COMMISSIONER INLAND REVENUE, ZONE-I VS SIEMENS PAKISTAN ENGG. CO. LTD., 2017 PTD-KARACHI-HIGH-COURT-SINDH 903 (2016)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 132(3), 133 & 221---Reference---Rectification of mistake---Scope---Contentious issue---Services outside Pakistan---Assessment order of taxpayer was amended by authorities in exercise of powers under S.122(1) of Income Tax Ordinance, 2001---Appellate Tribunal Inland Revenue set aside the amended assessment order---Validity---Powers of Deputy Commissioner Inland Revenue under S.221 of Income Tax Ordinance, 2001, were limited to the extent of mistakes apparent from record---Other provisions of law could deal with the authority of department officials with regard to reopening of assessment, revision etc.---Where department was of the view that certain income had escaped from chargeability of tax but for exercising such powers under S. 221 of Income Tax Ordinance, 2001, there must be a mistake apparently floating on the surface which was to strike one's mind without entering into long drawn process of reasoning, detailed deliberation etc.---Only those mistakes were rectifiable which were apparent from the record and floating on the surface and which did not require any long drawn process of reasoning, deliberation on a moot or debatable point---Issue with regard to taxability on services rendered by taxpayer outside Pakistan had been a continuous issue between authorities and taxpayer, therefore, the same fell outside the scope of mistake apparent from the record---In cases where there could conceivably be two views / opinions the same fell outside the scope and ambit of rectification of mistake---High Court answered all questions in favour of taxpayer---Reference was dismissed in circumstances.

CIT v. Shadman Cotton Textile Mlills Ltd. 2008 PTD 253; Commissioner of Income Tax and another v. Messrs Pakistan Petroleum Ltd. and 2 others 2012 PTD 501; Commissioner of Income Tax Company's II, Karachi v. Messrs National Food Laboratories 1992 PTD 570; CIT v. Messrs Adam Limited Karachi 1969 PTD 351; CIT v. Hero Cycle (Pvt.) Limited Company and others 228 ITR 463 (SC)); (3) T.S. Balaram I.T.O. Company Circle No.IV Bombay v. Volkart Brothers and others 82 ITR 50 (SC); CIT v. Abdul Ghani 2007 PTD 967; Helal Jute Press Limited v. Commissioner of Income-Tax, DACCA Zone, DACCA and another 22 Taxation 157 and Commissioner Inland Revenue, Karachi v. Messrs E.N.I. Pakistan (M) Limited Karachi 2013 PTD 508 ref.

Kafeel Ahmed Abbasi for Applicant.

Ammar Athar Saeed for Respondent.

Date of hearing: 22nd November, 2016.

ORDER

IRFAN SAADAT KHAN, J.---The instant Income Tax Reference Application (ITRA) has been filed against the order dated 23.04.2013 passed by the Appellate Tribunal Inland Revenue (Pakistan) Karachi (ATIR) in I.T.A. No.449/KB/2012 pertaining to the tax year 2003 by raising the following questions of law:--

1. "Whether on the facts and circumstances of the case the learned Appellate Tribunal was justified to uphold the order passed by CIR(A) who annulled the order passed under section 122 of the Income Tax Ordinance, 2001 treating it out of the ambit of section 221"?

2. "Whether on the facts and circumstances of the case the learned Appellate Tribunal was justified to delete the tax charged @ 1% on the receipts Rs.24,871,000/- on account of services rendered outside Pakistan under clause 3 of Part-II of Second Schedule to the Income Tax Ordinance, 2001"?

3. "Whether on the facts and circumstances of the case the learned Appellate Tribunal was justified to uphold the order passed by the CIR(A) without considering that both the mistakes of fact and law were rectifiable under section 221 of the Income Tax Ordinance, 2001"?

