APPELLATE
TRIBUNAL INLAND REVENUE (PAKISTAN)
KARACHI
BENCH, KARACHI
Present: MR.
M.M. AKRAM, J.M.
DR. TAUQEER IRTIZA, A.M
ITA No.1540/KB/2019
Tax Year
2014
u/s 122(1)
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M/s
Brand Activate (Pvt) Ltd.
House
No.C-32/5-1, Main Tipu Sultan Road,
KDA
Scheme No.1, Karachi ………....………………..Appellant
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Vs
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Commissioner
Inland Revenue,
Zone-IV,
CRTO, Karachi. ……...…………………Respondent
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Appellant by: Mr.
Taimoor Ahmed Qureshi, Advocate
Respondent by: Mr.
Naveed Dost, DR
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Date of hearing: 09.06.2021
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Date of order: 09.06.2021
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O R D E R
M.M.
AKRAM, JUDICIAL MEMBER: By
this order, we intend to dispose of the above-titled appeal filed by the
Appellant/Taxpayer challenging the validity of the Order No.69/2019 dated
30.09.2019, passed by the learned Commissioner Inland Revenue (Appeals-III),
Karachi, for the tax year 2014, on the grounds as set forth in the memos of
appeal.
2. Brief
facts giving rise to the appeal are that the appellant taxpayer is a Private
Limited Company. The principal business activity of the company is to provide
services in marketing and advertising. Return of income was filed declaring a
loss of (Rs.11,367,206/-). Subsequently, the appellant’s case was selected for
audit under section 177 of the Income Tax Ordinance, 2001 (“the Ordinance”) by the Commissioner Inland Revenue concerned.
Audit proceedings were initiated and IDR/notices followed by reminders were
issued from 15.05.2015 to 25.11.2015 which remained un-complied. On account of the
appellant’s persistent non-compliance to statutory notices/reminders issued
from time to time, the assessing officer ultimately passed the amended order
under section 122(1) of the Ordinance whereby a tax demand to the tune of Rs.31,466,590/-was
created against the appellant. Aggrieved with the said order, the appellant
preferred the appeal before the learned CIR(A) who vide order dated 30.09.2019 confirmed
the treatment accorded by the assessing officer. Felt aggrieved, the appellant
has assailed the impugned appellate order before this Tribunal on a number of
grounds.
3. This case came up for hearing on 09.06.2021.
The learned counsel appearing on behalf of the appellant/taxpayer reiterated
the contentions already submitted in the grounds of appeal as set forth in the
memo of appeal. On the other hand, the learned DR appearing on behalf of the
department has fully supported the impugned order and contended that the
learned CIR(A) has passed a speaking order and there is no infirmity in the
impugned order.
4. We have heard the arguments put forth by
the learned representative of both sides and have carefully gone through the
available record. After due consideration, we find that the submissions made by
the learned AR for the appellant carry substantial weight. The heart of the
controversy, involved in the instant appeal revolved around the interpretation
of section 177 of the Ordinance. Admitted facts, briefly, are that the case of
the appellant was selected for audit under section 177 of the Ordinance by the
concerned Commissioner Inland Revenue and for conducting an audit the case was
assigned to the Assessing Officer. In consequence thereof, the audit
proceedings were initiated by the Assessing Officer and accordingly, called
upon through notice to the appellant to produce the books of accounts and related
documents in support of its declared version for the purpose of conducting an
audit under section 177. The record shows that numerous opportunities were
provided to the appellant but all in vain and admittedly the appellant did not
provide the books of accounts and required documents. Now the following question
arises for determination by this Tribunal:-
Whether the
proceedings should have been finalized under section 122 or 121(1)(d) of the
Ordinance where admittedly the taxpayer did not produce the books of accounts
and related documents to the Assessing Officer for the purpose of an audit
under section 177 of the Ordinance?
To
answer the question, it would be advantageous
to reproduce hereunder the relevant provisions of law:-
177. Audit:- (1) The Commissioner
may call for any record or documents including books of accounts maintained
under this Ordinance or any other law for the time being in force for
conducting audit of the income tax affairs of the person and where such record
or documents have been kept on electronic data, the person shall allow access
to the Commissioner or the officer authorized by the Commissioner for use of
machine and software on which such data is kept and the Commissioner or the
officer may have access to the required information and data and duly attested
hard copies of such information or data for the purpose of investigation and
proceedings under this Ordinance in respect of such person or any other person:
-
Provided that--
(a) the Commissioner may, after recording
reasons in writing call for record or documents including books of accounts of
the taxpayer; and
(b) the reasons shall be communicated to the
taxpayer while calling record or documents including books of accounts of the
taxpayer:
Provided
further that the Commissioner shall not call for record or documents of the
taxpayer after expiry of six years from the end of the tax year to which they
relate.
