MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER. By this order, we intend to dispose of above titled appeal filed by the appellant/department against the impugned Order No.06 dated 17-07-2017.
The department agitated the following grounds:
1. "That the learned CIR (Appeals-IV), Karachi was not justified to delete the additions made on account of salaries as the taxpayer has failed to furnish evidence in support of salaries paid under the provisions of section 21(m) read with section 174(2) of Income Tax Ordinance, 2004.
2. That the learned CIR (Appeals-IV) Karachi was not justified to restrict the additions made under section 21(c) read with section 174(2) of Income Tax Ordinance, 2001 since the taxpayer failed to furnish in support of expenses during the course of audit proceedings which were produced at the time of appeal which is not plausible under the provisions of section 128(5) of the Income Tax Ordinance, 2001.
3. That the learned CIR(A) Karachi was not justified to delete the additions made under section 111(1)(a) on the grounds that no separate notice under section 111 of Income Tax Ordinance, 2001 was issued and served upon taxpayer. The Supreme Court of Pakistan in the case reported vide CLPAs Nos.147 to 149 K all of 2014 pronounced that the notice under section 122(9) is sufficient to amend the assessment under section 122(5).
4. That the learned CIR(A) Karachi has erred in deleting the additions made on account of expenses claimed under vehicle maintenance, the taxpayer is an AOP and only balance sheet was filed no any statement of fixed assets was filed during the course of audit proceedings, hence the deletion is a violation of section 128(5) of Income Tax Ordinance, 2001."
FACTS
2. Brief facts of the case as gathered from the record are that the taxpayer is an AOP engaged in the business of running hospital. The return of income were filed declaring income at Rs.69,12,104/- which was selected for audit under section 214C of the Income Tax Ordinance, 2001 by the FBR.
Audit proceedings were initiated and an IDR under section 176 was issued. In response to which adjournment was sought and extension of time was granted. A show-cause notice under section 122(9) was issued against the taxpayer filed the explanation though his counsel and found not plausible by the DCIR and the proceedings were culminated in passing the order under section 122(9)1(5) of the Income Tax. Ordinance, 2001.
3. Being aggrieved and dissatisfied with the treatment meted out by the DCIR, the taxpayer preferred appeal before the learned CIR(A) who vide his impugned order mentioned supra, held that the DCIR had not followed the audit proceedings / procedures as laid down by the Hon'ble Lahore High Court in its judgment reported as (2017) 115 Tax 84 and also on merit deleted the addition under section 174(2) made on account of salaries, additions made under section 21(c) read with section 174(2) on account of expenses and addition made under section 111(1)(a) of the Income Tax Ordinance, 2001.
4. Feeling aggrieved and dissatisfied with the impugned order passed by the learned CIR(A) now the department has come up in appeal before this Tribunal.
5. On due date of hearing, Mr. Azhar Erum Memon appeared on behalf of the appellant/department as D.R while Syed Muhammad Faraz Zaidi, 1TP appeared on behalf of the Respondent/taxpayer.
ARGUMENTS/SUBMISSIONS Departmental Arguments:
6. During proceedings before this Court, learned D.R. has contended that the Commissioner Inland Revenue (Appeals) was not justified in deleting the additions made under section 174(2) on account of salaries as the taxpayer has failed to furnish evidence in support of salaries paid under the provision of section 21(m) read with section 174(2) and further not justified in restricting the additions made under section 21(c) read with section 174(2) as the taxpayer had failed to furnish evidence in support of expenses during the course of audit proceedings and the learned CIR(A) was not justified to accept the evidence which was not produced before the DCIR. He further argued that the learned CIR(A) was not justified in deleting the addition made under section 111 on the ground that no separate notice under section 111 was issued. He submitted that the taxpayer had not disclosed the vehicle in the Balance Sheet and no fixed asset was filed. Finally, he has prayed that impugned order passed by the learned CIR(A) may kindly be vacated and that of the DCIR may be restored.
LEARNED A.R'S ARGUMENTS
7. The learned counsel for the Respondent/taxpayer has strongly supported the order of the learned CIR(A).
8. The learned counsel while rebutting the arguments of the learned D.R. objected that: No definite information, neither furnished nor proved and no addition is based on definite information. Mandatory requirement of sections 177 and 122(5) not fulfilled.
Mandatory requirement of section 122(5) and Clauses (i), (ii) and (iii) of section 122(5) failed to fulfill.
