1. ' The Taxpayer has filed the instant appeals against the consolidated order dated 29-11-2010 passed by the learned CIR (A-II) Islamabad for the assessment years 2006 to 2009 on the following grounds:--
(1) That both the orders of learned Commissioner Inland Revenue, (Appeal-II), Islamabad as well as the Taxation Officer Audit VII, Companies Zone, Islamabad, is bad in law and contrary to the facts and circumstances of the case.
(2) That the order passed under section 122(5) by learned Assessing Officer and the confirmation of the same by learned CIT(A) is illegal void ab initio.
(3) That the learned Taxation officer has erred and misdirected himself under the facts/law and circumstances of the case by invoking section 122(5) of the Income Tax Ordinance, 2001.
(4) That the learned CIR(A) was not justified to uphold the reopening of assessments on the basis of amended assessm ent of prior years (for tax year 2005). The principle of 'res judicata' does not apply to tax cases. Case relied upon are 1994 PTD 174 (SC); 2001 PTD 3090 (H.C.).
(5) That the basis on which amendment is made is baseless i,e, non filing of appeal for Tax year 2005.
(6) That there was no definite information available with Taxation Officer nor obtained from any other source as such action under section 122(5) is not sustainable, so the order is illegal..
(7) That the learned CIR(A) was not justified to uphold the order under section 122(1) on the basis of conjectures and surmises.
(8) That the 'learned CIR(A) was not justified to uphold the order under section 122(1) passed without issuing show-cause notice under section 122 read with Rule 68 of Income Tax Rules, 2002 as such order so passed is void ab initio , unlawful and without jurisdiction.
(9) That the Taxation Officer is not a competent assessing authority under the Income Tax Ordinance, 2001, so the order is illegal and without Jurisdiction.
(10) That the learned Assessing Officer erred in law by applying provisions of section 36 to the case for the year under consideration.
(11) That the learned CIR(A) was not justified to uphold the order under section 122(1) wherein the learned Assessing Officer has presumed that the 25% of the long term project was completed during the year under appeal.
(12) That the learned Assessing Officer failed to point out any defect in appellant's books of account in his impugned order under appeal.
(13) That the learned CIR(A) was not justified to ignore the fact that during Tax year 2005, the department had taxed the advances received during that tax year only and levied tax thereon, whereas for the year under appeal advances from the customers, pertaining to the past and time barred years have also been taxed and that too at an exorbitant rate 10%.
(14) That the learned CIR(A) was not justified to uphold the order under section 122(1) taking 1/4th of the advances from the customers (including the advance of the earlier years) as income for the year and charging net profit a 10% thereon whereas the department had itself applied such profits @ 2.5% in the appellant's case as well as in a case appearing at NTN1418598-9.
(15) That the learned CIR (A) was not justified to uphold the order under section 122(1) on the basis of so-called agreed assessm ent. Existence of the alleged agreement is denied. Mere non-filing of appeal, due to illness/absence from the country, of the appellant's Principal Officer cannot be construed as agreement and does not provide license to repeat the treatment given in any of the prior tax year.
(16) That the self-created formula of Taxation Officer is not understandable and not recognized by the Income Tax Ordinance, 2001.
(17) That the learned CIR(A) was not justified to ignore the fact that amended assessment is based on estimates and there is no concept of estimation in this newly born statute book.
(18) That the learned Assessing Officer as well as CIR(A) has adopted a very narrow and pedantic approach overlooking the correct law on the subject and correct lawful jurisdiction on the case and by-passing the real facts and without probing into those facts which were available on record.
(19) That learned CIR(A) erred in law by rejecting the application for condonation of delay filed for tax year 2005 his combined impugned appellate order without providing opportunity of being heard due to the fact that for tax year 2005 appellant had filed separate first appeal also which is pending for hearing. Therefore, rejection for condonation for tax year 2005 which is not subject- matter for the year under consideration as such is illegal.
(20) That the learned Assessing Officer as well as CIT(A) has not granted the credit of payments of tax deducted at source.
