VS, 2010 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1477 (2010)

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

----Ss.177, 122(1) & 122(5)-C. B.R. Circular C.No.1(1) S. (ITAS)/2004 dated 11-6-2004---C.B.R. Circular C.No.1 (1) S. (ITAS)/2004 dated 28-7-2004---Audit---Department contended that assessee was not justified to challenge the selection of the case because said issue did not arise out of order of First Appellate Authority---Validity---Ground of appeal before First Appellate Authority was "that the order under Ss.122(1) & 122(5) of the Income Ordinance, 2001 was bad in law and against the facts of the case" which covered the illegality of the order---Even otherwise, any legal objection that went to root of the case could be raised at any stage---Issue regarding selection of the case for audit went to the very root of the case, the assessee could not be debarred from raising such issue as the same had arisen out of the order---Said specific issue was challenged before the First Appellate Authority who had dealt with the matter while deciding the additional ground filed by the assessee---Objection raised by the Department was over-ruled by the Appellate Tribunal for the reason that the same was a legal issue and could be raised at any stage of the proceedings and had clearly arisen out of the order of First Appellate Authority.

1967 PTD 339; PLD 1976 Lah. 547; 2000 PTD 359; 2006 PTD (Trib.) 1778; 2008 PTD (Trib.) 397 and 2009 PTD (Trib.) 1136 rel.

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

----Ss. 177 & 122(5)---Audit---Action under S. 177 of the Income Tax Ordinance, 2001 whether appealable---Objection raised by the Department about non-appealability of action under S.177 of the Ordinance was unfounded and misconceived---Assessee had challenged the amendment order made under S.122(5) of the Income Tax Ordinance, 2001 which had been passed in pursuance of selection of case for audit---Amendment order issued under S.122(5) of the Income Tax Ordnance, 2001 stood on an illegal foundation and the same was liable to be annulled for order which was built on an illegal foundation was equally illegal and unsustainable in the eyes of law---Any superstructure raised on an illegal foundation would crumble and be set at naught and will be equally illegal as very foundation was not in accordance with law---Once it was established that selection for audit was contrary to the mandate available to the Commissioner, such principle shall be fully applicable---One can challenge in appeal any amended order on the grounds that the initial selection for audit was illegal and if the said selection was found to be illegal then the consequential amendment order would have the same fate.

1993 PTD 85; 1990 PTD 389; 2006 PTD 276; 2004 PTD (Trib.) 2691 and 2002 PTD (Trib.) 2512 rel.

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

---Ss.177 & 122(1)/122(5)---C. B. R. Circular C. No.1 (1) S. (ITAS)/2004 dated 11-6-2004---C.B.R. Circular C.No.1(1)S.(ITAS)/2004 dated 28-7-2004---Audit ---Department contended that circulars issued by the Central Board of Revenue were internal correspondence and were not open to public---Validity---Such circulars/letters had been throughout referred to before High Court as well as before Supreme Court of Pakistan and had been discussed---Text of the circulars/letters was itself very clear in the judgments that the field formation had been advised to contact taxpayers to avail the incentives---Circulars, in circumstances, could not be said to be internal correspondence and had rightly been referred by the appellant in his support.

1993 PTD 85; 1990 PTD 389; 2006 PTD 276; 2004 PTD (Trib.) 2691 and 2002 PTD (Trib.) 2512 ref.

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

----Ss.177 & 122---Audit---Amendment of assessment---Amendment order would remain intact even if the selection of case for audit was held to be illegal---Validity---Provisions of law permit the Taxation Officer to amend the assessment once "definite information" was acquired either as a result of audit or otherwise but in the present case, the record clearly showed that action taken by the Taxation Officer was on the basis of "definite information" that was acquired through audit---In the body of amendment order, the Taxation Officer had clearly stated the source for acquisition of the said "definite information "---Taxation Officer had admitted that the details filed during the audit proceedings constituted the basis of issuance of notice under S.122(9) of the Income Tax Ordinance, 2001---Arguments/ objections raised by the Department were, not relevant---Since the source of "definite information" remained the audit, the audit being illegal, maintainability of the order will have to be determined as to whether or not the Commissioner was legally empowered to select the case.

