This appeal has been filed by the Revenue, contesting the order of CIR(A), RTO, Hyderabad, vide order dated 15-9-2009 for the tax year 2005 which was amended under sections 122(4)(5)/177(6) of the Income Tax Ordinance, 2001 by Taxation Officer, Audit-III, RTO, Hyderabad.
The facts leading to the present appeal are based upon the following grounds of appeal: --
(1) That order passed by learned Commissioner of Income Tax, (Appeals) is bad in law and against facts of the case.
(2) That the Commissioner of Income Tax (Appeals) Hyderabad has erred in holding that Taxation Officer-III, RTO, Hyderabad had acted without justification under section 177 of the Income Tax Ordinance, 2001 whereas jurisdiction was re-allocated to Taxation Officer-III, RTO, Hyderabad vide CIT Order No, CIT(Audit)/RTO/Jud/2007-2008/05 dated 3-11-2007, which was duly intimated to taxpayer vide letter No, 242 dated 15-11-2007.
(3) That the Commissioner of Income Tax (Appeals) Hyderabad has erred in holding that selection of case under section 177 of the Income. Tax Ordinance 2001 for audit after lapse of two years of filing of return is not sustainable in the eyes of law.
(4) That the Commissioner of Income Tax (Appeals) Hyderabad has erred in holding that action of further amendment by Taxation Officer to under section 122(4)(5) of the Income Tax Ordinance, 2001 read with section 177(6) was not in accordance with law.
(5) That, the Commissioner of Income Tax (Appeals) Hyderabad has erred to delete additions made an account of depreciation on leased assets at Rs,99,52,144 as provisions of section 22(12) of the Income Tax Ordinance, 2001 clearly provide such claim to be allowable to leasing company against lease rental income.
(6) That the Commissioner of Income Tax (Appeals) Hyderabad has erred to delete addition under sections 21(c) and (m) on deduction claimed under the head salaries to driver and cleaners at Rs,1,57,40,004 without appreciating the fact that such salaries exceeded the threshold level of deduction under section 149 but not subjected to deduction nor payment made through banking channel.
(7) That, the Commissioner of Income Tax (Appeals) Hyderabad has erred to delete additions made on account of section 21(1) under the head of repair and maintenance of vehicles without appreciating the fact the such were made in respect of cash transaction exceeding Rs, 50,000 under single account head which were not made through normal banking channel.
(8) That the Commissioner of Income Tax (Appeals) Hyderabad has erred in deleting addition under section 174(2) of the Income Tax Ordinance 2001 at Rs,66,19;347 under various heads, without appreciating the fact, that no verification was furnished by taxpayer for verification of such expenses.
2. We have heard Mr. Amjad Hussain Memon, the learned D.R appeared on behalf of the department and Mr. A.S. Jafri, Advocate, appeared on behalf of the respondent/taxpayer.
3. Brief facts leading to this appeal are that the taxpayer is a carriage contractor, having status of AOP whose case was selected for Audit under section 177(4)(a) and (d) of the Income Tax Ordinance, 2001 and accordingly intimation letter bearing No,Jud./CIT/HZ/2007- 08/1029 dated 6- 10-2007 was served on the taxpayer to conduct audit by the Taxation Officer, Audit-II, RTO, Hyderabad.
4. During the year under appeal, original return of total income at Rs,11,20,530 was treated to be accepted under section 120(1) as deemed order as per. Income Tax Ordinance, 2001. After selection of the case for audit the appellant filed revised return of income at Rs,13,02,000 on 28-7-2004 and subsequently. 2nd. Revised return was filed at Rs,15,10,900, on 13-3-2008 which as per law is deemed to be an order under section 120(1) of the Income Tax Ordinance, 2001.
5. After due process the Taxation Officer Enforcement-III, arrived at the income under section 122(4)
(5)/177(6) of the Income Tax Ordinance 2001 as under:-- Income declared as per revised return Rs,15,10,900 ( i )Addition under section 21(c) and (m) as discussed supra.Rs, 1,57,40,004 ( i i )Addition under section 21(L) as discussed supraRs,57,30,403 ( i i i )Addition under section 174(2) as discussed supra.Rs,66,19,347 ( i v )Addition under section 18(3) read with return with section 22(12) of the Income Tax Ordinance, 2001 regarding excessive wrong claim of depreciation in respect of leased assets as discussed supra.Rs,99,52,144 Total Amended Income Rs,3,95,798
6. The taxpayer/appellant contested the appeal before the CIR(A) Hyderabad on various legal and factual grounds which were accepted and the order passed by the Taxation Officer has been declared ab initio, illegal and annulled. Hence the department filed appeal before this forum.
