ZAHID SIKANDAR (JUDICIAL MEMBER). The instant second appeal has been preferred by the taxpayer under section 131 of the Income Tax Ordinance, 2001(hereinafter referred as 'ITO') against the order dated 12.12.2021 passed by the Commissioner Inland Revenue (Appeals), Gujranwala wherein the learned Commissioner Inland Revenue (Appeals), partially accepted the appeal of the taxpayer by deleting the addition under section 111(1)(b) made on account of unexplained foreign remittances at Rs.482,714/- whereas, confirmed the additions made under section 111(1)(d) at Rs.4,294,183/- and disallowance of expenses under section 174(2)/21(1) at Rs.1,749,962/-under section 174(2) at Rs.60,000/- under the Heads of Purchases and P&L expenses respectively.
2. Brief facts of the case are that the appellant/taxpayer is an individual who filed income tax return for the tax year 2019 declaring net income at Rs.1,145,940/- which was deemed as an assessment order under section 120 of ITO. The case of the taxpayer was selected for audit under section 177 for the tax year 2019. The assessing officer vide different office letters/reminders intimated the respondent about the selection of case in audit and required the respondent to provide documents pertaining to accounts. In response, the AR for the taxpayer appeared on the given date and filed reply along with certain documents. However, being dissatisfied with the assertions of the AR, the assessing officer adjourned the case requiring some further documents i.e Books of accounts, cash book, evidence of receivables etc. In the meanwhile, the OIR also issued show- cause notices under section 122(9) and section 111(1) to the taxpayer for the purpose of amendment in assessm ent order by way of making certain additions as proposed in the show-cause notices.
Again, the taxpayer filed reply/explanation but to no purpose and the assessing officer vide order dated 07.06.2021 proceeded to pass the amended assessment order under section 122(1) read with section 122(5) in the following manner: Income declared 1,145,940 Addition under section 111(1)(d) on account of unexplained bank credit entries4,294,183 Addition under section 111(1)(b) on account of foreign remittances 482,718 Disallowance under section 174(2)/21(1) on account of expenses 1,749,962 Disallowance under section 174(2) on account of 60,000 Total income 7,732,799 Tax on above 1,392,512 Less tax paid Balance tax payable 1,392,512
3. Feeling aggrieved by the aforesaid treatment the taxpayer filed an appeal under section 127 of the ITO before the Commissioner (Appeals). The learned CIR(A) after hearing the matter vide order dated 12.12.2021 modified the amended assessment order by way of deleting the addition under section 111(1)(b) whereas confirmed the rest of the treatment given to the taxpayer in the impugned order. Hence, still aggrieved, through this second appeal the taxpayer has assailed the order passed by the CIR(A) to the extent of confirmation of addition under section 111(1)(d) and disallowance under section 174(2)/21(1) before this bench.
4. Mr. Shahbaz Butt, Advocate, appeared on behalf of the appellant taxpayer and argued the matter. The first and foremost contention raised by the learned counsel for the appellant is that the taxpayer after the issuance of notice joined the audit proceedings and furnished explanation on all the issues along with documentary evidence. However, the authority conducting the audit neither issued audit observations, nor confronted the appellant with the issues raised in the audit and directly proceeded to amend the original assessment without observing the provisions envisaged in sections 177(6) and 177(6A) inserted through Finance Act, 2019. The learned counsel submitted that the issuance of audit report containing proper findings on issues confronted during the audit is mandatory before initiating proceedings under section 122 and that too after issuance of notice under section 122(9) on the basis of audit report. In order to strengthen the arguments on the ground, the learned counsel relied upon various judgments of apex courts as well as this tribunal in cases reported in 2017 PTD 686, 2018 PTD 1444, I.T.A. No.1540/KB/2019. The learned counsel maintained that since provisions given in sections 177(6) and 177(6A) have not been adhered by the officer therefore besides other grounds raised, all the subsequent amendment proceedings are liable to be annulled on this score alone. The learned counsel for the appellant further argued that the existence of 'definite information' prior to amendment in assessment under section 122(5) is sin qua-non and unless such definite information is in the possession of department, original assessm ent cannot be amended under section 122(5). The learned counsel attacked the orders passed by the officers below for the reason that both the officers have passed the orders without bringing any material or evidence on record or any definite information prior to initiating proceedings under section 122(5).The learned counsel further submitted that since the case of the taxpayer was selected for audit and the taxpayer duly provided the requisite details to the officer therefore the exercise of powers under section 174(2) by the assessing officer is illegal.
