MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER-- The above-titled appeal has been filed by the Appellant calling in question the impugned orders No. 06 & 07/2018 dated January 18, 2019 passed by the learned Commissioner (Appeals - III) - CIRA, Karachi for tax year 2011---Through the order , the learned CIRA upheld the order D.C. No. 28/11, dated June 30, 2017 passed by the Officer Inland Revenue (OIR), Audit Unit-04, Zone-I, Corporate Regional Tax Office, Karachi, under Section 122(1)1(5) of the Income Tax Ordinance, 2001 (the 'Ordinance')---Being dissatisfied with the impugned order , the Appellant has filed present appeal before this forum and assailed the order of the CIR(A) on the following grounds:-- "1. That the order passed by the learned Commissioner Inland Revenue (Appeals-III) (CIR-A), Karachi is bad in law and on the facts of the case.
2. That the learned CIR-A maintained the order of the learned Officer Inland Revenue (OIR) despite it was pleaded before him the requirements of Rule 231F(4) & (5) of the Income Tax Rules, 2002 read with sections 177(6) and 122(9) of the Income Tax Ordinance, 2001 were not met and followed. Nor any show- cause notice was served as mentioned in the body of the order for complianc e on June 23, 2017 therefore, did not provide proper opportunity for compliance of the same was given which is against the natural justice as held by number of judgments of honourable Superior Courts of Pakistan.
3. That the taxpayer submitted representations before the Chief Commiss ioner Inland Revenue of the Regional Review Panel stating that out of fourteen criteria spelt out by FBR, no single criteria attracted for the above taxpayer and decision are pending.
4. Whereas the learned OIR himself allowed extension of time till June 23, 2017 for compliance of his first notice not 122(9), dated June 14, 2017. The learned OIR failed to fulfill the mandatory requirement of sub- rules (4) and (5) of Rule 231F of the Income T ax Rules, 2002.
5. That the learned CIR-A erred to confi rm the treatment adopted by the learned OIR to prorate expenses on the basis of ratio of income between NTR, FTR & Exempt income.
6. That the learned CIR-A erred to confirm the treatment adopted by the learned OIR not taking profit on debt of Rs. 86,077,356 for the purpose of allocation of expenses whereas no income can be earned without any expenditure as held in decided case-law on the subsequent reported as: 1(2009) 100 T ax 390 (T rib.)]
7. That the learned CIR-A erred to confirm the treatment adopted by the learned OIR to take dividend income as FTR income for proration of expenses whereas the year under consideration dividend income is under normal tax regime for Company and subject to reduced rate of tax (Ref 2005 PTD (Trib.) 2041), (2011 PTD (T rib.) 352 )
8. That the learned LIRA erred to confirm the treatment adopted by the learned OIR to add 'diminution in value of investments' of Rs. 23,268,445 in the income of the taxpayer . This treatment tantamount to convert the expenditure into income itself.
That the learned CIR-A erred to confirm the treatment adopted by the learned OIR to disallow advertisement expense of Rs. 1,309,264 under section 21(c) of the Income Tax Ordinance, 2001 being failed to deduct tax.
10. The appellant craves permission to add, amend, alter or disregard the above grounds on or before the hearing of appeal.
ADDITIONAL GROUNDS OF APPEAL: "That the learned Commissioner Inland Revenue (Appeals-Ill) erred to confirm the order passed under section 122(1)7(5) of the Income T ax Ordinance, 2001 by the ACIR.
That the order of the ACIR was passed without application of his independent mind without mentioning or pinpointing any violation of sub-rule of Rule 220A of the Income Tax Rules, 2002. The appellant did not violate the applicable income tax rules to it."
2. The above additional grounds of appeal go to the very root of the case and pertain to main grounds of appeal which are necessary for deciding the appeal. Therefore, we admit the above additional grounds of appeal and would be decided in the subsequent paragraphs of this order .
A.R.'s Arguments 2A. On the due date, Mr. Khaliqur Rahman , being the Authorized Representative (AR) appeared for the, Appellant/T axpayer , while Mr. Malik W aqas, DR appeared on behalf of the Respondent/T ax department.
3. At the very outset, the learned. AR briefly stated the facts of the case that M/s. Mahvash and Jahangir . Siddiqui Foundation (the `Foundation') is a Non-Profit Organization (NPO). The Foundation was incorporated on January 2003 as an association limited by Guarantee and not having share capital under section 42 of the Companies Ordinance, 1984. The principal activities of the Foundation are to promote educa tional activities, health facilities and social activities all over Pakistan. The Foundation utilises its income towards its objectives and prohibits the payment of any dividend or income to its members. The case of the appellant was selected for audit u/s. 214C of the Ordinance on February 25, 2013 and the proceedings were culminated in passing of an order under section 122(1)(5) of the Ordinance.
4. The AR had agitated during the hearing s on June 19, 2019 and June 25, 2019 that the CIRA was not justified to confirm the impugned order of the. OIR. He assailed the impugned order of the CIRA on the legal grounds as well on the facts.
5. The AR provided to this Bench the following set of documents that is:---
(a) Right from the stage of the creation of the Foundation i.e. under section 42 when company was registered with the Securities & Exchange Commission of Pakistan
(SECP) as a company limited by Guarantee. A copy of the License under section 42 of the Companies Ordinance, 1984 issued by SECP;
(b) The approval of Commissioner of Income Tax Ws. 2(36) of the Ordinance read with Rule 212 of the Income Tax Rules, 2002 dated November 4, 2004 followed by renewal letter dated July 12, 2006;
(c) Notification of the Office of the Chief Commissioner Inland Revenue Regional Tax Office dated February 2, 2010 in respect of approval under Clause 58(3) of Part-I of Second Schedule to the Ordinance;
(d) Three certificates from time to time issued by the Pakistan Centre of Philanthropy; and
(e) Income tax exemption certificates issued by the Commissioner of Inland Revenue (CIR) for the tax years 2011, 2012 and 2013 for which tax exemption was subsequently withdrawn by the Chief Commissioner Inland Revenue vide order dated June 17, 2017.
6. The AR argued that the case of the appellant was selected for audit under section 214C of the Ordinance on February 25, 2013. Upon receipt of the intimation of the selection of the audit, the appellant through its AR on May 2, 2013 filed written representation before the Chief Commissioner Inland Revenue (who was the Chairperson of the Regional Review Panel RTO-III), stating that none of the criterion, for selection of audit under section 214C given by the Federal Board of Revenue (FBR) were applicable on the appellant. The appellant is an NPO, therefore, the appellant's name be withd rawn from the selection list for audit under 214C of the Ordinance. The copy of the representation was produced before this bench which has also been placed on record.
7. The AR further argued that the Chief Commissioner did not dispose the represe ntation from the date of filing on May 2, 2013 till the date the passing of impugned order despite the fact that the office of well as the Chief Commissioner was given reminders vide letter dated May 22, 2013.
8. The AR drew our attention towards the reported judgment 2015 PTD 2538 on the subject-matter , wherein the Honourable Islamabad High Court had directed the Member Audit, FBR, to examine each case upon request of the applicant and dispose-of the same on merits. The above judgment states: "9. These cases are referred to Syed Ijaz Hussain Shah, Member (Audit) for his examination and decision in his personal capacity . All the petitioners shall send their representations alongwith supported documents to the Member . The Member (Audit) shall examine each case at his end and in case he forms an opinion that taxpayer was wrongly selected, he shall pass order accordingly---If his opinion is otherwise, he shall summon the taxpayer and shall provide an opportunity of being heard and thereafter a speaking order shall be passed. The needful shall be done within 60 days. If in his opinion, after hearing a taxpayer a parameter is not highly risk based, he shall drop the selection, on such parameter ."