7. The learned D.R, contested the order of earned CIR(A) and contended that the order has been declared annulled without taking into account the facts available on, record. He further contended, that a thorough and detailed deliberation was made while making the additions and the learned CIR(A) was not justified to declare the order as ab initio, illegal and void. He reemphasized departmental stance on the strength of grounds of appeal.
8. The learned A.R, Mr. A.S. Jafri Advocate on his turn contested 'the appeal on legal as well as factual grounds. He pleaded the same set of arguments which was presented before the Taxation Officer as well as learned CIR(A) during the course of "audit as well as appellate proceedings.
9. As per record the case was selected by the Commissioner of Income Tax Hyderabad Zone Hyderabad on the basis of following reasons:--
(1) You have filed income tax return declaring income at Rs,11,20,530 in the status of AOP nature of business shown as carriage receipts. In annexure IIA total receipts have been declared at Rs,12,51,92,890 and has debited total expenses at Rs,12,40,72,360 leaving behind net profit at Rs,11,20,530. Expenses claimed constitute about 99% of the gross receipts. Which appears to be highly inflated, nothing is placed on record from where such huge claim of expenses may be verified. This issue is required to be probed.
(2) In annexure-111 attached with return four members of AOP have been declared, but NTN not mentioned and columns have been left blank, which is also required to be probed.
(3) 'You have not mentioned and left blank the columns from Serial No,18 to Serial No,22 in respect of maintaining of books of accounts, which are required to be maintained under section 174 of the Income Tax Ordinance, 2001. This aspect is required to be probed.
(4) As regards investment in business of transportation of goods, huge capital is required for acquisition of heavy vehicles, but nothing is placed on record in this respect. This aspect is required to be probed.
The case of audit was to be conducted as per directions given to the Taxation Officer, Audit-II, Hyderabad. The taxpayer submitted an application on 8-10-2007 vide dated 8-10-2007 objecting that the selection was on the basis of conjecture and surmises, and it was explained through para- wise reply with comparative chart and later on return was revised at higher income at Rs, 1,302,000 on 24-11-2007 and again revised on 13-3-2008 at an income of Rs,1,510,900.
10. The learned DR of the department pleaded that notwithstanding with the legal status of return revised under section 114(6) of the Income Tax Ordinance, 2001, such revised return has no bearing on the proceedings of the case (as far as facts are concerned) and he pointed out before this bench that proper tax credit has been allowed to the appellant while computing the income and tax liability as per amended order. The learned DR of the department argued that the additions in the impugned order are extensively discussed and the appellant during the course of proceedings failed to rebut the additions which were made accordingly as per law after providing reasonable opportunity to the appellant. The learned DR further argued that the required information, documents and records were not completely furnished in connection with audit proceedings which were delayed and income was amended accordingly as per law.
11. On legal plane the DR relied that originally, the case was assigned to the Taxation Officer being an officer of audit-II and later on jurisdiction of case was re-assigned to Taxation Officer, Audit-III, Hyderabad, vide Commissioner's jurisdiction Order No,CIT/(Audit)/ RTO/Jud12007-08/05 dated 3- 11-2007. He also filed copy of intimation letter dated 15-11-2007 sent to the assessee/ respondent.
He further argued that after selecting the case under sections 177(4)(a) and (d) assigned the case to him and in pursuance of jurisdiction IDR was issued and later on as per law notice of amendment under section 122(9) read with section 122(1)/(5) of the Income Tax Ordinance was properly issued with confrontation of entire issues which treatment was meted out in the impugned order and has properly amended the order.
12. Mr. A.S.Jafri, advocate, the learned representative of the respondent at the very outset objected on point of jurisdiction and agitated the same issue which was discussed in the order of the learned CIR(A) that the record did not show the intimation to the taxpayer regarding jurisdiction of conducting audit assigned to Taxation Officer, Audit- III, RTO, Hyderabad whereas as per Commissioner Hyderabad Zone vide his intimation Letter No,1029 dated 6-10-2007 clearly spell out assigned jurisdiction for conducting audit to Taxation Officer, Audit-II, Hyderabad, hence this was the fatal and incurable legal lacuna on the part of the learned Taxation Officer audit-III, and such cognizance was well taken by the learned CIR(A).
