SAINDAK METALS LTD. VS CHAIRMAN, FEDERAL BOARD OF REVENUE, 2017 PTD-QUETTA-HIGH-COURT-BALOCHISTAN 2227 (2017)

(a) Words and phrases---

----"Business"---Meaning---"Business" was the activity of making, buying or selling goods or providing services in exchange for money and was a commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in livelihood or gain.

Webster Dictionary and Black's Law Dictionary rel.

(b) Income Tax Ordinance (XLIX of 2001)---

----Ss.221 & 122---"Amendment"---Meaning and scope---"Amendment" was the formal revision or addition proposed or made to a statute, Constitution, pleadings, order or other instrument and it was a change made by addition, deletion or correction; an alteration in the wording, a change in statements of allegations, an addition of supplemental information, the deletion of unnecessary, undesirable, outdated or untrue information---Amendment was done for the purpose of adjustment, betterment, elaboration, improvement or perfection to a statute, pleadings or documents---Amendment made to a section or part of a statute, order, pleadings or document did not change its nature and the basic document remained the intact.

Black's Law Dictionary rel.

(c) Income Tax Ordinance (XLIX of 2001)---

----S.221---"Rectification" of mistake---Meaning---Rectification was the court's equitable correction of a contractual term that was misstated, the judicial alteration of a written contract to make it conform to the true intention of the parties---As an equitable remedy, the court altered the terms as written as to express the true intention of the parties---Rectification was the correction of something that was wrong, or to correct by removing of an error; and was a process by which something wrongly entered in or omitted from a record or any document was corrected so as to express the true intention of the recorder or author, which was not expressed in the original version.

Webster Dictionary and Black's Law Dictionary rel.

(d) Income Tax Ordinance (XLIX of 2001)---

----Ss. 221, 122 & 133---Assessment---Amendment of assessment---Rectification of mistake---Taxpayer in its return classified a portion of its income under the head of "income from business", which return was subsequently rectified under S. 221 of the Income Tax Ordinance, 2001 by an order of the Commissioner, and said income was reclassified as income from other sources---Contention of the taxpayer, inter alia, was that such amendment did not fall within ambit of S. 221 of the Income Tax Ordinance, 2001 and was time barred under S. 122 of the Income Tax Ordinance, 2001---Validity---Difference between Ss. 122 & 221 of the Income Tax Ordinance, 2001 was that under said S. 122; an amendment was allowed in returns submitted by the taxpayer, whereas under S. 221 of the Income Tax Ordinance, 2001 empowered the named authorities to amend its own order to rectify mistake apparent in the assessment order---Taxpayer, in the present case, while submitting his returns classified its income as "income from business" which was initially accepted by the Commissioner through an order, without realizing it was not an income from business---Return submitted by the taxpayer under such classification of income was against fundamental principle of the Income Tax Ordinance, 2001 which was mistakenly accepted by the Commissioner and as such required rectification---When such mistake surfaced on the record, impugned notice was issued and mistake made in the returns was legitimately designed to avoid payment of tax; therefore the same needed to be corrected---Such amendment in the order rectifying an apparent mistake fell within ambit of S. 221 of the Income Tax Ordinance, 2001 instead of S. 122 of the same---No illegality therefore existed in the impugned orders---Reference was answered, accordingly.

Gohar Yaqoob Yousafzai and Habib-ur-Rehman for Petitioner.

Syed Ikhlaq Shah, D.A.G. for Respondent.

Rehmatullah Durrani, Additional Commissioner Income Tax.

Date of hearing: 24th April, 2017.

JUDGMENT

JAMAL KHAN MANDOKHAIL, J.---Through this judgment, we intend to dispose of the above titled Income Tax Reference.