Before modification under section 122(5) the finalized deemed assessment/amended deemed order must be cancelled for the purpose of modification. If deemed order existing in the field and not cancelled before invoking section 122, the alteration and modification is illegal.
Before embarking upon proceedings under section 122, the requirements of section 122(5) are to be fulfilled in letter and spirit. The selection of the audit and conducting audit in itself does not mean an assessment or modification of assessment.
That the DCIR/OIR has not given mandatory notice(s) under sections I22(5)(i), 122(5)(ii) and 122(5)
(iii) read with sections 122(5) and 122(8) of the Income Tax Ordinance, 2001.
That on plain reading of section 122(5) for passing order under sections 122(1) and 122(5) the availability of the "definite information" is the precondition and submitted that subsection 122(5) provides that an assessment order shall only be amended under sections 122(1) and 122(5) read with section 177, where "definite information" has been acquired through audit under section 177. In the instant case no such definite information was acquired by the DCIR/OIR.
Without prejudice to above the deemed order under section 122(1) can be amended either under subsections (4), (5) read with under section 177 of the Income Tax Ordinance, 2001 subject to definite information.
That impugned assessment having been framed under section 122(1) without fulfilling the requirement and without invoking the provision of section 122(5).
That no assessment could be made under section 122(1) alone without invoking subsections (4),
(5) or (5A) of the Income Tax Ordinance, 2001.
The Audit Policy has not been followed and mandatory requirement of section 177 has not been fulfilled. After selection of the case for audit under section 214C audit is conducted under section 177 and then Audit-Report under section 177(6) is to.be confronted to the taxpayer and if the reply is satisfactory then the audit proceedings may be dropped. However, after perusal of the reply, if the Commissioner considers that the deemed assessment needs some modification then he proceeded to amend the assessme nt under section 122(1) subject to section 122(5) (definite information) of the Income Tax Ordinance, 2001.
As steps wise procedure for selection of the case for audit was not followed and no opportunity provided for rebuttal of so-called audit report/Observations. Hence entire proceedings / exercise is void ab-initio.
No definite information, neither furnished nor proved and no addition is based on definite information. Mandatory requirement of sections 177 and 122 not fulfilled.
That the mandatory independent separate notice under section 111 had not been issued to the taxpayer, therefore, the action of the DCIR is not within the parameters set by the superior courts. In this regard he placed reliance on the judgment of the Honourable High Court of Sindh in the case reported as 2017 PTD 1839 (H.C. Sindh).
In support of his contentions he placed reliance on the judgments bearing ITA No. 51/KB/2014 dated 3.10.2014 CIR v. Dewan Steel Mills Karachi, ITA No. 2505/LB/2015 dated 28.4.2016 and ITA No. 373/KB- 2012 dated 5.4.2017, Dr. Azeeem Alamani reported as 2015 PTD 1242 and ITA No. 64/KB/2015 dated 6.6.2018 in the case of CIR v. Jawed Metal.
9. On factual plane, he vehemently contended that the grounds of appeal submitted by the department are vague and not specific. He referred to ground of Appeal No.2 whereby the deletion of addition on account of salaries had been made without specifying what was actual amount claimed and disallowed. Similarly, in the ground 'No. 3, the addition was made under section 21(c) without mentioning the amount to be restricted. He vehemently contended that in the ground it was alleged that the taxpayer had failed to furnish the details, in fact the details were submitted before the DCIR vide letter dated 28.11.2016. He urged that no specific separate notice under section 111 describing eventualities of clauses of section. 111 not issued. Regarding ground No. 5, it was alleged by the department that the taxpayer had not declared the vehicle in the balance sheet, therefore, the DCIR had made the addition. The learned counsel pointed out that the vehicle was duly declared in the Balance Sheet in Note 4 under the head Non-current Asset. He, therefore, submitted that the order of the learned CIR (A) is factually and legally on sound footings, therefore, the order of the learned CIR(A) may be upheld.
OPINION OF THE COURT
11. We have heard both the learned representatives and have also gone through orders of the authorities below and perused. the records of the case.
12. At the very outset we have observed that the learned CIR(A) has rightly observed that the amended order was framed on mere resumption and assumption without adhering to audit procedure laid down by the Hon'ble Lahore High Court in its judgment reported as 2017 PTD 686.
