LAL GHEE AND OIL MILLS MALAKAND AGENCY VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2012 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 449 (2011)

Income Tax Ordinance (XLIX of 2001)---

----Ss.122(1), 124(1) & 148---Constitution of Pakistan, Art.247(3)---Complaint against illegal issuance of notice for audit---Exemption from income tax---Complainant, a private limited company, was engaged in manufacturing and sale of ghee and cooking oil---Unit of complainant was located in Malakand (PATA) which was exempt from tax under Art.247(3) of the Constitution---Claim of total exemption was rejected and 20% of turnover was assessed by the Authority to tax and assessment order under S.124(1) of Income Tax Ordinance, 2001 was accordingly passed---Said assessment order was annulled by C.I.T. (Appeals) observing that the Assessing Officer had failed to bring any concrete evidence on record to support his action of treating 20%, sales having been made in taxable territory---Second appeal by the department against annulment of assessment was rejected by Income Tax Appellate Tribunal said rejection order attained finality as department had not filed appeal/reference against Tribunal's order before High Court---Department, instead of implementing the Tribunal's order started audit proceedings---Complainant contended that audit proceedings were illegal as verification of sale had already been done by the department and it was established that the business was done wholly and exclusively in the tax free Tribal areas and that another exercise of verification of sale was legally not tenable---Business of the complainant was situated in the tax exempt area and all the business operations were carried out in the Tribal areas---No fresh evidence was brought on record to rebut the claim of the complainant---Issue under consideration with the Federal Tax Ombudsman was not assessment of income and determination of tax liability of the complainant but was that correct procedure was not followed while making the assessment whichcould not stand the test of appeal---Due to inefficiency of the department, the complainant was subjected to rigors of lengthy proceedings---Non-implementation of decision of the Tribunal, was tantamount to maladministration under S.2(3) of Establishment of Office of Federal Tax OmbudsmanOrdinance,2000---Federal Board of Revenue was recommended to direct the Chief Commissioner to ensure that the decision of the Tribunal was implemented in letter and spirit without prejudice to a just and fair incomeoftheauditproceedingsandtoreportcompliancewithin30 days.

Istaat Ali, Advisor Dealing Officer.

Abdul Rehman and Sikandar Nawaz, General Manager Authorized Representative.

Faheem Sikandar, DCIR Departmental Representative.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE, FEDERAL TAX OMBUDSMAN.---Thiscomplaintisagainstallegedillegalissuanceof letters/notices for audit for tax years 2006 and 2007 by RTO,Peshawar.

2.The complainant, a private limited company, is engaged in manufactureandsaleofgheeandcookingoil.Thecomplainant'sunitis located in Malakand (PATA), which is exempt from tax under Article 247(3) of the Constitution. The complainant imports raw materials through Karachi seaport. When Customs authorities demanded payment of income tax at import stage under section 148 of the Income TaxOrdinance,2001(theOrdinance),thecomplainantfiledaWrit Petition beforePeshawarHighCourt,which,videorderdated19-10-2006 in Writ Petition No.1669 of 2004, directed the Departmentto release the post-dated cheques upon verification oftransportation and production of finished goods in PATA. As a result of verification, the Assessing Officer found that 58% sales were made to verifiable parties of Tribal Areas, while the remaining 42% could not be verified. A letter was accordingly issued to Collector Customs, Peshawar, to release cheques covering the verified sales.

3.The taxpayer again approached the High Court and moved proceedings for contempt of court. The Hon'ble Peshawar High Court vide order dated 23-12-2008 directed that the Department should issue a notice to the complainant for a specific date to satisfy each other about the entire amount of sales. Though the taxpayer filed verification of all sales on letter pads of the concerned parties, the matter could not be finally settled. The Peshawar High Court vide order dated 2-4-2009 again directed that both parties should sit together on 6-5-2009 for arriving at a possible settlement. However, both the parties adhered to their earlier stance and no headway could be made. The DG, RTO, Peshawar, then constituted a team consisting of representatives from both sides, to verify the sales which had remained unverified in first round. Resultantly, confirmation was made against six parties, while sales of four parties remained unverified.