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

----Ss.177, 122(1) & 122 (5)---C.B.R. Circular C. No.1(1)S. (ITAS)/2004 dated 11-6-2004---C.B.R. Circular C. No.1(1)S. (ITAS)/2004, dated 28-7-2004---Audit ---Tax year, 2003---Selection of case for audit in spite of the fact that the taxpayer had revised the return in terms of circular/letter of the Central Board of Revenue---Assessee contended that Commissioner was not competent to select the case as provided in the circular/letter dated 11-6-2004---Department contended that the incentive was available to non-corporate taxpayer as no such concession was available to corporate taxpayers---Validity---Federal Board of Revenue had issued two circulars/letters under same reference number both related to deletion of cases from list of cases selected for audit for tax year, 2003, later circular/letter did not override the earlier circular---Rational conclusion should be that, the cases covered by either of the circular/letter would have to be dealt with accordingly---Corporate taxpayers who had revised the return could not be reselected for audit---Commissioner did not have any mandate to select the case once the taxpayer had admittedly revised the return in accordance with the letters issued by the Federal Board of Revenue and subsequent proceedings/orders were held to be a nullity in the eyes of law--Amended order under Ss.122(1)/122(5) of the Income Tax Ordinance, 2001 and orders of First Appellate Authority were vacated as the assumption of jurisdiction to undertake the audit and framing of amended order were all illegal---Revised returns filed by the taxpayer shall be taken to be the valid assessment order.

Pakistan in C.I.T. v. Fatima Sharif Textile, Kasur 2009 PTD 37 and Bisma Textile Mills Limited v. Federation of Pakistan 2009 PTD 41 rel.

Asim Zulifqar Ali, F.C.A. for Appellant.

Muhammad Asif, D.R. and Ch. Tahseen Muzaffar, DCIT for Respondent.

ORDER

Through this appeal, the appellant has objected to the impugned order of the learned CIT(A) dated 5-5-2009 on the following grounds:--

(1) The order of the learned Commissioner Income Tax, Appeals-I, [CIT(A)] Lahore dated May 5, 2009 passed under section 129 of the Income Tax Ordinance, 2001 (Ordinance), in respect of above mentioned tax year is bad in law and against the facts of the case.

(2) That the learned CIT(A) has erred in not annulling/vacating the impugned order, in view of the fact that the impugned order is ab initio void and illegal being passed beyond the mandate given in the judgment of the Honourable Court of Pakistan in CIT v. Fatima Sharif Textile, Kasur 2009 PTD 37, declaring therein that no further action shall be taken in cases where revised returns have been filed under Circular No.1(1)S(ITAS)/2004.

(3) Without prejudice to the ground No.2 above, the learned CIT(A) has erred in upholding the disallowance of the appellant's claim on account of "Bad debts written off" amounting to Rs.6,307,428.

(4) Without prejudice to the ground No.2 above, the learned CIT(A) has erred in upholding the addition amounting to Rs.302,415 made under section 111(1)(a) of the Ordinance in respect of the amount payable to `Hampshire Insurance Company'.

(5) Without prejudice to the ground No.2 above, the learned CIT(A) has erred in upholding the disallowance of an amount of Rs.7,358,681 out of the claim of salaries in respect of the regular employees, on account of the alleged difference between the amount of salaries as per the employees ledgers and that shown in the detail of salaries.

(6) Without prejudice to the ground No.2, above, the learned CIT(A) has erred in upholding the disallowance of an amount of Rs.16,366,263 out of the salaries claimed in respect of the contractual employees under section 174(2) of the Ordinance.

(7) Without prejudice to the ground No.2 above, the learned CIT(A) has erred in upholding the addition of Rs.4,898,073 made under section 21(K) of the Ordinance.

(8) Without prejudice to the ground No.2 above, the learned CIT(A) has erred in upholding the addition of Rs.12,971,807 made on account of alleged suppressed production.

(9) Without prejudice to the ground No.2 above, the learned CIT(A) has erred in upholding the addition of Rs.32,866,323 made under section 111(1)(c) of the Ordinance on account of purchases of raw material alleged to have not been accounted for in the books of accounts by the appellant.