(2) After
obtaining the record of a person under sub-section(1) or where necessary record
is not maintained, the Commissioner shall conduct an audit of the income tax
affairs (including examination of accounts and records, enquiry into
expenditure, assets and liabilities) of that person or any other person and may
call for such other information and documents as he may deem appropriate.
(3)
Omitted.
(4)
Omitted.
(5)
Omitted.
(6) After
completion of the audit the Commissioner shall, after obtaining taxpayer's
explanation on all the issues raised in the audit, issue an audit report
containing audit observations and findings.
(6A) After issuing the audit report, the
Commissioner may, if considered necessary, amend the assessment under
subsection (1) or sub-section (4) of section 122, as the case may be, after
providing an opportunity of being heard to the taxpayer under sub-section (9)
of section 122.
(7)
…………………………….
(8)
…………………………….
(9)
…………………………….
(10)
Notwithstanding anything contained in sub-sections (2) and (6) where a person fails to produce before
the Commissioner or a firm of Chartered Accountants or a firm of Cost
and Management Accountants appointed by the Board or the Commissioner under
sub-section (8) to conduct an audit, any
accounts, documents and records, required to be maintained under section174 or
any other relevant document, electronically kept record, electronic machine or
any other evidence that may be required by the Commissioner or the firm
of Chartered Accountants or the firm of Cost and Management Accountants for the purpose of audit or
determination of income and tax due thereon, the Commissioner may proceed to
make best judgment assessment under section 121 of this Ordinance and the assessment treated to have been made
on the basis of return or revised return filed by the taxpayer shall be of no
legal effect.
(11)
……………………………
(12)
……………………………
(13)
…………………………..
(14)
…….............................
(15)
………………………….
(16)
………………………….
(17)
………………………….
Section 114. Return of income.- (1)
Subject to this Ordinance, the following persons are required to furnish a
return of income for a tax year, namely:-
……………..……………
(1A) …………………………..
(2) …………………………..
(2A) …………………………..
(3) …………………………..
(4) …………………………..
(5) …………………………..
(6) …………………………..
(6A) If a taxpayer files a revised return
voluntarily alongwith deposit of the amount of tax short paid or amount of tax
sought to be evaded along with the default surcharge, whenever it comes to his
notice, before receipt of notice under sections 177 or sub-section (9) of 122,
no penalty shall be recovered from him:
Provided that in case the taxpayer deposits
the amount of tax as pointed out by the Commissioner during the audit or
before the issuance of notice under sub-section (9) of section 122, he
shall deposit the amount of tax sought to be evaded, the default surcharge and
twenty-five per cent of the penalties leviable under the Ordinance along with
the revised return:
Provided
further that in case the taxpayer revises the return after the issuance of a
show-cause notice under sub-section (9) of section 122, he shall deposit the
amount of tax sought to be evaded, default surcharge and fifty per cent of the
leviable penalties under the Ordinance along with the revised return and
thereafter, the show cause notice shall stand abated.
(7) ……………………………
121.
Best judgment assessment.— (1) Where
a person fails to —
(ab) ……………..
(b) …………….. or
(c) …………….. or
(d) produce
before the Commissioner, or a special audit panel appointed under
sub-section (11) of section 177 or any person employed by a firm of chartered
accountants or a firm of cost and management accountants under section 177, accounts, documents and records required to be
maintained under section 174, or any other relevant document or evidence that
may be required by him for the purpose of making assessment of income and
determination of tax due thereon, the Commissioner may, based on any available
information or material and to the best of his judgment, make an assessment of
the taxable income or income of the person and the tax due thereon and the
assessment, if any, treated to have been made on the basis of return or revised
return filed by the taxpayer shall be of no legal effect.
(2) …………..
(3) ………….
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.
(2) ……………
(3) …………..
(4) …………..
(4A) …………..
(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
sub-section (4) where on the basis of
audit or on the basis of definite information 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.
(5A) …………
(5AA) ………..
