COMMISSIONER INLAND REVENUE VS Sheikh MANZOOR AHMAD, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 1771 (2015)

Income Tax Ordinance (XLIX of 2001) ---

----Ss. 122, 120, 114, 176 & 133 ---Amendment of assessment---Complete return filed under S. 114 of the Income Tax Ordinance, 2001 to be taken as an "assessment order"---Effect---Return filed by taxpayer for the year 2009 attained status of assessment order under S.120 of the Income Tax Ordinance, 2001 and thereafter on information in terms of S. 176 of the Income Tax Ordinance, 2001 regarding purchase of vehicle by taxpayer; notice for amendment of assessment under S. 122(9) of the Income Tax Ordinance, 2001 was issued to taxpayer and taxpayer explained source of funds for purchase of vehicle as savings over the years---Department, however, contended that household expenses claimed for years 2004 to 2008; were wrongly claimed which resulted into savings for purchase of vehicle and disallowed the same and made addition into income for the said years---Appellate Tribunal annulled said amendment by the Department inter alia on the ground that such addition to household expenses was wrongly made by the Department---Held, that Department had travelled beyond its jurisdiction and overlooked the legal position that household expenses relating to tax years 2004 to 2008 were part of respective assessment orders under S. 120 of the Income Tax Ordinance, 2001 as returns filed under S. 114 of the Income Tax Ordinance, 2001 on the day when the complete return was furnished, for all purposes of the Income Tax Ordinance, 2001 was taken to be an assessment order---Admittedly, independent notices were not issued for amendment of assessment orders under S. 120 relating to tax years 2004 to 2008 and the Department during proceedings for amendment of assessment order for the year 2009 formed opinion that household expenses claimed in the years 2004 to 2008 were not allowable and the same were disallowed, while making amendment to assessment for tax year 2009 and the same was done with blatant disregard to the provisions of law and sanctity attached to assessment orders, which were to be treated to have been issued under S. 120 of the Income Tax Ordinance, 2001---Amendments to assessments under S. 122 of the Income Tax Ordinance, 2001 could only be made on grounds/reasons mentioned in Ss. 122(5) and 122(5A) of the Ordinance, and in the present case, when source of purchase of vehicle was explained as savings over the years, the Department, stepped beyond its jurisdiction and lost sight of the only issue confronted in the show-cause notice---Right course for Department was to issue independent notices under S.122 of the Income Tax Ordinance, 2001 proposing amendment to assessment orders relating to tax years 2004 to 2008---Taxpayer was not confronted in the show-cause notice for addition of household expenses for which no definite information was available at the time of initiation of proceedings under S. 122 of the Income Tax Ordinance, 2001---Amendment of assessment of taxpayer was rightly annulled by Appellate Tribunal---Reference was answered, accordingly.

Independent Newspapers Corporation (Pvt.) Ltd. and another v. Chairman, Fourth Wage Board and Implementation Tribunal for Newspaper Employees, Government of Pakistan, Islamabad and 2 others 1993 SCMR 1533 and Commissioner of Income Tax Companies No.1, Karachi v. Messrs Hassan Associates (Pvt.) Ltd., Karachi 1994 SCMR 1321 = 1994 PTD 1256 rel.

Ch. Zakir Hussain for Appellant.

Nemo for Respondent.

Date of hearing: 6th January, 2015.

JUDGMENT

SHAHID JAMIL KHAN, J.---Following questions of law are proposed for our opinion, which are asserted to have arisen out of order dated 27-9-2011 by Appellate Tribunal Inland Revenue, Lahore ("Appellate Tribunal"):--

(i)"Whether on facts and circumstances of the case the learned ATIR was justified to annul the order of the Taxation Officer amended under section 122(1)/(5) of the Income Tax Ordinance, 2001 on the mere ground that prior approval of the concerned Commissioner before issuance of notice under section 176 of the Ordinance was missing, whereas, the Commissioner has already delegated the powers to the Taxation Officer under section 210 of the Ordinance."

