2010 P T D (Trib.) 878
[Inoue-tax Appellate Tribunal Pakistan]
Before Jawaid Masood Tahir Bhatti, Judicial Member and Muhammad Iqbal Khan, Accountant Member
I.T.A. No.232/KB of 2009, decided on 30/09/2009.
(a) Income Tax Ordinance (XLIX of 2001)---
----S. 177---Audit---Selection of case for total audit---Non-issuance of pre-show cause notice---Effect---Non-Issuance of pre-show-cause notice will make the selection of audit as illegal.
Writ Petition No.4630 of 2009 rel.
(b) Income Tax Ordinance (XLIX of 2001)---
----S.177---Audit---Notice before selection of case for audit---Inspite of absence of requirement of specific provision of notice in the law, before proceeding with the audit of an assessee, a prior notice was an essential requirement, as the audit of person's income tax affairs resulted in prejudice being caused to the tax payer who was subjected to scrutiny.
2005 PTD 152 rel.
(c) Income Tax Ordinance (XLIX of 2001)---
----S.177---Audit---Prior notice for selection of cases for audit was of immense significance and absence thereof in the cases render the letters to be devoid of any legal justification.
(d) Income Tax Ordinance (XLIX of 2001)---
----S. 122(5A)---Amendment of assessment---Estimation of sales---Case of the assessee had been reopened under 5.122 (5A) of the Income Tax Ordinance, 2001 despite the fact that sales of the taxpayer were under the strict control of Central Excise/Sales Tax Department and no discrepancy had been pointed out by the Department as well as by the Central Excise/Sales Tax Department---Estimation of Sales was not legally justified.
(e) Income Tax Ordinance (XLIX of 2001)---
----S.39(3)---Income from other sources---Payment to third party by the sister concern of the assessee---Addition of---Validity---Additions under S.39(3) of the Income Tax Ordinance, 2001 could not be made to the Payments to the third party by the sister concern.
(f) Income Tax Ordinance (XIIX of 2001)---
----S.122(5A)---Amendment of assessment---Audit report---Initiation of Proceedings under S.122(5A) of the Income Tax Ordinance, 2001---Validity---Proceedings under S.122(5A) of the Income Tax Ordinance, 2001 had been based on audit report made by the Deputy Commissioner of Income Tax/Taxation Officer---Such proceedings were not permissible under the law and order made by the Taxation Officer/Additional Commissioner was illegal---Proceedings under S.122(5A) of the Income Tax Ordinance, 2001 having been based on fresh evidence placing reliance on the audit report was not maintainable under the law as the proceedings in this respect had not been initiated with independent mind.
(g) Income Tax Ordinance (XLIX of 2001)---
----Ss. 122(5A) & 177---Amendment of assessment---Audit---Amendment of assessment by the Additional Commissioner of Income Tax while the audit proceedings were pending before Deputy Commissioner of Income Tax/Taxation Officer---After selection of case for total audit by the Commissioner, the matter was assigned to Deputy Commissioner of Income Tax/Taxation Officer, and proceedings were pending before him but the Additional Commissioner/Taxation Officer .without considering such fact had amended the assessment, without considering the explanations given by the assessee---No justification was available in amending deemed assessment by the Additional Commissioner/Taxation Officer under S.122(2A) of the Income Tax Ordinance, 2001 which had been upheld by the First Appellate Authority without any justification---Order of First Appellate Authority was vacated and the order passed by the Taxation Officer under S.122(5A) of the Income Tax Ordinance, 2001 was annulled by the Appellate Tribunal in circumstances.
2008 PTD 14191; Writ Petition No.5583 of 2009; Messrs Fauji Oil Terminal and Distribution Company Ltd. v. Additional Commissioner 2006 PTD 734 and C.A. No.778 and 2002 PTD 441 ref.
Munim Sultan for Appellant.
Syed Maroof Gallani, D.R. for Respondent.
ORDER
The appellant through this appeal has objected to the impugned order of the learned CIT(A) dated 18-2-2009 for the tax year, 2005 on the following grounds:
"(2) That the proceedings under section 122(5A) of Income Tax Ordinance have wrongly been initiated hence order is liable to be cancelled. The CIT(Appeals) is not justified to confirm the order.
(3) That proceedings under section 122(5A) have been based on Audit Report of the Taxation Officer Audit-II, Hyderabad (page 2 para first) which is not permissible under the law. Hence order is liable to be cancelled. The learned CIT(A) is not justified to confirm the order.
