FINDINGS/DECESION Maladministration is alleged in the instant complaint or the part of the CIT, Gujranwala for his failure to take cognizance of the information given to him vide letters dated 30-6-2001 and 17-7- 2001 that the two firms namely Messrs Accord International and Messrs Concerto Engineering bearing NTN: 16-10-0321873 and NTN: 16-10-0321960 respectively are engaged only in the trading of imported raw material while they are being assessed as manufacturers. Consequent!), according to Informer, instead of treating the tax collected from them under section 50(5) of the Income Tax Ordinance, 1979 (Repealed Ordinance ) as full and final discharge of their tax liability on gross value of imports, deemed to be income (presumptive income) under section 80-C of the repealed Ordinance, assessm ents are being made under section 62 resulting in huge refunds. Such assessm ents, allegedly, have been made against illegal gratification. The complainant apprehends connivance of inspecting and controlling officers on the basis of the fact that the matter was not investigated properly on complaints made to them.
2. Responding to the notice under section 10(4) of Ordinance XXXV of 2000 the RCIT, Northern Region has submitted that Messrs Accord International, SIE 11, Gujranwala NTN 16-10-0321873 and Messrs Concerto Engineering SIE 11, Gujranwala NTN 16-10-0321960 are being assessed in Circle 10 Gujranwala. Both the AOPs are deriving income from manufacturing and sale of spare parts of washini, machines/exhaust fans from imported raw material. Position of declared/assessed results of the cases is summarized below:-- 1. Messrs Accord International II. Messrs Concerto Engineering Assessment year Income Declared Income Assessed Income Declared Income Assessed 1995-1996 Rs.100,40 Rs.290,640 1996-1997 Rs.3,060,000 Rs.6,022,890 Rs.2,498,285 Rs.4.466.612 1997-1998 Rs.2,400,000 Rs.6,424,317 Rs.2,460,000 Rs.5.645.858 1998-1999 Rs.2,500,000 Rs.5,638,240 Rs.1,800,000 Rs.4.077.848 1999-2000 Rs.1,000,000 Rs.2,540,479 Rs.2,000,000 Rs.3,935,639
3. The RCIT submitted that the CIT Gujranwala zone had reported that assessments in both these cases were finalised after examining all the relevant facts in detail. Complaints in these cases were also lodged in the past as well. Nature of business of the two assessees was specifically looked into while concluding assessm ent proceedings. Consumption of electricity and bills paid, year-wise were found as under:-- 1. Messrs Accord International II. Messrs Concerto Engineering Assessment year Amount of Bill Paid Amount of Bill Paid 1996-1997 Rs.686,305 Rs.309,196 1997-1998 Rs.1,186,945 Rs.899,525 1998-1999 Rs.1,407,486 Rs.853,762 1999-2000 Rs.1,934,222 Rs.2,090,276
4. In addition to the above, the assesses had also declared generators for generating electricity utilised in manufacturing process. Expenses on purchase of diesel to operate generator had also been claimed in all the years. Similarly expenses under the heads "social security" and "EOBI" duly supported by documentary evidence had also been claimed in all the years. Consumption certificates issued by. Central Excise Department certifying that raw material imported was consumed by those two concerns were also available on record to prove that those were cases of manufacturers of plastic goods/washing machines and electric fan parts.
5. Assessm ents finalised in all the years had resulted in creation of refunds which had been issued after obtaining supporting documents, original challans of Income. Tax deduction under section 50(5) and due verification from concerned authorities. Allegation regarding filing of bogus documents had been denied as false and baseless. As reported by CIT Gujranwala Zone, administrative approval of Commissioner had been obtained and all refund vouchers were duly countersigned by the concerned IACs for all the years.
6. The complainant, however, submitted a rejoinder stating that both the aforesaid importers had initially submitted statements under section 143-B in accordance with law declaring gross value of imports as deemed income tax collected from them under section 50(5) as full and final discharge of their tax liability. However, subsequently the assessees were prompted by the concerned officers to file returns under section 55 of the repealed Ordinance to claim huge refunds to be shared with concerned officers. Returns as manufacturers were thus filed with the connivance of concerned officers, declaring low incomes on the basis of fake statements of manufacturing and trading accounts. According to complainant, the manipulation was evident from the statement in the reply of RCIT to the complaint that assessees had claimed expenses on generating their own electricity for manufacturing activity. The electricity expenditure on the WAPDA bills as mentioned in RCIT's report are too meager to justify consumption of imported material worth crores of rupees in each year. Thus, allegedly unlawful assessments, as shown in the reply of the RCIT supra, were made and refunds were shared with the assessees by all concerned unscrupulous officers.
