HAMID ASHRAF VS SECRETARY, REVENUE DIVISION, ISLAMABAD
2011 PTD 2336
2011 PTD 2336
[Federal Tax Ombudsman]
Before Dr. Muhammad Shoaib Suddle, Federal Tax Ombudsman
HAMID ASHRAF, Proprietor H.A. Construction, Lahore
Versus
SECRETARY, REVENUE DIVISION, ISLAMABAD
Complaint No.245/LHR/IT(212)502 of 2011, decided on 09/07/2011.
(a) Income Tax Ordinance (XLIX of 2001)---
----Ss.122(5), 122(5A) & 170(4)---Establishment of the Office of Federal Tax Ombudsman Ordinance, (XXXV of 2000); S.2(3)---Amendment of assessment---Fixed tax regime---Normal tax regime---Refund---Department accepted decision of First Appellate Authority and did not file second appeal; and also gave appeal effect, to the order of First Appellate Authority, citing resultant refund---Department instead of issuing refund, invoked provisions of S.122(5) of the Income Tax Ordinance, 2001 with a view to arbitrarily amend the deemed assessment, and thereby offset, in whole or in part, the refund claims---Taxpayer contended that notwithstanding the oppressive resort to provisions of Ss.122(5) and 122(5A) of the Income Tax Ordinance, 2001, the Department was duty bound to first settle the refund claim that the Department had itself created, as per appeal. effect, and then proceed with the amendments, if deemed necessary---Validity---Department `expected' to raise demand of tax against the complainant in the proceedings initiated under Ss.122(5) and 122(5A) of the Income Tax Ordinance, 2001 which could not be legally made a basis to deny settlement of refund claims---Under the law, settlement of pending refund claims had priority, and once said claims were settled, other proceedings could continue, provided of course, those were otherwise justified. under the law---Delay and arbitrariness apparent in issuance of refund, and non implementation of Commissioner's (Appeals) Order tantamounted to maladministration under S.2(3) of the Establishment of the Office of the Federal Tax Ombudsman Ordinance, 2000--Federal Tax Ombudsman recommended that Federal Board of Revenue direct the Chief Commissioner to issue refund/compensation due, as per law, within 21 days.
2009 PTD 1500 ref.
Khalid Mehmood v. C.B.R. No. 135 of 2004 FTO Law dated 7-5-2005 rel.
(b) Income Tax Ordinance (XLIX of 2001)---
----Ss. 170(4) & 122---Establishment of the Office of Federal Tax Ombudsman Ordinance, (XXXV of 2000), S.2 (3)---Refund---Withholding of refund---First settlement of refund claim---No provision exited in the Income Tax Ordinance, 2001 which empowers the Department to unreasonably withhold refund---Under S.170 of the Income Tax Ordinance, 2001, the satisfaction of the Departmental authority examining the refund claim was necessary to the extent that documentary evidence having a direct bearing on refund claim was in order---Such documentary evidence includes tax payment challans, deduction certificates and other relevant documentation like electricity bills, utilities bills, bank certificates, etc.---If said documents were found to be in order, then the claimed refund could not be withheld---Other matters having a possible bearing on the quantum of income assessed, like variations in Gross Profit rate, sale rate, apparent discrepancies in sales and capital shown on different documents, etc., were to be disposed of separately through an order other than an order under S.170(4) of the Income Tax Ordinance, 2001---Before starting said other, separate, assessment proceedings, the Department was bound under the law to first settle the refund claim.
(c) Income Tax Ordinance (XLIX of 2001)---
----Ss.170, 120(1) & 122(3)---Establishment of the Office of Federal Tax Ombudsman Ordinance, (XXXV of 2000), S.2 (3)---Refund---When deemed assessment under S.120(1) of the Income Tax Ordinance, 2001 or assessment under S.122(3) of the Income Tax Ordinance, 2001 stood finalized, the refunds could not be withheld.