(4) That proceedings under section 122(5A) having based on fresh evidence considering the audit report are not maintainable under the law and consequent order is liable to be cancelled.
(5) That proceedings under section 122(5A) of Income Tax Ordinance, 2001 have not been initiated with independent mind hence amended order is liable to be cancelled.
(6) That notices dated 13-6-2007 and 30-8-2007 were of no legal effect as the same did not contain any valid basis.
(7) That original order has wrongly been amended as the same was neither erroneous nor prejudicial to the interest of revenue.
(8) That Commissioner of Income Tax having selected the case for Total Audit and jurisdiction assigned to Taxation Officer, Audit-II Hyderabad. Resultantly, proceedings being pending with the Taxation Officer for Audit. The learned Additional Commissioner was not justified to interfere with the proceedings being conducted under directions of Higher Authority.
(9) That following additions were made after fishing inquiries and are liable to be deleted. Reliance is placed on case-law reported as 2008 PTD (Trio.) 1491.
(10) That addition of Rs.39,176,614 under section 39(3) of Income Tax Ordinance, 2001 has wrongly been made and confirmed by Commissioner of Income Tax (Appeals) and is liable to be deleted. That explanations of the appellant have not been considered.
(11) That sales has wrongly been estimated and confirmed by Commissioner of Income Tax Appeals at Rs.130,000,000 as against sales declared at Rs.121,028,790. That estimation of sales does not come under the ambit of provisions of section 122(5A) of Income Tax Ordinance, 2001.
(12) That G.P. rate at rate of 7% has wrongly been applied and confirmed by Commissioner of Income Tax (Appeals) as against declared at the rate of 5.6%. That application of G.P. rate does not come under the ambit of provisions of section 122(5A) of Income Tax Ordinance, 2001.
(13) That addition on account of following profit and loss account has wrongly been made and confirmed by Commissioner of Income Tax (Appeals).
| | Head of Accounts | Amount (Rs.) |
| i. | Sales Tax Refundable | 1,128,518 |
| ii. | Travelling Expenses | 16,664 |
| iii. | Staff Welfare/First Aid | 1,427 |
| iv. | Vehicle Running & Maintenance | 39,117 |
| v. | Entertainment | 42,664 |
| vi. | Rent for Staff House | 36,000 |
| vii. | Repair & Maintenance | 134,135 |
| viii. | Oil & Lubricants | 19,299 |
| ix. | Miscellaneous | 34,283 |
| x. | Depreciation | 281,911 |
2. The Taxpayer in this case is an AOP deriving income from Solvent Extraction Plant. , During the year under review as per assessment order there has been tremendous growth in the business. Besides earlier established Unit, No.1, further extension of plant was made in addition to cooking oil section. Return for the year under review has been filed under SAS which have been taken to have been assessed under section 120 of the Ordinance, 2001. The case of the assessee was selected for audit under section 177(4) and (d) of the Ordinance, 2001 for the following three reasons:---
"(1) Taxpayer has declared sales amounting to Rs12,10,28,790. But nothing has been furnished from where exact quantum of the sale could be verified. This issue is required to be probed.
(2) Taxpayer has declared manufacturing/trading expenses (operating cost) amount to Rs.1,43,75,940. But neither manufacturing/trading account nor break-up of the expenses and evidence in support thereof has been furnished. This aspect is required to be scrutinized.
(3) Taxpayer has declared profit and loss expenses amounting to Rs.48,18,037. But no details regarding the expenses and no evidence in support of claim has been furnished. This issue is required to be ascertained."
