Thursday, October 31, 2024

Mian Sadruddin vs The Commissioner Inland Revenue, AEIO, LTO, Islamabad

 

APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I,

ISLAMABAD

 

ITA No.1174/IB/2024
(Tax year 2019)

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Mian Sadruddin,

H.No.12, Nazim Uddin Road, Sector, F-7/1, Islamabad.

CNIC:6110105786555

 

Appellant

 

Vs

 

The Commissioner Inland Revenue, AEIO, LTO, Islamabad.

 

Respondent

 

Appellant By:                                         Mr. Kaleem Khan, ACCA

Respondent BY:                                     Mr. Naveed Hassan,DR

 

Date of Hearing:                                    12.09.2024

Date of Order:                                       23.09.2024

ORDER

M. M. AKRAM (Judicial Member):The titled appeal has been filed by the appellant taxpayer as a first appeal under Section 131 of the Income Tax Ordinance, 2001 ("the Ordinance"), challenging the Impugned Order dated June 30, 2024, issued by the Deputy Commissioner of Inland Revenue, Unit-AEOI-1, Range-AEOI, Zone-AEIO, LTO, Islamabad, concerning the tax year 2019. The grounds for this appeal are outlined in the memo of appeal.

2.      Key facts drawn from the records indicate that the appellant taxpayer, an individual, did not file a tax return for the tax year 2019, despite the issuance of a notice under Section 114(4) of the Ordinance on March 4, 2020, and a show-cause notice for the imposition of a penalty under Section 182 of the Ordinance on January 15, 2021. The information in this case was provided by the FBR, Islamabad, through Common Reporting Standards (CRS) data, revealing that the taxpayer maintains bank accounts/deposits in a foreign jurisdiction. Details of the offshore bank accounts and their balances as of December 31, 2017, are as follows:

Account No

Financial Institution Country Reporting Period

Account Balance Currency

130819 Brenden Marsh UK

2017

422,899 USD

GG-C002974-PF0002 Magrico Trust Guernsey

2017

580,091 USD

GG-C005025 Magrico Trust Guernsey

2017

138,446 USD

 3.      In light of the above, a statutory notice under Section 176(1) of the Ordinance was issued on October 21, 2019, to obtain documents, details, and related information regarding foreign movable assets and relevant records. However, the taxpayer failed to provide these documents, even after being granted adjournments. Due to the non-filing of the tax return and failure to furnish the requested details and documents as per the notice dated October 21, 2019, a show-cause notice under Section 121 of the Ordinance was issued on March 13, 2020, which also went unheeded. The response of the taxpayer's authorized representative (AR) was considered and found unsatisfactory. Consequently, due to the lack of explanation regarding the sources of investment used for the offshore accounts, as raised in the show-cause notice, the Assessing Officer was left with no choice but to conclude the proceedings based on the issues outlined in the show-cause notice under Section 121(1)(ab) read with Section 111(2)(ii) of the Ordinance. Dissatisfied with this outcome, the appellant taxpayer has now appealed to the Tribunal, challenging the impugned order on a number of grounds.

4.      This case was heard on September 12, 2024. The taxpayer's learned AR strongly argued that while it is undisputed that the appellant is a non-filer, a notice under Section 114(4) dated March 4, 2020, was issued, requesting the appellant to file a tax return for the tax year 2019. Since the appellant did not submit the return, the best judgment assessment under Section 121 should have been passed by June 30, 2022, in accordance with the proviso to Section 121(3) of the Ordinance. However, the impugned order was issued on June 30, 2024. Therefore, the AR contended that the impugned order is illegal, void ab initio, and beyond the Assessing Officer’s jurisdiction. He, therefore, requested that the appeal be accepted and the impugned order annulled.

5.      In contrast, the learned DR defended the impugned order, arguing that the general limitation period of six years applies to the case. Therefore, the order issued by the assessing officer is within the legally prescribed timeframe.

6.      We have heard the arguments from both parties and reviewed the record. The undisputed facts, as agreed by both sides, are that the appellant taxpayer is a non-filer who did not submit any income tax returns for the past ten years prior to the issuance of the notice under Section 114(4) on March 4, 2020. This was the first time that the Assessing Officer initiated proceedings based on information received from the FBR through CRS data. The Assessing Officer issued a notice under Section 176(1) of the Ordinance on October 21, 2019, and subsequently issued another notice under Section 114(4) on March 4, 2020 for filing of return for the tax year 2019. As a result, the Assessing Officer issued a best judgment assessment under Section 121 of the Ordinance, through the impugned order dated June 30, 2024.The core issue between the parties is determining the applicable limitation period in this case, as contemplated in Section 121(3) of the Ordinance. Specifically, the question is whether the appellant’s case falls within the proviso to Subsection (3) of Section 121, or the general limitation period of six years, as provided in that subsection, should apply.

