MUHAMAMD JAWED ZAKARIA (JUDICAL MEMBER).---Through this appeal the Appellant has challenged the validity of the impugned order No,761 dated 15.3.2012 passed by the learned Commissioner Inland Revenue (Appeals-I), Karachi. The Appellant has assailed the following grounds of appeal:-- "1. The order of the Commissioner Inland Revenue (Appeals) is bad in law and on facts of the ease.
2. The Commissioner Inland Revenue (Appeals) erred in confirming that the exercise of jurisdiction by the Additional Commissioner under Section 122(5A) of the Income Tax Ordinance, 2001 was valid.
3. The Commissioner Inland Revenue (Appeals) erred in confirming invocation of sections 108/109 of the Income Tax Ordinance, 2001 in respect of advance against equity amounting to Rs: 152,699,400/- and receivable on account of renovation and reconstruction of building and land owned by subsidiary at Rs,96,782,859/-.
4. The Commissioner Inland Revenue (Appeals) erred in confirming computation of deemed interest income Ct 10% on advance against equity at Rs,152,699,400 and on receivable on account of renovation and reconstruction of building and land owned by subsidiary at Rs,96,782,859/- by treating such amounts as loan and charging tax on such deemed interest income.
5. Without prejudice to ground No,4 the Commissioner Inland Revenue .(Appeals) erred in remanding the case to Additional Commissioner for allowing proportionate financial expenses instead of directing to allow such expenses.
6. The Commissioner Inland Revenue (Appeals) has erred, rather was extremely unjustified, in commenting that "filing of rectification application for allowing proportionate expenses against notional interest income computed by the Additional Commissioner under sections 108/109 ipso factor confirms that AR has impliedly accepted the addition made under sections 108/109 in principle as the filing of rectification application presupposes that invocation of sections 108/109 by AC1R was correct."
2. Brief facts of the case as gathered from the arguments of the parties, record of the case as well as from impugned orders are that the Appellant is a private limited company incorporated in Pakistan under the Companies Ordinance, 1984 with registered office in Lahore, Punjab and manufacturing facilities located at Manghopir Road SITE Karachi. The company entered into a joint venture with effect from 16 April, 1998 with Renfro Corporation USA, one of the largest socks manufacturing company in USA for manufacturing and-export of socks to USA. The company's main source of income is export proceeds realized from export of socks. The entire income of the appellant company falls under final tax regime for which statement of final taxation under section 115 (4) has been filed. During the current year the company also earned an amount of Rs, 600,802 as profit / mark-up on bank deposits which has been declared under normal tax regime. However, no deduction in respect of any expense whatsoever has been claimed by the company. The appellant had. a wholly owned subsidiary namely Elite Textile Mills (Private) Limited (Elite Textile) which was incorporated in 1951 as a listed company and was quoted on the Karachi and Islamabad Stock Exchanges. Elite Textile was, however, delisted from Karachi and Islamabad Stock Exchanges in 2004 and convened into private limited company. The registered office of Elite Textile was situated at Karachi and its principal business was manufacture and sale of yarn. Elite Textile ceased all its production activities from 1 September 1997 and disposed of all its plant and machinery and a portion of land and building. During financial year 2004-2005 Renfro Crescent purchased entire shares of Elite Textile and since the Elite Textile is its wholly owned subsidiary. As Elite Textile was in yarn manufacturing business and Renfro Crescent was in the business of manufacturing socks for which yarn is the basic raw material, the purpose of acquiring Elite Textile was to revive Elite Textile to achieve synergies in business for both companies. However, as any revival plan of Elite Textile could not be worked out, the owners decided to merge Elite Textile in to Renfro Crescent. The Scheme of Merger of Elite Textile into Renfro Crescent was approved in Board of Directors meeting of both companies held on 17 December 2010 and the scheme was approved in Extra Ordinary General Meeting of shareholders of both companies held on 7 January 2011. Joint application for sanction of merger . Was filed before Lahore High Court on 25 January 2011 and the Scheme of merger was sanctioned by the Honourable High Court on 19 April, 2011. When entire shares of Elite Textile were taken over by Renfro Crescent, Renfro Crescent injected a sum of Rs, 180.142 million in Elite Textile. The Additional Commissioner Inland Revenue by taking recourse to section 122(5A) of the Income Tax Ordinance, 2001 treating the deenied assessment erroneous and prejudicial to the interest of revenue and declared income was revised by adding markup income of Rs, 24,505,0001= by re-characterising under sections 108/109 of the Income Tax Ordinance, 2001 in respect of advance against equity amounting to Rs,152,699,400/- receivable on account of renovation and re-construction of building and land owned by subsidiary at Rs,96,782,852/ =. Being aggrieved and dissatisfied from the order of the ACIR the appellant preferred an appeal before the CIR(A) who vide order mentioned supra confirmed the treatment under sections 108/109 of the Income Tax Ordinance, 2001. Hence the instant appeal before this Tribunal on the above- mentioned grounds.
3. On the grounds of appeal the learned counsel for the appellant vehemently submitted that when entire shares of Elite Textile were taken over by Renfro Crescent. Renfro Crescent injected a sum of Rs,180.142 million in Elite Textile. The break-up of this amount is given in Note No, 5 of audited accounts of Renfro Crescent for the year ended on 30 June 2005. They submitted financial statement which revels as under:-- 2005 2004 Rupees Rupees Cost of 1,932,000 shares of Elite Textile Mills 27,442,850 - Limited Advance against equity/share capital 152,699,400 ----- 180,142,250 -------
4. The learned counsel explained that aforesaid amount of Rs,152.699 million was shown in the audited account of both Renfro Crescent and Elite Textile as "Advance against equity / share capital". During the same year i,e, 2004-2005, shares of Rs, 180.142 million were issued by Renfro Crescent against cash and further shares of Rs,180.142 million were issued to JV partner Renfro Crescent Corporation USA for consideration other than cash. It reflected in Note No,11 of audited accounts of Renfro Crescent for the year ended on 30 June, 2005. The learned AR furnished the same which is being reproduced below:- 2005 2004 2005 2004 Number of shares Rupees Rupees 18,014,227 2 Ordinary shares of Rs.10 each issued for cash Ordinary shares of Rs.10 each issued for consideration other than cash180,142,270 180,142,25020 18,014,225 - 36,028,452 2 360,284,520 20
5. The Learned AR pointed out that the source of investment of Rs,180.142 million in Elite Textile was through equity investment in Renfro Crescent and not from borrowed funds.
