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Petitioner: Muhammad Farooq Proprietor, Al-Noor Food Industries, Karachi VS Respondent: The Commissioner Inland Revenue, Zone-Iii, Ltu-Ii, Karachi and others
Court Name: Inland Revenue Appellate Tribunal Judge(s): Muhammad Jawed Zakaria, Saif Ullah Khan Title:Muhammad Farooq Proprietor, Al-Noor Food Industries, Karachi vs The
Commissioner Inland Revenue, Zone-Iii, Ltu-Ii, Karachi and others Case No.: I.T.A. No.1228/KB of 2017 Date of Judgment:2019-10-07 Reported As: 2021 PTD (Trib.) 1534 Result: Appeal allowed Judgment ORDER MUHAMMAD JAWED ZAKARIA, JUDIC IAL MEMBER .-- By this order , we intend to dispose of above titled appeal filed by the appellant/taxpayer against the impugned Order No.02 dated 2.11.2017 passed by the learned CIR (Appeals-IV), Karachi. The appellant/taxpayer has raised the following grounds of appeal: 1. "That the Order No. 02 dated: 02-11-2017 passed under section 129 of the Incom e Tax Ordinance, 2001, dated: 02- 11-2017 for the Tax Year-2014 by the learned Commissioner Inland Revenue, (Appeals-1V) Karachi, is bad in law as well as on facts of the case. 2. That the learned CIR (Appeals-IV), Karachi in the appeal order has totally ignored the grounds of appeal put forth by the appellant for remedy from his office. 3. That the CIR (Appeals-IV), Karachi in the appeal order has totally ignored the verbal and written legal and factual submissions submitted in his office including evidences handed over to him during the course of hearing. 4. That the learned CIR (Appeals-IV), Karachi has totally mislead himself by considering that the assessing officer has pointed out certain defects in the claim of expenses through show-cause notice which were not properly complied by the appellant. 5. That the only reason quoted in the impugned order for rejecting the appeal mentioned in the impugned order is " the appellant approached the concerned Commissioner Inland Revenue, and requested for granting further time to support their declared version. This request of the appellant was duly considered by the concerned Commissioner IR and he directed to the assessing officer to allow further time to the appellant " is totally wrong. During the entire assessment proceedings the appellant never asked for time to the Commissioner IR, Zone-III, L TU-II, Karachi. That die learned CIR (Appeals-IV), Kara chi has erred by supposing that the appellant filed a request letter to CIR, Zone-III, L TU-II, Karachi for granting further time for submission of supporting details / documents.
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That the learned CIR appeal has erred by assuming in the order that Commissioner IR, Zone-III, LTU-II, Karachi has allowed time for submission of details and supporting evidences, which is totally wrong and baseless. That the appellant has filed a letter dated 07-04-2017 to the commissioner IR, Zone-III, LTU-II, Karachi against the attitude of the assessing officer and requested him to direct the concerned officer to examine the record on merit and finalize amended assessment after considering appellant's explanations, which were already submitted to him during the course of hearing. That the learned CIR (Appeal-IV), Karachi has wrongly quoted that details/supporting evidences were not provided during the course of hearing while in the amended assessment order assessing officer / DCIR has himself admitted that the details were submitted by the appellant during amended assessment proceedings. 10. That the learned CIR(Appeal-IV), Karachi has erred that any specific show-cause notice was issued to the appellant and pointed out any specific discrepancy by the OIR. However , in initial letter he showed his attention to disallow the entire purchases and expen se 100% for non-production of record while most of the details were in his custody and the remaining derails were furnished by the appellant on 06-04-2017. 11. That the learned CIR(Appeal-IV), Karachi has erred by neglecting the facts that all the power bills were already submitted, withholding tax deducted under section 235 was also claimed in the return of income, and consumer number was also mentioned in the return of income as well as in the amended assessment order , which is an undeniable fact. 12. That the learned CIR (Appeal-IV), Karachi has erred by ignoring the fact that section 174(2) can only be invoked if a taxpayer remain unable to provide any record to the commissioner which was asked by the commissioner during any proceedings. While entire details of purchases, salaries / labour charges, travelling expenses, repair and maintenance and professional tax etc., were furnished and no specific discrepancy was pointed out through any show-cause notice to the appellant before passing the amended assessment order . 