YAHYA AFRIDI, J.---By this single judgment, this Court proposes to dispose of two Tax References, as common question of law is involved therein. The particulars of which are as follows:--
(1) Tax Reference No.26/2013 (Commissioner Inland Revenue Zone-II, Regional Tax Office, Peshawar v. Messrs Saydon Pharmaceutical Industries (Pvt.) Ltd:. Industrial Estate, Jamrud Road, Peshawar).
(2) Tax Reference No.27/2013 (Commissioner Inland Revenue Zone-II, Regional Tax Office, Peshawar v. Messrs Saydon Pharmaceutical Industries (Pvt.) Ltd: Industrial Estate, Jamrud Road, Peshawar).
2. Commissioner of Inland Revenue, Zone-II, Regional Tax Office, Peshawar, petitioner, has instituted the present Tax References agitating the following questions of law:-- T.R. No.26/2013.
(I) Whether under the facts and circumstances of the case, the Tribunal was justified to reject the departmental appeal without any legal and cogent reasons?
(II) Whether the Tribunal was legally justified to confirm the findings of the CIR (Appeals) holding that the assessm ent order was annulled for two fold reasons legal as well as factual whereas the Tribunal has ignored the facts that the judgment relief upon by the CIR (Appeals) was distinguishable as in that case the revised return was totally ignored wherein in the instant case revised return discussed in detail and that taxpayer was properly confronted about the additions but it failed to substantiate its claim through documentary evidence?
(III) Whether the amendment of an order by Invoking section 122(4) rather than 122(1) does not clearly mean the amendment of a revised return instead of amendment of original return?
(IV) Whether under the facts and circumstances of the case, the Tribunal was justified to reject departmental appeal and confirm findings of the CIR (Appeals) whereas according to provision of section 128(5) of the Income Tax Ordinance, 2001, fresh evidence cannot be entertained by the CIR (Appeals) which was to provide before the Taxation Officer at the time of assessment proceeding?
T.R.No.27/2013.
(I) "Whether under the facts and circumstances of the case, the Tribunal was justified to reject the departmental appeal without any legal and cogent reasons?
(II) Whether approval of Commissioner Inland Revenue is required to amend order under section 122(1) or to further amend an amended order under section 122(4) when definite information is acquired through audit or otherwise as provided under section 122(5)?
(III) Whether the ATIR was correct to hold that first approval of CIR was required to amend order for Tax Year 2008 when the said Tax Year was amended under section 111(2) for which legal cover has been given by section 122(5) and which requires no approval as it has been delegated to DCIR?"
3. Before this Court renders its opinion on the questions of law raised in the two References, it would be appropriate to first note the facts leading to the impugned decisions, which, in chronological order, are as follows:-- 29-3-2005. Messrs Saydon Pharmaceutical Industries (Pvt.) Ltd.: ("Respondent Company") filed its tax return for the Tax Year, 2004.
11-4-2008. Respondent Company was selected for audit under section 177 of the Income Tax Ordinance, 2001 ("Ordinance"). Commissioner (Audit) Regional Tax Office, Peshawar served upon the respondent Company, a notice for audit dated 11-4-2008 ("Notice"), which reads:- "To ' The Principal Officer, Messrs Saydon Pharmaceutical Industries (Pvt.) Ltd.
77-A, Industrial Estate Jamrud Road, Peshawar.
Subject: SELECTION FOR AUDIT UNDER SECTION 177(4) OF THE INCOME TAX ORDINANCE, 2001 FOR TAX YEAR 2004-OPPORTUNITY OF HEARING REGARDING.
Dear Taxpayer, We thank you for filing of Income Tax return for tax year 2004, wherein it has been mentioned that you are engaged in the business of manufacturing and Sales of medicines. You have declared loss at Rs.(3,061,823). The return so filed has been treated as an order under section 120(1) of the Income Tax Ordinance, 2001. Examination of your return and accounts however reveals the following:-
(1) You have made the following purchases during tax year 2004.