6. They contended that the land and building owned by Elite Textile was being used by Renfro Crescent, Renfro Crescent made payments on account of renovations and construction of factory land and building during the years 2005-2006 to 2009-2010 which accumulated to Rs, 96.78 million upto 30 June 2010. The Learned ARs, Pointed out that the said amount is reflected in Note No, 10 to the audited accounts of Renfro Crescent for the year ended on 30 June 2010 as follows:-- 2010 2009 Rupees Rupees
10. ADVANCE, DEPOSITS PREPAYMENTS AND OTHER RECEIVABLIES Other receivables Other10.1 96,782,859 87,933,850
7. The Learned AR went on to argue that the above amount, represents receivable from Elite Textile Mills (Private) Limited amounting to Rs, 96.78 million (2009: Rs, 87.93 million) on account of renovations and constructions on factory land and building which is owned by subsidiary. The aforesaid amount of Rs, 96.78 million was shown as "Receivable from Elite Textile" in the audited accounts of Renfro Crescent and "Payable to Renfro Crescent" in audited accounts of Elite Textile.
8. The ARs further vehemently argued that if business of Elite Textile would have been revived, shares would have been issued and advance against equity/share capital of Rs, 152.699 million would have been adjusted against shares issued. Similarly, Elite Textile would have paid the amount of Rs, 96.78 million due to Renfro Crescent. However, as contended by AR, the entities were ultimately merged, the advance against equity/share capital of Rs, 152.699 million and the amount of Rs,96.78 million receivable by Renfro Crescent and payable by Elite Textile on account of renovations and construction of *tory land and building were squared off/adjusted in the books of the respective companies, the learned AR out that these are as reflected in Note No, 1.1.2 of audited accounts of Renfro Crescent for the year ended on 30 June 2011.
9. The ARs, of the appellant contended that the learned ACIR has treated Advance against equity / share capital of Rs, 152.699 million and receivable of Rs, 96.78 million on account of renovations and construction of factory land and building as "loan" given by Renfro Crescent to Elite Textile and computed deemed/notional mark-up income on these amounts @ 10% on the ground that Renfro Crescent had borrowed funds and the borrowed funds were utilized to make the aforesaid payments to Elite Textile or on behalf of Elite Textile.
10. The learned ARs drew our attention to the contents of show cause notice-and operating paragraphs of the assessm ent order which are reproduced below for ready reference.
(a) Notice under section 122(9): "Subject: Notice under section 122(9) for amendment of assessment under section 122(5A) of the Income Tax Ordinance, 2001 for tax year 2010 Kindly refer to above and the return filed on 30-12-2010 declaring exports of Rs, 2.203(B) and Normal Tax Regime (NTR) income of Rs, 600,802 which is deemed assessment as per fiction of law under section 120 of Income Tax Ordinance. As per record the deemed order has not been amended and still holds the field. (If the return is revised or any amendment has been made please bring it to my notice and record).
As per record you have advanced Rs, 152.699 (M) against equity to the related party M/s. Elite Textile Mills (Pvt.) Ltd., but shares have not been issued for long (Note 6 to the audited accounts) from the said company (Rs, 87.933 (M) as on 30-06-2009 and Rs, 96.782 (M) as on 30-06-2010) which is in fact receivable on account of Renovation and Construction on factory land and building (Note No, 10.1 to the A/c).
As per Note # 30 to the A/c you are using land and building of wholly owned subsidiary i,e, Messrs Elite Textile Mills (Pvt.) Ltd., without any consideration.
As you have borrowed funds and incurring huge borrowing cost (Rs, 69 (M) in the current year and Rs, 62 (M) in the preceding year). Therefore, the amount advanced to the related party and expenses incurred on construction and Renovation are not without cost. Similarly use of the premises of the subsidiary can't be considered as a right.
Non-charging of cost of finances by you and non-charging of rent by the sister concern are transactions which are not on Arm's Length principle.
As you have been declaring income from exports which is taxable under PTR except Markup income therefore any income from funds utilized by the related party i,e, Markup by you would have resulted in Taxable Income chargeable under NTR. Whereas any charge of Rent would not have benefited you as your income from business is taxable under PTR but it would have resulted in income to the subsidiary which would have been taxable at a fixed rate.
Thus non-charging of markup by you and rent by subsidiary are part of tax avoidance scheme requiring recharacterization under sections 108/109 rendering the deemed order as erroneous in so far as prejudicial to the interest of revenue liable to action under section 122(5A) of the Income Tax Ordinance, 2001. Therefore, I intend to amend the deemed order by charging markup 010% on the basis of markup rate prevailing in this period. 1 will apply the rate on the balance sheet figures.
If you have any objection to the aforementioned treatment and working please furnish the same.
You may rely on any documents including A/cs or books of A/cs in this regard.
This is an opportunity of being heard as per Section 122 (9). Proforma notice under Rule 68 is enclosed."
(b) Operating paras of order under section 122 (5A)
In the light of the above there is no iota of doubt that advance against equity and cost of renovation and construction are in fact interest free advances to the subsidiary and are controlled transactions entered into in a tax avoiding scheme requiring recharacterization under section 108 read with ,109 of the Income Tax Ordinance.
Taxpayer was confronted for application of 10% interest rate for recharacterising and making the transaction in accordance with arm's length principle. The taxpayer was confronted for lower rate application in the presence of internal uncontrolled transactions at a higher rate. Transaction between the taxpayer and the financial institutions are internal comparables of CUT where loan has been acquired at KIBOR plus 2% to 3% markup rate which works out to 14% to 16%. The rational of lower rate application is wholly owned character of the subsidiary where investment is 100% secure therefore lower rate is being applied for giving margin of security of investment.
