This appeal has been filed by the taxpayer against the impugned order dated 18.03.2019 recorded by the learned CIR (Appeals-I) Lahore, wherein remanding the assessment under section 122(1) of the Income Tax Ordinance, 2001 to the taxation of ficer has been challenged.
2. Succinctly facts of the case are that the taxpayer , a private limited company derives income from manufacturing of laundry soap, washing power and dish washing soap. The case of the taxpayer was selected for audit under section 177 of the Income Tax Ordinance, 2001 for the year under appeal. The taxation officer issued a show- cause notice under section 122(9) of the Income Tax Ordinance, 2001 for confrontation of amended assessment Reply of the taxpayer was found to be unsatisfactory and amended the determining amended income and consequent tax liability . In appeal, the learned CIR (Appeals) remanded the mattes to the taxation officer for denovo consideration for the reasons and factors as embodied in the impugned order . This has brought the taxpayer in further appeal before this forum.
3. The learned AR of the taxpayer has vehemently argued that the return for the year under consideration was filed on 20.12.2016 dully filling all the column of the IT-1 accompanied with audit report (which was deemed to be assessed under section 120(1) of the Ordinance). Case of the taxpayer was selected for audit under section 177 of the Ordinance by the Commissioner Inlan d Revenue, Zone-IV , Lahore communicating the reasons for selection to the taxpayer . A show-cause notice under section 122(9) read with sections 122(1)/122(5) of the Income Tax Ordinance, 2001 dated 13.09.2018 was issued, in response to said show-cause the taxpayer filed written reply vide its letter No.1068 dated 22.09.2018. It is pertinent to mentioned here that; "no notice under section 111 of the Ordinance was issued by the DCIR for un-explained income or expenses incurred by the taxpayer appellant as well as of section 174(2) of the Ordinance to disallow or reduce the taxpayer's' claim for a deduction ". The expression "deduction" means any amount debited to trading account, manufacturing account, receipts and expenses account or profit and loss account. The appellant maintained proper books of account as envisaged under the Income Tax Rules. In a case reported as 2019 PTD 1828 (Lahore High Court); wherein their Lordships have held that: "A specific notice to a taxpayer is pre-requisite to include unexplained income/assets in income chargeable to tax in terms of Section 1 11(1) and without such notice substantial compliance of said provision of law could not be made.
Provisions of Section 111 of the Ordinance of 2001 show that if the instance/catego ries of unexplained income and assets, mentioned therein, come to the knowledge of the Commissioner , he is not obliged to form an opinion on the basis of information so gathered rather is required to issue notice to taxpayer seeking explanation, confronting the information collected that its case comes within the head(s) specified in subsection (1).
For an explanation to be offered by the registered person, he must have been issued notice without which no explanation could be offered, within the contemplation of Section 1 11."
He, therefore, prays for vacation of the same by accepting the appeal of the taxpayer .
4. On the other hand, the learned DR has supported the orders of the authorities below for the reasons recorded therein. No new set of arguments put forth by him which may be quotation here.
5. We have heard the rival arguments and perused the record and the orders subject matter of the cross appeals.
The case of the appellant selected for audit under section 177 of the Ordinance on 18.01.2018 and the amended assessment was framed on 28.09.2018 which is hit by limitation. Reliance was placed in a case reported as 2018 SCMR 1328 = 2018 PTD 1444 their Lordships have held that: "22. By same token, we also convinced that a general timeframe is necessary to be put in place in order to ensure that the tool of audit is not abused or misu sed to pester , torment or harass the Taxpayer on account of reasons not attributable to him. We, therefore, find that the timeframe mentioned in the policy guidelines namely completion of the audit within the same financial year in which a Taxpayer is selected for audit is fair and reasonable. It must as far as possible be adhered to. However , if delays are inevitable, beyond the contr ol pf the Department and do not occur on account of any act or omission on the part of the Taxation Officers and happen on account of litigation and grant of stay orders, the Audit Officer may seek extension of time from the Federal Board of Revenue for completion of the audit after recording reasons in writing for seeking such extension explaining reasons for his inability to complete the audit within the stipulated time. Even otherwise, the Department cannot be given a free hand to keep the matters pending indefinitely which is neither in the interest of the Taxpayer nor the Department."