………………………….” (Emphasis supplied)
It
can be seen from the combined reading of the above provisions of law that after
selection of the case for audit under section 177, the audit shall be conducted
as per procedure given in section 177 of the Ordinance. Under sub-section (5)
of section 177, the Commissioner shall conduct an audit of income tax affairs,
call for records or documents including books of accounts maintained under the
Ordinance for conducting an audit of income tax affairs of the taxpayer. After
obtaining the record of a taxpayer under subsection (5) of section 177, the
Commissioner shall conduct an audit of the income tax affairs of the taxpayer.
After completion of the audit, the Commissioner under subsection (6) of section
177 shall after obtaining the taxpayer’s explanation on all the issues raised
in the audit, issue an audit report. After issuance of the audit report, the
Commissioner may proceed if he considered it necessary to amend the assessment
order under section 122 of the Ordinance. The language of sub-section (6) of
section 177 is express, explicit, and mandatory
to the effect that the Commissioner proceeds to amend the deemed assessment
only after obtaining the taxpayer’s explanation on all the issues raised in the
Audit Report. Hence it is very clear that no proceedings for amendment of
deemed assessment can be initiated without obtaining the taxpayer’s explanation
on the Audit Observations. This view is
fortified by the judgment reported as Nestle Pakistan Limited etc. Vs. The
Federal Board of Revenue etc, (2017 PTD 686) which says that –
“Selection for audit
cannot and should not be allowed to be used for raising revenue simpliciter,
without conducting any audit and preparation of Audit Report. It is reiterated
that an audit, necessarily, is administrative in nature, which starts by
selection for audit and ends on the issuance of an “Audit Report” after seeking
an explanation from the taxpayer.
Issuance of “Audit Report” is the sine qua non for to maintain
separation between administrative and judicial powers, as envisaged in Article
175 (3) of the Constitution of 1973.”
It
is further held in the said judgment that:-
“Audit, being
administrative proceedings, shall complete on the issuance of Audit
Report. If an audit is not completed
within the given time frame, the selection shall be deemed to have been
dropped. After issuance of Audit Report; adjudication proceedings shall be
carried out by some other taxation officer to satisfy the command of the
Constitution under Article 10A.”
It
has very clearly and authoritatively held in the judgment supra that the Audit
Officer should issue an audit report before stepping towards amendment of an already
completed assessment order. The above judgment was subsequently upheld by the
Honorable Division Bench of Lahore High Court in the ICA No.338 of 2017 through
an order dated 18-07-2017. The Honorable Division Bench, while discussing the
matter of the audit report, has annunciated the legal procedure in the
following words;
“However,
in doing so it is vital that due process is followed and the basic requirements
of the FTS are not ignored. In terms of Section 177 of the Ordinance read with
Section 25 of the Act and Section 46 of the 2005 Act, the Commissioner can call
for the record or documents for conducting the audit of the income tax affairs
of the person provided that he gives reasons in writing and the reasons must be
communicated to the Taxpayer. Under Section 177(6) of the Ordinance the
Commissioner can seek an explanation from the Taxpayer on the issues raised
during the audit and only if satisfied that the explanation is unsatisfactory,
may proceed to amend the assessment under Section 122 of the Ordinance.”
The
above judgments were subsequently upheld by the Hon’ble Supreme Court in the
case titled CIR Vs Allah Din Steel & Re-rolling Mills (2018 PTD
1444) wherein it observed as follows:-
“16. A perusal of the
statutory landscape makes it clear that the provisions of sections 177 and 214C
of the Ordinance; section 25 of the Act, 1990, and section 46 of the Act, 2005
provide a mechanism and roadmap which is required to be followed by the
Taxation Officer/Auditor. In terms of section 177 of the Ordinance, the
Commissioner can call for the record or documents for conducting the audit of
the tax affairs of a person, provided he furnishes reasons to do so. Such
reasons must be communicated to the Taxpayer. He can also seek explanations
from the Taxpayer on issues raised during the audit in terms of section 177 of
the Ordinance. It is only if he is convinced that the explanation furnished by
the Taxpayers is not satisfactory, he may proceed to amend the assessment under
section 122 of the Ordinance, after giving the Taxpayer an opportunity to
defend him. We are therefore of the view that the statutory framework together
with the overarching umbrella of constitutional guarantees furnish adequate and
sufficient safeguards to the Taxpayer where there is a possibility of
overstepping by the Tax authorities.”
