CH. SHAHID IQBAL DHILLON (JUDICIAL MEMBER)---The titled appeal pertaining to tax year 2011, has been preferred on behalf of taxpayer calling in question the impugned order dated. 28.11.2017, passed by the learned CIR(A), Faisalabad.
2. Briefly stated, the relevant facts for disposal of present appeal are that the taxpayer-appellant, is an Association of Persons (AOP), derives income from processing of cloth. The original assessment is treated to be issued was subsequently amended by the Additional Commissioner by invoking the provision of section 122(5A) of the Ordinance. In re-assessment proceedings, the taxpayer was required to furnish certain information/ documents vide show-cause notice No.320 dated 31.12.2014, the crux of the impugned notice is as under: "AOP got registered on 03-03-2010 with a capital of Rs.2,000,000/- and for the tax year 2010, as per income tax return, no business was conducted. For the tax year 2011, capital invested in the business as on 30-06-2011 is Rs.2,000,000/-, whereas as per column No.6 of the return, you have declared closing stock at Rs.1.250,300/-; as per column No.44 of the return refund of Rs.277, 725/-.
Moreover, as per Annex-A of the return, cost of acquisition of depreciable assets at Rs.61,862,664/- has been declared. Since you have been found to be the owner of Rs.63,390,689/- (Rs.1,250,300 + 277,725 + 61,862,664) as on 30-06-2011, the amount over and above your employed capital of Rs.2,000,000/- i.e. Rs.61,390,689/- does not commensurate with known source and is required to be added in your taxable income as income from other source under section 111(1)(b) of the Income Tax Ordinance, 2001."
The crux of the taxpayer reply in response to the said show cause notice is as under: "OBJECTIONS:
(1) Capital has been invested at Rs.2,000,000/- as on 30-06-2011.
(2) As per column No.6 you have declared closing stock at Rs.1,250,000/-. Also in Annex-A of the return cost of acquisition of depreciable assets at Rs.61,862,664/- has been declared.
The reply of your queries is as under: Firstly, the taxpayer shown in "Ownership" column - Rs.20,000,000/- as capital not Rs.2,000,000/- as confronted by you for the year under consideration. The members of the AOP have already filed declarations in Investment Tax Scheme, 2008 (copies of the declarations are enclosed for perusal and record in your office). As per books of account total equity of the partners is at Rs.62,500,000/-.
A certificate showing the equity of both the partners is enclosed: Secondly, as discussed above the investment has satisfactorily been stand explained. Thus proceedings under section 111(1) (b) of the Income Tax Ordinance, 2001 seeking explanation regarding nature and source of the investment is beyond the scope of section 122(5A) of the Income Tax Ordinance, 2001."
Being dissatisfied from above reply, the deemed assessment under section 120(1) of the Ordinance was considered erroneous insofar as prejudicial to the interest of revenue and proceedings was culminated by making an addition of Rs.31,390,689/- under section 111(1)(b) of the Ordinance.
3. Felt aggrieved by the order of the amending authority the taxpayer filed appeal before the First Appellate Authority, who maintained the order passed by the Additional Commissioner with the following words: "The AR failed to answer the query that if the capital contributed by the members was Rs.62,500,000/-, then why the total capital was declared at Rs.20,000,000/- only by the AOP in its return. Since, the declared capital of the appellant failed to explain the assets owned by it as on 30-06-2011, therefore, the officer was justified to invoke the provisions of section 111(1)(b) of the Income Tax Ordinance, 2001. The AR referred to the judgment of the Honourable ATIR reported as (2017 PTD (Trib.) 1911). The facts and circumstances are distinguishable from the instant case. In the said case certain information was sought from the taxpayer whereas in the instant case, proceedings were initiated on the basis of information declared by the taxpayer itself in the return.
Therefore, reference to the said judgment of the Honourable ATIR is not valid. This being the position, the appeal of the appellant being devoid of merit fails and impugned order under section 122(5A) of the Income Tax Ordinance, 2001 is maintained accordingly."