13. Further perusal and examination of the amended order passed under sections 122(1) and 122(5) of the Income Tax Ordinance, 2001 reveal that the DCIR while passing the order had not adhered to the, requirements of law. In this regard we may refer to subsection (6) of section 177 of the Income Tax Ordinance, 2001 which is reproduced hereunder:- "177. Audit
(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 assessm ent under subsection (1) or subsection (4) of section 122, as the case may be."
(underling for emphasis)
13(sic) A bare reading of the above subsection (6) quoted supra, clearly lays down firstly, that it is obligatory upon the CIR/DCIR/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. Secondly, after considering the explanation of the taxpayer, if he consider necessary that the same is required to be amended on the basis of definite information then he may invoke subsection (1) of Section 122 for B acquiring jurisdiction to amend the order under subsection (4) read with subsection (5) as the case may be. However, the DCIR has not followed the requirement of law in letter and spirit and passed the order under sections 122(1), 122(5) of the Income Tax Ordinance, 2001 without confronting the Taxpayer the contents of the audit report/charge sheet / audit objections before invoking the amending assessment order under section 122(1) read with subsections (4), (5) and clauses (i), (ii) and (iii) C of Section 122(5) of Income Tax Ordinance, 2001 or even before the issuance of notice under section 122(9) of the Income Tax Ordinance, 2001. Therefore, the CIR (A) rightly observed that: "i)...A perusal of the orders that was framed on mere presumptions and assumption without assigning any definite information" ii) The assessing officer has also rot followed the Audit procedure laid down by the honourable Lahore High Court in its judgment reported as 2017 PTD 686 Hence, the amended assessm ent in this case has been framed in total ignorance of the law and in violation of the prescribed procedure and legal and mandatory requirements. The CIR/DCIR/OIR, in total oblivion of the mandatory requirement / condition precedent has been set out for the amended assessm ent under the provisions of section 122(1) in continuation to the proceedings of audit under section 177 without acquiring proper jurisdiction as prescribed in sections 177(6), 122(1) and 122(5). In our opinion the fact that the order has been amended under section 122 should be the point of favour of selecting a case for audit instead of being treated as an obstacle in the path of selection of case for audit because on the basis of amendment of an order it can be safely assumed that the return which has been converted into assessment order cannot be relied upon.
15. The audit proceeding under section 177 is only a procedure / mode and method to find out some defects in the accounts and to obtain information 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". We may further observe that for all practical purposes section 177 of the Income Tax Ordinance 2001 was a just process / mode and method and prescribed path to reach to conclusion as to from where the CIRIOIR/DCIR/assessing officer could further modify an already assessed income for which law had very clearly provided the provision in terms of Section 122(5) of the Income Tax Ordinance, 2001.
16. 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 beak processed' by the CIR/DCIR/OIR, selecting and thereafter conducting /doing audit. He is dealing with a 'assessm ent order' which by process of law has acquired a sanctity. The finalized assessm ent, therefore, cannot just be Modified or disturbed in continuation of the proceedings of audit under section 177.
17. The selection of audit or even conducting / doing of audit does not mean or include an assessm ent or amended assessm ent/alteration or modification of assessment. The. 'selection of audit and thereafter conducting of audit proceeding 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/objections. of taxpayer must be obtained and considered before proceeding for invoking Section 122. Then after acquiring jurisdiction, and fulfilling all tine requirements of subsections (1) and (5) of section 122. Only thereafter assessm ent may be amended under section 122. The mere (firstly) issuance of notice under section 122(9) read with under section 122(1) after selection but before conducting audit IA the taxpayer is not complete requirement of law. Department first has to reject the objection/rebuttal of taxpayer on audit report then require to acquire jurisdiction under sections 122(1) and then 122(5). However, this Having not been done so. We may conclude this issue that the CIR/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 and after ,obtaining and considering explanation of taxpayer on audit objections, only thereafter, if the CIR/OIR may consider necessary.
The CIR/DCIR/OIR, may amend the assessment under section 122(1), (4)/(5) after fulfilling all requirement of law subject to definite information and fulfillment of further condition of clause (i),
(ii) or (iii) of subsection (5) of Section 122.