9. The AR contended that none of the required process stated in the above judgm ent was done by the Regional Review Panel RTO-111 in the case `under appeal. The AR questioned the sanctity of the amended order as to how such an order can be passed without first disposing of the representation made by the appellant. He also brought to the knowledge of the Bench as to why the audit under section 214C of the Ordinance was conducted:---
(a) From the point of selection of audit on February 2, 2013 till June 14, 2017 when Information Document Request
(IDR) No. OIR/AU-04/Zone-I/CR TO/2017/904 was issued i.e., after a lapse of more than 4 years and during that intervening period, no audit proceedings were undertaken by the tax department.
(b) Through the IDR dated June 14, 2017, which had the nature of seeking information regarding details of expenses, audited accounts and other information at a very short notice by June 17, 2017 i.e., hardly two working days and June 17, 2017 being Saturday was a non-working day .
(c) Adjournment was sought till June 29, 2017 which was only allowed till June 23, 2017.
(d) On June 22, 2017, the appellant informed the OIR, to keep the audit proceedings in abeyance as the representation of the appellant was pending decision of the Regional Review Panel at R TO-111.
(e) The OIR, without serving any further notice and in undue haste, passed an amended order under section 122(1)/(5) on the basis of examination of return of income for tax year 2011. .Thus, the order passed under Section 122(1)1(5) was not based on definite information.
The AR pointed out that the order u/s. 122(1)/(5) states that a Show-Cause Notice (SCN) under section 122(9) of the Ordinance was issued for compliance on June 23, 2017. However , the AR vehemently argued that no such SCN was issued and in support therefor , the appellant produced before this bench an Affidavit under oath.
The AR agitated that the date of compliance to the IDR and the SCN were both on the same date i.e., June 23, 2017. By following the process of law, that once IDR is issued to the taxpayer and details are provided, then a SCNis issued identifying the defects, if any, in the information supplied in response to the IDR. In the instant case, this has also never happened and the IDR and SCN both required the appellant to make compliance on the same date, which does not make any sense.
(h) As per the AR, reference to the SCN in the amended order is an afterthought to cover up the legal deficiency as neither any reference to SCN number and date of issuance has been stated nor the date of serving of SCN on the appellant has been mentioned in the amended order . The amended order only mentions reference of IDR and in the light of this deficiency , it is quite clear that the SCN' was never issued to the appellant.
(I) The AR apprised the bench that no notice was issued under section 122(5)(1), (ii) and (iii), which is a condition precedent to pass an amended order under section 122(1)(5) on the basis of definite information.
10. The AR vehemently argued that the order under section 122(1)/(5) of the Ordin ance, thus, suffers from number of legal infirmities and is totally an illega l order which does not meet the legal requirements stipulated in section 214C as well as requirements of Section 177 (6) and Section 122(9) of the Ordinance.
11. The AR stated that sub-rules (4) & (5) of Rule 231F of the Income Tax Rules, 2002 (the 'Rules'), in particular , stipulate the essential requirements of conducting audit of the affairs of the taxpayers under section 214C of the Ordinance, which read as under:-- "231F . Selection and conduct of audit.-- (1) This rule shall apply to selection of cases for audit by the FBR under section 214C of the Income T ax Ordinance, 2001 (XLIX of 2001). ....................................... .......................................
(4) On completion of examination of books of accounts, data or information under this rule the discrepancies, if found, shall be intimated to the taxpayer for obtaining taxpayers' explanation, in the form of audit report, seeking taxpayer's explanation on these points.
(5) Explanations of the taxpayer , where found not acceptable, shall be intimated to the taxpayer , through a notice under section 122(9) of the Income Tax Ordinance, 2001 about the amendment in assessment alongwith the rationale or basis of such amendment and necessary amendment in assessment order shall be passed under section 122 of the said Ordinance after affording adequate opportunity of hearing to the taxpayer ." (Emphasis Supplied)
12. The AR also stated that the essentia l requirements of the section 177(6) were also not fulfilled in the instant case, which requires "that:--- "(6) After completion of the audit, the Commissioner may, if considered necessary , after obtaining taxpayer's explanation on all the issues raised in the audit amend the assessment under sub-section (1) or sub-section (4) of section 122 as the case may be."
13. The AR argued that the confrontation under section 177(6) read with section 122(9) of the Ordinance as well as under Rule 231F of the Rules has to be made after 'completion of the audit'. This means that after obtaining replies of the taxpayer on the matters raised as a result of audit conducted are to be confronted to the taxpayer in an audit report. Such confrontation is to be made under section 122(9) based on requirement of Section 177(6) of the Ordinance as well as Rule 231F supra.
14. In support of his stance, the AR placed reliance on some reported judgments of the Honourable Supreme Court of Pakistan (SCP), High Courts (HC) and Appellate Tribunal of Inland Revenue (ATIR). in which the above principle of law has been enunciated that a pre-req uisite for conducting audit of the affairs of the taxpayer is to be supported by issuance of a notice and thereafter , providing ample opportunity of being, heard to the taxpayer . The AR produced before us the copies of the below judgments, operative paras of which are as follows:--- 1971 SCMR 681 "The principle, so far as this country is concerned, is accordingly well-settled that where notice required to be given by the statute is a mandatory notice, then the failure to comply with such a mandatory requirement o the statute would render the act void ab initio as being an act performed in disregard of the provisions of the statute. Furthermore any further action taken on the basis of such a void order would also be vitiated and the defect at the initial stage would be incurable b a hearin at a subse uent sta t e."
PLD 1965 S.C 90 "Held, that in all proceedings by whomsoever held, whether judicial or administrative, the principles of natural justice have to be observed if the proceedings might result in consequences affecting "the person or property or other right of the parties concerned". This rule applies even though there may be no positive words in the statute or legal document whereby the power is vested to take such proceedings, for, in such cases this requirement is to be implied into it as the minimum requirement of fairness."
2015 PTD 1242 (Trib)
"45. The above findings may be summarized as under:-- Audit under section 177 read with sub-section (6) of section 177 is void rib initio and not in accordance with law having no legal effect. Amendment under section 122(1) without fulfilling legal. requirement of Section 177(6) is without jurisdiction or in excess of jurisdiction. Provisions of Section 122 of the Income Tax Ordinance, 2001 start with the language "subject to this section". Such language restricts all further proceedings for amendment of an assessment, which means it could only be amended if they were covered by the provisions of this section. Amendment of assessment for which this section has been prescribed cannot be made if the requirements and qualifications prescribed in this section were not completed before making suck amendment of the assessment. That once audit proceedings were initiated under section 177 of the Ordinance and amendment was required to be made. under section. 122(5), assumption of jurisdiction under section 122(5) was a condition precedent for amendment. DCIR failed to fulfill pre-requisite requirement under section 122(5) and has not brought on record "definite information".
What to speak of "definite information" clauses (i), (ii) and (iii) of sub-section (5) of section 122 further stipulate three conditions for issuing of a notice that is any income chargeable to tax has escaped assessment; or total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or any amount under a head of income has been misclassified If "deemed assessment" selected for audit and conducted audit under section. 177; It may be amended by invoking jurisdiction under section 122(1) subject to ful-fillment of conditions as envisaged under sub- section (6) of section 177 and after fulfilling the pre-requisite requirement of "definite information" under sub-section (5) of section 122 and subject to execution of conditions of clauses (0, (ii) and (iii of section 122(5).
No proper and valid notice issued under section 122(5) and no notice issued under which clause the DCIR had amended order under section 122(5) and what was the specific "definite information".
