FINDINGS /DECISION ' JUSTICE (RETD.) SALEEM AKHTAR, FEDERAL TAX OMBUDSMAN.---The main points in the complaint are as follows---
(i) Income tax assessm ent for the assessment year 2001-2002 was framed under section 59(1) of the repealed Income Tax Ordinance, 1979 on 30-6-2001 (actually 30-6-2002) in the complainant's case.
(ii) Demand notice under section 85 was issued showing 'nil' demand although on account of deductions under section 50 the complainant was entitled to a refund of Rs,375,082.
(iii) After the complainant had pursued the matter, refund of Rs,261,773 was issued on 21-2-2003 but refund of Rs,113,309 still remained outstanding.
(iv) The Additional Commissioner, Income Tax, Range-V, Faisalabad issued a show cause notice under section 122 of the Income Tax Ordinance, 2001 dated 23-4-2003. The Additional Commissioner expressed the intention to reopen and modify the assessment order for the assessm ent year 2001-2002 as well as A for the earlier two years, 1999-2000 and 2000-2001. 'This action was based on a letter from the Commissioner of Income Tax dated 1-2-2003 addressed to the IAC.
(v) A detailed para-wise explanation was furnished to the IAC vide letter dated 7-5-2003.
(vi) Apart from submission of para-wise explanation the complainant also raised a preliminary objection challenging the legality of the notice under section 122 as under: "The amendment in section 122, providing for its application to orders passed under the repealed Ordinance was inserted vide Finance Ordinance, 2002. Such amendment is applicable for assessm ent year 2002-2003 only and not to any earlier assessment year. The notice issued in respect of assessm ent years 1999-2000 to 2001-2002 is void ab initio."
(vii) On preliminary verbal discussions with the Additional Commissioner, the complainant also relied upon a' ruling by the President of Pakistan in support of the complainant's contention that no notice under section 122 could be issued in respect of assessment years 1999-2000 to 2001-2002.
(viii) The Additional Commissioner has, however, refused to follow the said ruling although it was circulated vide CBR letter dated 22-3-2004.
(ix) The continuation of proceedings initiated vide notice under section 122 for the assessment years 1999-2000 to 2001-2002 amounts to maladministration under the circumstances detailed above.
' It has been prayed that the proceedings initiated and pending before the Additional Commissioner of Income Tax, Range-V, Faisalabad be declared as null and void and- appropriate instructions be issued for payment of the balance refund of Rs,113,309 for the assessment year 2001-2002.
2. The respondent's reply contains the preliminary objection that the matter relates to assessment of income and determination of correct tax liability of the complainant. It is stated that the matter thus falls within the purview of section 9(2)(b) of Ordinance XXXV of 2000. On facts the main points in the reply are as follows:
(i) Refund of Rs,261,773 for the assessment year 2001-2002 was issued to the complainant on 21-2- 2003 as a result of verification from the concerned DPCs/DPUs.
(ii) From the examination of assessm ent records it was observed that action under section 122 was warranted on the following grounds--- Assessm ent year 1999-2000 ' For this year the complainant filed return of income as a new assessee but did not declare income at 30% of the declared business capital which was the minimum requirement of the self- assessm ent scheme. Assessm ent year 2000-2001 ' For this year the complainant, claimed expenses on account of rejection and breakage at Rs,280,000 in the profit and loss account whereas the expense related to the trading account. The complainant also claimed expenses on account of building and machinery repairs when no building was owned by the complainant and depreciation had also not been claimed on machinery from which it appeared that the machinery was on lease. Assessment year 2001-2002 ' The declared income for this year was Rs,170,000 while income as per computation chart was Rs,167,000 which meant that lump sum addition of Rs,3,000 had been made. This was not permissible under the self-assessment scheme.
(iii) It is incorrect that provisions of section 122 were not applicable to the assessment years 1999- 2000 to 2001-2002. Section 122(1) has been amended through Finance Ordinance, 2002 to read as under--- "Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121 (or issued under sections 59, 59A, 62, 63 or 65 of the repealed Ordinance) by making such alteration or additions as the Commissioner considered necessary.
