ANWAAR-UL-HAQUE, ACCOUNTANT MEMBER----Titled appeal pertaining to tax year 2018 filed by the taxpayer is directed against an appellate order dated 31-03-2022, passed by the learned CIR(A), Faisalabad on the grounds as set forth in the memos. of appeal.
2. Brief facts of the case are that the taxpayer in this case is an individual, filed return of Income for the tax year 2018 declaring income at Rs. 534,400/- which was deemed assessment order in terms of section 120(1) of the Income Tax Ordinance, 2001 ('the Ordinance'). Subsequently, the appellant's case was selected for audit under section 214C of the Income Tax Ordinance, 2001 ("the Ordinance") by the FBR and for conducting an audit the case was assigned to the Assessing Officer.
Audit proceedings were initiated under delegated powers by issuing statutory notices and accordingly a notice under section 177(1) of the Income Tax Ordinance, 2001 was issued on 16-10- 2020 requiring him to furnish documents in support of its declared version for the purpose of conducting audit, however, the appellant has provided only partial record and admittedly no prescribed books of accounts were provided. After examination of the available record, a show- cause notice under section 122(9) was issued for amendment of assessment under section 122(1) of the Ordinance. On account of the appellant's persistent non-compliance to statutory notices issued from time to time, the Assessing Officer ultimately passed the amended order under section 122(1) read with section 177(10) of the Ordinance whereby a tax demand to the tune of Rs.7,806,109/- was created against the appellant. Aggrieved with the said order, the appellant preferred the first appeal before the learned CIR(A) who vide order dated 31-03-2022 confirmed the treatment accorded by the assessing officer. Felt aggrieved and discontented, the appellant has assailed the impugned appellate through this second appeal filed before this Tribunal.
3. The learned counsel appearing on behalf of the appellant/taxpayer has argued that the proceedings should have been finalized under section 121(1)(d) of the Ordinance instead of section 122 where admittedly the taxpayer did not produce the books of accounts and related documents to the Assessing Officer for the purpose of an audit under section 177 of the Ordinance, 2001. It is further submitted by the learned AR that the assessing officer without establishing any nexus with the income, had unjustifiably and illegally treated the entire credit entries appearing in the bank account of the taxpayer as concealed income and directly added the same towards income in terms of section 111(1)(a) of the Ordinance. On the other hand, the learned DR appearing on behalf of the department as fully supported the impugned order and contended that the learned CIR(A) has passed a speaking order and there is no infirmity in the impugned order.
4. We have heard arguments of both the rival parties and have carefully examined the relevant provisions of law as well as the case record and the case laws cited by the learned AR of the taxpayer have also been perused carefully. It is an admitted fact that no books of accounts as prescribed under the law was furnished by the taxpayer and only partial record / documents were submitted by the taxpayer inspite of that an amendment order under section 122(1)/(5) has been passed which could be passed only on the basis of definite information acquired from audit or otherwise. The amended assessm ent order shows that after selection of case for audit, the assessing officer issued various notices requiring the taxpayer to submit books of accounts but he failed to do so. Instead of passing a best judgment assessment order under section 121(1)(d) read with section 177(10) of the Ordinance, the assessing officer passed an amendment order under sections 122(1) / 122(5) of the Ordinance. It is appellant's case that the order under section 122 is illegal and not in accordance with law. We have considered the relevant provisions of section 177 and section 121 as these existed at the time of passing order under section 122(1)/(5) which are reproduced below.
"177. Audit.----(1) The commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation grid proceedings under this Ordinance in respect of such person or any other person: Provided that--
(a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and
(b) the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall nor call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate.
(2) After obtaining the record of a person under subsection (1) or where necessary record is not maintained, the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person or any other person and may call for such other information and documents as he may deem appropriate.
3 to (5)
(6) After completion of the audit, the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment under subsection (1) or subsection (4) of section 122, as the case may be.
(7) ......................................
(8) ......................................
(9) ......................................
(10) Notwithstanding anything contained in subsections (2) and (6) where a person fails to produce before the Commissioner or a firm of Chartered Accountants or a firm of Cost and Management Accountants appointed by the Board or the Commissioner under subsection (8), to conduct an audit, any accounts, documents and records, required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine or any other evidence that may be required by the Commissioner or the firm of Chartered Accountants or the firm of Cost and Management Accountants for the purpose of audit or determination of income and tax due thereon, the Commissioner may proceed to make best judgment assessment under section 121 of this Ordinance and the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.
121. Best Judgment Assessment (1) Where a person fails to
(a) ......................................
(aa) .....................................
(ab) .....................................
(c) ......................................