2010 PTD (Trib.) 519 rel.
(d) Income Tax-s-
----Business, nature of---Manufacturer and service provider---Construction work---Sales tax registration certificate showed the complainant as a manufacturer and service provider and reference as made by Sales Tax audit in their audit report was only a recognition of the complainant's `capacity' for doing construction work---Sales tax authorities did not . refer to any construction work in which the complainant was actually involved and sales tax audit was initiated on 5-12-2008 and was concluded on 19-09-2009 whereas the period under reference in which the refund claim arose was from tax year 2004 to Tax year 2008---When Sales Tax audit authorities came to the manufacturing premises, the relevant period in which the refund claim arose had already expired---Departmental reliance on the Sales Tax audit report to conclude that construction work was a principal activity of the complainant in the tax years 2004 to 2008 was wholly misplaced.
(e) Income Tax Ordinance (XLIX of 2001)---
----S.170---Establishment of the Office of Federal Tax Ombudsman Ordinance, (XXXV of 2000), S.2(3)---Refund---Proceedings to dispose of a pending refund claim---Assessment proceedings---Discrepancies between income tax and sales tax returns---Difference was fully reconciled and explained to the Departmental authorities-Explanation was found to be plausible as in depth appraisal of any alleged discrepancy was not called for, these being not assessment proceedings but proceedings to dispose of a pending refund claim.
Muhammad Munir Qureshi Advisor Dealing Officer.
Nasir Jamil Khan, ACA Authorized Representative.
Muhammad Irfan Raza, Addl: CIR Departmental Representative.?
INDINGS/RECOMMENDATIONS
DR. MUHAMMAD SHOAIB SUDDLE (FEDERAL TAX OMBUDSMAN).---This complaint is against non-issuance of refund.
2. The complainant, a manufacturer cum supplier and service provider, claimed refund amounting to Rs.22,534,196, Rs.48,099,416, Rs.81,055,850, Rs.91,005,491, Rs.31,424,558, for Tax Years 2004 to 2008, on 18-3-2010 (revised), 30-9-2005, 30-9-2006, 29-9-2007, 16-11-2008 respectively. The refund arose on account of excess deduction of income tax at source.
3. The complainant states that the Deptt on 23-9-2010 rejected the complainant's refund claims in their entirety on the ground that as he was engaged in the "execution of contracts", the tax deducted at source constituted full and final discharge of his tax liability under the law.'
4. The complainant contested the Departmental action and filed appeals before the Commissioner (Appeals) Zone-III, Lahore. The Commissioner (Appeals) heard and decided the appeals on 15-2-2011. According to the Complainant, the Commissioner (Appeals) cancelled the order dated 23-9-2010 passed under section 170(4) of Income Tax Ordinance, 2001 (the Ordinance), holding that the reasons cited by the Deptt for rejecting the complainant's refund claims were wholly misconceived, arbitrary, and not maintainable.
5. The Deptt accepted the Commissioner's (Appeal) decision, and did not file second appeal before the Appellate Tribunal. The Deptt also gave appeal effect, vide order dated 28-2-2011, to the order of the Commissioner (Appeals) citing resultant refund of Rs.274.116 million for Tax Years 2004 to 2008 as pending.
6. However, rather than issuing refund that the Deptt had itself determined in the appeal effect order, the Deptt, on 9-4-2011, without any justification, invoked the provisions of section 122(5A) of the. Ordinance. Equally unjustifiably, on 3-5-2011, the Deptt invoked provisions of section 122(5) of the Ordinance, with a view to arbitrarily 21 amend the deemed assessments, and thereby offset, in whole or in part, the refund claims for the cited years.
7. It is the Complainant's contention that notwithstanding the oppressive resort to the provisions of sections 122(5) and 122(5A), the Deptt was duty bound to first settle the refund claim that the Deptt had itself created, as per appeal effect, and then proceed with the amendments under sections 122(5) and 122(5A), if deemed necessary.