The appellant in this case is a Private Limited Company engaged in the business of manufacturing and sale of `Pesticides'. Brief facts leading to the instant appeal are that the appellant filed the return of income for the tax year under review on the due date declaring loss. Subsequently, the revised return was submitted declaring net loss by adding provision for doubtful debts in the income. The return was revised for the third time also declaring net loss. It was deemed assessed under section 120(1) of the Income Tax Ordinance, 2001. However, the tax affairs of the appellant were selected for audit under section 177 vide letter of the Commissioner dated 29-5-2004. On completion of proceed ings, the deemed order under section 120(1) of the I.T. Ordinance, 2001 was amended vide order dated 31-12-2007 under section 122(1)(5) of the Ordinance, 2001 determining income after adjustment of declared loss as per third revised return against which the assessee filed first appeal before the learned CIT(A) which was decided through the above referred impugned order. Hence, this appeal before this Tribunal.

The appellant through the above referred grounds has challenged the impugned order on the facts of the case as well as on the legal ground regarding the very selection of the case for audit in terms of Provisions contained in section 177 of the Ordinance, 2001.

The learned Counsel representing the taxpayer has contended that since the very selection of the case, it appears from the amendment order that the same is equally illegal and unlawful and liable to be annulled. In this respect, reliance has been placed on the legal proposition that any superstructure built on an illegal foundation is a nullity in the eyes of law and thus liable to be set at naught. Elaborating the background, the learned Counsel of the appellant has contended that admittedly the case for the year under review was initially selected for audit vide letter dated 29-10-2007 issued by the Commissioner, on the basis that the provisions for doubtful debts was claimed as an allowable deduction in the computation of income. He has submitted that after the selection process was completed by the concerned Commissioner, no significant proceedings were undertaken in the appellants' case for about two years, that was so because in most of the cases where selection was carried out on the basis of aforesaid criteria, the taxpayer challenged the selection through the constitutional petitions before the Honourable High Court on the grounds that since this was undertaken on the basis of a criteria prescribed by the Federal Board of Revenue, which did not have any mandate under the law therefore the same was struck down. He has submitted that while the above selection was pending, the FBR issued two circular/letters in which taxpayers were given an incentive to have their cases deleted from the selection list provided they complied with the treatment contained in the said circular/letter.

The first circular in this regard was dated 11-6-2004 bearing C.No.1(1)S.(ITAS)/2004 wherein the following instructions were issued to the field formation:

"I am directed to refer to subject and to state that queries are being received in the Board as to whether the taxpayers selected for audit for the subject year can make up omissions and inadvertent wrong statements by filing revised return declaring income higher than the ones as declared in their original returns.

The matter was considered in the Board and I am directed to state that subsection (6) of section 114 of the Income Tax Ordinance, 2001 allows a reason who having furnished a return, subsequently discovers any omission or wrong statements therein, may furnish a revised' return within five years of the date of original returns was furnished. On the basis of the above legal provision, the taxpayers may file revised return even if their cases have been selected for audit. In case a person files a revised return the concerned Taxation Officers will review the revised declaration and if found satisfactory will close the audit proceedings and inform the taxpayer accordingly."

According to learned Counsel, subsequently, another circular was issued on 28-7-2004 with the same reference number i.e. C.No.1(1)S.(ITAS)/2004 whereby the non-corporate taxpayers were given an additional incentive for getting their cases deleted from the selection list. This circular/letter, according to the learned Counsel, did not withdraw the earlier circular/letter dated 11-6-2004 and hence was regarded as an incentive over and above the earlier circular letter. The contents of that Circular are reproduced hereunder:--

"I am directed to refer to the subject. It is stated that in order to facilitate the non-corporate taxpayers selected for audit, it has been decided to provide them an option of revising their income tax returns by paying 20% higher tax as compared to the tax payable on their original returns, provided there is definite information against them.

In view of the above, it is requested that the subject taxpayer may be offered the above option and upon acceptance, audit in their cases may be closed.

