NOT vs NOT

ORDER

1. AHMED SAEED, ACCOUNTANT MEMBER.---The larger Bench was constituted to hear and decide the common issue communicated by Authorised Representatives namely A.F. Ferguson and Co., Ernst and Young Ford Rhodes Sidat Hyder and KPMG Taseer Hadi and Co. Chartered Accountants to this Tribunal vide letter bearing number AT 1397 dated 17-11-2015 in the above referred appeals. The contents of the letter are as under:-- "The Chairman, Appellate Tribunal Inland Revenue Shaheed-e-Millat Secretariat, 2nd Floor, China Chowk Islamabad November 17, 2015 At 1397 APPEALS PENDING BEFORE HONOURABLE APPELLATE TRIBUNAL INLAND REVENUE REGARDING SECTION 122(5A) OF THE INCOME TAX ORDINANCE, 2001 [ORDINANCE] This is with reference to the meeting Syed Shabbar Zaidi, Senior Partner Messrs A.F. Ferguson and Co., had with your goodself on November 2, 2015. Mr. Zaidi, requested to constitute a larger bench on the matter of circumstances under which provisions of section 122(5A) of the Ordinance can be invoked.

2. During the meeting, you had very kindly assented to constitute a larger bench for examining the issue relating to amendment of assessment under section 122(SA) of the Ordinance as if amendment proceedings under section 122(5A) is similar to action / proceeding to be undertaken under section 177 of the Ordinance. This issue is a subject matter of many appeals pending before the Tribunal.

3. The matter has jointly been discussed by the senior tax partners of Messrs A.F. Ferguson and Co.

4. Messrs KPMG Taseer Hadi and Co. and Messrs Ernst and Young Ford Rhodes Sidat Hyder. We have jointly agree to represent our clients before the larger bench, if constituted, to argue this common ground taken in appeals.

5. We therefore request that a full bench may kindly be constituted.

6. Yours sincerely Sd/Sd/Sd/ A.F. Ferguson &Ernst and Young FordKPMG Taseer Hadi Co.Rhodes Sidat Hyder& Co."

2. The appellants were represented by Syed Mohammad Shabbar Zaidi, FCA, Mr. Asim Zulfiqar F.C.A., Mr. Muhammad Arshad FCA and the department was represented by Mr. Amjad Jawed Hashmi Advocate and Dr. Farrukh Ansari, Commissioner Inland Revenue, LTU, Karachi.

3. The bench observed that there was no question in the above referred letter framed by the appellants. The respondent department was also not holding any question in the above referred matter. In view of this bench asked the parties to frame questions after mutual consultation and submit it for decision. The tribunal however asked the parties to argue the case on the issue.

4. The A/R,-Messrs A.F. Ferguson and Co. Chartered Accountants submitted following question of law on 25.01.2016.

7. "Whether section 122(5A) of the Income Tax Ordinance, 2001 allows the Commissioner /Additional Commissioner to make enquirers and seek information and details from the taxpayer in the manner which is akin to the audit proceedings under section 177 of Income Tax Ordinance, 2001 so as to establish that an order (including deemed order) is erroneous in so far as prejudicial to the interest of revenue? "

8. The A/R also filed copy of letter bearing No.BT 1009 dated 25-01-2016 addressed to Chief Commissioner, LTU, Karachi whereby it had requested to give concurrence to the above question or otherwise, the respondent department may submit its own rephrased question. The Chief Commissioner, LTU, Karachi informed vide letter dated 18-01-2016 that following questions have been submitted to FBR for approval.

1. Whether the object, purpose and spirit of section 122(5A), as amended through Finance Act, 2012 is materially different than the objective, purpose and sprit of section 122(1)(5)".

2. Whether the provisions of section 122(5A), prior to the amendment brought about through the Finance Act, 2012, prevented the Commissioner from calling for any record or documents, once he considered that the order sought to be amended was erroneous in so far as it was prejudicial to the interest of revenue?

3. Whether the use of the word "considers" in subsection (5A) of section 122, as opposed to the use of the words "is satisfied" in subsection (5) shows the intention of the legislature to authorize the Commissioner to initiate action under subsection (5A) on the basis of only a prima facie case, which can be further confirmed or rejected, as the case may be, on the basis of further enquiry, and after allowing the taxpayers an opportunity of being heard?

4. Whether the amendment brought about subsection (SA) of section 122 through Finance Act, 2012 is only a declaratory provision, and the provision before amendment impliedly required action under the subsection (5A) on the basis of an enquiry by the Commissioner, after prima facie considering an order to be erroneous in so far as it was prejudicial to the interest of revenue?

5. Whether the word "enquiry" as used in the amended subsection (SA) can be assigned any restricted meaning under the law?"

9. It is evident from above that there was no mutual consensus on the question put up by appellant.

5. The proposed questions submitted by Chief Commissioner to FBR for approval to the our mind are not relevant to the issue. The issue was whether unlimited inquiries are permissible under section 122(5A) of the Income Tax Ordinance, 2001 as interpreted by respondent department, then what will be the difference between 122(5A) of the Income Tax Ordinance, 2001 and section 177 of the Income Tax Ordinance, 2001 (hereinafter called the Ordinance, 2001) wherein officer is empowered to call books of account, record, information, evidences, explanations probe the matter in depth and conduct unlimited ,enquirers. In view of this we approve the question put up by representatives of the appellant for answer by this forum.

6. Syed Mohammad Shabbar Zaidi, FCA informed that in this matter, issue was as to what extent inquiry is permissible under section 122(5A). It was emphasized that respondent department has started fishing and roving inquiries by interpreting that unlimited powers are provided in the provision of law. The Authorized Representative was of the view that if the unlimited inquiry is allowed to what the respondent department is understanding, then there is no difference between section 177 and section 122(5A).

7. Pressing the issue the learned authorized representative stated that there has to be an order passed under section 122 of the Income Tax Ordinance, 2001 and thereafter section 122(5A) could be pressed. The respondent department is taking up proceeding under section 122(5A) on the order deemed to have been passed under section 120 of the of the Income Tax Ordinance, 2001 i.e. soon after the receipt of return of income filed under section 114 of the of the Income Tax Ordinance, 2001. The learned authorized representative stated that on the issue of fishing and roving inquiries the superior legal fora has decided the issue in favour of taxpayers while taking up proceedings under section 66A of the repealed Income Tax Ordinance, 1979 (hereinafter called the repealed Ordinance, 1979) which is para material to section 122(5A) of the Income Tax Ordinance, 2001.

8. The learned AR drew attention to issue of definite information and towards section 65 of the repealed Income Tax Ordinance, 1979 and current para material section 122(5) of the Income Tax Ordinance, 2001, emphasizing that there has to be some definite information so that tax officer can proceed under section 122(5A).

9. The scheme of self assessm ent as per repealed Income Tax Ordinance, 1979 was also highlighted along with sections 59 and 59-A of the repealed Income Tax Ordinance, 1979.

10. It was further pointed out that respondent department is asking for information in the notice under section 122(5A) and thereafter proceeding to create tax demands. He vehemently argued that the two mandatory conditions to invoke section 122(5A) were missing in the notices issued. He stated that in order to invoke section 122(5A) there should be apparent legal infirmity in the finalized order along with apparent loss of revenue. The respondent department is issuing notices under section 122(5A) without meeting the mandatory requirements as envisaged in relevant section. He further highlighted that there is plethora of case law on the two prescribed mandatory conditions for invoking of section 122(5A).

10. 11.He emphasized that in some notices there are just observations of the tax officer and there is no substance and basis. The twin mandatory conditions are not apparent from the notice under section 122(5A).

11. 12.The same views were expressed by Mr. Asim Zulfiqar F.C.A. on the issue. He stated that words "after making or causing to be made, such inquiries as he deems necessary," have restricted sense and it does not give power to the tax officer to seek information from taxpayers and thereafter proceed to pass order under section 122(5A). He was of the view that inquiry does not mean to ask for information from the taxpayer. The two mandatory requirements i.e. there should be some illegality in the existing order and there should be apparent loss of revenue must be before the tax officer to proceed further under section 122(5A). The inquiry should be on the apparent two conditions and sense of inquiry should not be in respect of calling of information. The both learned authorized representatives emphasized that if the interpretation of respondent department is accepted that there is no restriction on inquiry whatsoever then what is the difference between section 177 and section 122(5A). They argued that in section 177 tax officer has all the powers to call any information, record, documents, books of account, vouchers etc for the purpose of audit and if the inquiry as interpreted by the respondent department is taken to be correct then any information, details, documents, books of account and vouchers could be called under section 122(5A) and there will be no difference between the two provisions.

12. 13.Mr. Muhammad Arshad, FCA representing Ernst and Young Ford Rhodes Sidat Hyder Chartered Accountants in the case of Messrs Jaffer Brothers (Pvt.) Ltd. drew attention to the portion of notices under section 122(5A) and stated that notices are just observations or means of calling of information and nothing else. He further stated that he adopts all the arguments taken up by Syed Mohammad Shabbar Zaidi, FCA and Mr. Asim Zulfiqar F.C.A.

13. 14.The learned Advocate Mr. Amjad Jawed Hashmi Advocate appearing on behalf of LTU stated that section 122(5A) and section 17,7 are two entirely different sections with distinct purposes. He stated that section 122(5A) is curative in nature and is to be invoked when there is some illegality or error of law in the existing order and there is some loss of revenue. Whereas section 177 is for selection of few taxpayers who have filed their returns under Universal Self Assessment Scheme in order to create deterrence of audit. The purpose is to inform the taxpayers to declare correct particulars of income voluntarily in their returns and there is a check mechanism in the form of audit under section 177 available with the respondent department.

14. 15.The learned advocate with regard to inquiry was of the view that there is no restriction imposed by legislature in section 122(5A) and that the respondent department has power to conduct any sort of inquiry as it deems fit and proper. No restriction can be imposed on conduct of inquiry and law is very clear on this issue. The same views were also expressed by DR Farrukh Ansari, Commissioner Inland Revenue, LTU Karachi.

15. 16.We have heard the parties in detail, arguments put forward were considered. We are of the firm view that the issue is a settled issue and has been taken up by superior appellate fora at length and there are many case-laws which support this settled issue. The case laws 2015 PTD 2824 Lahore High Court, 2015 PTD 1639 Islamabad High Court, 2014 PTD (Trib.) 2085, 2015 PTD (Trib.) 1193, 2014 PTD (Trib.) 1629, 2012 PTD (Trib.) 1739, 2012 PTD (Trib.) 1593, 2010 PTD (Trib.) 111, 2004 PTD 330 Karachi High Court, I.T.A. No.193 of 1998 Lahore High Court dated 31-01-2012, 1999 PTD (Trib.) 2851, 1999 PTD (Trib.) 7000, 1999 PTD (Trib.) 3229 and I.T.A. No.449/KB of 1999-2000 I.T.A.T. dated 24-12- 1999, support our view.

16. 17.Before proceeding further it is worthwhile to reproduce section 122(5A) and section 66A of the repealed Income Tax Ordinance, 1979.

