
(5) That the learned CIT(A) has erred in accepting the working of apportionment of expenses which is against the relevant rules laws and C.B.R.'s instruments on the subject.
(6) That the learned CIT(A) has erred in accepting direct addition of "Other income" to non-PTR Income."
While the assessee has assailed the impugned order on the following grounds:--
"(2) That the learned CIT(A) was not justified to direct to allow payment of gratuity amounting to Rs.25.393(M).
(3) Without prejudice to above, the learned CIT(A) was not justified to allow payment of gratuity as the expense was not incurred wholly and exclusively as required under section 20 of the Income Tax Ordinance, 2001.
(4) Without prejudice to above the learned CIT(A) was not justified to allow deduction of gratuity expenses merely on the basis that it was paid during the year."
2. The assessee taxpayer in this case is a private limited company engaged in the business of manufacturing and sale of guar gum and guar protein extracts. The return of income filed under section 114(1) of the Income Tax Ordinance, 2001 was deemed to have been assessed as per provisions of section 120(1) which was subsequently revised by the taxpayer on 10-2-2007 which has been treated as an amended assessment as per legal fiction contained under section 122(3) of the Income Tax Ordinance, 2001. The deemed order under section 120(3) has been considered erroneous insofar prejudicial to the interest of Revenue by the Taxation Officer on the following five reasons as confronted to the taxpayer by issuance of notice under section 122(9), dated 22-10-2007;
"(1) The taxpayer did not work out proportionate expense relatable to PTR and non-PTR income as per Rules Law.
(2) Disclosures on page IIB/2 of the revised return were not in accordance with prescribed format and Annex IIC had not been filed Column Nos.15 to 18 of Annex IIB/2, VIII & XI were left blank.
(3) The taxpayer had deducted Rs.25,395,047 in the unsigned/unauthenticated computation sheet annexed with revised return (which was used instead of Annex IIC of the return with the narration "payment of gratuity". Whereas the same amount was deducted in the original Return (Annex IIC & Computation Sheet) with narration "Gratuity paid (net of provision'', Examination of Balance Sheet shows opening balance of "Deferred liability---staff gratuity" at Rs.31,441.026 and closing balance at Rs.6,045,070. Thus the difference between the two is the same which has been claimed as deduction in the computation sheet. Examination of Note 14 to the accounts shows claim of gratuity of Rs.1,133.702 which was not explained by the above discloures.
(4) As per accounts, the taxpayer had claimed salaries, wages and benefits at Rs.27,558 (M) (Note 14 to the accounts) and at Rs.11.590 (M) (Note 16 to the accounts) aggregating to Rs.39,148(M). Claim of gratuity payment of Rs.25(M) was without any evidence of tax deduction and seemed out of proportion and required supporting evidence.
(5) The taxpayer had not attached evidence of tax deducted/paid claimed in the return, which was different from the existing computer record-of tax deduction. Therefore, prima facie excess credit had been claimed and allowed as per the deemed order."
3. The taxpayer responded the above reasons along with the computation of income and copies of previous assessment orders. After examining the reply and after further confrontation on the issue, the Taxation Officer finally amended the already completed assessment under section 122(5A) of the Income Tax Ordinance, 2001 being erroneous and prejudicial to the interest of Revenue. The assessee filed appeal before the learned CIT(A) who has upheld the treatment meted out by the Taxation Officer by invocation of section 122(5A). He has, however, allowed certain reliefs to the assessee against which the department has filed the cross-appeal. The relevant portion of the impugned order of the learned CIT(A) is reproduced hereunder:--
"In this appeal the .Additional Commissioner has invoked the provisions of section 122(5A) of the I.T. Ordinance, 2001 has given finding that the deemed order passed earlier was erroneous and prejudicial to the interest of revenue. The Additional Commissioner show-cause notice as required under section 122(9) of Income Tax Ordinance, 2001, dated 22-10-2007 and the Additional Commissioner listed out Five heads which in his opinion warranted invocation of section 122(5A) of the Income Tax Ordinance, . 2001. After receiving replies from the appellant, he partly accepted their arguments but on two heads he did not agree with the appellant viz.
(1) Appellant did not work out proportionate expense relatable to PTR and non PTR income as per provisions of section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the I.T. Rules, 2002.
(2) That claim of provision of gratuity of Rs.2.13 (M) as per Note 14 of the accounts needed explanation and for claim of payment of gratuity of Rs.25.395 (M) evidence of tax deduction needed to be examined and the claim of payment of such large amount of gratuity was disproportionately high.