Facts of the case are that the petitioner is a private limited company with the name of Saindak Metals Ltd. (SML). The company with the assistance of China Metallurgical Corporation (MCC), completed plant installation and other infrastructure in January 1996 for the purpose of exploiting, mining and Metallurgical processing of various metals and minerals at Saindak Balochistan. Subsequently, through a lease agreement dated 30th November, 2001, the project was leased out to MCC for a period of ten years, which formed 100% owned company with the name of MCC Resources Development Company (Pvt.) Limited (hereinafter called as MRDL) for Exploiting, Mining and Metallurgical Processing of various metals and minerals alone at Saindak. The MCC, in consideration to receive an amount of US$500,000 as Annual Rent and 50% of the after Tax Profit of the MRDL as Production Rent. The petitioner (SML) filed Income Tax Returns, declaring its income as "Income from Business" and claims losses of past years. The respondent (Income Tax Commissioner) did not agree with assessment, as such, the return was amended on 8th January 2010. Subsequently, the Income Tax Commissioner realized that the income of the petitioner is actually from "Other Sources", instead of "Income from Business", hence a rectification notice was issued to the petitioner under section 221 of the Income Tax Ordinance, 2001 (the Ordinance), declaring that its business is assessable under section 39 of the Income Tax Ordinance, 2001, therefore, it cannot get the benefit of Brought Forward Losses. The petitioner feeling aggrieved filed appeals before the Commissioner, Inland Revenue Quetta which were dismissed vide order dated 18th January 2016. The petitioner challenged the order before the appellate Tribunal, which too was dismissed on 14th October, 2016, hence these References.

2.Learned counsel for the petitioner stated that the impugned notice issued by the respondent was barred by time as provided by subsection (2) of section 122 of the Ordinance, therefore, the same was required to be set aside, but the forums below have failed to consider this legal aspect of the case, hence committed an illegality. The learned counsel stated that the scope of section 221 of the Ordinance is limited only to rectify an apparent error floating from the surface of the record, but the rectification order passed by the Commissioner has changed the frame of the assessment, which act is without jurisdiction, hence is an illegality. The learned counsel added that the petitioner has rightly classified its income under the head of "Income from Business", which is evident from the lease agreement, but it has wrongly been considered by the respondent as business from "Other Sources". The learned counsel stated that previously the respondents accepted the assessment and was agreed with what has been declared and furnished by the petitioner, therefore, after a long period, the respondent cannot go beyond its own findings. The learned counsel added that since the petitioner has succeeded in establishing that its source of income is business, therefore, the rectification order passed by the Commissioner was not justified, but the forums below were wrong in upholding the rectification notice, which is an illegality, therefore, the rectification notice and the order impugned are liable to be set aside.

3.The learned Assistant Advocate General and the Additional Commissioner, Income Tax Quetta stated that no law point has been raised in the References, therefore, the same are liable to be dismissed. They opposed the contention of the petitioner and stated that the rectification order has been passed under section 221 of the Ordinance, for which no time limit has been provided, but the petitioner has wrongly considered it as an order under section 122(5)(A), hence the objection of the limitation is baseless. They added that earlier, the source of income classified by the petitioner as "Income from Business" was erroneously accepted, which error has been rectified, therefore, the rectification order is very much within the ambit of Section 221 of the Ordinance. According to the learned AAG, the petitioner is receiving its income, as a result of lease of his land, building built thereon, together with plant and machinery, as such, the petitioner is not contributory to the business of MRDL in any way, hence its income is from "Other Sources", instead of income from Business", which is chargeable to tax, but the petitioner has made at wrong declaration, which was rectified by the Commissioner by exercising power under Section 221 of the Ordinance, therefore, the order of rectification was rightly passed, which has concurrently been upheld by the Forum below. The learned AAG added that no error, illegality or jurisdictional defect in the orders impugned has been pointed out by the petitioner, as such, the References are liable to be set aside.

4.We have heard the learned counsel for the parties and have gone through the record. It is important to mention here that Section 11 of the Ordinance classifies the following heads of income:--

a.Salary:

b.Income from property;

c.Income from business;

d.Capital gains; and

e.Income from other sources.

Every taxpayer has to classify his/her/its head of business in the returns. for the purpose of taxability of the income, while submitting income tax returns under section 120 of the Ordinance. The petitioner submitted its Income Tax Returns, wherein it classified its income as "Income from Business". The respondent initially accepted what the petitioner had classified, however, when it was surfaced that the petitioner has wrongly classified its source of income, the rectification order was passed, which was disputed by the petitioner. The issue between the parties is whether the income derived by the petitioner pursuant to the agreement is an "Income from Business" or "Income from Other Sources"? The word Business has been defined in sub-section (10) of section 2 of the Ordinance as under:--

"Business" includes any trade, commerce, manufacturer, profession, vocation or adventure or concern in the nature of trade, commerce, manufacturer, profession or vocation, but does not include employment.

The Webster Dictionary has defined the word "Business" as the activity of making, buying or selling goods or providing services in exchange for money. It has also been defined in the Black's Law Dictionary as, "A commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in livelihood or gain."

