ZAHID SIKANDAR, JUDICIAL MEMBER. Through the instant second appeal, the taxpayer inter alia has assailed Order No. 3877 dated 03.09.2023 passed by CIR(A) whereby taxpayer's appeal was rejected and rectification order passed by the assessing officer was confirmed.
2. Learned counsel for the appellant submits that the impugned order is illegal and unlawful.
Further contends that the CIR(A) erred in law while not appreciating the fact that scope of rectification is limited to error floating on surface which does not require detailed scrutiny and the action of the OIR rectifying the deemed assessment order by way of rejecting the refund claim/adjusted is beyond his lawful authority. Conversely, the learned DR supported the impugned order for the reasons recorded therein.
3. Arguments Heard, orders perused.
4. The taxpayer filed income tax return for tax year 2017 which was taken as deemed assessment order under section 120 of ITO. Later on, it was observed that the taxpayer adjusted refund amounting to Rs.115,549/- against tax liability for tax year 2017 without proper verification and determination by the Commissioner. Considering the same as mistake/error, the OIR initiated rectification proceedings by way of issuing show-cause notice under section 221 to the taxpayer. In response, as per order-in-original no one attended the proceedings on behalf of the taxpayer on the given date of hearing. Eventually, the OIR disallowed refund adjustment of Rs.115,549/- by way of passing rectification order under section 221 in the deemed assessment order for tax year 2017.
The CIR(A) also confirmed the impugned rectification vide order dated 03.09.2023.
5. Arguments Hear
6. It is a settled preposition now 'that the rectification is a jurisdiction ancillary to the appellate jurisdiction intended to rectify a mistake of fact or law apparent on the face of record which does not require investigation, appraisal of evidence, interpretation of law or an enquiry into facts. The scope of section 221 of the ITO is restricted to rectify the mistake apparent from the record. Where an officer exercising such power enters into the controversy, investigates into the matter, reassesses the evidence or takes into consideration additional evidence and on that basis interprets the provision of law and forms an opinion different front the order, then it will not amount to 'rectification' of the order. Any mistake which is not patent and obvious on the record cannot be termed to be an order which can be corrected by exercising power under section 221. Reliance is placed upon 2012 SCMR 371, 2018 SCMR 1131, 2006 PTD 2854 and 2021 PTD 913.
7. Procedure for submission of income tax returns, assessment of income and amendment of assessm ents is duly provided in sections 114, 120, 121 and 122 of the Ordinance. The Commissioner may conduct audit of the income tax affairs of a taxpayer under section 177 and after issuance of audit report if the Commissioner considers necessary may amend assessment. However, when the return is not complete the Commissioner shall issue notice to the taxpayer confronting deficiencies in terms of section 120(3) and if requirements of notice are satisfied, the return will be treated as complete. The Commissioner is empowered to amend the assessment order under section 122(1) and in case of revised return under section 122(3). The Commissioner is also authorized to further amend the amended assessm ent order under subsections (4), (5), and (5A) of section 122 as per conditions enumerated therein.
8. A careful reading of sections 120, 122 and 221 of the Ordinance makes it very dear that the powers under these provisions are not overlapping rather independently clearly intended to operate within their respective sphere. Section 221 relates to the rectification of mistake apparent from the record whereas the word 'assessm ent order issued under section 120 used in section 122(1) are clearly distinguished from the language of section 221 which says 'any order passed by him'. Thus, there is a mark distinction between the deemed order and the order passed by the authority after fully applying his mind and giving opportunity of being heard to the person. Under the law, the tax liability of an assessee in the process of rectification cannot be altered on the basis of a consideration, which was not part of the original proceedings and the concept of rectification of mistake to correct the error committed in the assessment order, which is found floating on the surface of the record, may not be beyond the assessment already made. Such mistake should be apparent from the record i.e. floating on the surface and consequently there should not be any controversies or investigations to the matter or a reassessment or any evidence in order to decide whether or not such mistake needs to be rectified. The powers under section 221 are quite limited to the extent of mistakes apparent form record since there are other provisions of law which deal with the authority of department officials with regard to reopening of assessment, revision etc. in cases where the department is of the view that certain income had escaped from the chargeability of tax, but for exercising powers under Section 221 of the Ordinance, there must be a mistake apparently floating on the surface which is so obvious to strike one's mind without entering into long drawn process of reasoning, detailed deliberation etc. Reliance is placed on a decision of the Hon'ble Lahore High Court in a case titled as CIR v. Ch. Steel Mills, Daska in PTR No.335 of 2013.