18. Adverting to the other aspect of the impugned order passed by the officers below 'that no definite information was found to have been available with the DCIR within the meaning of section 122(5) read with section 122(8) of the Income Tax Ordinance, 2001. The Hon' able Lahore High Court in its recent decision (2013) 107 Tax 41 2013 PTD 884 (H.C. Lhr) on the subject of "definite information" with reference to section 122(5) of the Income Tax Ordinance, 2001 has held as under:- "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, 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 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 exits 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. 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."
19. We may also rely on the judgment reported as 2007 PTD (Trib.) 2601. The relevant extract of which is reproduced as under: "15. In most of the cases the Courts try to implement the provisions of law and avoid declaring it as redundant. It is obWously under the spirit that laws are always made for implementation and not to just remain as part of the statue without being of any benefit to the public at large. However, this Tribunal has in many cases not allowed issuance of notices in slipshod manner without indicating the actual reason of issuance thereof. The Hon'ble Lahore High Court has even gone to hold that issuance of a notice under section 65 without indicating the reason of issuance of notice in terms of subsection (1), (2) or (3) or (a), (b) or (c) of the said section to be as illegal. In this case notice under section 62 is statedly issued which provisions does not exist in the scheme of new law. There is a provision under the title "amendment of assessment" and the same is 122(1) and all other provisions are subject to the said section 122. In the earlier part of our discussion we have already held that section 122(1) is the mother provisions while all other subsections are helping and the same determine the fitness of the amendment of the assessment to be made under section 122(1). The Assessing Officer in this case has not even bothered to mention the subsection in its notice. Hence even if one is confident that section 122 could be enough for acquiring jurisdiction, non-mentioning of the other provision in terms of subsection (5) of subsection (5A) is fatal as the parameters for each of the said provisions are entirely different from the other.
Besides, erroneousness of the assessment for determining prejudice to the interest of revenue in a deemed assessment order shall also need a good deal of dilation and discussion. There are certain more questions which would require answer in a case like this. The Assessing Officer has proceeded to make the assessment under section 120. The provision of section 122 which has been titled as assessments and as a sub title as an amendment of assessment, provides full authority for mating an assessment. These provisions in fact are para meteria to the assessments under section 62 as well as 63 in addition to 65 and 66(A) etc. Section 120 does not come into picture for amendment of an assessment. It supplication is only up to the deemed assessment order and has no extension beyond the said language.
16. The upshot of the above discussion therefore is obvious. The jurisdiction in this case could only be acquired by the Taxation Officer after receiving of an information from the audit department by issuance of an notice under section 122(5). Since said notice have not properly been issued for acquiring jurisdiction over this case, one cannot agree with the department that the subsequent proceedings are justified".
20. We may further seek support from the judgment of Appellate Tribunal vide order 2013 PTD 1083, (2013) = 107 Tax 389 (Trib.) in the light of various cases decided by the Hon'ble Supreme Court on the subject of "Definite Information has held as under :- "We are persuaded to agree with the arguments of learned AR that pre-requisite for invoking section 122(5) of the Ordinance was 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.
Further, the definite information must have come in the possession of Department after completion of assessment this dictum is elaborated in detail by the honourable Supreme Court in CIT v. Eli Lilly Pakistan (Pvt.) Ltd. 2009 SCMR 1279 = 2009 PTD 1392 and Central Insurance Co. and others v. CBR, Islamabad and others 1993 SCMR 1232 = 1993 PTD 766. We are also in agreement with the arguments of learned AR that in the presence of favorable judgments of higher courts on the issue the department could not invoke section 122(5) as mere disagreement with the decisions of higher courts did not constitute definite information. The honourable Lahore High Court in Saitax Spinning Mills Ltd v. Commissioner of Income Tax 2003 PTD 808 disapproved reopening of a completed assessment for want of definite information. Moreover, mere disagreement over legal interpretation of section 67 and estimation of life of computer software was not definite information as wrongly assumed by the Department. We therefore decide the appeal for this year in favour of taxpayer by declaring invoking of section 122(5) of above issues as unlawful"