The fact that out of five issues confronted, in the end only two additions were made after considering explanation of appellant goes on to show judicious approach of the Additional Commissioner. The Additional Commissioner duly confronted the appellant on issues vide notices under section 122(9) of the Income Tax Ordinance, Income Tax Ordinance, 2001. As the order passed under section 122(3) of Income Tax Ordinance, 2001 was erroneous and prejudicial to interest of Revenue, as also discussed below, on legal plane, the action under section 122(5A) of the Income Tax Ordinance, 2001 is confirmed.
On merits of the case on facts, in respect of disallowance of claim of gratuity, I find that appellant has been following mercantile system of accounts. Provision for gratuity of Rs.2.1337(M) being a liability was claimed in accounts. But in accounts actual amount of gratuity paid of Rs.25.395 (M) was also claimed as expense. Hence as very correctly observed by the Additional Commissioner, either actual amount of gratuity paid requires to be claimed or the provision based on ascertained liability of gratuity need to be claimed in accounts. The Additional Commissioner disallowed the actual amount paid and also provision for gratuity. I note that in this case there is no approved gratuity scheme and as such on actuarial basis liability for gratuity cannot be ascertained exactly, and as such, even in tax year, 2005 actual amount of gratuity paid was allowed and provision made for gratuity was disallowed by the same Additional Commissioner who has passed the present Order-in-Appeal. No- distinguishing facts between two years has been pointed out by the Additional Commissioner to give different treatment. Payment of gratuity is a statutory requirement of law of the land and genuineness of payment has not been challenged. The Hon'ble ITAT in case reported as 1999 PTD 3899 has held that actual and genuine payment on account of gratuity constitute business expenditure and is allowable. Hence considering the above facts and the history of the case and the decision of the Hon'ble ITAT, the actual amount of gratuity paid of Rs.25.393 (M) is to be allowed but the provision for gratuity made of Rs.2.13 (M) will not be allowed as per facts, history of the case and as candidly conceded by the learned AR that the appellant did not have an approved gratuity fund and same was not admissible under section 21(e) of the Income Tax Ordinance, 2001. The upshot of the above is Rs.25.393 (M) being actual gratuity paid is directed to be allowed and Rs.2.1337 (M) being mere provision for gratuity will not be allowed and as such addition of Rs.2.1337 (M) is confirmed."
4. The learned counsel representing the appellant has contended that the Taxation Officer has invoked section 122(5A) without any justification. He has contended that in response to the notice issued by the Taxation Officer, the assessee has furnished explanation on each and every query raised by the Department and it was specifically explained that the show-cause issued by the Taxation Officer did not fulfil the twin pre-requisites of erroneousness and prejudiciality as has been held by the Honourable Superior Courts to be essential for invoking provisions of section 122(5A). It was requested that the proceedings initiated under section 122(5A) should be dropt but the Taxation Officer in order to justify his action has issued two more show-cause notices and went on to further amend the assessment order under section 122(3) in terms of section 122(5A). In doing so, he recomputed the income of the taxpayer by directly adding other income comprising of profits and debts and gain on sale of depreciable assets, profit attributable to local sales without allowing any expenses whatsoever on the plea that no expenses are to be allowed against such other income. The learned counsel has submitted that the Taxation Officer has disallowed both provisions of gratuity and actual payment of gratuity made by the taxpayer during the year.
5. The learned counsel has contended that the plain reading of the contents of the notice, dated 22-10-2007 issued by the Taxation Officer to assume jurisdiction under section 122(5A) show that there is no erroneousness and prejudiciality to the interest of Revenue mentioned in the notice. The Taxation Officer has finalized the impugned assessment by indulging into fishy inquiries through a series of notices. According to learned counsel, the learned CIT(A) instead of taking cognizance of these illegalities has confirmed the action of the Taxation Officer for the reason that at out of five issues confronted in the end only two additions were made for which the taxpayer was specifically confronted under section 122(9) of the Income Tax Ordinance, 2001. The learned counsel has argued that none of the five issues confronted, in the notice, dated 22-10-2007 carry any element of erroneousness and prejudiciality to the interest of Revenue whereas it is a settled position up to now that the notice under section 122(9) has to clearly establish the said twin conditions to assume lawful jurisdiction to invoke under section 122(5A) but the same has not been established in the present case. The learned counsel has argued that mere issuance of notice providing the taxpayer an opportunity of being heard is not enough to establish erroneousness and prejudiciality to the interest of Revenue. He has contended that the learned CIT'(A) was not justified in confirming the action of the Taxation Officer on the basis of the initial show-cause notice as there was nothing erroneous by reference to definite violation or deviation from law in this notice. He has in this respect referred to a decision of this Tribunal reported as 2004 PTD 244 wherein it has been held that the erroneousness should float from the surface of the order at the time of the inspection. The observations that require support on arguments by the Taxation Officer are not covered within the definition of the word "erroneous" whereas in the instant case, the Taxation Officer has to rely upon a plethora of judgments of the Superior Courts to justify his illegal act. He has contended that the word "erroneous" cannot be considered wide enough to consider an estimate, a gossip, a feeling which gives reasons to suspect an apprehension. According to learned counsel, the case of the taxpayer has been reopened under section 122(5A) merely pointing out certain presuming to be deficiencies in the return, certain informations were sought and explanations and evidences were acquired and then the order has been amended on the basis of presumptions, conjectures and surmises raising apprehensions, therefore, it does not fulfil the pre-requisite of section 122(5A). The learned counsel in this respect has placed reliance on the decision of this Tribunal reported as 2004 PTD 422. He has referred another decision of this Tribunal reported as 2008 PTD 1491. He has asserted that under section 66A of the Repealed Income Tax Ordinance, 1979, the IAC had the power to make inquiries as he deemed fit but under the present section 122(5A) these powers have not been legislated.