No specific, separate and independent valid notice under section 111 issued for additions under sections 111(1)(a) and under section 111(1)(c). Moreover , there was no unexplained income or expenditure proved by the DCIR without any shadow of doubt."
2015 PTD 804 (Trib)
"We have further noticed from the order of DCIR that after examination of details and information submitted by the appellant no notice under section 122(5) confronting the taxpayer with the defects, if any, in the said details and information was issued although issuance of this notice was mandatory ."
2016 PTD 2422 (Lahore HC)
"9. As mandatory notice under proviso to Section 62(1) of the Repealed Ordinance was not issued, the entire subsequent proceedings and orders become illegal and wholly void. In the given circumstances, the learned CIT
(A) and learned Tribunal were required to accept the declared version of the taxpayer instead of remanded the case back to the assessing officer to fill in the defects and lacuna in the assessment order . In similar situation, the august Supreme Court in case Commissioner of Income Tax v. Messrs Ayesha Woolen Mills (Pvt.)
Limited (2014 PTD 215) accepted the declared version of the taxpayer on the ground that no notice under proviso to Section 62(1) of the Repealed Ordinance was issued and assessin g officer without pointing out any defect In the books of account rejected the same."
10. In view of the above discussion and law laid down by august Supreme Court as well as by this Court, the questions raised above are answered in negative. Resultantly , the declared version for both assessment years of the taxpayer shall be accepted. These reference applications are allowed in favour of applicant taxpayer in the terms stipulated above.
11. Office shall send copy of this judgment under the seal of the Court to the learned Appellate Tribunal Inland Revenue as per Section 133(5) of the Ordinance, 2001".
2017 PTD 686 (WP No. 32597 of 2015) on page 713 "Audit, being administrative proceedings, shall complete on issuance of Audit Report. If audit is not completed within the given time frame, the selection shall be deemed to have been dropped. After issuance of Audit Report; adjudication proceedings shall be carried out by some other taxation officer to satisfy command of the Constitution under Article 10A".
15. In support of his contention, the AR also placed reliance on the judgments bearing ITA No. 51/KB/2014 dated 3.10.2014 CIR vs. Dewan Steel Mills Karachi, ITA No. 2505/LB/2015 dated 28.4.2016 and ITA No. 373/KB/2012 dated 5.4.2017, Dr. Azeem Alamani reported as 2015 PTD 1242 and ITA No. 64/KB/2015 dated 6.6.2018 in the case of CIR vs. Jawed Metal and ITA No. 867/KB/2017 titled as The CIR, Karachi vs. Ws. A.O. Clinic, Karachi.
16. On the date of hearing on June 25, 2019, the AR also produced another judgment relevant on the subject- matter . The operative paras as part of addendum to his submissions of the said judgments are:-- "28. The above findings may be summarized as under: Audit under section 177 read with sub-section (6) of Section 177 is void ab-initio and not in accordance with law having no legal effect. Amendment under section 122(1) without fulfilling legal requirement of Section 177(6) is without jurisdiction or in excess of jurisdiction. Amendment proceedings initiated and notice issued' u/s. 122(9) prior to conduct of audit is ab initio Provisions of Section 122 of the Income Tax Ordinance, 2001 start with the language "subject to this section". Such language restricts all further proceedings for amendment of an assessment which means it could only be amended if they were covered by the provisions of this section. Amendment of assessment for which this section has been prescribed cannot be made if the requirements and qualifications prescribed in this section were not completed before making such amendment of the assessment."
29. In view of the foregoing discussion, we find no illegality or infirmity in the order . of the learned CIR (A) which is hereby maintained."
17. The AR argued that none of the legal requirements of issuing audit report/audit objection/audit charge-sheet was complied with nor any opportunity of being heard was given before passing of the order under section 122(1)1(5) of the Ordinance. Thus, the amended order is ab-initio void, illegal and not tenable in the eyes of law and it was prayed that the same shall be quashed.
18. Reverting to the other issues arising from the amended order , the AR stated that as a result of the said order , exempt income/non-taxable income of the Foundation was taxed in respect of profit on debt, income from the government securities and donations received.
19. The Leared counsel argued that the impugned order directly emanates from and has nexus with the Chief Commissioner's withdrawal order for approval granted under sub-clause (3) of Clause (58) of Part-I of the Second Schedule to the Ordinance read with Rule 220A of the Rules [now transposed in section 100C] of the Ordinance.
20. The AR went on to stress that section 100C of the Ordinance was inserted through the Finance Act, 2014, which is effective from the tax year 2015. In the instant case, the tax year involved under appeal is tax year 2011, thus, the Chief Commissioner had no jurisdiction to invoke the provisions of section 100C as he is not empowered under the law to apply the provisions of a prospective statute retroactively .
21. The AR explained that the appellant in the first place obtained approval from the Commissioner of Income Tax under Rule 212 of the Rules read with Clause (59) of Part I of the Second. Schedule to the Ordinance vide order No. CIT/COS.V/2004-05/1 170, dated November 4, 2004. The, said Clause (59) provides tax exemption to the following incomes:
(a) Investment in the securities of Federal Government.
(b) Profit on debt from scheduled banks.
(c) Grants received from Federal Government or Provincial Government.
(d) House property .
22. The AR apprised that major part of the income of the appellant enjoyed tax exemption under Clause (59) except income from donations which was one of the source of its receipts, the approval for which was to be obtained from the Chief Commissioner . Therefore, the appellant applied for tax exemption under Clause (58)(3) of Part I of the Second Schedule to the Chief Commissioner who was authorized to provide tax exemption in respect of donations. The AR opined that tax exemption under Clause (59) is still intact as the recognition under Rule 212 by the Commissioner has not been withdrawn. The withdrawal of tax exemption only exposes the appellant's receipts from donations but other receipts such as income from profit on debt as well as income from the securities of the Federal Government continue to enjoy tax exemption available under Clause (59) now transposed in Section 100(c)(e) of the Ordinance.
23. The AR further pleaded even if the act of the Chief Commissioner withdrawing exemption under Clause (58)(3) is accepted as valid for the sake of discussion, then also for taxing donations, expenditure under the head donations and other admissible expenditure were to be deducted in order to impose tax on the donations receipts.
The AR during the course of hearing on June 25, 2019 also presented working of loss under the head donations after accounting for expenditure in terms of section 67 of the Ordinance read with Rule 13 of the Rules. The AR also apprised the bench that the appellant had dividend income which was subject to tax under the Normal Tax Regime (NTR) for tax year 2011. However , amendment proceedings under section 122(5A) of the Ordinance were initiated to tax the same as income subje ct to Final Tax Regime (RR) Through an order dated October 25, 2013, the stance of the appellant was accepted and the proceedings were dropped. As no appeal was filed against such an order by the tax department, therefore, the said order attained finality . All these documents were placed on record.
24. The AR argued that proration of expenses in the amended order as done by OIR also suffers from factual errors as the OIR has treated specific expenditure relating to donations as a common expenditure between NTR and FTR; whereas, it solely relates to NTR income as the said expenditure was to be deducted from donations income.
Also, the OIR has treated the dividend income as FTR income whereas for tax year 2011, it falls under NTR income and was to be taxed at a special rate applicable then.
25. The AR also pointed out that the OIR disallowed advertisement related expenditure for non-deduction of tax at source. He submitted that as no audit was actually carried out by the OIR and without any documentary evidence in support (as in the vouchers or any other evidence) was obtained or examined, then the question of disallowing the expenditure on account of non-deduction of tax without establishing any default does not arise at the outset.
The AR provided the evidences of deduction of tax at source on payments made to advertising agencies, which was placed on record.
