APPELLATE TRIBUNAL INLAND
REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.1792/IB/2024
(Tax
year, 2018)
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Mr.CM Rafi, Maj Gen(R); House No.285/1, Raja Akram Road, Rawalpindi. |
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Applicant |
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Vs |
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The Deputy Commissioner Inland Revenue, Unit-AEIO, LTO,
Islamabad. |
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Respondent |
Appellant By: Mr.
Rafaqat Ali Syed, ITP
Respondent BY: Mr.
Khurshid Alam, DR
Date of Hearing: 16.01.2025
Date of Order: 16.01.2025
ORDER
M. M. AKRAM (Judicial Member): The titled appeal was transferred by the
learned Commissioner of Inland Revenue (Appeals-I), Islamabad, on September 18,
2024, under Section 126A(4) of the Income Tax Ordinance, 2001 (“the
Ordinance”), as the assessed tax value in this case exceeds twenty million
rupees. Consequently, this Tribunal is now tasked with deciding the appeal. The
appellant contests the Impugned Order dated February 29, 2024, issued by the
Assistant Commissioner of Inland Revenue, Unit-AEIO-2, Range-AEOI, LTO,
Islamabad for the tax year 2018, based on the grounds detailed in the memo of
appeal.
2. The brief facts of the case are that the
appellant taxpayer, an individual, earns income from salary and business. For
the relevant tax year, the taxpayer electronically filed their return on
25.11.2018, declaring the following: income from salary at Rs. 4,271,760/-
income from business at Rs. 375,080/- pension income at Rs. 1,748,472/- profit
on debts at Rs. 1,985,983/- and agricultural income at Rs. 80,000/-. The wealth
statement as of 30.06.2018 declared total assets amounting to Rs. 117,954,562.
The assessment was deemed finalized under Section 120(1) of the Ordinance as
per the return. The taxpayer later revised their wealth statement on
10.07.2019, maintaining the total assets at Rs. 117,954,562 but adding
accumulated US Dollars in various accounts, including TDRs amounting to Rs.
1,291,854/- and an offshore bank account with a zero balance. Subsequently, on
09.03.2023, the taxpayer revised their wealth statement again, keeping the
declared total assets unchanged but adding agricultural land measuring 52 kanal
and 17 marlas with the same value.
3. The taxpayer’s case was selected by the
Commissioner IR for audit under Section 177 of the Ordinance for the relevant
tax year. The reasons for selection were communicated to the taxpayer by the
then Commissioner Inland Revenue (CIR), Cantt Zone, RTO Rawalpindi, through an
intimation letter dated 17.12.2019. An Initial Document Request was issued
under Section 177(1) of the Ordinance on the same date, requiring submission of
supporting documents, details, and explanations. In response, the taxpayer
submitted a written reply dated 11.11.2023, along with supporting documents,
including tax deduction certificates issued by Soneri Bank Limited, a deposit
slip from the National Bank of Pakistan, tax deduction certificates from M/s
Hearts International Hospital (Pvt) Limited, and wealth statements of the
taxpayer and a related individual, Muhammad Usman Rafi. After reviewing the
taxpayer’s reply and the submitted documents, the department identified issues
requiring further clarification. These issues were communicated to the taxpayer
through a notice dated 29.01.2024 under Sections 177(6) and 177(10)
of the Ordinance to finalize the audit proceedings. The taxpayer requested an
adjournment, which was granted. Subsequently, the taxpayer’s AR submitted a
written reply on 15.02.2024, providing additional documents, including tax
deduction certificates and service charge details from M/s Hearts International
Hospital (Pvt) Limited, tax deduction certificates from PTCL and Soneri Bank
Ltd., handwritten details of medicines and diesel, proof of salary through the
income tax return of Ms. Ayesha Usman, and bank statements from Askari Bank
Ltd., Soneri Bank Ltd., National Bank of Pakistan, and Habib Bank Ltd., as well
as a token tax payment slip. The taxpayer’s response and submitted records were
reviewed but found unsatisfactory. Consequently, a show-cause notice was issued
on 23.02.2024 under section 122(9) of the Ordinance. In response, the taxpayer
submitted a written reply dated 28.02.2024. After reviewing the reply, the
assessment proceedings were finalized under Section 122(1), and an order was
issued on 29.02.2024. The taxpayer challenged this order on several grounds before
the learned Commissioner (Appeals) who transferred the appeal before this
Tribunal for decision.