13. On legal plain Mr. A. S Jafri's contention is based on revision of return. Original return has been filed at Rs,11,20,530 and 1st Revised return was filed on 24-11-2007 at an income of Rs,13,02,000 and 2nd. Revised return was filed on 13-3-2008 at an income of Rs,15,10,900. The A.R vehemently urged that when revised return has been filed the tax authorities cannot refuse to accept a revised return under any circumstances and he placed reliance on the reported judgment of Vol-13 No,4 Tax Forum-51= 2009 PTD (Trib.) 749. The learned A.R invited our attention upon subsection (3) of section 122 of the Income Tax Ordinance, 2001. The said provision read as under:--
(3) Where a taxpayer furnishes a revised return under subsection (6) of section 114.
(a) the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and
(b) the taxpayer's revised return shall be taken for all purposes of this Ordinance to be an amended assessm ent order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished.
The A/R specifies that, sub-clause (b) clearly envisaged that the learned Taxation Officer seriously erred while not taking in account the revised return for all purpose of this Ordinance.
As per A.R "all purposes" means that once the return has been filed should be treated as deemed to be an order under section 122(3) and the learned Taxation Officer seriously erred not to accept the revised return during the audit proceeding. But in this case such principle has not been adopted by the Commissioner under the clear legal pronouncement.
The learned A.R further invited our attention to the intimation notice of Commissioner of Income Tax, Hyderabad Zone, Hyderabad dated 6-10-2007 and the parameters for selection referred in already discussed as per para-9 supra and argued that out of four parameters Nos. 2, 3 and 04 are general in nature and more particularly are that the learned Taxation Officer Enforcement-VI , RTO, Hyderabad had issued deficiency letter vide Letter No,197 dated 19-11-2005 in which he asked the appellant to file Annexure-III and evidence of deduction at source under sections 235 and 236. The concerned Taxation OfficerEnforcement failed to require any other detail and the Commissioner made basis for selection of case for audit under section 177(4) of the Income Taint Ordinance, 2001.
He further argued that only one parameter left for adjudication before the Revenue. In this respect filing of revised return is one of the solid rebuttal against Ground No, 1 . Because the income has been enhanced and the expenses claimed constitute about 98 % of gross receipts which negates the stance as mentioned in the ground No,01. The . Objection was raised through letter addressed to the Commissioner of Income Tax, Hyderabad Zone, Hyderabad vide letter dated 8th October, 2007 which was also acknowledged on 8-10-2007, but the Commissioner failed to reply the same to the taxpayer.
14. While discussing the facts of the case, 'the learned AR argued that:--
(i) The Taxation Officer has made addition under sections 21(c) and (m) of the Income Tax Ordinance, 2001 to the tune of Rs,1,57,40,004 which pertains to claimed salaries at Rs,1,76,94,176 (Rs,1,57,40,004 operational Staff and Rs,19,54,176 at H.0/B.O. Staff) . As per departmental version the taxpayer was required to deduct tax on account of salaries under section 149 of Income Tax Ordinance, 2001 and payments on account of salaries paid were above the threshold limit of Rs,10,000 were required to pay through cross cheque or direct transfer of funds to the employees bank account as warranted in section 21 (m) of the Income Tax Ordinance, 2001. In fact the audit objection regarding non-deduction of tax under section 149 on account of salaries paid to staff, and default under sections 21(c) and 21(m) were raised after, submission of, the breakup of salaries filed with revised return/statement of account which also contained the total claim of salaries paid to employees at Rs,1,76,94,176 and no employee has been paid salary which comes under the ambit of section 149 of the Income Tax Ordinance 2001. In the revised statement of account the taxpayer/appellant has declared total salaries paid at Rs,1,76,94,174 along with supporting details/bifurcation of the salaries paid. As per disbursement of salary, the taxpayer employed two drivers and one cleaner engaged with one vehicle. There had been 33 vehicles plying during the year under audit. As per terms of employment an amount of Rs,8,000 each for two Drivers and Rs,6,000 for Cleaner and an extra amount of Rs,18,000 was paid in cash to two drivers and one cleaner engaged with one vehicle whereby a total monthly emolument paid to three employees at Rs,40,000 as per, declared version of the taxpayer. Resultantly it is evident that as per terms of employment the appellant had paid total salary at Rs,8,000 to one driver and Rs,6,000 to one cleaner including extra payment made in cash Rs,18,000 for two driver and one cleaner. The learned A.R invited our attention towards action of the Taxation Officer who 'has failed to bring on record the revised schedule of salaries and other extra payments (emolument) filed during the audit proceeding vide explanation dated 1-11-2008 duly acknowledged on 3-11-2008 and argued that the extra payment does not come at all in the ambit of salary or perquisite as per section 12(2)
(c)(d) read with section 13(2) of the Income Tax Ordinance, 2001. The learned A.R. Contended that in all fairness the learned taxation officer should have allowed all expenses which is the expenditure incurred on behalf of the employer on the employee's duties of employment because the driver took the goods from Karachi to other cities of Pakistan where they have to pay their food expenditure, vehicle expenses, regarding any unforeseen/contingences during the travelling which includes toll tax, police challan and daily allowance for there expenditure of bathing, washing etc. These expenses are essence and incidental to the vehicle plying on the roads which were reimbursed and does not attract section 21(c)(m) of the Income Tax Ordinance, 2001.