8. The complainant goes on to state that discriminatory nature of the Departmental actions was evident from the fact that other taxpayers, placed similarly as the complainant, were accorded different treatment. While they were placed in the normal tax regime, (NTR), he was singled out for oppressive treatment that was not permissible in law, and that clearly constituted maladministration under section 2(3) of the FTO Ordinance. The complainant cited a number of comparable cases of manufacturer cum suppliers and service providers, including Interwood Mobel (Pvt.) Ltd. (NTN 1316337), Immaj Holdings (Pvt.) Ltd. NTN 1692523; Ad-King (NTN 0666809), Flex-o-Sign's (NTN 1320725), and Workman (NTN 0893479).
9. When confronted, the Deptt filed a reply dated 8-06-2011, maintaining that the Deptt had gone in second appeal against the order of the Commissioner (Appeals), which was pending decision before the Appellate Tribunal. The Deptt contended that the Complainant's refund claim was wholly misconceived as he was correctly placed in the fixed tax regime (FTR). However, this contention was soon superseded by a second reply dated 11-6-2011, claiming that no second appeal had been filed against the order of the Commissioner (Appeals) and the Departmental intimation to the FTO Office regarding filing of a second appeal before the Appellate Tribunal was an inadvertent mistake. The Deptt claimed that the Complainant's refund claims were pending in the Deptt and were being processed according to law. It was further submitted that:
(i)???????? in Tax Years 2004 to 2008 as the complainant derived income through 'execution of contracts' that included contracts involving construction and renovation of commercial and residential buildings, he was placed in the FTR not NTR;
(ii)??????? in the complainant's own financial statement for Tax Year 2008, the principal activity was cited as construction and renovation of residential and commercial buildings, and also in the notes appended to the statement, mobilization advances were shown to have been received against construction contracts;
(iii)?????? the Commissioner (Appeals) had cancelled the order passed under section 170(4) on technical grounds that refund claims for Tax Years 2004 to 2008 were rejected through a single consolidated order, and not disposed of through separate orders for each Tax Year;.
(iv)?????? the refund claims of the complainant had not been finally rejected by the Deptt and were still under examination, following adjudication by the Commissioner (Appeals);
(v)??????? as the complainant had been placed in FTR in terms of the provisions of section 153(6) of the Ordinance, refund of tax deducted at source was barred under the law (section 169 of the Ordinance);
(vi)?????? the complainant had not been able to prove his case although necessary opportunity envisaged in law had been given to him;
(vii)????? the invocation of the provisions of sections 122(5). and 122(5A) of the Ordinance was in accordance with. law and based on merits o4 the case, as substantial discrepancies existed between the sales declared in the income tax returns and sales disclosed in the sales tax returns. The capital shown in the wealth statement and the balance sheet also differed by a huge margin;
(viii)????? there was no bar to invoking the provisions of sections 122(5) and 122(5A) without first settling pending refund claims under section 170;
(ix)?????? the complainant had not come before the Hon'ble FTO with clean hands as accounts prepared for bank purposes were different from those presented before the sales tax authorities;
(x)??????? refund was claimed as an afterthought in the revised returns filed by the complainant and was not so claimed in the original returns. Furthermore, the original revised return for Tax Year 2008 was not available on record and only a copy thereof was placed on the complainant's assessment file and its authenticity was not confirmed by the Departmental authorities concerned;
(xi)?????? the charge of maladministration levelled against the Deptt by the complainant was denied.
