The above titled appeal has been filed by the taxpayer against the appellate order No,332/2014 dated 30.10.2015 whereby the 1st appeal of taxpayer assailing the order of Officer Inland Revenue
(OIR) passed under section 121(1)(d) of the Income Tax Ordinance, 2001 (the Ordinance) has been disposed off by the Commissioner Inland Revenue (Appeals-III) Rawalpindi.
2. Brief facts of the case are that the appellant/taxpayer a motorcycle dealer, filed return for the tax year 2013 declaring net profit at Rs,380,000/-. The case was selected for audit by the board under section 214C of the Ordinance. The department confronted issues regarding under declaration of amounts received from its principal company to the appellant/taxpayer. The reply of the taxpayer was not found satisfactory by OIR who proceeded to pass the order under section 121(1)(d) of the Ordinance. Total income of the taxpayer was assessed at Rs,71,541,236/- by making addition of.Rs,22,35,900/- under section 111(1)(b) and Rs,68,925,336/- under section 21(c) of the Ordinance.
WWF amounting to Rs,14,30,825/- was also charged by the OIR.
3. Aggrieved by the taxpayer with the assessment order passed under section 121(1)(d) of the Ordinance filed appeal before the learned Appeal Commissioner who vide Order No, 332/2014 dated 30.10.2015 confirmed the impugned order passed by the Officer of Inland Revenue. This order of CIR(A) is challenged before the Tribunal by the taxpayer on the following grounds:- i. That the impugned order of Commissioner Inland Revenue (Appeals-III), Rawalpindi as well as the ex-parte order passed under section 121(1)(d) read with section 177(10) of the Income Tax Ordinance, 2001 (hereinafter called the Ordinance) by the Inland Revenue Officer (IRO), Audit Unit-I, Zone-I, RTO, Rawalpindi are bad in law and against the facts of the case. ii. That the order passed under section 121(1)(d) is liable to be declared null and void which is not a best judgment assessm ent because the facts of the case have not been properly taken into consideration. The IRO failed to apply his judicious mind, in making best judgment assessment.
Also held in : 2013 PTD 837; 2015 PTD (Trib.) 2042; 2013 PTD 682 and 2015 PTD 681. iii. That the order passed by the IRO under section 121(1)(d) is unjustified on the facts of the case which should have been cancelled by the CIR(A). In compliance to the notices issued the appellant has filed replies/documents and also requested the officer to allow time for the filing of further details / documents and but the officer has not considered the same and passed the order under section 121(1)(d) of the Ordinance in an arbitrary manner by mentioning inaccurate particulars of appellant's compliance and declared version. Also Held by CIR (Appeals-HI), Rawalpindi in order No,217/2013 dated 07-11-2013. iv. That the proceedings initiated and order passed under section 121(1)(d) are without jurisdiction and the same should have been annulled by the CIR(A). Neither the provisions of section 111(1)(b) nor of section 21(c) of the Ordinance are attracted on the facts of the case. v. That the CIR(A) is not justified to confirm the order passed by the IRO because at one end the IRO himself is treating the appellant as a "Commission agent" while making the addition of the amount of commission to the income and at the same time on the other hand he has made the addition of purchases of Rs, 68,925,336/- treating the business of purchases and sales as a trader. vi. That the provisions of Rule 30 of the Income Tax Rules, 2002 are not attracted in the case of appellant.
ADDITION UNDER SECTION 111(1)(b)---Rs,22,35,900/- vii. That without foregoing above contentions the addition of Rs,22,35,000/- made by IRO and confirmed by the CIR(A) is liable to be deleted because the provisions of section 111(1)(b) are not applicable on the facts of the case. The appellant has neither made any investment nor is the owner of any money or valuable articles. viii.That the CIR(A) is not justified to confirm the addition made by the IRO of the total amount of incentive / commission including those of sub dealers shown by the principal company. The appellant is sole dealer of the company, selling its bikes and only receiving margin / commission and has declared the Gross Profit in the return of income after excluding the margin passed on to the sub dealers. ix. That without foregoing above contentions the addition made under section 111(1)(b) of the Ordinance on account of difference of Rs,2,235,900/- in the commission declared and informed by the principal company is unjustified and liable to be deleted because the appellant has declared gross profit in Sr.7 of the Income Tax Return which is exclusive of the part of margin /commission passed on to the sub dealers and also discount allowed to the customer.