4. "Whether on the facts and circumstances of the case the learned Appellate Tribunal and CIR(A) were justified to place reliance upon the judgment of the Hon'ble Supreme Court of Pakistan reported as 2008 PTD (SC) 253, whereas in the instant case mistake was apparent and floating on the surface of record attracting the provisions of section 221 for which the taxpayer was duly confronted"?

2.Briefly stated, the facts of the case are that the assessee/respondent is a Public Limited Company engaged in execution of projects under contracts and in the manufacture, installation and sale of electronic and electrical capital goods. The return for the year under consideration i.e. 2003 was filed under section 114 of the Income Tax Ordinance (the Ordinance) by declaring an income of Rs.305,099,479/-. The said return was then treated as an assessment order as per the provisions of section 120 of the Ordinance. The said assessment order was then amended under section 122(1) of the Ordinance by the concerned Deputy Commissioner Inland Revenue (DCIR), Audit Unit 04, Zone-I, Large Taxpayer Unit, Karachi, vide order dated 18.03.2006. Thereafter the concerned DCIR issued a show cause notice under section 221 of the Ordinance dated 04.08.2009 to the respondent on the ground that the exemption claimed by the respondent from Income on receipts of export services under clause 131(b) of Part-I of Second Schedule to the Ordinance is liable to tax at the rate of 1% on the services rendered outside Pakistan under clause 3 of Part-II of the Second Schedule and since in view of the DCIR the above receipt was not charged to tax hence a mistake is apparent on record. A reply thereof was then filed by the tax representative of the respondent who vehemently agitated the same and stated that since the action of the DCIR in charging tax on the above referred income does not fall under the ambit of a mistake apparent on record rather the same is a debatable issue hence the action is not in accordance with law and requested that the proceedings initiated may be dropped. The DCIR however rejected the contention raised by the tax consultant and vide order dated 18.03.2011 passed an order under section 221 of the Ordinance by charging 1% tax on the receipts on the services rendered by the respondent outside Pakistan and thereby increasing the tax liability of the respondent to the extent of Rs.2,48,710/-. Being aggrieved with the said order an appeal thereafter was preferred before the Commissioner Inland Revenue (Appeals-III), Karachi, [CIR(A)] who vide his order bearing No.11/2012, dated 26.03.2012, annulled the order passed by the DCIR by observing that the order of the DCIR falls outside the ambit of section 221 of the Ordinance by placing reliance on the decision given by the Hon'ble Supreme Court of Pakistan reported as CIT v. Shadman Cotton Textile Mills Limited (2008 PTD 253). Being aggrieved with the order passed by the CIR(A) an appeal thereafter was preferred before the ATIR by the department and a Single Member of the ATIR disposed of the appeal by placing reliance on an order passed by the ATIR in I.T.As. Nos.87, 88, 850/KB/2006 and I.T.As. Nos.245, 246/KB/2010, 249/KB/2008 and I.T.A. No.808/KB/2006. It is against this order that the present ITRA has been filed by agitating the above mentioned questions of law, which were admitted by this Court for regular hearing vide order dated 10.11.2016.

3.Mr. Kafeel Ahmed Abbasi Advocate has appeared on behalf of the Department/applicant and stated that the above referred questions are questions of law which require adjudication from this Court. He stated that the mistake was apparent from the record hence the DCIR was quite justified in imposing tax at the rate of 1% on the services rendered outside Pakistan by the respondent under clause 3 of the Second Schedule to the Ordinance. He submitted that all the legal formalities in this regard were fulfilled by the DCIR while passing the order under section 221 i.e. show cause notice was duly given and the reply furnished by the tax consultant was also considered. He further submitted that the DCIR is fully empowered to rectify a mistake which is apparent from the record under the provisions of section 221 and since the issue with regard to charging of tax on the services rendered outside Pakistan by the respondent was not considered while passing the order under section 122(1) of the Ordinance hence the said order was rightly rectified by the DCIR and according to him no illegality has been committed by the DCIR and his order may be upheld as neither the CIR(A) nor the ATIR have considered that under the said provision of the law the DCIR is fully empowered to correct a mistake apparent from the record. He further stated that though four questions of law have been framed by the Department in the instant ITRA but the only point which needs adjudication by this Court is with regard to the question that "whether under the facts and circumstances of the case the DCIR was justified in invoking the provisions of section 221 of the Ordinance by charging the tax at the rate of 1% on the services rendered by the respondent outside Pakistan". The learned counsel in support of his above contentions has placed reliance on the decision given in the case of Commissioner of Income Tax and another v. Messrs Pakistan Petroleum Ltd. and 2 others (2012 PTD 501). He, therefore, submits that the questions raised in the instant ITRA may be answered in negative i.e. in favour of the Department/applicant and against the taxpayer/respondent.