17. "1[(5A) Subject to subsection (9), the Commissioner may 21, after making, or causing to be made, such enquiries as he deems necessary,] amend, or further amend, an assessment order, if he considers that the assessment order is erroneous insofar it is prejudicial to the interest of revenue.] "

18. 1[66A. Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order.---(I)

19. The Inspecting Additional Commissioner may call for and examine the record of any proceedings under this Ordinance, and if the considers that any order passed therein by the Deputy Commissioner is erroneous in so far as it is prejudicial to the interests of revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made, such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment to be made, 2[1-A The provisions of subsection (1) shall, in like manner, apply, (a)Where an appeal has been filed under sections 129, 134 and 137, or a reference has been made under section 136, against an order passed by the Deputy Commissioner; and (b)Where an appeal or reference referred to in clause (a) has been decided, in respect of any point or issue which was not the subject matter of such appeal or reference.]

(2) No order under subsection (1) shall be made after the expiry of four years from the date of the order sought to be revised.] 3[Explanation. -For the purpose of this section, an order prejudicial to the interests of revenue shall include an order passed without lawful jurisdiction.] The perusal of these show that both are para materia to each other and there is hardly much of difference between the two sections.

18. The first point raised by the authorized representative was that there should be an order under section 122 of the Income Tax Ordinance, 2001 prior to taking up of proceedings under section 122(5A). We do not agree to this proposition for the reasons that prior to passing of any order under section 122 of the Income Tax Ordinance, 2001 there is a deemed order under section 120 of the Income Tax Ordinance, 2001 in the field. This deemed order is as a result of filing of complete return of income under section 114 of the Income Tax Ordinance, 2001 and as per section 120(1)(a)(b) the Commissioner shall be taken to have made an assessment of taxable income for a tax year and return filed shall be taken for all purposes of the Ordinance to be an assessment order issued to the taxpayer by Commissioner on the day the return was furnished. D We are of the view that tax officer can proceed on an order passed under section 120 or 122 of the Income Tax Ordinance, 2001 under section 122(5A) if the two mandatory conditions for invoking this provision are available apparently. The two conditions are that there should be an error of law or in simple words illegality on face and there should be some loss of revenue evident in some form in the order under section 120 or 122 of the Income Tax Ordinance, 2001 under consideration. So we disagree with the view of learned authorized representatives that there has to be an order passed under section 122 of the Income Tax Ordinance, 2001 before proceedings can be taken up under section 122(5A).

20. 19.The next issue pointed out was of fishing and roving inquiry. On this issue we agree to the contention raised by learned authorized representatives that superior legal fora has already decided this in the proceeding under section 66A of the repealed Income Tax Ordinance, 1979 and also in proceedings taken up under section 122(5A) as well. In this regard we strongly believe that the issue is connected to the two mandatory conditions for invoking section 122(5A) discussed in above paras. We also agree that section 122(5A) is para materia to the section 66A of the repealed Income Tax Ordinance, 1979 and matter of enquiries and fishing and roving inquiries is to be seen in the context of two mandatory prescribed conditions referred in the provision. What we are trying to highlight is that inquiry is to be in conformity with the twin conditions and should not be outside the scope of the prescribed conditions.

21. 20.The issue of definite information was taken up by the learned authorized representatives. We are of the view that matter of definite information is related to section 122(5) of the Income Tax Ordinance, 2001 which is para materia to section 65 of the repealed Income Tax Ordinance, 1979. It does not have any nexus to section 122(5A). On the issue of definite information we have noted that this issue was decided in orders passed under section 65 of the repealed Income Tax Ordinance, 1979 as well in the orders passed under section 122(5) of the Income Tax Ordinance, 2001 by superior appellate fora. Probably learned authorized representatives have mixed up the twin mandatory conditions for invoking of section 122(5A) with definite information issue. We therefore do not agree with the view of the learned authorized representatives that there has to be definite information for invoking section 122(5A) as it has no relevance to section 122(5A).

22. 21.We now come to the main issue taken up by the learned authorized representatives in paras supra. The portion of show-cause notices referred by authorized representatives show that these are just observations of the tax officer. In some portions there is no substance and basis to invoke section 122(5A). In some of the portions of show-cause notices it appears that respondent/department has started calling for information from the appellants. Some of the portions of notices under section 122(5A) appearing in the case of M/s. Meezan Bank Ltd. are reproduced below; TAX YEAR 2004 "7) consumer loan under section 29A 7.1) The issue was confronted as under:-- "As per computation of income you have claimed deduction in respect of consumer loan under section 29, in terms of section you have allowed a deduction not exceeding three per cent of the income for the tax year arising our of consumer loan. Please identify the income arising from consumers loans." 7.2) Gist of the reply/rebuttal:-- The taxpayer identified the taxable income from Car ljarah Financing amounting to Rs.53,422,000/- on which 3% provision Rs.1,603,000/- is allowable under section 29A of the Income Tax Ordinance, 2001."

23. "8) TAX DEPRECIATION SCHEDULE: 8.1 Issue confronted: The issue was confronted as under: "As per tax depreciation schedule you have acquired following assets Rs.1,291,990 (M): Table S. No. Nature of assets claimed Amount Initial allowance charged 1 Op erating owned assets (including improvement of rented premises91.162 7,080,770 2 Owned and leased out assets 1,484.856 498.283 3 Intangible assets 5,295,446 226.066 Total 6,871.464 7,805.119 You have shown the above assets in the depreciation schedule and claimed initial depreciation as shown above. In this regard the following discrepancies are apparent from record:-- i) As per cash flow statement the investment in operating fixed asserts is appearing at Rs. Nil which is un-reconciled with the addition in assets, the un-reconciled amounts represent out of balance sheet items and are therefore required to be considered as concealed income. ii) Further, the tax depreciation schedule indicates that the additions disclosed in this year's depreciation schedule, in respect of owned and leased assets are shown as "additions during the tax year 2006 (cost)". Meaning thereby the consequent initial allowance and depreciation claimed thereon does not pertain to this year at least. Whereas the audited financial statement of the last year also do not support the declared version. The entire claim is thus inadmissible at Rs.25.065 (M).

24. Further claim of depreciation of earlier year is not allowable under the law."

25. 8.3) Findings/Inference: The reconciliation provided by the taxpayer has been examined and found in order.

26. In respect of prior years depreciation amounting to Rs.25,065,777/- the AR of the taxpayer M/s. A.F.

27. Ferguson and Co. vide letter No. DT 2493 dated 21-03-2009 (para. 3) contested that the prior year's depreciation is not the expense of the prior year which is not allowable under section 20 but the said amount is the depreciation claimed on assets purchased during the prior years and the depreciation on the carried forwarded WDV is being claimed. The said treatment has been given only for the purpose of disclosure.

28. The contention of the taxpayer examined in the light of write up and facts provided by the taxpayer. The depreciation on the WDV of leased assets carried forwarded from the prior year (2003) is allowable deduction till the time the assets are not transferred to lessee. No adverse inference is drawn."

29. ISSUANCE OF BONUS SHARES:-- 10.1) Issue confronted: The issue was confronted as under: "Your share Capital during the last year was Rs. 1,001,454,000/- (100,145,245 share issue of share capital). Please refer to note No.17. During the year you have issued the bonus shares of Rs.62,570,890/- (6,259,089 shares). No amount of cash has been received as cash, flow statement.

30. Please identify the receivables."

31. 10.2) Gist of the reply/findings: The reply of the taxpayer has been examined and it is admitted that the bonus shares issue is not the cash flow item. Hence, no adverse inference is drawn."

32. TAX YEAR 2006

7. Unrealized Gain on Held Trading Investment Rs.57.792 (M)

33. 7.1) Taxpayer was confronted as under: "As per computation of income, you have deducted amount of Rs. 57.792(m) on account of unrealized gain on held for trading investments. Please furnish computation in terms of section 37 of the Income Tax Ordinance, 2001. This is not allowable deduction under section 20 of the Income Tax Ordinance, 2001, 2001."

34. 7.2) Gist of reply of the taxpayer is as under: This is unrealized gain on the investment. The unrealized gain/loss are non taxing events.

35. 7.3 Findings: In the light of above reply and the legal provisions, no adverse inference is drawn. "

36. TAX YEAR 2007 "4) REVERSAL OF PROVISION FOR BAD DEBTS: 4.1 Taxpayer was confronted as under: "As per computation of income, you have deducted Reversal of provision for bad debts amounting to Rs. 1.537 (m) on the basis that the provision had already been disallowed in the prior years. This is not allowable under the law."

37. 4.2 Gist of reply of the taxpayer is as under: The reversal of Rs. 1.537 (M) has been claimed out of the provisions of tax year 2006. The order of the tax year 2006 has not been passed under section 122(5A). The break up is given as under: - Mujahid Hussain Zaki 120,000/- MNZ Corporation (Pvt.)

38. Ltd.821,000/- Abdul Hameed Timber Mart157,000/- Faizullah Khan 038,000/- Sultan Ahmad 207,000/- Tariq Mehmood 193,000/- Total 1,537,000/- 4.3) Findings Inference : The provisions during the tax year 2006 has been added to the income entirely hence, the reversal is allowable deduction."

39. "10) DIMINUTION FOR VALUE OF INVESTMENT 10.1 Taxpayer was confronted as under: "Diminution for value of investment amounting to Rs.1.297 (M) is not allowable under the law."

40. 10.2) Gist of reply of the taxpayer/findings is as under: The amount has already been added to the income. No adverse inference is drawn."

41. TAX YEAR 2010 "6 DONATION: 6.1) Taxpayer was confronted as under: "As per Note No.28, the donation of Rs.24.166 (M) has been claimed as deduction. It is not allowable as direct deduction under the Seventh Schedule read with section 61 of the Income Tax Ordinance, 2001. Further, the credit on donation is allowable in the cases where the institutions are approved within the meanings of section 61 to the Income Tax Ordinance, 2001. Hence, it will be added to your income."

42. 6.2) Reply of the taxpayer is as under: "It has been stated at point No. 7 that as per note 28 of the financial statements, donations amounting to Rs.24. 166 million have been claimed as deduction. However, the said note relates to other charges representing penalties imposed by the State Bank of Pakistan amounting to Rs.

43. 1,747,000/-. This amount has been offered for tax in the return of income.

44. It is pertinent to point out here that similar issue was also included in the show-cause notice for the year 2009 and no adverse action was then taken as discussed on page 18 of the order dated March, ,31, 2010 for that year. "

45. 6.3) Findings/Inference: In view of above reply, no further enquiry can be made under section 122(5A). No adverse inference is thus drawn."

46. TAX YEAR 2013 "15) DEPRECATION ON CERTAIN LEASED ASSETS 15.1 Taxpayer was confronted as under: "The depreciation on certain leased assets is not allowable as the dates of dispatches are not given."

47. 15.2) Gist of reply of the taxpayer is as under: The taxpayer company provided the details regarding 2671 cars leased out during the year on which normal depreciation has been claimed at Rs.264,600 (M) on the total cost (WDV) of equipments total in number 200 have been provided in which dispatches have been made up to 1st December, 2006 and only one dispatch of Rs.480,000/- have been made on 26th December 2006. The total claim of addition is assets is Rs. 1,500.148 (M) on which initial depreciation is Rs.739.820 (M) and normal depreciation @ 15% amounting to Rs.I10.973 (M).

48. 15.3) Findings/Inference: The details and documents have been examined and placed on file. The depreciation is as per law on the claimed/stated additions during the year. No'adverse inference is drawn."

49. "10) LOAN TO EMPLOYEES AND DIRECTORS 10.1 The taxpayer was confronted as under: Confronted through Point No.13 of the notice.

