CH. SHAHID IQBAL DHILLON (JUDICIAL MEMBER). These two appeals have been filed at the instance of the Revenue calling in question the combined order Nos. 44, 45 passed by the learned CIR(A) dated 30.12.201 1.
Revenue's appeals were earlier accepted by the Tribunal vide order dated 17.10.2016.
2. Being aggrieved, the respondent taxpayer filed Reference Applications under Section 133 of the Income Tax Ordinance, 2001 "Ordinance" before the Honorable Lahore High Court. The Honorable Lahore High Court has disposed of the said reference applications vide Order I.T.R. No(s).13-14 of 2017 dated 01.02.2017 in the following manner: "Two issues were addressed in the reproduced paragraphs. One was about bad debts and other was regarding expenses relatable to other income. Perusal of Commissioner (Appeals) order shows that elaborate reasons for allowing expenses were given, however , Appellate Tribunal has merely observed that undue favour was given to taxpayer to vacate the Commissioner (Appeals') order , which in our opinion, is not sufficient to reverse the findings of Commissioner Appeals. In paragraph No. 6 of the impugned order , Appellate Tribunal has observed that it had valid reason but no reason has been disclosed in this paragraph.
Needless to say that reasons given by Commissioner (Appeals) were required to be disclosed to form any different opinion by Appellate Tribunal. Hon'ble Supreme Court of Pakistan in Commissioner of Income Tax, Companies Zone-II Karachi v. Messrs Sindh Engineering (Pvt.) Limited, Karachi (2002 SCMR 527 = 2002 PTD 419) and this Court in Commissioner Inland Revenue v. Messrs Mehran Traders (2015 PTD 1330 ) has already laid down certain parameters to be followed by the Appellate Tribunal while exercising its jurisdiction.
Since the impugned order is passed without applying judicious mind and without giving elaborate necessary reasons, therefore, is set-aside. This and connected case are remanded to Appellate Tribunal for re-consideration of the matter in view of law laid down in the judgments noted above".
3. In view of the above directions of the Hon'ble Lahore High Court, Lahore instant appeals are taken up for hearing and are being disposed of through this combined order .
4. Facts leading for disposal of the instan t appeals are that the taxpayer/respondent filed Income tax Returns for the tax years 2005 and 2006 declaring loss of Rs.(14,968,000) and Rs.(23,730,000) respectively which were treated to be assessment orders in terms of Section 120(1) of the Income Tax Ordinance, 2001. Subsequently , on scrutiny of record, the Additional Commissioner observed certain discrepancies which rendered the assessments deemed to have been finalized under section 120(1) of the Ordinance erroneous insofar as prejudicial to the interest of revenue. Accordingly , notices under section 122(5A) read with section 122(9) were issued confronting the said discrepancies with the intention to amend the assessment under section 122(5A) of the Ordinance. In response, the taxpayer submitted replies which were reproduced in the impugne d orders and considered by the Additional Commissioner unsatisfactory . Therefore, he amended the original assessments for the tax years 2005 and 2006 by invoking provisions of section 122(5A) of the Ordinance by making certain additions to arrive at total income of Rs.7,312,000/- and Rs.34,1 16,666/- for both years under consideration respectively vide two separate orders of even dated 30.05.201 1. Feeli ng aggrieved with the action of the assessing officer, the respondent taxpayer preferred appeal before the learned CIR(Appeals-II) Lahore who by virtue of his order dated supra deleted the additions on account of bad debts and certain administrative expenses. The dispensation has compelled the revenue to come up in appeal before this Tribunal for the tax years 2005 and 2006.
5. The learned DR appearing on the behest of the revenue vehemently contended that the learned CIR (Appeals-II)
Lahore was not justified to delete the disallowance on account of Bad Debts written off as no evidence was provided by the taxpayer to support the claim that debtors had lost capacity to return debts and had exhausted legal remedy against debtors. Further contended that the learned CIR (Appeals-II) was also not justified to delete the disallowance of Administrative Expenses as the taxpayer had not declared any business income under section 18 but income from other sources under section 39 was declared. The assessing officer allowed 1/3rd Administrative Expenses on ad hoc basis which are sufficient enough to run the office. The learned A.R. supported the orders of the learned CIR (Appeals-II) Lahore with the findings recorded therein.
6. Right at the very outset, learned AR appearing on behalf of Respondent/taxpayer argued that the treatment meted out by the Additional Commissione r is contrary to the facts of the case and principles of norms of justice. AR stated that in response to Additional CIR's observation a detailed write up by filing requisite information, supporting documents were submitted but unfortunately relevant law on the issue and factual position has not been considered judicially by the Additional CIR. At the same time the AR also argued that the appellant has already faced the cumbersome round of assessment at the first stance therefore, another round would have meant that the appellant would have been subjected to another round of cumbersome proceedings which is deprecated in law and such order should not be passed in a routine manner to allow a party to improve his case or to fill in the lacuna.