As there is no movement in the amount reflected as advance against equity therefore markup 6 10% on the same works out to Rs, 15.269(m). The amount considered as loan on renovation and construction shows opening balance of Rs, 87.933(m) and closing balance of Rs, 96.782(m) therefore average balance of the balance sheet figures comes to Rs, 92.358(m) and markup @ 10% comes to Rs, 9.236(m).
Thus total income from these recharacterized transactions is Rs .
24. 505 (m).
11. The ARs,, of the Appellant vehemently contested the vires of sections 108 and 109. Both of the learned counsel argued that:- That ACIR has invoked Sections 108 and 109 simultaneously. As both provisions of law are independent they cannot be invoked simultaneously. If both sections are invoked simultaneously, one of the two sections becomes redundant and redundancy cannot be attributed to law. The ACIR should have been very clear as to which section can be invoked in a given situation. Whereas, in the instant case, that none of the sections can be invoked.
That Section 108 cannot be invoked because it empowers the Commissioner to distribute,
(b) apportion or
(c) allocate the following: Income Deductions Tax credit The learned A.Rs, further argued that in this case there is neither any "income" not "tax credit" which needs distribution, apportionment or allocation. However, as the ACIR mentioned in his notice that the company has incurred huge borrowing cost, therefore, he has apparently tried to contend that as part of the borrowed funds were given to subsidiary without charging any interest, therefore, proportionate borrowing cost should be allocated to subsidiary instead of claiming the entire borrowing cost by parent company. But, as the AR contended, the ACIR has missed the point that for this purpose the borrowing cost must have been claimed as a deduction by the appellant company. Whereas the admitted fact is that entire income of the appellant company was from exports and taxed under final tax regime and deduction of any expense or cost was neither claimed nor allowed to the company.
12. The learned AR next-submitted that section 108 is applicable to actual transactions i,e, where some actual income is earned or actual tax deductions or tax credits have been claimed. Under section 108 the Commissioner is empowered to either distribute or apportion or allocate actual income declared or actual tax deductions or tax credits claimed by the taxpayer between associates. It does not empower the Commissioner to work out deemed income. As the power to work out deemed income is not available under section 108, the question of distributing, apportioning or allocating such deemed income between associates does not arise. In this case no mark-up income was earned by the appellant from its subsidiary. Similarly, no interest/mark-up on borrowing was claimed as an admissible deduction due to taxation of appellant under final tax regime. Further, no tax credit was claimed by the appellant. Therefore the question of distributing, allocating or apportioning any income or deductions or tax credit does not arise and there is no room to invoke section 108 in this case.
13. The learned A.R. Further vehemently contended that Section 109 cannot be invoked because the parameters as envisaged and prerequisite of section 109 are not fulfilled which are that the Commissioner may:
(a) recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme.
(b) Disregard a transaction that does not have substantial economic effect.
(c) recharacterise a transaction where the form of the transaction does not reflect the substance.
For this purpose, "tax avoidance scheme" means any transaction where one of the main purposes of a person in entering into th transaction is the avoidance or reduction of any person's liability to tax under the Income Tax Ot.Dinance, 2001.
14. Reverting back to the facts of the case the learned counsel submitted that in this case, the purpose of giving advance against equity / share capital to subsidiary and recording the cost of renovations and construction of factory land and building as receivable from subsidiary was not to avoid tax but was a business necessity i,e, to either revive the subsidiary or to merge it and this fact is proved by actual merger of the subsidiary.
15. The Learned AR urged that on the basis of the facts of the case explained above the following positions emerges:--
(a) the form of the transactions i,e, advance against equity and recording of receivable on account of renovations and construction cost of factory land and building reflect the substance of the transactions; and
(b) both the aforesaid transactions i,e, advance against equity and recording of receivable on account of renovations and construction cost of factory land and building have substantial economic effect.
16. The AR stated that the above transactions were the business necessity of the parent and subsidiary in view of the dormant status of the subsidiary and pending revival or merger of subsidiary.
17. Referring to section 109, the learned AR argued that provisions of section 109 cannot be invoked to a valid and legally permissible transaction. In this regard, the AR of the appellant has relied on the order of this Tribunal in I.T.A. No, 391/KB of 2007 vide order dated 30 October 2009. Relevant extracts from the order are reproduced below:-- "The Taxation Officer has invoked provisions of section 85 (Associates), section 108 (Transaction between Associates) and section 109 (Recharaterisation of income and deduction) of Income Tax Ordinance, 2001 to make addition under section 111 of Income Tax Ordinance, 2001. In our opinion, the action of the Taxation Officer is unfair and unjustified. A valid and legally permissible transaction cannot be hit by the provisions of section 109 of Income Tax Ordinance, 2001. If the logic of the Taxation Officer is to be followed, then any loan from Cresox (Pvt.) Ltd. v. CIR, Zone-IV, LTU any relative, say a loan from father to son, or from mother to son, or from husband to while etc. Will be discarded by the Department under section 109 of Income Tax Ordinance, 2001. The Taxation Officer can under garb of section 109 of Income Tax Ordinance, 2001 doubt, question and can disregard the Hiba (Gift). There can be no end to challenges from the Taxation Officer and taxpayer will seriously suffer from heavy handedness of Taxation Officer. In this case what is to be seen is that whether the fronds pass from one individual to another, was banking channels used for fund transfer and is it corroborated through bank statement. If the answers to these questions are in affirmative, which they are in this case under appeal then it is not for the Taxation Officer to disregard and disbelieve a bona fide loan in our eastern cultural environment and disregard a loan from family relative, or friend. In view of the above facts and discussion, we hold that the order of learned CIT(A) does not warrant for any interference, hence the departmental appeal fails".
18. The AR also relied on another order of this Tribunal reported as 03 PTD (Trib.)
116. Relevant extracts from the order are reproduced low:-- "We have heard the learned representatives of both the sides and have also gone through the record of the case as well as case-laws cited at bar.