(ii) That as per impugned order the second addition under section 21(I) of the Income Tax Ordinance, 2001 was made to an amount of Rs,57,30,403 against the claim of Rs,1,54,88,594 under the head of repair & maintenance of vehicle. The departmental version on this count is that any expenditure exceeding Rs,50,000 was to be made through banking channel and section 21(I) is applicable and these transactions were identifiable and confronted to the tax payer. The AR argued that the nature of these expenses is purely trading nature and does not come at all in the ambit of section 21(1) of the Income Tax Ordinance, 2001. The Central Board of Revenue vide its Circular No, 11 of 1998 clearly directed to the authorities that the expenses of trading and manufacturing is outside the ambit of section 24(ff) of repelled Ordinance, 1979. It is further clarified that clause (ft) applies to expenditure normally chargeable to profit and loss account.
Though it is not a case of trading in nature nor trading account has been filed daring the proceedings but the expense regarding repair & maintenance of vehicle claimed is in the nature of trading with the reason that these vehicles are those which are earning source and it is not possible to pay the repair expenses at far-flung areas from the office of the tax payer at Hyderabad because these vehicles require repairs and maintenance during plying on day to day basis in various workshop and other shops over the country and the expenses claimed in the head is below the limit as prescribed under the law. It is argued by the A.R that the repair & maintenance includes replacement of accessories like tire tubes and many other parts and most of replacement, repair incurred after plying the vehicles when the vehicle are not at Hyderabad, and as per nature of this business it is not possible to provide all expenditure through banking channel.
The learned Taxation Officer has failed to establish the entire head of account and resultantly an amount of Rs,57,30,403 was added in the total income and thus the learned T.0 either add entire addition or it should be deleted in to. The partial addition has no bounds and thus when the Assessing Officers is not confident to add entire amount then, he has no option to disallow the part amount.
(iii) Another addition under section 174(2) of the Income Tax Ordinance, 2001 was made at of Rs,66,19,347. This additions have been made on lump sum basis which pertain to the heads fuel and Oil; hire paid to other transporters, repair and maintenance, computer and office, site office expenses, stationery expenses, entertainment expenses, travelling expenses and miscellaneous making a total claim amounting to Rs,6,61,93,471. The A.R. Has argued on this score that the claim of Rs,3,92,56,700 under the head fuel and oil, it is not possible to collect evidence from the petrol pumps as these vehicles get their fuel from various petrol pumps all over the Pakistan and it is not possible to pay through cross cheque, however, the evidence regarding petrol pumps receipt were available. As regards the hire of vehicles from other transporters, an amount of Rs,23,147,027 being 10% of claim had been added in total income in spite of the facts the agreements regarding, hiring were provided to the department. As regard the expenses regarding different heads pertaining to repair and maintenance of computer in office, site office expenses, stationery/printing stationery, entertainment expenses, travel of conveyance, miscellaneous and office expenses which if aggregate comes to Rs,3,789,746. The disallowance @ 10% is 'unjustified as complete detail and evidence was furnished.
(iv) Further addition made under section 18(3) read with section 22(12) of the Income Tax Ordinance, 2001 was on the basis of excessive/wrong claim of depreciation in respect of leased assets amounting to Rs,99,52,144. The learned AR took the same stand as taken at below level. The addition pertains to the payment against leased assets.
15. Rival parties heard and perused the case record/case laws cited. We are of the considered opinion that it is incumbent to dilate the controversy on legal plane. We are of the opinion that it is not necessary for the department to issue a pre-show-cause notice. It has now been crystallized by Honourable Supreme Court in their judgment in the case of Commissioner of Income Tax and others v. Fatima Sharif Textile Kasur and others that while selecting a taxpayer's ease for audit, the Department should intimate him about it and also disclose the criteria/ reasons of selection of the case for audit. In our opinion, this condition is still obligatory in nature in the present scenario. It is incumbent upon the Department that if the case of any taxpayer is selected for audit, an intimation should be given about such selection to the taxpayer and criteria/reasons of such selection should also be communicated. In this case the criteria have already been confronted by the then learned Commissioner Hyderabad Zone, Hyderabad, hence the objection overruled.