The Said assessment was not completed within the same financial year in which a taxpayer is selected for audit and no reasons was recorded in C writing is available in this case. Hence, taking guidance from the case law cited supra the assessment is hit by limitation.
6. The procedure for determination of value provided in sections 25 and 25A of the Customs Act, 1969. All the payments were routed through banking channels. Section 25A of the Customs Act, 1969 is, a non-obstante clause and it supersedes the procedure provided in section 25 so far as the formation of an advice is concerned. The Customs Authorities had fixed parameters during determination of value of goods and the process of appraisement has been done judiciously with the intention of collection of revenue of its well deserve value. The following Valuation Ruling are submitted during the course of hearing are as under:
(i) Valuation Ruling No.609/2013 dated 1 1.11.2013.
(ii) Valuation Ruling No.781/2015 dated 16.12.2015.
(iii) V aluation Ruling No.889/2016 dated 28.06.2016.
For this purpose, the learned counsel also provides the copies of the GDs along with ledger accounts to this Tribunal to remove the difference in respect of the custom value assessed and the actual value paid by the taxpayer . He also produced a judgment of the Lahore High Court, Lahore reported as 2009 PTD 281; their Lordship has held that: "Once a consignment is out of charge after due Consideration of relevant facts it becomes a past and closed transaction to the extent of its value etc. The same, therefore, should not be invoked only on the basis of the mere estimate, gossips, personal whims or feelings that the value could have been enhanced or it could fetch more taxes etc. The opening of an appraisement for the purposes of re-valuation of an earlier estimate or adopted figure would require "reason to believe" and not "reasons to suspect". For example, if one subsequently , finds that the description of the imported goods was different, H.S. Code applied was wrong as a result of misrepresenting or the number of items mentioned in GD and accepted by the Department incorrectly , etc., nobody will have any objection on the application of provisions of section 32. However , if one feels that more revenue could have been generated and thus invokes the provisions of section 32, said course was not justified. The valuation ruling cannot be considered a piece of evidence unless the same is based upon sound footings. However , on the basis of a valuation ruling, the provisions of section 32 cannot be invoked."
The learned counsel strongly contented that the learned DCIR failed to rebut any of the queries raised in the said letter . It is settled principle of law; "that decision which is not based on reason is not judgment in the eyes of law.
The three basic ingredients of every decision i.e., findings of fact both direct and inferential, statement of principles of law applicable to the legal terms disclo sed by the facts and the judgment passe d on the combined effect of the above ingredients". Further , he argued that issuance of combine notice under section 122(9) was not enough to proceed further and the DCIR could not directly reach the conclusion to make addition without fulfilling the requirements of law. No specific notice for addition in income of the taxpayer was issued and the superior Courts in such like situation had always disappro ved the addition made by the departments. Show-Cause Notice is a foundational document, which is to comp rehensively describe the case made out against the taxpayer by making reference to the evidence collected in support of the same. It is the narration of facts in the show-cause notice along with the supporting evidence which determines the offence attracted in a particular case. show-cause notice is not a casual correspondence or a tool or license to commence a roving inquiry into the affair of the taxpayer based on assumptions and speculations but is a fundamental document that carries definitive legal and factual position of the department against the taxpayer . Reliance was placed by an unreported case Appellate Tribunal Inland Revenue, Lahore vide IT A Nos.2135- 37/LB/2015 dated 19-02- 2016. The honourable Tribunal held that: "...............issuing of combined notice under two different sections was fatal Taking guidance from the case law cited supra we are of the considered opinion that the addition under section 111(1) (b) was made without fulfilling the legal requirements of law and has wrongly be maintained by the learned first appellate authority .
Consequently , the same are deleted and appeal is allowed."
7. It is also found that the taxation officer did not point out any deficiencies while finalizing the amended assessment proceedings.