26. The AR also mentioned a factual illegality by pointing out that the provision of Rs. 23,268,445 made under the head diminution in the value of investments was treated as an income and was subjected to tax in the amended order . As per the AR, there is a notional loss worked out on mark to market basis to value of investments at year end of the Foundation and the same by no stretch of imagination could be held as an income of the appellant unless the investments are disposed of.
27. The AR vehemently argued that the order of the Chief Commissioner through which the tax exemption of the appellant was withdrawn was factually and legally was not maintainable as the appellant had actually spent 93% of the amount of donations as against alleged amount equal to 23% of the amount of donations. He provided details in support of the contention and the sane were placed on record. The AR agitated that order dated June 17. 2017 passed by the Chief Commissioner (withdrawing exemption) was patently illegal for the reason that such a withdrawal of tax exemption for the tax years 2011, 2012 and 2013 cannot be made with retrospective effect by passing an order in the year 2017. He placed reliance on the judgments of the SCP reported as 1992 SCMR 1652 and 2005 SCMR 492 in which the said principle is very clearly enunciated.
28. The AR also argued that the order of Chief Commissioner was also unjustified on the basis of Rule 220A (7)(b)
(v) as this Rule also provides a breathing space to an entity including the appellant that in case, the Investments are short of required level of 75% of total income, then, justification has to be obtained for sufficient reasons for the shortfall. The AR berated that had this information been asked for by the Chief Commissioner , it would have been Provided along-with justification of the financial commitments as the same were duly disclosed in the audited financial statements. He further stated that the appellant was committed to make substantial investments in educational project of IBA and huge investment in a hospital in Sehwan Sharif f, which in subsequent years, such projects were actually executed by the appellant. The AR apprised the bench that taking these future projects into account,reasonable cause was available with the appellant to explain the shortfall.
29. The AR finally concluded by raising the following legal question to be adjudicated upon considering his grounds and detailed submission above:
(i) Is amended assessment which is not a "Speaking order", valid and legal without meeting the mandatory requirements of law of providing sufficient opportunity of being heard and confronting and taxpayer on the basis of adverse inference drawn?
(ii) Can tax exemption of a taxpayer be withdrawn with retrospective effect after lapse of 6 years and after issuing valid tax exemption certificates in past years or tax exemption shoul d be withdrawn prospectively , if so warrants. The case-law relied upon reported as:
1. 1992 SCAB 1652
(iii) Can tax exemption be withdrawn without first withdrawal of SECP approval being the front line Regulator as the Foundation which was created and approved by SECP being section 42 company registered under the Companies Ordinance, 1984 particularly when SECP renewed its recognition on May 07, 2015?
(iv) Can tax exemption be withdrawn in any subsequent tax year related to alleged violation of previous years? (In this case for tax year 2008 as no alleged violation was admittedly done in tax year 201 1)?
(v) Can order under section 122(5) be passed without first disposal of representation of the taxpayer by the Chief Commissioner?
(vi) Whether the Chief Commissioner had valid reasons to withdraw tax exemption based on:
(a) Rule 220A(7)(v); and
(b) Other un-substantiated reasons.
(v) Was the order of withdrawal of tax exemption judiciously passed in view of the powers given under Rule 220A(9) read with Rule 220A (7)(v) even adverse inference to be drawn judicially?
REVENUE VIEWS
30. On the other hand, the DR supported the orders of the two officers below and submitted that the order of the CIRA should be maintained as there is no irregularity or illegality . He pointed out towards the findings of the CIRA that the audit proceedings were kept in abeyance for long at the behest of the taxpayer . Since the OIR was pressed for time to pass the order under appeal as the tax year 2011 was becoming barred by time on June 30, 2017.
Hence, the plea of the AR is not valid that the opportunity of being heard was not provided to the taxpayer .
31. It is quite surprising that on the date of hearing June 25, 2019, the DR candidly admits that he did not find any evidence of SCN being issued under section 122(9) in the record file/case papers/assessment/audit file of the tax department, which he himself examined on the instructions given by worthy members of the bench during hearing.
The DR also expressed his inability to bring the author of the order to the Court to defend the order as directed by the bench during the hearing on June 19, 2019.
FINDINGS/OPINION OF THE COURT
32. We have heard the arguments of both the AR and the DR and have gone through the orders of the authorities below and perused the records of the case and case-laws cited at bar .
33. The legal objections raised by the AR merit consideration. The numerous case-laws related to providing sufficient opportunity of being heard to the taxpayer against whom tax demand is being raised is available in the judicial history of the country . It is held in plethora of judgments that the same is an essential pillar of natural justice.
Also the ATIR Karachi Bench has given the same verdict in number of judgments on the issue of amended orders passed under section 122(5) of the Ordinance. These orders enunciate the principle on which an order under section 122(5) is to be passed. Some of the judgments have also been relied upon by the learned AR including reported/unreported judgments such as 2015 PTD 1242 and 1T A No. 867/KB/2017 respectively .
34.The learned D.R. could not trace out the SCN from the record file/assessment record/case paper of the taxpayer . The D.R. has admitted that SCN was not found in the record file which would result to the effect of nullifying the whole proceedings. Moreover , the compliance to the IDR and alleged SCN issued (as mentioned in the amended order) were set for the same date, which shows the mala fide intention of the tax department Therefore, it is with great blight that the SCN was not issued as due process of law was not followed in letter and spirit which is suf fice to annul the whole proceedings enunciated by the department
35. Under the facts and circumstances of the case we are of the considered opinion that the scope of an audit is extensive and involves grave verification before reaching a conclusion. Such verification in this instant case has not been conducted and unfortunately , the ex-parte order has been passed in haste, without any definite information in hand, which is a pre-requisite for amendment of an assessment order under Section 122(1) of the Ordinance. The audit proceedings under section 177 is only a procedure/mode and method to find out defects in the accounts and in the business affairs of taxpayer and to obtain definite information and objection of taxpayer on audit report and after confrontation to the taxpayer to further enter into the jurisdiction under section 122(1) for making an amended assessment after acquiring authority under section 122(5) on the basis of "definite information".
36. We may further observe that for all practical purposes under section 177 of the Ordinance was a just process/mode and method and prescribed path to reach to the conclusion as to from where the DCIR could further modify an already assessed income for which law had very clearly provided the provision in terms of section 122(5) of the Ordinance. We are of the considered opinion that Section 177 does not in itself provide any power or absolute empowerment to modify assessment or re-determine the income of taxpayer . In this regard, the key point which is to be kept in mind is that it is not a return of income which is being processed by the OIR selecting and thereafter conducting/doing audit. He is dealing with an assessment order' which by process of law has acquired a sanctity . The finalized assessment, therefore, cannot just be modified or disturbed in continuation of the proceedings of audit under section 177.
37. The selection of audit or even conduc ting/doing of audit does not mean or include an assessment or amended assessment/alteration or modification of assessment. The selection of audit and thereafter conducting of audit proceedings is just process and audit authority before invoking provision of section 122 for amendment have to frame charge-sheet/audit observation/audit qualification/audit report and the same ought to be communicated to the taxpayer for rebuttal and the .explanation/reply/assertion/contention/objection s of taxpayer must be obtained and considered before proceeding for invoking section 122. Then after acquiring jurisdiction, and fulfilling all the requirements of sub-sections (1) and (5) of section 122 only thereafter assessment may be amended under section
122. The mere (firstly) issuance of notice under Section 122(9) read with section 122(1) after selection but before conducting audit of the taxpayer is not complete requirement of law. The tax department first has to reject the objection/rebuttal of taxpayer on audit report then require to acquire jurisdiction under section 122(1) and then section 122(5) of the Ordinance. We may conclude this issue that the OIR after selection and conducting audit ought in every case to be able to give the taxpayer all the charges/objection/issues raised in audit against taxpayer such as to enable him to answer/explain them before invoking provisions of section 122 of the Ordinance and after obtaining and considering explanation of taxpayer on audit objections, only thereafter , if the OIR may consider necessary , amend the assessment under Section 122(1)/(5) of the Ordinance, after fulfilling all requirement of law subject to availability of definite information.