It is obvious from the facts of the case that the transaction of sale and repurchase have taken place resulting in actual realization of capital gain which had accumulated over the years for the reason of increase in market prices of the shares over the appellant 's cost of purchase. The veracity of these transactions has not been doubted by the taxation officer in his order. In fact on page 24 of the order, the taxation officer has observed that all elements of the transactions existed in this case including sale consideration, movement of funds, delivery of shares in CDC accounts, deduction of tax and CVT on the transactions. We respectfully feel that the submissions made by the learned DR on veracity of the transactions do not merit consideration.
In our view tax avoidance can only be done where a taxpayer has more than one modes of carrying out a particular transaction which result in different tax liabilities for each mode."
19. The learned counsel by placing reliance on the judgment of Hon'ble Supreme Court of Pakistan reported as PLD 1992 SC 562 = 992 PTD 954 in the case of Pakistan Industrial Engineering Agencies Limited, argued that the Department cannot dictate the taxpayer how to do business or how to utilize its funds. If the taxpayer enters in certain transactions for business purposes by adopting legal modes, and one of the main purpose of entering into such transactions is not avoidance or reduction of tax liability, then even if such transaction results in some tax benefit, it cannot be considered as a "tax avoidance scheme". Hon'ble Supreme Court of Pakistan has very aptly and categorically laid down this principle in the aforesaid judgment in the following words:- "An assessee is entitled to manage his own affairs to the best of his benefit even by adopting legal modes which may result in reduction of tax and the same if covered by the provisions of law cannot be challenged on the ground of prudence, advisability or business practice.
20. The AR argued that the ACIR has computed deemed / notional interest income in this case but he has not cited any provision of law under which such deemed/notional interest income can be charged to tax. Currently, there is only one provision in Income Tax Ordinance, 2001 for determining deemed/notional interest income in the case of employees which is subsection (7) of section 13.
Apart from this, there is no provision in Income Tax Ordinance, 2001 which permits determination of deemed/notional interest income. While explaining further the AR submitted that there was a provision i,e, Section 12(7) in Repealed Income Tax Ordinance, 1979 for determining deemed / notional interest income on all types of interest free loans except loans advanced to employees in accordance with the terms and conditions of employment and persons exempted by notification in the official Gazette but even that subsection was made inapplicable for assessment year, 1985- 86 onwards and no similar provision (except section 13(7) pertaining to loans to employees) exist in the Income Tax Ordinance, 2001. The AR further submitted that the courts have always held that any deemed/notional income cannot be determined without the availability of a specific enabling provision / charging section in law. The AR cited the cases reported as PLD 1997 SC 582 = 1997 PTD 1555 (Ellahi Cotton Mills Limited), Hon'ble Supreme court of Pakistan and 2004 PTD 3032 (Call Tell (Private) Limited) mentioned inter alia the following principle for determining income and charge of tax:- "Before charging tax, an assessee must be shown to have received income or the same has arisen and accrued or deemed to be so under the statute. Any amount which cannot be treated as above is not an income and, therefore, cannot be subject to tax.
21. The learned A.R. Further urged that as per section 11, income must be classified under one of the five heads of income given in that section. In this case, it is obvious that the deemed / notional interest income worked out by the ACIR cannot be classified under the head "Salary, "Income from Property", "Income from Business" and "Capital Gains". If the head "Income from Other Sources" is considered, the provision to compute income under this head is given in section 39.
Section 39 clearly says that profit on debt RECEIVED in a tax year shall be taxed. Section 69 which explains "Receipt of income" says that a person shall be treated as having received an amount if: it is actually received; nor applied on behalf of the person, at the instruction of the person or under any law; or made available to the person.
22. The learned counsel concluded that in this case, the interest income deemed by the ACIR has neither been actually received, nor applied on behalf of the company, at the instruction of the company or under any law, nor made available to the company.
23. The learned counsel therefore, prayed that deemed / notional interest income worked out by the ACIR neither taxable under section 39 of the Ordinance as "Income from Other Sources" neither under section 18(2) as "Income From Business". Hence the orders of the officers below may be vacated.
24. On the other hand, the learned D.R. Strongly supported the orders of the officers below.
25. The learned D.R. Submitted that the appellant, a private limited company, entered into a joint venture with effect from 16.04.1998 with Renfro Corporation USA for manufacturing and export of socks to USA. The appellant enjoys income from export proceeds realized from export of socks manufactured by it. The said source of income is covered under final tax regime. Accordingly the appellant company, as per statement under section 115(4) of the Ordinance, has shown export receipts and paid final tax liability thereon. The appellant has also offered for tax an amount of Rs, 600,802/- under normal law which is earned on bank deposits, being assessable under section 39 of the Income Tax Ordinance, 2001 and against which no expenses whatsoever have been claimed.
Subsequently the provisions of section 122(5A) of the Ordinance were invoked and national interest income amounting to Rs,24,505,000/- was charged on interest free advances/ loans to subsidiary company and taxes as other income in terms of section 39 of the Ordinance on normal tax rates.
This action was also confirmed by the learned Commissioner Inland Revenue (Appeals) vide his order No, 761, dated 15.03.2012 but remanded back to reconsider the rectification application, filed subsequently by the appellant on the issue of apportionment of interest expenses against notional interest income charged as per amended order. The Learned DR submitted that as per return/financial statements of the accounts, the appellant had not shown any interest income from advances to subsidiary company and it had allocated entire finance cost against its business income which is covered under final tax regime. As entire financial cost stood allocated against business income which is covered under section 169 of the Income Tax Ordinance, 2001; the question of apportionment of such financial cost against national interest income did not arise. He contended that apportionment of financial cost against notional interest income charged as per amended order as requested by the appellant, at this stage is afterthought and will render the financial statements defective and unreliable. He submitted that the advances given to the subsidiary company against equity correctly treated as interest free advances in a controlled transaction actionable under section 108 read with section 109 of the Income Tax Ordinance, 2001.