6. The learned counsel has contended that the initial notice which authorized the Taxation Officer to assume lawful jurisdiction did not meet the pre-requisite essential to assume jurisdiction which was specially replied to the satisfaction of the Taxation Officer, therefore, the proceedings initiated should have to be ended and there should be no further correspondence with the taxpayer on the subject. But the Taxation Officer, on the contrary kept on issuing notices one after the other wherein the stance taken in one notice was different than the other. The learned counsel in this respect has referred a decision of the Honourable Karachi High Court reported as (1995) 72 Tax 233 wherein it has been held that it is a settled law that if initial notice is void, all subsequent proceedings/orders or the superstructure built on it would be void. According to learned counsel, the Taxation Officer in this case has failed to establish that the deemed assessment under section 122(3) was erroneous and prejudicial to the interest of Revenue, therefore, he had no jurisdiction to invoke section 122(5A) and the learned CIT(A) confirmed that order without considering the legal issues. The learned counsel in this respect has further submitted that the basis on which the notice under section 122(9) was issued is not the basis on which the assessment has been further amended under section 122(5A) for which the taxpayer has not been confronted on the basis of which the order has been amended. He is, therefore, of the view that the requirement of audi alteram partem has also been violated.
7. On the facts of the case, the learned counsel has argued that the expenses worked out by the taxpayer are in accordance with section 67 of the Ordinance. Rules 23 of the Income Tax Rules, 2002 and Circular No.5 of 2000, dated 6-3-2000. He has contended that no income is earned without incurring of expenditure. In the instant case, expenses were allowable under section 40 against `income from other sources' and the taxpayer has rightly added other income for the purpose of apportionment of expenses.
8. Regarding claim of expenses on account of gratuity paid during the year, the learned counsel has argued that the Department itself has allowed the claim in the tax year, 2005 being actually paid. He in this respect has referred the decision of this Tribunal reported as 1999 PTD (Trib.) 3899 wherein it has been held that actual and genuine payments on account of gratuity constitute lawful business expenditure and are allowable under the law even if a particular establishment did not have an approved gratuity fund or scheme. The amount of gratuity was allowable as salary expenses being included in the definition of the term "salary" as per section 16 of the Repealed Income Tax Ordinance, 1979 and section 24(g) of the Repealed Ordinance which relates to contributions to unrecognized funds and not actual payments as per legal requirements of labour laws. Regarding reliance placed by the Taxation Officer on the decisions reported as 1992 SCMR 763, 1981 PTD (Trib.) 168 and 1985 PTD 413 to support his contention that being an ascertained liability gratuity expense is to be allowed when it is incurred and not when paid, he has contended that all these judgments were pronounced in the backdrop of the provisions of revoked Income Tax Act, 1922. He has submitted that a drastic change has been brought about in the Repealed Income Tax Ordinance, 1979 through section 24(g) which has rendered these decisions redundant. According to learned counsel, no analogous provision was available in the Revoked Income Tax Act, 1922. However, an identical provision is available in the Income Tax Ordinance, 2001' in the shape of section 21(e). The learned counsel in this regard placing reliance on the decision of the Honourable Sindh High Court reported as 2006 PTD 460, has contended that in that decision it has been held that the Taxation Officer rightly disallowed the claim of provision of gratuity on account of clear bar contained in section 24(g) of the Repealed Income Tax Ordinance, 1979. it has been further held that no such bar was contained in the Revoked Income Tax Act and, therefore, this Court while considering the provisions contained in the Revoked Income Tax Act, held in the case referred to above i.e. 1981 PTD (Trib.) 168 and 1985 PTD 413 that the provision of gratuity was an admissible expenditure for the reason that it pertained to ascertained liability. After introduction of the. bar contained in section 24(g) of the Repealed Income Tax Ordinance, 1979, the earlier judgments of this Court delivered on consideration of the provisions contained in the Revoked Income Tax Act, 1922, are no more applicable for the reason that no provision analogous in section 24(g) of the Repealed Ordinance was there in the Revoked Income Tax Act, 1922. The learned counsel has submitted that this decision of the Honourable High Court has demolished the view taken by the Taxation Officer to tax the actual, genuine, verifiable and purely business related expenditure on account of gratuity as judgments relied upon by the Taxation Officer are no longer relevant because of the introduction of section 24(g) in the Repealed Ordinance and section 21(e) in the new Income Tax Ordinance. The learned counsel has, therefore, requested that the cancellation of the order passed by the Taxation Officer under section 122(5A) of the Income Tax Ordinance, 2001.