38. We are of the considered opinion that in order to invoke the provision of section 122(5) of the Ordinance, it is first essential to issue a specific notice in terms of Clauses (i), (ii) and (iii) of sub-section (5) of section 122 of the Ordinance, highlighting the fact under which category the appellant's case falls. Non-issuance of such a notice clearly means that while passing the amend assessment order , the OIR was not in possession of definite information and the reasons assigned for additions/disallowances while passing the amended assessment order cannot be termed as 'definite information'. Thus, the law renders the entire proceedings void ab initio, and illegal.
Before making any additions and disallow ances to the assessed income under the garb of audit under section 177 and amended assessment under section 122(1)/(5), the tax department is required to acquire legal jurisdiction under the provisions of section 122(5) of the Ordinance. This can only be done to modify or alter or amend the already assessed income only by establishing that taxpayer's income is either under assessed or assessed at too low rate or subject to excessive relief or refund and to be based on definite informa tion. However , we also find that there is no specific finding in terms of "definite information" in the instant case.
39. We may observe that the requirements of section 122(5) of the Ordinance are to be strictly fulfilled. It may be further observed that in view of the Article 10A of the Constitution and Section 24-A of the General Clauses Act, every public functionary , including the Taxation Authorities, are required to provide fair opportunity of being heard to any person before taking an adverse action against him, or passing any order of assessment or creating any additional liability of tax, by confronting such person with the proposed action in writing. The fair trial and right of hearing is regarded as a cardinal principle of natural justice, which has to be read into every Statute, even if it may not be specifically provided therein. Here, it would not be out of place to mention that where a law requires a thing should be done in a particular manner unless the same is done in the prescribed manner the same shall be illegal.
In case of Khalid Saeed vs. Shamin Rizvi reported as 2003 SCMR 1505 the Hon'ble SCP while considering the impact of violation or non-observance of method prescribed by law for doing any act in particular manner or mode observed that if the law had prescribed method of doing a thing in a particular manner. Such provision of law is to be followed in letter and spirit and achieving or attaining the objective of performing or doing of a thing in a manner other than provided by law would not be permitted and would be illegal. In view thereof, the amended assessment is not in strict compliance with the procedure provided in statute and lacks jurisdiction.
40. It is a pre-requisite that there be an acquisition of definite information' with regard to escapement or under- assessment of income or assessment at too low a rate or subjection of excessive relief or refund. Here, we would also like to discuss the concept of self-assessment under section 120 of the Ordinance. The return of income filed by the taxpayer is deemed assessment order passed by the Commissioner Inland Revenue under section 120 of the Ordinance, and can be amended under section 122(1) of the Ordinance only when the taxation officer has definite information in his possession wherefrom it is certain that income or part of it has escaped taxation or been under taxed or excessive relief or loss has been claimed. We reproduce below section 122(5) of the Ordinance, for, ready reference:-- "An assessment order in respect of tax year, or an assessment year, shall only be amended under sub- section (1) and an amended assessment for that year shall only be further amended under sub-section (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that --
(i) any income chargeable to tax has escaped assessment; Or
(ii) total income has been under-assessed , or assessed at too low a rate, or has been the subject of excessive relief or refund; or
(iii) any amount under a head of income has been mis-classified."
41. It is further submitted that it is a settle d principle that definite information does not require any further probe or processing. In this regard, reference is made of judgment of the Hon'ble Supreme Court of Pakistan in the case reported as 68 TAX 1, wherein it was held that the expression "definite information" means much more than mere' material so as to cause a reasonable belief or even such evidence which might lead to definite belief. The relevant extract of the judgment is reproduced below:--- "The expression definite information, and similar other expressions used in the above notice provisions or other related provisions certainly meant much more than mere material so as to cause a reasonable belief of even such evidence which might lead to a dffinite belief Unless there is definite direct information and there is no further need to put the said definite information to trial by putting in further supporting material the process of self-assessment could not be reopened.
In this case in order to establish through so-called "definite information" the department had to rely upon further reasoning in order to clothe their information with credibility what to talk of definiteness. They had to make inquiry in regular trial in which all the persons who purchased the other plot (or majority of those, who sold or purchased the other plots) might have been examined in order to know under what conditions they paid prices which were higher than the price mentioned by the respondent in the case. And in any case the seller of the plots in this case had to be examined in order to ascertain whether the price mentioned by the respondent, was not genuinely paid. It partakes of some procedural aspects of the disputes in pre-emption and other land cases where the price of the land is in dispute. There is plethora of law on this aspect of pricing of land. Keeping all this in view we agree with the learned Judges of the High Court that defin ite information in the context of the law under discussion could not mean mere difference of opinion or further reasoning on other exercise of logic or even drawing of conclusions."
42. The above case-law makes it clear that conjecture, guess work, hypotheses and assumptions cannot be termed as "definite information" which does not require any further analysis . It is, therefore, essential for invoking section 122(1)/(5) of the Ordinan ce that definite information is available to the taxation officer to claim that an income has escaped assessment or taxed at low rate or excess relief has been claimed. In 2018 PTD 749, the Lahore HC discussed the concept of 'definite information' as under:
7. The question as to what constitutes a "definite information" is probably one of the most debated issues not only under Income Tax Ordinance, 2001, but also under the Repealed Income Tax Ordinance, 1979, as the latter also contained a similar concept---This is for the reason, that this term has not been defined in the statute. Some of the most illuminating judgments which explain this concept include: "Income Tax Officer and another vs. Ms. Chappal Builders" (1993) 68 TAX 1 (S.C. Pak.)=( 1993 SCMR 1108), "Inspecting Assistant Commissioner and another vs. Pakistan Herald Ltd. through Director Finance and Corporate Affairs" (1997) 76 TAX 131 (S. C. Pak.) -- (1997 PTD 1485 (SC)), "Messrs E.F.U. General Insurance Co---Limited vs The Federation of Pakistan and others" (1997) 76 TAX 213 (S.C. Pak.) = (PLD 1997 SC 700), "Commissioner of Income Tax Companies Zone-14 Karachi is. Messrs Sindh Engineering (Pvt.) Limited,Karachi" (2002) 85 TAX 386 (S.C. Pak.) = (2002 PTD 419), "Commissioner Inland Revenue vs. Messrs Khan CNG and Filling Station and others" (2013) 107 TAX 41 (HC. Lah.) = (2013 PTD 884), "Commissioner of Income lax vs. Messrs Bashir Brothers" ( 2014 PTD 1377 ).
From the micro analysis, scrutiny and judicial survey of the above judgments, inter alia amongst others, following principles are emerged:
(i) An assessment cannot be reopened or amended on the basis of every information for the reason that every information is not a "definite information".
(ii) "Definite information" cannot be given a universal meaning. It has to be construed in each case.
(iii) The expression "definite information" means more than mere material which may cause a reasonable belief There must be definite and direct information without there being any further need to acquire further material to support it. Where the Department has to rely upon further reasoning or inquiry to clothe their information with credibility , it is not definite information.
(iv) Where a taxpayer has disclosed all the material facts without any concealment, in the absence of discovery of any new facts which can be treated as "definite information", the assessment cannot be amended.