10. During the course of hearing, the Deptt was specifically directed to make a comparison with the five, statedly, similar cases referred to by the complainant. The details of the treatment accorded by the Deptt in the five cases are as follows:--
| S. No. | NTN/Status | Nature of Business | Tax years | Deptt'al Treatment | Remarks |
| 1 | Interwood Mobel (Pvt.) Ltd. (NTN 34-01- 1316337) | Manufacture and sale of furniture, (retail and supplies), rendering of services, and execution of contracts. | 2008, 2009 and 2010 | Entire Income of Taxpayer placed in the Normal Tax Regime except for export proceeds that fall under FTR. All assessments finalized under section 120 except. for Tax Year 2004. | Refund adjustments have been made by the Deptt in all years cited. No amendment of declared income in Tax years 2008 to 2010. Amendment made only in Tax Year 2004 and not contested by taxpayer. |
| 2 | Immaj Holdings Pvt. Ltd. (NTN 1692523) | Horticulture, upgrading, maintenance and development services in DHA Lahore under contract. | Tax years 2004 to 2007 | Returns assessed under section 120 and later amended under section 122(5) on the ground that execution of contract was involved that fell under FTR whereas taxpayers contention was that he was a service provider only and should be placed in NTR. | Taxpayer's appeals accepted by Commissioner (Appeals) and the ITAT. A writ petition filed ' by taxpayer was also successful and refund was issued to the taxpayer on the orders of the Lahore High Court. |
| 3. | Ad-King (NTN 0666809) | Outdoor publicity and advertisement services including erection and maintenance of self manufactured hoardings/sign boards | | Returns assessed under section 120 and later amended under section 122(5) on the ground that execution of contract was involved that fell under FTR whereas tax- payers contention was that he was a service provider Only and be placed in NTR. | Taxpayer's appeals accepted by Commissioner (Appeals) and the ITAT. Deptt'al reference against ITAT order pending in Lahore High Court. - |
| 4. | Flex-o- Signs (NTN 1320725) | Manufacture and sale/ supply of hoardings and sign boards and rendering of advertisement services | Tax years 2005 and 2006 | Returns assessment under section 120 and later amended under section 122(5) on the ground that execution of contract was involved that fell under FTR whereas taxpayers contention was that he was a service provider only and should be placed in NTR. | Taxpayer's appeals accepted by Commissioner (Appeals) and the ITAT. Deptt filed reference against ITAT order before LHC which was pending. Complaint filed before Hon'ble FTO against non issuance of refund. Complaint accepted and Deptt directed to issue refund (C.D. No.1824-L/2008). Refund has since been issued. |
| 5 | Workman (NTN , 0893479-7) | Manufacture and supply of furniture under contract | Tax Years 2007 to 2010 | Statements of Final Taxation filed. | FTR case. In 2007 services already in FTR; from 2009, non corporate manufacturing/supply also in FTR. |
11. The Deptt did not cite any distinguishing feature of significance between the complainant's and the case cited at Serial. No. 01, in particular, except that in the Interwood case, the services were placed in NTR since it was a private limited company whereas the Complainant, being an individual, did not enjoy this advantage. The assertion of the Deptt was not found correct as distinction between a company and an individual business was made through the Finance Act, 2008, by amending section 153(6A) of the Ordinance, whereas the complainant's cases pertained to period prior to aforesaid amendment. The complainant was therefore entitled to same treatment as meted to Messrs Interwood Mobel (Pvt.) Ltd. At the same time, there is a great deal in common between the two both, are large scale manufacturers/suppliers of furniture; both also render services. However, tax treatment in the two cases is quite different. While Interwood is placed in the NTR, the Complainant is sought to be placed in the FTR - notwithstanding the Commissioner's (Appeals) ruling against the Deptt.
12. As regard cases at Serial Nos. 2, 3 and 4, there are strong commonalities between the complainant's case and the cited cases as they all render services and supply self-manufactured items (hoardings/ signboards Serials Nos. 3 and 4). The main point of difference that the Deptt seeks to emphasize between the complainant's case and the cited cases is that the nature of the complainant's contractual arrangements is different from others; the complainant's contracts specifically included construction/renovation work. The Deptt also points out that the Sales Tax audit had brought out the fact that the complainant was engaged in construction work.
13. So far as the WORKMAN case is concerned, its non-corporate services are placed in FTR, from Tax Year 2007. Similarly, from Tax Year 2009, non-corporate manufacturing and supply is also placed in FTR. However,' as the Complainant's refund claims are for Tax Years 2004 to 2008, in the Workman case, the operational period commences from Tax Year 2007. The commonality between the two is thus limited.
14. The AR submitted that it was his right under the law to revise Returns of Income for Tax Years 2004 and 2008 filed earlier, as there were valid grounds for their revision. He explained that Return for Tax Year 2004 was revised on 18-3-2010 to claim refund at Rs.22,534,196 as against refund of Rs.18,685,191 claimed in the original Return. This revision was made on the basis of certificate of withholding tax deduction under Rule 42. It was not correct for the Deptt to say that refund was not claimed in the original Return for Tax Year 2004. As regards Return for Tax Year 2008, its revision was made to claim adjustment of tax deducted at source on self-manufactured supplies only.