(d) produce before the Commissioner, or a special audit panel appointed under subsection (11) of section 177 or any person employed by a firm of chartered accountants or a firm of cost and management accountants under section 177, accounts, documents and records required to be document or evidence that may be required by him maintained under section 174, or any other relevant for the purpose of making assessment of income and determination of tax due thereon, the Commissioner may, based on any available information or material and to the best of his judgment, make an assessment of the taxable income (or income of the person and the tax due thereon and the assessment, if any, treated to have been made on the basis of return or revised return filed by the taxpayer.... Shall be of no legal effect.
From the combined reading of the above inter-related provisions of the Income Tax Ordinance, 2001, it is evident that after selection of case for audit under section 177, the audit shall be conducted as per procedure given in section 177 of the Ordinance. Then subsection (1) provides for Commissioner to "call for record or documents including books of accounts of the taxpayer". These books of accounts and records are mentioned in section 174(1) and prescribed under the Income Tax Rules, 2002. Then subsection (2) provides that only after obtaining the record of a person under subsection (1) or where necessary record is not maintained, the Commissioner shall conduct an audit of the income tax affairs including examination of accounts and records. Then subsection (6) provides that, after completion of the audit, the Commissioner may, after obtaining taxpayer's explanation on all the issues raised in the audit, proceed to a rend the assessment under sections 122(1) or 122(4). This means that first, a report of issues raised in audit is to be prepared and issued, and then the explanation of the taxpayer is to be obtained before proceeding under section 122 of the Ordinance. Hence law requires that only after obtaining the taxpayer explanations to the issues raised in audit can the notice under section 122(9) be validly issued to pass amendment order under sections 122(1)/122(5). We observe that above actions as required by subsections (1), (2) and
(6) of section 177 were not carried out by the assessing officer before amending the assessment under section 122 of the Ordinance.
5. Moreover in a case selected for audit, but where no records or books of accounts arc obtained from the taxpayer, then subsection (10) of section 177 provides the course of the proceedings to be taken by the assessing officer. This provision applies notwithstanding subsections (2) and (6) thus the overriding provisions of section 177(10) is attracted and applies where: a) a person fails to produce any accounts, documents and record required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine, or b) a person fails to produce any other evidence that may be required by the Commissioner The commissioner may proceed to make best judgment assessment under section 121 of the Ordinance. Thus in a case where no records or books of accounts are produced or audited, then subsection (10) would apply and the assessment will be completed under section 121(1)(d) of the B Ordinance. We observe that the assessing officer did not pass an order under section 121(1)(d) read with section 177(d0) but' instead passed the order under section 122(1)/(5) of the Ordinance.
6. After carefully perusing the above quoted provisions of law, it is crystal clear that subsection (10) of section 177 of the Ordinance has an overriding effect, contemplates that where a person fails to produce before the Commissioner any accounts, documents, and records, required to be maintained under section 174 or any other relevant document, electronically kept a record, electronic machine or any other evidence that may be required by the Commissioner for the purpose of C an audit or determination of income and tax due thereon, the Commissioner may proceed to make best judgment assessment under section 121 of this Ordinance and the assessm ent treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.
7. In the instant case, it is an admitted fact that the appellant failed to produce the books of accounts and related records for the purpose of an audit before the Assessing Officer, therefore, there was no occasion for her to conduct an audit, prepare an audit report and call for an explanation thereon from the appellant as required under subsections (6) and (6A) of section 177 of the Ordinance respectively. Thus, the only recourse available to the Assessing Officer was to pass an ex parte order under section 121(1)(d) of the Ordinance, 2001 on the basis of available information and record. When the provision of subsection (10) of section 177 is read with section 121(1)(d) in a juxtaposition, it is made clear that the assessment, if any, is treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect. It is a settled law that in order to arrive at the correct conclusion D a scheme of law is to be examined in its totality. Reference may be placed on the judgment titled as "M/s. Bilz (Pvt.) Ltd. v. The DCIR, Multan and another" reported as (2002 PTD 1 SC). It is also well-settled law that when the law requires an act to be done in a particular manner, it had to be done in that manner alone. Reliance is placed on the case titled as "IAC Income Tax v. M/s. Micro Pak (Pvt.) Ltd. and others" reported at (2002 PTD 877 SC). Therefore, keeping in view the above discussions, we hold that the Assessing Officer has to pass an order only under section 121(1)(d) of the Income Tax Ordinance, 2001 where the taxpayer fails to provide the books of accounts and related record for the purpose of an audit before the Assessing Officer, the assessment, if any, treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.
8. In view of the foregoing discussions, both the orders passed by the authorities below are annulled being ab initio void and without jurisdiction.
9. Appeal filed by the taxpayer succeeds in the above manner.