50. As per note 11.14 you have given loans to employees and directors at Rs. 1,064,004,000/- No interest has been charged against this loan. This transaction requires examination in terms of sections 108/109 of the Income Tax Ordinance 2001."

51. 10.3 Findings/Inference.

52. History and findings in audit during tax year 2011 reveal that the taxpayer charges the interest to employee. Hence, no further action can be taken."

53. In this portion of notice we have observed that officer is not sure about the relevant section to be invoked as he has confronted the appellant with both sections 108 and 109 of the Income Tax Ordinance, 2001. This action comes within the ambit of fishing and roving inquiry and is not sustainable.

54. "14) ACCRUED EXPENSES 14.1) The taxpayer was confronted as under: Confronted through Point No.17 of the notice: "As per note-I8 of the financial statement of accounts you claimed accrued expenses have increase many folds. It is not allowable deduction unless the documentary evidence is given."

55. 14.2) REPLY OF THE TAX PAYER IS AS UNDER: "In the notice, you have shown the intention to disallow the increase (many folds) in accrued expenses (note 18) to the financial statement unless necessary documentary evidence is given in this respect.

56. In this context, we state that during the current year accrued expenses have only been increased by 0.23 percent as compared to last year, and not many folds as stated in the notice. Hence, no explanation is warranted. Note 18 of the Financial Statement is enclosed as Annexure XII."

57. 14.3) Findings/Inference: The taxpayer provided the explanation. No further enquiry is required in the audited accounts on the factual points."

58. 22.The perusal of portions of notices cited supra show that respondent/department had nothing with regard to the two mandatory conditions to invoke section 122(5A). We therefore agree with the views expressed by learned authorized representatives that this is not the spirit of enquiries as mentioned in the relevant provision. Calling of information and thereafter finalizing the order under section 122(5A) without the presence of twin mandatory conditions is not permissible. This act of the departmental authorities is nothing but fishing and roving enquiries which is not legal and in accordance with the provision of law. Further we also agree that some portions of the notices as highlighted above were observation and without basis and are not meeting the mandatory conditions.

59. 23.Some portions where information have been sought further queries were raised on reply from taxpayer and still the matter remained unclear and amounts were added in the income. One such example taken from the portion of notice for the year 2007 is being reproduced below:-- "13) CHARGE FOR DEFINED BENEFIT PLAN AND COMPENSATED ABSENCES 13.1) Taxpayer was confronted as under: "Charge for defined benefit plan and compensated absences during the year is not allowable being a provision."

60. I3.2)Gist of reply of the taxpayer is a under: The AR of the taxpayer Messrs A.F. Ferguson and Co., vide letter No. DT 2911 dated 24.04.2009 replied the above departmental contention in response to this office notice dated 06-12-2008 and 05-03-2009. The gist of the reply is as under:- i) The above payment is not provision but ascertainable amount. ii) This amount has been charged as per IAS 19. Under section 32 income is chargeable on accrual basis and similarly expenses are also chargeable on accrual basis in mercantile system of accounting. iii) The expense has been accrued against gratuity which is allowable deduction on accrual basis. iv)The honourable Supreme Court of Pakistan and honourable High Court of Sindh in following cases have decided the matter in favour of taxpayer::- 1992 SCMR 763 2008 PTR 184 1995 PTD 413 1992 PTD 668 13.3) Findings/Inferences : Under the provisions of section 32 only ascertainable liability is allowable expense. Under section 34(4) an amount shall be payable by a person when all event that a determined liability have occurred. In case of provisions the amount is not in respect of any person to whom it is payable but it is an estimation to be paid to certain persons. Meaning thereby the amount is not ascertainable to qualify as a deduction in the mercantile system of accounting. When the expense has yet been ascertained to be claimed as accrued within the meaning section 32 it is not allowable under section 20 of the Income Tax Ordinance, 2001.

61. The actuarial valuation according to IFRS is not in accordance with the provisions of sections 20/32/34(3) of the Income Tax Ordinance, 2001.

62. The case law cited by the taxpayer are on the provisions of Income Tax Ordinance, 1979 (Repealed), Now the provisions of section 32 are dependent on other provisions of Income Tax Ordinance, 2001 i.e. starting with "Subject to this Ordinance". In this regard the clear guidance under section 34(3) has been given regarding determination of the liability for future payment or accrued. Secondly, in the said decision particularly the decision reported as 1985 PTD 413 it has been hold that the amount accrued is allowable not 'actually be expended or paid'. The mentioned decisions of apex Court by AR of taxpayer also approve the said decision or recognize the principle that the amount payable is allowable deduction i.e. ascertainable liability.

63. The ascertainable liability has been clarified (provided for) by the legislature in the statute book under section 34(3).

64. The defined benefit plan had not been identified with the employees, but general provision has been made.

65. In the light of above facts, the taxpayer has made the provisions of Rs. 7.929 (m) which is not allowable deduction as the amount is not ascertainable. In respect of compensated absences the taxpayer contested that the reversal of Rs.6.15 (M) out of the provision has been offered for tax.

66. This fact is not arising from the account; hence the amount of Rs. 6.15(M) is added to the income.

67. After going through the above portion of the notice we have no hesitation in inferring that such type of inquiries are not permissible under section 122(5A) and come within the ambit of fishing and roving. Moreover the provision of law on which inference has been drawn i.e. sections 32 and 34(3) of the Income Tax Ordinance, 2001 were not even confronted to the appellant. Furthermore the officer has not gone into the detail accounting entries. In order to see that all events which determine liability have occurred one has to see accounting entries related to various employees to whom gratuity is payable and also those accounting entries which were related to compensated absences in respect of various employees. In order to ascertain that events have not yet occurred accounting entries related to subsequent periods are required to be seen along with original accounting entries passed at the time of booking of accrued expense and appellant should have been confronted with the defect detected as a result of examination. For example if the expense of gratuity in respect of employees or in respect of compensated absence have been claimed on accrual basis detail of this should have been compared when actual payment was made in subsequent period in respect of employees, then it could be established that event has not occurred in respect of certain employees. We do not see such exercise carried out by officer so the action is not sustainable.

24. Some portions of notices show that amount appearing. In the computation sheet of the amended assessm ent order was not confronted to the appellant which cannot sustan the test of appeal. One such example is reproduced below which is tor tax year 2008 at para-4, page 13 of the amended assessm ent order.

68. 4) REVERSAL OF PROVISION FOR BAD DEBTS: 4.1) Taxpayer was confronted as under: "As per computation of income, you have deducted Reversal of provision for bad debts amounting to Rs.4.125(m) on the basis that the provision had already been disallowed in the prior years. This is not allowable under the law."

69. 4.2) Gist of reply of the taxpayer is as under: The taxpayer provided the breakup of reversal of Rs.23.212 (M) in accordance with Note No.11.7 to the accounts. The provided details reversals that the provisions were created from assessment years 2001-2002 to tax year 2006.

70. 4.3 Findings/Inference: Total amount of the provision has stand disallowed, hence, the entire amount of the reversal is allowable deduction and the same will be allowed as deduction and the net provisions will be added to the income. However, the taxpayer has already deducted the reversal of Rs.4.125(M) from income on the computation sheet. Hence, the reversal of Rs. 19.087 (M) (23.212 - 4.125) will be adjusted from the claim of provisions as per Note No.11.7 to the accounts.

25. Another example has been taken from the portion of notice for tax year 2010 appearing at page 34 para 11.1 of the amended assessme nt order, which is reproduced below: 11) NON DEDUCTION OF WHT ON PROFIT ON DEBTS-ACTION 21 (c): 11.1) Taxpayer was confronted as under: "You have paid/credited profit on debts amounting to Rs.740,869,000/- [Note No.18] on the fixed deposits which is not allowable deduction as the tax has not been deducted under section 151 of the Income Tax Ordinance, 2001. The tax required to be paid / collected within the meanings of section 158(b). As the same has not been done, hence the action under section 21(c) is required in the light of judgment of Honourable High Court of Sindh."

71. The reply of appellant as appearing in the body of amended assessment order at pages 34, 35 and 36 and the relevant portion is reproduced below for understanding of the issue:-- 11.2)Reply of the taxpayer is as under: "In the notice, you have contended that tax was not deducted on the accrued profit on debts on fixed deposits amounting to Rs.740,869 million appearing in note 18 to the financial statement. The Bank has been informed of your intention to initiate action under section 21(c) of the Ordinance in light of the decision of the High Court of Sindh.

72. In this respect, the breakup of accrued profit is reproduced below:-- S. No.Nature of deposits Accrued ProfitDue date of payment Certificate of Islamic Investment306,022,000Monthly, Quarterly, Semi- annually Saving Account 68,028,000 Monthly Meezan Islamic Institution deposit account7,076,000 Monthly Karobari Munafa Account49,818,000 Monthly Meezan Bachat Account35,095,000 Monthly Karobar Munafar account plus941,000 Monthly Mahana Amdani Certificate26,960,000 Monthly Month Modaraba Certificate22,699,000 Monthly Margin Account 43,000 Monthly 210, 660,000 Certificate of Islamic Investment122,179,000 Ranging from 3 months to above one year Meezan Providence Certificate5,257,000 Ranging from 3 months to above one year Accrued profit on borrowing from SBP60,315,000 Provisions of section 151 are inapplicable provisions of section 151 are inapplicable 13.Accrued borrowing Banksprofit fromon other36,436,000 96,751,000 Total = 740,869,000 In this respect, we would inform you that the bank's financial reporting system is designed to deduct tax automatically at the time of payment/credit of interest to the customer accounts.

73. Therefore, the tax is being deducted at the time when the recipient is 'entitled to receive' the profit.

74. Banks, as a usual practice under the accrual principles of accounting, charge mark-up/interest expense, in respect of the customer deposits, to the profit and loss account at cut-off dates, with a corresponding effect shown in 'other liabilities', being mark-up payable on maturity of such deposits. We would submit that the mark-up/interest accrued at the end of the accounting year (at the cut-off date) is never actually credited into the individual accounts of the banks' customers as it is not receivable by the person as of that date. Hence, no payment under section 158(a) of the Ordinance is consequently made which may be liable to withholding of tax under section 151 of the Ordinance. The above mentioned 'accrual ' entry for the financial reporting purposes. The accrual entry is reversed on the subsequent day after the cut-off date and the general ledger is returned to the pre-accrual position. The mark-up/interest is only credited / disbursed to the customers on the date of maturity of their deposits and the related withholding of tax is appropriately made..

75. We reiterate that this aspect has been considered during the monitoring audit of profit on debt by Enforcement and Collection Division, Large Taxpayers Unit, who are vested with such powers and no negative inference was made.

76. Without prejudice to the above, we would mention that the Bank has duly withheld and deposited taxes withheld from the profit/ mark-up at the time of actual payment/credit to the customer's respective accounts, subsequent to the balance sheet date. Since the tax withheld has already been deposited the same cannot be again recovered from the Bank. In this respect we are enclosing the copies of annual statements for the period January 2010 to October 2010 as annexure 'iv' which is showing the deduction of taxes on profit on debts at the time of payment in subsequent months. Since this verification has been conducted by the Enforcement and Collection Division for the immediately two preceding years, the same can only be verified from the Banks records under such powers vested and not the limited powers of section 122(5A) of the Ordinance on a presumed basis.