16. As regard the preliminary objection regarding assumption of jurisdiction we are inclined to agree with learned DR that case was properly assigned to Taxation Officer, Audit-III and he has rightly and legally conducted the audit and passed the order. Thus the observation of CIR(A) is not justified on this score. However the blatant mistake which was incurred by the department are that in the reasons/grounds which were confronted with regard to Ground No, 2 Ground No, 3 has not been taken in the preliminary examination of the return filed under the Income Tax Ordinance, 200.1 the deficiencies letter bearing No, 197 has been issued by the then Taxation Officer Enf.-VI, Hyderabad vide dated 11-11-2005 in which he only asked to submit annexure-III, and whereas this deficiency has not been cured and the same has been repeated and further become the reasons and grounds for selection of this case. This is very unpleasant state of affair that when the deficiency notice was issued by the concerned Enforcement Officer he should fulfill the deficiencies as observed after obtaining the return under section 120(3) of the Income Tax Ordinance, 2001. In the case in hand the criteria for not mentioning certain facts is prima facie not justified.
17. Now we come to the significant part of discussion that two revised return had been furnished after selection of this case and no cognizance has been taken by the taxation officer in view of subsection (3) of section 122 of the Income Tax Ordinance, 2001 which is reproduced in earlier part of this order upward revisions of returns culminate the audit proceedings and the case reported as Volume 13 No,4 tax forum 51 2009 PTD (Trib.) 749 in which it has been categorically mentioned by the ITAT, that tax authorities cannot refuse to accept a revised return, under any circumstances.
The relevant portion is hereby reproduced for ready reference:- In our opinion, scope of "omission'or "wrong statement" is very wide and all encompassing. If a taxpayer, after filing his return discovers that it is not correct and any part of taxable Income has been omitted and not included in taxable income or a "wrong statement " included "wrong statement of accounts" has been filed, he is legally entitled to correct such "omission" or "wrong ,statement". Contrary to the provisions of repealed Ordinance of 1979 the right of revision of return does not abate (during statutory limitation even after the completion of deemed assessment or amended ,assessment. Similarly, this right continues to remain legally due, even after potation of any "omission or "wrong statement" from the department. The law does not stop any taxpayer from revising his return. No bar can be put on the rights of a taxpayer granted to him by the statute, Powers of assessment of income, conferred upon the tax authorities by law, can neverthelessbe exercised, in relation to the return so revised by a taxpayer and, they are also empowered to declare a return as invalid, if it does not fulfill all legal requirements. But tax authorities cannot refuse to accept a revised return, under any circumstances. In this case, additional Commissioner's action of refusal to accept the revised return was therefore, legally not correct."
We have gone through the impugned order passed by the. Taxation Officer, Audit-III, who has just reproduced the revised statement which is on the basis of second revise return and no adverse inference has been drawn regarding acceptance or rejection of the revised returns. Thus it clearly envisages that when he reproduced the receipts & expenditure account at page No, 2 in the impugned order and tax adjustment on the basis of second revised return, it is incumbent upon the officer to accept the revised return or to reject the revise return and should have dilated the issue of revised return in view of subsection (3) of section 122 of the Income Tax Ordinance, 2001. The learned A.R. Mr. A. S. Jafri, Advocate also invited our attention towards the latest amendment through Finance Act, 2009, vide Circular No, 3 of 2009 dated 17-7-2009 in which a fresh amendment has been brought in the statute book with regards to revision of return and as per A.R. Before the insertion of this amendment, a taxpayer was allowed to file revised return under the provision of subsection (6) of section 114 at any time within 5 years from filing of the original return. However, subsection (3) of section 122 clearly allowed to revise the return which should be taken for all purposes of this Ordinance to be an amended assessment order to the taxpayer by the Commissioner on the day on which the revised was furnished.
18. In this case we have no hesitation to say that the taxpayer's/ appellant's revised return has not been taken for "all purposes". Whereas all purposes includes audit under section 177, amendments under section 122 of the Income Tax Ordinance, 2001, respectively. The learned taxation officer seriously erred in this connection. Hence making an assessment in ignorance to the amended assessm ent order by implication of the provisions of section 122(3)(b), an amended order on the basis of earlier assessm ent order obviously cannot stay in the field. The assessment framed therefore, obviously is illegal hence the same is cancelled.