13. That the learned CIR (Appeal-IV), Karachi has erred by ignoring the legal provision that section 174(2) cannot be invoked if 3rd Party (Brokers) didn't comply the letter of OIR. 14. That the learned CIR (Appeal-IV), Karachi has erred by ignoring the fact that in the amended assessment order the DCIR has made addition of 9.7 million whereas in the wealth statement / wealth reconciliation there is increase of only 4.6 million and this increase was made from the T/Y 2014 income of the appellant from flour mill, which is totally reconciled. 15. That the CIR (Appeal-IV), Karachi has erred by ignoring the fact that monitoring for the tax year 2014 in the appellant's case was also conducted by the department and details were filed during the monitoring proceedings, which was finalized through order under section 161(205) dated: 20-10-2015. 16. That the OR (Appeal-IV), Karachi has erred in not considering the fact that the assessing officer has totally ignored the Circular No. 7(2) dated: 01-02-1994 manifests that three opportunities of clear 15 days should be offered to the assessee before making estimation/assessment. 17. That the order under appeal passed by the CIR (Appeal-IV), Karachi is entirely based on wrong assumptions, supposition and against the facts, which is illegal and against the norms of justice. 18. That the learned CIR (Appeals-IV), Karachi has erred by not properly applying judicial mind, ignoring the evidences on record and legal submissions of the appellant. 19. That the appellant craves permission to alter, amend or modify all or any of the ground of appeal on or before the date of hearing. Facts of the case 2. Brief facts of the case as stated by the learned counsel are that the taxpayer appellant is a proprietorship concern and is running a flour mill name and style as Messrs Al Noor Food Industries for the last two decades. The appellant has filed normal income tax return under section 114(1) which has become deemed assessment order under section 120 of the ITO, 2001, as well as statement of assets/ liabilities under section 116(2) along with wealth reconciliation statement within due date for the Tax Year 2014. In the return of Income filed for the-tax year 2014 the appellant has declared business income of Rs.6,940,548/- while the gross revenue was declar ed amounting to Rs.865,489,049/-. The Appellant has also declared the cost of sales at Rs.837,678,144/- however , gross profit was Rs.27,810,905/-. In
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the initial order passed under section 122(1) dated 28-08-2017 by the DCIR, Unit-III (Audit), Zone III, LTU II, Karachi the following additions were made. DESCRIPTION AMOUNT CLAIMED IN THE RETURNDISALLOWED BY THE DCIR UNDER SECTION 174(2) Purchases from Brokers562,229,907 96,535,630 Salaries and W ages 10,966,835 2,150,254 Power (Electricity) 30,874,548 30,874,548 Gas 229,900 229,900 Repair and Maintenance2,171,589 322,831 Professional Charges 95,300 95,300 Travelling 1,241,533 620,768 At the same time the DCIR had added back Rs.9,700,000/- in the income of the appellant under section 111(1)(b) of the Income Tax Ordinance, 2001. Against the initial impugned order passed under section 122(1) by the DCIR the appellant preferred an appeal before the Commissioner Inland Revenue (Appeal) for want of justice from the learned CIR (A) but in the Order No. 02 dated 02-11-2017 passed under section 129 of the Income Tax Ordinance, 2001 by the learned CIR(A) the additions made by the DCIR were confirmed. Being aggrieved and dissatisfied with the treatment meted out by the OIR, taxpayer filed appeal before the learned CIR(A) who vide his impugned order confirmed the order passed by the DCIR. Hence, the instant appeal before this Tribunal. 3. Narrating the back ground of the case, the learned counsel for the appellant, submitted that Notice for intimation/call for record under section 177(1) of the Income Tax Ordinance, 2001 with the subject "Selection of case for Audit (Tax Year 2014) under section 214C" dated 26th October , 2015 was issued from the office of Commissioner Inland Revenue, Zone III, LTU-II, Karachi. Notice for intimation/ call for record under section 177(1) of the Income Tax Ordinance, 2001 dated 17th February , 2016 from the office of Commissioner Inland Revenue, Zone III, LTU-II, Karachi. Notice under section 176(1) (to obtain information or evidence) with the subject notice under section 177 regarding audit proceedings under section 214C of the Income Tax Ordinance, 2001 for the Tax Year 2014 dated 3rd March, 2016 from the