Reliance was placed in a case reported as 2004 PTD 1263 (Lahore High Court); their Lordships have held that: "6. After hearing the learned counsel for the parties, we are persuaded to allow the contentions made at the bar for the appellant that the learned Tribunal was not justified in restoring the additions as no deficiency was pointed out in the books maintained by the assessee. The appellant is correct in pointing out that loss due to dry-age was a normal and unavoidable feature of the manufacturing process and that the same could be verified from the quantitative details of the cotton purchased, consumed and the _ yarn manufactured given in the record maintained for the purpose of excise duty .
7. The reliance of the learned counsel for the appellant on a judgment of the Karachi High Court in re. Tanvir Textile Mills Ltd. v. Commissioner of Income Tax (1990 PTD 254) is also pertinent and relevant. The facts in the case before their Lordships and the one in hand are strikingly similar . In both cases the genuineness of books of accounts maintained by the assessee was not questioned. Neither the Assessing Officer nor at the two appellate stages any substantial mistake or discrep ancy in the accounts was pointed out. Their Lordships of the Karachi High Court on relying upon their earlier decision observed as under: "After hearing the learned counsel for the Assessee and the Department we are of the view that there was no justification for rejecting the wastage claimed by the assessee in the above assessment years . It is quite clear from the order of Income Tax Appellate Tribunal that the genuineness of the account books maintained by the petitioner was not doubted. In fact, the additions made by the Income-tax Officer on account of unverifiable sales in the sale figure disclosed by the assessee/applicant in its returns for the above years, were not only rejected by the Appellate Assistant Com missioner in appeal, but it was maintained by the Income-tax Appellate Tribunal in the appeal filed by the Departm ent against the order of the Appellate Assistant Commissioner . This goes to show that there was nothing wrong in the manner of accounting maintained by the assessee. In the case of Indus Textile Mill Ltd. v. CIT (1989 P7D 567) a Division Bench of this Court held that the accounts maintained by the assessee, can be rejected if there are substantial mistakes and discrepancies due to which it is not possible for the Assessing Authority to correctly and clearly determine the income of the assessee. It is also observed in the above case that where it is not possible to maintain record of stagewise production and stagewise wastage and no such record was maintained in the past, the department could not reject the accounts of assessee for that reason.
We are in respectful agreement with above observations which are fully attracted in the present case. Apart from that it is quite obvious on a simple mathematical calculation that the quantity of cotton yarn added in each assessment year by the ITO, to the produ ction figures disclosed by the applicant, if taken, together with vistide and invisible wastages disclosed by the applicant, which was duly accounted for in the assessment, the total production of assessee/applicant in each of the above-mentioned assessment year exceeded the total quantity of cotton consumed in that year . This is obviously an absurdity which could not take place."
8. Further , the term direct and indirect taxes and income are elaborated in a case reported as 1997 PTD 1555 (Supreme Court of Pakistan)]; their Lordships have held that: "While we are engaged on the question of direct and indirect taxation, reference may be made to the following passage from the book under the title "Indirect Taxation in Developing Economics. The Role and Structure of Customs Duties, Excises and Sales T axes" by John F . Du, which reads as under "The term indirect tax will be used to refer to three categories of taxes: customs duties, excise taxes, and sales taxes. The term is not ideal, since it is used in so may different ways, but it is employed in preference to coining a new one. The term commodity tax is sometimes applied to the three categories, but such taxes may apply to services as well as tangible commodities, and this term emphasizes the objects rather than the transactions and the persons involved in them.
The assumption will be made that the taxes am primarily "borne by consumers" in the sense that the reduction in private sector real income that results from the use of resources by government is related to consumption expenditures on the taxed goods." .......................................................................................................................
"I think that, properly considered, income-tax is a tax on a person in relation to his income. The tax is not imposed on income generally; it is imposed on the income of a person; natural or artificial, as defined in section 3. The assessment has to be made against a person, and the tax has to be collected from the assessee. The tax is not made a charge on the income upon which it is levied, and I think, broadly speaking, it is accurate to say that income-tax is a imposed upon person in relation to his income." .....................................................................