(v) The expression "definite information" includes factual information as well as information about the existence of a binding judgment of a competent Court of law or forum.
However , this does not cover a case where after framing assessment consciously , the Assessing Authorities realize that any provision of law has been ignored or not applied or misapplied.
(vi) Any interpretation of a provision of law by a functionary which is not charged with the duty/function to interpret such provision judicially is not "definite information". Thus, a circular issued by the Board of Revenue whereby it interprets any legal provision cannot be termsed as "definite information".
(vii) A different interpretation of a legal provision or deriving a different conclusion from a given set of facts cannot be reckoned as "definite information". It is merely a change of opinion.
(viii) We may also place reliance on case-law reported as 2013 PTD 884, relevant para Nos.12 & 13 reads as under in support of argument relating to definite information.
"12. The term "definite information" in section 122(5) of the Ordinance is not just any information but definite enough to satisfy the concerned officer that income chargeable to tax of an assessee has escaped assessment or total income of an assessee has been under-assessed, etc. "Definite" means indisputable, known for certain explicit! recise clearly defined, leaving nothing to establish beyond doubt and cut and dried. Definite information is, therefore, that select information which falls within the restrictive meaning of the word "definite" explained above. The law also provides that definite information must be acquired from audit or otherwise. Applying the interpretative tool/doctrine of ejusdem generis which literally means "of the same kind or class" and the doctri ne provides that where general words follow an enumeration of two or more things, they apply only to persons or things of the same gene ral kind or class specifically mentioned the word "otherwise" appearing next to the word "audit" in section 122(5) of the Ordinance on the basis of the above doctrine means a methodology akin or similar to audit where some determined, final, certain, indisputable, calculated information is picked up from any available record of the assessee.
"Otherwise," therefore, does not mean putting information through further process of calculation by the department--The word "acquired" used in section 122(5) of the Ordinance which literally means to "gain possession of" in the present context connotes that the information already exists and has to be picked up from the records or documents--This acquisition provides no margin for incomplete, imprecise and inexact information to be completed through further calculation or processing as that would not be acquiring information but analyzing it.
13. Reading of section 122(5) of the Ordinance, therefore, shows that information in a definite, final and conclusive form must alread exist in some document or record at the time o acquisition. Any information which is incomplete or requires further processing falls outside the domain of definite information and can best pass for a departmental opinion, judgment, guesstimate, approximation or estimate.)"
(ix) In (2017) 1 15 TAX 237 (T rib.), the following points emerged from the decision of T ribunal :
(A) Interference with sales ...,......
(B) Framing of charge-sheet-- The Selection of audit and thereafter conducting audit is just a process and audit authority before invoking provision of section 122 for amendment have to frame charge sheet/audit observation/audit qualification/audit report and the same ought to be communicated to the taxpayer for rebuttal and the explanation/reply/assertion/contention/objections of taxpayer must be obtained and considered before invoking section 122.
(C) Definite Information--The CIR/DCIR//OIR, may amend the assessment u/s. 122(1), (4)/(5) after fulfilling all requirements of law subject to definite information and fulfilment of further conditions of clause (i), (ii) or (iii) of sub-section (5) of s ection 122.
(D) Nature of Supposed Income. It is trite law that the provisions of sub-section (5) of section 122 of the Income Tax Ordinance, 2001 allows amendment of any assessment only when department is in possession of definite information and not otherwise, and in this context the DCIR was under legal oblig ation to specifically identify , the nature of suppressed income and issue notice in terms of clauses (i), (ii) and (iii) of sub-section (5) of Section 122 of the Income T ax Ordinance, 2001 highlighting the fact that under which category appellant's case falls.
(E) Initiations of assessment proceeding through notices. The initiation of assessment proceeding through notices under sections 177, 122(9) is legally not justified and order is passed in consequence thereof being unlawful are not sustainable and ab-in itio void. Unless any definite informatio n acquired in the possession of the DCIR/OIR as a result/finding of audit conducted by the CIR u/s. 177 and the OIR/CIR is satisfied that on the basis of "definite information" and not on the basis of "mis-information" or "doubtful information" that these further three prerequisite requirements to be stretched in pursuan ce to the definite information but these are not cumulative or to be established together:
(i) Any income chargeable to tax has escaped: or
(ii) Total income has been under-ass essed, or assessed at too low rate, or has been the subject of excessive relief or refund; or
(iii) Any amount under a head of income has been misclassified.
43. En a recent decision of the ATIR reported as 2019 PTD 1347 , it was held that the Deputy Commissione r Inland Revenue was under legal obligation to specifically identify nature of suppressed income and issue notice in terms of S. 122(5)(i), (ii) and (iii) of Ordinance highlighting fact that under which category case of taxpayer falls. Non- issuance of such notice means that while passing amended assessment order , the Deputy Commissioner Inland Revenue was not in possession of "definite information" and reasons assigned for additions/disallowances while passing amended assessment order could not be termed as "definite informati on". The entire proceedings, in circumstances, were considered void ab initio and illegal as simple issuance of notice under section 122(9) of Ordinance before conducting audit of taxpayer prior to confrontation audit report/objection/charge-sheet for obtaining rebuttal/explanation by taxpayer was not enough to further proceed in matter for amending assessment order under section 122 of Ordinance which was already completed under law .
44. We would also like to point out that instructions of the Islamabad HC in 2015 PTD 2538 on the subject-matter has not been followed in appellant's case, and therefore, any proceedings in disregard of the instructions laid down in the said judgment are also not sustainable in the eyes of the law .
45. On the touch stone of another aspect of the case that the taxpayer was simultaneously subjected to proceedings under two different pillars of the Ordinance i.e., section 122(5A) and section 122(5) of the Ordinance on the same issues, which resulted in two different orders on the same date i.e., June 30, 2017. Though the case of the appellant was selected for audit under Section 214C of the Ordinance first and the proceedings were kept in abeyance for reasons stated by the AR. The action of the Additional Commissioner Inland Revenue (ACIR) in issuing SCN under Section 122(5A) for the same tax year and subsequently passing an order was patently illegal.
It is trite in law as held in many cases that no second order for the same tax year is sustainable in the eyes of law.
If such a second order is given freedom, this would have meant that the appellant would have been subjected to another rigorous round of cumbersome proceedings, which are deprecated in law, as nobody should be vexed twice for the same cause. We have noted that the CIRA while following the dictum laid down in 2016 PTD 270 has already annulled the order passed under Section 122(5A) of the Ordinance, and therefore, we feel that this matter need not be further dilated upon.
46. In this case, admittedly , no audit report was issued to the taxpayer containin g audit observations as already discussed in the bod, of this order . We feel no hesitation in holding that the amended order itself states that "considering the time constrain fir completion of audit proceedings for tax year 2011 being barred by limitation" the amended order under Section 122(1)/(5) was passed in haste without affording reasonable opportunity of being heard to the Appellant. This whole scenario was fabricated in bid to save the case from becoming time-barred on June 30, 2017 and hence, the Appellant was detained by not providing proper opportunity . We also feel no hesitation to state that in this case the principle of "audi alteram partem - no body to be punished unheard" has not been taken into consideration. The principle of "audi alteram partem has been enshrined in various judgments of highe r Courts to be a principle of universal application regarding affording opportunity of hearing to the parties and it is now an established law that the person should be heard before taking any decision affecting him. We refer to an Indian case-law [M. Appakutty v. STO, (1966) 17 STC 380 (Ker)] in which it was held that: "Principles of natural justice demand that there should be fair determination of a question by quasi-judicial authorities. Arbitrariness will certainly not ensure fairness. If giving a mere opportun ity to show cause and to explain would satisfy the principles of natural justice, the notice to show cause becomes an empty formality signifting nothing, for, after issuing the notice to show cause, the authority can decide according to his whim and desire. The judicial process does not end by making known to the person the proposal against him and giving him a chance to explain. It extends further to a judicial consideration of his representations and the materials and a fair determination of the question involved."