Local Purchases......Rs.21,401,575 Imports.....................Rs.4,288,56 Total..........................Rs. 25, 609, 831 After charging the cost of sales i.e. (Direct Expenses) and P&L expenses including adjustments the net result is the declared loss for the year. Thus minimum tax has been charged on the above. Further you have claimed tax deduction on Imports at Rs.1,568,826 for the year, accordingly on the basis of your tax deduction Imports were required to be declared at Rs.26,480,433 instead of Rs.4,288,256 meaning thereby that you have either suppressed imports to the tune of Rs.22,192,177 or have claimed excess tax credit worth Rs.1,331,530. This requires detailed examination with reference to related documentation through an audit.
(2) As per depreciation chart for the year you have claimed vehicle transferred/addition in fixed assets at Rs.4,506,023. This requires detailed examination with reference to related documentation through an audit.
(3) You have claimed salaries/directors remuneration at Rs.2,681,150 and Rs.1,440,000 respectively.
This requires detailed examination with special reference to section 21 of the Income Tax Ordinance, 2001 and related documentation through an audit. The undersigned intends to select your case for audit of your income tax affairs for the tax year 2006 under clause (d) of subsection
(4) of section 177 of the Income Tax Ordinance, 2001 on the basis of above reasons.
' You are hereby given an opportunity of hearing and to explain as to why your case should not be selected for audit of your income tax affairs for the tax year 2006 under section 177(4)(d) of the Income Tax Ordinance, 2001. Your written explanation along with documentary evidences in support thereof, if any, should reach this office by 25-4-2008 positively.
'Please note that. Non filing of any explanation on your part would be considered as if you have either no explanation/objections and/or that you agree with the above observations/reasons recorded herein as above by the undersigned. Thanking you, (Muhammad Iftikhar Khan)
Commissioner (Audit)
Regional Tax Office, Peshawar."
12-5-2008. Commissioner (Audit) Regional Tax Office, Peshawar delegated to the Taxation Officer Audit-II, Peshawar, the jurisdiction to proceed against the respondent Company for the audit of Tax Year, 2004. The delegation order read as under:-- "Subject: ASSIGNMENT OF JURISDICTION IN CASE OF Messrs SAYDON PHARMACEUTICAL INDUSTRIES (PVT.) LIMITED PESHAWAR FOR TAX YEAR 2004.
The, above named tax payer has been selected for audit for tax year 2004. You are assigned the case for audit proceedings and amendment under section 122, if any. Audit proceedings should be completed within one month. Copy of selection letter is enclosed."
End (As above)
Sd/- (MUHAMMAD IFTIKHAR KHAN) COMMISSIONER (AUDIT)"
27-6-2008. The respondent Company, on receipt of the Notice, filed its Revised Returns for the Tax Year, 2004, under subsection (6) of section 114 of the Ordinance.
28-3-2009. The Adjudicating Officer passed the amended assessment order for the Tax Year, 2004 (T.R.No.26/2013).
9-4-2009. Deputy Commissioner Audit-II, Regional Tax Office, Peshawar, who had concluded the audit of the respondent Company, served upon it notice under section 122 (9) of the Ordinance for certain un-explained amount during the Tax Year 2008. The said un-explained amount, according to the said notice, came to light during the audit proceedings of the respondent company carried out for the Tax Year 2004.
28-4-2009. The Adjudicating Officer passed the amended assessment Order for the Tax Year, 2008.T.R.No.27/2013.
28-1-2010. The appeal of the respondent Company was accepted by the Worthy Commissioner Inland Revenue (Appeals), Peshawar, in terms that:- Tax Year,2004 (T.R. No.26/2013).
"In view of the above position, the impugned order suffers from legal defects and factual lacuna.