The learned Counsel has submitted that the litigation initiated in the other cases on the subject referred above went up to the Honourable Supreme Court of Pakistan and finally was disposed of in the case of CIT v. Fatima Sharif Textile, Kasur and others reported as 2009 PTD 37 (SC Pak) with the observation that "it is also pointed out that in some of the cases the CBR had issued Circular No.1(1)S(ITAS)2004, under which returns have been revised and payment of tax was made, therefore, in such cases observation for issuance of fresh notices will be issued". It was further observed by the honourable Supreme Court of Pakistan that"let appellants issue fresh notices to the respondents in terms of section 177 of the Ordinance, as it was prevailing at the relevant time, disclosing criteria/reasons for selecting their cases for purpose of audit. As far as the cases in respect whereof observations have been made hereinabove relating to Circular C.No.1(1)S(ITAS)/2004 or otherwise if the returns have been revised and payment has been made by the assesses no further action shall be taken against them. The parties are left to bear their own cost".

The learned Counsel has contended that after the above referred consent order issued by the honourable Supreme Court of Pakistan, the Commissioner having jurisdiction in the appellant's case reselected the case of the appellant through letter dated 10-6-2006 in which it was stated that the said selection was carried out on the basis of principles laid down by the apex court. The intimation so served on the appellant was contested for the reason that since the appellant had already revised the return by itself offering provisions for doubtful debts as an inadmissible deduction in the computation by placing reliance on the above referred circular letter dated 11-6-2004 and since the apex court has held that the cases where revised returns had been filed would not be reselected for audit, therefore, the case of the appellant should be closed in terms of the contents of both the circular letters dated 11-6-2004 and the decision of the honourable Supreme Court. He has argued that the Commissioner did not exceed to the request of the appellant and in a follow up letter dated 22-5-2007 he informed the appellant that the incentive/concession was applicable to the non-corporate taxpayers whereby 20% further tax was deposited by the person availing the concession and subsequently the Taxation Officer to whom jurisdiction was delegated has amended the assessment under section 122(5) against which the appeal was filed before die learned CIT(A) and due to the inadequate relief, the impugned order has been assailed before this Tribunal.

The learned counsel has contended that there was no justification for reselection of the case as the case could not be validly reselected after the return had been revised which fact has not been disputed by the department. It has further been contended that the findings of the honourable Supreme Court of Pakistan have been given very restrictive meaning which is beyond the mandate available to the Commissioner as the honourable Supreme Court of Pakistan has nowhere said that the above referred circular will exclusively apply to non-corporate cases. He has contended that the circular is applicable to both types of taxpayer as the taxpayer who has voluntarily revised the return by placing reliance on the circular of the F.B.R., the case thereto should not be prejudiced by giving restrictions or adverse interpretations. The learned counsel in this regard has placed reliance on the decision of the honourable Lahore High Court in Bisma Textile Mills Limited v. Federation of Pakistan reported as 2009 PTD 41 through which the aforesaid ratio of the honourable Supreme Court of Pakistan has been upheld with the following observation:

"Before proceedings further reference to the relevant para from the Judgment of the honourable Supreme Court of Pakistan delivered in the case "of Fatima Sharif Textile (Supra), is relevant. The directions of the honourable Supreme Court are clear. It is said that in the cases which have been revised under Circular No.1(1)S(ITAS)/2004 or otherwise if the return has been revised and payment has been made by the assessee no further action shall be taken against them. Since the present petitioner has revised its return under the referred Circular, it is specifically covered by the said directions.

No proceedings, therefore, can be initiated for audit against him under section 177 of the Income Tax Ordinance, 2001. Ignoring all other covered by the above directions the proceedings initiated against him are declared to be as against the mandate of the judgment mentioned (supra), the same, therefore, is cancelled."

On the basis of the above referred decision of the honourable Lahore High Court, Lahore, the learned Counsel has pleaded that the action of the concerned Commissioner selecting the case of the appellant for audit was contrary to law and, therefore, the amended order passed on the basis of assumption of jurisdiction through legal selection was also illegal.