77. Without prejudice to above, you will appreciate that profit/interest accrues periodically - say yearly, half yearly or it may accrue once i.e. on maturity. The dates of accrual may be different from the last day of accounting year of the Bank receiving the deposits. The Bank is, however, required to make a provision in its accounts for interest calculated upto the end of its accounting year. In such a case, the provisions of section 158(a) of the Ordinance should be construed as not compelling the Bank to deduct tax from the interest so calculated, for the following main reasons:

(a) The withholding tax provisions of section 151 of the Ordinance do not come into operation unless and until income has accrued to the account holder. Where the amount is inchoate and has not yet accrued / crystallized into income, but is only in the process of accrual, the stage of income is not reached. The subject matter of tax is interest, and not mere expectancy of receiving interest on the date of maturity.

(b) The fundamental feature and object of the section is deduction of tax at source. No tax can be deducted under section 151 of the Ordinance, unless income accrues; and income accrues only when it becomes due and payable. Interest on deposits/securities does not accrue from day to day but only on certain fixed days and, therefore, section 151 of the Ordinance cannot come into operation at any time before the fixed date for payment of interest.

78. As shown above profit is credit monthly, quarterly, semiannually or on maturity as the case may be and tax is withheld in the month of payment as explained above in paragraph 12.5.

79. In the order of the Sindh High Court quoted by you, the action of recovery of tax under section 161 on such accrual was challenged by the Banks. In that case, the action has been held as illegal without establishing the fact that whether or not interest was receivable. It has been decided with the following remarks: "However, in our opinion, the analogy between the provisions of the above section and section 158 of the present Ordinance can be drawn from the word 'receivable' used in section 17(1)(a) of the Ordinance, 1979 and the phrase to the account of recipient employed in section 158 of the present Ordinance and thus the principle as laid down in the above cited judgment that in view of the word 'receivable' used under section 17(1) (a) of the Ordinance, 1979 income can only be charged under the head interest on securities in the income year in which it is receivable by an assessee is equally applicable to a case under section 158 of the present Ordinance, as in terms thereof and in view of the above phrase used therein the petitioners become liable to withhold/deduct the.tax in question and to deposit the same with the State treasury only at the time of maturity of the deposit and when the same is accordingly credited to the respective account of the customer/depositor. We would, therefore, hold that the impugned demand from the Income tax Authorities is illegal, without any justification and quash the impugned notices and set aside the orders passed in pursuance thereof "

80. In the perspective of the above clear finding, we consider that the remarks with respect to action under section 21 need to be considered and applied in the context of the rationale held as reproduced above. It needs to be examined as to where there is a violation of the above quoted principle and not in the manner being envisaged by you. This a question of fact which needs to be examined from the records and undertaken as a result of the monitoring exercise. We reiterate this action cannot be undertaken on an ad hoc presumed basis as confronted in the notice under section 122(5A).

81. In this respect, it is stated that the matter had also been examined in detail during the monitoring of withholding taxes exercise, on profit on debt and salaries paid for the years 2008 and 2009 by the Enforcement and Collection Division. A reconciliation of the expense for the tax years 2008 and 2009 with the amount of tax deducted is also enclosed for your perusal. The information/ explanations provided vide our letters DT 3661 dated June 12, 2009, DT 3874 dated June 25, 2009, DT 198 dated July 15, 2009, DT 499 dated August 10, 2009, DT 665 dated August 26, 2009, DT 829 dated September 14, 2009, DT 1085 dated October 2, 2009, DT 1472 dated October 29, 2009, DT 2023 dated December 9, 2009 and DT 2124 dated December 16, 2009. After the information filed vide our letters filed including evidences of exemption / taxes paid, no negative inferences were drawn.

82. The powers of monitoring are vested with the Enforcement and Collection Division. Hence, any tax on profit on debt paid not deducted is to be examined during the proceedings of monitoring by the Enforcement and Collection Division. In case if you are not in agreement with any of the view then please let us know. We reiterate on behalf of the client that we will be pleased to assist the department in this regard.

83. Action is being envisaged under section 21(c) of the Ordinance, which is reproduced below: "(C) any salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee paid by the person from which the person is required to deduct tax under Division III of Part- V Chapter X or section 233 of Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X"

84. Under this provision, where tax due to be deducted on the payments as prescribed has not been deducted on the payments as prescribed has not been deducted on the payment of any salary, rent, brokerage, or commission, profit on debt, payment to non-resident for services or fee paid by the person from which tax is required to be deducted, the related expense is to be treated to be income unless the person has paid or deducted and paid as required by the law. The words 'until' was substituted with 'unless' and 'paid or deducted' were inserted by the Finance Act, 2003.

85. A review of the above mentioned provisions transpires that it is not the intention of the law to recover the tax paid 'twice'.

86. The perusal of the portion of notice and reply show that it is not known how the officer came to the conclusion that tax under section 151 of the Income Tax Ordinance has not been deducted. No evidence appears to have been available with the officer, as nothing in the notice is stated on these aspects. There is reference of section 158(b) of the Income Tax Ordinance, 2001 but how the provision is applicable in the case of appellant has not been highlighted in the notice. We are of the positive view that this provision is not applicable in the cases of banks. So question invoking of section 21(c) of the Income Tax Ordinance, 2001 does not arise. The most interesting aspect is that proceedings were dropped by stating that these cannot be taken up under section 122(5A) but can be taken up under section 177 by highlighting the case of Habib Bank Ltd in C.P No. D-2011/2010 dated 2/06/2010 decided by Honourable High Court of Sindh. These facts are discussed by officer in findings/inference at para 11.3 which is reproduced below: 11.3) Findings/ Inference: The above reply shows that there are various credits which require verification for the purpose of taking action under section 21(c) which is out of the purview of provisions of Section 122(5A) and thus require audit under section 177 of the Income Tax Ordinance, 2001. Further, the Honourable High Court of Sindh has decided in the cases of various Petitioners including decision in C.P. No.D- 1211/2010 dated 02-06-2010 in the case of Messrs Habib Bank Ltd. that the income Tax Authorities' should be allowed to proceed against the petitioner banks for misusing the provisions of Section 31 in violation of Section 21(c) of the Income Tax Ordinance, 2001. Further it has been contended in the Court and thus observed that the said amount is not yet 'receivable' and not a matured liability and therefore, the tax is not deductible. Hence, this issue cannot be finalized under section 122(5A) and thus matter is required to be taken in audit under section 177. The issue of ascertainable liability and tax deduction thereon for the purpose of Section 151 read with Section 158 and action under section 21(c) of the Income Tax Ordinance, 2001 can only be examined in the audit.

87. 26.Similar situation exist in portion of notice for the tax year 2010 appearing at page 21 para 6.1 in the amended assessm ent order of the officer. The proceedings were dropped under section 122(5A) by holding that these cannot be taken up under this provision. We have observed that portion of notice for tax year 2013 appearing at page 33 para 9 of the amended assessment order is also not meeting the required criteria of twin mandatory conditions and we hold that section 21(c) of the Income Tax Ordinance, 2001 is not applicable in the situation where there is no proper evidence of tax deduction available before the officer. In fact officer has himself stated in the findings/inference that action under section 122(5A) cannot be taken in such situation and can only be taken under section 177.

88. 27.We are of the firm view that officer has formed correct opinion in the above situations and this should be followed in all similar situations where twin mandatory conditions to invoke section 122(5A) of the Income Tax Ordinance, 2001 do not exist. We direct the respondent/ department not to proceed under section 122(5A) in all such similar situations.

28. The portion of notice in the case of Messrs Jaffer Brothers (Pvt.) Ltd. For the tax year 2011 appearing at para 7 pages 15 and 16 of the amended assessment order is reproduced below:-- "As per audited accounts, you have claimed deduction on account of following provisions: Provision for leave fare assistance1,924,655Note-19.2 Provision for doubtful written off288,845 Computation These, being mere provision, are inadmissible and warrant addition in your income declared for the year under consideration."

89. In compliance, the taxpayer vide its AR M/s. Ernst and Young Ford Rhodes Sidat Hyder, CAs' letter No. T/6081/2012 dated 11-06-2012 submitted the following response: "In this connection, we would like to inform you that leave fare assistance represents accrual of determined liability calculated on the basis of Company's policy. The amount accrued at the year end under consideration, has been fully paid subsequently."

90. Findings: "The explanation of the taxpayer has been examined but not found convincing because the claims made during the year under consideration are mere provisions and the law does not permit admissibility of any deduction which is not yet ascertained or quantified. Further, the taxpayer's reply, quoted herein above, is silent on the issue of claiming of provision on account of doubtful debts written off and no supporting documentary evidences have been provided in respect of provision of leave fare assistance and its subsequent payment, as contended.

91. Section 34(3) of the Income Tax Ordinance, 2001 stipulates that an amount shall be payable by a person when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy. Since the events determining the liability have not yet occurred, therefore, both the claims of provisions amounting to Rs.1,924,655/- and Rs.288,845/- are disallowed and added back in declared income under section 34(3) of the Income Tax Ordinance, 2001."

92. The perusal of above show that officer has inferred in the findings that events which determine liability in respect of various employees for compensated absences have not yet occurred. There was nothing on record at the time of invoking of section 122(5A) to arrive at such a finding and inference. To determine this claim detail accounting entries are required to be examined in respect of various employees. The accrued expenditure is allowable if the accuracy is determinable from the accounts. We could not see anything whereby officer inferred that the events determining the liability have not occurred. Nothing has been brought on record regarding this inference. Further we have observed section 34(3) of the Income Tax Ordinance, 2001 which empowers the officer to disallow the accrued expenditure payable in case events which determine liability have accrued and the amount of the liability is determinable with reasonable accuracy was not confronted to the appellant.

29. This issue is also appearing in the notices under section 122(5A) for the tax year 2007 at para 5 pages 10 and 11 and tax year 2008 para 4 pages 10,11 and 12 of amended assessment orders of the officer. We are of the considered opinion that this example is a case of fishing and roving enquiries and cannot be allowed to continue. We strongly believe that such matters may be taken up in proceedings under section 177.

93. 30.We reproduce below portion of the notice from the case of Jaffer Brothers (Pvt.) Ltd. for tax year 2011 appearing at para-2, page-9, of the amended assessment order of the officer.

94. "As per annexure-C-1 to the return, you have claimed tax deduction under section 231A of the Income Tax Ordinance, 2001 at Rs.104,504/- on cash withdrawals made during the year at Rs.34,834,667/-, which are used for expenditures incurred during the year. Thus the expenses paid in cash become inadmissible and intended to disallow in terms of section 21(1) of the Income Tax Ordinance, 2001."

