ORDER: MR. TAUQEER ASLAM CHAIRMAN.--(1). These appeals have been filed by the taxpayer bearing Reg.
No. 1710235269419 against the following Orders passed u/s 221 of the Income Tax Ordinance, 2001 by the Assistant/Deputy Commissioner IR, Unit-4, Range-B, Zone-II, Regional Tax Office-1, Karachi against the following orders:- Tax YearOrder No. Dated 2018 100000209727828 26.9.2024 2019 100000209792958 26.9.2024 2020 100000209801324 26.9.2024 2021 100000209803143 26.9.2024 2023 100000209808296 26.9.2024
2. Brief facts in accordance with the impugned orders are that case of the taxpayer is an individual who derives income from the import of different spices and its ingredients and subsequent sale of the same under the name and style of M/s Wali Trading Company. The taxpayer filed its returns of income declaring income tax deducted/collected at import stage as adjustable tax and subsequently claimed refund of income tax for the impugned year and refund orders were issued u/s 170(4) of the Income Tax Ordinance, 2001 as per following details:- Tax YearOrder Number Dated Refund Allowed vide Order u/s 170(4) (Rs.)
2018 100000158818321 04.9.2023 27,191,934 2019 100000158595202 31.8.2023 49,429,011 2020 10000015860079 31.8.2023 49,598,426 2021 100000158929376 05.9.2023 49,947,122 2023 100000192745858 04.4.2024 19,400,107
3. Subsequently in the light of letter of I&I vide No. DIR/I&I- IR/Intelligence Advisory/2024/2675 dated 14-06-2024 and CCIR, RTO-I Karachi vide No. CCIR/RTO-I/Khi/2024-25/1844 dated 11-09-2024 notices u/s 221(2) of the Income Tax Ordinance, 2001, were issued dated 03-Jul-2024 through which it was confronted to the appellant/taxpayer that report pertains to the investigation into an alleged illegal income tax refund claim the taxpayer, concerning the misuse of industrial undertaking status for income tax refund due to non-verification of addresses associated with the businesses. In response to the show cause notices the taxpayer furnished written replies which were found unsatisfactory and the impugned orders u/s 221 of the ordinance, 2001 were passed by the Assessing Officer with the assertion that the taxpayer failed to establish his case of being manufacturer, resulting in creation of income tax liability as under:- Tax YearOrder No Income from Business (Rs.)Income Tax Demand created (Rs.)
2018 100000209727828 83751487 28532520 2019 100000209792958 434407973 125128312 2020 100000209801324 324741002 112779351 2021 100000209803143 485775153 170171875 2023 100000209808296 61029484 20533645
4. Being aggrieved with the aforesaid treatment, the taxpayer preferred appeals before this forum on the common grounds set forth in the Memo of Appeal. The case was fixed for hearing. Mr. Naeem-ul-Haq, Advocate appeared on behalf of the appellant while the department was represented by the Mr. Bilal Jafri, DR. During the hearing of appeal learned AR of the appellant at the very outset contended that the very principle of natural justice has been denied in the instant case and argued that claim of the appellant is his excess payment for the tax year under reference for which he had applied to the department as per law and accordingly the department issued a refund order u/s 170(4) after examining all aspects of the matter including determination of the status of the appellant as a "manufacturer" and "an industrial undertaking". The learned Assessing Officer while passing order u/s 221 has not taken into account the reply of the appellant and has not discussed the reports of the RTO, Peshawar issued to RTO-I Karachi wherein upon a physical visit by RTO Peshawar it was observed that the taxpayer is engaged in manufacturing of spices by blending/mixing of different grades of imported as well as local raw materials and produced his own product with brand name of "SUFFA & NADA" and subsequent sale of different products of spices. The RTO team also verified that there were more than ten persons were employed for manufacturing purposes. AR further argued that the AO while passing orders u/s 221 has not appreciated that the appellant has also paid the WWF which also proves that the taxpayer is an industrial undertaking. He contended that the documentary evidence provided with the reply to the show cause notices and placed on record including registration in the