4. The case was heard on January 16, 2025.
The learned Authorized Representative (AR) for the appellant contested the
order issued by the assessing officer, asserting that it was contrary to the
law and the facts of the case. He relied on the arguments already presented in
the grounds of appeal. The AR forcefully argued that the impugned order was
issued without the preparation of a formal audit report, in violation of the
provisions of Section 177(6) of the Ordinance and the principles established by
superior courts. He elaborated that an order issued in the absence of a formal
audit report cannot be considered valid. In support of this contention,
reliance was placed on 2018 PTD 1444. The AR further
submitted that the assessing officer, while issuing the notice under Section
177(6), explicitly acknowledged that no documentary evidence necessary for the
issuance of an audit report had been provided. He contended that the mere use
of the term “audit report” does not satisfy the requirements of an actual audit
report. Consequently, the assessing officer should have issued a notice under
Section 121 of the Ordinance and proceeded under the provisions of that
section. The AR cited 2022 125 TAX 354 in support of his
position. Concluding his arguments on legal grounds, the AR asserted that these
procedural and legal deficiencies are incurable and render the entire
proceedings void ab initio and without jurisdiction in light of the
aforementioned legal precedents.
5. On the merits of the case, the learned AR
for the appellant submitted written arguments supported by material evidence
and records, which will be examined in detail in the subsequent part of this
judgment.
6. On the other hand, the learned
Departmental Representative (DR) appearing on behalf of the revenue department
defended the order passed by the assessing officer. He argued that the
appellant was afforded sufficient opportunities to submit the necessary records
in support of their declared version but failed to provide a complete set of
records. In the absence of the required documentation, the assessing officer
acted appropriately in concluding the audit proceedings and issuing the
impugned order. The DR, therefore, requested that the appeal be dismissed.
7. We have carefully
considered the arguments presented by the learned representatives of both sides
and thoroughly reviewed the available records. After due deliberation, we find
that the submissions made by the learned AR hold significant merit. The core legal
issue in the present appeal pertains to the interpretation of Section 177 of
the Ordinance. Specifically, the question is whether, after the production of
records and related documents, the conduct of an audit, issuance of an audit
report upon the conclusion of audit proceedings, and seeking explanations from
the taxpayer on all issues raised during the audit are prerequisites for the
Assessing Officer to assume jurisdiction under Section 122 of the Ordinance. To
address this 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 an 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.
(2A) For the purpose of sub-section
(2), the Commissioner may conduct audit proceedings electronically through
video links, or any other facility as prescribed by the Board.
(2AA) Where a taxpayer— (a) has not
furnished record or documents including books of accounts; (b) has furnished
incomplete record or books of accounts; or (c) is unable to provide sufficient
explanation regarding the defects in records, documents or books of accounts,
it shall be construed that taxable income has not been correctly declared and
the Commissioner shall determine taxable income on the basis of sectoral benchmark
ratios prescribed by the Board. Explanation.—The expression “sectoral benchmark
ratios” means standard business sector ratios notified by the Board on the
basis of comparative cases and includes financial ratios, production ratios,
gross profit ratio, not profit ratio, recovery ratio, wastage ratio and such
other ratios in respect of such sectors as may be prescribed.
(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 subsection (9) of section 122.
(7)
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(8)
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(9)
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(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)
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(12)
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(13)
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(14)
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(15)
………………………….
(16)
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(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 along with 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 percent 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 percent of the
leviable penalties under the Ordinance along with the revised return and
thereafter, the show cause notice shall stand abated.
(7) ……………………………
Rule 231F – Selection and conduct of audit.-(1)………………..
(2)…………….