3. The Taxation Officer conducted the audit proceedings and found deemed assessment framed under section 120 of the Ordinance, 2001 to be erroneous in so far as prejudicial to the interest of revenue. Consequently, notice under section 122(9) of the Ordinance, 2001 for amendment of the assessment under section 122(5A) was issued on 13-6-2007 requiring explanation along with supporting evidence, documents, books of accounts and other required details but the assessee failed to comply above referred notice therefore the Taxation Officer again confronted the assessee through notice dated 30-8-2007 under sections 120(9)/122(5A) of the Ordinance, 2001. The relevant portion of the notice is reproduced hereunder:---
Manufacturing/Trading Account
"(1) During the year under review there has been tremendous growth in business and unit No.2 and cooking oil section has also been established' You have declared total sales at Rs.121,028,790 against the sales of Rs.90,934,917 for the preceding year i.e.. tax year 2004 which is nominal increase in comparative to the extension made by you as unit No.2 and Cooking Oil section. In this connection you were requested to provide account statement in respect of raw material (in put) used and finished goods (out put) made/sold during the year under consideration with supporting evidence, but no plausible explanation along with evidence was furnished. You have also not furnished the supported documents/explanation in respect of sale of dirt and selling rate is not ascertainable. The details of sales and purchases furnished the supported documents /explanation in respect of sale of dirt and selling rate is not ascertainable. The details of sales and purchases furnished by you do not bear complete mailing addresses of customers/parties and the cash memos/bills were neither substantiated nor cross-verified. In view of the above your declared version is unreliable and leading to infer that you have furnished inaccurate particular of sales and purchases. You were requested time and again to produce the books of accounts/supporting evidence/details and documents in support thereof, but it is regretted to say that the required details/books of accounts and copies of cash memos/bills have not been furnished as yet, which reinforce their office stance that you have suppressed the sales and purchases. However, you are finally requested to furnish the required details/books of accounts/supporting evidence to substantiate your declared version otherwise, your sales shall be worked out at Rs.13,00,00,000 against the declared sales of Rs.12,10,28,790 in view of the proportionate increase in business as confronted in detail in earlier notices.
(2) You have declared/claimed operating cost at Rs.14,375,940 out of which expenses under the head of Haxene, Soda Caustic, Wooden Fuel for Boiler and chemicals at Rs.3,266,208, Rs345,582, Rs.2,097,065 and Rs.57.094 have been claimed respectively for which you were required to furnish the evidence in support thereof, but you have failed to furnish the evidence of the same. However, you are finally requested to furnish the documentary evidence along with books of accounts in support of above referred purchases otherwise same shall be restricted and curtailed under section 174(2) of the Income Tax Ordinance, 2001.
(3) You have declared sales excluding sales tax in Annexure-II, of the return of income for the year under review at Rs.12,10,28,790 but further claimed Rs.10,676 as sales tax paid under operating cost which is also not allowable expense under section 21(a) of Income Tax Ordinance, 2001, under the subject head of account. Reply furnished by your A.R. is vague and is not supported with any provision of law. You are therefore finally required to furnish plausible explanation along with supporting provision of law so as to substantiate your declared version, otherwise amount claimed under operating cost in respect of sales tax paid shall be disallowed accordingly.
Profit and Loss Account Expense
(1) You have claimed administrative/general expenses at Rs.48,18,037 out of which an amount of Rs.11,28,518 has claimed as non-refundable sales tax. This amount does not constitute validity for claim in P&L expenses having been no relevance with the P&L account maintained for the year which is not allowable under section 21(a) of Income Tax Ordinance, 2001. Reply of your A.R. is vague and is not supported with any provision of law. You are however again requested to substantiate your declared version supported with provision of law regarding subject claim in profit and loss account statement. Besides above you have claimed following expenses but failed to furnish details, documents supporting evidences and books of accounts with reference to proper record in support of claim
| i. | Insurance Charge | 92,252 |
| ii. | Miscellaneous & Contractual Labour Charges | 361,682 |
| iii. | Travelling Expenses | 83,304 |
| iv. | EOBI Contribution | 31,320 |
| v. | Staff Welfare/first aid | 71,355 |
| vi. | Paper & Periodical | 5,704 |
| vii. | Printing & Stationery | 20,219 |
| viii. | Postage & Couriers | 5,350 |
| ix. | Vehicles running/petrol/repair | 195,585 |
| x. | Fee & Taxes | 33,550 |
| xi. | Entertainment (Mess) | 213,320 |
| xii. | Rent for staff house | 36,000 |
| xiii. | Repair & Maintenance (consolidated) | 670,675 |
| xiv. | Oil & Lubricants | 96,495 |
| xv. | Miscellaneous expenses (consolidated) | 171,470 |
| xvi. | Depreciation | 939,706 |
The claim at Sr.No.i, iv & x to be fully disallowed due to non-furnishing of the documentary evidences and the rent of amounts claimed as referred above to be disallowed curtailed under section 174(2) of Income Tax Ordinance, 2001. Subsequently the claim of depreciation amounting to Rs.939,706 shall also be restricted in terms of section 22(1) of Income Tax Ordinance, 2001 because the schedule of fixed assets as well as extension in units reveals that the assets were purchased during the year under review but failed to furnish the documentary evidences in support thereof.