On the other hand, the learned DR is supporting the impugned orders of the officers below. He has argued that the objection of the appellant as to the selection was not entertainable as the same did not arise out of the impugned order. He has contended that the legal objection can be raised before any stage of the proceedings but the same must arise out of the impugned order before any appellate authority. It has been contended by the learned DR that since the selection had not been challenged at any earlier stage, therefore, it could not be agitated before this Tribunal. The learned DR has further argued that no appeal can be filed against order under section 177 of the Ordinance, 2001 therefore, the objection raised by the appellant was not maintainable. In this respect, emphasis have been placed on the proposition that the appeal is a right extended by a statute and said right could not be exercised where the statute so provide. According to him, where a statute does not provide such right in respect of some order no appeal can be entertained. Regarding the circular letter referred by the learned Counsel for the taxpayer, he has contended that these letters are internal correspondence between the departmental officers and as such the appellant could not place reliance on a document that has not been addressed to it. He is of the view that these circulars/letters are not entertainable by this Tribunal. Regarding the judgment of the honourable Lahore High Court, reported as 2009 PTD 41 referred by the learned Counsel of the appellant, the learned DR has contended that no matter the same favours the appellant but the same does not constitute a valid precedent as the honourable High Court was not properly assisted in that case and as such observation in the order of the Hon'ble High Court cited (supra) actually pertain to non-corporate cases. The learned Counsel is insisting that the honourable High Court did not properly apply the decision of the honourable Supreme Court of Pakistan. It has further been contended by the learned DR that the order passed by the Taxation Officer as upheld by the learned CIT(A) is not liable to be annulled having been passed giving all justifications in this regard. He has, in this respect, submitted that the provisions of section 122(5) of the Ordinance authorize the Taxation Officer to amend the assessment where they acquire "definite information" either through audit or otherwise and even if audit proceedings are held to be unsustainable/illegal the amendment order would stay intact having been passed on the basis of the "definite information" acquired otherwise. He has, therefore, requested for the upholding of the orders of the officers below.

We have heard the detailed rival arguments from both the sides and have also gone through the impugned order of the learned CIT(A) as well as the order passed by the Taxation Officer, perused the case-laws and also consult the available record of the case.

Regarding the objection of the learned DR that the appellant is not justified to challenge the very selection of the case because this issue does not arise out of the impugned order of the first Appellate Authority, we have found that the first ground of appeal before the learned CIT(A) was "that the order under sections 122(1)/122(5) of Income Tax Ordinance, 2001 is bad in law and against the facts of the case" which covers the illegality of the order. Even otherwise, we are not inclined to agree with the stance taken by the learned DR as there are plethora of the case law that any legal objection that goes to the root of the case could be raised at any stage. In this regard, the decision reported as 1967 PTD 339, PLD 1976 Lah. 547, 2000 PTD 359, 2006 PTD (Trib.) 1778, 2008 PTD (Trib.) 397, 2009 PTD (Trib.) 1136 can be referred. Undisputedly this issue beyond any shadow of doubt goes to the very root of the case, therefore, the appellant cannot be debarred from raising this issue as the issue arises out of the impugned order. It seems that the learned DR has not fully gone through the impugned order. We have noted that this specific issue was challenged before the learned first appellate authority who has dealt with this matter at page-19 while deciding the additional ground filed by the appellant. The objection in this regard raised by the learned DR is, therefore, overruled firstly for the reason that this is a legal issue and can be raised at any stage of the proceedings and secondly this clearly arises out of the impugned order of the learned C.I.T. (Appeals).

The next objection raised by the learned DR is that section 177 of the Ordinance is not appealable and, therefore, the arguments taken by the appellant needs to be disregarded. We are of the view that this objection raised by the learned DR is also unfounded and misconceived. In the present case, the appellant has challenged the amendment order made under section 122(5) of the Ordinance which has been passed in pursuance of selection of the case for audit in the manner discussed supra. The arguments of the appellant is that the amendment order issued under section 122(5) of the Ordinance is stated on an illegal foundation and that being the case said amendment order is liable to be annulled.

