JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).-- 1. The appellant through this appeal has objected to the order dated 16-12-2009 recorded by the learned CIR(A), Gujranwala Camp at Faisalabad on the following grounds:--
(i) That the Assessing Officer and the learned CIR(A) totally ignored the evidences produced before them.
(ii) That written arguments were filed before the CIR(A) at the time of hearing the appeal and further evidences regarding the construction rates fixed by the PWD were produced in supports of declared version, but the same were also ignored.
(iii) That a written valid Contract Agreement dated 16-5-2001, between the appellant and the contractor for the construction of Plaza and Affidavits of the Contractor were arbitrarily rejected by the Assessing Officer and the learned CIR(A).
(iv) That the construction rates applied by the Assessing Officer and subsequently reduced by the learned CIT(A) are still highly excessive arbitrary and against the facts of the case.
(v) That the construction rates applied by the Assessing Officer are not for the relevant period, as a part of Plaza was rented out to Al-Falah Bank Ltd. On 19-6-2003 and the rates of construction applied by the Assessing Officer are for the period 2004-2005 to 2006-2007
(vi) That assessm ent order was passed under section 122(1) read with 122(5) of the Income Tax Ordinance, 2001 for which "definite information" is required for any amendment. No such "definite information" was available with the Assessing Officer. Even otherwise construction rates confronted by the processor of the Assessing Officer were available on record, which goes in favour of the appellant.
2. Learned A.R. Representing the appellant has contended that the appellant purchased Property No,P-237/B Peoples Colony Faisalabad on 1-8-1997. After getting the possession of this property through Court decree, dated 14-6-2000, the appellant entered into a written Agreement dated 15- 6-2001, with Bismillah Construction Company Peoples Colony No,2 Faisalabad for the construction of Younis Plaza on P-237/B Peoples Colony Faisalabad. According to the learned A.R., the Plaza was constructed by the Contractor under the terms and conditions of the Contract Agreement. The structure was completed up to 30-6-2003 and after completion of Basement and Ground Floor, it was rented out to Messrs Al-Falah Bank Ltd. Faisalabad from 19-6-2003 under the terms of a written Rent Agreement dated 18-6-2003 with the Bank. Learned A.R. Further stated that during assessm ent proceedings for assessment years 2001-2002 and 2002-2003, notices under section 62/13 of the repealed Income Tax Ordinance, 1979 were issued, confronting the cost of construction of Plaza. The same were complied with. The contractor was also summoned by issuing Notice under section 148 of the said Ordinance. His statement was recorded. Contractor also filed affidavit confirming the contents of construction agreement. Assessment for the assessment years 2001- 2002 and 2002-2003 was completed on 10-6-2005 and proceedings for assessment years 2001- 2002 and 2002-2003 were filed. Learned A.R. Also stated that the Return of the appellant for the tax year, 2005 was selected for Audit under section 177 of the Income Tax Ordinance, 2001 by the learned Commissioner Audit Regional Tax Office, Faisalabad, vide his intimation No,104 dated 15-7- 2009 under section 177(4) of the said Ordinance, with assurance that "it is assured that the audit proceeding would be closed if nothing adverse is discovered". Learned A.R went on to say that the Taxation Officer Audit-3, started audit proceeding by issuing Letter No, 73, dated 23-7-2009 calling certain information and documents in support of declared cost of construction. Proper reply to this letter was given on 27-7-2009, stating that the requisite documents and details have already been filed during assessm ent proceedings for assessment year 2001-2002 and 2002-2003 and discussed in the body of Assessm ent Order dated 10-6-2005. According to the learned A.R., the attention of the Taxation Officer Audit-3 was drawn towards Contract Agreement for the construction of Plaza, all correspondence and notices issued under section 62/13 by the then Taxation Officer along with replies thereto submitted by the appellant, during assessment proceeding for assessm ent years 2001-2002 and 2002-2003 but the same were ignored by him.
The learned A.R. Stated that the Taxation Officer Audit-3 arbitrarily disbelieved the genuine Contract Agreement arrived at between the owner of Plaza and the contractor, executed with free and fair consent of the parties. Learned counsel has argued that a valid contract is defined in sections 10 and 11 of the Contract Act as under:-
(10) "All agreements and contracts if they are made by the free consent of parties competent to contract, for a Lawful consideration and with Lawful object and are not hereby expressly declared to be void."
(11) "Every person is competent to contract who is of the age of majority according to the Law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any Law to which he is subject."
In this context, the learned A.R. Referred to a Judgment reported as 1991 PTD 488 wherein the Honourable Supreme Court of Pakistan has very clearly held as under:-- "When two contracting parties agreed to do something by a mutual valid contract or intended to do so, and it was not prohibited by Islam, a third party like Income Tax Department or for that matter the Court had no power to modify either the contract or interfere with what they intended to do with it".