It
is quite obvious from the judgments referred above that the department is under
legal and statutory obligation, prior to further proceed for the amendment
process contemplates under section 122 of the Ordinance to obtain explanation/clarifications
on all the issues raised during the audit from the taxpayer which in the
instant case was not done. After the judgment of the Hon’ble Supreme Court
cited above, the provision of sub-section (6) was amended and a new sub-section
(6A) of section 177 was inserted through the Finance Act, 2019 which expressly
mandates that after completion of the audit, the Commissioner shall after
obtaining taxpayer’s explanation on all the issues raised in the audit, issue
an audit report. After issuance of the audit report, the Commissioner may proceed
if he considered it necessary to amend the assessment order under sections 122(1)
read with 122(5) of the Ordinance.
5. Similarly, the first proviso to
sub-section (6A) of section 114 of the Ordinance gives safeguard, privilege,
and the waiver of penalty to the extent of 75% to the taxpayer if he deposits
the amount of tax as pointed out by the Commissioner during the audit
proceedings or before the issuance of notice under sub-section (9) of section
122 along with default surcharge and twenty-five percent of the penalties
leviable under the Ordinance along with the revised return. If such an
opportunity during the audit proceedings or before the issuance of notice under
section 122(9) of the Ordinance is not given to the taxpayer, it would be
seriously deprived of its statutory right enshrined in the said proviso which
is not permissible under any canon of interpretation. It is a settled principle of interpretation of the statutes that each and
every word appearing in a section is to be given effect to and no word is to be
rendered or surplus. So was held by the Apex Court in the cases of (i) In the
matter of Reference by the President of Pakistan under Article 162 of the
Constitution of Islamic Republic of Pakistan PLD 1957 SC (Pak.) 219, (ii) Muhammadi Steamship Company
Ltd Vs CIT, (Central) Karachi (PLD 1966 SC 828), (iii) M/s
V. N. Lakhani and Company vs M. V. Lakatoi Express and 2 others
(PLD 1994 SC 894) and (iv) Director
General Intelligence and Investigation FBR Vs Sher Andaz and 20 Others (2010 SCMR 1746).
6. Simultaneously, sub-section
(10) of section 177 of the Ordinance has an overriding effect, contemplates
that where a person fails to produce before the
Commissioner any accounts, documents, and records, required to be maintained
under section 174 or any other relevant document, electronically kept a record,
electronic machine or any other evidence that may be required by the
Commissioner for the purpose of an audit or determination of income and tax due
thereon, the Commissioner may proceed to make best judgment assessment under
section 121 of this Ordinance and the assessment treated to have been made on
the basis of return or revised return filed by the taxpayer shall be of no
legal effect.
7. In
the instant case, it is an admitted fact that the appellant failed to produce
the books of accounts and related records for the purpose of an audit before
the Assessing Officer, therefore, there was no occasion for him to conduct an
audit, prepare an audit report and call for an explanation thereon from the
appellant as required under sub-sections (6) and (6A) of section 177 of the
Ordinance respectively. Thus, the only recourse available to the assessing
officer was to pass an ex-parte order under section 121(1)(d) of the Ordinance
on the basis of available information and record. When the provision of
sub-section (10) of section 177 is read with section 121(1)(d) in a
juxtaposition, it is made clear that the assessment, if any, is treated to have
been made on the basis of return or revised return filed by the taxpayer shall
be of no legal effect. It is settled law that in order to arrive at the correct
conclusion a scheme of law is to be examined in its totality. Reference may be
placed on the judgment titled as M/s Bilz (Pvt.) Ltd Vs DCIR, Multan and
another 2002 PTD 1(SC). It is also well-settled law that when the law
requires an act to be done in a particular manner, it had to be done in that
manner alone. Reliance is placed on the case titled IAC Income Tax Vs Micro Pak
(Pvt,) Ltd and others, 2002 PTD 877(SC).
Therefore, keeping in view the above discussion, the
answer to the question is that the Assessing Officer has to pass an order only
under section 121(1)(d) of the Ordinance where the taxpayer fails to provide
the books of accounts and related record for the purpose of an audit before the
Assessing Officer, the assessment, if any, treated to have been made on the
basis of return or revised return filed by the taxpayer shall be of no legal
effect.
8. Notwithstanding the aforesaid, further we
have noted that the record available before us shows that while assuming the
jurisdiction under section 122 of the Ordinance, the mandatory notice under
section 122(5) has not been issued to the appellant which is a sine qua none
for assuming the jurisdiction under the said section. The basic amended order
passed by the ACIR is silent about the issuance of notice under the provisions
of sub-section (5) of section 122 ibid.