(3) The
cases selected for audit by the Board shall be processed and the Commissioner
Inland Revenue concerned shall issue intimation letter to the taxpayer about
the selection of his case for audit with the following details:-
(a) section under which selection has
been made;
(b) tax year for which the case has
been selected for audit;
(c) mode of selection whether random or
parametric;
(d) compliance requirements on the part
of taxpayer e.g.-
(i) provision of prescribed books of accounts;
(ii) supporting information and documents, etc;
(iii) computerized data, access to computerized data or provision of
attested hard copies of computerized data.
(4) On
completion of examination of books of accounts, data or information under this
rule the discrepancies, if found, shall be intimated to the taxpayer for
obtaining taxpayers’ explanation, in the form of audit report, seeking
taxpayer’s explanation on these points.
(5) Explanations of the taxpayer, where
found not acceptable, shall be intimated to the taxpayer, through a notice
under section 122(9) of the Income Tax Ordinance, 2001 about the amendment in
assessment along with the rationale or basis of such amendment and necessary
amendment in assessment order shall be passed under section 122 of the said
Ordinance after affording adequate opportunity of hearing to the taxpayer.”
(Emphasis supplied)
8. To
ensure compliance with the above provisions of the Ordinance and to properly conduct an audit, the Assessing
Officer should
follow a structured and legally compliant process. Below are the steps in
sequence for
conducting an audit either selecting the case of the taxpayer under section 177
or 214C of the Ordinance, followed by the necessary steps for completing the
audit proceedings:
i. Procedure
for conducting an Audit by the Assessing Officer (AO) After Case Selection:
Once
a case is selected for audit, the following steps should be followed by the AO
as per the Income Tax Ordinance, 2001 and rules made thereunder:
1. Issuance of Intimation Letter:
The AO shall issue an intimation letter to the
taxpayer about the selection of the case for audit, specifying:
a)
The section under which the
selection has been made (e.g., Section 177 or Section 214C).
b) The
tax year for which the case is selected.
c) The
mode of selection (random or parametric).
d) Compliance
requirements for the taxpayer, such as providing books of accounts, supporting
documents, and electronic records.
2. Request for Records:
a) The
AO shall request the taxpayer through a notice to provide the necessary
documents, books of accounts, financial statements, and other necessary
documents under section 174 of the Ordinance. If records are maintained
electronically, access to the system/software should be granted by the
taxpayer.
b) If
the taxpayer fails to provide the records, this should be documented on the order
sheet for the reason that the proceedings under the Ordinance are
quasi-judicial.
3. Examination of Records:
a) Legal
Basis:The AO will examine the provided records,
documents, and accounts under Section 177(2), which includes investigating
income, expenditures, assets, liabilities, and sectoral benchmarks if required.
b) Action:The
Assessing Officer (AO) will evaluate whether the records comply with tax laws
and identify any discrepancies, omissions, or unexplained income or expenses.
If any details are missing or require clarification, the AO shall request
additional information in accordance with Sections 177(2A) and 177(6). Where
necessary, the AO may issue a follow-up request or formally address
discrepancies through a confrontation process. It is important to note that all
audit proceedings scheduled by the AO with the taxpayer must be documented on
the order sheet. This ensures that the proceedings reflect fairness,
transparency, and adherence to due process, thereby facilitating both the
department and the taxpayer in the event of litigation.
4. Taxpayer’s Explanation:
Legal Basis: Upon receiving the
taxpayer's reply or explanation, if discrepancies are identified, the Assessing
Officer (AO) must formally confront the taxpayer in writing under Section
177(6), clearly detailing the findings.
Action: Conduct a thorough audit
examination to identify discrepancies in the following areas:
a) Declared income.
b) Claimed tax deductions.
c) Unexplained income or
assets, such as bank credits or property purchases.
The audit findings should
comprehensively address:
(i)
Discrepancies in declared
income.
(ii)
Unsubstantiated claims.
(iii)
Non-declaration of certain
assets or income.
5. Issuance of Audit Report:
After considering the
taxpayer’s explanations, the AO will issue aformal audit report under
section 177(6) with findings, requests for clarification, and proposed tax.