Therefore, the order of the Taxation Officer under section 122(4) of the Income Tax Ordinance, 2001 dated 28-3-2009 is annulled with the direction to the Taxation Officer to accept the revised return of the appellant filed on 27-6-2008 in light of provisions of subsection (b) of section 122(3), as per law, the Taxation Officer was required to drop the audit proceedings started on the basis of original return. This treatment has also held by the L/ITAT, Lahore vide 'reported case 2007 PTD 2153.
It needs to be mentioned that annulment does not mean that assessments cannot be refrained.
The taxation office can frame the assessment against provided it is not hit by limitation etc. Appeal succeeds as above"
Tax Year, 2008 (T.R.27/2013).
"In view of the above position, the impugned order stand annulled due to two reasons: As the initial order was annulled, therefore, this being second portion of the order, as already explained above.
Due to the reason that express jurisdiction for conducting audit for tax year 2008 is missing from the proceedings.
Appeal succeeds, as above".
24-8-2012. The Appeals of the Revenue against the decision of the appellate forum in both Tax Years, before the Appellate Tribunal Inland Revenue, Peshawar Bench, Peshawar ("Tribunal") were also dismissed, in terms that:- Tax Year 2004 (T.R.No.26/2013).
"We have heard the arguments of the parties and examined the case record. It reveals that learned CIR(A) has annulled the assessment for two folded reasons, legal as well as factual. On legal issue, the L/CIR(A) annulled the order by directing to accept the revised return of the appellant filed on 27-6-2008 by relying upon the judgment of Tribunal cited in the impugned order and non confronting the taxpayer on the issue of additions while on account of factual position the learned CIR(A) has observed that the relevant accounts and evidence was produced by the taxpayer during the assessment proceedings, yet he has ignored it. Keeping the above position of the case we see no reason to disapprove the impugned findings therefore it is confirmed and being devoid of merits the appeal on behalf of the department stands rejected."
Tax Year, 2008 (T.R.No.27/2013)
"The additional made for this year appeal is identical to that of Tax Year 2004 which has been deleted for legal as well keeping in view the factual position of the case. Furthermore, the taxpayer is confronted in an illegal manner, and if this year was approved by the Commissioner the illegality could not be cured. Under the Income Tax Ordinance, 2001 it is the Commissioner upon whom the entire powers and jurisdiction vests, if he delegates the powers to the taxation officer then only he could exercise the powers of Commissioner.
According to the procedure, the taxation officer should have obtained permission to assume jurisdiction over tax year 2008, in order to make the alleged addition under sections 111(1)/ 111 (2) of the Income Tax Ordinance, 2001 which was not done hence he assumed jurisdiction without seeking prior permission.
The L/CIR(A) also in an elaborated manner decided annulment for Tax Year 2008, no infirmity has been seen in the impugned order, it is therefore, confirmed."
Hence, the present Tax References. OPINION IN TAX REF.NO.26/2013.
4. The authority, criteria, scope and the mode of proceeding in 'audit' against a person has been provided under section 177 of the Ordinance. The said provision, as it stood at the time of initiating the 'audit' of the respondent Company on 12-5-2008, read as under:- "177.Audit(1) The Central Board of Revenue, may lay down criteria for selection of any person for an audit of persons income tax affairs, by the Commissioner.
(2) The commissioner shall select a person for audit in accordance with the criteria laid down by the Central Board of Revenue under subsection (1).
(3) The Central Board of Revenue shall keep the criteria confidential.
(4) In addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of the' persons income tax affairs having regard to---
(a) the person's history of compliance or non-compliance with this Ordinance.
(b) The amount of tax payable by the person;
(c) The class of business conducted by the person; and
(d) any other matter which in the opinion of Commissioner is material for determination of correct income.
(5) [After]selection of a person for audit under subsection (2) or the Commissioner shall conduct an audit of the income tax affairs including examination of accounts and record, enquiry into expenditure, assets and liabilities of that [person]"
5. The bare reading of the aforementioned provision clearly provides the following:-
(I) The competent authority to initiate an audit of a person in the Commissioner.