9. On the other hand, the learned DR supporting the impugned orders of the officers below in this respect, has contended that the amended assessment under section 122(3) was erroneous in so far prejudicial to' the interest of Revenue on account of five reasons which were duly confronted to the assessment through notice under section 122(9) of the Income Tax Ordinance, 2001. He has argued that these expenses under the head "business income" assessable under section 18 are allowable when the same are incurred as provided in section 20 of the Ordinance. According to learned DR, a company under section 32 is bound to maintain accounts on accrual basis and shall incur expenses when the same become payable as provided in section 34 of the Ordinance. Accordingly, in his opinion the taxpayer can claim the expense on account of gratuity when it becomes payable in the preceding years and cannot be allowed in the year under consideration on the basis of accrual payments. The learned DR in this regard has referred certain cases which have already been discussed in the impugned orders of the officers below. ,The further arguments raised by the learned DR are the same on the basis of which the Taxation Officer has justified his action under section 122(5A) of the Income Tax Ordinance, 2001 and on the basis of which the learned CIT(A) has upheld the action of the Taxation Officer. The learned DR has also objected the directions of the learned CIT(A) while allowing certain relief in respect of the gratuity in the impugned order.
10. We have heard the learned representatives from both the sides 'and have also perused the impugned order of learned CIT(A), the order passed by the Taxation Officer under section 122(5A), the case-law referred from both the sides and other relevant record of the case.
11. We have found that the Taxation Officer in this case, has initiated the proceedings under section 122(5A) by issuance of a notice under section 122(9), dated 22-10-2007 which is reproduced hereunder:--
"Return of income filed for the tax year, 2006 declaring taxable income of Rs.8,280,443 was deemed to have been assessed as per provision of section 120(1) of the Income Tax Ordinances 2001. You have revised the return on 10-2-2007 at an income of Rs.13,354,298 and it has been treated as an amended assessment as per legal fiction contained in section 22(3).
Deemed order under section 122(3) of the Income Tax Ordinance, 2001 is erroneous in so far it is prejudicial to the interest of Revenue for the following reasons:--
(1) You have not worked out proportionate expense relatable to PTR and non PTR income as per Rules Law.
(2) Disclosures on page IIB/2 of the revised return are not in accordance with prescribed format and Annex IIC has not been filed. Column Nos.15 to 18 of Annex IIB/2 VII & XI have been left blank.
(2.2) You have deducted Rs.25,392,047 in the unsigned/ unauthenticated computation sheet annexed with revised return (which has ,been used) instead of Annex IIC of the return with the narration "payment of gratuity". Whereas the same amount was deducted in the original Return (Annex IIC & Computation Sheet) ' with narration "Gratuity paid (net of provision)". Examination of Balance Sheet shows opening balance of "Deferred liability staff gratuity at Rs.31,441, 026 and closing balance at Rs.6,045,979. Thus the difference between the two is the same which has been claimed as deduction in the computation sheet. Examination of Note 14 to the accounts shows claim of gratuity at Rs.1,133.702 which is not explained by the above disclosure.
(2.3) As per accounts you have claimed salaries, wages & benefits at Rs.27.558 (M) (Note 14 to the accounts) and at Rs.11.590 (M) (Note 16 to the accounts) aggregating to Rs.39.148 (M). Claim of gratuity payment of Rs.25 (M) is without any evidence of tax deduction seems to be out of proportion and requires supporting evidence.
(3) You have not attracted evidence of tax deducted/paid claimed in the return, which is different from the existing computer record of your tax deduction. Therefore, prima facie excess credit has been claimed and allowed as per the deemed order.