(ii)"Whether on facts and circumstances of the case the learned ATIR was justified to annul the order of the Taxation Officer amended under section 122(1)/(5) of the Income Tax Ordinance, 2001 with the observation that the information was not definite in terms of section 122(5) of the Ordinance, whereas the taxation officer was in possession of definite information regarding purchase of motor vehicle."

(iii)"Whether on the facts and circumstances of the case the learned ATIR was justified to annul the order of the Taxation Officer amended under section 122(1)/(5) of the Income Tax Ordinance, 2001 with the observation that the addition on account of household expenses under section 111(1)(b) read with section 111(2) cannot be made in the immediate preceding year whereas the Taxation Office rightly made the addition in the Tax Year immediately preceding the financial year in which the amount was discovered as provided in section 111(2) of the Income Tax Ordinance, 2001."

2.Facts; as reflecting from Appellate Tribunal's order, are that return filed by respondent taxpayer, for Tax Year, 2009, attained status of assessment order under Section 120 of the Income Tax Ordinance, 2001 ("the Ordinance"). On an information, regarding purchase of motor vehicle (Suzuki Bolan), certain documents were called through notice under Section 176, which was followed by another notice under Section 122(9) of the Ordinance. During proceedings, respondent taxpayer explained the source, for purchase of the motor vehicle, as savings over the years. However, in Taxation Officer's opinion, household expenses relating to Tax years 2004 to 2008 were wrongly claimed, which resulted into the alleged savings to justify the purchase of motor vehicle. The household expenses were disallowed and addition of Rs.250,000 under Section 111(1)(b) was made. This order was unsuccessfully challenged before the Commissioner (Appeals), therefore, second appeal was filed before Appellate Tribunal. Appellate Tribunal annulled the amended assessment order for reasons that disallowance of household expenses were never confronted to the taxpayer in any of the notices. It was also observed that definite information regarding household expenses was not available.

3.Learned counsel for the applicant submits that definite information regarding purchase of motor vehicle was available with the Taxation Officer, which was duly confronted. He argues that the impugned order by Appellate Tribunal is suffering from misreading of evidence available on record.

4.Heard learned counsel at preliminary stage, record perused.

5.In our opinion; the Taxation Officer, probably with predetermined mind to make the addition, had travelled beyond his jurisdiction. He overlooked the legal position that the household expenses, relating to Tax years, 2004 to 2008, were part of respective assessment orders under Section 120 of the Ordinance.

Return filed under Section 114 of the Ordinance is taken to be an assessment order, on the day when complete return is furnished, for all purposes of the Ordinance. This legal position is reflecting, unequivocally, from a bare perusal of subsection (1) of the Section 120, which is reproduced for ease:--

"S.120. Assessments.---(1) Where a taxpayer has furnished a complete return of income (other than a revised return under subsection (6) of section 114) for a tax year ending on or after the 1st day of July, 2002,?

(a)the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified in the return; and

(b)the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished."

(emphasis supplied)

The expression, "amounts specified in the return" needs a little elaboration, in context of this case. Under scheme of the Ordinance, a confidence is reposed in the taxpayer that whatever is declared in return, for a tax year, is taken as assessment order, for all purposes of the Ordinance. 'Tax payable', shown in the return, is a result of calculation made by taxpayer after working out `Taxable Income.' Taxable Income is defined in Section 9 (read with Section 2(64)) of the Ordinance, reproduction of which is necessary:--

S.9. Taxable income.---The taxable income of a person for a tax year shall be the total income of the person for the year reduced (but not below zero) by the total of any deductible allowances under Part IX of this Chapter of the person for the year. (emphasis supplied)