ADDITION UNDER SECTION 21(c) ---- Rs, 68,925,336/- That the addition made by the IRO under section 21(c) of the Ordinance at Rs,68,925,336/- and the same confirmed by the CIR(A) is invalid and liable to be deleted because the provisions of section 21(c) of the Ordinance are not attracted on the facts of the case. Without foregoing the contentions that the appellant is a dealer/distributor earning discount/commission even otherwise no addition on account of purchases in any case could be made under section 21(c) of the Ordinance.
Also held in 2012 PTD 1444 (ITAT No,104/LB of 2011 dated 30-04-2012) "Collective provisions of section 21 transpired that the same dealt with expenses debitable to profit and loss account and even if it was to cover trading account then it will deal with only the deductions like rent, wages, fuel, commission, interest, salary (relating to manufacturing-cum-trading account); and purchases, without any shadow of doubt, could not be termed as deductions. xi. That without forgoing the contention that the appellant is earning discount/commission as a dealer / distributor of principal company in any case the disallowance of 100% purchases means no business activity has taken place i,e, no question of business income arises. Even otherwise such addition made in any case is not only unconstitutional and illegal but also against the principle of accounting and norms of business as well as of justice. xii. That without prejudice to above grounds the income assessed at Rs,71,541,236/- against declared at Rs,380,000/- is unjustified and illegal being against sub section (10) and other provisions of section 177 of the Ordinance and unjustified being based on assumptions and wrong presumptions hence liable to be deleted. xiii. That the WWF of Rs,14,30,825/- charged by OIR is illegal and unjustified on the facts of the case hence liable to be deleted. xiv. That the order of IRO to issue notice under section 182(2) for penalty under section 182(1) for non-production of accounts is unjustified and illegal. xv. That the order of IRO to issue notice under section 182(1) for concealment of income is also unjustified and illegal.
4. In response to call notice Mr. Atif Waheed, Advocate AR appeared on behalf of the appellant taxpayer. The department was represented by Mr.Masood Akhtar, D.R, both of whom have been heard.
5. Learned AR in his arguments vehemently contended that both the additions of Rs,22,35,900/- made under section 111(1)(b) as well as of Rs,68,925,336/- made under section 21(c) of the Ordinance are not only illegal being against the provisions of Income Tax Ordinance, 2001 law but are also unjustified considering the facts of the case. He further contended that neither the provisions of section 111(1)(b) nor of 21(c) are attracted on the facts of the case. He argued that it is not the case that the appellant/taxpayer has made any investment or is found to be the owner of any money or valuable article as such the invoking of the provisions and addition made under clause (b) of subsection (1) of section 111 of the Ordinance is without jurisdiction hence illegal and void ab-initio. He further argued that the addition of alleged purchases amounting to Rs,68,925,336/- made under clause (c) of section 21 is also illegal and liable to be deleted because the said provisions specifically deals with the non admissibility of expenses under the specific heads of salary, rent brokerage or commissioner, profit on debt, payment to non-resident and payment for services or fee paid and that this provision is not relevant to the purchases. He stated that in any case even otherwise the provisions of section 153(7)(i) are not attracted in the appellant case. He further stated that no purchases having been declared hence no question of disallowance of the same under section 21(c) could be made.
6. Learned AR also challenged the validity of best judgment order passed by the Inland Revenue Officer under section 121(1)(d) of the Ordinance and the charge of WWF on the income assessed. He asserted that replies and documents were filed by the taxpayer as the same were also filed before DR on the direction of CIR(A). He further asserted that documents could have been produced if the opportunity had been provided for the same.
7. According to learned AR the Inland Revenue Officer passed the order by mentioning inaccurate particulars on behalf of the taxpayer. He submitted that the order passed by the IRO is not only confusing but also contradictory on the facts of the case. It is submitted by the learned AR that on one hand the taxpayer is being treated as a commission agent which case is covered under section 233 read with section 169(1)(b) as final taxation whereas at the same time he i,e, taxpayer is considered as doing the business of purchases and sales.