7. The complainant has submitted in the rejoinder that only mock verification of declared sale of "manufactured items" has been conducted for record purposes which is evident from the following facts: --
(a) that out of 32 purchasers declared in assessment year 1996-97 and 22 purchasers named in assessm ent year 1997-98 by Messrs Accord International, who are expected to be manufacturers of fans of various type, only one party holds the NTN:
(b) that confirmation letters from almost all the said fake purchasers have been received on the same date;
(c) that at least ten confirmation letters are in the handwriting of the Inspector of Income Tax (ITI)
Mr. Ejaz Ahmad;
(d) that letters-heads of the said fake purchasers were also printed through the aforesaid ITI;
(e) that none of the workers of either of the two aforesaid AOPs is registered with EOBI and the misreporting from the Zone to the RCIT warrants verification from EOBI directly;
(f) (f) that the nature of material imported by the aforesaid AOPs is required to be verified from category- passbooks ;n order to ascertain if the declared items could be manufactured from the actually imported material;
(g) that complainant's written request that the enquiry into the matter may be assigned to Mr. Sarfraz Ahmed, IAC has been turned down by the CIT. According to complainant, when Mr. Sarfraz Ahmad was the DCIT Incharge, he had resisted making such assessments and issuing refunds.
8. It transpired on examination of whatever records of assessment proceedings were produced by the respondent's representative that copies of electricity bills claimed by Messrs Accord International available on record did not bear complete address (see para 13 also) of the assessee which happened to be No,29-B, SIE, Gujranwala. Last return of income on record was for assessm ent year 1999-2000. It was a one page return without any statement of account or balance-sheet. Declared business in the status of AOP was manufacturing of spare parts of washing machine and fans. A balance-sheet was available in the cover for miscellaneous papers placed on record, implying that it was not filed with the return of income. Assessment year 1999- 2000, incidentally, was the last assessed as well, resulting in refund of Rs,731,198.
9. Examination of records of assessment proceedings of Messrs Concerto Engineering in assessm ent year 1996-97 showed that copies of electricity bills available on record were in the name of one Mr. Khalid Pervez while names of the members of the said AOP were Mr. Muhammad Zakaria, Mr. Iftikhar Ahmad both sons of Ch. Muhammad Hussain and Ch. Aftab. Saleem son of Haji Muhammad Hussain. The first balance-sheet available on record pertained to the year ending 30- 6-1998 showing plot of industrial land bearing No,43E, SIE Gujranwala, building constructed thereon and some machinery. The last return available on record pertained to assessment year 2000-2001 declaring income of Rs,2,000,000 on sales of Rs,59,355,197 while the imports for the year were declared at Rs,38,905,898.
10. Mr. Moazzam Basheer, DCIT, appearing on. Behalf of the respondent, submitted that the reason why electricity meter was installed in the name of Khalid Pervez at the Industrial Plot No,43-E, owned by Concerto Engineering was that Khalid Pervez was the holder of power of attorney in respect of the said industrial plot prior to its transfer to Concerto Engineering in 1995. However, he admitted that no spot enquiry had been conducted in either case by the Department even after the complaint and that he shall convey the position to CIT, Gujranwala Zone.
11. CIT, Gujranwala Zone was instructed to hold proper enquiry under his own supervision into the affairs of Messrs Accord International as well as Messrs Concerto Engineering Company by taking their assessm ent records in his custody and assigning the enquiry to competent and responsible officials. CIT was required to stop issuance of any refunds that were still due till decision on the complaint. He was required to attend in person on 27-8-2002 with the enquiry report or authorise one of the Senior Officers of the Zone to come alongwith Moazzam Bashir, DCIT. Complainant was also directed to verify his information by visiting the premises personally. Investigations carried on and the findings arrived at are being recorded in each of the two cases one after the other hereunder.
Accord International
12. The complainant submitted that he visited the registered address of Accord International at Industrial Plot No,29-B, Small Industrial Estate (SIE) Gujranwala. He found that there were two dilapidated rooms enclosed with a boundary wall. The rusted gate indicated that nobody used the premises and there was no machinery installed there. Messrs Accord International had declared that it was manufacturing parts of washing machines and fans at the said premises. The complainant, therefore, asserted that his allegation that the entire imports made by Messrs Accord International were liable to be charged under section 80-C of the Income Tax Ordinance, 1979 was proved. .
13. The CIT Gujranwala submitted that enquiries were conducted on 24-8-2002 by Mr. Muhammad Gulzar, ITI posted in his own office, in the case of Messrs Accord International as directed during the course of investigation proceedings. The assessee derived income from manufacturing and sale of spare parts of washing machines and exhaust fans. The business concern is situated at 29-B, SIE-II, Gujranwala. The facts found were as under:-- Factory Building: The business concern is situated on plot No,29-B, SIE-II, Gujranwala.
The said plot is one Kanal and the construction observed is as under:---
(a) Hall: having covered area of 1725 Sq. Ft. Was constructed during the assessment year 1995-96.
(b) Two Rooms: These double storey rooms were being used for Godown and residence of labourer.
(c) Double Storey Building: was being used for office.
(d) Basement: situated beneath the double storey building was utilized as Godown.