office of Mr. Rab Nawaz Ahmed Matiana, DCIR (Audit) Unit III, Range-B, Zone III, LTU-II, Karachi. Notice under section 122(9) (Notice to amend assessment) with the subject notice under section 122(9) read with sections 122(1)/122(5) of the Income Tax Ordinance, 2001 for the Tax Year 2014 dated 17th March, 2017 from the office of Mr. Asif Nazir Sheikh ACIR (Audit) Unit III, Zone HI, LTU-II, Karachi. The earlier two notices were intimation letters received from the concerned Commissioner Inland Reven ue Office, however , letter dated 3 March 2016 was compiled by the appellant on 21st March 2016. Detailed reply was furnished by the appellant and relevant details/documents were handed over to Mr. Rab Nawaz Matiana. After lapse of one year 2nd notice under section 122(9) of the Income Tax Ordinance 2001 dated 17 March 2017 was issued from the office of Mr. Asif Nazir Sheikh with the intention to disallow the entire expenses 100% in respect of comm ission, power , gas charges, repair and maintenance, stationary , professiona l charges, other direct expenses, other indirect expenses, travelling and rent expenses for non-production of record under section 174(2) of the no 2001. In the said notice he also informed the appellant that wealth. statement of the appellant is not being filed for the last five years. In response to the said notice the appellant filed detailed reply on 6th April, 2017 and handed over to him pending documents in support of claim in the return along with three bank accounts statement. 4. During the course of hearing the appellant also informed that monitoring of the case has also been conducted for the tax year 2014 and copy of the order passed under section 161/205 dated 20th October 2015 was also handed over to DCIR on 6th April, 2017 and also furnished before this bench. Instead of examining the case on merit he passed an unjustified order and an addition of Rs. 130,829,581/- was made under section 174(2) of the ITO 2001 as well as added back Rs. 9,700,000/-under section 111(1)(b) of ITO 2001. In the order DCIR disallowed purchase of Rs.
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96,535,630/- with the reason that third party verification was not received from brokers from whom the purchases were made by the appellant. However , complete details were furnished along with reply . It was also explained that purchases were made from government and from private parties through brokers. Complete details of brokers, breakup of purchases made and challan of withholding tax on commission under section 233 of the Income Tax Ordinance, 2001 (also available on Iris) were furnished but he didn't consider the evidences. However , during the monitoring proceedings where the concerned taxation officer after examining the details of salaries & wages, power , gas. Repair and maintenance, professional charges and travelling expanses submitted along with other details in his of fice, passed the order under section 161/205 of the IT O, 2001 without rejecting any expense. In the audit proceedings he contended that the attitude of the DCIR was not justified and he did not examine the record on merit. 5. On legal plane the learned counsel for the appellant vehemently argued that the concerned DCIR made additions under section 174(2) of IT O, 2001. He referred to Section 174(2) for ready reference which is being reproduced "Section 174 Records.-(2) the Commissioner may disallow [or reduce] a taxpayer' s claim for a deduction if the taxpayer is unable, without reasonavle [cause] to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction." 6. From the above it is obvious that the OIR may disallow or reduce the taxpayer's deduction if relevant documents were not furnished by the taxpayers. However , in the order under appeal the taxation officer is admitting that details were furnished by the taxpayer . However , due to non-availability of third party verification (brokers) he disallowed the expenses of the taxpayer . The OIR disallowed the purchases made from private parties through brokers while on the other hand he allowed entire commission paid to those brokers against the same purchase. 