4.Mr. Ammar Athar Saeed Advocate has appeared on behalf of the respondent and stated that the respondent has been claiming exemption under the relevant clause i.e. 133(1)(b) of the Second Schedule in the previous years which has been allowed by the Department and even in those tax years in which the exemption claimed by the respondent was disallowed by the Department the same has always been allowed in appeals. He stated that it is a settled principle of law that while rectifying any mistake apparent from the record the same should not be a debatable or a moot point since a debatable or moot point falls outside the ambit and scope of section 221 of the Ordinance. He further stated that the DCIR while examining the matter under section 122(1) of the Ordinance has allowed exemption to the respondent hence the DCIR was not justified in disallowing the exemption by resorting to provisions of section 221 of the Ordinance on the ground that the same is a mistake apparent from the record. The learned counsel then read out the order passed by the DCIR under section 221 of the Ordinance and pointed out that a show cause notice was issued by the DCIR on 04.08.2009, whereas the order was passed on 18.03.2011 which clearly shows that the said order has been passed after detailed examination and deliberation on the issue whereas according to him scope of section 221 is restricted to mistakes apparent from the record or the mistakes floating on the surface, which do not require any detailed examination and deliberation. In support thereof the learned counsel has placed reliance on the decision given in the case of Commissioner of Income-Tax Company's II, Karachi v. Messrs National Food Laboratories (1992 PTD 570). He further stated that the decision relied upon by the learned counsel for the department is quite distinguishable. The learned counsel submitted that the order passed by the CIR(A) and the ATIR were based on valid and cogent reasons and since the DCIR has transgressed his jurisdiction by enlarging the scope of section 221 on a moot point or on an issue which requires detailed deliberation and examination hence the answer to all the four questions raised in the instant ITRA may be answered in affirmative i.e. in favour of the assessee/respondent and against the Department/ applicant.

5.We have heard both the learned counsel at considerable length and have also perused the record and the decisions relied upon by them.

6.Before proceeding any further, we deem it appropriate to reproduce hereinbelow section 221 of the Ordinance, on which the whole case of the department hinges around:-

'221. Rectification of mistakes.--(1) The Commissioner, the Commissioner (Appeals) or the Appellate Tribunal may, by an order in writing, amend any order passed by him to rectify any mistake apparent from the record on this or its own motion or any mistake brought to this or its notice by a taxpayer or, in the case of the Commissioner (Appeals) or the Appellate Tribunal, the Commissioner.

(1A) The Commissioner may, by an order in writing, amend any order passed under the repealed Ordinance by the Deputy Commissioner, or an Income Tax Panel, as defined in section 2 of the repealed Ordinance to rectify any mistake apparent from the record on his own motion or any mistake brought to his notice by a taxpayer and the provisions of subsection (2), subsection (3) and subsection (4) shall apply in like manner as these apply to an order under subsection (1).

(2) No order under subsection (1) which has the effect of increasing an assessment, reducing a refund or otherwise applying adversely to the taxpayer shall be made unless the taxpayer has been given a reasonable opportunity of being heard.

(3) Where a mistake apparent on the record is brought to the notice of the Commissioner or Commissioner (Appeals), as the case may be, and no order has been made under subsection (1) before the expiration of the financial year next following the date on which the mistake was brought to their notice, the mistake shall be treated as rectified and all the provisions of this Ordinance shall have effect accordingly.