For the purpose of invoking jurisdiction under
section 122(1) read with 122(5) of the Ordinance, the following conditions are
to be satisfied:-
(a) There should be definite information acquired from an audit or
otherwise or information received as defined in subsection (8) of section 122;
(b) An
income chargeable to tax has escaped the assessment; or
(c) Total income has been under-assessed, or assessed at too low a
rate, or has been the subject to excessive relief or refund; or
(d) Any amount under a head of income has been misclassified.
Sub-sections (1), (3), (4), and (5) of section 122 are to be read
together and not in isolation or distinctly, or separately. Thus, an assessment
order or revised assessment order issued or taken/treated as issued can be
amended by invoking original jurisdiction under sub-section (5) of section 122,
on fulfillment of conditions specified therein, and on no other ground.
Reliance may be placed on the judgment of the Hon’ble Sindh High Court titled
as Fauji Oil Terminal and
Distribution Company Ltd., Karachi Vs Additional Commissioner/Taxation
Officer-A, Audit Division, Karachi and 2 others, (2006 PTD 734). As stated above, the
impugned amended order is silent about the issuance of notice under the
provision of sub-section (5) of section 122 and even does not show under which
clause of sub-section (5) the case of the appellant falls. On this score alone,
the proceedings are void ab-initio, uncalled for, and cannot be sustained in
the eyes of law. Reliance may be placed on the
judgment reported as 2007 PTD 2601 wherein it was observed that:-
“16. The upshot of the above discussion, therefore, is
obvious. The jurisdiction, in this case, could only be acquired by the Taxation
Officer after receiving information from the audit department by the issuance
of a notice under section 122(5). Since said notice have not properly been
issued for acquiring jurisdiction over this case, one cannot agree with the
department that the subsequent proceedings are justified.”
Similarly
in another case reported as 2008 PTD 1549 observed as follows:-
“While perusal of the order passed by the Taxation Officer
under section 122(1) of the Income Tax Ordinance, 2001, I have found that he
has nowhere mentioned that which assessment order is being amended and the
additions have been made on the basis of assessment for the years, 2001-2002
and 2002-2003, without any reference to the assessment order regarding tax
year, 2003. I have further noted that
the order has been passed by the Taxation Officer under section 122(1) and
notice in this regard has been sent to the assessee as mentioned in the amended
order under section 122(9) and nowhere in that order, subsections (5) or (5)(a)
of section 122 has been mentioned.
In view of
these legal infirmities, I am of the view that the learned CIT(A) has upheld
the amended order and has not considered the fact that the Taxation Officer has
not mentioned in the order which the order is going to be amended. The impugned
order of the learned CIT(A) is, therefore, vacated and the amended order passed
by the Taxation Officer being illegal is annulled.” (Emphasis supplied)
9. For the foregoing reasons, both the orders
passed by the lower authorities are annulled being void ab-initio and without
jurisdiction. It is an immutable
principle of law that defective assumption/exercise of jurisdiction by
the authorities is incurable. Reliance may be placed on Director General Intelligence and
Investigation FBR Vs Sher Andaz and 20 Others (2010 SCMR 1746), Director
General Intelligence and Investigation and others Vs M/s AL-Faiz Industries
(Pvt.) Limited and others PTCL 2008 CL 337(S.C) and Collector,
Sahiwal and 2 others Vs Muhammad Akhtar (1971
SCMR 681). In all these judgments it was held by the Hon’ble Supreme Court of
Pakistan that:-
i) Where an essential feature of assumption of
jurisdiction is contravened or the forum exercises power not vested in it or
exceeds authority beyond the limit prescribed by law the judgment is rendered
coram non-judice and inoperative (2002 SCMR 122).
ii) If a mandatory condition for the exercise
of jurisdiction before a Court, Tribunal, or Authority is not fulfilled, then
the entire proceedings which follow become illegal and suffer from want of
jurisdiction. Any order passed in continuation of these proceedings in appeal
or revisions equally suffer from illegality and are without jurisdiction (2008
SCMR 240)”
Since
we have decided the appeal on a legal issue, therefore, there is no need to
dilate upon the other grounds of appeal which relates to the merits of the
case.
10. The appeal of the appellant is accepted in
the manner stated above and the orders passed by the authorities below are
annulled.
11. This order consists of (13) pages and each
page bears my signature.
Sd/-
(M. M. AKRAM)
JUDICIAL
MEMBER
Sd/-
(DR.
TAUQEER IRTIZA)
ACCOUNTANT MEMBER
CERTIFICATE
U/S 5 OF THE LAW REPORT ACT
This case is fit for
reporting as it settles the principles highlighted above.
-Sd-
(M. M. AKRAM)
JUDICIAL MEMBER