47. In 2011 PTD 2161 , the Sindh HC held that:--- "13. We have examined the case in the light of the arguments of the learned counsel and ........................ It is a settled law that once books of accounts are produced the onus is on the Income Tax Officer to examine it and controvert the explanation of the applicant, with specified instances of the fallacy of assessee's explanation from the books of accounts. This exercise has apparently not been done by the ITO and, therefore, his decision of rejecting the trading accounts cannot be susta ined We will now examine... ........................... "
48. In 2012 PTD 964, the Hon'ble Lahore High Court has held that order passed without providing reasonable opportunity to explain the position is not tenable in law .
49. In a decision reported as 5. TAX 20 (T rib), the Tribunal held as follows:--- "It is fundamental principle of law that the Income Tax Office should act in a judicia l manner , proceed with a judicial spirit and should come to a judicial finding He should give sufficient opportunity to the assessee to place his case before him and conduct himself in accordance with the rules of justice, equity and good conscience, Has all this been done by the officer who had signed the order? Surely , not, and the Department admits that this has not been done by the gentleman who is supposed to he the assessing office. In our opinion, the order as it stands is vitiated by illegality and cannot be treated as a valid order passed in accordance with law ."
50. In the case of United Kashmir Hour Mills (Private) Limited [reported as PLD 2004 SC (AJ&K)], the Supreme Court held as follows:-- "It is a celebrate principle of law that if by an order the interest of a person is adversely affected, he is to be given a notice of hearing as the natural justice so demands and the principle of natural justice shall be presumed to be in every statute unless the same is excluded by the relevant statute itself."
51. In the CIT Vs. Miss Aasia Film Artist reported as 83 TAX 61, the following principle emerges: "Principle of audi alter= partem (that no man shall be condemned unheard) visualize hearing not only in judicial proceedings but in all kinds of proceedings affecting person or property of a party . Further that mere absence of a provision as to notice in the statute cannot override the principle of natural justice that an order affecting the rights of a party cannot be passed without af fording an opportunity of hearing to the party ."
52. We also refer to the directions issued by the CBR through circular C. No. 1(23)1T-1/77 dated January 1' 1977 [reported in Third Edition (1988) of CBR Income Tax Manual (Part V)] to the assessing officers that no disallowance of addition should be made without giving the assessee an opportunity to explain their position before drawing any adverse inference. It is directed in the said circular as follows: "(iv) Opportunity to explain. Before an adverse inference is drawn, the assessee should be afforded an opportunity to explain. Most of the appeals against the department succeed as no opportunity is afforded to the assessee---It can be done by a notice under section 62 or an entry on order sheet---If an assessee accepts as defect and the consequent adverse inference, an admission may be recorded on order sheet and got signed by assessee or his authorised representative and a reference is made in the order .
(v) Reasons of rejection of explanation, Ii an explanation is not found to be acceptable; cogent reasons for its rejection have to be recorded..............."
53. Justice Bhagwati, speaking in the case of Swadeshi Cotton Mills Co. Ltd V. Union of India (Supreme Court) emphasizes that: "audi alteram partem is a highly effective rule advised by the Courts to ensure that a statutory authority arrives at a just decision and it is calculated to act as a healthy check on the abuse or misuse of power ..
Hence its reach should not be narrowed and its applicability circumscribed"
54. It was further laid down in M. Appakutty v . STO, ( 966) STC 380 (Ker) that: "Principles of natural justice demand that there should be fair determination of a question by quasi-judicial authorities. Abritrariness will certainly not ensure fairness. If giving a mere opportunity to show cause and to explain would satisfy the principles of natural justice, the notice to show cause becomes an empty formality signifying nothing, for, after issuing the notice to show cause, the authority can decide according to his whim and desire. The judicial process does not end by making know n to the person the proposal against him and giving him a chance to explain. It extends further to a judicial consideration of his representations and the materials and a fair determination of the question involved."
55. In Union of India (1981) 51 Com Cas 210 wherein their lordships settled that:-- "A quasi-judicial or administrative decision rendered or an order made in violation of the audi alteram partem rule is null and void and the order impugned in such a case can be struck down as invalid on that score alone."
56. We may further observe that the audit proceedings have been conducted without meeting the mandatory requirements of law contained in sections 177(6), 122(9) and Rule 231F(4) &. (5) of the Rules. A bare reading of sub-section (6) of section 177 as well as Rule 23 I F(4) and (5) in preceding paragraphs' it clearly lays down firstly , that it is obligatory upon the OIR that after formulation of the audit report/audit observation/objections/charge-sheet, he ought to first confront the same to the taxpayers the contents of the report on all the issues.
57. Secondly , after considering the explanation of the taxpayer , if he (CIR/OIR) considers necessary that the same is required to be amended on the basis of definite information then he may invoke sub-section (I) of section 122 for acquiring jurisdiction to amend the order under sub-section (4) read with sub-section (5) as the case may be However , the O1R has not followed the requirements of law in letter and spirit and proceeded to pass the order under section 122(1)/(5) of Ordinance without framing audit report in the first place and without confronting the taxpayer the contents of the audit report/charge-sheet/audit objections before invoking section 122(1)/(5) of the Ordinance. This whole scheme in the instant case become of a sham as no SCN was issued: which fact is also admitted by the DR. SUMMARISED CONCLUSIONS:
58. On the basis of above discussion, our findings are summarized as under:
(1) Audit conducted of the appellant under section 177 read with sub-section (6) is void ab-initio and not in accordance with law having no legal effect.
(ii) Amendment under section 122(1)/(5) of the Ordinance, without fulfilling legal requirement of section 177(6) of the Ordinance is without jurisdiction or in excess of jurisdiction.
(iii) Amendment proceedings initiated and concluded without issuance of SCN under section 122(9) is ab initio void, illegal and lacks jurisdiction.
(iv) Provisions of section 122 of the Ordinance start with the language "subject to this section". Such language restricts all further proceedings for amendment of an assessment, which means it could only be amended if they were covered by the provisions of this section---Amendment of assessment for which this section has been prescribed cannot be made if the requirements and qualifications prescribed in this section were not completed before making such an amendment.
(v) That once audit proceedings were initiated under section 177 of the Ordinance and amendment was required to be made under section 122(5), assumption of jurisdiction under section 122(5) of the Ordinance was a condition precedent for amendment i.e. "Definite Information" which is missing in this case.
(vi) What to speak of "definite information" clauses (i), (ii) and (iii) of sub-section (5) of sectio n 122 of the Ordinance, further stipulate the three conditions for issuing of a notice i.e., any income chargeable to tax has escaped assessment; or total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or any amount under a head of income has been misclassified. The OIR has failed to fulfill pre-requisite requirement under section 122(5) of the Ordinance and has not brought on record any instance of "definite information".
59. As for the withdrawal of exemption of the appellant with retrospective effect, there are plethora of case-laws in field by the apex Court of this country , wherein the principles for interpreting an exemption clause are enshrined. In Messrs Elahi Cotton Mills Ltd. and others v. Federation of Pakistan, through Secretary M/o Finance, Islamabad and 6 others (PLD 1997 Supreme Court 582) , it was ruled:-- "Under sub-section (1) of section 14 of the Income Tax Ordinance, 1979 the Central Board of Revenue has been given The power to grant exemption in respect of the income or class of income or person or classes of persons specified in the Second Sche dule including exemption from tax under the Ordinance subject to the conditions and to the extent specified therein or to exempt front the operation 'of any provision' of the Ordinance subject to the conditions and to the extent specified therein. The Federal Government has also been given power under sub-section (2) of section 40 to make amendment in the Second Schedule subject to the proviso that such amendment shall be placed before the National Assembly ."