5. Balance Sheet
Perusal of Balance Sheet reveals that liabilities/loans are declared as Rs.5,35,96,614 which are attracted under the provision of section 39(3) of Income Tax Ordinance, 2001. Your A.R. stated that above mentioned liabilities/loans are through banking channel as required under section 39(3) of Income Tax Ordinance, 2001. In support of his declared version he has produced following Bank certificates which are reproduced as under:
The documents/Bank certificates provided so far by the A.R. of the taxpayer reveals following amounts transferred to Messrs Sharif Solvent Plant from Messrs Sharif Oil Industries during the period 1-7-2004 to 30-6-2005.
1. Certificate issued by MCB Islamic Bank Abdali Road Branch Multan dated 23-7-2007.
| Sr.No. | Amount | Date of Transfer | Mode of Payment | Account No. |
| 1 | 10,00,000 | 11-1-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 2 | 10,00,000 | 15-1-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 3 | 8,00,000 | 1-6-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 4 | 3,00,000 | 6-6-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 5 | 5,00,000 | 1-6-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 6 | 28,00,000 | 1-6-2005 | T.T. to A/C No.3042 | MCB Kunri |
| Total: | 64,00,000 | | | |
2. Certificate issued by MCB Islamic Bank Abdali Road Branch Multan, dated 23-7-2007.
| Sr.No. | Amount | Date of Transfer | Mode of Payment | Account No. |
| 1 | 650,000 | 27-1-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 2 | 450,000 | 28-7-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 3 | 400,000 | 16-3-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 4 | 850,000 | 17-3-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 5 | 670,000 | 26-3-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 6 | 750,000 | 28-3-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 7 | 600,000 | 7-4-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 8 | 850,000 | 28-4-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 9 | 10,00,000 | 20-5-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 10 | 15,00,000 | 24-5-2005 | T.T. to A/C No.3042 | MCB Kunri |
| 11 | 300,000 | 9-6-2005 | T.T. to A/C No.3042 | MCB Kunri |
| Total: | 802,000 | | | |
Despite commitment made by A.R. that reaming verification in terms of section 39(3) of Income Tax Ordinance, 2001 shall be complied with on or before 22-8-2007, but no compliance has been made so far as a result it leads to believe that the A.R. has nothing to offer further and balance amount Rs.3,91,76,614 is clearly attracted under section 39(3) of the Income tax Ordinance, 2001. Information from banking authorities it respect Bank accounts disclosed by you was also obtained with the approval of competent authority which also only bear the above mentioned amounts transferred in your Bank Account No.3042 MCB Kunri Branch Mirpurkhas. This also established that you have no further explanation/evidence so as to avoid adverse inference under section 39(3) of Income Tax Ordinance, 2001 in respect of balance amount of loan/liabilities to the extent of Rs.3,91,76,614. It would not out of place to mention here that Messrs Sharif Oil Industries were also requested to verify your declared version, but no reply has been received so far inspite of reminder issued, which also reinforce this office stance that you have nothing to offer further in respect of above. Under these circumstances, you are finally called upon to explain as to why the amount of Rs.3,91,76,614 shall not be treated as income chargeable to tax under the head Income from other sourcesfor the tax year in which it was received i.e. tax year 2005 under section 39(3) of the Income Tax Ordinance, 2001."