According to the learned A.R. Being guided by the above verdict given by the Hon'ble Supreme Court of Pakistan, the learned Income Tax Appellate Tribunal in its Judgment reported as 2005 PTD (Trib.) 745 also held that:- "Contract arrived at between the two Muslims should not be doubted by the third party including the Income Tax Department unless they have in hand some proof in contrary."
3. The learned A.R. Further stated that the Taxation Officer Audit-3 issued letter No, 287 dated 6-10- 2009, as Notice under section 122(5) of the Income Tax Ordinance 2001, confronting the construction rate as reported to him by P.W.D. Vide their letter No,EE/CCD/AQS/1653, dated 15-11- 2007 for the years 2004-2005 to 2006-2007 as under:-- S. No. Type of Cons- trauctionYear of Cons- tructionRate per Sft.
BasementGround FloorFirst Floor
1. A-Class 2004-05 to 2006-2007825 800 750
2. B-Class 2004-05 to 2006-07750 710 690
3. C-Class 2004-05 to 2006-07625 580 550 In reply to this Notice, it was brought to the notice of said Audit Officer that proposed rates of construction, as reported by PWD are not for the relevant period of construction as the structure of Plaza was completed up to 30-6-2003 and Basement and Ground, Floor was rented out on 19-6- 2003 to a leading commercial bank. It was also pointed out that the rates of construction reported by PWD are their highest rates and the departmental practice is that the work is awarded to that contractor who offers lowest rates. It was also pointed out that such rates included contractors profit and Departmental Commission etc. Therefore, the application or such rates is not justified.
According to the learned A.R., the Taxation Officer Audit-3 misreported the period of rates reported by PWD in assessm ent order under sections 122(1) and 122(5) read with 111 of the Income Tax Ordinance, 2001 (under appeal) as from 2003 to 2006-2007, against confronted period from 2004 to 2007 through Notice under section 122(5) of the Income Tax Ordinance, 2001 vide No,287 dated 6-10-2009. The learned A.R. Stated that this action of the Taxation Officer was due to the fact that the structure of Plaza was completed on 30-6-2003 and a part of it was rented out from 19-6-2003.
The further submission made by the learned A.R. Are as under:--
(i) That the appellant has also obtained the prescribed rates from PWD duly signed by the competent authority and are attached herewith for ready reference and perusal. These rates are much below the rates as applied by the Taxation Officer Audit-3 in the order under appeal.
(ii) That this being an Audit case, there was no concept of estimation in Audit proceedings. The appellant produced documentary evidence in support of declared version, which was accepted in Assessm ent Order for Assessm ent Years 2001-2002 and 2002-2003. The appellant also draws the attention towards already issued Notices under section 62/13 of the repealed Ordinance confronting the rate of construction and replies thereof. All these evidences were ignored by the Taxation Officer Audit-03. Thus, an arbitrary decision was taken by him enhancing the cost of the Plaza. It was a clear case of change of opinion.
(iii) That an assessm ent already completed cannot be reopened under section 122(5) of the Income Tax Ordinance, 2001 merely on the basis of different view of the matter, as all the material facts were on record and on the basis of which predecessor has taken a view. No "definite information" was acquired from Audit or otherwise for action under section 122(5). It is only a change of opinion because the word "Definite Information" has been defined by the Higher Appellate Authorities in quite a number of judgments wherein it has been held that "Definite Information" means the information, which does not allow inclusion of any estimate, gossip and surmises. "Definite Information" further means a direct information which need not be put to further trial by supporting material. Here in this case construction rates were applied on the basis of construction rate supplied by PWD vide their letter dated 15-11-2007, where proceedings under section 177(4) were started on 10-7-2009, therefore, it cannot be said that this Definite Information was acquired from Audit. The cost of construction arrived at on the basis of PWD rates was further reduced Q 4% by the Assessing Officer. The learned First Appellate Authority further reduced the cost of construction. Therefore it cannot be said as "Definite Information as defined by the Higher Appellate Courts and used under section 122(5) of the Income tax Ordinance, 2001.
(iv) That apart from the above it is further submitted that opportunity of being heard allowed under section 122(9) through Notice under section 122(5) read with section 111 the Income Tax Ordinance, 2001 is absolutely uncalled for because such opportunity of being heard is to be allowed in those cases where, on the basis of personal knowledge of the Commissioner or on the basis of any information, the Commissioner intend to amend or to further amend any assessment, found to be erroneous insofar as it is prejudicial to the interest of Revenue. Whereas in audit proceedings under section 177 of the Income Tax Ordinance, 2001, it has been made obligatory on the Commissioner to obtain taxpayer's explanation under section 177(6) on all the issues raised in Audit proceeding before passing an order under section 122(1) of Income Tax Ordinance, 2001. In this context, the learned A.R. Referred to section 177(6) Circular No,7 of 2007.