5. Conversely, the learned DR supported the impugned order by submitting that the taxpayer failed to furnished satisfactory explanation well supported by documentary evidence in support of his declared version on the confronted issues therefore the CIR(A) rightly confirmed the impugned additions and disallowance under section 111(1)(d) and section 174(2)/21(1). Finally, the DR prayed for the dismissal of the instant appeal.
6. The provisions contained in sections 177(6) and 177(6A) amended through Finance Act, 2019 stipulate that after completion of audit, the commissioner shall issue audit observations and findings and then after issuing audit report the commissioner may amend the assessment order after providing opportunity of hearing to the taxpayer. Both the relevant, provisions given in sections 177(6) and 177(6A) are reproduced below for ready reference: "177(6): After completion of the audit, the Commissioner shall, after obtaining taxpayer's explanation on all the issue raised in the audit, issue an audit report containing audit observations and findings.] 177(6A): After issuing the audit report, the Commissioner may, it considered necessary, amend the assessm ent under subsection (1) or subsections (4) of section 122, as the case may be, after providing an opportunity of being heard to the taxpayer under subsection (9) of section 122.]"
7. It is of paramount importance to mention here that the present position is result of the deliberations and judicial pronouncement by the Superior Courts. Notwithstanding the subsequent amendments brought about in section 177(6) and insertion of section 177(6A) through Finance Act, 2019, the Honourable Lahore High Court while dealing with cases for audit selected prior to aforesaid amendments held in case reported as 2017 PTD 686 in re: Nestle Pakistan Limited v. FBR, held at Para 18, Pages 710 and 711 held as under: "18. Role of audit officer is to dig out the instances of tax evasion and non-compliance to the statutory provisions causing tax evasion. His role finishes on issuance of audit report, after seeking explanation based on which further action is to be taken by an officer having quasi judicial power of adjudication. The audit proceedings, being inquisitorial and administrative in nature are akin to function of prosecution in criminal cases, which finishes by preparation and submission of "challan", Under the Federal Taxing Statutes, the unsatisfactory reply to the explanation sought by audit officer becomes an "information" or "definite information" based on which show-cause notice is issued to initiate quasi judicial proceedings. Taxpayer has option, either to accept the confronted discrepancies/allegations and pay tax with concessionary penalty rates or to contest by filing reply to show-cause notice.
Therefore, process of adjudication starts, which is to be followed by a speaking and -reasoned order; Asking an audit officer to raise demand and making monthly collection through qualitative indicator is alien to the scope and concept of audit. Any plea bargain to drop audit proceedings, if certain, percentage of extra tax is paid is against the provisions, in Federal Taxing Statutes, dealing with audit. Selection for audit cannot and should not allowed to be used for raising revenue simplicities, without conducting any audit and preparation of audit Report. It is reiterated that audit, necessarily, is administrative in nature, which starts by selection for audit and ends on issuance of "Audit Report" after seeking explanation from the taxpayer. Issuance of "Audit Repot" is sine qua non for completion of audit proceedings under respective provisions of the Federal Taxing Statutes. To maintain separation between administrative and judicial powers, as envisaged in Article 175 (3) of the Constitution of 1973, it is necessary that quasi judicial proceedings be carried out by a taxation officer other than audit officer who conduct the audit because adjudication and audit are separate proceedings under the Federal Taxing Status. The intent of legislature is to provide another opportunity of being defended to the taxpayer by responding to the show-cause notice. Needless to say that procedural standards, under judicial quasi-judicial or proceedings, are different from standards of administrative proceedings. Audit is man inquiry/investigation of the tax affairs and adjudication needs to, satisfy the requisites of fair trial as guaranteed to the taxpayer under Article 10A of the Constitution."
8. The above position was further endorsed by the Honourable Supreme Court of Pakistan, in case reported as 2018 PTD 1444 in re: Commissioner Inland Revenue Sialkot v. Messrs Allah Din Steel and Re-Rolling Mills and others held at Para 16 at Page 1454 of the report as under: "16. A perusal of the statutory landscape makes it clear that the provisions of sections 177 and 214 of the Ordinance; section 25 of the Act, 1990 and section 46 of the Act, 2005 provide a mechanism and roadmap which is required to be followed by the Taxation Officer/Auditor. In terms of section 177 of the Ordinance, the Commissioner can call for the record or documents for conducting the audit of the tax affairs of a person, provided he furnishes reasons to do so. Such reasons must be communicated to the taxpayer. He can also seek explanations from the taxpayer on issues raised during the audit in terms of section 177 of the Ordinance. It is only if he is convinced that the explanation furnished by the taxpayer is not satisfactory, he may proceed to amend the assessm ent under section 122 of the Ordinance, after giving the taxpayer an opportunity to defend him. We are therefore, of the view that the statutory framework together with the overarching umbrella of constitutional guarantees furnish adequate and sufficient safeguards to the taxpayer where there is a possibility of overstepping by the tax authorities."