4.During the course of proceedings, the taxpayer in its letter dated 3-7-2009 made an offer to the Commissioner that he would withdraw the application for contempt of court, provided a reasonable proportion of sales was taxed. This offer was not accepted by the Department, which made it a basis for rejection of claim of exemption. Though sales of four parties remained unverified, the claim of total exemption was rejected and 20% of turnover was assessed to tax, and assessment order under section 124(1) accordingly passed.

5.However, the assessment order under section 124(1) was annulled by CIT (Appeals) who observed that the Assessing Officer failed to bring any concrete evidence on record to support his action of treating 20% sales having been made in taxable territory. It was further observed that deemed assessment order made on the basis of Returns of the taxpayer could be amended under section 122(1), or 122(5) of the Ordinance. Instead, the Taxation Officer passed order under section 124(1) which was illegal. The Department filed second appeal against annulment of assessment, which was rejected by the Income Tax Appellate Tribunal. The Department did not file any appeal/reference against the Tribunal's order before High Court. The Department rather than implementing the Tribunal's order started audit proceedings for tax years 2006 and 2007. According to the complainant, these audit proceedings were illegal as verification had already been made by the Department and it was established that the business was wholly and exclusively conducted in tax free tribal areas. Yet another exercise of verification at this stage was legally not tenable.

6.The complaint was sent to F.B.R. on 25-10-2011, for comments. In response, the Department vide F.B.R's. Letter C.No.4(1159)T.O.I/ 2011 dated 16-11-2011 contended that the Hon'ble Supreme Court in Civil Review Petition No.62 of 2003 dated 7-11-2007 in the case of Gul Cooking Oil Co. (Pvt.) Limited, Dargai, Malakand had ruled that immunity from payment of income tax could not be claimed without establishing the fact that taxable income was not derived from the areas where Income Tax Ordinance was applicable. During the course of assessment proceedings, the list of sales provided by the taxpayer showed that sales had remained partly unverified. The Department stated that annulment did not mean that assessment could not be reframed, provided it was not hit by limitation. As the proceedings did not attain finality in the complainant's case, the case was rightly selected foraudit.

7.During the hearing, the AR stated that business of the taxpayer was situated in the tax-exempt area of Malakand. All the business operations were carried out in the tribal areas. Complete verification had already been made by the Department and no evidence could be found to prove that any income was generated from taxable areas of Pakistan. No fresh evidence was brought on record to rebut the taxpayer's claim. This is why the Department did not go in appeal before the High Court. In order to cover up their non-compliance of the Tribunal's orders, these fresh audit proceedings had been illegally started.

8.TheDRstatedthatinthefirstround,theorderundersection 124(1) of the Ordinance was annulled in appeal on technical grounds. According to him, after annulment of assessment order, alternative remedy of fresh action was available with the Department. That is why appeal/reference was not filed before the High Court. He contended that action of the Department was aimed at protecting the State revenue. Also, the decision of the Hon'ble Supreme Court in the case of Gul Cooking Oil provided a road map for further action. Blanket exemption was not available to any taxpayer. In order to avail the benefit of tax exemption, the onus was on the taxpayer to establish that no income was earned in the areas where tax laws were applicable. He stated that reassessment under consideration was initiated to verify the fact as to whether any business was done in taxable areas. He assured that the taxpayer would be provided with proper opportunity of hearing and final action would be taken according to law. If it is established that no taxable transaction was made in settled areas, the taxpayers' claim of exemption would be accepted.

9.The DR further contended that the matter in hand being related to assessment of income and determination of tax liability was hit under section 9(2)(b) of the FTO Ordinance 2000.

10.Averments of both the sides have been examined in the light of relevant record. The issue under consideration with the Hon'ble FTO is not assessment of income and determination of tax liability, but that correctprocedurewasnotfollowedwhilemakingassessmentinthefirst round. It could not stand the test of appeal. The Departmentdidnotgointofurtherappeal/referencebeforetheHighCourt,andso the Tribunal's decision attained finality. Due to inefficiency of the Department, the taxpayer was subjected to rigors of lengthy proceedings.

Findings:

11.Non-implementation of Tribunal's decision is tantamount to maladministration under Section 2(3) of the FTO Ordinance, 2000.

Recommendations:

12.F.B.R. to --

(i)direct the Chief Commissioner to ensure that the Tribunal's decision is implemented in letter and spirit without prejudice to a just and fair outcome of the audit proceedings; and

(ii)report compliance within 30 days.

H.B.T./5/FTOOrder accordingly.