(4) No order under subsection (1) may be made after five years from the date of the order sought to be rectified."

7.It is seen that deemed order under section 120 of the Ordinance was amended under section 122(1) of the Ordinance which subsequently was rectified under section 221 of the Ordinance. The amended order dated 31.3.2006 under section 122(1) of the Ordinance was passed after due deliberation. An appeal thereafter was also preferred by the respondent before CIR(A) which amply proves that the department had the occasion of examining the return filed by the respondent and going through the details furnished by the respondent-company during the process of the assessment, so far as the aspect of claim of exemption on the receipts falling under Clause 131(b) of Part-I of Second Schedule of the Ordinance is concerned. However, the same was not taxed by the department whereas the said issue in the previous as well as subsequent tax years had remained a contested and moot issue between the respondent and the department. In the succeeding tax years i.e. tax year 2004 and tax year 2005 the said receipt was taxed by the DCIR however when the same was challenged in appeal before the CIR(A) the same were deleted. Against the orders of CIR(A) appeals were preferred by the department before the ATIR and the learned ATIR in appeals bearing Nos.I.T.A. 245/KB/2010 and I.T.A. 246/KB/2010 disposed of the same in the following manner:--

"Departmental Appeal for the tax years 2004 and 2005 under section 122(5)(A)

11. Department has agitated the following sole ground for these two year.

"That the learned Commissioner (Appeals-1) Inland Revenue was not justified in deleting the tax charged @ 1% of gross receipts under Clause (3) of Part-II of Second Schedule to the Income Tax Ordinance, 2001.

12. The learned DR has contended that the CIR (A) was not justified in deleting the addition for both the years. The learned DR further submitted that the respondent had claimed exemption Income from export of technical services under Clause (131) of Part-II of Second Schedule of Income Tax Ordinance, 2001. He further submitted that as per Clause 131(B) of Part-I of Second Schedule any income by way of fee for technical services rendered outside Pakistan under an agreement was exempt from total income. Whereas Income in respect of services rendered outside Pakistan shall be charged tax at the rate of 1% of gross receipt under Clause (3) of Part-II of Second Schedule. The respondent has shown receipt rendered outside Pakistan in the audited accounts. He further submitted that order of Additional Commissioner being in accordance with law may be restored and order of learned CIT (A) may be vacated.

13. On the other hand, the learned counsel for the respondent/ assessee has supported the order of CIR(A).

14. We have heard the learned representative of both side and perused the case record as well as case laws cited at bar after perusal of the order of the learned CIR (A), we are inclined to agree with the order of the learned CIR(A) for the following reasons: -

1)The company has been claimed the exemption under Clause 131 of Part-I in Second Schedule.

2)The respondent has history of acceptance of claim of exemption for the past including during the audit taxation year 2003 and for the assessment years 2001-2002 and 2003 completed under the repealed Income Tax Ordinance, 1979. Exemption for subsequent years has also been accepted.

3)The taxation officer has failed to appreciate the nature of receipts of respondent and claim of exemption under Clause (131) Part-I of the Second Schedule without providing any material evidence to substantiate departure from history of acceptance of claim of exemption.

4)That it is held in so many cases that assessee's own history is best guideline for determining the assessment, taxpayers enjoys acceptance of exemption and such treatment has been accepted by the department.

5)The taxation officer has failed to prove that the claim of the company was not correct on account of technical services rendered to foreign entity.

6)If exemption not claimed under Clause (3) of Part-II of Second Schedule the same cannot be imposed on the respondent thus the application of last Clause (3) of Part-II of Second Schedule is devoid of merit and has legal support. It is prerogative of respondent to choose beneficiary exemption under the Second Schedule in view of case law relied upon by the respondent reported as 1964 PTD 554 wherein it has been held that exemption cannot be allowed if not claimed.