Confront the taxpayer with audit findings and provide them with an opportunity
to explain discrepancies. Ensure all issues are clearly documented.
ii. Requirements
for Completion of Audit and Disclosure of Proposed Tax Amount.
Upon completing the audit:
1. Issuance of Audit Report:
Under Section 177(6), the AO
must prepare and share the audit report with the taxpayer, detailing the
findings, discrepancies, proposed tax and issues raised during the audit.
Provide the taxpayer with a chance to explain these findings before concluding
the proceedings.
2. Disclosure of Proposed Tax Amount:Section
114(6A) of the Ordinance provides specific relief to taxpayers under certain
conditions, and failure to comply with these provisions appears to undermine
the protections and procedures established in this section.
a) According
to the first proviso to Section 114(6A), if the taxpayer voluntarily files a
revised return, pays the tax shortfall or evaded amount with default surcharge
before receiving a notice under Section 177 or Section 122(9), no penalty will
be levied.
b)
In cases where the
Commissioner points out discrepancies during the audit, the taxpayer must pay
the tax sought to be evaded, default surcharge, and 25% of the leviable
penalties along with the revised return.
c)
If the taxpayer revises the
return after receiving a show-cause notice under Section 122(9), they must pay
the tax, default surcharge, and 50% of the penalties. The show-cause notice
will then stand abated.
The proposed tax amount and applicable penalties must be
communicated to the taxpayer either during or after the audit but prior to the
issuance of a notice under Section 122(9) of the Ordinance or before amending
the assessment, as applicable. This ensures the taxpayer has the opportunity to
avail the benefits provided under Section 114(6A) of the Ordinance.
iii. Remedy with the AO if Taxpayer Fails to
File Books of Accounts.
If
the taxpayer fails to provide the required books of accounts for an audit or
incomplete record, the AO may proceed as follows:
A.
Section 177(10): Authority to
Proceed with Best Judgment Assessment.
Section 177(10) explicitly provides
that when a taxpayer fails to produce the required records, documents, or books
of accounts, the Commissioner may proceed to make a best judgment assessment
under Section 121. This is a necessary and logical step because:
- Audit Requirements Unfulfilled: An audit under Section 177
requires the examination of books of accounts and relevant records.
Without these, the AO/ auditor cannot perform the intended verification or
reconciliation.
- Statutory Safeguard: The law anticipates such
non-cooperation and empowers the assessing officer to rely on best
judgment assessment, ensuring that non-compliance does not halt tax
proceedings.
·
Presumption
of Incorrect Declaration: Under Section
177(2AA), if the taxpayer does not furnish records, provides incomplete
records, or cannot explain defects in the records, the AO can presume that
taxable income has not been correctly declared.
·
Sectoral
Benchmarks: The AO may determine the
taxpayer’s income based on sectoral benchmark ratios notified by the FBR (e.g.,
gross profit ratios, and net profit ratios).
B.
Section 121: Best Judgment
Assessment.
Under Section 121, the assessing
officer can determine the taxable income and tax liability based on available
information, external benchmarks, or reasonable estimates. This provision is
specifically designed for situations where:
1. Records are not provided or are
inadequate.
2. The taxpayer fails to justify
discrepancies or provide explanations during the audit.
C.
Conducting
Audit Without Books of Accounts.
An audit fundamentally involves
examining the financial records, documents, and explanations to assess the
correctness of income declared, deductions claimed, and tax paid. Without
access to books of accounts, the audit process is rendered incomplete. In such
a scenario, the only legally sound option is to terminate the audit and
initiate a best judgment assessment under Section 121, as the taxpayer has
violated their obligation under Section 174 (Maintenance of Records).
These procedures ensure
fairness while maintaining the Commissioner’s authority to enforce compliance
with tax laws.
D.
Practical
Approach in This Scenario.
Given that the taxpayer has
admittedly not provided books of accounts for the tax year in question:
1. The assessing officer should conclude
the audit under Section 177(10) as non-productive due to non-cooperation.