21. We, therefore, hereby hold that it is a trite law that the provisions of subsection (5) of section 122 of the Income Tax Ordinance, 2001 allows amendment of any assessment only when the department is in possession of. definite information and not otherwise, and in this context the DCIR was under legal obligation to specifically identify the nature of suppressed income and issue notice in terms of clauses (i), (ii) and (iii) of subsection (5) of section 122 of the Income Tax Ordinance, 2001 highlighting the fact under which category appellant's case falls. None issuance of such notice clearly meant that while passing the amend, assessment order DCIR' was not in possession of definite information and the reason assigned for additions/ disallowances while passing the amended assessm ent order, cannot be termed as. definite information. Thus, the law has rendered the entire proceedings void ab initio, and illegal. Even otherwise the Simple issuance of notice under section 122(9) even in this particular case before conducting audit of the taxpayer and what to speak of prior to confrontation audit report/objection/charge sheet for obtaining rebuttal/Explanation by the taxpayer was not enough to further proceed in the matter for amending under section 122 already completed under law. Before making any additions and disallowances to the assessed income under the grab of audit under section 177 and amended assessm ent. under sections 122(1)/122(5). The tax department is required to acquire legal jurisdiction under the provisions of section 122(5). This can only be done to modify or alteration 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 information. However, we also find that there is no specific finding in terms of "definite information". It appears the findings of the learned CIR(A) are legally valid as it appears that there was no grave error in deemed assessment. The IR Department has to qualify through audit that the deemed assessm ent is under assessed or as the case may be in terms of Section 122(5) [subject to definite information]. The requirement of section 122(5), are to be strictly fulfilled in letter and spirit. The initiation of conducting audit of assessment through notice under 122(9) prior to audit tantamount to amend assessm ent before audit which is legally not justified and order is passed in consequence thereof being unlawful are not sustainable and ab-initio void. Unless any definite information acquired in the possession of the DCIR/OIR as a result/finding of audit. conducted by the CIR under section 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 pre-requisite requirement to be stretch in pursuance to definite information but these are not cumulative or to be established together: I) Any income chargeable so tax has escaped; or II) Total income has been under-assessed, 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 mis-classified.
22. It is also opined that additions under Section 111 have been made without issuing specific and separate notice under Section 111 which is sine qua non and no addition under section 111 can be made Without independent, specific and separate notice under section 111 with Specification of relevant clauses, and subsection of section 111 of the Income Tax Ordinance. Furthermore, the "Definite Information" is missing from the amended order while making addition under section 1110)
(a) and (c) therefore, the additions made under section 111 are hereby deleted.
23. The DCIR has not given independent specific, separate notice or disclosed his mind under separate notice which clause apply. Each clause has different eventuality. Hence the aforesaid additions under section 111(a) are without filling the legal requirement of said clauses and specific separate notice is illegal, unwarranted and uncalled for, ab initio void. That in numerous cases it has been held by the higher appellate courts. that specific, separate and independent mandatory notice under section 111 of the I.T. Ordinance, 2001 specifying and invoking a relevant subsection and particular clauses be issued prior to making addition. However, in the instant case no specific; separate and independent mandatory notice under section 111(1) of the I.T. Ordinance, 2001 has been issued and served upon the appellant. Therefore the addition made under section 111 of I.T.
Ordinance, 2001 is unjust, unfair, illegal and rightly deleted by the learned CIR(A). Reliance may be made on judgment of the Tribunal reported as 2012 PTD (Trib.) 312 whereby the learned Tribunal has cancelled the order passed under section 122(1) by the DCIR as statutory notice was not served upon the taxpayer: The relevant partition of which is reproduced below: "Ss.111(1)(b), 122 & 128---Unexplained income or assets---Proper service of statutory notices-- Revenue contended that First Appellate Authority was not justified in treating the service of statutory notices under S.218 of the Income Tax Ordinance, 2011 as improper and annual the order passed under S.122 (I) of the Income Tax Ordinance, 2001 merely on technical grounds---Taxpayer contended that notice issued were not properly served and opportunity of being heard was not provided to explain the source of investment: and taxpayer had valid source to explain the source of investment: and taxpayer had valid source to explain the investment---First Appellate Authority had given a categorical finding that the notice issued were not property served and the assessment had been made without providing reasonable opportunity of being heard to the taxpayer---Assessing Officer failed to serve statutory notice in accordance with law---First Appellate Authority was justified to cancel the assessment made under S.122(1) of the Income Tax Ordinance, 2001--Appeal filed by the Revenue was dismissed being avoid of any merit.