register of Registrar of Trade Marks, Karachi for brand names Suffa and Nada, Licence certificate u/s 15 of KPFS & HFA Act, 2014 bearing no. 7372/DG/KPFSHFA/2022 issued by Khyber Pakhtunkhwa Food Safety and Halal Food Authority showing status food manufacturing unit but the same was also not considered. He stated that even the Honorable Federal Tax Ombudsman in the case of the appellant has established the maladministration of the department and also ordered to issue of refunds in appellant's case against which the department filed a representation before the President of the Islamic Republic of Pakistan against the orders of FTO dated 04-07-2024 and the President of Pakistan on 12-09-2024 accordingly dismissed the departmental representation. AR contended that the status of the appellant being "Manufacturer" has already been confirmed by the concerned office of RTO-I, Karachi his own office while passing orders u/s 170(4) and determining refund claims after due verification thus the impugned orders are a clear case of "change of opinion" which is not allowed under the law. He argued that the status of the appellant as "Manufacture" has already been determined by the CIR (Appeals) and ATIR at appeal proceedings while acknowledging the status of the appellant as manufacturer and industrial undertaking u/s 2(29C) of the Income Tax Ordinance, 2001. The report of the I&I that the appellant taxpayer is non-existent at Karachi address is also refuted by the report of RTO-I, Karachi thus the impugned orders are also self-contradictory in nature.
5. AR further argued that the learned Assessing Officer has misinterpreted the word "manufacturer" despite the settled interpretation by the highest foras and has not appreciated that the word manufacture includes a process whereby use of art and skill a better or more useful substance brought into existence. The appellant is an industrial undertaking and installed manufacturing units, whereby the spices leaves and dust by a mechanical process resulting in the end product of various flavors which is considered as a new marketable product, which is a highly specialized and technical job. The ATIR has already determined in ITA No. 369/PB/2017 dated 7.2.2019 that the process of mixing and blending of teas is a manufacturing process and that it is the right of the manufacturer or industrial undertaking to change the original import packing after mixing, blending and processing. Learned ATIR also held that the grinding process of spices and their mixing, grinding of leaves of green leaf, grinding of green cardamom, mixing and grinding of dry fruits i.e. almonds, peanuts, nutmeg, dry coconut etc for kheer, grinding of food grains, cutting of paper roll and use for different purposes and the act of cutting the tin plate to size are the examples of manufacturing. The department, against the order of learned ATIR however, filed Reference before Honorable Peshawar High Court, which was also decided against the department therefore, the ATIR judgment attained finality in the matter thus binding on the department. He placed reliance on the judgment of ATIR in ITA No. 369/PB/2017 dated 7.2.2019 as well as "2000 PTD 874" and stated that mixing and blending is a manufacturing process as held by the ATIR and that the appellant is also involved in similar kind of activities. Reliance was also placed to the judgment of ATIR reported as "2018 PTD 726" Vs. Collector Customs (Appeals) Peshawar and others and stated that the ATIR has held that "mixing and blending" is a manufacturing process as provided under section 153(7)(iv)(b) of the Ordinance, 2001. He also placed reliance on the judgment of ATIR reported as "2018 PTD 1188" and stated that the ATIR categorically held that even mixing and blending of imported LPG and bottle into small cylinders according to the requirement of users is a manufacturing process and the unit involved in such process is an industrial undertaking. He stated that the learned tribunal relying on the case of Telenor Pakistan reported as 2017 PTD 118, wherein the word "Process" appearing in section 2(29c) has been declared as having wider meaning going beyond the manufacturing of goods as material, has declared the process of mixing of gases as manufacturing process and the unit as Industrial undertaking.