8. Learned AR further contended that addition of the total value of motorcycles to the income of the appellant in any case is not only highly unjustified and illogical in the light of the principles of accounting and business but is also illegal being against the norms of justice. He further contended that it is evident from the invoices and certificate of principal company that the appellant taxpayer being a sole distributor for the area is allowed a fixed margin/profit out of which he has to pass on a certain ank..,nt to sub-dealers which fact is evident from the principal company's cert fi ate that rp<Ijor part of motorcycles has ')een sold through sub-dealer,, to whom ie same were directly delivered by the manufacturer's company. According to learned AR the assessm ent order passed by the IRO should have been annulled by the CIR(A). He stated that charge of WWF amounting to Rs,14,30,825/- was also unjustified and liable to be deleted.
9. Learned DR on the other hand in his arguments defended the impugned orders of both the authorities below. According to learned DR proceedings initiated and additions made by the Inland Revenue Officer under sections 111(1)(b) and 21(c) of the Ordinance are justified. He made the assertion that the IRO was justified to initiate proceedings as the taxpayer concealed the actual amount of commission received from The principle company. Learned DR stated that the declaration of gross profit by the appellant taxpayer means that he was doing the business of purchase and sales.
10. Arguments of learned representatives of both the parties have been heard. The facts of the case have been considered in the light of the relevant provision of law. It has been noticed that the IRO has issued notices invoking the provisions of sections 21(c) and 111(1)(d) and ultimately made the addition under these two provisions of the Ordinance.
11. Before proceeding further we will like to reproduce here the provisions of section 21(c) of the Ordinance which are:-- Section 21 - Deductions not allowed a. ......................................... b. ......................................... 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 of Chapter X or section 233 of Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV or Part V of Chapter X; From the perusal of above it is quite clear that the purchases are not covered by the said provision.
We agree with the view point expressed by learned AR that section 21(c) deals with the specific expenses and no addition under this provision could be made on account of purchases. In this regard we also find support from the judgment of the ATIR on the issue reported as 2016 PTD (Trib.)
7 and 2015 PTD (Trib.) 804. Furthermore the IRO has not established the taxpayer is a prescribed person under section 153(7)(i) of the Ordinance for the tax year under consideration. By crossing the prescribed limit of Rs,5 million during a tax period the taxpayer will become prescribed person for the next year.
12. As a result the addition of Rs,68,925,336/- made under section 21(c) of the Ordinance being illegal hereby stands deleted.
13. So far as the next addition of Rs,22,35,900/- made under section 111(1)(b) of the Ordinance is concerned, the same is also not legally maintainable. Clause (b) of subsection (1) of section 111 deals with the case of any investment made by a person or being the owner of any money or valuable articles which are not the facts of the case before us. In the present case the issue involved is that according to department the taxpayer has not declared true particulars his income. Whereas the contention of the taxpayer is that he declared his profit/margin after deducting the part of the same passed on to sub-dealers and thus no concealment has been made. The perusal of the order of the IRO reveals that from the beginning of proceedings through the issuance of show-cause notice till the finalization of assessment the taxpayer has been confronted and proceeded under the provisions of section 111(1)(d) of the Ordinance. Thus it is established beyond any doubt that the IRO with his cautious mind invoked and applied the provisions of section 111(1)(d) as well as 21(c) of the Ordinance which were not applicable on the facts of the case before us.
14.For the reason discussed above and also' relying upon the judgment of ATIR reported as 2015 PTD (Trib.) 2042 the addition of Rs,22,35,900/- made under section 111(1)(b) is also deleted.
15. Now coming to the question relating to Best Judgment Assessment in our opinion the order passed by the IRO is not a Best Judgment Assessment. From the perusal of the order under section 121(1)(d) it transpires that as if IRO has passed an order of amendment of assessment under section 122(1)1(5) by making addition to the declared income being case of deemed assessment under section 120 E, of the Ordinance. From the face of it the order passed by him appears to be an order of amendment of assessm ent under section 122(1)1(5) and not a be judgment assessment under section 121(1)(d) of the Ordinance. It has also been noted that the case was not excluded under the provisions of section 177(10) from the ambit of section 120 for proceedings under section 121(1)(d) of the Ordinance to frame the Best Judgment Assessment. The IRO appears to be totally confused while passing the order and making the addition to the income. The order of IRO is not a Best Judgment Assessm ent not having been passed in accordance with the provisions of section 177(10) read with section 121(1)(d) of the Ordinance hence legally not maintainable. As a result the orders of IRO as well as of CIR(Appeals) confirming the same are hereby vacated.
16.Since the relief has been allowed to the taxpayer on the above grounds the remaining issues are needed not to be adjudicated upon.
17. The appeal of the taxpayer succeeds.