This dispensation has compelled the taxpayer to come up in appeal before the Tribunal.
4. We have heard the arguments of the learned AR while none present from the respondent side to counter the arguments of the AR Main thrust of learned counsel for the taxpayer was that on the issue of fishing and roving enquiries the legal superior courts decided the issue in favour of the taxpayer while taking up proceedings under section 66A of the repealed Income Tax Ordinance, 1979 (here-in-after referred to as "Ordinance") which is pari materia to section 122(5A) of the Income Tax Ordinance, 2001. It was further pointed that respondent department asked for information in the notice under section 122(5A) and thereafter proceedings to create tax demands.
He vehemently argued that two mandatory conditions to invoke section 122(5A) were missing in the notices issued. He further submitted plethora of citations on the two prescribed mandatory conditions for invoking the section 122(5A). He further added that enquiry does not mean to ask for information from taxpayer and thereafter pass order under section 122(5A). 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 official to proceed further under section 122(5A). The enquiry should be on the apparent two conditions and sense of enquiry should not be in respect of calling of information. The learned counsel stated that section 122(5A) and section 177 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 section of few taxpayers who have filed their returns under Universal Self-Assessm ent 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. Reliance was placed in the case reported as 2017 PTD (Trib.) 1911; wherein the larger bench of the honourable ATIR, Karachi Bench, Karachi have held that: "Validity---(1) Whether perusal of section 122(5A) of Ordinance, 2001 and section 66A of Ordinance, 1979 show that both are pari materia to each other and there is hardly much difference between two sections---Held yes.
(2) Whether tax officer can proceed on order passed under section 120 or 122 of Income Tax Ordinance, 2001 under section 122(5A), if two mandatory conditions, i.e. error of law (illegality) or some loss of revenue are present for invoking this provision---Held yes.
(4) Whether matter of inquiries and fishing and roving inquiries is to be seen in context of two mandatory prescribed conditions referred in the provision---Held yes.
(7) Whether calling of information's and thereafter finalizing order under section 122(5A) without presence of twin mandatory conditions is not permissible---Held yes.
21. We now come to the main issue taken up 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)."
5. On perusal of the show cause notice, amended assessment order as well as the appellate order; we found that the reassessm ent proceedings has taken place on presumption basis confronting wrong facts to re-open the assessme nt tantamount to fishing enquiry. In the light of above referred case law it is held that the first show notice issued was defective as neither the assessment is erroneous nor prejudicial to interest of revenue. This action of the amending authority was ab-initio illegal as there was no proper basis for invoking provisions of section 122(5A) of the Income Tax Ordinance, 2001. Thus, the amended assessment orders as well as the order of the learned Commissioner (Appeals) were vacated on this score alone.
6. The learned counsel further argued that the members of the AOP have sufficient funds which were obtained by availing Investment Tax Scheme, 2008 issued vide Circular No.3 of 2008 dated 01-07-2008. Both the members of the AOP have made cash declaration on 31-12-2008 as under:
(i) Mr. Muhammad Rafi Rs. 20 , 000 , 000/-
(ii) Mr. Muhammad Sami Rs.26,700,000/- He submitted that the above said unexplained income/assets was only incorporated in the books of accounts or wealth statement as per para (5) of the said scheme. For sake of facility, it is reproduced as under: "Where the declarant has paid tax on his unexplained income/ assets in accordance with the Scheme, he shall be entitled to incorporate such income in his books of accounts."
The learned AR further contended that the taxpayer duly incorporated the said amount in the "books of accounts" namely wealth statement of the members of the AOP on 30-06-2009 onward.