6. On the point of assumption of jurisdiction while passing impugned orders AR vehemently contended that the Assessing Officer clearly exercised beyond lawful jurisdiction by reviewing the orders passed u/s 170(4) of the Ordinance, 2001 which is not the mandate available u/s 221 of the Ordinance, 2001. He argued that to invoke section 221, the mistake should be so obvious that on merely reading the order it may immediately strike on the face of it and the officer cannot enter into the controversy, investigates into the matter, reassesses the evidence or take into consideration additional evidence and on that basis interprets the provision of law and forms an opinion different from the order, then it will not amount to 'rectification' of the order. As per law, jurisdiction cannot be stretched to review the original order, .that too upon application of mind. It is absurd to assume that the rectified order passed u/s 170(4) after any debatable determination regarding the controversy is without lawful jurisdiction as already settled by constitutional courts.
He placed reliance on the judgment of the Honorable Islamabad High Court reported as "2023 PTD 390" in the case of CIR, LTU Islamabad Vs. M/s International Wireless Communication Pakistan Ltd. and stated the Honorable Court settled the ratio while categorically holding that the Commissioner IR has no power to undertake a review of its previous order in the exercise of authority u/s 221 of the Ordinance, 2001. However, in the instant matter, there is a clear case of review and change of opinion by the Assessing Officer which cannot be rectified u/s 221 of the Income Tax Ordinance, 2001. He stated that it is obvious from the various judgments of the superior courts that the power under section 221 of the Ordinance is not to review its earlier order but only to amend it with a view to rectify any mistake apparent from the record while the assessing officer obviously tend to review the amended order. Moreover, opportunity of being heard was denied to the appellant which is prerequisite u/s 221(2) for rectification. There was no element of definiteness, authenticity or certainty and these actions are therefore, not legally correct even on this account.
He argued that even mere' existence of a mistake or error would not per se render the order amenable for rectification, but such a mistake must be one which must be manifest on the face of the record. He contended that section 221 of Income Tax Ordinance, 2001 left no room for doubt that only those mistakes were rectifiable which were apparent from the record and floating on the surface and which did not require any long drawn process of reasoning, deliberation on a moot or debatable point. He also placed reliance stated that it is a settled law that where the law requires a thing to be done in a particular manner unless, it was done in the prescribed manner, same would be illegal as held by the Apex Court in the case reported as 2003 SCMR 1505 (Khalid Saeed vs Shamim Rizvi). Learned AR pleaded that the orders of the authority below are liable to be vacated being illegal and against the facts of the case.
7. Learned DR on the other hand stated that Conversely, learned counsel for the department submits that the orders passed by the (Assessing Officer) squarely falls within the ambit of jurisdiction extended under section 221 of Ordinance 2001 and the mistake that was apparent from the record was rectified by the officer after affording opportunity of being heard to the appellant.
He added that the Assessing Officer also exercised his lawful jurisdiction by rectifying the mistakes in the refund orders passed u/s 170(4) of the Ordinance, 2001 when establish that the appellant was not a "manufacture" or "an industrial undertaking", therefore, the tax deducted/collected at import stage u/s 148 was final/minimum tax and not the adjustable tax thus the refund claims were not genuine therefore rectified by assuming lawful jurisdiction u/s 221 of the Income Tax Ordinance, 2001.
8. We have given due consideration and analyzed the arguments put forth by both sides. The matter in dispute relates to the passing of orders u/s 221 for rectification of mistakes in respect of orders passed u/s 170(4) of the Income Tax Ordinance, 2001 for the impugned tax years. The legislature provided section 221 in the Income Tax Ordinance, 2001 for rectification of mistakes in the orders passed by the authorities subject to certain conditions the most important is that such mistakes must be apparent from the record. The context of the facts narrated and judicial pronouncements calls for interpretation of the scope, extent, and limits of rectification jurisdiction, envisaged under section 221 of Ordinance, 2001. Section 221 of the Ordinance, 2001 is successor to section 156 of the erstwhile Income Tax Ordinance, 1979 (Ordinance, 1979). Hundreds of judgments whereby section 221 of the Ordinance, 2001, section 156 of Ordinance, 1979, and section 35 of the erstwhile Income Tax Act 1922 were invariably interpreted. There is no cavil that broader principles for exercise of rectification jurisdiction are Settled, which, defined principles are followed, invoked, and applied in the context of facts of each case. To bring broader the principles into sharper-focus, reference is made to the ratio settled in the case of "COMMISSIONER OF INCOME-TAX COMPANY'S II, KARACHI v. M/s NATIONAL FOOD LABORATORIES" (1992 SCMR 687) and relevant portion whereof is reproduced hereunder:-- "Section 35 of the repealed Income-tax Act, 1922, hereinafter referred to as 'The Act' confers a power to rectify any mistake in the order which is apparent from the record. Such power can be exercised Suo Motu or if it is brought to the notice by any assessee. Therefore, essential condition for exercise of such power is that the mistake should be apparent on the face of record; mistake which may be seen floating on the surface and does not require investigation or further evidence.
