These two appeals have been filed by the Revenue for the tax years 2003 and 2005 on the common grounds:--
(a) That the learned CIR (A) was not justified to annul the order on the basis that Issuance of another notice constitute change of opinion.
(b) That the learned CIR(A) was not justified to reject the basis on which sales were estimated because of the fact that the taxation officer rightly quoted a parallel case for estimation of sales.
(c) That the appellant may be allowed to add, amend or alter any ground of appeal on or before the date of hearing.
2. Facts for the purpose of disposal of these two appeals are that the taxpayer AOP derives income from the business of construction and sale of plazas. In the years under appeal it filed returns declaring income at Rs,9,80,582 and Rs,53,96,553 respectively, which was generated from the construction and sale of two plazas built on Plot 35 and 33 1-8 Markaz Islamabad, named as Ahmed Centre and Aneeque Arcade respectively. During the tax year, 2003 the AOP constructed and sold part of Ahmed Centre whereas in the tax year 2005 apart from the construction and sale of the other plaza i,e, Aneeque Arcade, remaining unsold offices/fiats etc. Etc. In Ahmed Arcade were also disposed of.
3. Case of the taxpayer AOP was selected for audit under section 177 of the Income Tax Ordinance, 2001 and as a consequence of finalization of audit income of the AOP for both the years was amended under section 122(1) and determined at Rs,18,81,52,698 and Rs,17,41,32,477 respectively vide orders dated 26-5-2008. From, the perusal of the amendment assessment orders passed under section 122(1) of the Income Tax Ordinance, 2001, it transpires that during the course of audit proceedings the AOP made only partial compliance with the statutory notices issued by the taxation officer from time to time and did not produce books of accounts, bank statements and other pertinent material details which were requisitioned by the taxation officer for the determination of income. He, therefore, discarded the declared version of the AOP and estimated sales in both the years on the basis of Agreements to sell which were requisitioned from the purchasers. The taxation officer also curtailed declared cost of construction of both the plazas in both the years which yielded additions of Rs,1,46,92,116 and Rs,2,20,26,209 in the tax years 2003 and 2005, respectively. In the tax year 2005 addition of Rs,68,77,715 was also made out of various P & L account expenses and resultantly income for both the years under appeal was determined at Rs,8,81,52,698 and Rs,17,41,32,477 respectively. Being aggrieved the taxpayer filed appeal before the CIT(A) who vide his consolidated order dated 3-4-2009 annulled the amended assessment orders with the following observations:-- "The arguments of the AR carry much force. In the light of the judgments of the Tribunal quoted above, specifically, case-law reported as (2007 PTD (Trib.) 2601) I am convinced that the criteria, as given in the above mentioned judgments, has not been met by the department and accordingly hold that the notice issued under section 122 to be without lawful jurisdiction, having not mentioned the exact provision of law under which the officer intended to proceed. The subsequent proceedings being vitiated by the issuance of an illegal notice, the impugned order is rendered unlawful and is consequently hereby annulled. This appeal having been decided on legal ground, other grounds, being of secondary nature, are not being adjudicated upon."
4. The department feeling dissatisfied filed appeals before the I.T.A.T. Which vide its order dated 2- 10-2009 vacated the order of the CIT (Appeals) and remanded the case to him with the direction to adjudicate the appeals on other grounds taken before him. In pursuance of this order the CIT (Appeals) again took up the matter and for various reasons recorded in the consolidated order dated 19-3-2010 annulled the assessments for both the years which the Revenue has contested on the grounds supra.
5. We have heard arguments from both the sides and also perused the orders of the authorities below. The learned DR appearing on behalf of the Revenue contended that the order of the taxation officer on the point of estimate of sales and curtailment of cost of sales was based upon valid reasons which inter alia included non-production of books of account, bank statement, detail of sales (customer-wise) on the format communicated to the taxpayer and some other relevant and incidental information and details. Although the taxpayer did make compliance by furnishing partial information, it was not in accordance with the requirement of the taxation officer as spelled out in the statutory notices issued from time to time. Under these circumstances, the taxation officer was not left with any option except to discard the declared version and resort to estimates.
The learned AR of the taxpayer AOP, on the other hand, supported the order of the CIT (Appeals) and contended that the first appellate authority had given relief to the taxpayer on valid grounds as recorded in the appellate order.