' It has been prayed that the complaint be rejected as no maladministration is involved in the case.
3. During the hearing, the two sides reiterated their contentions. The learned ARs for the complainant also pointed out that during the pendency of the complaint, orders under section 122 had been passed on 19-6-2004 by the taxation officer for all the three years creating a very substantial demand. It was contended that the taxation officer should have waited for the outcome of the complaint before finalizing the proceedings. With regard to the applicability of section 122 to the assessm ents for the years 1999-2000 to 2001-2002 it was contended that despite the amendment in sub-section (1) of section 122 brought about by the Finance Ordinance, 2002 the provisions of that subsection were still not applicable to the assessment years prior to the coming into force of the Income Tax Ordinance, 2001 on 1-7-2002. It was further stated that a new subsection (5A) had been inserted in section 122 through the Finance Act, 2003 but this new subsection was also not applicable to assessments framed prior to the insertion of the new sub- section, viz. Framed upto 30-6-2003. In this context support was also sought from a C.B.R. Circular dated 17-2-1981 in which it was clarified .That section 66A inserted in the repealed .Income Tax Ordinance, 1979 through the Finance Ordinance, 1980 did not have retrospective application and assessm ents finalized before 1st July, 1980 could not be reopened under section 66A of the Income Tax Ordinance, 1979. The operative lines of the circular read as under-- 44 section 66A does not have retrospective application. The assessments finalized before 1st July, 1980 cannot be reopened under section 66A of the Income Tax Ordinance, 1979."
' It was pointed out that this interpretation made by the C.B.R. Was later held to be valid by the Lahore High Court in the case reported as 2001 PTD 1525 in the following words--- "Having considered the submissions made at the bar we are persuaded to agree that section 66A is not procedural in nature, and therefore, it could not have retrospective effect to touch the completed assessm ents before its introduction on the statute book."
' Reference was also again made by the learned ARs to the order of the President referred to earlier.
The representative of the respondent on his part reiterated that as a result of the amendment brought about in section 122(1) of the Income Tax Ordinance, 2001 by the Finance Ordinance, 2002 through the insertion of the words "or issued under sections 59, 59A, 62, 63 or 65 of the repealed Ordinance", the Commissioner was empowered to amend any assessment made under the said sections of the repealed Ordinance irrespective of the dates of assessment. It was also pointed out that the complainant had not challenged the correctness of the facts as contained in the show cause notices under section 122 and had only challenged their validity on legal grounds which, however, were not tenable in view of the clear provisions of law.
4. The arguments of the two sides have been considered and the contentions made on behalf of the ,complainant have been found to be quite valid. Apart from the fact that these contentions are supported by the CBR circular issued in the context of the then newly inserted section 66A of the repealed Income Tax Ordinance and by the subsequent order of the Lahore High Court referred to above; the C.B.R.'s own circular dated 24-4-2004 issued in the context of the order of the President in Complaint No,530-L/2002 and the amendment in section 122(1) made through Finance Ordinance, 2002, also supports this view. The said C.B.R. Circular No,3(12) IT-Jud/2004 dated 24-4- 2004 reads as under-- "From: Sajjad Ali, Secretary (IT-Jud)
To: All Regional Commissioners of income Tax And ' Director General LTU, Karachi ' SUBJECT: REPRESENTATION UNDER SECTION 32 OF THE ORDINANCE XXXV OF 2000 AGAINST FINDINGS OF THE FEDERAL TAX OMBUDSMAN DATED 9-9-2002 IN COMPLAINT NO.530-L (ZAHID SADIQ v. C33.R.)
INSTRUCTIONS REGARDING ' It has been brought to the notice of the Board that the Honourable President of Pakistan in his decision issued vide No,111/2002-'Rep(FT)/Law dated 11-11-2003 while accepting representation of the department against Federal Tax Ombudsman's order has also observed as under--- "Further, the 2001 Ordinance Which came into force on 1-7-2002 does not apply to the assessment order for the assessm ent year 2000-2001."