Electric Connection An industrial electricity connection was installed at the business premises bearing reference No,24- 2133-000707 with capacity of 112 H.P. The detail of electricity expenses for the period from 1-7-1998 to 30-6-1999 was under:- Billing Amount July-98 Rs.144,138 23,700 Aug-98 Rs.87,605 84,310 Sep-98 Rs.63,264 99,910 Oct-98 Rs.105,952 97,398 Nov-98 Rs.878,351 Dec-98 Rs.85,865 86,159 Jan-99 Rs.87,951 29,651 Feb-99 108,136 32,997 Mar-99 Rs.410,556 102,534 Apr-99 Rs.278,569 65,164 May-99 Rs.203,185 97,177 Jun-99 Rs.260,750 Nature of Business The assessee derived income from manufacturing and sale of washing machine and exhaust fan spare parts. However, manufacturing activity during the assessment year 2000-2001 declined and was ultitriately discontinued in the month of April-2001. The electricity connection was transferred in the name of Messrs Top Tech. Corporation, 27-B, SIE-II, Gujranwala; hence no manufacturing activities observed at the said business premises. Machinery As stated by Chowkidar, the machinery installed in the preceding year had been shifted on the instruction of owner of the business concern to elsewhere.
Thus, according to the. CIT, local enquiries as well electricity consumption proved that manufacturing process was carried on upto April, 2001 till the electricity connection was shifted to Messrs Top Tech Corporation, 27-B, SIE-II, Gujranwala. The owners of the business had disposed of the machinery and were not contactable at the business premises. (It does not appear to be an application for change of name. It is an application for fresh connection. Was there any such connection at all in the name of Accord? See Para 8 also).
Concerto Engineering
14. Regarding the factory premises of Concerto Engineering at Industrial Plot No,43-E, SIE, Gujranwala, the complainant submitted that although a rusted signboard of their name was hanging alongwith a prominent signboard of Chaudhary Engineering Company, manufacturers of Toys Fine International Plastic Furniture. The premises were actually let out to them and Concerto was not engaged in any manufacturing activity of its own. He produced letter head and printed publicity material of Chaudhary Engineering Company bearing three telephone numbers installed in the name of Ch. Muhammad Zakaria of Concerto Engineering Company viz 283849, 283824 and 282810. According to him, the foregoing facts supported his allegation that Concerto Engineering was assessable under section 80-C instead of section 62 because it was simply a commercial importer and not manufacturer. The refunds allowed to it on the basis of assessments under section 62 amounted to maladministration on the part of Assessing Officers and the report submitted by them was factually incorrect amounting to misrepresentation of facts.
15. The CIT, on the other hand, reported as under:--Land & Building:
(a) Messrs Concerto Engineering Company bearing NTN: 16-10-0321960 was situated on Plots bearing Nos.43-E, 44-E, 45-E, 64-E, and 66-E, SIE-II, Gujranwala. The said plots were owned by Mr. Khalid Pervez son of Muhammad Shafi, Caste Khokhar, resident of 272-A, Model Town, Gujranwala who sold out these plots to Muhammad Zakaria son of Haji Muhammad Hussain resident of Gill Road, Gujranwala (Member of the AOP). The said plots were purchased for consideration of Rs,1,34,000 . The values of land including cost of legal charges were shown at Rs,1,44,000.
(b) General Power of Attorney was executed by Khalid Pervez (the seller) in favour of Muhammad Zakaria son of Haji Muhammad Hussain (the purchaser) on 25-1-1995 whereby the purchaser was authorised to take physical possession of land to deal with all the affairs with Government departments and to apply for water, electricity, gas and telephone connections on the said plots.
(c) The said plots were transferred in the name of Messrs Concerto Engineering Company; SIE-II Gujranwala on 21-3-1995 through Mr. Muhammad Zakaria empowered by General Power of Attorney executed on 25-1-1995.
(d) As per enquiry report the factory building was constructed on 6 plots of 7 Marlas each bearing Nos.43-E, 44-E, 64-E, 65-E, 66-E. Total area of the land is 42 Marlas. However, year(s) of construction is not indicated in the report. Following construction is reported to have been found at the business premises on the date of enquiry i. Office ii. Rooms (6) iii. Veranda iv. Hall v. Retiring rooms.
Machinery Installed.
(e) Further, the following machinery is reported to have been found installed at the business premises:
(i) Injection Moulding machine (04) (ii) Lathe Machine 02 Hydraulic Press 02 (iv) Drill Machine 01
(v) Polishing Machine 02 (vi) Cutter Machine 01 Electricity Connection
(f) Electricity connection bearing Reference No,242136. 0007600 was installed at the business premises in the name of Mr. Khalid Pervez. The billing from 1-7-2001 onwards was as under:-- Month Amount July-2001 Rs.2,19,400 Aug-2001 Rs.1,88,500 Sep-2001 Rs.2,48,300 Oct-2001 Rs.2,53,600 Nov-2001 Rs.1,58,200 Dec-2001 Rs.1,96,700 Jan-2002 Rs.2,30,430 Feb-2002 Rs.3,29,400 Mar-2002 Rs.2,44,000 Apr-2002 Rs.3,57,200 May-2002 Rs.3,19,500 Jun-2002 Rs.7,57,500 Sales Tax Registration
(g) It was duly registered with sales tax authorities vide Registration No,09-04-8450-005-28 since 24-6-1995. The same sales tax. Registration No, was also printed on electricity bills paid in respect of electricity connection installed as discussed above. Nature of Business
(h) Assessee is reported to have derived income from manufacturing of parts of washing machine and electric exhaust fans. However, assessee had started business of manufacturing arid sales of plastic furniture w,e,f, September, 2001.