The mistake should be so obvious that on mere reading the order it may immediately, strike on the face of it. Where an officer exercising power under section 35 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 from 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 15. In this regard reference can ITR No. 224/1510 be made to Shaikh Muhammad Iftikhar ul Haq v. Income-tax Officer, Bahawalpur, (PLD 1966 SC 524) and Pakistan River Steamer Limited v. Commissioner of Income-tax, 1971 PTD 204. In the present case the mistake pointed out by the petitioner was not of a nature to attract section 35 and, therefore, the High Court has correctly answered the first question in the negative".
The Honorable Supreme Court of Pakistan, in above judgment while defining the scope of rectification, has held that a mistake should be apparent from record, floating on surface and may not require any investigation or further evidence. It has been further held that a mistake which is sought to be rectified must be so obvious and apparent from record that it may immediately strike on the face of it. It may not be something which may be established by a long drawn process of reasoning on issues on which there could be conceivably two views or opinions.
The scope of rectification is limited to the extent of rectification of an "error apparent from record" and the said provision cannot be invoked as an alternate or substitute of an appeal, revision or review. In this regard we are also guided by the judgment of Islamabad High reported as "2023 PTD 390" in the case of CIR, LTU Islamabad Vs. M/s International Wireless Communication Pakistan Ltd. wherein the Honorable Court has categorically held that the Commissioner IR has no power to undertake a review of its previous order in the exercise of authority u/s 221 of the Ordinance, 2001.
The Honorable Court in the judgment also held that the reasoning constituted a change of opinion and not the rectification of any mistake apparent from the record. In the cases under reference the Assessing Officer resorts to reasoning, inquiries which is clearly of review, and change of change of opinion thus outside the ambit of rectification as provided u/s 221 of the Income Tax Ordinance, 2001 therefore no sustainable under the law.
9. It has also been observed that the Assessing Officer in the instant case passed no speaking orders without observing the set principles of justice, equity, and fair play without adjudicating the submissions of the appellant/taxpayer and even in the notice dated 11.9.2024 while assuming jurisdiction it has been asserted that the appellant has failed to make proper compliance even though the detailed written submissions were available on record in the form of written replies and supporting documents. It is already settled that the obligations of the State and all its functionaries to act in a just, fair, and reasonable manner and all state functionaries exercise state authority to facilitate the inhabitants of the country without exception. The Constitution and the body of statutory laws under it aims to protect the citizen and prohibit the State from treating the citizen in an equitable manner and to dispense justice. In the instant case, it has been observed that the appellants had to approach FTO who vide its order established maladministration on the part of the department against which the department filed representation before the Honorable President of Pakistan which was rejected by his office. There is no concept of "unfettered discretion" in the fiscal laws of this land and arbitrary exercise of discretionary powers has to be struck down. It has been held in 2001 SCMR 256 that discretion becomes an act of discrimination when it is improper or capricious exercise or abuse of discretionary authority and the person against whom that discretion is exercised faces certain appreciable disadvantages which he would not have faced otherwise.