2. Queries have been raised as to whether, the above observation is to be followed in other cases because apparently it is not in line with the provisions of section 122 of the Income Tax Ordinance, 2001 which read as under--- "122. Amendment of assessm ents---(1) subject to this section, the 'Commissioner may amend an assessm ent order treated as issued under section 120 or issued under section 121 (or issued under sections 59, 59A, 62, 63, 65 of the repealed Ordinance) by making such alteration or addition. As the Commissioner considers necessary."
3. The matter has been considered in the Board. It is clarified that sub-section (1) of section 122 of the Income Tax Ordinance, 2001 was amended through Finance Ordinance, 2002 to extend its applicability to an assessm ent order issued under sections 59, 59A, 62, 63 and 65 of the repealed Ordinance, 1979 as well. As such, the observation of the Honourable President of Pakistan being in the context of the facts of a specific case relevant to assessment for the assessment year 2000- 2001 framed before the aforesaid amendment in law is, therefore, not operative.
(Sd.)"
(Emphasis added)
The C.B.R's, interpretation which is clearly implied in the above circular is that while the amendment brought about in section 122(1) through the Finance Ordinance, 2002 would be applicable to assessm ents made under the repealed Ordinance after the said amendment it would not be applicable to assessm ents framed before the aforesaid amendment in law viz. Before 1-7-2002. In the instant case all the three assessments had admittedly been made prior to the amendment brought about in section 122(1) through the Finance Ordinance, 2002 effective from 1-7-2002. Thus in the light of the ratio of the judgement of the Lahore 'High Court referred to above and also in the light of the C.B.R's. Own interpretation these assessments could not be reopened under section 122 of the Income Tax Ordinance. It is added that on 14-9-2002 the Government made some further amendments in the Income Tax Ordinance,. 2001 including subsection (5) of its section 122. The relevant portion of the S.R.O. (which was subsequently rescinded through S.R.O. 608(1)/2003 dated 24-6-2003) reads as under - "S.R.O.633(I)/2002---In exercise of the powers conferred by section 240 of the Income Tax Ordinance, 2001 (XLIX of 2001), the Federal Government is pleased to direct that in making any assessm ent for the year beginning the first day of July 2002 or making any deduction or collection of tax for the year beginning the first day of July 2002, the said Ordinance shall have effect as if---- in section 122,---
(a) ----
(b) in sub-section (5), in clause (a), after the word "Ordinance" the words "or the repealed.
Ordinance" were inserted."
Since the above S.R.O. Applied to assessment for the year beginning on first July, 2002 the referenc.e to the repealed Ordinance inserted in subsection (5) of section 122 of the Income Tax Ordinance, 2001 would again not be applicable to assessments made prior to such insertion. This further confirms that action under section 122 could not have been taken regarding assessments for the years involved in the complainant's case because those were made prior to 1-7-2002.
5. In the light of the above, the action of the taxation officer in initiating proceedings under section 122 of the Income Tax Ordinance, 2001 is contrary to settled law and binding beneficial circular of C.B.R. The completion of the amended assessments under section 122 amounts to incompetence and ineptitude of the respondent in discharge of his duty and responsibility. Maladministration, as defined in section 2(3)(i)(a), (b) and (ii) of Ordinance XXXV of 2000 is proved and the matter falls within the jurisdiction of this forum.
6. It is recommended that-- (.) The Commissioner undertakes written counselling of the Taxation Officer concerned and places the copy of his counselling memo on personal file of the concerned officer.
(ii) The Commissioner, in discharge of his statutory obligation, under section 122A takes due cognizance of proceedings initiated in contravention of principle of law settled by binding decision and C.B.R. Circulars, culminating in the perverse orders under section 122 for the assessment years 1999-2000 to 2001-2002 and proceeds in accordance with law to discharge his obligation under section 122A of the Income Tax Ordinance, 2001.
(iii) Outstanding verified refund, if any, based on the original . Assessment for the year 1999-2000 be paid to the complainant.
(iv) Compliance be reported within 30 days.