RIZWAN AHMAD URFI, ACCOUNTANT MEMBER. The titled appeal preferred at the instance of the taxpayer is directed against the order dated 27.01.2022 passed by the learned CIR (Appeals-II), Multan.
2. Brief facts necessary for disposal of appeal are that the taxpayer is a private limited company engaged in production under sale of poultry feed. Return of total income for tax year 2019 e-filed by the taxpayer was deemed to be assessment order in terms of Section 120(1) of the Income Tax Ordinance, 2001 ('the Ordinance'). Later, the Officer of Inland Revenue (OIR), observed that the taxpayer had wrongly adjusted unverified refund of previous year amounting to Rs.25,731,483 towards the current year's tax liability. This was termed as mistake warranting rectification under section 221. The OIR, issued notice under section 221 requiring the appellant to explain as to why said refund adjustment may not be disallowed. No reply was furnished by the taxpayer. The OIR passed the impugned order under section 221 of the Ordinance by disallowing adjustment of previous year refund at Rs.25,731,483/- against tax liability for tax year 2019.
3. Being aggrieved, the taxpayer filed appeal before the CIR (Appeals-II) Multan who vide appellate order dated 27.01.2022 rejected the appeal and confirmed the impugned treatment for the reasons recorded therein. The taxpayer being dissatisfied has come up in further appeal before this forum on grounds as set out in Memorandum of appeal.
4. The learned A.R of the appellant agitated the treatment accorded by the lower fora on multiple grounds. It was contended that the rectification order as well as appellate order were illegal as the adjustment was as per law/rules as well as established past practice. It was further argued that the impugned order is contrary to the ratio settled by Lahore High Court in 2015 LHC 226 in PTR No.15/2012 titled CIR v. Sheikh Manzoor Ahmad. It was further contended that the OIR failed to establish the existence of mistake apparent from record in the self-assessment order under section 120(1) the Ordinance. It was explained adjustment of refund was as per format of Return of Total Income prescribed under the Income Tax Rules, 2002 and that disallowance of adjustment without first proving its inadmissibility in relevant tax year, was patently illegal. It was further argued that impugned action was clearly against the cases reported as 2015 LHC 2276 in CIR v. Chicago Metal Works and PLD 1998 SC 64.
5. The learned D.R on his turn supported the orders of authorities below for the reasons recorded therein the orders.
6. We have examined the record and have gone through the rival arguments. It is admitted position that the format of return of total income is prescribed under the Income Tax Rules, 2002.
Perusal of format of the return for Tax Year 2019 indicates that under the head computation there is a column with description "Refund Adjustment of Other Year(s) against Demand of this Year at Code [92101].
In this column the adjustment in question has been made. As per format of return and instructions thereof contained in the Rules there is no requirement or additional documentation for making the above adjustment.
7. As per facts, neither there is any recent change in section 170 nor in the columns of adjustment of refund. It appears that the aforesaid adjustment is being considered dependent to an order under section 170(3), whereas, as per principles of law propounded by the superior court, an established past practice has the force of law. Reliance in this regard is being made on judgment of the Supreme Court of Pakistan reported as 1989 SCMR 353 titled Radaka Corporation and others v.
Collector of Customs wherein the relevant extract is as under: "7. ....Now it is settled law that where departmental practice has followed a particular course in the implementation of some rule, whether right, or wrong, it will be extremely unfair to make a departure from it after elapse of many years and thereby disturb rights that have been established by a long and consistent course of practice; see Nazir Ahmad v. Federation of Pakistan and others (PLD 1970 SC 453)."
8. In the impugned order, the expression used by the OIR is "unverified refund" as basis for impugned rectification. The term "refund" has not been defined in the Ordinance. Reference can, however, be made to section 170 which reads as under: "170. Refunds.---(I) A taxpayer who has paid tax in excess of the amount which the taxpayer is properly chargeable under this Ordinance may apply to the Commissioner for a refund of the excess."
[Underlined for emphasis]
9. From the above language, it transpires that "refund" means payment of tax in excess of tax chargeable: When a taxpayer claims refund in return of income, it means tax paid by him is in excess of his tax liability for that relevant year. As per format of acknowledgment of return of total income, this is shown as "refundable income tax" at Code [9210] and assessment is treated to be made under section 120 on the date of filing. In our considered opinion, unless refund claimed by a taxpayer is found inadmissible, after due verification under the law, the same cannot be disallowed merely on basis that it was "unverified". In the case in hand, the Department has neither disputed tax overpaid for preceding year nor was there any verification process employed by DCIR to declare it as inadmissible. Therefore, disallowing adjustment of prior year's refund is not found justified under the circumstances and that too through rectification proceedings.
