COMMISSIONER OF INCOME TAX VS SEFAM (PVT.) LTD., 2017 PTD-LAHORE-HIGH-COURT-LAHORE 2162 (2017)

Income Tax Ordinance (XLIX of 2001)---

----Ss.122(5), 111, 120 & 133---Amendment of assessment---"Definite information obtained from audit or otherwise"---Meaning, scope and application of "definite information" for amendment of assessment---Unexplained income or assets---Application of S.111 of the Income Tax Ordinance, 2001---Scope---Question before the High Court was "whether transfer of sale proceeds of taxpayer to alleged benmai account constituted 'definite information' under S. 122 of the Income Tax Ordinance, 2001 and whether on basis of the same, addition could be made in taxpayer's income under S. 111 of the Income Tax Ordinance, 2001"---Held, every information did not qualify as a 'definite information' and such information could not form basis for reopening of assessment---Expression "definite information" could not be given a universal meaning and the same had to be determined in context of circumstances of each case as to whether material in question constituted 'definite information' or not---'Definite information' was a pre-requisite to attract provisions of S.122(5) of the Income Tax Ordinance, 2001 and it may be acquired from audit or otherwise---In the present case, it was during sales tax audit when it was discovered by auditors that taxpayer was diverting major portion of its sale receipts through an undisclosed/undeclared benami account and the auditors inter alia got hold of such Bank statements and details of money transfers---High Court observed that since all such material was acquired by Department during course of an audit, same qualified as "definite information"---High Court further observed that since it was established by Department that taxpayer was actual owner of benami Bank account, and the money deposited therein, therefore, the matter fell within ambit of S.111(b) of the Income Tax Ordinance, 2001 which made owner of "any money" liable, who failed to offer any explanation about nature and source of such money---Reference was answered accordingly.

Income Tax Officer and another v. Messrs Chappal Builders 1993 SCMR 1108; Messrs E.F.U. General Insurance Co. Limited v. The Federation of Pakistan and others PLD 1997 SC 700; Commissioner Inland Revenue v. Messrs Khan CNG and Filling Station and others 2013 PTD 884 and Commissioner Inland Revenue v. Messrs Sika Paint Industries (sic) 2017 LHC 1679 rel.

Sarfraz Ahmad Cheema for Applicant.

Iqbal Hashmi for Respondent.

Date of hearing; 17th May, 2017.

JUDGMENT

TARIQ SALEEM SHEIKH, J.---This is an application by way of reference under Section 133 of the Income Tax Ordinance, 2001 (the "Ordinance"), against order dated 25-6-2012 passed by the Appellate Tribunal Inland Revenue, Lahore Bench, Lahore (the "Tribunal"), in I.T.A. No. 527/LB/2012.

2.The Respondent is a private company limited by shares. It derives income from exports and local sales of manufactured textile products through its retail outlets within and outside Pakistan. It sells embroidered stitched and unstitched cloth and plain cloth under different brand names, including, Bareeze, Mini Minor, Leisure Club. On 31-12-2005 the Respondent filed its income tax return for the Tax Year 2005 declaring income of Rs.10,421,777/-. This return was taken to be an assessment order under Section 120(1) of the Ordinance. During sales tax audit it was found that the Respondent had been diverting its sales to a Benami bank account maintained at the Standard Chartered Bank Limited, Shadman Branch, Lahore, in the joint names of Aftab Ahmad and Asif Mehmood. The Respondent had not disclosed that account in its books. It was also observed that the Respondent had various outlets in various parts of the country which transferred their sale receipts online and sent a copy of the deposit slip to the Head Office along with the Daily Sale Reports. From the detail of monthly sales and deposit reports the auditors observed that the Respondent deposited some of its sale proceeds in the company's account and the remaining portion thereof in the undisclosed aforementioned Benami account. On the basis of this "definite information" proceedings under Section 122(5) were initiated against the Respondent and the Assessing Officer issued Show Cause Notice under Sections 122(9)/122(1) to it. The Respondent submitted its reply thereto which was considered unsatisfactory. The Assessing Officer, vide order dated 30-6-2011, held that the Respondent had suppressed the sales to the tune of Rs.194,955,973/- and made an addition under Section 111 accordingly. Aggrieved, the Respondent preferred an appeal before the CIR (Appeals) which was dismissed. It then filed second appeal before the Tribunal which was accepted vide order dated 25-6-2012. The Tribunal held that there was no "definite information" within the meaning of Section 122(5) of the Ordinance which could justify proceedings against the Respondent. Further, the nexus between the sale receipts of the Respondent and the money deposited in the alleged Benami account could not be established. And lastly, clause (d) of subsection (1) of Section 111 under which the addition of Rs.194,955,973/- was sought to be made to the income of the Respondent was inserted in the Ordinance through an amendment by the Finance Act, 2011. Since clause (d) was a charging provision it could not be applied retrospectively to the case of the Respondent which pertained to the Tax Year-2005. The Department has now filed this reference application before this Court against the Tribunal's Order dated 25-6-2012.