Telephone Connection
(i) the following Telephone connections were installed at the business premises: Telephone Nos. Name of Subscriber 285054 Messrs Concerto Engineering Co.
285053 Messrs Concerto Engineering Co.
283049 Ch. Muhammad Zakaria (Member of AOP)
16. Enquiries were also conducted on the directions of the CIT in respect of Messrs Ch. Engineering Co. SIE-II, Gujranwala, to ascertain the factual position and facts revealed viere as under:- Messrs Ch. Engineering Co.
It was dealing in manufacturing/sale of plastic furniture under Trade Mark of Toyo Plastic and was being assessed at TR No,15321-16-10 in the status of AOP.
Factory Building The business premises were situated on Plots bearing No,41-E, 42-E, 67-E, 68-E, 69-E, at SIE-Il, Gujranwala, adjacent to Messrs Concerto Engineering Co. The said plots were transferred in the name of Messrs Ch. Engineering Co. On 26-6-1997 and construction was made later on during the assessm ent year 1998-99. Construction found at the site was as under:--
(i) Hall [02] (ii) Godown [02] (iii) Office [01] (iv) Hall at. Ist Floor [02] Machinery
(a) Injection Moulding machines (03)
(b) Generator (01)
(c) Allied Equipments in the shape/dia Electricity Industrial Electrical Connection is installed in the name of Messrs Ch. Engineering Co. Bearing No, 2421360010700.
Sales Tax registration The business concern is registered with Sales Tax Department at Sales Tax Registration No,09-04- 7326=077 46 in the name and style Messrs Ch. Engineering Co. 40-41-42-67-68-69/E, SIE-II, Gujranwala vide certificate of registration dated 5-1-1996.
Telephone Connections The following telephone connections are in utilization: Telephone Nos. Name of Subscriber 283852 Ch. Iftikhar Ahmed son of Muhammad Hussain 283824 Ch. Iftikhar Ahmed son of Muhammad Hussain 283810 Ch. Iftikhar Ahmed son of Muhammad Hussain 254131
17. The above findings, according to CIT, showed that Messrs Ch. Engineering Co. SIE-II, Gujranwala was a separate and different entity adjacent to Messrs Concerto Engineering. Telephone numbers were also different. Identical numbers appearing on the letter head of Ch. Engineering Co. Was because of the facts that Ch. Ahmad was member of both of the AOPs and the two telephone numbers 283852 and 283824 were in his name.
18. The CIT further submitted vide letter dated 29-11-2002 that the complaint had been filed on the basis of information likely to have been obtained from some Income Tax functionary in the Audit & Inspection Office Gujranwala which, according to him contravened the provisions of section 150 of the repealed Ordinance. According to the CIT it called for criminal proceedings against the delinquent tax functionary. The CIT further submitted that the complainant was not an aggrieved person as required under sections 9(1) and 10(1) of Ordinance XXXV of 2000 and that none of his rights or interest had been jeopardised by any act of omission or commission by any tax functionary in his Zone; hence complaint was liable to be dismissed in limine.
19. Besides reporting on the findings on personal visit of the ITI to the business premises of the firms, the DCIT also produced copies of following documents:--
(i) Comments of IAC Range-I, Gujranwala dated 5-6-1999 on Audit Paras 13 and 14 of the Audit Report dated 23-9-1998 of the Additional Director, Inspection and Audit (Direct Taxes) followed up through his letter No,315 dated 1-6-1999,
(ii) Report dated 24-9-2001 of Special Inspection conducted by the Additional Director Inspection Muhammad Arif Khan submitted to the Director General of Inspection in compliance of his directions dated 7-8-2001,
(iii) Special Report of Director Inspection, Northern Region dated 10-4-2002 in the case of Messrs Accord International sent to IAC, Range-I, Gujranwala for his comments,
(iv) Letter of the CIT dated 22-7-2002 to the Director I&A enclosing letter No,1742 dated 1-6-2002 addressed by the IAC to the Director I & A in the case of Concerto Engineering.
20. Statement of the Audit Officer, Mr Sarshar Anmad Butt (Special Officer) who conducted the audit in 1998 was also recorded on oath. He stated that Inayatullah Kashani was posted as Additional Director I&A in 1998. The D.G. I & A had assigned him the task of audit and inspection of cases where huge refunds were issued. As Incharge Officer of Audit of Circle-20, Mr. Butt reported cases of Messrs Accord International and Messrs Concerto Engineering where huge refunds were issued. The Additionl Director directed him to include the two cases in his report which was complied with by including audit Paras 13 and 14 to his Audit report of Circle-20, Gujranwala dated 23-9-1998. Mr. Butt sent his report to the concerned Income Tax Officer for necessary action. The IAC, Range-t, Agha Muhammad Shah vide his comments dated 8-6-1999 intimated that he did not consider the orders passed under section 62 to be erroneous and prejudicial to interest of Revenue.