The deemed order is erroneous in so far as prejudicial to the interest of Revenue. I intend to amend the order accordingly, However, you are provided on opportunity under section 122(9) of the Income Tax Ordinance, 2001 to defend the return version. You may produce books of accounts, documents, bank statement etc, which you require to support and defend your position.
Notice as per Rule 68 of the Income Tax Ordinance, 2001 is also enclose."
12. We have found that the Taxation Officer through second notice, dated 15-11-2007 has claimed to have elaborately highlighted errors that caused prejudice to revenue. We are of the view that this second notice is an admission on the part of the Taxation Officer that he could not point out any errors in his first notice under section 122(9), dated 22-10-2007 to invoke section 122(5A) which has been reproduced above. The Taxation Officer has also not mentioned as to under what legal provision the second notice was issued. The Taxation Officer issued another notice under section 122(9), dated 10-12-2007 and the third notice was again sent to the taxpayer which shows that first two notices were deficient on legal grounds. We have found that the Taxation Officer has repeatedly issued notices on the same issues which shows that he was not sure on the issues which were confronted to the assessee through first notice under section 122(9). We are of the view that this type of fishy inquiries cannot be approved to make basis for invocation of section 122(5A) as this type of approach, if allowed, would result in gross misuse of the provisions of law. Mere suspicions cannot be allowed to be a basis to invoke section 122(5A). Even on the point of facts, we have found that the taxpayer has actually paid the gratuity during the year and has deducted tax thereon fulfilling the condition of section 121(f) and in the light of the above referred decision reported as 1999 PTD 3899, the claim of the expense on account of gratuity paid is an admissible expense being a lawful business expense. In this regard, we find no force in the arguments made by the learned DR that being an ascertained liability, the gratuity expense is to be allowed when it is incurred and not when paid as the Honourable Sindh High Court in its decision reported as 2006 PTD 460 has already held that the provisions 13 of gratuity is admissible expenditure for the reason that it pertained to ascertained liability. We are of the view that the Department cannot be allowed to use a double-edged sword against the taxpayer first by not allowing the expenses in previous years being a provision and again by not allowing the same in the year of payment on the basis of accrual basis. There appears no legal or moral justification to deviate from the treatment meted out to the actual payment and provision of gratuity in the immediately preceding year without actual payment on account of gratuity was allowed as a genuine and lawful business expenditure by the department and provision thereon was allowed and rightly so being inadmissible under section 21(e) of the Income Tax Ordinance, 2001. Under the law of consistency, the identical treatment this year could meet the ends of justice. We have further noted that the taxpayer has not claimed the entire expense of gratuity paid against non-PTR income. As the same has been included in the total expenses that have been apportioned between PTR and non-PTR income.
13. As far as inclusion of other income for apportionment is concerned, we have, found that income from other sources cannot be earned without incurring certain expenses including administrative expenses. The provisions of sections 40 and 67 with rule 13 have referred by learned counsel for the assessee in this regard. It has been pointed out that the expenses disallowed by the Taxation Officer as a result of direct addition of "other income" to provide attributable to local sales constitute 0.822% of the expenses claimed. It cannot be said that a taxpayer would not even incur expenditure to the tune of 0.822% in earning income of over Rs.7.6 (m) particularly when provisions of law in the shape of section 40 and section 67 read with section 13 are there to cater to the allowance/allocation of admissible deductions. We have further noted that the Taxation Officer has not confronted this issue through any notice sent to the taxpayer under section 122(9) and has only made this a basis while passing the impugned order under section 122(5A). In view of the above facts and legal position, we are of the view that the Taxation Officer has passed the order under section 122(5A) on the issues which were not confronted through notice and the order passed by the Taxation Officer in this respect do not fulfil the. twin pre-requisites of erroneousness and prejudiciality as has been held by the Honourable Superior Courts as essential to invoke the provisions under section 122(5A). The notice on the basis whereof the action under section 122(5A) has been upheld by the learned CIT(A) merely pointed out certain deficiencies in the return while seeking information, explanations and evidence raising apprehensions. Therefore, we are of the view that initial notice was void all subsequent proceedings/orders or the superstructures built thereon have become void and the order passed by the Taxation Officer is not sustainable in the eyes of law. Accordingly the impugned order of the learned CIT(A) is vacated and the order passed by the Taxation Officer under section 122(5A) is annulled and the deemed amended assessment under section 122(3) of the Income Tax Ordinance, 2001 is restored.
14. As a result, the appeal filed by the taxpayer is allowed while the cross appeal filed by the Department is dismissed.
C.M.A./123/Tax (Trib.)Order accordingly.