6. After consideration of submissions from both the sides and examination of record we have noted that the contentious issues are estimate of sales, curtailment in the cost of sales in both the years and additions out of P&L Account expenses in the tax year 2005. They are discussed and disposed of in the following manner.
SALES
7. In the tax years under appeal the AOP declared sales of shops offices and flats etc. At Rs,6,02,00,000 and Rs,13,43,00,000 in both the plazas, respectively, which were on cash basis and also not supported by attested registered sales-deeds. The taxation officer referred the agreements produced before him to the customers for verification but most of the customers did not respond to the letters of the taxation officer. However, two purchasers namely Mr. Nazir Muhammad Khawaja and Mr. Sarmad Nazir Khawaja resident of House No, 47, St. 17, 1-9/1, Islamabad complied with the notices of the taxation officer. Mr.Nazir Muhammad Khawaja provided copy of Sale Agreement dated 17-6-2003 executed between him and the AOP for the sale of office No,3, 2nd Floor in Ahmad Centre, according to which the said office was sold for Rs,17,00,000 whereas the taxpayer had disclosed its sale price at Rs,700,000 only. Similarly, in the other Agreement to sell dated 20-5-2005 saleprice of office No,T-16, 3rd Floor, Aneeque Arcade Centre, 1-8 Markaz, Islamabad was recorded at Rs,28,00,000 whereas the taxpayer AOP had disclosed its sale price at Rs,7,25,000. Based upon the above evidence the taxation officer through notice under section 122(9) dated 5-5-2008, confronted the taxpayer AOP with understatement in the declared sale price and asked it to explain as to why the declared sale price being unreliable and unsupported by the registered/attested Sale Agreements may not be rejected. He also confronted the taxpayer with the estimate of sales at Rs,13,32,80,000 and Rs,27,43,72,000 in the tax years 2003 and 2005, respectively on the basis of price recorded in the Agreements to sell referred to above. The taxpayer, in reply submitted that Office No,3, 2nd Floor, Ahmad Centre, was sold to some Mr. Amir Rahim Qureshi who in turn sold the same to Mr. Nazir Muhammad Khawaja, whereas the other office was sold by the AOP to some Mr. Muhammad Afzal who in turn sold the same to Mr. Sarmad Nazir Khawaja for Rs,28,00,000. The taxpayer thus attempted to explain that the price of both the offices relied upon by the taxation officer for the purpose of estimating Sales was not relevant as both the transactions had not been executed between the seller and the alleged buyers and that the said offices were purchased by the respective buyers from the persons to whom the AOP had made sales earlier. The taxation officer, however, did not accept this plea because in the case of Mr. Nazir Muhammad Khawaja the transaction was made between the AOP and the said buyer for Rs,17,00,000 in respect of Office No,3, 2nd Floor, Ahmad Centre 1-8, Markaz, Islamabad and contents of the said Agreement have been produced at Pages-12 and 13 of the order for the tax year 2003. Besides, the names of both the buyers appeared in the lists provided by the taxpayer itself during the course of audit proceedings.
8. From the facts discussed above it is quite evident that the taxpayer's stance before the taxation officer had not been consistent. It declared the sale of Office No,3, Second Floor, Ahmad Centre for Rs,700,000 and that of office No,T-16, Third Floor, Aneeque Arcade 1-8 Markaz, Islamabad, for Rs,725,000. It also submitted the lists of buyers/Customers of both the plazas which included the names of Mr. Nazir Muhammad Khawaja and Mr. Sarmad Nazir Khawaja. When the taxation officer discovered the actual sale price in respect of both the offices, the taxpayer tried to extricate itself by pleading that both Mr. Nazir Muhammad Khawaja and Sarmad Nazir Khawaja had purchased the offices from third parties with whom the AOP had no concern. This plea of the learned AR of the taxpayer is, however, belied by the fact that the names of both the customers were disclosed in the lists of buyers submitted by the taxpayer itself. We fail to understand as to why the taxpayer AOP included the names of Sarmad Nazir Khawaja and Mr. Nazir Muhammad Khawaja in the lists of buyers if it had not made any deal with them. It appears that the taxpayer contrived this plea when the taxation officer unearthed the real price for which the offices were sold. Had the plea of the taxpayer been forceful and genuine, it would have produced the evidence regarding payments made by both Mr. Aamir Rahim Qureshi and Mr. Muhammad Afzal from time to time and also the bank account statement into which these payments were credited. Unfortunately the requisite evidence was not produced to substantiate the assertions made before the taxation officer. Under these circumstances we are constrained to hold that the taxpayer has not only been persisting in non-compliance but also producing only those documents which suited its interest of getting away with assessm ents of its own choice. We are therefore, of the considered view that the taxpayer AOP did not approach the taxation officer with clean hands as it did not deliberately produce the pertinent information before the taxation officer including bank statements and schedule of payments according to which the customers made payments to it for the purchase of offices and flats. The taxation officer, on the other hand successfully proved understatement in the disclosed sale price from the taxpayer's own record and details filed during the course of audit proceedings. We, therefore, uphold the estimate of sales in both the years.