The Learned DR further urged that rectification application was lawfully rejected as financial expenses are not allowable against notional interest income charged/ taxed as per amended order under section 122(5A) of the Income Tax Ordinance, 2001 and the said notional interest income is chargeable to tax at normal rates under section 39 of the Income Tax Ordinance, 2001.
The learned DR also asserted that all the issues raised stand properly addressed in the body of amended order and the documentary evidences provided by the appellant in its defense were also properly entertained after providing sufficient opportunity of being heard. Thus any documentary material, not produced at the amendment stage is not liable to be admitted at appellate stage.
26. We have heard the learned representatives of both the parties and have also gone through the record of the case as well as case laws cited at bar. The learned CIR (A) has dismissed the appeal of the taxpayer just in two sentences. The operating para from the order of the learned CIR(A) is reproduced as under:-- "The AR has not been able to rebut the'se findings satisfactorily. In these circumstances the invocation of sections 108/109 appears justified."
27. Perusal of the order of the learned CIR(A) it is clear that he has recorded his findings in just two lines as is evident from the above extract. The order of the learned CIR(A) is running into 21 pages and his whole order is consisted of mere quoting /reproduction of arguments of the counsel verbatim then he simply reproduced the order/ finding of ACIR and penned down his findings in two lines (supra). However, he even did not bother to record the arguments of the learned counsel in his own words. No reasons has been recorded by him. No process of application of conscious and judicious mind by CIR(A). There can be no order passed by the learned CIR(A) in the instant case within the parameters set up by the higher appellate fora. The impugned order appears is not decision is simply disposal. If the decision is given without any reasons then one of the two most essential ingredients will be missed. It is on the basis of the reasons which support Order that the same can be challenged in an appeal. The said Order of CIR(A) is cryptic and devoid of reasons. No reason whatsoever has been assigned by the CIR(A) as to how and why he has arrived at a finding.
An order ought to contain the point or points for determination, the decision thereon and the reasons for the decision is totally violated in the instant case. Obviously when no reasons are given, the Order of CIR(A) is vitiated as being violative of rules of natural justice. It is in this backdrop that Hon'ble Supreme Court of Pakistan as well as from foreign jurisdiction has made it imperative for all to lay down reasons in support of their judgments/Orders. As mentioned supra, the learned CIR(A) has not applied his independent, judicial, judicious and conscious mind honestly and fairly, he only reproduced the arguments of the learned counsel and simply reproduction of extract from ACIR's amended order under section 122(5A). Summarily rejected the appeal by the CIR(A) just in two lines without incorporating reasons, does not come to the criteria laid down by the superior courts.
In fact the CIR(A) should have passed a reasoned order after proper application of judicious and conscious mind so that it would have been known to Tribunal and/or the parties as to why the appeal of taxpayer's rejected/dismissed. The recording of reasons in support of the order passed by CIR(A) has been held to inspire public confidence in administration of justice, and help the Tribunal to dispose of appeals filed against such order. Reasons were held to be the heartbeat of every conclusion, apart from being an essential features of the principles of natural justice, that ensure transparency and fairness, in the decision-making process. Giving of satisfactory reasons is the basic requirement arising out of an ordinary man's sense of justice and a healthy discipline for all those who exercise power over others. Failure to give reasons amounts to denial of justice.
Reasons are live links between the mind of the authority who takes decision taken to the controversy in question and the decision or conclusion arrived at. Recording of reasons in cases where the order is subject to further appeal is very important from yet another angle. An Appellate Court or the authority ought to have the advantage of examining the reasons that prevailed with the Court or the authority making the order of that advantage and cases an onerous responsibility upon it to examine and determine.
28. In the instant case, evidently the CIR(A) without appreciating the facts of the case and without applying his own mind simply confirmed the treatment meted out on the ACIR in few words, in our view had not discharged his duty upon him and therefore, the order of CIR(A) is totally unsatisfactory and is liable to be remanded back. The CIR(A) was required to record his reasons and application of his own judicious mind in his judgment/order which was not having done so.
Tribunal would have remand the case back to the CIR(A) to reconsider in the light of what have been stated above. The judgment of the CIR(A) B should strictly conform to and should set out the points for determination, the decision thereon and the reasons for decision, the nature of the case and grounds urged before him, and show that the CIR(A) has considered the points/issues/evidence/grounds/arguments/ relevant provisions, judge-made-law, application of judicious mina and proper justifiable reasons by himself and has to come to a clear-cut finding upon an independent consideration of the facts, circumstances evidence, and his order must show that the CIR-Appeal has exercised his own mind independently on the questions, involved.
29. We are of the opinion that the learned CIR(A) ought to deal with each grounds of appeal separately and record his findings on each of them. It is now well settled law, that every judicial order should be a speaking order and particularly in tax matters, CIR(A) is not clothed with finality and subject to further scrutiny by higher appellate fora. We find it difficult to decide the 2nd appeal.
Thus, if the learned CIR(A) fails to pass proper judicial order, by considering all the facts and points of law raised before him and more so without reasons, amounts to negation of justice. The CIR(A) is always required to dilate upon all the questions of facts and law agitated before him, so that, the Tribunal is not handicapped in deciding the 2nd appeal.