2. Brief facts leading to these appeals are that Taxpayer is a private limited company which derives income from land developing and sale/purchase of plots. Returns filed were deemed to be assessm ents under section 120. The Assessing Officer took 25% of accumulated advances from allottees in tax year 2005 and taxed the same under section 36 and treatment given by the department was accepted; as the A taxpayer-company did not contest it before any appellate authority. Accordingly non-taxation of remaining 75% of advances on proportionate basis of 25% for each year under appeals required amendment of assessments completed under section 120.
2. The assessee was confronted with this issue through notices. Explanation furnished by the AR was considered unsatisfactory. For the reasons recorded in the order, assessments were amended as confronted.
3. Being aggrieved with the treatment given by the learned Taxation Officer taxpayer preferred appeal before learned CIR(A-II), who after considering the facts and circumstances of the case confirmed the assessm ent order with the following observation:-- "1 am of the opinion that the Taxation Officer has rightly considered the treatment meted out to the taxpayer in tax year 2005 as definite information as the treatment has not only been accepted but. The tax due was also accordingly paid. Further my opinion is strengthened from the fact that the appellant is conducting business and declaring Nil income and once he was taxed in 2005 he duly admitted and paid tax.
3. ' Regarding the case-laws these have been examined which do not cater for the special condition in this particular case as in this case definite information has been created by taxpayer own acceptance of the nature of his business and the profit derived by him accordingly.
4. ' In view of the above position I endorse the opinion of the. Taxation Officer and the orders for tax years 2006 to 2009 are confirmed and through this order I also reject the condonation application for filing of appeals for tax years 2005 being barred by time and an afterthought."
5. ' Feeling dissatisfied with the treatment given by the learned CIR(A) the Taxpayer has come up in appeal before this Tribunal on the grounds supra.
4. The learned AR for the Taxpayer has argued that even if section 36 is applicable, the accounting method for working out revenue under the percentage completion method is vague and variant which is fatal to the validity of the section 36 of the Income Tax Ordinance, 2001. He has further argued that section 36 is a charging section therefore it needs to be interpreted strictly. If there is any ambiguity it should go in the favour of the taxpayer. He placed reliance on cases of Indian and Pakistani jurisdiction including PLD 1964 SC 113, (sic) SCMR 274 (sic) SC 370, (sic) SCMR 1470 and 275 ITR 30. He also states that computation method is vague therefore cannot be valid and presented case law reported as (1985) 155 ITR page 144 and in the wake of ambiguity of percentage Completion Method, the taxpayer is at liberty to adopt its accounting method under IAS18 which is Final Computation Method. Therefore taxpayer has adopted it. On the other hand learned DR on behalf of Revenue forcefully rebutted the contentions of the AR of the appellant. In order to bring forth the issue he narrated history of taxation of contractors and C.B.R. Circular No,2 of 1975 usually not completed in a tax year or assessment year and historically their assessment was made on provisional basis from assessm ent year to year on the receipt in an accounting year and subjected to a provisional GP rate and on completion final accounts were required to be prepared. Then he explained the problem in scope of assessments that projects usually did not file completion and proper recovery could not be collected from the construction industry in spite of profit making by them. With this back ground he explained the history of taxation of long term construction contracts on percentage computation method which requires computation of profit on the basis of total cost of construction as compared to the cost incurred during the accounting Cycle/Tax Year.
6. He also explained the necessity of this shift from receipts during the year to cost incurred during the year so as to work out the percentage of completion. He went on to explain that cost incurred is put on the numerator and total cost of the project is placed on the denominator, multiplied by 100 to arrive at percentage completion. Once the percentage of completion is arrived at by the above method the profit of the project as per feasibility is taken and percentage of profit is worked out proportionate to the completion during the year. He explained that even if in a long term contract, the contractor has received the entire consideration but has incurred 10% cost, then the contractor can be taxed on entire receipts by deducting the cost of percentage completion.