The calculations (working out of 'taxable income', after reducing 'deductible allowances' from total income) are the `amounts specified in the return' based on which 'tax due' is paid. The household expenses, relating to tax years, 2004 to 2008, were worked out as deductible allowances in respective returns, therefore had attained status of allowed expenses (allowances) under the assessment orders (under Section 120) for respective tax years. These allowances could be disallowed (added back) only after amendment of the assessment orders of those years under Section 122 of the Ordinance, relevant part of which is also reproduced:--

"S.122. Amendment of assessments.-

(1)Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121 by making such alterations or additions as the Commissioner considers necessary." (emphasis supplied)

Additions (add back) of the allowances (household expenses), claimed in respective assessment orders, under Section 120, could be made by Commissioner (or by Taxation Officer on delegation under Section 210) only by invoking the provisions of Section 122 for each year.

6.Admittedly, independent notices were not issued for amendment of assessment orders, under Section 120, relating to tax years, 2004 to 2008. The Taxation Officer, during proceedings for amendment of assessment order relating to tax year, 2009, formed an opinion that household expenses claimed in tax years, 2004 to 2008 were not allowable. He went on to disallow the expenses of other years, while making amendment for tax year 2009, which amounts to be a blatant disregard of the provisions of law and sanctity attached to assessment orders, treated to have been issued, under Section 120.

7.Amendment under Section 122 of the Ordinance can be made on the grounds/reasons mentioned under subsections (5) & (5A) i.e. if Commissioner is in possession of 'definite information', from audit or otherwise, or the order under Section 120 was "erroneous and prejudicial to the interest of revenue". In this case; when the source to purchase the motor vehicle was explained by showing savings over the years, the Taxation Officer, in an over ambitious pursuit, not only over stepped his jurisdiction under the law, but had lost sight of the only issue confronted in the show-cause notice. If, in opinion of the Taxation Officer, the explained source in shape of the savings was unjustified or unlawful, the right course for him was to issue independent notices under Section 122; proposing amendment of the assessment orders relating to tax years, 2004 to 2008 also. Needless to say that an action under the law can be taken only in a way authorized by law. The action of Taxation Officer by overstepping the provisions of law certainly was coram non judice for want of jurisdiction and nullity in the eye of law.

An illuminating observation by Apex Court in Independent Newspapers Corporation (Pvt.) Ltd. and another v. Chairman, Fourth Wage Board and Implementation Tribunal for Newspaper Employees, Government of Pakistan, Islamabad and 2 others (1993 SCMR 1533) can be referrer with advantage,

"The principle is well-settled that when express statutory power is conferred on a public functionary, it should not be pushed too far, for, such conferment implies a restraint in operating that power, so as to exercise it justly and reasonably. In the words of Scarman L.J. "excessive use of lawful power is itself unlawful" ("The Development of Administrative Law" published in Public Law 1990, page 490 at 491). Further there is a presumption that the legislature does not transgress its jurisdiction and invade the fundamental rights given by the Constitution. This rule is to be kept in view also in construing and enforcing the law."

8.We agree with the findings of the Appellate Tribunal, in this backdrop, that taxpayer was not confronted, in the show-cause notice, for addition of household expenses for which no information was available at the time of initiation of proceedings under section 122. Our answer to question No. (ii), therefore, is in affirmative i.e., against the applicant department.

After answer to question No. (ii), very basis of the order under Section 122 are held without jurisdiction, hence answer to questions Nos. (i) and (iii) becomes only an academic exercise which is not warranted in advisory jurisdiction under section 133 of the Ordinance, as is held by Hon'ble Supreme Court of Pakistan in Commissioner of Income Tax Companies No.1, Karachi v. Messrs Hassan Associates (Pvt.) Ltd., Karachi (1994 SCMR 1321 = 1994 PTD 1256). Therefore, we decline to answer questions Nos. (i) and (iii).

Reference Application is decided against the applicant department.

9.Office shall send a copy of this judgment under seal of the Court to the Appellate Tribunal Inland Revenue as per section 133(5) of the Income Tax Ordinance, 2001.

KMZ/C-13/LOrder accordingly.