DECISION /FINDINGS Brief facts of the case are that the complainant, an AOP derived income from dealing in rice. Return for the assessm ent year 2002-2003 was filed under Self-Assessment Scheme declaring an income of Rs.258,400. The RCIT, Eastern Region, Lahore vide his notice, dated 22-1-2003 to the complainant expressed his intention to select the complainant's case for total auuit under para. 9(a)(ii) of the Self-Assessm ent Scheme 2002-2003 on the following grounds:-- "(i) Comparative analysis of declared results with a parallel case bearing NTN 21-20-0450680 reflect the following position:-- 2002-2003 2002-2003 Parallel case Sales 17,046,777 3956,350 Net profit declared258,400 129,700 Net profit rate 1.51% 3.27
(i) The disclosed net profit rate of 1.15% is considerably low as compared to the parallel case mentioned above.
(ii) It is also observed that turn over has decreased from Rs.19,735 million in assessment year 2001- 2002 to Rs.17.46 million in the year under discussion. This aspect needs thorough probe."
3. In response to the RCIT's notice, the complainant had contested that the cited case was not parallel to his case because the capital employed in the said case was not known whereas the complainant was running the business with bank borrowings on which he paid a mark up, together will insurance, to the tune of Rs.14,654,157. The sales declared in the parallel case were stated to be about five times lower than the sales declared by the complainant and the accepted principle of business that lower the sales, the higher the profit and higher the sales the lower the profit had been ignored by the RCIT. Regarding decline in sales over the last year it was stated that the complainant started the year with `nil' opening stock and had to effect sales as and when purchases were made from the market. The RCIT, however, proceeded to select the case for total audit, hence this complainant.
4. In reply the respondent has raised preliminary objection to the effect that selection of case for total audit was a proceeding for assessment against which remedy of appeal was available in law and as such the case does not fall within the jurisdiction of the Federal Tax Ombudsman. The selection of the case has been defended to be valid and in accordance with the C.B.R's. Guidelines.
The net profit rate disclosed at 1.51% as compared to 3.27% in the parallel case and decline in sales to the tune of Rs.2.7 million over the last year provided basis for selection. As regards mark up paid by the complainant it is stated that overdraft facility of Rs.3,400,257 from NBP available to the complaint was not reflected in the consequent sales declared at Rs.17.046 million.
5. Representatives of both sides attended and reiterated their contentions. The complainant's AR further contended that the respondent ignored the G.P. Rate and based his decision on comparative decline in NP, which did not form part of the criteria for selection as laid down by the C.B.R. The G.P. Rate declared at 9.55% against 9.22% in the last Year showed a considerable improvement. In the parallel case sales declared were only Rs.3,956,350 against complainant's sales shown at Rs.17,046,777 and therefore comparing the net results of the two was not justified. It was further pleaded that the complainant managed his business with money borrowed from bank for which he paid a sum of Rs.1,367,586 as mark up and had he owned his on capital he would have shown higher N.P. Rate with much more income. The representative of the respondent contended that there was evident decline in income which formed valid basis for selection of the case. He further stated that the cited case was parallel to that of the complainant as both carried out identical business and higher N.P. Rate declared in the parallel case showed that the complainant had understated the particulars of his income. He contended that the overdraft facility enjoyed by the complainant should have led to increased volume of business which needs to be verified through audit.
6. The contentions and arguments of the both sides were considered and relevant record was examined. As regards the question of FTO's jurisdiction, it may be pointed out that this issue has been examined in detail in Complaint No.1250 of 2001 (2002 PTD 1918) and Complainant No.1436 of 2002 and the objection raised by the Revenue Division was rejected. Moreover the process of selecting the case for total audit is completely independent of assessment. The complaint is against the B illegal mode adopted for selection. It may be noted that no appeal has been provided against the order selecting the case for total audit. Hence the objection is overruled. The perusal of record shows that the C complainant declared an income of Rs.258,400 which is more than the income shown in last year at Rs.215,400. The G.P. Rate declared at Rs.9.55% is also better than the rate shown last year at 9.22%. Net profit rate has improved from 1.09% in the proceeding year to 1.15% in the year under consideration. Fall in turn over by 2.4 million is due to the fact that the complainant had no opening stock for immediate sale at the start of the year. He had to effect the sales out of purchases as and when made. Secondly, sales were made at better rates to earn higher margin of profit which is evident from net results over the last year and existence of closing stock of Rs.2.34 million. Higher bank interest is also due to larger involvement of borrowed money in closing stock. The quantum of capital employed and its constitution (borrowed or not) in the parallel case is not known. Had the complainant not employed borrowed capital the net profit rate in his case would have evolved at 9.5%. The sales declared by the complainant at Rs.17,046,777 are more than four times of the sales shown in the cited case at Rs.3,956,350. The two cases cannot conveniently be considered as parallel to each other.
7. In view of the facts and circumstances of the case as discussed above the action of the RCIT for selection of the complainant's case for total audit is arbitrary, unreasonable and contrary to law based on irrelevant grounds. Maladministration is thus proved.
8. It is recommended that:--
(i) The order of the RCIT regarding selection of complainant's case for total audit be withdrawn and complainant's return for the assessment year 2002-2003 be accepted under Self-Assessment Scheme.
(ii) Compliance be reported within 30 days.