In arriving at this conclusion our view is fortified with the judgment of ATIR 2012 PTD (Trib.) 790; wherein it has been held that "that no separate notice under S.111(C) of the Income Tax Ordinance, 2001. was issued: and that addition was not sustainable in the eye of law--Validity-- Without issuance of separate notice no addition could be made---Addition was deleted by the Appellate Tribunal being wrongly made by the Taxation Officer"
The DCIR has failed to comply with the requirement of law and if the law had prescribed method for doing of 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. Reliance is placed on 2006 SCMR 129. In another case, the honourable Supreme Court of Pakistan Collector, Sahiwal v. Muhammad Akhtar 1971 SCMR 684 their lordships observed as under: "The principle so far as this country is concerned, is accordingly well-settled that where the requirement to be fulfilled to be given by the statute is a mandatory, then the failure to comply with such a mandatory requirement of the statute would render the act void ab initio as being an act performed in disregard of the provisions of the statute.." It was further observed by their lordship that 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 by a hearing at a subsequent stage."
In another case reported as 1993 PTD 392 = NTR 1993 TRIB 143 it has been held that no addition is legally sustainable if mandatory requirement had not been complied with. Further it has been held in many cases that if the law requires a thing to be done in a particular manner, it would be legal and valid only if it was done in the manner and not otherwise. Reliance is placed on the judgment of the honourable Peshawar High Court reported as 2005 MLD 1329."
Recently the Division bench of this Tribunal vide order passed in the case of CIR v. Pharmaceutical, Karachi bearing ITA No.65/KB/2018 dated 24.9.2018 has resolved the controversy at rest by observing that: "We will now see the manner in which each and every addition was made by the ACM towards the income of the appellant which was later annulled by the learned CIR(A) . The first addition is for Rs.6,931.024/- which was made out of declared purchases to the extent of 20 percent on account of unverifiability. In addition thereof, another addition of Rs. 2, 745,682/- was made out of manufacturing expense by curtailing the same by 50 percent. Lastly, an amount of Rs.4.385,341/- was added back out of the expenses debited to the profit and loss account to the extent of 50 percent of the claim.
7. Having discussed the extent and manner in which said additions were made towards the income of the respondent taxpayer, we are inclined to agree with the treatment meted out to such addition by the learned CIR(A). Even a passing glance towards the original order clearly indicates that all these additions were made on the basis of pure guesswork and conjecture which by no stretch of imagination can be allowed to hold field when seen with particular reference to the provisions of section 122 of the Ordinance. This section which enables the revenue authorities to amend an assessment order provides modalities for making the intended amendments. Under normal circumstances, correct manner to which the ACIR could have based his action was to invoke provisions of subsection (5) of section 122 which gives powers to make necessary amendments on the basis of some 'definite information' from an audit or otherwise in the following eventualities:- i. Any income chargeable to tax has escaped assessment. ii. Total income has been under-assessed, assessed at too low a. rate, or have been the subject of excessive relief or refund. iii. Any amount under a head of income has been misclassified.
8. Moreover, the term 'definite information' has also been defined in subsection (8) of section 122 as under:
(8) For the purpose of this section, "definite information" includes information on sales or purchases of any goods made by the taxpayer receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance and on the acquisition possession or disposal of any money, assets, valuable article or investment made or expenditure incurred by the taxpayer.
9. After discussing the above facts of the case, we are of the view that the law has provided a mechanism when a taxpayer after selection of his income tax affairs for audit fails .to furnish required details and documents considered necessary for completion of audit.
10. It may be appropriate to reiterate that resorting to mere guesswork while proceeding within the periphery of section 122(1) is not permissible under the law and is liable to be discarded. Similarly, resorting to the provisions of section 111 of the Ordinance which deals with unexplained income or assets is hopelessly misplaced in the wake of given circumstances of the case. We accordingly agree with the findings of the learned CIR(A) that the order under section 122(1) is unlawful and not sustainable. The departmental appeal therefore fails."