7.      Before delving into the issue at hand, it is important to first examine the scope of best judgment assessments under Section 121 of the Ordinance and the provision of subsections (4) and (5) of Section 114 of the Ordinance.

Scope of Section 121: Best Judgement Assessment

Section 121 of the Income Tax Ordinance, 2001grants the Commissioner the authority to make a best judgment assessment of a taxpayer's income when the taxpayer fails to meet certain tax-related obligations. This provision allows the Commissioner to determine the taxable income and the amount of tax owed based on the available information or material at hand. Here is the scope of section 121 of the Ordinance:-

1.   Triggers for Best Judgment Assessment:

o   If the taxpayer fails to file a return of income in response to a notice issued under subsection (3) or (4) of Section 114 (related to the filing of returns).

o   Failure to file a return as required under Sections 143 or 144.

o   Non-compliance with Section 116 (related to the submission of statements).

o   Failure to produce accounts, documents, or records required under Section 177 before the Commissioner, a special audit panel, or other authorized individuals.

2.   Method of Assessment:

o   The Commissioner can conduct the assessment based on any available information or material. This assessment will supersede any assessment based on the taxpayer's return, effectively rendering the taxpayer's original or revised return invalid.

3.   Sectoral Benchmark Ratios:

o   In making a best judgment assessment, the Commissioner may rely on sectoral benchmark ratios (such as gross profit ratio, net profit ratio, etc.) as determined by the Board. These benchmarks help estimate the taxpayer’s income based on comparable businesses within the same sector.

4.   Issuance of Assessment Order:

o   Once the assessment is completed, the Commissioner must issue an order that includes:

§  The taxpayer's taxable income.

§  The amount of tax due.

§  Any tax already paid, if applicable.

§  Information on the taxpayer’s appeal rights, including the time, place, and procedure for filing an appeal.

5.   Time Limitations for Issuance:

o   The assessment order must be issued within six years after the end of the tax year or income year to which the assessment relates.

o   An exception applies if the taxpayer is issued a notice under subsection (4) of Section 114 for any of the last ten completed tax years. In such cases, the assessment order must be issued within two years from the end of the tax year in which the notice was issued.

8.      Scope of section 114(4) and 114(5)

As far as the provision of Section 114(4) and 114(5) of the Ordinance is concerned it is noted that the provision of subsection (4) of section 114empowers the Commissioner to issue a notice, in writing, to any person whom the Commissioner believes is required to file a tax return for a particular tax year but has failed to do so.The person receiving the notice is required to file the return within 30 days from the date of the notice's service. However, the Commissioner has the discretion to specify a longer or shorter period in the notice or allow an extension as deemed appropriate.

Subsection 114(5):

  • Issuance of Notice for Past Years: This subsection extends the Commissioner’s authority under Section 114(4), allowing the issuance of a notice for one or more of the last five completed tax years or assessment years.
  • Special Provision for Non-filers: If the person has not filed returns for any of the last five completed tax years, the Commissioner may issue a notice for one or more of the last ten completed tax years.
  • Foreign Income and Assets Exception: The second proviso eliminates the time-limitation altogether if the Commissioner has recorded reasons in writing, based on which it is determined that the person has foreign income or owns foreign assets. In such cases, a notice can be issued beyond the standard five or ten-year time limits.

Key Points:

  • General Time Frame: The Commissioner can issue a notice for up to the last five completed tax years.
  • Extended Period for Non-filers: For those who have not filed any returns in the past five years, the scope extends to the last ten completed tax years.
  • No Time-Limit for Foreign Income/Assets: If a person is found to have foreign income or foreign assets, there is no time restriction on when a notice can be issued. The Commissioner must, however, document the reasons for such action in writing.

9.      Now we turn to the issue involved in the instant case. As stated above Section 121(3) of the Ordinance, 2001, provides two distinct limitations for issuing an assessment order under the best judgment assessment process, depending on the circumstances.