4. On the date of compliance of the above said notice i.e. 8-9-2007, A.R. of the taxpayer attended without books of accounts and evidence required in respect of expenses debited to manufacturing/ trading and Profit and Loss Account and therefore the Taxation Officer has amended the assessment against which the taxpayer filed appeal before the learned CIT(A) who has disposed of the same vide impugned order in the following manner:---
"I have examined the case record, perused assessment order and written arguments along with its annexure of the appellant. I have noted that the appellant despite having been asked repeatedly to produce books of accounts to substantiate his declared version has not produced the same. The maintenance and production of books of account is a mandatory requirement of law as provided under section 174 of Income Tax Ordinance, 2001, read with Rule 29/30 of Income Tax Rules, 2002 and non submission and production of the same would be a deliberate and wilful attempt on the part of the taxpayer, to hide the facts and true picture of his business affairs from the tax authorities. The appellant has been afforded more than sufficient opportunities to produce books of account and other evidences in support of his declared version and claim of expenses and the liability shown in the balance sheet. Non-production of books of account and other requested information and evidences required for substantiating declared in the return of income and account statements are serious defaults, which leaves the Taxation Officer with little choice but to draw adverse inference. As it is evident from the record that the appellant has made further extension in the Plant and has established another unit .of cooking oil section but despite such expansion sales has not proportionately increased. The taxpayer has neither produced books of account and documentary evidence in respect of expenses debited to manufacturing/trading in profit and loss account, nor has provided complete details in respect of taw material used and finished goods sold during the year with supporting evidence The details of sales and purchases furnished do not contain complete mailing addresses of the parties to enable the Taxation Officer cross check such transaction. Letter issued to the parties has been returned un-served. This has been discussed on page 6 of the Taxation Officer order. Due to non-production of books of account and non-verification of sales and purchases the Taxation Officer was justified to estimate appellant's sales at Rs.130,000,000 as against Rs.121,028,790 and the same is quite justified and reasonable hence is confirmed and not interfered with.
As regard application of G.P. rate at 7% as against 5.6% the expenses claimed under the head Haxene, Soda Caustic, wooden fuel for boilers and chemicals at Rs.3,266,208, Rs.345,582, Rs.2,093,065 and Rs.57,094 ,are neither supported with any documentary evidence nor any details of the same has been provided despite repeated requests, therefore the Taxation Officer was quite justified to infer that the above-mentioned expenses are inflated and resultantly he applied G.P. rate at 7% as against 5.6%. Since the appellant could not substantiate his claim of aforementioned expenses with documentary evidences nor he has produced books of account before Taxation Officer, therefore, the action of Taxation Officer to apply G.P. rate at 7% is quite justified and is therefore confirmed.
As regard Sales Tax of Rs.10,676 this is not allowable expense under section 21(a) of Income Tax Ordinance 2001, and has rightly been disallowed.
As regard other expenses of profit and loss account including non-refundable sales tax amounting to Rs.1,128,518 as has been discussed on pages 8 to 11. The Taxpayer has been properly confronted to substantiate his claim with documentary evidence nor books of account to substantiate his claim of such expenses. Further all additions under various accounts of P&L account have been made with cogent reason and are reasonable therefore all these additions being proper and according to law are hereby confirmed.
Addition of income from other sources under section 39(3) of Income Tax Ordinance, 2001, amounting to Rs.39,176,614
In the balance sheet the appellant has shown loan/general liability under the head general credit transaction amounting to Rs.53,596,614. The taxpayer has been confronted by the Taxation Officer to explain the nature of the liability and mode of receipts in terms of section 39(3) of Income Tax Ordinance, 2001. It has been submitted that the subject amount has been received from Messrs Sharif Oil Industries Multan, and has been disclosed as trading liability from sister concern. It was also explained that these liabilities/loans are through banking channels as required under section 39(3) of Income Tax Ordinance, 2001. In this regard Bank certificates provided reveals that an amount of Rs.6,400,000 and Rs.8,020,000 has been transferred to the appellant from Messrs Sharif Oil Industries during the period relevant to impugned tax year through MCB Islamic Bank Abdali Road Branch Multan and MCB Kunri Branch Mirpurkhas respectively. However, regarding remaining amount of Rs.39,176,614, the taxpayer could not produce banks certificate to prove that this amount was received through banking channel as required under the provision of section 39(3) of Income Tax Ordinance, 2001. The taxpayer has finally taken the plea that the above-mentioned amount was paid by sister concern Messrs Sharif Oil Industries Multan directly to the supplier on their behalf but the appellant despite of repeated request could not produce books of account and ledger account copies of the suppliers. The taxpayer has also produced certificate of NBP Ghalla Mandi Branch, Multan wherein it has been claimed that an amount of Rs.26,690,000 has been directly paid to some suppliers on behalf of the appellant. But the examination of list of the supplier provided by the appellant during the course of proceedings do not tally with the list of supplier as mentioned in the certificate and such interference has been discussed by the Taxation Officer in page 14 of his order. The perusal of the above mentioned NBP certificate available on record reveals that it is addressed to the Manager Sharif Oil Industries Multan and not to the appellant. Messrs Sharif Oil Industries is separate entity and any payment made to persons as mentioned in the certificate of NBP may be to its own suppliers and not to appellant's suppliers. Since the appellant has not produced complete books of account and the amount has not produced complete books of account and the amount has not been received by appellant through proper banking channel as provided under section 39(3) of Income Tax Ordinance, 2001, and further appellant contention that the amount was directly paid to supplier by their sister concern Messrs Sharif Oil Industries Multan and such claim was not supported with any reliable documentary evidence, therefore the provision of section 39(3) have been correctly attracted and the addition made at Rs.39,176,614 under the head income from other source is quite justified and hereby confirmed."