We find force in the contention of the learned Counsel of the appellant that any order which is built on an illegal foundation is equally illegal and unsustainable in the eyes of law. The reliance in this regard may be placed on the decisions reported as 1993 PTD 85 (SHC), 1990 PTD 389 (SHC), 2006 PTD 276 (LHC), 2004 PTD (Trib) 2691 and 2002 PTD (Trib.) 2512, wherein the consistent interpretation that arises out of these judgments is that any superstructure raised on an illegal foundation would crumble and be set at naught and will be equally illegal as very foundation is not in accordance with law. This principle shall be fully applicable in the present case once it is established that very selection was contrary to the mandate available to the concerned Commissioner. Consequently, we do not agree with the objection raised by the learned DR and hold that one can challenge in appeal any amended order on the grounds that the initial selection was illegal and if the said selection is observed to be illegal then of course consequential amendment order would have the same fate. Regarding the circulars referred above issued by the FBR, it has been contended by the learned representative of the department that these are internal correspondence and are not open to public. We are of the view that this is a strange argument as these circulars/letters have been throughout referred to before the honourable High Court as well as before the Hon'ble Supreme Court of Pakistan and has been discussed in the above referred judgments besides the text of the circulars/letters is itself very clear that the field formation has been advised to contact taxpayers to avail the incentives. In these circumstances, we are of the view that these circulars cannot be said to be internal correspondence and has rightly been referred by the appellant in his support.

Regarding the arguments of the learned DR that the amendment order would remain intact even if the selection of case for audit is held to be illegal, we do not agree with the learned DR in this respect. We are of the view that the provisions of law permits the Taxation Officer to amend the assessment once "definite information" is acquired either as a result of audit or otherwise but in this case the record clearly shows that action taken by the Taxation Officer is on the basis of "definite information" that was acquired through audit. In the body of the amendment order, the Taxation Officer has clearly stated the source for acquisition of the said "definite information" as mentioned at page-2 of the amended order. The Taxation Officer has admitted that the details filed during the audit proceedings constituted the basis of issuance of notice under section 122(9) of the Ordinance. That being the case, we are of the firm opinion that so far as the facts of the case are concerned, the arguments/objections raised by the learned DR are not relevant. Since in this case the source of "definite information" remains the audit, therefore, the audit being illegal, maintainability of the order will have to be determined as to whether or not the Commissioner was legally empowered to select the case.

Now, coming to the main controversy as to whether the Commissioner could have selected the case of the appellant for subject year once the taxpayer/appellant had revised the return in terms of circular/letter dated 11-6-2004. The appellant has pleaded that the Commissioner was not competent to select the case as provided in the circular/letter dated 11-6-2004 read with the above referred judgment of the Honourable High Court reported as 2009 PTD 41. In this regard, the contention of the learned DR has been that the incentive was available to non-corporate taxpayers as no such concession was available to corporate taxpayers. We have found that the F.B.R. has issued two circulars/letters under the same reference number both relate to deletion of cases from the list of the cases selected for audit for tax year 2003, later circular/letter did not override the earlier circular. Therefore, we are of the view that the rational conclusion should be that the cases covered by either of the circular/letter would have to be dealt with as observed by the honourable Supreme Court/High Court. The self created distinction/ anomaly by the department that the corporate taxpayers fall outside the judgment of the honourable Supreme Court stands already negated by the above referred decision of the honourable Lahore High Court, Lahore which is in the case of a corporate taxpayer and in this case it has already been unequivocally held that the corporate taxpayers who had revised the return could not be reselected for audit. We, therefore, find no hesitation to conclude that in the case of appellant, the Commissioner did not have any mandate to select the case once the taxpayer had admittedly' revised the return in accordance with the above referred letters issued by the F.B.R. Consequently, the subsequent proceedings/ orders are held to be a nullity in the eyes of law.

Resultantly, the amended order under sections 122(1)/122(5) and the impugned order of the learned CIT(A) are vacated as the assumption of jurisdiction to undertake the audit and framing of amended order were all illegal. With this result, the orders of the authorities below are vacated and the revised returns filed by the appellant/taxpayer shall be taken the valid assessment order. Since we have accepted the appeal filed by the taxpayer on the basis of legal ground, therefore, the other grounds need not be adjudicated.

The appeal succeeds as above.

C.M.A./77/Tax(Trib.)Appeal accepted.