3.The Petitioner Department has urged that the following questions of law emanate from the Tribunal's Order dated 25-6-2012 which require determination by this Court:

i)Whether, on the facts and circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified to hold that the transfer of sale proceeds from company branches to bank account of the employees did not constitute definite information in terms of provision of section 122 of the Income Tax Ordinance, 2001?

ii)Whether, on the facts and circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified to hold that the addition made under section 111(1)(b) of the Income Tax Ordinance, 2001, was unlawful on the basis of provisions of section 111(1)(d) inserted through the Finance Act, 2011?

4.There is no cavil with the proposition that Section 122(5) empowers the Commissioner to amend an assessment order treated as issued under Section 120 where there is a definite information that it is false. For facility of reference, Section 122(5) is reproduced hereunder:

"(5) An assessment order in respect of tax year, or an assessment year, shall only be amended under subsection (1) and an amended assessment for that year shall only be further amended under subsection (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that:

i)any income chargeable to tax has escaped assessment; or

ii)total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or

iii)any amount under a head of income has been mis-classified".

5.The term "definite information" has not been defined in the Ordinance. It was also not defined in the Repealed Income Tax Ordinance, 1979, which contained a similar concept. Consequently, it has generated a lot of debts. However, it is by now well settled that every information does not qualify as a definite information and it cannot form the basis for reopening of the assessment. Further, the expression "definite information" cannot be given a universal meaning and it has to be determined in the context of circumstances of each case as to whether the material constitutes definite information or not. Reliance is placed on "Income Tax Officer and another v. Messrs Chappal Builders" (1993 SCMR 1108) and "Messrs E.F.U. General Insurance Co. Limited v. The Federation of Pakistan and others" (PLD 1997 SC 700). Nevertheless, subsection (8) of Section 122 explains:--

"(8) For the purpose of this section, "definite information" includes information on sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance, and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer".

6.Definite information is a pre-requisite to attract the provisions of Section 122(5). However, it may be acquired from audit or otherwise. In the instant case, it was during the sales tax audit of the Respondent when the auditors discovered that it was diverting a major portion of its sale receipts through an undisclosed/undeclared account. The auditors inter alia got hold of the Respondent's bank statements, bank vouchers, details of online money transfers by branches to the Head Office and their daily and monthly sale and deposit reports. Since all this material was acquired by the Department during the course of an audit, it does qualify for definite information within the meaning of section 122(5).

7.Learned counsel for the Respondent contended that the aforementioned information could not be reckoned as definite information on the touchstone of the law laid down by the Hon'ble Supreme Court of Pakistan in Chappal Builders case (supra), wherein it was held that "unless there is definite direct information and there is no further need to put the said definite information to trial by putting in further supporting material, the process of self-assessment could not be reopened". He argued that the ratio of the said case has been consistently followed by the Courts over the years and in this context referred to one of the recent judgment of this Court which is reported as "Commissioner Inland Revenue v. Messrs Khan CNG and Filling Station and others" (2013 PTD 884).