9. Recently the Hon'ble Sindh High Court, while dealing with issue and effect of non observance of the provisions of section 177(6) has held as under in the case ITRA 32 of 2020 min re: CI v. Mahvish and Jhangir Siddiqui decided on August 25, 2021 has held at Paras 61 and 7, Page-3 of judgment as under: "6. The statutory prerequisites of the audit report and a reasonable opportunity of hearing are crystal clear and suffer from no ambiguity. Notwithstanding the foregoing, even if there was any doubt, the same had to be resolved min favour of the taxpayer A Division Bench of this Court observed as much in Citibank, and the PTV (per Mian Saqi Nisar, J, the august Supreme Court settled principles in such regard and enunciated inter alia that there is no regard intendment or equity about tax and the provisions of a taxing statue must be applied as they stand, the provisions creating a tax liability must be interpreted the strictly in favor of the taxpayer and against the Strictly revenue authorities; any doubts arising from the interpretation of a fiscal provision must be resolved in favor of the taxpayer; and if two reasonable interpretations are possible, the one favoring the taxpayer must be adopted.
7. In the present case the respondent has been selected for audit and the department had every right to conduct such an exercise, within the remit of the law. The record demonstrates that no audit report was issued to the taxpayer containing audit observations and that no reasonable opportunity of a hearing was` provided. Admittedly, this was done considering the time constrain
(six) for competition of audit proceedings for tax year 2011 being barred by limitation. Such conduct has rightly been deprecated by the Learned Tribunal and we find ourselves in concurrence therewith."
10. Further in a recent judgment the Appellate Tribunal Inland Revenue (Karachi) while dealing with the issue of confirmation of audit observation/audit report, in I.T.A. No. 1540/KB/2019 (Tax year 2014) in re: Brand Activate (Pvt.) Ltd. v. Commissioner Inland Revenue Karachi decided on June 9, 2011 has observed.
"It can be seen from the combined, reading of the above provisions of law that after selection of the case for audit under section 177, the audit shall be conducted as per procedure given in section 177 of the Ordinance. Under subsection (5) of section 177, the Commissioner shall conduct an audit of income tax affairs, call for record or documents including books of accounts maintained under the Ordinance for conducting an audit of income tax affairs of the taxpayer. After obtaining the record of a taxpayer under subsection (5) of section 177, the commissioner shall conduct an audit of the income tax affairs of the taxpayer. After completion of the audit, the Commissioner under subsection (6) of section 177 shall after obtaining taxpayer's explanation on all the issues raised in the audit, issue an audit report. After issuance of the audit report; the Commissioner may proceed if he considered necessary amend the assessment order under section 122 of the Ordinance. The language of subsection (6) of section 177 is express, explicit and mandatory to the effect that the Commissioner proceed to amend the deemed assessment only after obtaining taxpayer's explanation on all the issues raised in audit report. Hence it is very clear that no proceedings for amendment of deemed assessm ent can be initiated without obtaining taxpayer's explanation on the audit observations."
11. From the bare reading of sections 177(6) and 177(6A) it is evident that after completion of audit, authority has to issue an audit report, containing all the issue raised in audit and to provide an opportunity to settle the said issues prior to commencement of amendment proceedings. The language of subsection (6) of section 177 is express, explicit and mandatory to the effect that the commissioner may proceed to amend the assessment only after obtaining taxpayer's explanation on all the issues raised in audit report. Further, the courts have also vividly held that on completion of audit and confrontation on the issues raised in audit is mandatory and sine qua non and in absence whereof the judicial proceedings cannot be triggered or commenced. Since the perusal of impugned amendment reveals that the statutory requirements as envisaged under sections 177(6) and 177(6A) have not been complied with therefore any proceedings under taken in absence thereof shall strain down to the earth.
12. Now coming to the question of the assumption of jurisdiction by the assessing officer under section 122(5) without having 'definite information', we find that the assessing officer confronted the differential amount of total bank credit entries and declared turn over amount of Rs.8,939,183/- treating the same as suppressed sales in terms of section of 111(1)(d). However, being satisfied with, the explanation furnished by the taxpayer to the extent of Rs.4,645,000/- the assessing officer vacated the show-cause notice to that extent and made addition to the rest of the confronted differential amount at Rs.4,294,183/-. The assessing officer rejected the plea of the taxpayer that the transactions were made for personal use and those transactions should not be considered as business transactions. The said addition was confirmed by the CIRCA) as the taxpayer failed to satisfactorily explain the amount in question.