24. Last, but not the least, we may also rely on the latest judgment of Hon'ble High Court of Sindh at Karachi reported as 2017 PTD 1839 titled as the Commissioner Inland Revenue, Zone-I, RTO, Sukkur v. Messrs Ranipur CNC Station, Sukkur whereby the Hon'ble Judges their lordships Mr. Justice Aqeel Ahmed Abbasi and Mr. Justice Nazar Akbar, observed that no separate, independent notice under section 111(1) was given to the taxpayer, the addition so made was deleted, the relevant portions of which read as under: "4. From bare perusal of the above statutory provisions, it is clear that the addition under section 111 of the Income Tax Ordinance, 2001, can be made, only if an opportunity is provided to the taxpayer through specific Notice, whereby, the taxpayer is confronted with any of the aforesaid eventuality as visualized under section 111 of the Income Tax Ordinance, 2001, whereas, if the taxpayer fails to offer any explanation about nature and source of the amount credited or the investment made, money or valuable article; or funds from which the expenditure was made; only then, such addition can be made in the income of the taxpayer. In the instant case, it appears that no Notice under section 111 of the Income Tax Ordinance, 2001 was issued to the taxpayer, nor the taxpayer was specifically confronted with such proposed addition by the taxation office so that the taxpayer could have offered some explanation in this regard. In view of above undisputed facts, the addition made by the taxation officer under section 111 in the instant matter appears to be without any lawful authority., While confronted with above factual and legal position as emerged in the instant case, learned counsel for the applicant could not controvert the same nor could point out any error or illegality in the order passed by Appellate Tribunal. Whereas, the Appellate Tribunal in the instant case, after having taken cognizance of the above factual as well as the legal provisions as contained in Section 111 of the Income Tax Ordinance, 2001, relating to providing an opportunity to the taxpayer to explain the unexplained income or assets, has been pleased to hold as under: "We have heard both the learned representatives and have gone through the record of the case.
On perusal of the impugned order it transpires that the CIR(A) has discussed the issues in detail.
Before making addition under section 111(1) of the Income Tax Ordinance, 2001, the ACIR had not adhered to condition as laid down by the law.
No specific notice under section 111 of the Ordinance, 2001 was issued by the ACIR, hence, the learned CIRCA) was justified in deleting the addition made under section 111(1) of the Ordinance, 2001.
In view of the above facts and circumstances the impugned order passed by the learned CIR(A) is legal, lawful and in accordance with law, therefore, no interference is required in the impugned order of the learned CIR(A) which is hereby upheld.
5. It may be further observed that in view of the Article 10A of the Constitution and Section 29-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.
6. In view of hereinabove facts and circumstances of this case. We are of the opinion that impugned order passed by the Appellate Tribunal Inland Revenue, in the instant case, does not suffer from any error and illegality, which otherwise depicts correct legal position. Accordingly instant reference application being devoid of any merits is hereby dismissed, and the question of law as proposed here in above is answered in affirmative against the applicant and in favour of the respondent."
25. Here, it would not be out of place to mention that where a law requires a thing should be done in a particular manna unless the same is I done in the prescribed manner the same shall be illegal.
In case of Khalid Saeed v. Shamin Rizvi reported as 2003 SCMR 1505 the Hon Supreme Court of Pakistan 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 addition thereof the amended assessm ent is not in strict compliance of the provision and the procedure provided in statute and lacks jurisdiction.
26. On factual plane also we find a lot of force in the arguments of the learned counsel for the Respondent /taxpayer that the departmental grounds of appeals are unspecific and vague and not sustainable in law. In the grounds of appeal the department even has not been bothered to mention the amount of claim and disallowed by the DCIR. The operative part from the order of the learned CIR (A) is reproduced as under: "A perusal of the order shows that was framed on mere presumptions and assumption without assigning any definite information" When above findings are juxtaposed with the treatment of assessing officer it is found that the same are not in line with the ratio settled on the judgment of the superior courts referred to above.
The assessing officer has also not followed the Audit Procedure laid down by the honourable Lahore High Court in its judgment reported at 2017 PTD 686 operating part thereof is reproduced supra in written arguments.
The officer has disallowed salaries expenses amounting to Rs.5,434,5001= for the reason that EOBI has not been paid on entire salary without going through the law i.e. section 9 read with section 2(P) of the Act which prescribe the contribution by Employer @ 5% of the minimum wages declared by the Government under the minimum wages Ordinance, 1967. Hence the disallowance of Rs.5;434,500/= is unlawful is hereby annulled.
The assessing officer has also disallowed indirect expenses to the tune of Rs.9,060,130/= despite the fact that appellant had submitted complete details with supporting evidence vide its letter dated 28.11.2016. The disallowance is on mere presumption without identifying any specific instance of violation of sections 21(c) and 174(2) of the Ordinance. The amount disallowed includes payments made for EOBI, SESSI, Education Cess, CDGK Medical wastage, CDGK & KWSB, Bank charges, property tax insurance totaling Rs.2, 161,352/= on which tax is not required to be withheld. The amount of depreciation expenses of Rs.1,079,402/= also does not attract the WHT provisions.