"(v) Fundamentals of Accounting, Fourth Edition, by Perry Mason; Sidney Davidson and James S. Schindler; in which the authors have dilated upon on the question, as to how determine net income and its distribution as follows: "A CENTRAL PROBLEM in accounting is the determination of periodic net income. The goal of a realistic determination of income, guides a very large proportion of a realistic determination of Income guides a very large proportion of the decisions made in accounting analysis and acts as a focal point for most accounting problems, the process of income determination is often expressed as one of matching costs and revenues. By this we mean that we attempt to associate with a given revenue source, or with the revenue of a given accounting period, the applicable amount of cost used up in connection with the earning of that revenue. ...................................................................................
"When the amount of net income of the business entity for the period has been determined, the total must then be allocated among the various equities or claimants to income. This involves interest charges on indebtedness, income taxes, dividend . declarations or proprietary withdrawals, and the residua l change in the stockholders' or proprietary equity . "
"(xvi) That the process of income determination is often expressed as one of the matching costs and revenues. It involves the process of working out costs used in connection with the earning of the revenue in a particular accounting period." .................................................................................................................
(xxii) That any legislation whereby either the prices of marketable commodities are fixed in such a way as to bring them below the cost of production and thereby make it impossible for a citizen to carry on his business or tax is imposed in such a way so as to result in acquiring property of those on whom the incidence of taxation fell, then such legislation would be violative. of the fundamental rights to carry on business and to hold property as guaranteed in the Constitution." .................................................................................................................
"(xxv) That a direct tax is one which is demanded from the very person, who it is intended or desired should pay it, whereas indirect taxes are those, which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another , like customs duties, excise taxes and sales taxes, which borne by the consumers."
"(xxxiii) That before charging tax, an assessee must be shown to have received income or the same has arisen and accrued or deemed to be so under the statue. Any amount which cannot be treated as above is not an income and, therefore, cannot be subject to tax."
If an assessee makes profit more than what is subject to tax under subsection (1) of Section 80C, the Revenue has no power to charge tax on the additional income so long as the above additional income is earned by him on account of the transactions, which have been subject to tax under subsection (1) of Section 80C. However , if the assessee claims that he has made unusual profit, for example, he has earned Rs.1,00,000/-instead of Rs.5,000/-,which would have been the normal profit, the protection of above subsection (4) of Section 80-C will still be available to him if he can on the 'basis of reliable evidence prove the above fact to the satisfaction of the forums provided under the Ordinance, But if he fails to discharge above burden of proof, in that event subsection (5) can be invoked. The assessee in disguise of total, discharge of his liability under subsection (4) of Section 80C cannot convert black money into white money by showing the black money as a profit earned, though factually it is not so.
With the above clarification, the above submission is answered."
9. As per contention by the learned AR that DCIR already completed the withholding tax assessment for the year under consideration vide its Order dated 16.03.2017. Further , the taxpayer company has rightly calculated the depreciation of each vehicle restrict to 2.5 million. For sake of facility , the provision of sub-clause (a) of Clause (13) of section 22 of the Income Tax Ordinance, 2001 is as under: "(a) the cost of a depreciation asset being a passenger transport vehicle not plying for hire shall not exceed two and half million rupees."
The plain read of the said clause clear indicated that the limit of 2.5 million is for one vehicle. Anxious thought to the contentions of the taxpayer is that after making add backs the taxation officer must properly examine the books of accounts as evidence in support of the returned income. Three conditionalities to be enforced which ere as under:
(a) Firstly , that the Deputy Commissioner of Income tax shall give a notice to the taxpayer of the defects noted in the books of accounts.
(b) Secondly , that he shall provide an opportunity to the assessee to explain his point of view about such defects in the accounts.
(c) Thirdly , that he shall record such explanation and the basis of computation of total income of the assessee in the assessment order .
Now this is the statutory obligation of the DCIT to comply with such conditionalities in seriatim and if any one of them ceases to be implemented or not followed in proper order the returned version cannot revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.