' This appeal has been filed by the taxpayer against the order No,1176/2014 dated, 30.06.2015 passed by the learned Commissioner Inland Revenue (Appeals-III), Rawalpindi for the Tax Year 2013 on the following grounds:-
1. That the order passed by the Commissioner Inland Revenue (Appeals-III), Rawalpindi and Inland Revenue Officer, Audit Unit-I, RTO, Rawalpindi is bad in the eyes of law and contrary to the facts and circumstances of the case.
2. That the Learned Commissioner Inland Revenue, Appeals-III was not justified to confirm the order passed by the learned Inland Revenue Office Audit Zone-I, RTO, Rawalpindi.
3. That the order of CIR (Appeals-III) IRO Audit-I, Zone-I, RTO Rwp passed under sections 122(1)/122(5) is illegal void ab initio.
4. That the order of CIR (Appeals-III) has also erred and misdirected himself under the facts/law and circumstances of the case by confirming the order of IRO.
5. That the learned Inland Revenue Office has erred and misdirected himself under the facts/law and circumstances of the case by invoking sections 122(1)/122(5) of the Income Tax Ordinance, 2001.
6. That amendment under section 122(1) can only be made if there is definite information under section 122(5) available on record whereas definite information under section 122(5) is not available in this case and the- learned Officer completed the assessment on his guess work by applying wrong provisions of section 39(3) of law so the order passed is illegal as well as against the spirit of law.
7. That there was no definite information available with IRO nor obtained from any other source as such action under section 122(1) of is not sustainable so the order is illegal.
8. That the term "definite information" in section 122(1) is not just any information but definite enough to satisfy the concerned officer that income chargeable to tax of a taxpayer has escaped assessm ent or total income of a taxpayer has been under assessed.
9. That the learned DCIR had erred and mis-directed herself under the facts/law and circumstances of the case by invoking section 122(5) of the Income Tax Ordinance, 2001.
10. That the learned DCIR failed to bring any concrete material evidence on record while passing the order.
11. That the learned IRO has wrongly invoked/applied the provisions of section 39(3) of the Ordinance in this newly incorporated company because the provisions of said section are applicable in an already existing company where the company received advances for issuance of shares.
12. That the learned IRO was not justified to treat/consider the amount paid for allotment of shares as advance deposits for issuance of shares.
13. That the learned IRO has wrongly invoked/applied section 39(3) of the Ordinance because provisions of section 39(3) deals with the advances for issuance of shares for later/subsequent period whereas situation in this case is different.
14. That the learned IRO 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.
15. That the appellant beg to leave to add, amend or alter the above said grounds.
2. Brief facts of the case are that the taxpayer filed return of income for tax year 2013 declaring net loss at (Rs,590,789/-). The case was selected for audited under section 214C of the Income Tax Ordinance, 2001 on the basis of certain parameters. Show cause notice under section 122(9) along with other notices were issued for providing records and information as requisitioned earlier, but reply of the taxpayer was not found to be satisfactory. Therefore, the officer proceeded to assess income of the taxpayer under section 122(1)/(5) of the Ordinance by making addition under section 21(c) at Rs,590,789/- and addition under section 39(3) at Rs,5,515,000/. The appellant's appeal before the learned CIR(A) failed, hence appeal was filed before this Tribunal.
3. This case came-up for hearing on 18.01.2016. The learned AR argued the ground of appeal contending that addition of Rs,5.5 million to the appellant income was made under section 39(3) of the Income Tax Ordinance, 2001 on the ground that the initial subscription to the company was made by the appellant without a cross cheque or banking transaction. He argued that the Companies Ordinance, 1984 required reporting of initial subscription in the memorandum of association, an article of association as without this subscription the private limited company could not have been constituted. The learned DR defended the order of the learned CIR (A) arguing that section 39(3) of the Income Tax Ordinance, 2001 clearly provided that any loan, addition, deposit for issuance of shares must be transacted through banking channel.
4. We have heard the rival contentions in this case. The appellant's case at bar is that the expense incurred by him on account of his initial subscription for acquisition of shares in the Private Limited Company of which is a member was added by the Respondents to his income in term of section 39(3) of the Income Tax Ordinance, 2001. It was alleged that the appellant did not make monetary transaction of the value of his shares through banking channel into the company's account. The central argument of the appellant is that the reporting of initial subscription in the memorandum of association and article of association is a prerequisite for incorporation of a new company under the Companies Ordinance, 1984 but no company can open an account with a bank unless it is already incorporated as a company by the Security Exchange Commission of Pakistan. This argument of the counsel carries weight. In this case, shares worth Rs,5.5 million were reported to be acquired in the appellant's (Pvt.) Ltd. Company prior to its incorporation. Clearly, at the time of acquisition of shares in the company, the company had no bank account as it had not yet come into existence by way of its incorporation under the Companies Ordinance, 1984. In any case, the allocation of shareholding in a company or recognition of the value of shares is an internal matter among its members. The members of the (Pvt.) Ltd. Company themselves decide how much shares will be owned by each member of the company and how the contribution to the paid up capital by member will be recognized. Sometime, value of shares is also expressed in kind such as transfer of assets like land, machinery or even monetization of personal services which are recognized by the members of the company as such. The Companies Ordinance, 1984, does not even bar the allocation of shares on carried interest basis, i.e, without actual monetary investment.
Similarly, directors of (Pvt.) Ltd. Company may or may not have as shareholding. In this case, the appellant could not have made the payment of his initial subscription in to the company's account through banking channel because the company had not come in to existence. In our view, the show cause notice which is predicated on violation of section 39(3) of the Income Tax Ordinance, 2001 is prima facie misconceived. The learned forums below seem to have charged the appellant for failure to do something which is legally impossible. Therefore, the orders passed by both the authorities before are held to be bad in law, hence, vacated. If there was a concern with regard to the appellant's source of investment, he should have been confronted under section 111(1)(b) of the Income Tax Ordinance, 2001. The invoking of section 39(3) of the Ordinance in a situation like the one in question is without authority of law. When the company had not been born, the question of its having a bank account does not arise. In any case, the provision of section 39(3) are not attracted here. The appeal is accepted to this extent. The respondent department may, however, feel free to ask the appellant to disclose its source of investment.
5. We have also found that the appellant's pre-incorporation expenses for example, the incorporation fee deposited in the Security Exchange Commission of Pakistan (SECP) was not allowed as expense. This disallowance is unfair. The appellant is entitled to book this expense and claim it's deduction as a business expense. Thus, the addition to the extent of pre-incorporation expenses including the SECP fee is ordered to be deleted.
6. This order consists (04) pages each page bears my signature.