Hence, tax liability created by invoking the provisions of section 221 in deemed assessment order is illegal and unlawful.
9. However, it transpires from record that the taxation officer declared the self-adjustment of refund as illegal without determination of overpaid tax by the Commissioner. The taxpayer adjusted refund against tax liability of Rs.115,549/-. It is an admitted position that the taxpayer did not file any refund application under section 170 for determination of his claim by the Commissioner rather adjusted the refund against tax liability at the time of filing of return. Section 170 of Income Tax Ordinance, 2001 deals with conditions, procedure and powers of issuing or refusing refund. Under the said provision a taxpayer who has paid tax in excess of the amount may apply to Commissioner for refund of excess amount paid. According to Rule 71 of Income Tax Rules, 2002, an application for refund of tax shall be made in the proforma specified in Part VI of First Schedule of the rules. Taxpayer has, to disclose in application (i) the total income of relevant tax year (ii) tax chargeable in respect of total income and (iii) amount of tax paid. The refund application shall be accompanied by such documents, statements and certificates as specified in the form and in the Ordinance and Rules. On receipt of application, once the commissioner is satisfied that the tax has been overpaid, he under section 170(3) shall either apply the excess in reduction of any other tax, apply the balance of the excess if any in reduction of any outstanding liability or refund the remainder. If the commissioner is not satisfied, he shall pass a written order refusing the claimed refund after providing opportunity of hearing to the taxpayer.
10. The whole mechanism given is section 170 nowhere provides or allows self-adjustment of refund by the taxpayers on their own against their tax liabilities Section 170 read with Rule 71 are very clear that a person claiming any refund is required to submit an application on a proper proforma given and it is the authority of the Commissioner to determine the correctness of overpaid tax and to allow/reject the refund after determination. Excess tax paid could be claimed only by filing an application with the proper officer. In the instant case there is no such application available on record given by the taxpayer rather the taxpayer after self-assuming the jurisdiction of commissioner adjusted the refund claimed against tax liability.
11. Though, the apex courts as well as this tribunal have always discouraged the retention of money known to have been paid under a mistake of law or not due under the law and such practice has been regarded as a shabby thing or dirty trick but the taxpayers cannot be allowed to self-adjust refunds against their tax liabilities without proper determination of overpaid amount by the relevant officer as it would amount to giving them jurisdiction and powers of Commissioner provided under section 170 of Income Tax Ordinance. Without proper application on a given pro forma and without determination/approval, no refund can be adjusted by the taxpayers against their tax liabilities on their own. Needless to mention that it is also a settled preposition that declared version of refund can only be varied through an amendment under section 122 while disposing of refund application. Reliance may be placed on a decision of the Hon'ble Lahore High Court given in a case titled as CIR v. Fatima Enterprises in STA No.1654/LB/2015 reported in 2016 PTD 377. Further reliance is placed on 2019 PTD 1116.
12. The taxpayer has illegally adjusted the refund against its tax liability without properly filing application for refund and without any determination by the Commissioner. The CIR(A) is right to the extent that the taxpayer failed to get the refund determined by the Commissioner before the self-adjustment however he failed to deliberate upon the very vital question of scope of rectification in deemed assessm ent orders. Based on what has been narrated above, we are of the candid view that the taxpayer committed wrong by adjusting the refund claim against tax liability of Rs.115,549/- without getting it determined by the Commissioner. The OIR rather than dealing the matter under relevant provisions of Income Tax Ordinance proceeded to rectify the self- assessm ent order which cannot be approved as the case of the taxpayer did not fall in the ambit of rectification in the given circumstances, impugned orders are set aside having been passed without lawful authority and of no legal effect. However, the department is at liberty to initiate proceedings against the taxpayer for disallowance of refund adjustment after adopting due procedure under the relevant provisions.
13. The instant appeal filed at the behest of the taxpayer is allowed.
14. We order accordingly.