30. The settled principles regarding administration of justice are that the appellate authorities / judicial are quasi-judicial authorities including officials/ Administrative or taxing authorities while dispensing justice and exercising judicial or quasi powers are supposed to apply their own mind to the cases and to determine after evaluating those to give their own verdict justified by reasons. We are sorry that we are remarking these words just to guide the senior officers and CIRs(A) too so that their orders may be on right path and upto the mark and make them able to stand the test of appeal, therefore, we observe that the order impugned can in no manner be placed in the arena of judicial orders. If somebody requires us to give example of a sketchy and unreasoned order, we find that the best order to refer in this behalf would be the one impugned herein. We can refer to numerous judgments to support that the CIR(A) was needed to pass a speaking order based his own reasons. Section 24A. Of the General Clauses Act, 1897, are enough which clearly mandate without any reservation that reasons have to be given in support of conclusion drawn. No reasons have been given for the impugned order. Absence of reasons, in the impugned order clearly depicts non-application of conscious judicial mind by the CIR(A), who by so doing appears to have acted mechanically. The newly enacted section 24A of the General Clauses Act, 1897 is nothing but old wine in new bottles now give legislative recognition to the view that the duty to give reasons is part of the duty to uphold the rule of law in the sense indicated above, by providing that the statutory decision-maker shall "so far as necessary or appropriate, give basis and reasons for making the order or, as the case may be, for issuing directions...."; it also gives effect to the principles of fairness. [Messrs Airport. Support Services v. Airport Manager 1998 SCM R 2268, 2277.], Zahur Ilahi v. Secretary to Government, [PLD 1975 Lah. 499], S.S. Miranda v. Chief Commissioner [PLD 1959 SC 134] and Govt. Of Pakistan v. Dada Amir Haider [PLD 1987 SC 504] are few examples of cases in which the decision-making power was held subject to an implied duty to give reasons.
31. We, have also happened to look this statement, of Genevra Richardson [in the article "The Duty to Give Reasons: Potential and Practice" in 1986 Public Law 437] put it "effectively summarize into three categories the main benefits commonly attributed by official bodies to the giving of reasons: fairness or the provision of satisfaction to the parties; the improvement of decision-making; and the facilities of appeal". When the law provides an appeal against an order which gives no reasons, there can be no effective exercise of the right of appeal. "Without knowing the reality of the reasons for decision. How could the appellants controvert them before the appellate authority?
32. The duty to give reasons when the decision maker is performing a function of a judicial nature or quasi-judicial. In short the duty to give reason is part of the duty to uphold the rule of law. The duty to give reasons is a great check against arbitrariness.
33. If we look again at Section 24A of the General Clauses Act, it binds every officer, authority or person making any order is required to give reasons and any judicial findings without discussing necessary facts and material or record is not a judicial order and consequently is not sustainable in the eyes of law. In order to maintain the sanctity of both quasi-judicial and administrative proceedings, it is necessary to maintain oversight on the performance of adjudicating officers whose orders should not be entirely dependent on opinions and comments of the reporting officers.
34. The impugned order of the learned CIR(A) shows that the same is non-speaking order, and did not conform to the mandatory requirements of section 24-A of the General Clauses Act, 1897. Any order which did not contain substantial reason and did not show that it was passed on objective consideration shall always be treated as illegal void, arbitrary and a result of misuse of authority vested in public functionary. No room was available for such illegal, void and arbitrary orders in any system of law. Ff any authority, Court/Tribunal gave a finding of fact which was not based on material available on record was illegal, arbitrary without discussing and considering the material available on record it became perverse, and a perverse finding of fact which was violative of the established principles of appreciation of evidence on record was not sustainable in law. Principle that every judicial or quasi-judicial finding should be based on reasons containing the justifications for the finding in the order itself was an established principle of dispensation of justice Adjudication orders being violation of the basic principle of the good governance and mandatory requirements of section 24A of the General Clauses Act, 1897 were not only illegal and void but also not sustainable under the law and were quashed by this Appellate Tribunal time and again.
35. Statutory obligation of judicial/quasi-judicial authorities. All judicial/quasi-judicial authorities were obliged to pass judicial/ adjudication by a speaking order manifesting by itself that the judicial/ adjudicating Authority had applied its judicial mind to the issues and the points of controversy involved in the case. When the reasons would not be forthcoming, Appellate Authority/court would be deprived of the valuable views of the subordinate fora. Order which was not a speaking order and devoid of reasons, was not sustainable being in contravention of the law.
In the absence of properly framing issues, adjudicating authority or the first Appellate Authority could follow any trajectory and even sail into uncharted territories, which was not appreciable in the eyes of law. Assessing authority/ Adjudicating Authority and the first Appellate Authority [CIR(A)] must pass speaking orders, duly supported by reasoning and showing due application of mind to the points of facts and law applicable while disposing of the cause before it.
36. The learned CIR (A) has not followed the provisions of Clause 24A of the General Clauses Act. If law had prescribed method for doing of a thing in a particular manner, such provision of law is to be followed in letter and spirit and achieving or attaining the objective of performing or doing of a thing in a manner other than provided by law would not be permitted and the law requires to do certain things as per the statue book that should be followed in its letter and spirit because that has been prepared for awareness of the court proceedings for the rival parties. Action of the CIR(A) which is contradictory or has been done out of the way to cross the rules and regulation does not have any legal support.
37. In the background of the aforesaid findings contained in the order of the CIR(A) hardly needs any further debate to arrive at the conclusion that the finding advanced by the learned first appellate authority, in the impugned order, improper, unlawful, illegal and without substance.
38. As discussed in detail in the preceding paragraphs we have no hesitation to hold that the impugned order of the learned CIR(A) is defective as the same lacks the essentials required by law to be noted therein which at the same time is abuse of exercise of the vested discretion and thus the same is not sustainable at law. The impugned order is neither self-explanatory nor speaking without giving any reasons or grounds or application of independent mind thereto. The CIR(A) neither substantiated by any reasoning nor any fair basis. The learned CIR(A) has only decided the appeal by reproducing the Taxpayer's written submissions and merely reproduction of order of ACIR. Such approach is not reflective of application of independent judicial mind and is obviously shorn of rationale and reasons for the conclusions recorded therein. In arriving at this conclusion we are further fortified by a judgment Nafees Cotton Mills Limited v. ITAT, Lahore reported as 2003 PTD ;841 (H.C. Lahore) wherein their lordships held as under:- "The impugned order is neither self-explanatory nor speaking. The appeal has been decided by the learned Tribunal without giving any reasons or grounds thereto ... ... ...The learned Tribunal has only decided the appeal by reproducing Assessing Officer's order and contentions of parties. Such approach is not reflective of application of independent judicial mind and is obviously shorn of rationale and reasons for the conclusions recorded therein.