10. On the factual side, it has been observed that the appellant filed its returns with the claim of "industrial undertaking" and declared the tax deducted at the import stage as "adjustable tax" and subsequently filed refund applications which were allowed by the department through passing orders u/s 170(4) of the Income Tax Ordinance, 2001 being verified refund claims and refund was determined under the relevant provisions of Ordinance ibid. The Assessing Officer, however, upon the "Physical Verification Report" signed by Director I&I IR, Karachi, issued vide No. DIR/I&I/Intelligence Advisory/2024/2675 dated 14.6.2024 initiated proceedings for rectification u/s 221 in respect of refund orders passed u/s 170(4) of the Income Tax Ordinance, 2001 after issuance of show. cause notices. First, it would be imperative to discuss the physical verification report which is the basis for rectification proceedings. The said letter dated 14.6.2024 addressed to Chief Commissioner IR, RTO-I, Karachi provides that physical verification was conducted of the following declared address of the appellant taxpayer:-
(i) 3rd floor, Sb no. 15, St 10, sector 6-g, Mehran Town, Korangi Town.
(ii) Office no. 5/19, Wazir Manzil, Ali Akber street, Saddar Town, Karachi.
As per report no business activity is carried on the first address while second address was untraceable and that the second address is related to wholesale market and manufacturing activity is not possible there. The said correspondence dated 14.6.2024 further provides that the items imported by the appellant/taxpayer were ready to use and apparently no further processing was needed to be done and that the tax deducted at import stage of a commercial importer is required to be considered as "minimum tax" in terms of section 148(7) of the Income Tax Ordinance, 2001 and following actions were proposed to the CCIR:- I. All pending Income Tax Refunds may be examined in the light of the facts narrated above, and II. Recovery proceedings may be initiated to recover value addition tax evaded at the import stage.
AR of the appellant challenged and refuted the I&I report and stated the RTO authorities at their own conducted physical verification of the business premises of the appellant at Karachi as well as Peshawar which has been duly verified but the impugned proceedings are silent the subsequent reports. During the proceedings before this forum, DR was asked to rebut the same who produced copy of the letter dated 09.7.2024 duly signed by the CIR (Zone-II), RTO-1, Karachi which was addressed to the concerned CCIR. Perusal of the letter reveals that after receipt of the Physical Verification Report, from I&I dated 14.6.2024, the authorities of RTO-I, in the light of the I&I report conducted physical verification to determine the taxpayer's status on the following addresses:-
(i) 3rd floor, Sb no. 15, St 10, sector 6-g, Mehran Town, Korangi Town.
(ii) Malak Maqbool Market, Mirch Mandi, Charsadda road, Peshawar, The letter dated 09.7.2024 revealed that the same was written by the CIR, Zone-II, RTO-1, Karachi dated 09.7.2024, addressed to the CCIR, RTO-, Karachi and was accompanied by copies of physical verification reports of RTO-1, Karachi and RTO, Peshawar. Para 3 and 4 of the said letter dated 09.7.2024 is reproduced below:- Ouote "............
3. The Physical verification, performed at the Karachi unit, revealed at the facility is engaged in manufacturing processes and the manufacturing operations at Karachi unit are currently in the development stage. The detailed physical verification report is attached for reference.
4. Secondly, in response to this office letter No. CIR/ZONE-II/RTO-VI&I-KHI/2023-24/4333, dated 29- 06-2024 for conducting physical verification of the said unit located in Peshawar, this office received a comprehensive report by the office of the Chief Commissioner Inland Revenue, Regional Tax Office, Peshawar vide letter bearing No. CCIR RTO(HQ)/Misc:/CIR Pesh/2023/10 dated 04.07.2024 by this office on 08.07.2023. In this detailed report the Commissioner-IR, RTO Peshawar confirms that a significant portion of the taxpayer's manufacturing operation is conducted at the unit located in Peshawar. It is apparent that I&I's Karachi observation regarding non-existence of manufacturing unit(s) appear factually incorrect."