95. The appellant submitted detail reply that proposed action is based on assumption and cannot be taken up under section 122(5A) which is appearing at pages 16 and 17 of the order. The details were filed which the officer has mentioned it in its finding at page-12 of the amended assessment order, the Same is reproduced below:-- Date Voucher No.DescriptionAmountReasons for disallowance 08-09-10644 Karachi Staff benefits28,846Cash payment being more than Rs.15,000/- 22-10-10 1038HQ's Staff benefits24,495Cash payment being more than Rs.15,000/- 1089Cake from Armeen Bakery15,485 Cash payment being more than 10,000/- 18.02.11 2071Transportation charges from Karachi to Isb.15,000 Cash payment being more than 10,000/- 18.02.11 2070Transportation20,000Cash payment charges from Karachi to Isb.being more than 10,000/- 22.03.11 2398HQ's Staff Benefits25,074Cash payment being more than 15,000/- 28-03-11 2422House Keeping Items10,832 Cash payment being more than 10,000/- 20.04.11 2634HQ's staff benefits26,236Cash payment being more than 15,000/- 14-05-11 2856HQ's staff benefits13,064 Cash payment being more than 15,000/- 18-05-11 2893Adhesive stamps for PPL agreement10,865 Cash payment being more than 10,000/- Total amount disallowed189,519 The perusal of the above show that addition of Rs.189,519/- was made which amount was not determinable at the time of initiation of the proceedings under section 122(5A). So in view of this vital fact we are sure that loss of revenue which is one of the condition mentioned in provision of law as "in so far it is prejudicial to the interest of revenue," was not before the officer. He was therefore not in a position to invoke the relevant section. Further from the details given by appellant supra we have come to the conclusion that voucher number of each entry is not related to one expense or one person. Each voucher number is inclusive of petty expenses of various persons and expenses and supporting details would have confirmed this. For instance voucher number 644 dated 8-9-2010, 1036 dated 22-10-2010, 1089 dated 28-10-2010, 2398 dated 22-03-2011, 2634 dated 24-04-2011 and 2856 dated 14-05-2011 are for staff benefits, the detail attached would have shown that these cover more then one employee so the amount of payment goes below the prescribed threshold limit provided under section 21(1) of the Income Tax Ordinance, 2001. Moreover officer has in his finding referred to section 21(m) of the Income Tax Ordinance, 2001 which we are sure is not applicable in the given circumstances. We have also observed that section 21(m) of the Income Tax Ordinance, 2001 was not even confronted to the appellant. In view of above stated facts we cannot approve such notices under section 122(5A).

31. The portion of notice in the case of M/s. Novartis Pharma (Pakistan) Ltd, for the tax year 2012 as appearing at para-8 pages-19 and 20 is reproduced below:-- "As per tax depreciation schedule, you have claimed initial allowance of Rs.21,748,529 and 9,402,289/- on Equipment and E.D.P. Equipments respectively. Please file supporting documentary evidences to prove that such assets placed into service are eligible for initial allowance in terms of section 23 of the Income Tax Ordinance, 2001"

96. In response detail reply along with evidences on sample basis was provided by the appellant vide letter dated 16-08-2013 appearing at page 19 of the amended assessment order of the officer. The perusal of same show that the authorized representative has comprehensively replied that depreciable assets meet the eligibility criteria as per section 23 of the Income Tax Ordinance, 2001.

97. However officer after examination of reply and sample evidences issued another notice dated 20- 09-2013 asking to provide trail, supporting invoices, bills, journal, vouchers, allied documentary evidence in respect of certain entries, detail of which is appearing at page 20 of the amended assessm ent order. It seems that officer is not well conversant with the examination of accounts otherwise he would have not insisted for furnishing of documents, evidences in such a manner. To our mind cash payment vouchers or bank payment vouchers of relevant accounting entries should have been called along with relevant entries of cash book or bank book and ledger entries. The cash payment vouchers and bank payment vouchers attached along with original receipt, bill, cash memo, invoice as the case would have clarified the matter. The most interesting part is that officer after examination of details requisitioned dropped the proceedings by stating in the finding at page 20 that on the basis of evidence provided no adverse inference is drawn. It is worthwhile to mention this portion of notice was highlighted by Mr. Muhammad Arshad FCA during the hearing.

98. We are of the considered opinion that such inquiries are not permissible under section 122(5A).

32. Another portion of notice appearing at para 3 page 11 is worth mentioning. The officer has confronted the appellant Messrs Novartis Pharma (Pakistan) Ltd. for loss sustained on account of disposal of fixed assets and relevant text is reproduced below:-- "As per computation of income, you have claimed tax loss on disposal of fixed assets at Rs.I2,375,464/-. Please file working of such loss supported by documentary evidences in terms of section 68 read with sections 77/78 of the Income Tax Ordinance, 2001.

99. Without prejudice to the above, out of total tax loss of Rs.I2,375,464/-, you have allocated an amount of Rs.8,563,821/-(69.20%) against cost of sales and accordingly charged to manufactured goods i.e. local and export products. The remaining tax loss of Rs.3,811,643/- has also been apportioned against such local and export sales. This being business loss is also apportioned against sales out of commercial imports covered under FTR, which you have failed to do so.

100. Accordingly such tax loss is intended to be apportioned against said said of commercial imports, including tender vaccine sales, declared at Rs.2,461,481,425/- and the excessive tax loss charged to normal law income which comes to Rs.1,079,144, is intended to be disallowed and added back in your declared income. Please file your objection, if any, in this regard."

101. The perusal of above show, sections confronted were 77 and 78 of the Income Tax Ordinance, 2001.

102. To our mind relevant provision which was required to be invoked was section 22 of the Income Tax Ordinance, 2001 which also provides for taxing of gain and loss on disposal of depreciable assets comprehensively. The officer has confronted the appellant again vide rejoinder notice dated 20- 09-2013 relevant portion of which is reproduced below:-- "In response to query regarding disposal of fixed assets, the working of tax loss provided vide your AR's letter dated 16-082013, has been examined and it is observed that you have claimed tax loss amounting to (Rs.12,375,646/). Examination thereof further revealed that no proceeds have been declared against disposal of the following assets:- S. No.Particulars Initial CostTax DepreciationWDC Sales ProceedLoss 1 Building 15,030,39410,827,933 4,203,20100 4,203, 2 Plant and Machinery9,613.5637,994,738 1,988,26500 1,988, 3 Equipment23,127,42718,189,586 5,393,53200 5,393, Please appreciate that every asset has its salvage value. You are, therefore, requested to bring on record material facts in the form of documentary evidences to support above transaction, otherwise the WDV of the assets appearing their against will be taken as their sale value and loss declared will be ignored in terms of sections 75/76/77 of the Income Tax Ordinance, 2001."

103. Here again officer has failed to confront the appellant. In fact officer chose sections 75,76,77 and 78 of the Income Tax Ordinance, 2001 and confronted these section in the notices cited supra. It is further observed that total loss confronted was. Rs.123,75,646/- where as in the chart appearing in the notice amount of total loss is Rs.115,85,298/-, which is not matching with the figure of Rs.123,75,646/-. In view of these legal infirmities, we are fortified to believe that one of the condition for invoking section 122(5A) i.e. erroneousness is lacking as relevant section 22 of the Income Tax Ordinance, 2001 was not pressed by the officer. Further with regard to other condition i.e. loss of revenue, the difference in the amounts appearing in the notices i.e. Rs.123,75,646/- and Rs.115,85,298/- makes the notices vague and unclear. We therefore cannot endorse such type of notices and are clear that such notices do not come under the ambit of section 122(5A) and are not sustainable.

33. The attention of the learned authorized representatives were drawn to the portion of the notices under section 122(5A) wherein there was considerable substance with regard to the two mandatory conditions available to proceed under section 122(5A). Both these learned authorized representatives stated that entire notices issued under section 122(5A) were not defective but some portions as elaborated above were not meeting the mandatory requirements. On this the bench observed that such matters are to be decided on case to case basis and facts of such notices separately. To set the record straight some portions of the notices under section 122(5A) are reproduced below which meet the twin mandatory conditions of the provision of law from the case of Messrs Meezan Bank Ltd. TAX YEAR 2004 "As per computation of income of you have claimed exempt capital gain on sale of listed securities under clause (110) of Second Schedule to the Income Tax Ordinance, 2001. You have also not provided the working of the capital gain from the shares within the meanings of section 38(2) of the Income Tax Ordinance, 2001. Please explain.

104. Further you have also not apportioned the administrative and financial expenses against the leasing income. This requires proration as per section 67 read with rule 13 of the Income Tax Ordinance, 2001."

105. "You have shown exempt income earned in dealing of listed securities at Rs.105.339 (M) and earned dividend income of Rs.114.625 (M) but the proportionate expenses have not, been allocated in terms of section 67 read with rule 13 of Rule, 2002.

106. Further you have not allocated the administrative/financial expenses against the lease rental income which is a separate class of income for the purpose allowances. Further the income should have been calculated to the claim said allowance under sections 22/23 of the Income Tax Ordinance, 2001."

107. WRITE OFF AGAINST PROVISIONS DURING EARLIER YEARS The issue was confronted as under "As per computation the amount of Rs.95.2196 (m) on account of write off against. Provision previously disallowed is not allowable as a deduction from income because of the following reasons:- The year wise break up 0 the taxing of provision during earlier years has not been provided with the computation of income. b)As it also not allowable as a deduction from income in view of the learned ITAT 's decisions reported as (1998) 77 Tax 232 (Trib.) and (2000) PTD (Trib.) 2628. c)The amount written off during the year at Rs.95.296 (M) cannot be allowed as deduction as the account of endeavors made for recover of each investment has not been provided to facilitate the department as to qualification of the claim in terms of section 29 of Income Tax Ordinance, 2001." TAX YEAR 2007 3.1) Taxpayer was confronted as under:-- "As per note No.11.7 to the financial statements, you have charged provision against non performing advance amounting to Rs.123. 118 (M) (note-12.7). However only Rs.24.822 (M) have been offered for tax. The entire amount is inadmissible as deduction on the basis of being mere provision of nonperforming loans. "

108. 3.2) Gist of reply of the taxpayer is as under: The amount of Rs.98.296 (M) has not been offered for tax because these are the specific provision made in accordance with Prudential Regulations of State Bank of Pakistan".

109. Findings/Inference: "The bad debts are allowable under section 29 or 29A of the Income Tax Ordinance, 2001 in respect of non-consumer loans and consumer loans respectively. The taxpayer company has not claimed the said expenses on the basis of write off in the accounts which are irrecoverable. Meaning thereby the twin condition of write off and recover-ability is required for the claim of said debts as deduction. The taxpayer has made the provision of bad debts on the basis of Prudential Regulations of the State Bank of Pakistan which is on the time base criteria i.e. substandard, doubtful and loss category of bad debts after the time of 90 days, 180 days and 360 days respectively in both the situations i.e. general provisions of specific provisions. This provision is made only on the basis of presumption which is thus non-accrual nature of the expenses. In the accrual basis accounting, the provisions are not allowable within the meaning of section 32 of the Income Tax Ordinance, 2001. Under the provisions of section 34(3) the expense can only accrue when all the events to determined liability has occurred. In this case no such events have occurred to determine the liability. It may be mentioned here that during each year taxpayer makes reversals which shows that the recovery is being made regularly. Further, the write off are also being made in the accounts which also shows that the taxpayer has separate mechanism for making provisions and write off. Hence, the provisions made by the taxpayer cannot be compared/equated with the write offs. The provisions are not allowable and only irrecoverable write offs are recoverable under section 29 of the Income Tax Ordinance, 2001. The contention of the taxpayer that the provision 29 allows a deduction in respect of bad debts (non exceeding the write offs) as may be determined by the Assessing Officer is not the language of the provisions of section 29 of the Income Tax Ordinance, 2001. The taxpayer has wrongly interpreted the said provisions.

110. The case law cited by the taxpayer are on the provisions of the repealed Income Tax Ordinance, 1979 and Income Tax Act, 1922 or the provisions of the Income Tax Law of India. Here in the Income Tax Ordinance, 2001, the mechanism regarding allowability of bad debts has been given in section 29 of the Income Tax Ordinance, 2001. Under the previous laws the circulars were issued as the provisions of section 32 or correspondence of Income Tax Act, 1922 were not dependent on the provisions of section 23(1)(x) or similar provision in the Income Tax Act, 1922 (both) repealed).