2. Proceed to assess the taxpayer’s
income under Section 121, applying reasonable judgment based on:
a)
Past
tax filings.
b)
Sectoral
benchmarks.
c)
Third-party
information (e.g., bank statements, property records).
9. Section 224 of the Ordinance
stipulates that any proceedings conducted under the Ordinance before the
Commissioner are deemed to be judicial proceedings. In light of this, it is
imperative for the Assessing Officer (AO) to maintain a comprehensive and
accurate record of all proceedings on the order sheet. This includes
documenting every audit proceeding scheduled with the taxpayer, as well as any
correspondence, requests for information, or clarifications made during the
process.
Maintaining
a detailed order sheet serves several critical purposes:
1.
Ensures
Fairness and Transparency: By recording all
interactions and actions taken, the process reflects a fair and transparent
approach, safeguarding the rights of both the department and the taxpayer.
2.
Adherence
to Due Process: A well-documented order
sheet demonstrates compliance with legal and procedural requirements,
reinforcing the integrity of the proceedings.
3.
Facilitates
Dispute Resolution: In the event of litigation
or appeals, the order sheet serves as a clear and reliable record of the
actions undertaken, providing clarity on the issues raised, the taxpayer's
responses, and the AO's determinations.
Therefore,
it is crucial for the AO to diligently record all relevant proceedings and
activities on the order sheet to uphold the principles of fairness,
accountability, and legal compliance throughout the audit process.
10. We now address the objection raised by the
learned AR for the appellant concerning the so-called audit report issued under
Section 177(6) read with Section 177(10) of the Ordinance. This report was
communicated via bar-coded Notice No. 100000186703688 dated January 29, 2024,
and is incorporated on Page 2 of 21 of the impugned order dated February 29,
2024. The audit report exhibits substantial issues in both its substance and
structure, which may undermine its validity and its compliance with the principles
of transparency, fairness, and procedural integrity. A detailed analysis of the
deficiencies in the report is provided below:
i. Absence
of Clear and Comprehensive Audit Report Structure.
* Deficiency: The
report lacks a structured presentation. It does not clearly separate findings,
analysis, legal basis, and conclusions, which are essential to a formal audit
report.
* Recommendation:
Reorganize the report into clear sections: (a) Introduction, (b) Summary of
Audit Findings, (c) Detailed Observations, (d) Legal Analysis, (e)
Recommendations/Proposed Tax, and (f) Taxpayer's Response and Next Steps.
ii. Failure to Summarize Findings for Quick
Reference.
·
Deficiency:
The report does not include a summary of discrepancies or a consolidated table
of adjustments proposed, making it difficult to assess the scope of issues at a
glance.
·
Recommendation:
Include an executive summary highlighting key findings, proposed adjustments,
and their financial implications.
iii.
Lack of Specific Legal Citations for
Each Finding.
·
Deficiency:
While some findings refer to relevant sections of the Ordinance (e.g., Sections
177(6), 174(1), and 111(1)(b)), these references are inconsistent and do not
always directly connect to the observations.
·
Recommendation:
Clearly cite the specific legal provision applicable to each issue raised and
explain its relevance to the observation.
iv. Inadequate
Documentation of the Audit Process
·
Deficiency:
The report does not outline the steps taken during the audit process, such as
the examination of records, correspondence with the taxpayer, or interim
findings.
* Recommendation:
Include a detailed account of the audit process, including the dates of
notices, responses, meetings, and any other significant events. This ensures
transparency and procedural compliance.
v. Ambiguity in Observations.
* Deficiency:
Certain findings are vague and lack specificity. For instance:
o Observation
(a): "Other Revenues" declared at Rs. 20,55,400/- is mentioned
without elaborating on what specific evidence was sought and why the provided
documents were considered insufficient.
o Observation
(c): Complete bank statements are requested, but there is no detailed reasoning
for treating "total bank credits" as unexplained income.
·
Recommendation:
Provide detailed reasoning for each observation, explaining why the provided
evidence is inadequate or how it violates specific provisions of the law.
vi. Procedural
Non-Compliance in Confronting Findings
·
Deficiency:
The report does not clearly specify the taxpayer’s rights or explicitly provide
them with an opportunity to respond before finalizing adjustments.