Appellate Authority, was obliged to deal, reflect upon and reverse the findings and reasons given by CIT(Appeals). The impugned order cannot but be held to be arbitrary and a product of non-applicability of mind."
39. In support of our submissions we may further place reliance on the judgment reported as Engro Chemicals Pakistan Limited v. Additional Collector of Custom and others: 2003 PTD 777 [H.C.
Karachi] (per Muhammad Mujeebullah Siddiqui and Azizullah M. Memon, JJ) wherein the Hon'ble High Court of Karachi has held that:- "The Appellant Tribunal is always required to dilate upon all the questions of facts and law agitated before it so that the High Court is not handicapped in deciding the questions of law, and if the Tribunal fails to proper pass judicial order by considering all the facts and points of law raised, it would amount to a negation justice. The Tribunal was also directed that in future no appeal should be disposed of by the Tribunal without giving due consideration to each and every point of fact and law in terms of a speaking Order. "if the learned Tribunal fails to pass proper judicial order by considering all the facts and points of law raised before it, it amounts to negation of justice. Every judicial order should be a speaking order and particularly in tax matters, where the scope of appeal/reference before the High Court is very limited.
The Tribunal is always required to dilate upon all the questions of facts and law agitated before it, so that, the High Court is not handicapped in deciding the questions of law.
For the foregoing reasons, the impugned order is set aside and the appeal is remanded back to the Customs, Excise and Sales Tax Appellate Tribunal Karachi Bench, with the direction to rehear the appeal after giving reasonable opportunity of being heard to the parties and decide all the issues of facts and law raised by the parties before the Tribunal, by an elaborate and speaking order.
We further direct that, in future no appeal should be disposed by the Tribunal by a summary and slipshod order. The Tribunal is a final forum for deciding facts, therefore, the Tribunal should not merely dispose of the appeals but should decide the same, meaning thereby, that, each and every point of facts and law should be given due consideration and be decided by speaking order. The appeal stands disposed as above."
40. We may further elaborate that the perverse finding of CIR(A) which is violative from the established principle of appreciation of evidence on record was not sustainable in raw. The principle that every judicial or quasi-judicial finding should be based on reasons containing the justification for the finding in the order itself is an established principle of dispensation of justice.
The order of the CIR(A) being violation of basic principle of the good governance and mandatory requirement of section 24A of the General Clauses Act, is not only illegal and void but also not sustainable under law. Thy said position is also fortified by the judgments of Superior Courts reported as 2005 YLR 1019, 2007 PTD 2500, 2004 PTD 1973, 2005 YLR 1719, 2003 PTD 777, 2003 PTD (Trib.) 2369, 2002 M LD 357, 1983 CLC 2882, 2005 PTD 2519, 2005 PTD 1189, 2003 PTD 2369, PLD 1995 SC
(Pak) 272, PLD 1970 SC 158, PLD 1970 SC 173, 1984 SCM R 1014 and 2012 PTD IG (Trib) 619.
41. We have already observed that the CIR(A) has not examined the case on its merit nor discussed the same which ought to have been done. It seems that the order passed by CIR(A) in haste and slipshod manner, the CIR(A) should have done something more than passing a mechanical order simply reproduction of OIR/ACIR's order. Even in an ex-parte order/judgment reasons must be given. An order unsupported by reason is no order in the eye of law. It is well settled that reason are to be recorded in order and final conclusions/decisions must be based on logical reasons after application of judicial, judicious and conscious mind honestly and fairly. The CIR(A) was under an obligation to apply his mind. Judgment appellate decision/ order would mean judicious determination of dispute between parties specifying grounds and substantial reasoning for arriving the particular decision. The order of the learned CIR (A) is not reasoned judgment "Even ex- party" order/judgment is required to be a speaking order/judgment [Wapda v Mir Khan Muhammad Khan Jamali 2006 CLC 92 (Quetta).]
42. The learned CIR(A) being a judicial officer it is expected from him that he would pass the speaking order to enable everyone to have an idea or the fair view which found favour with the presiding Judgment/ Order should contain facts of the case, points grounds for determination which had been raised, arguments, rebuttal of the parties, the decision thereon reason after application of mind for such decision judicial order must be speaking and meaningful itself exhibiting that the court has applied its mind to the resolution of all the material issues"; [Mollah Ejahar AM v. Govt. Of East Pakistan and others cited as PLD 1970 SC 173,]
43. The speaking order has been defined by the higher appellate fora in so many cases. With due respect to them we may further add that when we speak of a "speaking judgment/order", it entails clarity of mind of the judge. A speaking judgment order exhibits two things: I- It explains the decision to the parties concerned. II- It makes available reasons for an appellate Court to consider.
Moreover, What is required is a reasoned judgment and not reasons for the judgment.
Judgment/order would mean judicious determination of dispute between parties specifying grounds and substantial reasoning for arriving the particular decision after application of Judge's Judicial, judicious and conscious mind. Judgment ought to be Self-contained, unambiguous, lucidly explained the provisions of law and its interpretation so that no guess work or probabilities may be possible, no vagueness or ambiguity, only one interpretation can be derived from the judgment and no possibility of double interpretation, no extraneous considerations, there should be reasons as discussed supra which favours decision, Concise statement of case/facts and dispute be incorporated, Points/grounds needing determination in the light of the pleaded/argued on facts and law of the parties.
44. In the present case in hand, the quasi-Judicial officers in his capacity as CIR(A) failed to discuss evidence, reasons, lack of application of mind and he has also not discussed the disputed facts and law in its prospective, hence, it is not Judicious order in the eye of law. The order of the learned CIR (A) is also violation of law, the learned CIR (A) is bound to decide the appeal on the basis of the arguments and material available with him.
45. Reverting back to the merits of the case again from perusal of the order of the learned CIR(A) we have found that the learned CIR(A) laid his hands on irrelevant material which was not the subject matter of appeal. The relevant findings of the learned CIR(A) is reproduced as under:-- "The AR has not been able to rebut these findings satisfactorily. In these circumstances the invocation of sections 108/109 appears justified".