5.Thus, classification of an income depends upon source and nature of activity, through which an income is being generated. An income gained from the investment of capital, from making, buying and selling goods or providing services in exchange for money or any income that is realized as a result of business activity is called a "Business Income". It is a type of an income gained from transaction after any expense or any other financial obligations are deducted. It is a fact that the petitioner installed of plants, machinery and constructed infrastructure upon the site, subsequently, leased out the project as a whole to the MRDL in consideration of US$500,000 as Annual Rent and also receives 50% of the profit as Production Rent. Admittedly, the petitioner did not invest capital nor provided any service or anything to be sold or made for the business. Similarly, it did not contribute practically, nor has any activity or a decision power in the affairs of the business. The MRDL has solely invested capital in the business, whereas it has its own administrative and ministerial staff and labours, with whom the petitioner has no concern. The set up established by the petitioner has been leased out at fixed rate in exchange whereof, a specific amount is being generated. Under such circumstances, the income earned by the petitioner does not qualify the definition of "Business Income".

6.Now, to consider as to whether the notice in question was rightly issued by the Commissioner under Section 221 of the Ordinance or otherwise? Let's understand the procedure for assessment of the income and submission of the income tax returns. Section 120 of the Ordinance allows taxpayer to furnish true and complete information of income for the tax year ending on or after 1st day of July, by properly classifying head of the income, through income tax returns to the Commissioner for determination of taxability of the income. It is for the Commissioner either to accept the returns in toto or to disagree with the amount of the taxable income or head of the income shown therein. In case of disagreement, the Commissioner may conduct audit of the income of the taxpayer and if it is found disproportionate to his actual income the Commissioner has the power under section 122 of the Ordinance to amend the assessment within five years from the end of financial year. Here, the word "amendment" has been used in this section, which has been defined in the Black's Law Dictionary, as a formal revision or addition proposed or made to a statute, constitution, pleadings, order or other instrument; a change made by addition, deletion or correction; an alteration in wording; a change in statements of allegations, an addition of supplemental information; the deletion of unnecessary, undesirable, outdated or untrue information. The amendment is done for the purpose of adjustment, betterment, elaboration, improvement or perfection of a Statute, pleadings or documents. An amendment made to a section or part of a Statute, orders, pleadings, a document etc. does not change its nature and the basic document remains intact.

Similarly, the Commissioner, the Commissioner (Appeals) or the Appellate Tribunal has the power under Section 221 of the Ordinance to amend any order passed by him/it to rectify any mistake surfaced on the face of the record on his or its own motion. In this section, the word rectification has been used, which has been defined in the Black's Law Dictionary as under:--

"A court 's equitable correction of a contractual term that is misstated; the judicial alteration of a written contract to make it conform to the true intention of the parties. As an equitable remedy that Court alters the terms as written so as to express the true intention of the parties." Similarly, the rectification has been defined in the Webster Dictionary as "to correct something that is wrong; to correct by removing error".

Rectification is a process by which something wrongly entered in or omitted from a record or any document, is corrected so as to express the true intention of the recorder or author, which was not expressed in the original version. The difference between section 122 and section 221, of the Ordinance is that under section 122, the amendment is allowed in the returns submitted by the taxpayer, whereas section 221 empowers the named authorities to amend his or its own order to rectify mistake apparent in the order.

7.In the present case, the petitioner, while submitting its returns, has classified its income as "Income from Business", which was initially accepted by the Commissioner through an order, without realizing that it is not a Business Income. The returns earlier submitted by the petitioner classifying its earning as "income from Business" was against the fundamental principle of the Ordinance, which was mistakenly accepted by the Commissioner through an order, as such, it required rectification. When such mistake did surface on the record, the impugned notice was issued by the Commissioner to rectify his earlier order, therefore, the notice was actually for the rectification of that order. It is established that the mistake made in the returns was legitimately designed to avoid payment of tax, therefore, no reason why it should not be corrected. Such amendment in the order rectifying an apparent mistake in it, falls within the ambit of section 221, instead of section 122 of the Ordinance, therefore, no time limit has been provided by law in this behalf. The petitioner has failed to give reason to interfere in the discretion of the Commissioner, which has been concurred by the forum below. The notice and the orders impugned do not suffer from any illegality or irregularity to interfere in them.

Thus, in view of above, the above titled References are dismissed. The interim order passed earlier stands recalled.

KMZ/111/Bal Order accordingly.