General Limitation (Six-Year Time Limit)

 

  • Scope: Under the general rule in Section 121(3), an assessment order can only be issued within six years after the end of the relevant tax year or income year to which the assessment relates.
  • Application: This six-year limitation applies to cases where a taxpayer has failed to comply with certain obligations, such as not filing returns for the last one or more of the last five completed tax years or assessment years or not producing required documents, but does not involve a special situation, such asnon-filing of returns for any of last five completed tax years (non-filer) or the discovery of foreign income or assets.

Special Limitation (Two-Year Time Limit)

  • Scope: The proviso to Section 121(3) introduces a special time limit that applies when a notice is issued under Section 114(4) for one or more of the last ten completed tax years. However, this shorter two-year limitation only applies to cases where the notice was issued under the specific circumstances mentioned in the proviso to Section 114(5)—which concerns taxpayers who have foreign income or own foreign assets or non-filers for any of the last five completed tax years.
  • Application: In these special cases, if a notice under Section 114(4) is issued for one of the last ten completed tax years, an assessment order must be issued within two years from the end of the tax year in which such notice was issued.

10.    To enhance the understanding of the special limitation, it is essential to reproduce the proviso to subsection (3) of Section 121 of the Ordinance below.

“Provided that where notice for furnishing a return of income under sub-section (4) of section 114 is issued in respect of one or more of the last ten completed tax years in pursuance of proviso to sub-section (5) of section 114 an assessment order under this section shall only be issued within two years from the end of tax year in which such notice is issued.”

 

The phrase "in pursuance of proviso to sub-section (5) of section 114" is crucial in determining the limitation period.This phrase directly links the two-year limitation for issuing an assessment order to the specific cases covered by the proviso to Section 114(5). The proviso to Section 114(5) refers to situations where a taxpayer has not filed returns for any of the last five completed tax years and where a notice under Section 114(4) is issued for up to the last ten completed tax years. Importantly, it also applies when the Commissioner has identified that the taxpayer has foreign income or foreign assets, allowing the Commissioner to bypass the standard time limits.

Why is this Phrase Crucial?

  • The two-year limitation in the proviso to Section 121(3) only applies if the notice for filing a return is issued in relation to one of the last ten completed tax years based on the special circumstances mentioned in the proviso to Section 114(5). Specifically, this would involve cases of non-filers or taxpayers with foreign income or assets.
  • Without the invocation of the proviso to Section 114(5), the general six-year limitation applies, meaning the Commissioner can issue an assessment order within six years of the tax year in question.

In summary, the phrase "in pursuance of proviso to sub-section (5) of section 114" is essential because it restricts the application of the two-year limitation to specific cases involving non-filers or individuals with foreign income or assets, as outlined in the proviso to Section 114(5). Without this link, the standard six-year limitation applies.        Top of FormBottom of Form

11.    Now we undertake to apply the above legal text to the facts and circumstances of this case. Undisputedly, in this case, the appellant is a non-filer, and the Assessing Officer has issued a notice under section 114(4) for the tax year 2019 in March 2020. To determine the limitation period for issuing the assessment order under section 121 of the Income Tax Ordinance, 2001 let's break it down:

Relevant Provisions:

1.   Section 114(5): Since the person is a non-filer, the notice can be issued for any of the last ten completed tax years.

2.   Section 121(3): Once the notice under section 114(4) is issued, the assessment order must be issued within two years from the end of the tax year in which the notice was issued.

Application to This Case:

  • The notice under section 114(4) for the tax year 2019 was issued in March 2020.
  • Under section 121(3), the tax authority has two years from the end of the tax year in which the notice was issued to issue the assessment order. The notice was issued in the 2020 tax year (since March 2020 falls in the tax year 2020).
  • Therefore, the two-year limitation period starts from the end of the tax year 2020 (which ends on June 30, 2020).

Limitation Period for Issuing the Order:

  • The tax authority must issue the assessment order within two years from the end of the tax year 2020.
  • This means the deadline for issuing the assessment order under section 121 would be June 30, 2022.

Conclusion:

In this case, the Assessing Officer was required to issue the assessment order under Section 121 of the Ordinance by June 30, 2022. However, the impugned order was issued on June 30, 2024, exceeding the limitation period prescribed in the proviso to subsection (3) of Section 121 of the Ordinance. As a result, the impugned order is declared illegal, void ab initio, and without jurisdiction. Consequently, the impugned order is annulled, and the appellant's appeal is accepted.


 

                                   Sd/-

                    (M. M. AKRAM)

                     JUDICIAL MEMBER

                  Sd/-

(IMRAN LATIF MINHAS)

  ACCOUNTANT MEMBER

 

 

 

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