"However, apropos proportionate allowing of financial charges against notional interest additions made under sections 108/109, it is noted that both the appellant as well as the department are blowing hot and cold in the same breath. The appellant on the one hand is agitating invocation of sections 108 and 109 of the Ordinance for taxation of notional interest income and on the other hand it has filed rectification application seeking proportionate allowance of interest expense against notion interest income. It cannot be over emphasized that filing of a rectification application for allowing proportionate expense against interest income under sections 108/109 ipso facto confirms that the AR has impliedly accepted the addition made under sections 108/109 in principle as the filing of rectification application presupposes that invocation of provision of 108/109 by the ACTT was correct. Similarly, the department has taxed notional interest income but has summarily rejected the taxpayer's rectification application for allowing proportionate expenses against the interest income computed under sections 108/109 with affording a proper and reasonable opportunity of being heard despite the fact that the AR had given a computational basis for this rectification. Under the circumstances, the summary rejection of rectification application is not justified. Therefore, Additional Commissioner is directed to reconsider the same by allowing the appellate time to prove its contention of rectification and the taxpayer/ appellant is directed to furnish the relevant details with facts and figures for substantiating its claim made in the rectification application. After considering the same the ACIR should pass a speaking and judicious order to dispose of the rectification application as per law after affording proper opportunity of hearing to the appellant."
46. From perusal of the above quoted findings it can be seen thai while disposing of the appeal against original amended order passed under section 122(5A) of the Income Tax Ordinance, 2001 the appellate authority/cannot give decision/ or cannot even any finding on any other separate appealable order which was not pending adjudication before him CIR(A) he has acted beyond his jurisdiction and transgressed his powers. We are of the considered opinion that during the pendency of appeal rectification of mistake is not barred. The wide powers possessed by the CIR(A) do not mean that the CIR(A) should start simultaneous and parallel investigation or lay a hands, particularly in respect of those points which are neither the part of pleading nor of the grounds of appeal framed and the same are not raised by the Taxing Assessing Officer in impugned amended order under section 122(5A) by the ACIR. The CIR(A) ought not to rely on a rectification application filed before the Additional Commissioner (which is separate applicable matter), while disposing of main appeal stretched his hands on rectification application which already repelled by Assessing Officer and the same was not subject matter of appeal. The CIR(A) has grossly erred in relying on the said application on his own motion which was not even pending adjudication before him nor pleaded before him. This amount to embarrassing any of the parties (Assessing Officer / Department or Taxpayer as the case may be) loading the record unnecessary and complication the issues of impugned order because all such acts are beyond the scope of his power.
47. As discussed in the preceding paragraphs in detail, the impugned order of the learned CIR (A) cannot be termed as speaking order, missing of ingredients of judgment, lack of his own reasons, therefore, we deem it appropriate to remand the case to him for recording appropriate detailed findings/reasons observation on each and every issues contested before him, after providing reasonable opportunity of being heard to the appellant as well as to the department. For the reasons noted above we vacate the impugned order of the CIR(A) with result that appeals of the taxpayer shall deemed to be pending before CIR(A) and shall be decided afresh in accordance with law, we direct CIR(A) to expeditiously decide the appeal as soon as possible on out of turn basis.
48. Before parting with this judgment, we though do not want to record such observation but we with very heavy heart observe that the order of the learned CIR(A) lacks necessary ingredients of the judgment as explained and does not fulfill the criteria of the judgment as embodied in the case [Akhter Saeed v. Azad Kashmir Government cited as PLD 2003 SC (AJ&K) 1; and other reported as 2002 CLC 4 Pesh.]
49. That in the wake of above discussion and on perusal of record one is at a loss to notice the irresponsible demeanour of appellate forum below, which are constituted under the law to act as per settled principles and procedure laid down thereunder and per Judge made law, which empowered the authority to exercise jurisdiction vested in them or not to exercise jurisdiction not invested in them. They cannot evolve any method in discharge of their duties according to their own whims and choice or pleasure. CIR(A) is not at liberty and so free to exercise naked and unarmed powers in a despotic manner. He cannot go beyond his limits and has to perform his job within the four corners of law. CIR(A) is supposed to dispense justice and not to hamper justice, for the sake of substantial justice, he has even to ignore technicalities. It is our faith as a Muslim that Almighty Allah the Most Beneficial, Merciful and Benevolent. Judges are His trustees on earth. We deliver justice on behalf of Allah, so we are shouldering heavy and great responsibility to transmit further. This is why Judge is not free, uncontrolled and unchecked creature, he is supposed to be a slave of his conscience, law besides accountable to Almighty Allah.
50. In the instant case it is noticed with serious concern that the CIR(A) without following the law and procedure without applying his judicious, judicial and conscious mind without conceiving the consequences of valuable rights of the taxpayer just in a very cursory manner just reproduction of the amended assessm ent order merely with one stroke of pen rejected the appeal of the taxpayer, CIR(A)'s order can only be delivered after full hearing or otherwise it is nullity in the eyes of law. We have, time and again, observed that a judgment should contain a concise facts of the case, the points /grounds raised before him for determination, detailed reasons for the decision, application of own mind to the issues, the requirements for a complete and valid Order must be filled-up even by an ex parte Order. These requirements also required to be fulfilled by the Appellate Authority to state complete reasons and findings on each and every issues as raised before him. Above all the Appellate Authority [CIR(A)] to utmost surprise acted as a jury member not discussing the factual and legal aspect of the case violative to norm and administration of justice to tax laws maintaining the uncalled for an unwarranted order of the CIR(A) after reproducing 20 pages reduced the order in just two lines manifestly speaks of responsibility of so Senior Judicial Officer.
51. Whatever the fate of the case warrants, CIR (Appeals) is bound to adopt set principles of law and procedure given for judicial or quasi-judicial decision and shad decide the case on merit after affording opportunity to both the parties, in no way and under no circumstances CIR (Appeals) are let free to make mockery and play with the rights of the parties guaranteed under the Constitution of Islamic Republic of Pakistan, 1973.
52. In terms of the above findings the appeal is hereby disposed of.