111. Hence, the method of account regard debiting and crediting of bad debts adopted by the assessee was considered by the CBR acceptable through the said circular. However, not the law has changed and the provision of section 32 are starting with phrase "Subject to the Ordinance" which shows that the provisions of section 29 will prevail over the accounting methodology of the taxpayer. Hence, under section 29 the bad debts provisions or non performing loans are not allowable and only bad debts write-offs which are irrecoverable are acceptable.

112. This has recently been acknowledged by the FBR vide letter C. No. 4(121)/ITP/2008/202683/R dated December 6, 2008. In the said circular it has been clarified that the Circulars are not protected under section 239(10) of the income Tax Ordinance, 2001 as these circulars were not in accordance with the provisions of section 29 read with sections 32 and 34(3) of the Income Tax Ordinance, 2001.

113. Similarly the case laws quoted by the taxpayer are not in consonance with the provision of section 29 of the Income Tax Ordinance, 2001. In the recent judgment the honourable High Court of Sindh in the case of Grindlays Bank on Appeal No.565 of 2000 dated 01-03-2006 has hold that the provisions are not allowable as deduction under section 23(1)(x) of the Income Tax Ordinance, 2001.

114. The relevant part of judgment is reproduced as under: - account of provisions for bad debts and doubtful debts. We have asked the learned counsel for the appellant to show from the provisions contained in Section 23(1)(x) of the Income Tax Ordinance, 1979, if any provision for bad and doubtful debts is admissible deduction. After referring the relevant provision of law, the learned counsel is not able to show that any such claim can be allowed as deduction. The finding of the Tribunal, as in consonance with the relevant provisions of law and no interpretation is required by this Court. Consequently, the question No. (i) is not admitted for consideration by this Court."

115. No where in the judgment it has been commented that reclaimed provisions are not allowable. The honourable Court has given the wider judgment that the provisions for bad debts and doubtful debts are inadmissible deduction under section 23(1)(x) of the Income Tax Ordinance, 1979 (Repealed). The taxpayer is confusing the situation by adding the word reclaim of the provisions of bad debts. The reclaim of the provision of the bad debts is otherwise not allowable under the law as the same pertains to prior tax years and not the charge of the year in which it is reclaimed. The claim of prior years provisions of bad debts and it allowability during in the following years was neither the subject matter in appeal nor discussed in the judgment. On the contrary, the decision has been given on the allowability of provisions for bad debts under section 23(1)(x) of the Income Tax Ordinance, 1979 (Repealed).

116. In the light of above judgment the provision of the bad debts are entirely not allowable deduction.

117. Hence, the amount of Rs.98,296,000/- are added to the income claimed as deduction being specific provision."

118. TAX YEAR 2008 7.1 Taxpayer was confronted as under: "As per computation of income you have claimed deduction in respect of provision for consumer loan at Rs.47.716 (M). Working of the said debt is not allowed."

119. The consumer loan provision is to be adjusted from reserves. Hence, provision of Rs.47,716,927/- is not required and thus not allowable deduction." Income Tax Ordinance, 2001 allows the 3% of Income arising out of consumer loans as an allowance. The represents the reserves of the year.

120. An amount of Rs.47,716,927/- has been claimed against the lease rental of Rs. 1,590,566,000/- received against Car Ijarah and House Finance.

121. There is no write off during the year. Hence, the amount has been adjusted against income during the year."

122. 7.3) Findings/Inference: "The lease rental business income is taxable under section 22(12) of the Income Tax Ordinance, 2001. Hence, the bad debts provisions of section 29A in respect of said income can not be created and adjusted against other business income.

123. The lease rental income is computed as per section 22(12) and section 77(4) of the Income Tax Ordinance, 2001. Hence, the expenses/allowances are exclusively and extraordinarily allowable against the said rental income. The general provision regarding consumer bad debts are thus not applicable in this case.

124. The house finance loans are mortgaged loans against which provisions of bad debts under section 29A is not allowable deduction. Secondly, the said loan is recoverable from the mortgaged/pledged properties. The recovery proceedings and its allow ability are required to be done according to the revision of section 29 of the Income Tax Ordinance, 2001 The amount of Rs.47,716,927/- claimed as provision for consumer loans is not allowable deduction from income during the year."

125. TAX YEAR 2009 2.1) The taxpayer was confronted as under: "According to clause (g) of Rule (1) of Seventh Schedule to the Income Tax Ordinance, 2001 IAS 39 and 40 are not applicable in respect of profit and gain of banking company. Said clause is produced below for ready reference: "1. Income, profits and gains of a banking company shall be taken to be the balance of the income, from all sources before tax, disclosed in the annual accounts required to be furnished to the State Bank of Pakistan subject to the following provisions, namely:--

(g) Adjustment made in the annual accounts, on account of application of international accounting standards 39 and 40 shall be excluded in arriving at the taxable income."

126. It is apparent from the above mentioned provision of law that unrealized losses are not admissible under the provisions of the Income Tax Ordinance, 2001.

127. You have however disclosed following deduction under, the head "Other Liabilities" in Note No.17 to the account, which are unrealized: Unrealized loss on foreign exchange contracts - Rs.135.634 (M)

128. The above mentioned amounts of losses are neither appearing in statement of changes in equity nor are offered for tax in the computation sheet of taxable income. You were required by law to offer such notional and unrealized amount of deduction for tax while computing your taxable income in accordance with the provisions of Seventh Schedule to the Income Tax Ordinance, 2001 Keeping in view the above legal facts, I intend to amend your; assessment under section 122(5A) of the Income Tax Ordinance, 2001, on the above issue for being erroneous and prejudicial to the interest of revenue. You are hereby provided opportunity of being heard as stipulated in section 122(9) of the Income Tax Ordinance, 2001 for amendment of order under section 122(5A) of the Income Tax Ordinance, 2001."

129. 2.2) Gist of the reply of the taxpayer is as under: "Under rule 1 of the Seventh Schedule, the accounts and income submitted to the State Bank of Pakistan (SBP) is required to be taxed by the department except some adjustments from sub-rules

(a) to (h).

130. The "unrealized loss" does not represent, in adjustment in accordance with IAS 39 as the said Standard has been made inapplicable by the State Bank of Pakistan (SBP) vide BSD Circular No.10 dated 26-08-2002. Hence, rule 1 (g) is not attracted. In this regard the taxpayer has submitted the extract from Financial Statements regarding 'Statement of Compliance' as on Note No.3.1. In the said Note it has been mentioned that the requirement of Standard Nos.39 and 40 has not been considered. However, the investments which include unrealized losses in question have been classified and valued as prescribed by SBP through various Circulars.

131. The taxpayer further clarified that there are certain requirement under IAS 39 with respect to valuation of forward foreign contracts. However, the taxpayer contested that as IAS 39 is inapplicable in its overall context. Hence, the forward foreign contract unrealized losses have also not been made under IAS 39.

132. This loss and gain of Rs. 135,634,000/- (other liabilities) and Rs.20,554,000/- (other assets) respectively is in respect of foreign exchange rates fluctuation on the said forward foreign contracts. Exchange rates fluctuation is being recognized in accordance with IAS 21 and not IAS 39.

133. The corresponding en tires in this respect have been affected in the profit and loss account.

134. This treatment is thus in accordance with Section 71 of the Income Tax Ordinance, 2001 under which every amount is to be taken in Rupee for the purpose of Ordinance. Hence, this amount is not taxable event."

135. FINDINGS/INFERENCE "Under rule 1 of the Seventh Schedule, the income of banking companies in the accounts submitted to the SBP is to be accepted if certain conditions provided in the sub-rules (a) to (h) of rule 1 and condition in other rules from 2 to 9 of the said schedule are fulfilled. In this case, taxpayer is only relying on rule 1.

136. Under sub-rule (g) of rule 1 the adjustments made in annual accounts on account of application of International Accounting Standard 39 and 40 shall be excluded in arriving at taxable income. The SBP Circular No.10 of 26-08-2002 is not binding on the Income Tax Department. The provisions of rule 1(g) of the Seventh Schedule are the legal provisions and have overriding impact on the circulars issued by the SBP. Further, as mentioned above in the gist of the reply, the taxpayer has itself admitted that certain requirements of IAS 39 in respect of forward foreign exchange contracts have been appreciated while preparing the accounts. Hence, where the IAS 39 is appreciated/applied the provisions of rule 1(g) of the Seventh Schedule to the Income Tax Ordinance, 2001 will also be applicable. This makes the deductions on account of foreign currency fluctuation on the forward foreign contracts not an allowable expense.

137. Without prejudice to above, like IAS 39, the SBP 's Circular in respect of foreign currency valuation and related foreign exchange losses/gains are pertaining to national or unrealized loss/gain adjustments. Under the provisions of Income Tax Ordinance, 2001 the 'provisions' or the 'liabilities' which have not yet been determined are not allowable expenses. In this respect it is said that under section 32 the expense can be allowed which has accrued in the mercantile basis of accounting. For this purpose as per section 34(3) the amount becomes payable by a person when all the events to determine the liability have occurred. In this case the income or loss on forward foreign exchange contract has not yet been determined. Hence, no deduction on this account can be claimed. Like overall context of the Income Tax Ordinance, 2001 given in section 34(3), the provisions of rule 1(g) of the Seventh Schedule has also been provided for not considering such notional/unrealized losses or provisions [ diminution in value of investment] for the purpose of computation of income of banking companies.

138. Hence, the claim of such unrealized losses on the basis of IAS, 39 or any of SBP 's Circular in respect of said losses is not adjustable within the meanings of rule 1(g) of the Seventh Schedule.

139. The taxpayer has further contended that IAS, 21 is applicable in this case as the unrealized foreign exchange losses are due to foreign exchange rate difference. In this respect it is said that said unrealized loss has occurred on the forwarded foreign exchange contract. Hence, the provisions of IAS, 39 are very much applicable here. Hence, this expense/liability is covered by the provisions of rule 1(g). Without prejudice to this, the unrealized loss is not allowable under section 34(3) read with rule 9 of the Seventh Schedule to the Income Tax Ordinance, 2001.

140. However, the contention of the taxpayer that the adjustments of income of Rs.19,994,000/- has been made in the foreign currency income is being Considered and net unrealized loss amounting to Rs.115,080,000/-. [135,634,000 -20,554,000] is being added to the income of the taxpayer and the unrealized gain of Rs. 20,554,000/- is not subject to tax on the same principle as applicable to the unrealized loss." TAX YEAR 2010 PROVISIONS FOR BAD DEBTS AGAINST NON-PERFORMING LOANS AND ADVANCE: 3.1 Taxpayer was confronted as under: "You have claimed the provisions for bad debts amounting to as per Note 11.7 to the financial statement you have charged non performing loans at Rs.1,430,536,000/- and deducted the provision which is allowable under Rule 1(c) & (d) of Seventh Schedule to the Income Tax Ordinance, 2001 @ 1% of total advance. However, deduction is allowable unless to furnished auditors certificate regarding bifurcate the classification of advances. Your explanation if any will be considered as per law. However, 1% of balance sheet advances under provision of seventh schedule to the Income Tax Ordinance, 2001 are allowable as deduction, instead of total advances including provisions for bad debts amounting to Rs. 2,528,544,000/- which are Rs. 46,716, 610,000/- "

141. 3.3) Findings/ Inference: "The contention of the taxpayer was examined in the light of provisions of section 100A of the Income Tax Ordinance, 2001. The taxpayer has already added back the provisions Rs.1,577,295,000/- and claimed the provisions as per Rule 1(c) and (d) of the Seventh Schedule amounting to Rs.467,166,000/- on the gross advances as per Notes to the accounts.