7)It is undeniable fact that Siemens AG Germany has entered into power generation contract for which technical staff was provided by the Siemens Pakistan. Perusal of the copies of contracts shows that the scope of workers was limited to provision of skilled manpower/ supervisor/foreman etc. Thus income from such service by Siemens falls under exemption Clause 131.

15. In view of the above the order of the CIT(A) is maintained both the years under appeal and departmental appeals for these two years stand dismissed"

The above referred decision of the ATIR clearly indicates that not only in the tax years prior to the year under consideration but in the succeeding years also the issue of chargeability of tax, as raised in the current tax year, had remained a contentious issue between the DCIR and the respondent company.

8.It is seen that the issue of taxability on the above receipt was only taken-up by the DCIR by invoking the provision of section 221 of the Ordinance, which deals squarely with mistakes apparent and floating on the surface of the record, and which do not require any detailed deliberation. It is now a well settled principle of law that a mistake about which there could conceivably be two opinions or is a debatable issue or moot point cannot be the subject matter of rectification under section 221 of the Ordinance. In our view, the jurisdiction of DCIT while passing an order under section 221 of the Ordinance is dependent upon existence of a mistake apparent from the record. Moreover, the said mistake should be so obvious that it should strike to one's mind without there being long drawn process of reasonings, interpretation of some sections/statute, dilation upon a moot or debatable issue which, in our view, falls squarely outside the scope of rectification of mistake. Reference in this regard may be made to the decisions given in the cases of (1) CIT v. Messrs Adam Limited Karachi (1969 PTD 351), (2) CIT v. Hero Cycle (Pvt.) Limited Company and others (228 ITR 463 (SC)) and (3) T.S. Balaram I.T.O. Company Circle No.IV Bombay v. Volkart Brothers and others (82 ITR 50 (SC)).

9.In the decision given in the case of CIT v. Abdul Ghani (2007 PTD 967) the Hon'ble Apex Court observed as under:--

". . . . Viewed in the background of above legal and factual position, it is observed that the Tribunal had decided the above issue after application of mind, consciously and giving plausible and satisfactory reasons for the same. It, therefore, cannot be said to be a mistake or inadvertent finding or an error floating on the face of the judgment so as to be rectifiable under section 156 of the Ordinance. Rectification under section 156 of the Ordinance is permissible if the error is apparent, obvious and floating on the face of the judgment and can be rectified without long drawn arguments and proceedings for appreciating facts and interpretation or application of any provision of law."

10.In the decision given in the case of CIT v. Shadman Cotton Mills Limited (2008 PTD 253) the Hon'ble Supreme Court observed as under:--

"7. . . . . The perusal of the orders of the Assessing Authority, Commissioner, Income Tax (Appeals) and the order of Income Tax Appellate Tribunal as well as the order passed by the High Court would make it clear that exercise undertaken by the Assessing Officer under section 156 of the Ordinance was not simply in respect of a mistake apparent on the face of the record within the contemplation of section 156 (ibid), rather it was re-assessment of the tax liability of the assessee on the basis of existing record. The expression "mistake apparent on record" means the error or mistake so manifest and dear which, if is permitted to remain on record, may have material effect on the case. But an error of fact or law, which having direct nexus with the question of determination of rights of parties affecting their substantial rights or causing prejudice to their interest, is not a mistake apparent on the record to be rectified under section 156 (ibid). The mistake must be of the nature, which is floating on the surface of record and must not involve, an elaborate discussion or detailed probe or process of determination."

In the above decision the Hon'ble Supreme Court has further observed as under:--

"Similarly the Assessing Officer does not enjoy the power of review to recall its earlier order under section 156(1) of the Ordinance; rather he has limited power of rectifying the mistake on the face of the order without any material change. The tax liability of an assessee in the process of rectification cannot be altered on the basis of a consideration, which was not part of the original proceedings and the concept of rectification of mistake to correct the error committed in the assessment order, which is found floating on the surface of the record, may not be beyond the assessment already made, therefore, the question as to whether certain expenses can or cannot be deducted for the purpose of assessment of the income is a material question, which cannot be brought within the purview of section 156(1) of the Ordinance for the purpose of rectification of the order of assessment."