10. Perusal of appellate order shows that the learned CIR (Appeals) by relying on section 170(3) of the Ordinance, observed that refund is only due when the Commissioner is "satisfied" that tax has been overpaid and there is an adjustment order under section 170(3)(a). It is, however, noted that the finding is misconceived since aforesaid provision envisages issuance of refund or its adjustment by the Department and not adjustment by the taxpayer.
11. Secondly, if the Commissioner in this case was not "satisfied regarding excess payment of tux", it also means that the Commissioner was not "unsatisfied" as well on this account. From perusal of record, it is undisputed that no order under any provision of the Ordinance had been made by the Department to the effect that tax in this case had not been overpaid. The verification of correctness of refund claim of a taxpayer is the responsibility of Department. If this responsibility is not fulfilled, the taxpayer cannot be punished for inaction of the Department.
12. We are of the considered view that before disallowing refund adjustment in the case in hand, the OIR should have made attempt to verify refund claim of the taxpayer for relevant year and if, after verification, tax paid in excess was not verified, only then he could issue notice for disallowing adjustment of the same against tax payable for subsequent year. In the absence of any finding on record, the observation that taxpayer had adjusted "unverified" refund is not sustainable. When the ground on which rectification was sought is not established from record, question of there being any mistake apparent from record does not arise, hence, section 221 was wrongly invoked under the circumstances. We also observe that mistake, if any, could at best be attributed to the relevant tax year to which the said "unverified refund" pertained to and not this subsequent year under appeal.
13. It is further noted that this Tribunal in its decision reported as 2020 PTD 2163 has held that section 221 cannot be invoked in the case of deemed assessment under section 120(1) of the Ordinance. Relevant part of the order reads as under: "5. It can be seen from the combined reading of sections 120, 122 and 221 of the Ordinance reproduced above, it becomes very clear that the powers under these provisions are not overlapping rather independently clearly intended to operate within their respective compass.
Section 221 of the Ordinance relates to the rectification of mistakes which are apparent from the face of record. The words used in the said provisions are very specific and purposeful "any order passed by him". This clearly does not include an order which is deemed to have been issued by the Commissioner by fiction of law which is the case for assessment orders under section 120 of the Ordinance. The words "an assessment order treated as issued under section 120" used in section 122(1) of the Ordinance are clearly distinguishable from the words used in section 221 of the Ordinance which says "any order passed by him". The act of passing of formal order by any Officer of Inland Revenue presupposes an application of mind and in most cases adjudication on merits after hearing the parties. Thus, there is a marked distinction between the deemed order and the order passed by the authority after fully applying his mind and giving proper opportunity of being heard to the person. The principle of 'interpretation of statute that every word used in a statute has to be given effect to and no word or provisions of a statute is to be treated as surplus age and redundant. The case of East and West Steamship Co. v. Queensland Insurance Co.
Ltd reported as PLD 1963 SC 395 can be cited in this regard A similar observation was made by the.
Supreme Court in the case of Jalal Muhammad Shah v. Federation of Pakistan reported in PLD 1999 SC 395. By applying the aforesaid principle of interpretation, the words "any order passed by him" used in section 221 of Ordinance expressly and deliberately provides that the authority can rectify, such order which is passed by him. If the order is not passed by the Commissioner, no question of rectification of mistake committed by him arises which can only be the case if there is an order pass& by an officer after conscious application of mind and in which a mistake has crept which is sought to be rectified at a later stage. The rectification is permissible only to "amend any order passed by him. It is not mentioned in section 221 of the Ordinance that the order treated to have been issued under section 120 of the Ordinance because the deemed order did not amount to an order passed by the authority. Had it been the intention of the legislature, it become necessary to introduce the specific provisions or amendment with certain words to cater the eventuality of deemed order in section 221 that a deemed order under section 120 can be amended in case of a mistake apparent from record"
14. In view of the above observations made and case law relied upon, we hold that the adjustment of prior year's refunds appearing in the acknowledgment as "refundable income tax" was in accordance with law, rules and established past practice. Therefore, there was no mistake apparent from record which could be rectified through order under section 221.
15. For the foregoing reasons, orders of the authorities below are annulled being not maintainable and appeal of the taxpayer is accepted.