21. Audit Para 13 of the Audit report dated 23-9-1998, as well as the comments of IAC vide his letter dated 8-6-1999 were examined. The Audit Officer noted that as per assessment order Messrs Accord International was an importer of Steel Sheets in assessment year 199697. The IAC observed that it was half truth because scrutiny of bills of entry revealed that the assessee also imported plastic moulding compound, high density polyethylene films grade laden and the business of the assessee was manufacturing of spare parts of electric fans and washing machines. The IAC did not mention the dates of bills of entry he was referring to. Further the IAC failed to find any discrepancy in the audit observation that a return was filed on 30-9-1996 followed by a revised return bearing no date or initial in acknowledgement of receipt. It has become a norm to place documents on record without routing the same through the diary or at least subscribing initials with date by the Dealing Officer. Regarding audit observation that refund amounting to Rs,2,421,385 was issued disregarding instructions of the Board in Circulars bearing numbers 6 of 1995 and 12 of 1996 on the assumption that assessee was a manufacturer, the IAC replied that it has been mentioned in the order under section 99(3) that assessee had produced original challans alongwith original bills of entry. The IAC again could not find any bearing of the following audit observations on the merits of the order passed by the Assessing Officer.:--
(a) That copies of notices under section 144(c) issued to 51 customers to verify the sales did not indicate the mode of service.
(b) Confirmations received on 24-7-1997 from almost all the said customers were through registered post in identical envelopes and none of them had mentioned their NTN.
The IAC brushed aside Audit Officer's inference of engineered verification merely because the letter heads of declared customers were bearing complete addresses. The IAC did not consider it worthwhile even to get a bird eye enquiry conducted to alley the apprehensions of Audit Officer that were based on prima facie circumstantial evidence on record.
22. Similarly comments of the IAC on audit observations in Para 14 of the Audit report dated 23-9- 1998 in the case of Messrs Concerto Engineering were considered. The Audit Officer noted that a statement under section 143-B of the repealed Ordinance was filed in assessment year 1995-96 declaring the payment of Rs,90,119 made under section 50(5) on imports of Rs,4,505,950. The IAC offered no comment on the foregoing observations though it was warranted. Tax collectable under section 50(5) @ 5% of Rs,4,505,950 amounted to Rs,(sic)25,297 while deduction according to, audit para was only Rs,90,119. Thus either the figure of imports was wrong or the figure of tax collected was wrong. The next observation of the Audit Officer that "Presumptive income on the basis of deduction was worked out at Rs,1,802,380 being a manufacturer" also warranted cognizance by the IAC. There is no provision under the law to work out presumptive income of an importer at an amount less than the aggregate amount of customs duty plus CIF of his imports which was Rs,4,505,950 as per Audit Para. The duty of the IAC in such cases was not only to revise the orders considered erroneous and prejudicial to Revenue but to take action against the officers passing such orders.
23. The Audit Officer further observed on 30-9-1996 followed by a revised return bearing no date or initial in acknowledgement of receipt. Again the IAC failed to find any discrepancy in the audit observation in Para 14 that return of income for assessment year 1996-97 was filed on 30-9-1996 by a revised return bearing no date or initial in acknowledgment of receipt as if it was a norm to place documents on record without routing the same through the diary or at least subscribing initials with date by the Dealing Officer. Regarding audit observation that refund amounting to Rs,?, 975,691 was issued disregarding instructions of the Board in Circulars bearing numbers 6 of 1995 and 12 of 1996 on the assumption that assessee was a manufacturer, the IAC replied that it had been mentioned in the order under section 99(3) that assessee produced original challans alongwith original bills of entry. The IAC again could not find any bearing of the following audit observations on the merits of the order passed by the Assessing Officer:-
(a) That copies of notices under section 144(c) issued to customers to verify the sales did not indicate the mode of service.
(b) Confirmations received from 7th to 12th July, 1997 from almost all the said customers were posted through registered post in identical envelopes and none of them had mentioned their NTN.
The Audit Officer inferred engineered verification.
The ICA, in this case. As well, brushed aside Audit Officer's inference of engineered verification merely because the letter heads of declared customers were bearing complete addresses. The IAC did not consider it worthwhile even to get a bird eye enquiry conducted to alley the apprehensions of Audit Officer that were based on prima facie circumstantial evidence on record.
24. Mr. Sarshar Ahmad Butt further stated that when he was posted as Assistant Director (I&A)
Gujranwala, the complainant who was a member of Advisory Committee moved an application before the CIT on 30-6-2001 followed by a reminder on 16-7-2001 requesting that the matter may be investigated through DCIT, Mr. Sarfraz Ahmad to ascertain the truth. According to Mr. Butt, the D.G. (I&A), Malik Muhammad Shafi directed the Additional Director, Arif Khan in August 2001 to monitor compliance of Audit Paras 13 and 14. Mr. Butt stated that during the same month one Mr. Muhammad Gulzar son of Abdul Ghafoor Kamboh contacted him and requested him to arrange a settlement between Raja Babar Nawaz and the Additional Director. According to him he was transferred to Circle-II, Gujranwala on 20-8-2001 when he refused to involve himself in compromising- the interest of Revenue. He alleged that he was shunted from post to post for his non-submission till he was charge-sheeted for allegedly drafting a complaint in Urdu containing observations as recorded in Audit Paras and got it filed through his front man. He stated that the Additional Director, Arif Khan submitted a special report to the Director Inspection on 25-9-2001. He filed copies of documents in support of his foregoing statements.