(v) That it appears that neither anything adverse was discovered nor any issue was found in audit proceedings. The only information used against the appellant was PWD construction rates notified vide their letter No,EE/CCD/AQS//1653 dated 15-11-2007. This information does not relate to the audit period which was started in the Year, 2009 and also ended in the same year, whereas the rates notified by PWD on 15-11-2007 when no audit proceedings were in hand.
(vi) That though the construction rates applied do not relate to the relevant period of construction of plaza, even then if the contractor's margin of profit @ 20% is reduced from the total cost estimated on page 6 of the assessme nt order at Rs,8.566.370.00 the position will be as under:-- Cost of construction assessed Rs,8.566.370.00 Less 4% margin allowed for relevant periodRs, 342,655.00 Balance cost of construction Rs,8,223,715.00 Less 20% contractor's profit Rs,1,644,743.00 Balance cost of construction Rs,6,578,972.00 Add cost of plot Rs,1,500,000.00 Total cost of plaza Rs,8,078,972.00 The appellant has declared total cost of construction of plaza at Rs,8,300,000.00 in his Wealth Statement as on 30-6-2005.
5. In a nutshell, the learned A.R. Has prayed that the declared cost of construction of Younis Plaza being most reasonable and supported with genuine Contract Agreement may kindly be accepted.
6. On the other hand, the learned D.R. Is supporting the orders of the officers below.
7. I have heard the learned representatives of both the sides and have also perused the documents placed before me. On perusal of the Notices dated 2-5-2003 and 16-6-2003 sent by the Taxation Officer under section 62/13 of the repealed Income Tax Ordinance, 1979 for the assessm ent year 2002-2003 and the assessment order for the assessment year 2002-2003, dated 10-6-2005. I have found that the Taxation Officer in that order has accepted the version of the taxpayer including the rate of construction and has finally observed that the property was under construction up to 30-6-2002 and has been let out in the last months of Tax year, 2003 i,e, on 19-6- 2003 and the investment was declared in the Tax Year 2003 at Rs,800,000 and in the Tax Year, 2004 at Rs,10,00,000. Hence, no adverse inference is drawn. I have further noted that in the previous years i,e, from 2001-2002 to Tax Year 2004, notices regarding the same property were issued under section 13(1)(d). However, the proceedings were dropped. The appellant has declared the total cost of construction of Plaza in his Wealth Statement as on 30-6-2005 at Rs,83,00,000. The Taxation Officer in the order under section 122(1) read with sections 122(5) and 111 of the Income Tax Ordinance, 2001 has assessed the cost of construction at Rs,85,66,370 I am, therefore, of the view that the version of the appellant is forceful. In this regard, as the Taxation Officer has not given any contractor's profit which according to the taxpayer is 20%. On behalf of the appellant, agreement regarding construction, the affidavit of the contractor has also been furnished and I find no justification for not accepting the affidavit and the agreement. Admittedly, the Plaza on the basis of which the case of the taxpayer has been reopened was completed before 30-6-2003 and the part of which was rented out to Messrs Alfalah Bank on 19-6-2003. Therefore, the learned A.R. Of the appellant has rightly contended that the rates as applied by the Taxation Officer for the tax years 2004 to 2007 were not relevant. I have found that the learned CIT(A) has reduced the cost of construction but he has not considered the fact that on behalf of the appellant, an affidavit of the contractor and the agreement have been furnished which have not been rebutted by the Taxation Officer. Therefore, this should have been accepted. On behalf of the appellant, the decision of the Honble Supreme Court of Pakistan reported as 1991 PTD 488 wherein it has been held that when two contracting parties agreed to do something by a mutual valid contract or intended to do so, and it was not prohibited by Islam, a third party like Income Tax Department or for that matter the Court had no power to modify either the contract or interfere with what they intended to do with it.
It has further been held that the income Tax Department could not change the nature of the contract intended by the parties to do under the pretext that a fiscal law in this behalf is different.
Keeping in view these facts and circumstances as well as the legal position. I find no justification to the addition made by the Texan Officer. The impugned order of the learned CIR(A) is therefore, vacated and the order passed by the Taxation Officer under section 122;1) read with sections 122(5) and 111 of the Income Tax Ordinance, 2001 is cancelled. As a result, the appeal filed by the appellant-taxpayer is allowed.