7. ' He also emphasized that position be changed under the Income Tax Ordinance, 2001 wherein under section 32 of the Income Tax Ordinance, 2001 accrual based method of accounting has been made mandatory for all the corporate cases in recognizing income chargeable under the head business. All other persons may maintain accounts on cash or accrual basis if not prescribed by the F.B.R. He further states that section 32 is subservient to the Ordinance and it has been stated in section 34 that income will accrue when it is due to the person. He explained that in the case of sale in installments right to receive accrues on the date on which the installment is due but he was of the view that all these issues are irrelevant in deciding the issue that whether the taxpayer falls under section 36 or not. He also states that the case laws quoted by, the learned counsel of the taxpayer were not relevant. He further states that taxpayer is a corporate body therefore, it is mandatory under law to maintain its account on accrual basis. The section 36 of the Income Tax Ordinance, 2001 has given Method of computation of such income which is "Percentage Completion Method". He states that explicit provisions of law override general provisions therefore section 36 will be applicable in the taxpayer's case.
8. ' The learned DR has argued that section 36 is not a charging section, it neither creates any additional obligation nor it takes away any right, it merely gives a method of computation of income in case of a long term contract. As section 36 is not charging section, has no bearing. If for argument sake section 36 is strictly construed even then there is nothing in it which can be so interpreted to give any benefit to the taxpayer. He further counter argued that section 36 is neither vague nor variant. It is very explicit regarding computation method to 'be adopted by the person accounting income chargeable to tax under Head Income from Business on accrual basis under a long term contract for construction. He states that the law has borrowed only the concept of Percentage Completion Method from Generally Accepted Accounting Principles, The relevant accounting standard is IAS-II. Law does not go into natty gritty of the IAS-II, it only borrows the concept of Percentage Completion Method and has modified it by subsection (2) of the section 36 of the Income Tax Ordinance, 2001. He states that as there was no ambiguity and no vagueness therefore, taxpayer's case falls under section 36 of the Income Tax Ordinance, 2001. He further stressed that vires of section 36 on the basis of vagueness cannot be challenged in these proceedings. He states that the cost incurred during the year are to be taken as numerator and total costs as per feasibility report are to be taken as denominator and to be multiplied by 100 to arrive at percentage completion of the project. By this method revenue is to be recognized for the period which would give a taxable income for the year under consideration.
9. ' The DR 1 not, lies in the reading of the text of the law itself. It, is relevant to reproduce the same here:--- "36. Long-term contracts.--
(1) A person accounting for income chargeable to Tax under the head "income from Business" on an accrual basis shall compute such income arising for a tax year under a long-term contract on the basis of the percentage of completion method.
(2) The percentage of completion of a long-term contract in a tax year shall be determined by comparing the total costs allocated to the contract and incurred before the end of the year with the estimated total contract costs as determined as the commencement of the contract.
(3) In this section, "long-term contract" means a contract for manufacture, installation, or construction, or, in relation to each, the performance of related services, which is not completed within the tax year in which work under the, contract commenced, other than a contract estimated to be completed within six months of the date of which work under the contract commenced; and 'Percentage of completion method" means the generally accepted accounting principle under which revenue and expenses arising under a long term contract are recognized by reference to the stage of completion of the contract, as modified by the subsection (2).
10. The mere reading reveals that it gives a computation method and is not charging section. Further it is explicit method for computation of income where cost incurred during the year is compared with the total estimated cost of the project. Revenue and expenses are required to be recognized by referring to the stage of completion under General Accepted Accounting Principles. The plea of the taxpayer regarding the changing nature of section 36 of the Income Tax Ordinance, 2001 being vague and variant are not sustainable in the eye of law. - Circular No, 2 of 1975 ' Circular No, 2 of 1975 provides that the following procedure for, taxability of contractors deriving income from contracts which took: more, than one year to, complete shall be followed:--
(i) Profits may be computed from year to year during the currency of the contract in the normal manner on the basis of actual receipts and accounts for each year.
(ii) When the contract is completed the total profit of the contract should be computed. The profits already assessed in the earlier years for that contract should be deducted from, the total profits and only the balance profit should be assessed in those years of the contract for which assessm ents have yet to be made.