The learned AR has also referred the reported verdicts of binding nature in 2002 PTD 407 (High Court), 1997 SCMR 524 and 1997 SCMR 1849 .
7. On factual grounds AR stated that though in the body of the assessment order a mentioning has been made to say that respondent/ taxpayer provided details with supporting documents in respect of bad debts and expenses but unfortunately learned Additional CIR acted illegally and arbitrarily to create a huge patently illegal tax demand.
During the course of hearing before this Tribunal, the learned AR also presented cumbersome record/documents/data which directly relate to taxpayer's efforts to recover the debts and thereafter winding up petitions before the Hon'ble Lahore High Court, which adequately proves the stance of the respondent/taxpayer that taxpayer had duly fulfilled all legal formalities to support that it made adequate recovery arrangements before claiming bad debts in the account as well as tax returns. In case of ad hoc additions in administrative expenses, all additions have been made without confronting the appellant and without specifying any defects in the presented record/data during assessment stage.
8. The learned counsel by placing reliance on the judgment of Hon'ble Supreme Court of Pakistan reported as Commissioner of Income Tax v. Pakis tan Industrial Engineering Agencies Limited (1992 PTD 954), argued that the department cannot dictate the taxpayer how to do business. If the taxpayer enters in certain transactions for business purposes by adopting legal modes and one of the main purpose of entering into such transactions is not avoidance or reduction of tax liability , Hon'ble Supreme Court of Pakistan has very aptly and categorically laid down this principle in the aforesaid judgment in the following words. "An assessee is entitled to manage his own affairs to the best of his benefit even by adopting legal modes which may result in reduction of tax and the same if covered by the provisions of law cannot be challenged on the ground of prudence, advisability or business practice". Learned A.R. further vociferously contended assessment order passed by the Additional CIR is contrary to the scheme of the law and without observing the principles of natural justice. If doing of a thing is made lawful in a particular manner then doing of that thing is conflict with the manner prescribed will be unlawful. Reliance is placed on 2006 SCMR 129. The things which cannot be done direct ly are not capable to be done indirectly 1993 PLD SC 473, Mian Muhammad Nawaz Sharif v. President of Pakistan and others. Where the original action is void then the subsequent actions and proceedings there from would also be vitiated 1958 PLD 104 (SC). When exercise of jurisdiction is subject to mandatory conditions, then the exercise of jurisdiction disregard to those conditions render the exercise of jurisdiction void and following and flowing actions and proceedings are null and void and non-fulfilment of mandatory conditions is incurable jurisdiction defect. 1971 SCMR 681 and 1972 PLD SC 271.
9. The learned AR vehemently concluded his arguments and submitted that independent judicious view would automatically unmask the picture that orders passed by Additional CIR are errone ous, factually incorrect and has resulted in great miscarriage of justice that's why learned Appeal Commissioner has disapproved the patently illegal treatment. The learned AR submit ted that issues involved in the present appeals require consideration of these principles, in support of his contentions various judgments of higher as well as superior fora were also referred. Present appeals are taken up and decided in terms of following observations.
10. We have heard the arguments and perused the relevant record presented. It is established that one cannot be permitted to first create an ambiguity in the law and facts and then to proceed to employ niceties of the interpretation to resolve it. However , where the provision of law is apparently uncertain or ambiguous and admits of more than one equally possible interpreta tion it is only there that in fiscal statutes an interpretation favorable to a taxpayer can be made. This principle was explained in The Commissioner of Income Tax, East Pakistan v.
Hossen Kasam Dada, Karachi (PLD 1961 Supreme Court 375). The rule of beneficial interpretation of a provision is always subject to the condition that two equally reasonable meaning of the provision are possible.
However , as mentioned earlier where language of statutory provision is clear , effect must be given to it as found by the Supreme Court in 1992 SCMR 663. In fiscal laws an equitable interpretation is not possible as found in PLD 1977 Lah. 292 and approved in 1993 SCMR 274 .
11. The taxpayer had claimed bad debts amounting to Rs.13,306,000/- and Rs.48.867,000/- for the tax years 2005 and 2006 respectively which were disallowed by the Additional CIR due to the sole reason that the taxpayer had not fulfilled legal formalities and no evidence was provided to support that it made adequate recovery arrangements. Available record reveals the facts that Additional CIR wrongly disallowed the bad debts written off merely on the basis of suspicion and misconception that the formalities and conditions laid down in section 29 of the Ordinance for admissibility and allow-ability of bad debts admissible deduction were not followed by the taxpayer in true letter and spirit.