25. The report of Additional Director ibid was also examined by the Additional Director, on the basis of evidence available on record already considered supra, reported that "manufacturing process is quite established". However copies of Special Reports dated 10-4-2002, in respect of proceedings in the cases of Messrs Accord International and Messrs concert Engineering, prepared by the Director Inspection, Nawal Rai N. Oad at the behest of D.G. (I&A) conveyed vide his letter dated 9-3-2002 indicate that both the superior officers were dissatisfied with the report of the Additional Director.
26. The first report of Director Inspection was captioned.
"Special Inspection Report Messrs Accord International, Gujranwala NTN 16-20-3908626 (old) 16-10- 0321873 (new) assessm ent years 1995-96 to 1999-2000"
27. It was a comprehensive report covering almost all the facts which inter alia , included following significant findings and observations:
(a) Statements of manufacturing & trading accounts and balance-sheets enclosed with the returns that finally formed the basis of assessments were as under:- Head of A/c 1995-96 1996-97 1997-98 1998-99 1999-2000 Sales 1,896,321 114,660,200 106,426,030 84,728,424 (sic)
Purchases: (Imports) 6,386,033 81,178,167 88,736,546 56,844,99 (sic),524,499 (Local) 205,500 3,913,423 2,885,529 6,071,515 (sic)35,841 Carriage 30,680 92,800 90,500 470,590 240,500 Wages 30,800 856,400 815,200 612,200 425,100 Mfg.Exp 85,308 1,310,500 1,418,700 2,180,000 (sic),879,602 Gross Profit 236,500 21,831,100 20,974,555 16,455,010 8,202,793 P&L Exps 136,360 18,771,100 18,574,555 13,955,010 7,202,793 Net income 100,140 3,060,000 2,400,000 2,500,000 (sic),000,000 Liabilities 1995-96 1996-97 1997-98 1998-99 1999-2000 Members capital 3,460,140 5,920,140 8,055,380 10,159,380 11,793,380 Loans/Advances 6,969,227 2,925,000 7,961,284 7,000,000 2,047,805 Assets Building 243,750 219,375 647,437 582,694 524,425 Machinery 351,000 440,800 352,640 682,112 613,901 L/C Transit 3,973,658 1,130,794 252,811 230,312 Advance/deposits 681,963 1,050,000 4,742,793 7,725,900 8,533,768 Cash/Bank 78,746 345,510 591,496 612, (sic)23 61,562 Profit & Loss A/C Salaries (Admn) 980,000 920,400 925,020 620,200 925,020 Salaries (Sales) 745,800 725,000 715,000 650,000 715,000 Commission 7,744,814 3,601,692 3,301,137 1,068,224 3,301137 Advertisement 1,110,800 2,959,657 1,546,025 1,168,95 1,546,025 Entertainment 503,750 520,620 300,115 116,116 300,115 Packing/Forwarding 2,370,280 4,370,300 2,880,174 1,021,363 2,880,174 Repairs/Maintenance980,860 864,999 750,800 373,593 750,800 Travel/Conveyance: Administration 1,936,260 1,796,210 1,371,010 506,395 1,371,010 Sales 875,156 1,090,500 850,500 725,116 850,500 Miscellaneous 360,500 518,500 300,100 128,600 300,100
(b) The year-wise figures of imports, tax paid under section 50(5) and the refunds finally allowed in rupees, as noted by the Director from assessment record, were as under:-- Narration 1995-96 1996-97 1997-98 1998-99 1999-2000 Imports 6,386,033 81,178,167 88,736,546 56,844,199 27,524,499 Tax paid U/S 50(5) 448,758 4,762,767 4,262,591 2,894,377 1,584,330 Income declared Original 39,500 398,000 2,400,000 2,500,000 1,000,000 Revised 100.140 3,060,000 Not filed Not filed Not filed Assessed 290,640 6,028,900 6,424,317 5,638,240 2,540,469 Date of order 27-6-1996 8-8-1997 30-6-2000 4-10-2000 11-7-2001 Refund 386,352 2,421,385 1,764,111 1,601,203 731,198
(c) The most significant feature of the statements of account supra, noted by the Director , was that both the wages claimed as well as the declared cost of machinery were too low to support assessees claim that he was a manufacturer/industrial importer. It was a very valid observation because no plant worth three to six hundred thousand rupees with wages around four hundred fifty thousand rupees could be automatic enough to convert steel sheet coils and plastic molding compound (granules) worth Rs,75,000 million a year on an average into parts/components of washing machines or fans.
(d) Another indicator of the dubious character of the statements of account supra noted by the Director was the average claim of around Rs, 750,000 on account of repairs & maintenance against building and machinery with total written down value being around the same amount.
Other manufacturing expenses too were claimed only @ Rs,1,400,000 on an average.