·
Recommendation:
Clearly state the taxpayer’s right to provide explanations, along with
timelines, and outline the consequences of non-compliance. Ensure the process
adheres to the principles of natural justice.
vii. Lack
of Quantified Adjustments and Supporting Calculations
- Deficiency:
The proposed adjustments to income, expenses, or deductions are not
quantified in monetary terms, nor are the calculations shared in the
report.
- Recommendation:
Include precise calculations for each adjustment with supporting
documentation or benchmarks used for comparison (e.g., industry
standards).
viii. Ambiguity
in Legal Analysis of Agricultural Income
- Deficiency:
The treatment of agricultural income under Section 111(1)(b) lacks
clarity, as it does not justify the application of the "worked-back
formula" in the taxpayer's case.
- Recommendation:
Clearly explain the rationale for the inclusion of agricultural income and
provide detailed computations using the worked-back formula.
ix. Missing Acknowledgment of Taxpayer's
Written Submissions
- Deficiency:
The report acknowledges receipt of the taxpayer's written reply but fails
to address how this response was evaluated or why it was deemed
unsatisfactory.
- Recommendation:
Acknowledge the taxpayer’s submissions in detail, summarize their
arguments, and provide reasons for rejecting or partially accepting them.
x. Missing Details on Proposed Tax and
Penalties
- Deficiency:
The report does not specify the proposed tax adjustments or penalties
applicable under Section 114(6A) for discrepancies identified during the
audit.
- Recommendation:
Clearly disclose the proposed tax liability, penalties, and any
surcharges. Ensure that this information is communicated transparently to
the taxpayer.
By
addressing these deficiencies, the audit report will align with legal and
procedural requirements, ensuring fairness, transparency, and enforceability.
Thus, the so-called audit report issued by the assessing officer is defective
and contrary to the statutory provision.
11. On merit, the submissions made on behalf of
the appellant carry weight. After
thoroughly examining the submissions and evidence presented, the court
concludes as follows:
Addition
of Rs.98,103,385/- under Section 39 of the Ordinance
The addition made by the Assessing Officer (AO) on account of unreconciled
credit entries in the appellant's bank accounts is reviewed in detail. It is
observed that significant errors and omissions exist in the computation and
assessment of the unreconciled amount.
i. Excess Attribution of Rs.15,158,016.18
o An amount of Rs.15,158,016.18,
equivalent to USD 124,760.21, attributed as unreconciled, is explained as
foreign remittances received in the appellant’s bank account.
o The remitted amounts were reflected
in the bank account as of June 30, 2018. The AO's contention that the source of
these credit entries is unexplainable is erroneous.
o Supporting evidence in the form of
bank statements establishes the explainable nature of these entries.
Consequently, Rs.15,158,016.18 is incorrectly included in the unreconciled
amount.
ii. Duplicate Addition of Rs.38,879,104.00
o An amount of Rs.38,879,104.00 is
erroneously treated as unreconciled for two USD accounts (A/c Nos. 01180036019
and 02180070452) with Soneri Bank Ltd.
o The credited amount of USD 320,018
in A/c No. 01180036019 represents the encashment of Term Deposit Receipts
(TDRs) purchased in 2013 and 2015, supported by a bank certificate. These
transactions are time-barred for Tax Year 2018.
o Furthermore, the same amount is
considered unexplainable in A/c No. 02180070452, which reflects an internal
transfer of USD 320,000 from the first account. Bank account statements
corroborate this.
o A total of Rs.77,758,208/- is thus
incorrectly included in the unreconciled amount.
iii. Erroneous Addition of Rs.12,149,720.20
o The amount attributed as
unreconciled in USD A/c No. 20004175949 pertains to foreign remittances and
transfers from other accounts, as evidenced by the bank statement.
o These entries were overlooked during
the assessment. Therefore, Rs.12,149,720.20 is fully explainable and
incorrectly included in the unreconciled amount.