(II) That the audit is not of the returns filed by the person but his entire 'income tax affairs'.
(III) The determining criteria for selection for audit of a person is not restricted to the returns filed by the said persons. It may include the person's history of compliance or non-compliance A with the Ordinance, the amount of tax payable, the class of business conducted and any other matter, which in the opinion of the Commissioner is material for determination of correct income.
(IV) While conducting the audit, it is the income tax affairs, including the examination of accounts and record, inquiry into expenditure, assets and liability of the persons under audit. Thus, the scope of audit is not restricted to just the returns filed by the person under audit.
6. On the other hand, the scope for filing a Revised Return by a person, has been provided under subsection (6) of section 114 of the Ordinance:This provision has with time been amended, and on 27-6-2008, when the respondent Company filed its Revised Return for the Tax Year, 2004, it reads as:-- "(6) Any person who, having furnished a return, discovers any omission or wrong statement therein, may furnish a revised return within five years of the date that the original return was furnished."
7. While, Finance Act, 2010 amended the said provision and added conditions precedent for a person to file an amended return. The conditions precedent have also been a subject of change, and presently subsection (6) of section 114 provides the following conditions:- "114(6) Subject to subsection (6A), any person who, having furnished a return, discovers any omission or wrong statement therein, may file revised return subject to the following conditions namely:-
(a) it is accompanied by he revised accounts or revised audited accounts, as the case may be;
(b) the reasons for revision of return, in writing, duly signed, by the taxpayers are filed with the return.
(ba) it is accompanied by approval of the Commissioner in writing for revision of return; and
(c) taxable income declared is not less than and loss declared is not more than income or loss, as the case may be, determined by an order issued under sections 121, 122, 122A, 122C, 129, 132, 133 or 221: Provided that if any of the above conditions is not fulfilled, the return furnished shall be treated as an invalid return as if it had not been furnished."
8. Keeping in view the scope of 'audit' provided under section 177 of the Ordinance and reviewing the contents of Notice for 'audit' served, upon the respondent Company, it is evident that the Notice sought clarification of five specified issues. The respondent Company, in response thereto, filed a revised return, only addressing part of one of the five issues raised in the Notice, whereby the local purchased amount were substituted with that of imports. Whereas, the difference of Rs.4.288 million also pointed out in the said query, remained unexplained. Similarly, the other four issues, despite reminders, remained to be explained by the respondent Company. To appreciate the issues raised in the Notice and the findings so recorded thereon by the Audit Officer are as follows:- - S. No.Issue raised Amended Assessment Order
1. Differen in local import purchase Rs. 21,401,575 Import purchase Rs.4,288,256 Total Rs.25,609,831Local purchases accepted as declared. Import purchases worked out on the basis of income tax collected at import stage at Rs.26,147,100.
Less import purchases declared Rs.
21,401,575. Difference of Rs.4,745,525 added as mentioned in S. No.2 Column 3.
(1) (2) (3)
2 Difference in import purchases on the basis of tax collected at Rs.1,568,826Addition of Rs.4,745,525 in sales declared on the basis of tax collected at import claimed at Rs.1,568,826 3 In depreciation chart Addition/transfer in fixed assets at Rs.4,506,023Rs. 1,319,084 added on account of depreciation claimed on lease hold assets.
4 Claim of salaries/directors remuneration at Rs.2,681,150 and Rs.
1,440,000Additions made on account of salary and wages and director remuneration at Rs.1,491,000 and Rs.1440,000 5 Creditors amount increased from Rs.3,336,544 to Rs.3,749,730Addition made under section. 34(5) at Rs.830,530.
9. It is noted that the revised return for the Tax Year, 2004 filed by the respondent Company was accepted in totality and the clarification rendered 'qua' the local purchases and the imports was accepted. However, the respondent Company did not explain the other issues raised in the Notice.