8.This Court examined the above argument in the "Commissioner Inland Revenue v. Messrs Sika Paint Industries" (2017 LHC 1679(sic)) and observed that what the law prohibits is a roving inquiry into the affairs of a taxpayer. It excludes from the domain of "definite information" any incomplete information that requires further inquiry into the affairs of the taxpayer before the Department can reach a conclusion or, as the Hon'ble Supreme Court said in the Chappal Builders case (supra), "to clothe their information with credibility". In the instant case, as already stated, the entire information on the basis of which the Department proceeded against the Respondent was derived from its own documents of unimpeachable authenticity and is fully covered by subsection (8) of Section 122 reproduced above.

9.The second issue involves the interpretation of Section 111 and the applicability of clause (d) of subsection (1) which was added by the Finance Act, 2011. We reproduce the relevant provisions of Section 111 hereunder for ready reference:--

"111. Unexplained income or assets---(1) Where---

(a)any amount is credited in a person's book of account;

(b)a person has made any investment or is the owner of any money or valuable article; [ ]

(c)a person has incurred by expenditure, [;or]

[(d) any person has concealed income or furnished inaccurate particulars of income including:

(i)the suppression of any production, sales or any amount chargeable to tax; or

(ii)the suppression of any item of receipt liable to tax in whole or in part,]

and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made [suppression of any production, sales, any amount chargeable to tax and of any item of receipt liable to ax] or the explanation offered by the person is not, in the Commissioner's opinion, satisfactory, the amount credited, value of the investment, money, value of the articles, or amount of expenditure [suppressed amount of production, sales or any amount chargeable to tax or of any item of receipt liable to tax] shall be included in the person's income chargeable to tax under head "Income from [Other Sources"] to the extent it is not adequately explained. [:]

[Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law.]

(2) The amount referred to in subsection (1) shall be included in the person's income chargeable to tax in the tax year [to which such amount relates.]

10.The Tribunal held that the basic charge against the Respondent was that it had concealed its income by suppressing its sales which falls within the mischief of Clause (d). Since it is a charging provision and was not on the Statute Book in the Tax Year-2005, it could not be given a retrospective effect and was not applicable to the case of the Respondent. We have observed that the Assessing Officer had assessed the Respondent under Clause (b). As such, the question before the Tribunal was whether the instant case was covered by the said provision. It proceeded on the wrong premise.

11.In the instant case, the allegation against the Respondent was that it was diverting its sales to an undisclosed account bearing Account No.7405-733097-050 which was in the joint names of Aftab Ahmad and Asif Mehmood (herein referred to as the "Benami Account"). The Assessing Officer established the nexus between the Benami Account and the Respondent inter alia through the following:

i)Monthly sale and deposit reports.

ii)Credit card sales and cash sales.

iii)Online money transfers.

iv)Date-wise comparative analysis.

v)Brach-wise comparative analysis.

vi)Deposit slips showing direct deposit of sales of Bareeze in the Benami Account.

vii)Bank transactions between the declared business account No.7405-136663-050, undeclared Benami Account No.7405-733097-050 and some common accounts, including Account No.5851-048142-050 and Account No. 6102-43579-090.

viii)Issuance of a pay order for Rs.17.00 million on 12-1-2005 from the Benami Account in the name of Mrs. Suraya Zaman, director of the Respondent company (although the said pay order was subsequently cancelled).

12.It is noteworthy that it is not a case of suppression of sales simpliciter as the learned counsel for the Respondent attempted to argue. The Department has established that Account No.7405-733097-050 is Benami and the Respondent is its actual owner thereof as also the monies deposited therein. The instant case, therefore, squarely falls within Clause (b) of Section 111(1) which makes "owner of any money" liable who fails to offer any explanation about the nature and source of his money. The Assessing Officer rightly proceeded against the Respondent under Clause (b) ibid. the Tribunal's reference to clause (d) of section 111(1) is misplaced.

13.For the above-reasons, we answer the above-noted question in the negative (i.e. in favour of the Petitioner Department and against the Respondent) and allow this application.

14.Office shall send a copy of this judgment to the Tribunal under the seal of this Court in terms of section 133(5) of the Ordinance.

KMZ/C-20/L Order accordingly.