5. Now the appellant has come up in appeal before this Tribunal. The learned counsel representing the appellant has contested the impugned orders of the officers below on the legal as well as factual grounds. He has raised preliminary objection that initiating of proceedings under section 177 and selection of the case for audit and passing order under section 122(5A) to be illegal. In this respect he has contended that the unsubstantiated objections as to sale, cost of manufacturing, G.P. and profit and loss expenses has been confronted and the deemed assessment has been amended by estimating sales at Rs.130,000,000 against declared G.P. at 6.9%. He has contended that as far as not meeting with pre-requisites as laid down for audit are concerned, here also illegalities have been committed as no pre show-cause notice as expressed under section 177 under the provision of the Ordinance has ever been issued providing basis for selection for audit. In this respect learned counsel has placed reliance on the decision of the honourable Lahore High Court in Writ Petition No.4630 pf 2009. He has contended that the Taxation Officer has not adopted the procedure specified under the law regarding selection for audit and therefore the order passed by the Taxation Officer is illegal void and ab initio. He has in this respect referred the decision of the honourable High Court dated 14-7-2009 in Writ Petition No.5583/2009 wherein the procedure for selection of cases for audit by the Commissioner has been provided elaborating therein that the notices under section 177 are the basic requirement. It has been dilated in this decision that the scheme of even as set out in section 177(4) has to be followed and the Commissioner himself should firstly confront the taxpayer regarding the ousting of the case for the total audit. Learned counsel has contended that basis of selection to be confronted should not be general in nature but should be solid and duly substantiated. He has contended that the provision of section 177 as a whole should be applied.
The second objections raised by the learned counsel for the assessee is regarding defect of jurisdiction empowering revision jurisdiction under section 122(5A) which according to the learned counsel has become a settled issue as it has categorically been held in the case of Messrs Fauji Terminal and distribution company Ltd. v. Additional Commissioner, reported as 2006 PTD 734. The learned counsel in this regard has also referred the decision of the honourable Supreme Court of Pakistan dated .22-5-2009 in C.A. No.778 etc. wherein it has been held that under subsection (5) of 122 it is the original jurisdiction whereas subsection (5A) of section 122, specifies the Revisional Jurisdiction. The learned counsel has argued that the revisional jurisdiction could be exercised when there is an actual order after conducting the proceedings. He has in this respect referred the decision of the honourable High Court reported as 2002 PTD 441.
The third legal objection raised by the learned counsel for the taxpayer is regarding the assumption of jurisdiction by Additional Commissioner when jurisdiction after selection of case for audit was assigned to Taxation Officer/DCIT, Audit-II, and the Taxation Officer/DCIT has not parted with jurisdiction. He has argued that after audit proceedings the order was required to be passed under section 122(5A) as has been specified in this section. According to the learned counsel in the provision of section 177(6) it has been stated that "after completion of the audit under subsection (5) or subsection (8), the Commissioner may, if considered necessary, after obtaining Taxpayer explanation on all the issues raised in the audit, amend the assessment under subsection (1) or subsection (4) of section 122 as the case may be".
6. Regarding the facts of the case learned counsel has repeated the same arguments which have also been mentioned in the order passed by the Taxation Officer under section 122(5A) of the Ordinance, 2001.
7. On the other hand, learned DR is supporting the impugned orders of the officers below. He has contended that the appellant has been afforded more than sufficient opportunity to produce books of accounts and other evidences and in support of declared version land claim of expenses and the liability shown in the balance sheet and therefore the Taxation Officer has little choice to draw adverse inference. He has contended that the appellant has not given any explanation regarding establishing new unit of Cooking Oil Section and despite these expansions the sales are not proportionately increased. He is therefore of the view that in these facts and circumstances of the case, the appeal filed by the assessee is liable to be dismissed.