13. The difference in amount of Rs.4,294,183/- between total turnover declared and total bank credits was taken as suppression of income by the OIR. We have noted that the assessing officer by taking easy approach by just considering the difference in entries as suppressed income and added the income without proving exact nexus of the transactions. Deemed assessment was amended by presuming that the difference between the declared receipts and total entries as suppressed income. The learned officers below did not make any observation on this explanation of the taxpayer with regards to disputed transactions made for personal use rather added the amount as the taxpayer failed to substantiate his version with any plausible evidence. The case of the taxpayer was selected for audit under section 177 and the deemed assessment can only be amended under section 122(5) if the department is in possession of 'definite information' prior to making an amendment in original assessment order. The concept of 'definite information' has been elaborated by apex courts as well as by this tribunal in various cases. Some of them are also relied by the learned counsel for the taxpayer. The Hon'ble Supreme Court in a case reported in 2017 PTD 1731 observed as under: "From the above provisions of the two laws, it is evident that the power to initiate proceedings to amend an assessm ent order was not available under section 65(2) of the Repealed Ordinance unless some definite information had already come in the hands of the Income Tax Officer. This was so, as under the repealed Ordinance, the initial assessment used to the made by the Income Tax Officer with the conscious application of mind, therefore, second option on such assessment was not permissible as a matter of course. The Income Tax Officer had to have definite information in his hands before he could even initiate proceedings for making additional assessment. In the case of Central Insurance Co. v. Central Board of Revenue, Islamabad (1993 SCMR 1232) while discussing the scope of secant 65 of the repealed Ordinance, it was held that once the return of income, disclosing all material facts without any concealment has been assessed under section 59 of the repealed Ordinance then unless some definite information first became available to the income tax authorities, the assessm ent order cannot be reopened for scrutiny. In other words, no change of opinion was held to be permissible on the basis of material on which the Income Tax Officer has already made assessme nt with conscious application of mind. Thus, in absence of definite information, the very initiation of the proceedings with the intent to make additional assessm ent was prohibited under the repealed law. The ratio of other judgment cited at the bar by the counsel of the respondents is also the same. Under the Income Tax Ordnance, 2001, however, the Commissioner has been given the authority to initiate proceedings such as audit and investigation and in the process if he acquires 'definite information' which satisfies him to form an opinion that any income chargeable to tax has been under assessed or escaped assessment or wrongly classified or assessed at too low a rate then he can proceed to amend the original assessm ent order, which on account of provisions of section 120(1) of the Ordinance was deemed to have already been issued by him. The main reason behind this change brought about under the Ordinance was that the original assessment orders are not issued with conscious application of mind as was the case under the repealed Ordinance and therefore the question of prohibiting second opinion on a consciously assessed assessment order does not arise under the present Ordinance."
14. In another case titled as Commission Inland Revenue v. Khan CNG Filling Station reported in 2013 PTD 884, the Hon'ble Lahore High Court defined the term 'definite information' in unequivocal terms. The relevant extract of the judgment is as follows: "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 assessm ent or total income of an assessee has been under assessed, etc. "Definite" means indisputable, known for certain explicitly precise, clearly defined, leaving nothing to implication, established 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 doctrine provides that where general words follow an enumeration of two or more things, they apply only to persons or things of the same general 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 assesse.
"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 already exist in some document or record at the time of 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."
15. In the instant case the only information for the purpose of 'definite information' the assessing officer possessed was the difference in amount between declared receipts and credit entries. In the light of principles settled by the apex courts and after considering the facts of the case, we observe that the requirements of section 122(5) were not met and the addition of Rs. 4,294,183/- under section 111(1)(d) is accordingly annulled.
16. Further, the assessing officer disallowed amounts of Rs.1,749,962/- claimed under the Head of Purchases at Rs.8,749,810 being not supported by any record or evidence. Out of the total claimed purchases, the OIR disallowed 20% of the same at Rs.1,749,962/- being unverified and added the same under section 174(2)/21(c). Similarly, the OIR disallowed an amount of Rs.60,000/- under section 174(2) out of total P&L expenses claimed at Rs.300,000/-. The CIR(A) upheld the disallowance as the taxpayer failed to substantiate his declared version with any supporting evidence. We are of the view that the assessing officer failed to comply with the mandatory provisions related to audit' proceedings and amendment in assessment therefore the order of confirmation of additions under section 1 1 1 and disallowance under section 174(2)/21C by the CIR(A) is illegal and unlawful and is accordingly annulled.
17. For the forgoing reasons, the impugned orders are annulled. The instant appeal filed at the behest of the taxpayer is allowed.