(e) The Director pertinently noted that absence of evidence about the mode of service of notices under section 144 for verification of sales, the identical replies received in identical envelopes within a span of three days in confirmation of transactions from most of the declared customers none of whom disclosed his NTN rendered the whole process unreliable. He further noted that neither the Assessing Officer insisted on the requirement nor issued any intimation slips about the transactions to circles in whose jurisdictions the addresses of such customers were falling. The fact that the Inspecting Additional Commissioner(s) deliberately chose to overlook and insisted not to take cognizance even when pointed out supported the apprehension of connivance with ulterior motives. The Director noted many other serious lapses that, in the particular circumstances of the case, supported the charge of prompting the assessee in posing as a manufacturer to escape assessm ent on deemed income under section 80-C as commercial importer as well as of aiding and abetting in creation and payment of unlawful refunds.
28. Second special report of the Director Inspection was captioned:-- "Special inspection report Messrs Concerto Engineering Co. Gujranwala NTN: 16-20-3908688 (old)
16-10-0321960 (New) assessm ent year 1995-96 to 1999-2000"
29. It too was a comprehensive report covering almost all the facts which, inter alia, included following significant findings and observations:--
(a) That a statement under section 143-B bearing date of filing as 30-6-1995 was found on record for assessm ent year 1995-96 declaring imports amounting to Rs,4,505,950 and tax payment under section 50(5) amounting to Rs,90.119. NTN column bears the words "New case". Besides, a return of income under section 55 for the same assessment year was also found on record bearing the date of filing as 30-9-1996 bearing initials of the Assessing Officer. The Director did not find any assessm ent order on record. He, however, found a wealth statement as on 30-6-1995 in the miscellaneous file cover for assessm ent year 1996-1997 showing:-- Business Capital Rs.48,000 Jewelry Rs.8,50,000 Shares of A-1 Industry, Gadoon Rs.4,50,000 Cash Rs.1,95,000 Liabilities Rs.Nil Net wealth Rs.2,263,000
(b) The year-wise figures of imports, tax paid under section 50(5) and the refunds finally allowed in rupees, as noted by the Director from assessment record, were as under:- Narration 1995-96 1996-97 1997-98 1998-99 1999-2000 4,505,950 57,904,832 70,126,388 38,973,464 42,797,970 90,119 3,639,946 (sic) (sic) (sic) 2,498,285 2,460,000 1,250,000 1,800,000 4,466,612 5,645,868 3,148,212 4,077,848 1,975,691 973,007 1,220,833 1,062,692 (c)The Director's conclusions in the instant case were identical to his conclusions in sub-Paras c, d and e of para 26 supra in the case of Accord International. The basis of his conclusions was absolute absence of any evidence upto assessment year 1997-98 of installation of any plant or machinery and nominal investment declared thereon in the balance-sheet as on 30th June 1998. It was too insufficient to justify the claim of conversion of the imported material into parts and components of washing machines or electric fans. Even the existence of following machinery and building reported by the ITI of the CIT in the report of his enquiry conducted on 24-8-2002 was inadequate to justify the claim of the assessee that he was an industrial importer:--
(i) Injection Moulding machine (04)(ii)Lathe Machine 02
(iii) Hydraulic Press 02 (iv)Drill Machine 01
(v) Polishing Machine 02 (vi)Cutter Machine 01
(d) Another common feature noted by the Director that he found significant in the context of the issue as to whether the assessees were commercial or industrial importers was that although huge additions were made to the declared income in each year by the Assessing Officer vide his orders but neither of the two assessees filed appeal against any such order.
30. The Director, therefore, concluded that in both the cases the importers managed to deprive the State of its due revenue. The examination of case records, according to the Director, revealed "gross negligence, inefficiency, extreme carelessness and malpractices by the Assessing Authority" compelling him to say "that the assessees could not have succeeded in their mission without considerable cooperation and involvement of Assessing/Supervising Officers concerned. The unlawful and illegal assessm ents were made only to issue maximum refund and to receive suitable share from loss sustained sic (caused) to the exchequer." The Director finally concluded, I do not think there could be any other purpose for doing what has been done by the Assessing Authority."
31. It transpired on further investigation that even those reports were not given any objective consideration; rather the IAC concerned took it as an affront and wrote in his letter No,1742 dated 1- 6-2002 addressed to the Director I &A that precisely the issues, as identified by him in his letter No,118 dated 2-5-2002, for all the years were the same, which could be broadly categorised as under:--
(a) The assessm ents were not to be framed under section 62 but to be finalised under section 80- C. Reason given by the Directorate was the that assessees had a history of filing statements under section 143-B for the assessm ent year 1995-96.
(b) The assessee had not exercised the option available to manufacturers under C.B.R. Circular No,26 of 1991 as provided under Clause (9) Para-IV of the Second Schedule to the Income Tax Ordinance, 1979 (the repealed Ordinance).
(c) Return for the assessm ent years 1996-97 and 1999-2000 were revised by the assessee and accepted by the Department without any question.
(d) It had been reported that the assessee was not a manufacturer but a commercial importer but no effort was made to ascertain this fact. Allegedly, it was evident from the fact that the assessee had not employed sufficient machinery for any manufacturing.