He contended that after perusal of the wealth statement of the members of AOP; it would reveal that they have sufficient sources to invest as capital in business namely M/s Al Raheem Textile Processing, Faisalabad declared in the wealth statement as on 30-06-2011 as under:
(i) Mr. Muhammad Rafi Rs.30,000,000/-
(ii) Mr. Muhammad Sami Rs.32,500 000/-
6. In support of his arguments, the learned counsel referred a citation reported as 2004 PTD (Trib.)
880; wherein it has been held that: "During the entire proceedings and at all stags the identification of the source factually and logically routes through the Directors who have floated this company through proper documentation and have introduced investments. The fact that their documents proved to be as not satisfactory does create a reasonable doubt about their source, however, not against the company a legal person which has started business after incorporation and has not done any trading or manufacturing whatsoever so as to make us believe that the same can be identified as from some transaction done by the company."
The learned AR also placed reliance on a case reported as 2003 PTD 1040 (Lahore High Court); wherein their Lordships have held that: "The provision of law invoked could come into play only if source was not explained. Here the source was properly explained though improperly ignored."
He further referred the Apex Court decision reported as PLD 2018 Supreme Court 28 wherein it was held that: "one cannot ignore the fundamental principle relating to administration of justice that law is written on the sleeves of the Judges and it is the primary duty of a Judge to apply the correct law to a case before it and even the party is not bound to engage a counsel for telling the Court how a particular law is to be applied and how the jurisdiction is to be exercised thus, the impugned judgment being not sustainable in law, is set at naught".
7. After careful perusal of record made available before us and after taking into consideration of the argument of the learned AR and case law relied upon, we find that both the members of the AOP had made investment in the business namely M/s Al Raheem Textile Processing, Faisalabad. If the revenue department has disagreed with the explanation offered it, than they were required to tax the said investment in the individual capacity not as an AOP. The amending authority made huge addition of Rs.31,390,689/- under section 111(1)(b) of the Ordinance with the reason that the assets declared by the members in the Investment Tax Scheme were not available with them as on 30-06-2009. The assets which were consumed or utilized before 30th June, 2009 cannot be used to explain investment during the tax year 2011. Here, both the authorities below inadvertently miss- read the Investment Tax Scheme, 2008. Both the members only declared cash declarations in the return of Investment Tax Scheme. The Income Tax Authorities discarded the explanation of the taxpayer to arrive at in an objective way, that is to say, there must be some material on the basis of which such opinion could be reasonably formed. It cannot be said that any possible explanation which the taxpayer putforth for clarifying the source and nature of cash investment must have to be accepted by the Income Tax Department nor can it be lawfully urged that the amending authority can arbitrarily rejected the taxpayer's explanations. The Authority will have to adduce reasons which will be regarded as fair and legitimate and he will discard irrelevant and extraneous considerations. A judgment which does not disclose reasons will be of little assistance to the Appellate Authority or the Court. The Court and Appellate Authority will have to wade through the entire record for such reasons to decide whether the decision is right or wrong. The order is, therefore, struck down as no reason have been given where substantial reasons are needed.
8. Both the members of the AOP had duly declared their business assets in the wealth statements as on 30-06-2009. The members of the AOP duly explain the origin of sources of cash investments made in the firm. Further, the revenue department has not made any exercise to discard the given result of the members of the AOP. They simply reject the explanation without giving any cogent reasons. Even the taxpayer had valid justifiable explanation to offer in investment in the business made as an AOP. Therefore, it is not very material as to whether or not the assets were disclosed in the wealth statements. It has to be seen as to whether the taxpayer successfully brought on record sufficient documentary evidences to explain the sources of accretion in assets. If the amending authority intends to reject the explanation regarding source of investment as well as evidence produced in this regard; he will have to issue notices to concerned members and any lack of deficiency must be taxed in the hands of members of the AOP not in the hand of AOP.
9. In view of the above, we hereby hold that taxpayer investment in M/s Al Raheem Textile Processing, Faisalabad is from verifiable sources and the impugned addition was without justification. Learned CIR(A) also failed to appreciate these facts in judicious manner. Therefore, orders of both the authorities below are vacated, and the impugned addition is deleted.
10. Taxpayers appeal succeeds in the above manner.