12. Before resolving the controversy , it is important to look into certain basic concepts relating to the impugned subject in common parlance, income tax statute and cases law. First of all we will examine what is 'debt' bad debts' and what it implies? It is appropriate to reproduce the provisions of the Income Tax Ordinance, 2001 governing Bad Debts. Section 29 of the Ordinance read as under:- Bad debts .(1) A person shall be allowed a deduction for a bad debt in a tax year if the following conditions are satisfied, namely:- the amount of the debt was - previously included in the person's income from business chargeable to tax; or in respect of money lent by a financial institution in deriving income from business chargeable to tax; the debt or part of the debt is written off in the accounts of the person in the tax year; and there are reasonable grounds for believing that the debt is irrecoverable.
(2) The amount of the deduction allowed to a person under this section for a tax year shall not exceed the amount of the debt written off in the accounts of the person in the tax year .
Debt, what it implies?
The word 'Debt' has been defined in subs ection (15) of section 2 of the Income Tax Ordinance, 2001 as well as in various legal dictionaries, thesaurus and cases law as under:- Subsection (15) of section 2 of the Ordinance; "Debt" means any amount owing, includin g accounts payable and the amounts owing under promissory notes, bills of exchange, debentures, securities, bonds or other financial instruments; Bad Debt, what it implies ?
What is bad debt and what it implies is evident from the following: Debt which is unlikely to be paid (for example, because of probable or actual financial failure of the debtor). Bad Debts may usually be treated as losses and written of f against reserves for such debts'.
"The debts which are found to be irrecoverable are called bad debts. Before claiming an allowance for bad debts or irrecoverable loans under this clause, the following conditions must be satisfied The debts or loans must be relating to the business which is carried on by the assessee in the relevant accounting year; The method of accountancy followed must not be on cash basis but this condition will not apply in the case of moneylenders: The loan must have been made in the ordinary course of business, profession or vacation and be incidental to the business: The debt or loan must have become irrecoverable in the relevant accounting year and not prior to that year .
The sum allowed under this clause should not exceed the amount actually written off as irrecoverable in the books of the account.
Bad Debt is debt which is uncollectable; a permissible deduction for tax purposes in arriving at taxable income. A deduction is permitted if a business account receivable subsequently becomes worthless providing the income arising from debts was previously included in income. The deduction is allowed only in the year of worthlessness.
13. The definition in Income Tax Ordinance, 2001 is enumerative definition with reference to financial and negotiable instruments. In other words, a debt may be defined as a sum of money due from one person to another .
As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity , it is accepted that a debt exists for Inc purpos es of section 2(15) of the Ordinance. There is a debt for the purposes of section 2(15) where a taxpayer has merely an equitable entitlement to the debt. "Debt" has been defined as "a sum of money due from one person to another . A debt exists when a certain sum of money is owing from one person to another . 'Debt' denotes not only the obligation of the debtor to pay, but also the right of the creditor to receive and enforce payment"
14. Perusal of record specially Liquidation Petition C.O. No.06/ 2002 filed in January 2002, C.M. No. 372-L/2002, C.M. No. 325/2003, reports submitted before Hon'ble Lahore High Court by Joint Official Liquidators and order passed by Hon'ble Lahore High Court by their Lordships Mr. Justice Muhammad Sair Ali and Mr. Justice Umar Ata Bandial in C.O. No. 06/2002 undoubted ly reveals the fact that all legal formalities were duly fulfilled by the respondent taxpayer while writing off the bad debts for both the tax years under appeal. We have observed that said bad debts were written off in the accounts after duly considering the feasibilit y of recovery as the companies from whom amounts were due had been liquidated and no recovery was possible to be made under any stretch of imagination. Reliance may be placed on (1971) 82 ITR 147 (SC) and (1989) 179 ITR 387. We have also perused the conditions laid down in section 29 of the Ordinance for writing off bad debts and found that all the legal formalities were duly fulfilled by the respondent taxpayer but the Additional CIR had failed to bring anything on record for disallowing the bad debts in question. All the companies from whom the debts were to be recovered had been liquidated, on the other hand, the respondent taxpayer is also remained sick and no function had been performed since many years. Hectic efforts have been made by the State owned respondent taxpayer but it was not possible to make recovery of the debts in question. The action on the part of learned CIR (Appeals) to delete the additions on this account is well founded and legally justified, needs no interference.