iv. Cash Deposits of Rs.3,016,545/-
o Cash deposits of Rs.1,853,921/- and
Rs.1,162,624/- (totaling Rs.3,016,545/-) in PRs A/c 3038869367 with NBP
represent pension payments, as evidenced by the pension book.
o The AO disregarded the documentary
evidence, rendering this amount fully explainable.
v. Sale Proceeds of Land (Rs.4,000,000/-)
o An amount of Rs.4,000,000/-
deposited in A/c No. 20003309418 with Soneri Bank Ltd. represents the sale
proceeds of land, supported by evidence placed on record.
o This amount is fully explainable.
vi. Encashment of TDRs (Rs.23,000,000/-)
o The credited amount of
Rs.23,000,000/- in PRs A/c No. 01020245753 with Soneri Bank on February 19,
2018, represents the encashment of TDRs purchased in February 2012.
o Bank statements and certificates
substantiate this transaction. The amount is fully reconciled.
vii. Sale Proceeds of Vehicle (Rs.1,900,000/-)
o The deposit of Rs.1,900,000/- on
October 11, 2017, in PRs A/c No. 081400168401 with HBL corresponds to the sale
proceeds of a vehicle, as shown in the Wealth Statement for Tax Year 2017
(Annex N).
o This amount is fully explainable.
Conclusion
We find that the addition of Rs.98,103,385/- as unreconciled credit entries is
not supported by factual evidence and contains significant computational
errors. Based on the detailed review and the documentary evidence provided, the
purported unreconciled amount is incorrectly assessed and should be excluded
from the appellant's taxable income. Consequently, the
addition to this account is hereby deleted.
12. Addition on Account of USD Accounts
The addition of Rs.90,769,804/- (USD
747,093.79) to the appellant's taxable income is found to be procedurally
flawed. The amount in question was never specifically confronted in the notice
issued under Section 122(9) of the Ordinance. Paragraph 2(f) of the notice
referenced an amount of USD 1,291,854/- appearing in various foreign currency
accounts. This amount, as discussed in Paragraph 11 above, was already included
in the addition of Rs.98,103,382.82.The Honourable Supreme Court of Pakistan,
in the judgment titled CIR vs. RYK Mills (2023 SCMR 1856),
has unequivocally held that a taxpayer must be confronted with specific
allegations in a show-cause notice, along with the grounds for such
allegations, to provide a meaningful opportunity for response. Relevant
excerpts from the judgment underscore the necessity of issuing a fresh or
supplementary show-cause notice if new grounds or factual aspects arise during
the inquiry. Failure to do so renders any subsequent determination invalid.In
this case, it is evident from the impugned order that the addition of
Rs.90,769,804/- was made based on the appellant's reply without adequately
confronting the taxpayer with the specific allegations. This procedural lapse
is contrary to the principles laid down by the Honourable Supreme Court.
Furthermore, as noted in Paragraph 11, a portion of the foreign currency
account investment has already been explained and reconciled.Accordingly, the
addition of Rs.90,769,804/- is invalid and is hereby deleted in light of the
judgment in CIR vs. RYK Mills and the procedural deficiencies
identified.
13. Addition on Account of GBP
The addition of Rs.3,796,023/-,
equivalent to GBP 23,736, under Section 111(1)(b) of the Ordinance is found to
be unjustified. Evidence submitted indicates that the GBP account in question
is jointly held by the taxpayer and his son, who resides abroad. The account
was maintained by the son and is duly declared in the taxpayer’s wealth
statement. Furthermore, the deposited amount originated from the taxpayer’s
daughter, who was also residing abroad at the time. Given the explanation and
supporting evidence, the addition lacks merit and is hereby deleted.
14. In light of the above discussion, the
impugned order passed by the assessing officer is legally untenable and is
therefore annulled.
15. Let this order be
sent to the learned Member (Operation) and Member (Legal) Federal Board
of Revenue for the purposes of issuing instructions to all assessing officers
to ensure compliance with the aforementioned legal provisions, procedures,
directions, and their mandatory nature. They should also be apprised of the
serious consequences that will follow for any officers who fail to strictly
adhere to these provisions and procedures.
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