(e) The assessm ents were framed for the purpose of issuance of refunds to the assessee for ulterior motives.
(f) Action on letter No,457 dated 18-2-1998 for re-opening of the case under section 65 for the assessm ent year 1996-97 warranted priority because that was going to be time-barred on 30-6- 2002.
32. The reasons offered by the IAC for his disagreement with the contents of Directorate's Inspection Note have been examined and shall be considered in the subsequent paras. Keeping in view the foregoing facts and circumstances found on investigation:--
(a) The IAC has contended that there was no bar on the assessee to file statement under section 143-B in one year and a return under section 55 in the subsequent year; hence case was correctly processed under section 62. The contention reflects, under the foregoing facts and circumstances of the cases, that the IAC is either totally naive and incompetent or he too is aiding and abetting in the pilferage of revenue. He has either totally missed the point or has deliberately side tracked the point that the Directorate of Audit & Inspection has been questioning the assumption that the assessees are manufacturers and the fact that initially statement under section 143-B was filed has been cited as one of the factors supporting the view.
(b) The view canvassed by of the IAC that the option to file statement under section 143-B is available only to commercial importers and that a wrong done in one year could not be made the basis to unto a correct action in the subsequent years is simple rhetoric employed to avoid the issue. It requires conclusive evidence that the Assessing Officer conducted proper enquiries in relevant years directly from concerned sources and placed valid proof on record that the assessees have been manufacturers in all the assessment years under consideration.
(c) The IAC has noted that the most important part of the inspection report was the observation that the assessee was not a manufacturer as it did not possess enough machinery to utilise the entire imports in the manufacturing process if any and that electric consumption was also nominal; besides, to cover up, the assessee had. Claimed expenses under the head Generator/Fuel. He has observed that the following pieces of evidence available on record in support of the claim of assessees that they are manufacturers have been overlooked by the Inspection Authorities:
(i) expenses on EOBI and Employees Social Security supported by relevant vouchers,
(ii) evidence of consumption of electricity,
(iii) following certificates obtained from the Customs and Central Excise and Sales Tax Department and placed on the file in support of manufacturing capability of the assessee while framing the assessm ent for the assessm ent year 1999-2000.
Consumption Certificate Statement of imported raw material Final certificate: To certify the survey of the unit by the staff of Central Excise and Sales Tax and to verify the assessee as an importer and manufacturer of electric fans parts and washing machines parts.
Form-L: A licence to engage in business in connection with excisable goods and allowing the assessee to conduct the business of manufacturing and dealing in plastic goods and electric fans and parts of washing machines: It is found that firstly IAC has conveniently ignored the fact that the relevant assessm ent years start from 1995-96; secondly that whatever evidence is available on record is submitted by the assessees and, admittedly, never, verified from the concerned authorities meaning thereby that the possibility of concoction of evidence cannot be ruled specially when the collusion of Assessing and Supervising Officers is alleged and thirdly the purpose of inspection and audit is not only to retrieve the loss of revenue but to enforce accountability upon the errant or delinquent functionaries which renders the issue of time bar to initiate action against the assessee party irrelevant.
(d) The IAC has also tried to take refuge behind equally superficial and bogus examination of the cases by the Additional Director, Inspection and Audit (DT) Gujranwala in September, 2001 as well as by the Inquiry Wing of C.B.R. Already considered supra.
(e) Ultimately the IAC has observed that the remarks given regarding Assessing Authorities and the Supervisory Officers are not only premature but also derogatory. According to the IAC it cannot be inferred that all departments and all Income Tax Authorities are in league with the mala fide of the assessees. The remarks of the of the IAC that the observations of the Director Inspection were derogatory to say the least, are insolent. The defiant attitude of the Field Officers genuinely led the Director Inspection to believe that there was chain of A collusion among the Field Officers; hence no prematurity in the adverse remarks of Director Inspection.
(f) The report of the present IAC that proposal for re-opening of the assessment for the assessm ent year 1996-97 was considered by the IAC Range-I, Gujranwala at that time and did not find the proposal worthy of approval vide his letter No,516, dated 26-2-1998, available on record further supports the observations of the Director Inspection about the role of concerned officers in the matter.
33. The alleged maladminsitration is established. It is recommended that:--
(i) Jurisdiction over both the cases be assigned to Mt. Sarfraz Ahmed, Taxation Officer (BS-19);
(ii) Sarfraz Ahmed, Taxation Officer to conduct, personally with the assistance of his subordinates, the verification of all the evidence already placed on record from year to year since assessment years 1995-96 inter alia;
(a) the existence of customers shown as per details of sales filed, if any, with their NTN and the business they were engaged in, if any, in the relevant year;
(b) authenticity of copies of electricity and other bills submitted by assessees;
(c) authenticity of copies of certificates submitted by the two assessees from various departments;
(d) verification or registration under Sales Tax Act as well as the declared sales from records of Sales Tax Department.
(iii) Compliance be reported alongwith findings within 30 days from the receipt of the decision.
34. Further recommendations if any warranted by the compliance report shall be made on receipt of report.