11.In the decision given by the Dacca High Court in the case of Helal Jute Press Limited v. Commissioner of Income-Tax, DACCA Zone, DACCA and another (22 Taxation 157) it was observed as under:--

"It has been already found in the present case that the alleged rectification of mistake will require more than elucidation, of argument or debate as the rectification cannot be done."

12.Reference may also be made to the decision given in the case of Commissioner Inland Revenue, Karachi v. Messrs E.N.I. Pakistan (M) Limited Karachi (2013 PTD 508) wherein a learned Division Bench of this Court observed as under:-

"5. We do not find any error or illegality in the order passed by the CIT (Appeals), while rejecting the rectification application moved by the applicant, whereas the Tribunal has rightly concurred with such findings, which otherwise depicts correct legal position. The Hon'ble Supreme Court of Pakistan, in the case of Messrs National Foods v. CIT reported as 1992 SCMR 687 = 1992 PTD 570 while, defining the scope of rectification, has held that a mistake should be apparent from record, floating on surface and may not require any investigation or further evidence. It has been further held that a mistake which is sought to be rectified must be so obvious and apparent from record that it may immediately strike on the face of it. It may not be something which may be established by a long drawn process of reasoning on issues on which there could be conceivably two views or opinions."

13.The decision relied upon by the counsel for the department in the case of Pakistan Petroleum Ltd. (supra) is found to be distinguishable since in that decision the main issue was with regard to the fact that the respondent in that case paid tax by mistake and thereafter filed rectification application and the Hon'ble Supreme Court observed that the department has the right to correct a mistake if there is any mistake in tax calculation in case of short levy etc. Whereas in the instant case it is seen that the DCIR has invoked the provisions of section 221 of the Ordinance on a issue which was a contentious matter between the DCIR and the respondent and hence could not be considered to be a mistake apparent from the record.

14.It would not be out of place to mention that section 35 of the Income Tax Ordinance, 1922 (repealed), section 156 of the Income Tax Ordinance, 1979 (repealed) and section 154 of Indian Income Tax Act, 1961 are para-materia to section 221 of the Ordinance, 2001. The powers of DCIR under section 221 of the Ordinance, as stated above, are quite limited to the extent of mistakes apparent from record since there are other provisions of law which deal with the authority of department officials with regard to reopening of assessment, revision etc. in cases where the department is of the view that certain income had escaped from the chargeability of tax, but for exercising powers under section 221 of the Ordinance there must be a mistake apparently floating on the surface which is so obvious to strike one's mind without entering into long drawn process of reasonings, detailed deliberation etc.

15.A perusal of the above decisions will leave no room for doubt that only those mistakes are rectifiable which are apparent from the record and floating on the surface and which do not require any long drawn process of reasonings, deliberation on a moot or debatable point. It is seen that the issue with regard to the taxability on the services rendered by the respondent outside Pakistan has been a contentious issue between the DCIR and the respondent hence, in our view, the same falls outside the scope of mistake apparent from the record. Moreover as seen from the above decisions it was already held in a number of decisions quoted supra that in cases where there could conceivably be two views/opinions the same falls outside the scope and ambit of rectification of mistake. In the instant case also the view of charging tax on the impugned receipts as per the view of DCIR was liable to tax whereas as per the views of CIR(A) and ATIR the same is exempt under the relevant provisions of law, meaning thereby that there were two views/opinions and hence the issue was a moot point requiring detailed deliberation, lengthy arguments which could not be considered to be a mistake apparent from the record or a mistake floating on the surface.

16.We, therefore, answer all the questions raised in the instant reference application in affirmative i.e. in favour of the respondent-company and against the applicant-department.

MH/C-28/Sindh Reference dismissed.