(iii) Where the contract, on completion results in loss or less profit than what has already been assessed in respect of that contract the loss or profit may be allocated to the years of the contract.
11. The assessm ents for the pending years may be made on the amount allocated to each of those years. As for the assessm ents already completed for earlier years these may be revised by the CIT under section 138.
12. The allocation of profit or loss is to be made on the basis of receipts for each year. These instructions which supersede the instructions of 1946 apply only to those contractors who keep regular accounts and where the total profit of a contract on completion is acceptable, subject to such adjustments for inadmissible expenses as may be necessary.
13. ' According to learned AR subsection (3) of section 36 provides that for the purpose of this section "long-term contract" means a contract for manufacture, installation, or construction, or, in relation to each, the performance of related services, which is not completed within the tax year in which work under the contract commenced, other than a contract estimated to be completed within six months of the date of which work under the contract commenced. He states that if the legislature's intention was to include developers and Housing Societies for taxability of their income under the provisions of section 36; it would not have restricted only to contract for manufacture, installation, or construction; they could have included the developers and housing projects as well We are of the view that if the project is not completed within year, it has to be treated alike.
5. In this case the officer has taken the accumulated advance of amounting Rs,28,54,47,067, 25% of same was taken in tax year 2005 and on same analogy, rest of the amount was distributed by taking in the ratio of 25% in the coming years. Thus assessment were completed for tax years 2006 to 2008. Margin of net savings profit was taken @ 10% (estimated). Thus amendment 122(1)(5) was made accordingly. The contention of department is that amended assessment for tax year 2005 under section 122(1) was made basis for amending the subsequent deemed assessment. The taxpayer had not challenged that amended assessment of 2005. He has now filed the application for condonation of delay much after when the assessments of subsequent year were amended.
14. We would like to say that the assessments of all the years have been made on wrong premises.
15. Percentage method only speaks of cost incurred divided by total feasibility cost X 100. As far as receipts are concerned, officer can take the receipts either as reported in feasibility or the actual receipts declared by taxpayer after verification of same. If the receipts are taken from the feasibility report; then definitely income will come in positive figure every year, but at the same time loss to department is that actual receipts will slip away from the verification. So law is silent about the receipts to be taken either on percentage basis from feasibility submitted or the actual receipts during the year. Among the two methodologies, department can adopt any of them which may suit. The learned DR is of the view that this is the project of 1992, no feasibility report or Broacher is on the record of tax department. Taxpayer can now introduce an afterthought feasibility report at any stage. Thus methodology by taking produce actual receipt be only ordered and not that of mentioned figurers in feasibility report. Taxpayer with connivance of lower staff can get replaced the record. Undoubtedly it is responsibility of the department to plug holes in the administrative working and transparent maintenance of record. I am fully conscious of the fact that Company observe accounting method on accrual basis. So it is for the department to adhere one yardstick adopted once for onward years. However, discretion vests with the department to make choice between any one of method. However, if actual receipts declared by assessee are taken, that can be accepted or rejected after verification. Thus department will exercise constant check over the reported figures receipt in assessm ent. It is argued by the learned AR that the department has taken the accumulated figure of receipts, then distributed the same in the ratio of 25% over all the years. Needless to mention, taxation officer cannot do so, each and every assessment year is an independent year. He has to take receipt for that year only and not the accumulated figure.
16. Methodology of distributing the accumulated figure over years is not warranted by law because assessm ent of every year is independent one. The department may take either the figures mentioned in feasibility report on proportionate basis or actual receipts declared by taxpayer F during the year. Once any of methodology is adopted; it has to be stuck with onward. However it is to be left upon choice of the department to select any of methodology between two. As far as the profit is concerned, actual expenses have to be examined vis-a-vis receipts during the year. So order passed by the officers below for taxpayer are set aside and cases are remanded to the Inland Revenue Officer with the direction to take only receipts of the respective year and not accumulated receipts of the entire project. Amendment if warrants can be made within the limitation period prescribed under the law.
17. ' As a result, these appeals are disposed of as above.