COST OF SALES
9. From the perusal of the amended assessment order it transpires that the covered area of Ahmad Centre and Aneeque Arcade is 45710 sq. Ft. And 62173 sq. Ft., respectively. During the course of audit proceedings the taxation officer obtained information from Pak PWD regarding the rates of construction which for both the years are as under:-- Type Construction 2003 2005 A Class Rs,975 per sq.ft. Rs,1,050 per sq.ft.
B Class Rs,800 per sq.ft. Rs,875 per sq.ft.
C Class Rs,650 per sq.ft. Rs,700 per sq.ft.
On the basis of cost of sales declared at Rs,5,98,19,418 and Rs,11,01,31,048 in the tax years 2003 and 2005, respectively, the taxation officer worked out rate of construction at Rs,1308.66 per sq.Ft. And Rs,1771.35 per sq.Ft. Which in comparison with the rates intimated by Pak PWD appeared to be inflated. The taxpayer was accordingly confronted with the alleged inflation in the declared rates of construction with a view to suppressing the taxable profits. The taxpayer in its reply submitted that the declared rates of construction had not been calculated correctly because the cost of land had also been included in the cost of construction. It was further argued that the owner had also incurred some extra expense on the items like glass, lift and aluminum in the tax year 2005 and if the cost of land as well as glass, lift and aluminum was excluded, the declared cost of construction would favourably compare with the rates obtained from the Pak PWD. After the receipt of reply from the taxpayer the taxation officer issued another notice under section 122(9) of the Income Tax Ordinance, 2001 on 5-5-2008 whereby the taxpayer was confronted with "appropriate addition" out of cost of sales on the ground that the declared cost was not open to verification. The taxpayer submitted reply on 21-5-2005 whereby it was contended that there was no justification to change the earlier stance and confront the taxpayer with an altogether new basis of addition and that too when D the taxpayer had successfully proved that its declared cost of construction was more than reasonable, being favourably comparable with the rates provided by the Pak PWD. The explanation submitted by the taxpayer was, however, not accepted by the taxation officer because in the absence of relevant supporting record the declared cost of construction was not considered as reliable. Accordingly, he made additions of Rs,1,46,92,116 and Rs,2,20,26,209 being 20% of the declared cost of construction in the tax years 2003 and 2005 respectively.
10. From the sequence of facts discussed above we have noted that the cost of construction has been curtailed by the taxation officer in a very clumsy manner which smacks of lack of propriety and professionalism. When the taxpayer AOP successfully demonstrated that the declared rates of construction in both the years compared favourably with the rates of the Pak PWD which the taxation officer had himself considered to be reasonable there remained no justification for him to take a somersault and come up with a new basis for curtailment of cost of construction. Such type of arbitrary and whimsical treatment has never been looked upon with favour by the hierarchy of the courts, being absolutely discordant with the norms of justice and fair play. We have further noted that the amounts of additions have also been worked out in a very careless manner because the additions of Rs,1,46,92,116 and Rs,2,20,26,209 do not represent 20% of declared cost of construction of Rs,3,43,46,544 and Rs,5,88,88,307 in both the years, respectively. We, therefore, order the deletion of additions made out of cost of sales in both the years under appeal.