142. However, the claim of the taxpayer regarding gross advances as per notes to the accounts is not as per law as per facts and law due to the following reasons: The advance's are always taken which are the part of the balance sheet and not the advances as per notes to the accounts. The notes to the accounts are the integral part of the accounts, but these are for disclosure purpose, the balance sheet entry is required to be considered for the purpose of accounts. The claim is therefore, restricted to the extent of 1 % of the advances as per balance sheet. b) It is true that the word 'total' means total amount. However, it is not mathematically and principle correct that the amount which one has itself made bad is still a considerable amount for the purpose of treating it stilling the kitty of the taxpayer. The taxpayer has already expenses out the said amount in through the profit and loss account and the amount appearing in the balance sheet is only the net advances (considered good).

143. For understanding the difference between classified advances (bad debt provision balances) and unclassified advances, it is important to understand the accounting entries. When the debt/advance is classified by the bank as non performing loan or advance, the said amount is deducted (credited) in the balance sheet (on its relevant note). It means in the accounts it is no more an asset (debit). The corresponding debit impact is made in the P&L account by expending out the said debt. In this situation it is abundantly clear that the classified advance (non performing loan) is not an asset i.e. advance as per accounts. In the notes to the accounts it appears only for the purpose of disclosure and future reversals or write offs if any. d)If the arguments of the taxpayer is accepted and the 1% is calculated on the advances which includes the classified advances over the years (this year's bad debts + provision balances of earlier years), the said allow ability will also covers the reversals of earlier years from the held provisions amounting to Rs.146,759,000/. In this situation, the reversals will not be allowable as deductions on the computation sheet of income. The taxpayer has itself separately claimed the reversals and recoveries made out of the earlier years' provisions/ write offs of bad debts. The FBR vide Circular letter No. 4(1)ITP/2008-49 dated 23-12-2009 (now the Rule 8A of the Seventh Schedule) has allowed the reversals and recoveries made out of the provisions of earlier years. The allow ability of 1% of provisions on the basis of bad debts and subsequent allow ability' of the reversal from the same amount will be the double deduction. Hence, it is against the facts and law.

144. Further, the claim of 1% on the classified advances (bad debts) will be double claim as the taxpayer is being allowed 1% of the said classified advances under the provisions of Seventh Schedule. e) The taxpayer has claimed the 1 % advances amounting to Rs.467,166,000/-. The taxpayer has worked out the said amount on total financing (Rs.46,716,600,000) as per Note No.11 to the accounts. This contains the provision balance of NPL or classified advances/bad , debts amounting to Rs. 2,528,544,000/-. However, the net advances which have been taken to the balance sheet from the notes to the accounts are Rs.44,188,066,000/-. One per cent of the said amount will be Rs.

145. 441, 880, 660 / - .

146. Total claim as per computationRs.467,166,000/- Allowable claim as per above discussionRs.441,880,660/- Balance for addition (disallowed)Rs. 25, 285, 340/- "

147. 7.1) Taxpayer was confronted as under: As per noted 10.10, provision from diminution in value of investment amounting to Rs.88,640,000/- is not allowable deduction during the year within the meanings of rule (1) (g) of the Seventh Schedule to the Income Tax Ordinance, 2001 7.3 Findings./ Inference: "Under rule 1 of the Seventh Schedule, the income of banking companies in the accounts submitted to the SBP is to be accepted if certain conditions provided in the sub-rules (a) to (h) of rule 1 and condition in other rules from 2 to 9 of the said schedule are fulfilled. In this case, taxpayer is only relying on the rule 1.

148. As per paragraph (3) of rule 2 the capital gain or loss can be adjusted against each other. Hence, in case this loss is otherwise allowable if it will be adjusted against the capital gain. In this respect it is said that the notional loss is otherwise not allowable under rule 9 read with sections 20 and 32/34 of the Income Tax Ordinance, 2001.

149. Under sub-rule (g) of rule 1 the adjustments made in annual accounts on account of application of International Accounting Standard 39 and 40 shall be excluded in arriving at taxable income. The SBP Circular No.10 of 26-08-2002 is not binding on the Income Tax Department. The provisions of rule 1(g) of the Seventh Schedule are the legal provisions and have overriding impact on the circulars issued by the SBP.

150. SBP 's BSD Circular No.4 of 2009 dated 13-02-2009 has allows the banks and DFIs to adopt the SECP's Notification No. SRO 150(1)/2009 dated 13-02-2009. In the said SRO of the SECP read with SBP 's BSD Circular No.04 of 2009 dated 13-02-2009 the banks cannot route impairment loss or gain on securities through profit and loss account. But it is to be taken directly to the equity. However, banks/companies can only consider the said amount for the purpose of dividend under sub-Para

(iii) of para 1 of SECP's SRO 150(1)/2009 dated 13-02-2009.

151. Hence, the said amount cannot be treated as a profit and loss accounts item within the meanings of rule 1(c) of Seventh Schedule also,.

152. It is again reiterated that the adjustment on account of revaluation of shares and securities is to be made under the IAS 39/40. However, the method of valuation may be different which in this case has also been made. The taxpayer has itself contended that the valuation has been made as per requirements of SBP. In this regard it is said that when the Seventh Schedule was inserted in Income Tax Ordinance, 2001 through Finance Act, 2007, SBP 's BSD Circular No.10 dated 26-08-2002 had already been in the field. The legislature ignored the said circular and made the IAS 39 and 40 applicable for the purpose of computation of taxable income.

153. Without prejudice to above, the provisions of Seventh Schedule are later in time than the SBP 's BSD circular No.10 dated 26-08-2002. Hence, the provisions of Seventh Schedule will prevail over the earlier laws/circulars. It is further mentioned here that the special provision of law i.e. Seventh Schedule has been inserted for the banking companies in which income and adjustments against said income for arriving at the taxable income have been given. It has already been held by the Honorable Supreme Court of Pakistan in the case of Elahi Cotton Mills cited at .76 Tax 5 = 1997 PTD 1555 that the special provisions will prevail over the general provisions of law. It has also been held that if both the provisions are special in nature, the provisions of law which is later in time will prevail over the earlier enactment.

154. Without prejudice to above, under Rule 9 of Seventh Schedule read with Section 34(3) the notional losses or provisions are not allowable deductions. The expense/liability can only be claimed when all the event to determine the liability have occurred. In this back ground the adjustment of notional losses or gains which are made under IAS 39 or 40 are not allowed under Rule 1(g) of the Seventh Schedule. Hence, if due to any technically the taxpayer claims the Notional losses being not covered under Rule 1(g), the provisions of rule 9 read with Section 34(3) will be applicable. It may be mentioned here that the general provisions of Section 34(3) read with Section 32 of the Income Tax Ordinance, 2001 are equal in effect to the Rule 1(g) of the Seventh Schedule.

155. In the light of above discussion, the diminution in investment amounting to Rs.88,640,000/- is not allowable deduction and added to the income. Further, the notional loss or provisions are not allowable against the income during the year."

156. This Issue is also appearing in tax year 2013 at pages 16, 17, 18, 19, 20, 21, 22, 23, 24, 25 and 26 of the amended assessm ent order.

157. 10.1) Taxpayer was confronted as under:-- "You have claimed the other provisions of Rs.21,352,000/- [Note No.14.31 the provisions are not allowable as per law and beyond the limit provided under the provisions of rule 1 of the Seventh Schedule to the Income Tax Ordinance, 2001."

158. 10.3) Findings/Inference : "Under Rule 1 of the Seventh Schedule to the Income Tax Ordinance, 2001, the income in the cases of banking companies is taxable as per accounts submitted to the State Bank of Pakistan.

159. However, there are some exceptions provided from Rule 1(a) to (h) and some conditions are also given under Rule 2 to Rule 9 for the computation of taxable income. Under the provisions of Rule 1(c) the provision in respect of bad debts are not allowable beyond I% of total advances. The taxpayer has already been allowed the provisions for bad debts @ I % of advances. Hence, no further provisions are allowable under the law.

160. Without prejudice to above, under the provisions of Rule 9 read with Sections 34(3)/32 and 29 of the Income Tax Ordinance, 2001, the provisions are not allowable and only ascertainable liability can be claimed as deduction. Since, this is a provisions, it is not allowable expenses."

161. TAX YEAR 2013 I. PROVISION FOR NON PERFORMANCE LOAN: II. PROVISION FOR SME AND CONSUMER ADVANCES: III. 2.1 The taxpayer was confronted as under: IV. Confronted through Point No.1 o/the notice: "As per computation of income, you have added the provisions of Rs.1,471,613,672/- as net. The perusal of account note 11.12 of the audited gross provision at Rs.1,824,125,000/-. The reversal are not allowable being a part of allowed provisions from tax year 2009, and allowed the provision up to assessment year 2002-2003. Subsequently, you have also been claiming the write off out of the held provisions. All these provisions appear to be substandard in nature in the absence of the certificate from the Chartered Accountants. Therefore, the difference of Rs.352,511,328/- between gross and net claim of provision is to be added in declared income in terms of Rule 1 of Seventh Schedule to the Income Tax Ordinance, 2001."

162. Confronted through Point No.2 of the notice: "You have claimed the provisions for SME and Consumer Advances under Seventh Schedule amounting to Rs.248,936,512/- and provision against other advances (corporate) for Rs.

163. 557,908,129/- (S.Nos.9 and 10 of the computation to return of income) totaling in all to Rs.814,844,641/-. There are no consumer/SME advances in the balance sheet, you have not furnished certificate from the external auditor to the effect that such provisions are based upon and are in line with the Prudential Regulations. Hence all advances are proposed to be treated as general advances. As per note-11 of the audited statement of account, you have shown advances

(net) amounting to Rs.59,155,585,000/-and allowable provision in terms of Rule 1(c) Seventh Schedule 1% comes to Rs.591,555,850/- as against claimed at Rs.814,844,641/-. The difference of Rs.223,288, 791/- being excess claim of provisions is to be disallowed and added in declared income.

164. Without prejudice to above, you have not shown any advances in balance sheet, hence 1%/5% under rule is not allowable. In ' your case you made financing and investment and not given any advances."

165. 2.3) Findings/Inference: The net provisions for Non-Performing Loans (NPL) Rs.404,146,000/-has been added by the taxpayer in the taxable income. Charge of the provision during the year is Rs.854,789,000/-. This gross amount (later) was required to be added to income for the purpose of calculating the .allowable provision within the meanings of rule 1 of Seventh Schedule to the Income Tax Ordinance, 2001. However, the taxpayer is entitled to claim the reversals under rule 8A, if any. The statements of account and above reply of the taxpayer reveals that the reversals of Rs.450,643,000/- are post seventh schedule reversals which should have been to the income being covered under rule 1(c) to (f) of the Seventh Schedule as the provisions were allowed during previous years (tax year 2009 onward).

166. Hence, the entire difference between the gross provisions and net provisions amounting to Rs.450,643,000/- is added to the income.