Accordingly, the Audit Officer was, thus, correct in proceeding with the said issues and passing findings thereon.
10. In view of the above tactual and legal discourse, this Court is of the opinion that:- Audit
(I) Audit envisaged under section 177 of the Ordinance is not restricted to the tax returns filed by a person being subject of the said audit.
(II) In case, the audit is based solely on the particulars stated in the tax returns filed, the revised returns for the said Tax Year, if it clarifies all the issues raised in the Notice for audit, then the audit would conclude and the revised returns so filed would have to be accepted and amended assessm ent order be passed under the Ordinance.
(III) In the present case, the respondent Company filed a revised return clarifying only part of one of the five issues raised in the Notice of audit. In such circumstances, when all the issues raised in the Notice of audit were not clarified, then the audit is to proceed and appropriate amended assessment order .Is to be passed under section 122 of the Ordinance.
Revised Return
(I) Prior to Finances Act, 2010, a person under audit could, under subsection (6) of section 114 of the Ordinance, furnish a revised return within five years of the date that the original return was furnished.
(II) After the amendment introduced in subsection (6) of section 144 vide Finance Act, 2010, this concession allowed to a person to file revised return without any condition to furnish C a revised return within five years has been made conditional upon fulfillment of certain conditions stated earlier in the opinion.
(III) In the present case, the respondent Company could under sub' section (6) of section 114 of the Ordinance, file the revised returns Income Tax Year, 2004 despite pending audit proceedings for the said Tax Year, as it was within the stipulated five years period.
OPINION IN TAX REFERENCE No.27/2013.
11. During the audit of the respondent Company for the Tax Year, 2004, the Commissioner (Audit)
Regional Tax Office, Peshawar delegated to the Tax Officer audit-II Peshawar to audit the income tax affairs of the respondent Company and pass appropriate amendment orders under the Ordinance. During the said proceedings, the 'delegatee' Audit Officer, who was delegated the power only to the extent of Tax Year 2004, not only served the Notice upon the respondent Company but passed amended Assessment Order for the Tax Year 2008 under section 122 of the Ordinance.
12. The two Appellate Forums have rejected the stance taken by the Revenue on two grounds.
Firstly, that with the filing of the revised return, the audit proceedings ought to have been terminated. Secondly, that the Worthy Audit Officer lacked the jurisdiction.
13. As far as the first reason, this Court has already rendered its opinion dis-agreeing with the said finding of the two Appellate forums, as discussed in detail above.
14. However, as far as second ground regarding the jurisdiction of the Audit Officer to pass the impugned order is concerned, this Court is in complete consonance with the view rendered by the two Appellate forums.
15. An un-explained amount in the Tax Year, 2008 could only be taken up by the Commissioner and not an Audit Officer. Under section 122 or 177 of the Ordinance, the competent authority to initiate proceedings envisaged therein is the Commissioner, however, delegate the authority to another Taxation Officer to proceed but the same was required to be through express delegation. This express delegation was wanting in the present case.
16. In fact, the Audit Officer had only been delegated the authority to proceed against the respondent Company in the audit for the Tax Year 2004 and with conclusion of the audit for the Tax Year, 2004, he became 'functus officio' . The said Audit Officer, thereafter, could only proceed in audit proceed in audit under section 177 or under section 122, with express delegation of authority from the competent officer, the Commissioner. This express and requisite authority was missing.
Hence, the entire proceedings initiated by the Worthy Audit Officer against the respondent Company were without jurisdiction. When the foundation lacks legal mandate, the entire superstructure built thereon would surely fall.
17. In view of the reasons rendered hereinabove, Tax Reference 26/2013 is answered in the Positive.
Tax Reference No.27/2013 is answered in the ' Negative.
The office is directed to send a copy of this judgment under seal of the Court to the Appellate Tribunal, Inland Revenue, Peshawar Bench, Peshawar for proceeding in accordance with law.