Hence after excluding the above payments and depreciation, the disallowance is restricted to 1/3rd of the remaining amount of Rs.5,819,3761= which works out to Rs. 1,939.792/= The assessing officer has also made addition of Rs.817,0431= under section 111(1) (a) of the Ordinance, on account of escaped income. The appellant failed to claim tax withheld amounting to Rs.57,1931= in the return of income since paid challans were not available which is a prerequisite for claim of tax. The amount was however, shown in the Balance Sheet as Advance tax, and hence, no concealment is evident. Further, the amount withheld represents income under FTR hence no addition to income could be made on this account. The Assessing officer while making the addition has invoked section 111(1) (a) of the Ordinance, without issuing specific and separate notice under section 111 which was mandatory as held by the appellate Tribunal Lahore in case No, 2505/LB/2015 dated 28.4.2016. The addition made is hereby deleted.
In the case of vehicle repair maintenance expense, the Assessing officer has disallowed an amount of Rs.512,617/= for the reasons that no vehicle is shown in the balance sheet whereas the same is duly disclosed in the Fixed Assets schedule attached with the balance sheet. Hence the disallowance being unlawful is hereby deleted".
27. A careful examination of the order passed by the learned CIR (A), it is abundantly clear that the order passed by the DCIR is not maintainable for the reason that the DCIR had not followed mandatory requirement and procedure. Therefore, he should have vacated the order of the learned DCIR in limine but he preferred to decide the appeal on merit on factual grounds.
Therefore, the appeal of the department is also not maintainable on merit. On merit of the case the learned CIR (A) has held that EOBI has been paid on salaries in accordance with Circular No.01/2015-2016 dated 1.3.2016 by the taxpayer, the copy of which has also been furnished by the learned counsel. Further the learned CIR (A) has rightly restricted the additions made under section 21(c) by observing that some expenses does not attract WHT, the details of which had been submitted to the DCIR, therefore, the same was rightly restricted by the learned CIR (A). Similarly, the motor vehicle was duly declared by the Taxpayer under Note 4 of the Balance Sheet, therefore, the provision of section 111(1)(a) Could not be invoked and the additions under section 111 was without specific and separate notice under section 111. Hence, the order of the learned CIR (A) on the factual plane is also maintained.
28. The above findings may be summarized as under: Audit under section 177 read with subsection (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 under section 122(9) prior to conduct audit is ab initio void.
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 assessm ent 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 assessm ent. 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 i.e. "Definite Information" which is missing in this case.
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 subsection (5) of section 122 further stipulate three conditions for issuing of a notice that is i.e. any income chargeable to tax has escaped assessm ent; 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 assessm ent" selected for audit and conducted audit under section 177. It may be amended by invoking jurisdiction under section 122(1) subject to fulfillment of conditions as envisaged- under subsection (6) of section 177 and after fulfilling the pre-requisite requirement of "definite information" under subsection (5) of Section 122, and subject to execution of conditions of clauses (i), (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 section 111(1) (a) and under section 111(I)(c). Moreover, there was no un explained income or expenditure proved by the DCIR without any shadow of doubt. As while making the additions under sections 111(1) and 111 (1)(c) legal requirements have not been followed and definite information is missing.
The grounds of appeal agitated by the department are vague and unspecific hence not maintainable. Additions and disallowances are not tenable on merit even on factual scores.
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.
30. Before parting with this judgment we may observe that: No tax shall be levied or collected except by authority of law. A tax can only be imposed by a legislative Act and not on executive order. It thus embodies the democratic principle "No taxation without representation". The law imposing a tax must be a valid law, that is, it should not violate any provision of the Constitution and should be within the legislative competence of the legislature. It will be valid only if it is made in accordance with the procedure prescribed by the statutes. This Court cannot hold that the revenue Departments was constitutionally free to ignore all the procedures of the law and power to tax is not power to destroy. Who will sympathise with the Revenue Officers for impatient commitment to their cause for achieving the budgetary target and ought not to try culled out budgetary targets of revenue from arties of taxpayer but must respect to judicial process which rightly termed a small price to pay for the civilizing hand of law, which alone can be given abiding meaning to constitutional freedom. "The law makes no difference between great and petty officers; thank God, they are all amenable to justice."
31. Consequently, the appeal filed by the revenue is hereby failed accordingly.