167. Gross and Net advances - Calculation: The claim of the taxpayer regarding gross advances as per notes to the accounts is not as per facts and law due to the following reasons. a) The advances are always taken which are the part of the balance sheet and not the advances as per notes to the accounts. The notes to the accounts are the integral part of accounts, but these are for disclosure purpose, the balance sheet entry is required to be considered for the purpose of accounts. The claim is therefore, restricted to the extent of I% of the advances as per balance sheet. b) It is true that the word "total" means total amount. However, it is not mathematically and principally correct that the amount which one has itself made bad is still a considerable amount for the purpose of treating it still in the kitty of the taxpayer. The taxpayer has already expensed out the said amount in / through the profit and loss account and the amount appearing in the balance sheet is only the net advances (considered good). c) For understanding': the difference between classified advances (bad debt provision balances) and unclassified advances, it is important to understand the accounting entries. When the debt/advance is classified by the bank as non performing loan or advance, the said amount is deducted (credited) in the balance sheet (on its relevant note). It means in the accounts it is no more an asset (debit). The corresponding debit impact is made in the P&L account by expending out the said debt. In this situation it is abundantly clear that the classified advance (non- performing loan) is not an asset i.e. advance as per accounts. In the notes to the accounts it appears only for the purpose of disclosure and future reversals or write offs if any. d) If the arguments of the taxpayer is accepted and the I% is calculated on the advances which includes the classified advances over the years (this year's bad debts + provision balances of earlier years), the said allowability will also cover the allowed provisions of earlier years - this year and the held provisions of earlier years. Actually 1 % / 5% calculation is only to be made on the advances which are good advances and not the bad advances as the later has been allowed @ 1% /5% during the previous years. e) The taxpayer has claimed/calculated the provisions in respect of corporate advance and consumer/SME advances amounting to Rs.851,475,716/- @ 1 % and Rs. 151,182,000/- @ 5% of the said advances respectively. These are made on the basis of the advances (gross) as per Note No.11 to the accounts t. e. Rs.94,402,266,900/- which contains the classified advances amounting to Rs.5,724,191,000/-. Classified advances have already been routed and claimed in the profit and loss account. These are appearing on the notes to the accounts for only disclosure purpose.

168. Actually the said advances have already been allowed as deduction. Hence, 1% or 5% further allowance will be double deduction. However, total advances of both category i.e. General and Consumer/SME as per balance sheet (net of adjustment of classified etc. advances) are Rs.

169. 88,678,076,000/-. 1% and 5% of the said advance will be allowed.

170. It may be mentioned here that this is the dispute on the applicability of rule 1(c) and the rule 9 is not being invoked. Hence, this point is not covered by the decision of the learned ATIR cited at 2012 PTD 1055 (Trib.)

171. In the light of above discussion, the claim is calculated as under:- CORPORA TE: Advance as per balance sheet

(Net) as worked out as per para 5.6 of AR's letter dated 29-11- 2013 80,088,618,120 Provision for bad debts allowable @ 1% 800,886,181 Less: Claimed as per Computation sheet of income 851,475,716 Excess claimed to be disallowed (A): 50, 589, 535 Advances as per balance sheet (Net) as worked out as per para 5.6 of AR's letter dated 29-11-2013 8, 589, 457,929 Provision for bad debts allowable @ 5% 429,472, 896 Less: Claimed as per Computation sheet of income 151,181,986 Excess claimed to be disallowed: (B) .................

172. Total disallowed (A + B) 50,589,535"

173. III.OTHER PROVISIONS AND WRITE OFF (NET)

174. Confronted through Point No. 8 of the notice "As per profit and loss account you have claimed the other provisions and write offs (net) at Rs.23,105,000/-. This is not an allowable expense within the meanings of Rule 9 of Seventh Schedule read with Section 34(3) of the Income Tax Ordinance, 2001. Further, you have not claim the provisions beyond Rule 1(c) (d) and (e) of the Seventh Schedule."

175. Findings I Inferences [PROVISION AGAINST OTHER ASSETS] Under Rule 1 of the Seventh Schedule to the Income Tax Ordinance, 2001, the income in the cases of banking companies is taxable as per accounts submitted to the State Bank of Pakistan. However, there are some exceptions provided from Rule 1((a) to (h) and some conditions are also given under Rule 2 to Rule 9 for the computation of taxable income. Under the provisions of Rule 1(c) the provision in respect of bad debts are not allowable beyond I% of total advances. The taxpayer has already been allowed the provisions for bad debts @ I% of advances. Hence, no further provisions are allowable under the law.

176. Without prejudice to above, under the provisions of Rule 9 read with Sections 34(3)/32 and 29 of the Income Tax Ordinance, 2001, the provisions are not allowable and only ascertainable liability can be claimed as deduction. Since, this is a provisions, it is not allowable expenses.

177. In respect of taxpayer's claim that rule 9 of the Seventh Schedule is not wider in its applicability relying on the decision of the learned ATIR in 2011 PTR 222, ITA No.625/IB/2010 and 2012 PTE 124 (Trib.) it is said that Honourable High Court of Sindh in the case of M/s. EFU General Insurance Company cited at 2011 PTD 2042 = 104 Tax 313 has held on para 20 that specific "rule 9 ... state that the provisions of the Ordinance would apply to the Seventh Schedule", With great reverence to the decision of the learned Tribunal it is said that the provisions of Section 34(3) has not been discussed in the context of the rule 9 of the Seventh Schedule. Hence, the above decision of the Honourable High Court of Sindh is available for the guidance.

178. In view of above, the amount of Rs.1,245,000/- is added to the income being a provision against other assets charged for the year is not allowable under the law."

179. 34.The portion of notice for the tax year 2007 in the case of Jaffer Brothers (Pvt.) Ltd. appearing at para 4 page 8 of the amended order is reproduced below:-- "As per audit accounts, under the head 'other operating expenses', you have claimed deduction on account of write-offs at Rs.3,952,253/-. Please file supporting documentary evidences showing recovery measures taken as provided under section 29 of the Income Tax Ordinance, 2001"

180. 35.In all the notices cited in paras 33 and 34 supra we see loss of revenue well as relevant sections highlighted by the officer. There is reference of some quantified amount of loss highlighted by officer and there appears erroneous and infirmity as well. The officer to our view has touched and reflected both loss of revenue as well as onerousness by highlighting and making references to the relevant sections of the Income Tax Ordinance, 2001 in the cited examples. So we hold that enquires in such circumstances is permissible.

181. 36.We are very mindful of the fact that we are not dealing the merit of the issues. Whether the inquiries have been conducted properly and efficiently is a matter which we are not dealing in all the above notices cited supra. These issues can be taken by the respective benches at the time of decision on merits of each case and notices. We are only approving when the inquiries as provided in the provision of law can be conducted.

182. 37.The learned advocate appearing on behalf of the respondents stated that law is not imposing any restriction on inquiries and the tax officer can call for any information and conduct any sort of inquiries. A question was posed to the learned Advocate of the respondents if unrestricted inquiries are allowed in the proceedings under section 122(5A) and even calling for any information is allowed then what will be the difference between section 177 and section 122(5A). Besides this another question was put up to the learned Advocate if unlimited enquires are permitted under section 122(5A) will it not mean to conduct of audit which powers are available under section 177.

183. The learned advocate stated that there is lot of difference between the two provisions. He repeated his viewpoint as already discussed at paras 14 and 15 supra. However, he failed to answer the specific query raised. In fact he just highlighted the purposes of both the provisions but on conduct of unlimited inquiries he could not offer any plausible explanation. It was clarified to the learned advocate that in section 177 tax officer can call any record, information, books of account and conduct any sort of inquiries. If the conduct of inquiries as interpreted by the respondent department i.e. unrestricted and unlimited inquiries are also allowed in section 122(5A) then there appears no difference between the two provisions and it means to conduct of audit under section 122(5A) which power is exclusively available under section 177 and such definitely is not the intention of legislature.

184. 38.We are in complete agreement with the learned authorized representatives of the appellants that a line is to be drawn for conduct of inquiries. As already observed by us this is an already settled issue by superior appellate fora i.e. the inquiries are to be restricted to the extent of two mandatory conditions as prescribed in the provision. We are of the firm view that if there is apparent illegality or error of law in the already finalized order under section 120 or under section 122 of the Income Tax Ordinance, 2001 and there is apparent loss of revenue, then the tax officer is empowered to conduct inquiries. He has first to show some substance with regard to the two mandatory conditions and thereafter he can proceed to conduct such inquiries as he deems necessary on the twin mandatory conditions.

185. 39.We would also like to clarify that section 177 is not a charging section. It only defines procedure for conduct of audit through section 122 of the Income Tax Ordinance, 2001. Any case taken up by Commissioner for audit under section 177 may result into an amendment of earlier assessment finalized under section 120 or 122 of the Income Tax Ordinance, 2001. In fact section 177 is deterrent for those tax payers who have filed returns of incomes under Universal Self Assessment Scheme.

186. According to this scheme all returns of incomes filed under section 114 of the Income Tax Ordinance, 2001 are accepted whether it is nil income or loss declared or any income declared, every return is accepted as it is. The scheme further provides that declarations made by tax payers are correct and true particulars of incomes have been filed. There is a check mechanism in the form of audit under section 177 and is a deterrence for those who have concealed their incomes or filed inaccurate particulars in the returns of incomes. The respondent department is advised to utilize this section for the purpose of audit and not section 122(5A). The canvas is broader and tax officer has full powers to call any information, conduct any sort of enquires, call books of accounts and vouchers and any other record for the purpose of audit. We would also like to caution respondent department not to use section 122(5A) for revenue generation purposes. It is a curative section available for certain circumstance wherein the twin mandatory conditions are there in an earlier finalized order to plug the leakage of revenue. This section is also not authorizing conduct of audit to respondent it is revisional in nature.

187. 40.In this regard we have highlighted examples In paras 21, 22, 23, 24, 25, 26, 28, 29, 30, 31 and 32 supra where we are of the view that portion of notices under section 122(5A) appears to be mere observations and hence are not in accordance with the provision of law and are without basis. We also agree with the views of the learned authorized representatives that these are mere calling for information and conduct of such inquiries is not permissible and comes within the ambit of fishing and roving inquiries. The intent of provision is mainly related to the two mandatory conditions and inquiries have direct nexus to the mandatory conditions of the provision. The use of word of inquiries cannot be read in isolation and it does not mean calling for information from the taxpayers and thereafter proceeding to finalize the order under section 122(5A). To our mind enquires conducted without the presence of twin mandatory conditions as provided in the provision are not permissible and come within the ambit of fishing and roving inquiries which we dispel and do not approve. If the view of the learned advocate for the respondent is accepted then there will be no difference between section 177 and section 122(5A) and it will mean conduct of audit in both the sections, this definitely is not intention of legislature.

188. 41.The examples taken from the portion of the notices under section 122(5A) from the three cases i.e. Messrs Meezan Bank Limited, Messrs Jaffer Brothers (Pvt.) Ltd. and Messrs Novartis Pharma (Pakistan) Ltd. cited above are guiding in nature. These examples show that some portions of the notices are not in accordance with the provisions and some portions are meeting the requirement of the provision. The issue is therefore to be decided on case to case basis and on facts of each case. These examples can be referred for the purpose of guidance and we accordingly dispose of the issue as elaborated above in detail.

189. 42.The roster is directed to fix all these Income Tax Appeals as well as other such appeals before the respective benches for order on merits.