15. The Departmental contention that the revised Return for Tax Year 2008 was dubious and its authenticity remained in doubt was vehemently denied by the complainant. The complainant contended that the first dealing officer (Ms. Sehar Aftab Butt, ACIR) specifically requisitioned the entire record from the CIR IP and fully satisfied herself with regard to its completeness and authenticity and raised no objection whatsoever in that regard.
16. The successor ACIR (Ms. Beenish Iftikhar), though initially raised questions with regard to the revised Return filed for Tax Year 2008, but in the final show-cause notice that she issued, before passing order under section 170(4), there was no mention of any issue regarding the revised Return for Tax Year 2008. Rather, she found fault only with the Return for Tax Year 2004, on the ground that no official stamp was affixed thereto.
17. The AR argued that the Deptt did not contest the findings of the Commissioner (Appeals), and gave appeal effect thereby confirming his order. If the Deptt truly believed that revised Returns for Tax Years 2004 and 2008 were 'dubious,' then the Deptt ought to have filed second appeal before the Appellate Tribunal.
18. As regards the alleged discrepancies in the sales figures in the income tax Returns and the sales tax Returns and the quantum of capital disclosed in the wealth statements and- the balance sheets, the complainant submitted that there was nothing in the documentation submitted that could not be plausibly explained/reconciled. But the Departmental authorities could not start assessment proceedings in the garb of disposing of a refund claim.
19. With regard to his status under income tax law, the complainant asserted that the Lahore High Court in judgment cited as 2009 PTD 1500 had held that all services, professional or otherwise, were held to be chargeable under general tax provisions and not under FTR. This was in response to the Departmental contention during the complaint case proceedings that services rendered other than professional services fell under FTR. While on this issue, the complainant gave the following bifurcation of work done by him in the assessment years 2004 to 2008:--
| | 2004 (Rs.) | 2005 (Rs.) | 2006 (Rs.) | 2007 (Rs.) | 2008 (Rs.) |
| Supplies of Self Manufactured Goods | 435,797,916 | 849,687,170 | 1,304,815,775 | 1,695,352,034 | 922,066,638 |
| Services | 87;683,064 | 176,133,390 | 280,044,877 | 223,986,847 | 110,136,024 |
| Grand Total | 523,480,980 | 1,025,820,560 | 1,584,860,652 | 1,919,338,881 | 1,7,202,662 |
The above bifurcation supports the complainant's contention that in the Tax Years 2004 to 2008 he was primarily a manufacturer cum supplier.
20. After hearing both sides, it is clear that there is no provision in the Ordinance that empowers the Deptt to unreasonably withhold refund. Under section 170, the satisfaction of the Departmental authority examining the refund claim is necessary to the extent that documentary evidence having a direct bearing on refund claim is in order. Such documentary evidence includes tax payment challans, deduction certificates and other relevant documentation like electricity bills, utilities bills, bank certificates, etc. If these documents are found to be in order, then the claimed refund cannot be withheld. As regards other matters having a possible bearing on the quantum of income assessed, like variations in GP rate, sale rate, apparent discrepancies in sales and capital shown on different documents, etc., these are to be disposed of separately through an order other than an order under section 170(4)' However, before starting these other, separate, assessment proceedings, the Deptt is bound under the law to first settle the refund claim.
21. Moreover, as deemed assessments under section 120(1) for Tax Years 2005 to 2007, and under section 122(3) for Tax .Years 2004 and 2008 stood finalized in this case, the refunds could not be withheld as per the Appellate Tribunal's judgment in 2010 PTD (Trib.) 519:--
"Where refund is created by the Commissioner himself as a result of an order under section 120 of the Income Tax Ordinance, 2001, then, in terms of section 170(3) of the.I.T. Ordinance, it was the legal obligation of the Commissioner to issue refund, suo motu, and if the Commissioner failed to do so' within 90 days of the refund becoming due, then section 171 of the Income Tax Ordinance will come into play."