60. In Messrs Humayun Ltd. v. Pakistan and others (PLD 1991 Supreme Court 963), the basic principles and rational of exemption clause is emphasis by reproducing an excerpt from the case Bank of Commerce v. Tennesse (161 US 134) , which is as under: "Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of anyone to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded on plain language. There must be no doubt or ambiguity in the language used upon which the claim to the exemption is founded---It has been said that a well-founded doubt is fatal to the claim; no implication will be indulged in for the purpose of construing the language used as giving the claim for the exemption. where such claim is not founded upon the plain, and clearly expressed intention of the taxing power ."
61. In Karachi Development. Authority v. Central Board of Revenue through Members Central Excise and Land Customs, Islamabad and others (2005 PTD 2131), the Hon'ble apex Court held: "Taxing statutes were construed strictly in favour of subjects whereas the provisions relating to exemptions were construed in favour of Government as Taxing authority and the Government, while exercising the power of exemption of duty on a particular article, might impose such condition, limitation and restriction as it defined fit."
62. Necessary corollary is that while interpreting an exemption clause, plain language is to be considered; implications are not allowed; conditions stipulated in the exemption clause must be fulfilled. In 2016 PTD 2004 , the principles of interpretation of statutes and exemption under taxing statutes have been discussed by the Lahore High Court.
"Rules Special to T axing Laws:
4. It is settled by now that where a provision in a taxing statute can be reasonably interpreted in two ways, that interpretation which is favourable to the assessee has to be accepted...
5. The rules regarding exemptions under taxing statute have also been established by precedents. One, exemptions under taxing statute must be strictly construed---The said rules have been brought out in Sutherland on Statutory Construction (Third Edition V ol. 3) in the following words:-- "As a general rule grants of tax exemptio ns are given a rigid interpretation against the assertions of the taxpayer and in favour of the taxing power . The basis for the rule is the same as that supporting a rule of strict construction of positive revenue laws that the burdens of taxation should be distributed equally and fairly among the members of society ."
6. This rule against exemptions, however , is not an absolute, proposition. In Swadeshi Polytex Ltd v. Collector of Central Excise .(1990) 2 SCC 358, the Supreme Court of India observed as follows: "It is true that in a fiscal provision if benefit of exemption is to be considered this should be strictly construed But the strictness of the construction of exemption notification does not mean that the full effect of the exemption notification should not be given by any circuitous process of interpretation."
7. The following observations from Interpr etation of Taxing Statutes by Markandey Katju (Second Edition) would be relevant: "An exemption clause should be interpreted to further the object of the provision. In Gujarat Industrial Corp. v. CIT the assessee was a statutory body created for developing industries in Gujarat and to assist generally in the development thereof. Section 10(20A) of the Income Tax Act grants exemption to the income of "an authority constituted in India by or under any law enacted for the purpose of planning, development or improvement of cities, towns or villages". The question was whether under this provision the assessee was entitled to exemption. It was held, development of an industrial area would have a direct impact on the development or improvement of that part of the city, town or village where such an area was located, and hence the exemption was available.
In Broach Dist. Cooperative Cotton Sales Ginning and Processing Society Ltd. v. CIT, Ahmedabad while interpreting the proviso to S. 81(i)(c) of the Income Tax Act the question considered was whether for the purpose of claiming exemption, the process of ginning and processing could be taken as antecedent to the process of marketing of the cotton, in which case the income from those processes also could be exempt. The Supreme Court observed that the object of S. 81(i) was to encourage and promote the growth of cooperative societies, and consequently a liberal construction must be given to the operation of that provision. The Court held that the entire activities of marketing, processing and ginning were to enjoy the exemption from income tax. Thus the Court adopted a liberal interpretation of the exemption."
8. A statement on the issue expressed in Maxwell on the Interpretation of Statutes, Twelfth Edition, page 256 has been oft-quoted with approval by the superior Courts: According to Maxwell: Statutes which impose pecuniary burdens are subject to the same rule of strict construction. It is a well-settled rule of law that all charges upon the subject must be imposed by clear and unambigu ous language because in some degree they operate as penalties: the subject is not to be taxed unless the language of the statute clearly imposes the obligation, and language must not be strained in order to tax a transaction which, had the legislature thought of it, would have been covered by appropriate words. 'In a taxing act, said Rowlett, 'one has to look Merely at what is clearly said There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look. fairly at the language used. But this strictness of interpretation may not always enure to the subject's benefit, for if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be'. As u general rule, and in accord with the prevailing view, revenue laws, and particularly tax laws, should he construed in favour of the taxpayer and against the Government. In fact, they are to be construed liberally in' favour of the taxpayer and any substantial doubt resolv ed in favour of the citizen.. Hence, any tax proceedings must he in strict accord with the provisions of the statutes relating thereto."
9. In Messrs Mehran Associates Limited v. The Commissioner of Income Tax, Karachi (1993 SCMR 274), the Supreme Court of Pakistan laid down the basic rule as follows: "The cardinal principles of interpretation of a fiscal statute seem to be that all charges upon the subject are to be imposed by clear and unambiguous language. There is no room for any intendment nor there is any equity or presumption as to tax. A fiscal provision of a statute is to be construed liberally in favour of the tax-payer and in case of any substantial doubt the same is to be resolved in favour of the citizen."
10 .................
11 ...............
12 ......................
13 ...............................
14 ............................
15 ........................
16. The 2nd Schedule which relates to exemption from specific provisions has its provenance in section 53 of the Ordinance, 2001. Section 53 in turn deals with the exemptions and tax concessions to be given in the 2nd Schedule and relates to the income or class of income or persons or class of persons specified in that Schedule who shall be exempted from tax under the Ordinance subject to any conditions and to the extent specified therein. Moreover , the said provision deals with the income or class of income or person's or class of persons who are subject to tax under the Ordinance at such rate as may be specified or are allowed a reduction in tax liability under the Ordinance, 2001. It also relates to the exemption from the operation of any provision of the Ordinance, 2001 subject to any conditions and to the extent specified therein. By subsection (2) of section 53, the Federal Government has been given the power to make such amendment in the 2nd Schedule by adding any clause or condition or-making any change in any clause or condition therein."
63. We feel that we are restrained to opine on the questions of law raised by the AR on the exemption withdrawal since in our opinion, the issue of withdrawal can be contested by appellant before the higher forum as matters of such stature do not fall in our domain. As for the other issues highlighted by the AR in the grounds of appeal 5 through 9, we feel that we do not need to dilate upon them for the reason that what we are restricted here is the illegality of the amended order in the light of the Ordinance. On the basis of the discussion supra, we therefore, hold that the amended order suffers from absolute illegality and that we find no hesitation to vacate the orders of the two of ficers be low .
64. Before parting with this judgment, we may observe that taxing statutes are to be construed strictly , in the sense that one has to look merely at what is clearly said, there being no room for any intendment, but a fair and reasonable construction must he given to the language without leaning to one side or the other . In a taxing statute analogies play no part. Whether it is a charge, allowance of a deduction or exemption from a charge, in every one of these cases, the revenue will have to follow the direct terms of the statutory provisions.
65. Resultantly , the appeal succeeds as indicated above.