Unquote It is explicit from the above letter dated 09.7.2024 and the physical verification reports conducted by the concerned RTOs that the appellant is also involved in the process of manufacturing and that E a significant portion of the manufacturing operation is conducted at the Peshawar premises. The impugned orders however, silent about the said reports. It is settled principle of law that if base/foundation of any order or action is illegal then the whole superstructure built F thereupon cannot be sustained. In the instant case, the basis/foundation of the case is the initial report of I&I which has been refuted by the subsequent "Physical Verification Reports" of the department duly verified by the concerned Commissioner IR. Before drawing conclusion it would be imperative to refer 2(29C) of the Income Tax Ordinance, 2001 which provides definition of the "industrial undertaking". Clause (a) sub-clause (i) of section 2(29C) provides that where ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy and which is engaged in the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition. After examination of the record including reports annexed with the CIR letter dated 09.7.2024 and taking into consideration the arguments it is evident that the appellant falls under sub-clause (i) of clause (a) of section 2(29C) as the persons more than ten persons are employed at the business premises of the appellant who imported certain spices and other relevant in bulk consignments which were cleaned, crushed, grinded, mixed, blended, packed and sold under his own brand names of "Nada" and "Suffa" as a finished product.
As per record, the said packing is also available in the wholesale as well as retail market under different packing i.e. "clove powder", "cardamom powder", "mix dry fruit powder", "black pepper powder" etc as a finished product to be sold in retail market under own brand at printed price. We therefore, hold that the appellant is involved in the process of grinding, mixing, blending and packing to be sold under the brand name.
11. Now the question to be determined before this forum is whether the appellant is engaged in the manufacture of goods or materials or the subjection of goods or materials to any process that substantially changes their original condition and whether the process of grinding, mixing, blending, and packing to be sold under brand names, can be termed as "manufacturing process"?
The appellant claims that such a process involves a manufacturing process to reach the final products and that it is "an industrial undertaking". For this learned AR quoted several judgments to support this claim.
12. We have examined the arguments of both sides. The ITAT in its judgment reported as "2000 PTD 874" dated 12.11.1999 in ITA No. 66KB to 70KB, after a comprehensive debate has answered this very question and decided the issue as under:- .......
37. For the foregoing reasons it is held that the appellant is an industrial undertaking and has engaged in the manufacturing of finished tea out of the imported raw leaves and dust, after subjecting them to a manufacturing process. Consequently, we hold that the Assessing Officer rightly allowed exemption under clause (118-E) of Part-1 of the Second Schedule to the Income Tax Ordinance, 1979 to the appellant in the assessment years 1993-94, 1994-95, /995-96 and part of assessment year 1996-97 to which no interference was required. The exemption so allowed was not erroneous and, therefore, it was not prejudicial to the interest of the interest of revenue.
Furthermore, in a similar case as to the case under reference the ATIR in ITA No. 369/PB/2017 dated 7.2.2019 in the similar case of Al Khyber Tea and Food Co, Peshawar vs the CIR, RTO, Peshawar answered the as to whether or not the mixing, blending and coloring is manufacturing process and the appellant was an industrial undertaking as provided u/s 2(29C) of the Ordinance, 2001? and it was eventually answered and held that mixing and blending is a manufacturing process thus the appellant qualifies as "an Industrial Undertaking". ATIR in another judgment reported as "2018 PTD 1188". also held that mixing and blending of rent type of imported LPG and bottle into small cylinders according to the requirement of users is a manufacturing process and the unit is an industrial undertaking as per section 2(29c) of Ordinance, 2001.
13. In view of the foregoing and ratio settled by the ATIR we second the judgment quoted in preceding paras that the process of grinding, blending and packing to be sold under band name is a manufacturing process, which entitled the appellant under reference, the status of "an industrial undertaking" as provided u/s 2(29C) of the Income Tax Ordinance, 2001, therefore, was entitled to claim adjustment of tax on the import of such products and lawfully applied for refunds which were allowed u/s 170(4) of the Income Tax Ordinance, 2001 in a lawful manner.
14. In view of the above discussion we declare the orders passed u/s 221(1) for the impugned years as illegal, without lawful jurisdiction, and against the facts therefore, have no validity in the eyes of the law and given the facts under reference.
15. Based on the above discussion, we do not feel any hesitation to vacate the orders of the authorities below.
Consequently, the appeals under consideration stands accepted and the income tax demands created as well as the consequential proceedings also stand vacated while the refund orders passed u/s 170(4) may be processed under the law.