15. In case of disallowance on account of administrative expenses, quite amazingly the learned DR argued that taking a lenient view, the Additional CIR allowed 1/3rd expenses and disallowed the administrative expenses amounting to Rs.22,280,000/- and Rs.57.845,666/- under the various heads of accounts (including bad debts) due to the reason that all the expenses in question attributable to the income classifiable under section 18 but the respondent taxpayer had not declared any business income. The learned AR vehemently contended that the assessments for the tax years 2005 and 2006 were finalized without having definite information and the proceedings were finalized in a fanciful manner even without pinpointing any violation of law on the part of respondent/ taxpayer . The Additional CIR on the one hand, changed the classification of business income under section 39 instead of section 18 and on the other hand, the assessing authority himself allowed 1/3rd of the expenses on the basis of presumption and purely on guess work, which is not supported by any of the provision of Income Tax Ordinance, 2001.
16. We have given due consideration to the arguments of the rival parties in the perspective of the impugned orders and are persuaded to hold that the contention of the learned AR is found convincing. The Additional CIR had disallowed the expenses under the variou s heads despite the fact that the same were attributable to the business income taking a lenient view meaning thereby the Additional CIR had no definite information regarding erroneousness of assessment order and his action in disallowing the said expenses was totally based on mere presumption and guess work which has no place in the Income Tax Ordinance, 2001. We feel that Additional CIR without properly following the procedure laid down in the Ordinance, disallowed administrative, expenses under various heads totally on presumed basis by adopting 1/3rd formula which is nothing but shooting in the dark. In fact spirit of changes with regard to assessment/audit/additional assessment proceedings brought about through new law i.e., Income Tax Ordinance, 2001, were altogether overlooked by the Additional CIR which is judiciously and justly taken care by the learned CIR(Appeals). The Additional CIR made the lump-sum ad hoc additions in a total void manner and in contravention of the procedure as laid down in section 174 of the Ordinance. It is un-disputed fact that it was an account case and the Additional CIR was required to H confront the taxpayer by way of a specific notice and to express his intention to disbelieve any part of the disclosed version duly supported with documentary evidence. Principles of natural justice requires that where a taxpayer produces books of accounts and supporting documents the Assessing Officer shall before disagreeing with such accounts/ version, give a notice to the taxpayer of the defects in the accounts and provide an opportunity to explain his point of view about such defects.
Also that the Assessing Officer shall record the explanation of the taxpayer and the basis of computation of total income by the taxpayer in the assessment order . We are persuaded to agree that the Additional CIR did not act in accordance with law while discarding the declared version of the respondent/taxp ayer under the various heads of administrative expenses. It is a settled principle that when law requires a thing to be done in a particular manner then it must be done in that manner or it should not be done at all. The law requires that in accounts cases the Assessing Officer will give a notice to the taxpayer pointing out the defects in the accounts and will also rule upon the explanation made in reply to such notice. In the case before us, in the first instance no specific notice appears to have been given by the assessing officer. A simple reference in one word (1/3rd) can hardly be said to have fulfilled the legal requirements. In order to justify such an action he was required to bring some material on record to establish that the disclosed version in fact was incorrect or that accounts were not maintained faithfully . Even otherwise the view of Superior Courts has always been that after rejecting a returned version the Assessing Officer is required to establish his own estimate. Further that in absence of proper basis the estimate made by the assessing officer to 1/3rd of the claim could not stand at a better footing than the returned version. An estimate of the assessing officer must be based upon facts and circumstances of the case as borne out from the record and not on the basis of whims and desires. This way of legitimizing ones doubt cannot be approved. Particularly when it comes to judge the action of a person exercising judicial or quasi judicial authority under the fiscal statutes, therefore, the judicious order passed by the learned CIR (Appeals) to delete the additions is fully in accordance with law , needs no intervention.
17. In view of the foregoing facts and legal position, we are of the considered opinion that additions made by the Additional CIR suffer from factual infirmities and legal defects. The upshot of the above discussion is that Additional CIR yeas arbitrarily and contrary to the provisions of law ignored the facts of the case and relevant law and completed the assessment illegally and arbitrarily . The combined Order Nos. 44, 45 passed by the learned CIR (Appeals-II), Lahore dated 30.12.201 1 is reasoned one since he has decided the case purely in view of documentary evidence provided by the respondent taxpayer not only before the Additional Commissioner but also in appeal proceedings. The learned D.R. has failed to rebut the assertions made by the learned A.R. as well as observations made by the learned CIR (Appeals) in his order . Keeping all these facts in view, we are of the opinion that the learned CIR (Appeals) was amply justified in deleting the additions, thus no interference is required in the impugned order which is hereby maintained.
18. Appeals of the Revenue are dismissed being devoid of any merit.