8. We have heard the learned representatives from both the sides and have also perused the impugned order of the learned CIT(A), the order passed by the Taxation Officer under section 122(5A), the case-law and other documents produced by both the sides and have also considered other relevant facts of the case.
Regarding the first legal issue taken by the assessee we have found that on behalf of the assessee it has been contended that non-issuance of pre-show-cause notice is the mandatory pre-requisite for selection of the case and the failure of the same will make the selection as illegal. In this respect the decision of the honourable Lahore High Court dated 14-7-2009 in the case of Messrs Mohsin Raza v. Chairman FBR vide Writ Petition No.4630 of 2009 has been referred wherein it has been held that the non-issuance of pre show-cause notice will make the selection of audit as illegal. Regarding the issuance of notice prior to the selection of the case for audit, the honourable High Court has observed that section 177 of the Income Tax Ordinance, 2001 is silent on this aspect and similar was the position with regard to this section prior to the coming into force of Finance Act, 2004. The case of Muhammad Hussain reported as 2005 PTD 152 has been referred wherein it has been held that inspite of absence of requirement of specific provision of notice in the said law, before proceeding with the audit of an assessee, a prior notice is an essential requirement, as the audit of person's income tax affairs results in prejudice being caused to the Tax Payer who becomes subjected to scrutiny. The returns filed by the Taxpayer in this situation are reopened. The learned counsel has contended that the selection of the case for audit in itself tantamount to an adverse order, since it undermines the sanctity of an adverse order issued by the Commissioner of Income Tax in terms of clause (b) of subsection (1) of section 120 of the Income Tax Ordinance, 2001. An adverse order made without affording an opportunity of personal hearing is to be treated as void order. It is due to this reason that honourable Supreme Court of Pakistan has always laid its utmost stress on strict observance of norms of natural justice in general and principles of audi alteram partem in particular. These principles are to be read into every statute. The reliance in this respect has been placed on the decisions of honourable Supreme Court of Pakistan reported as PLD 2008 SC 663, 2007 SCMR 330, 2005 SCMR 678-1814 and PLD 2004 SC 441. In all these cases the honourable Supreme Court of Pakistan has held that prior notice for selection of cases for audit is of immense significance and absence thereof in the cases in question to render the impugned letter to be devoid of any legal justification. Even otherwise on the facts of the case we have found that the case of the assessee has been reopened under section 122(5A) of the Ordinance, 2001 despite the fact that the sales of the taxpayer are under the strict control of Central Excise/Sales Tax Department and no discrepancy has been pointed out by the Department as well as by the Central Excise/Sales Tax Department. Likewise, regarding the additions/add backs made out of profit and loss account expenses we have found that the add backs have been made on the basis of presumption and surmises on percentage basis and for non-availability of evidence in this regard despite acknowledging the payments to 3rd party by the sister concern on account of purchases made by the appellant. We are of the view that it is not legal for the reasons that it has become settled that the additions under section 39(3) cannot be made to the payments to the third party by the sister concern. We have found that in this case the proceedings under section 122(5A) have been based on audit report made by the DCIT/Taxation Officer Audit-II, as has been mentioned at page 2 of para 2 of the assessment order. We are of the view that it is not permissible under the law and therefore the order made by the Taxation Officer/Additional Commissioner is illegal. The proceedings under section 122(5A) having been based on fresh evidence placing reliance on the audit report is not maintainable under the law as the proceedings in this respect have not been initiated with independent mind. We have further noted that the original order has wrongly been amended as the same was neither erroneous nor prejudicial to the interest of revenue and the Taxation Officer only on the basis of presumption and surmises has made the addition. Regarding the extension of the machinery on behalf of the appellant it has been explained that the operation of the new machinery was not started in the year under review but both the officers below have not considered this fact. We have further noted that after the selection of case for total audit by the Commissioner, the matter was assigned to the DCIT/Taxation Officer, Audit-II, and the proceedings were pending before him but the Additional Commissioner/Taxation Officer without considering this fact has amended the assessment, without considering the explanations given by the appellant. In view of these facts and circumstances of the case we find no justification in amending deemed assessment by the Additional Commissioner/Taxation Officer under section 122(5A) of the Ordinance which has been upheld by the learned CIT(A) without any justification. The impugned order of the learned CIT(A) is therefore vacated and the order passed by the Taxation Officer under section 122(5A) is annulled.
9. The appeal filed by the assessee is allowed.
C.M.A./4/Tax (Trib.)Appeal Allowed.