11. From the perusal of the order of the first appellate authority it transpires that the taxpayer has been vehemently alleging "Change of Opinion" against the taxation officer, which according to him, is not permissible under the law and renders the entire assessment unsustainable. Crux of the plea, as discussed above, is that the taxation officer, on the basis of rates of construction obtained from the Pak PWD, confronted the taxpayer with the curtailment of the declared cost of construction which was alleged to be excessive and inflated. In reply the taxpayer clarified that he (taxation officer) had miscalculated the cost of construction and that the declared cost favourably compared with the rates of construction intimated by Pak PWD. Since reply of the taxpayer was quite satisfactory, the taxation officer changed his stance and came up with an altogether different reason for reducing the declared cost of construction i,e, unverifiability of various components of cost of construction. This change in stance of the taxation officer, the learned AR pleaded, was not permissible under the law and rendered the whole edifice of amended assessm ent unsustainable.
12. The learned DR, on the other hand, contended that the plea of the learned AR was misconceived because the so called principle of "Change of Opinion" simply connoted that the same authority having taken a conscious decision by passing an assessment order was not vested with the jurisdiction to revise/review its decision through reappraisal of the same facts. He explained that the said principle was not attracted in the instant case because the taxation officer confronted the taxpayer with a different basis of curtailment of cost of construction before the passing of an assessm ent order and not afterwards. He further argued that such changes do occur during the course of proceedings and are the natural outcome of the interaction between the taxpayer and the taxation officer and flow of information in different phases of proceedings. Thus an opinion formed on the basis of material on record may undergo change if the (the taxpayer) refutes the confronted proposition with the help of plausible explanation. This process continues till the finalization of assessm ent. However, when an assessment stands finalized, the Assessing Officer who framed the assessm ent or the officer succeeding him is divested of jurisdiction to reappraise the same material on record and come to a conclusion different from the one recorded in the assessm ent order. Concluding his arguments, the learned DR submitted that the change in stance during the process of audit proceedings on the basis of change in the situation of the case did not amount to "Change of Opinion" as contended by the learned AR.
12(sic). We have given due consideration to the arguments of both the sides and feel persuaded to agree with the learned DR. The Tribunal in its earlier order dated 2-10-2009 clarified that:-- "Before the assessm ent order is made, the Assessing Officer cannot be legally stopped from changing his position on the basis of change in the situation of the case and issuance of subsequent notices based on change in situation will be legally correct."
The principle of "Change of Opinion" came up for consideration before the Lahore High Court in the case reported as 2006 PTD 1617 wherein the Court held that:-- "Change of Opinion pre-supposes the making of an order by the same person or at best by the same authority."
From the above quoted finding of the High Court it is quite evident that the principle of "Change of Opinion" relates to the "Order" and not to the notice because during the course of interaction between the taxpayer and the taxation officer information/details and record etc. Are provided in different phases and consideration thereof may prompt the taxation officer to change of his opinion depending upon the situation of the case. However, when audit proceedings culminate into an order, the findings recorded by the taxation officer on different aspects of the case cannot be reviewed by him or an officer succeeding him because "Change of Opinion" about a fact or a finding already recorded in the assessment order is not permissible.
13. In the instant case the taxation officer changed his stance about the declared cost of construction which he was fully authorized to do provided the change was the outcome of convincing and plausible reasons. We have already dilated upon this aspect and come to the conclusion that the change in stance by the taxation officer before finalization of assessment though permissible, was not based upon valid reasons. Consequently addition made to the income of the taxpayer on account of reduction in cost of construction has been ordered to be deleted.
14. Profit and Loss Accounts additions which relate to the tax year 2005 have been made at Rs,68,77,715 out of total claim of Rs,1,90,12,399 on account of unverifiability. It is an admitted fact that the taxpayer did not produce pertinent record which has resulted in the rejection of its declared version. However, we feel that under some heads the disallowance is excessive which is curtailed as under:-- Heads of Accounts Reduce To Entertainment Rs,400,000 Salaries Rs,250,000 Travelling and ConveyanceRs,150,000 Other expenses Rs,1,000,000 Rent of Equipment Rs,400,000 Advertisement and MarketingRs,300,000 Rest of add-backs appear to be reasonable and are, therefore, confirmed.
15. The departmental appeals succeed to the extent and in the manner discussed above.