22. The Departmental reference to the sales tax audit report of 19-9-2009 also needs a mention here. The Deptt seeks to establish that construction work was a principal feature of the work done by the complainant during Tax Years 2004-2008. First of all, the Sales Tax Registration Certificate No. 03-09-9403-010-19 dated 7-2-2001 shows the complainant as a MANUFACTURER and SERVICE PROVIDER. According to the complainant, the reference as mile by Sales Tax audit in their audit report was only a recognition of the complainant's 'capacity' for doing construction work. The Sales Tax authorities did not refer to any construction work in which the complainant was actually involved. The complainant also pointed out that the Sales Tax audit was initiated on 5-12-2008 and was concluded on 19-9-2009 whereas the period under reference in which the refund claims arose was from Tax Year 2004 to Tax Year 2008. In other words, when the Sales Tax audit authorities came to the complainant's manufacturing premises, the relevant period in which the refund claims arose had already expired. That being so, the Departmental reliance on the Sales Tax audit report to conclude that construction work was a principal activity of the complainant in the Tax Years 2004 to 2008 was wholly misplaced.
23. As regards the alleged discrepancies between income tax and sales tax returns, the AR contended that the so-called difference was fully reconciled and explained to the Departmental authorities vide letter H-1/Tax/2010/991 of September 6, 2010. The explanation was found to be plausible as in depth appraisal of any alleged discrepancy was not called for at this juncture, these being not assessment proceedings but proceedings to dispose of a pending refund claim.
24. Similarly, in the case of mobilization advance statedly relevant to construction contracts referred to in the notes appended to the Financial Statement, the AR explained that the accounts of the complainant's proprietory business were prepared on cash basis for income tax purposes, as required under the law. These accounts were, however, converted into accrual-based accounts so as to meet requirements of the State Bank's prudential regulations. He categorically denied any nexus with construction work, as such, in the relevant period. Nor was any evidence whatsoever iii this regard placed on record by the Deptt. The four contracts entered into with Wand Telecom and the work orders with Bank Alfalah when considered in the context of itemized BOQs and ex-factory commercial invoices of self manufactured goods, along with delivery challans, bank statements and independent certification of the work done and other related documents, it was clear that, prime facie, the mobilization advance was not in relation to any construction contract.
25. As regards Departmental reference to construction work allegedly done by the Complainant for Sialkot International Airport Ltd. (SIAL), the AR explained that here too the complainant rendered professional, specialized contractual services that did not involve construction work of any kind. The record examined during the complaint proceedings supports the complainant's viewpoint and no adverse inference could therefore be drawn with regard to services provided by the complainant to SIAL.
26. In a decision by the Hon'ble President of Pakistan (No.135 of 2004 FTO Law dated 7-5-2005, Mr. Khalid Mehmood v. C.B.R.) disposing of a representation filed by the Deptt against the Hon'ble Federal Tax Ombudsman's recommendations in Complaint No 1643-L of 2003, it was held that:-
"The State cannot hold citizens' money except under the authority of law. There is no law that the State can hold a citizen's money on the ground that his liability is likely to arise in future."
27. That the Deptt 'expected' to raise demand of tax against the complainant in the proceedings initiated under sections 122(5) and 122(5A) of the Ordinance could not be legally made a basis to deny settlement of refund claims for Tax Years 2004 to 2008. Under the law, settlement of pending refund claims had priority, and once these claims were settled any other proceedings could continue, provided of course those were otherwise justified under the law.
Findings:
28. The delay and arbitrariness apparent in issuance of refund, and non-implementation of Commissioner's (Appeals) order dated 15-2-2011, is tantamount to maladministration under section 2(3) of the FTO Ordinance.
Recommendations:
29. F.B.R. to direct the Chief Commissioner to--,
(i) issue refund/compensation due, as per law, within 21 days; and
(ii) report compliance within 7 days thereafter.
C.M.A./197/FTO???????????????????????????????????????????????????????????????????????????????? Order accordingly.