7. The learned counsel argued that the taxation officer could only invoked section 174(2) if details were not furnished by the taxpayer but in the order he has admitted that the taxpayer has furnishe d details. Therefore section 174(2) ,cannot be invoked in the appellant' s case and the addition made under section 174(2) is illegal and unjustified were not liable to be confirmed. However , the taxation officer mentioned in the order that the appellant did not furnish the detail of power and gas as well as third party verification was not done. He further stated that he wrote a letter to K- Electric for verification of electricity charg es in respect of the subject taxpayer but they refused that the details cannot be provided due to the absence of Consumer Number (Page No. 13 of the initial order ). However , surprisingly on Page No. 18 of the order he is showing the Consumer Number of appellant electricity bill. 8. It was further submitted by the learned A.R. that during the entire proceedings only two notices were received by the taxpayer on 3rd March 2016 notice under section 176(1) and another on dated 17th March 2017 under section 122(9) of the ITO, 2001 for submission of detail s. Before passing the order the DCIR didn't issue any show-cause notice or confront the same to the taxpayer . There was no definite information before him in the audit proceedings and the said order is totally violation of section 122(5) and section 177(6) of the ITO, 2001. It was asserted by the learned counsel that the addition made under section 111(1)(b) is totally illogical and based on false assumption. In the Tax Year 2013 the appellant mentioned prize bond at Rs. 3 (M) and personal Bank balance of Rs.1.56(M). In the Tax Year 2014 the appellant declared the income of Rs.6.94(M) and total increase of Rs.4.6(M) instead of examining the wealth statement on merit. The AR further contended that the OIR again played a decisive role by neglecting the facts that in Tax Year 2014 prize bond and personal bank balance were added in the capital. Wealth reconciliation statement is fully reconciled there is no flaw or any definite information of additional income, but the OIR intentionally created illegal addition only to harass the taxpayer and created illicit tax demand. During the entire proceedings the DCIR did not issue any specific and separate notice under section 111 of the ITO, 2001 for making any addition, however , there is no unexplained income /investment in the appellant's case. 9. The learned counsel vehemently argued that the learned CIR (A) didn't discuss grounds of appeal filed by the appellant along with appeal documents. Surprisingly , the learned CIR (A) confirmed the order passed by the DCIR with the following new reasons. 1. The appellant approached the concerned Commissioner and requested for granting further time to support their declared version. 2. The request of the appellant was duly considered by the Commissioner and he directed to the assessing officer to allow further time to the appellant for filing details / supporting evidences.
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3. Despite of availing sufficient time the appellant couldn't furnish details to the concerned officer . 4. The assessing officer passed the impugned order on the basis of available record. 10. Mr. Syed Muhammad Imran Salim, the learned counsel for the appellant strongly rebutted all the aforesaid four allegations as mentioned in the order passed by the CIR (A) as the same has no ground reality . During the entire proceedings the appellant had never made any request to the Commissioner for time for submission of details. The learned counsel argued that in fact, the appellant has submitted entire details through letters on 21-03-2016 and 06- 04-2017 all the details were furnished along with bank statements of three accounts for the period from 01-07-2013 to 30-06-2014. The appellant filed all the details as asked by the assessing officer and there was no short fall of document at his/ appellant part. The CIR (A) misdirected himself by creating new reason for rejection of case. In the order under section 122(1) the DCIR has admitted that details were furnished by the appellant. Simultaneously , in the order the DCIR is showing Consumer Number of K-electric but the CIR (A) neglected grounds of appeal and dismissed the appellant plea with the wrong assumption that the appellant asked the Commissioner for time to file details. Complete details were furnished during audit proceedings and appellant never requested the Commissioner to allow time for filing of details. On 7th April 2018 the appellant filed a complaint to the Commissioner and informed him that the act of concerned officer ( Mr. Asif Nazir Sheikh AC/DCIR ) is against the spirit of law and to meet the justice the appellant requested the Commissioner to direct the AC/DCIR to examine the record on merit. Hence, the order under appeal passed by the CIR (Appeals-IV) Karachi is entirely based on wrong assumptions, supposition and against the facts which is illegal and against the norms of justice. The learned CIR (A) Karachi did not apply his judicial mind, totally ignoring the evidences on record and legal submissions of the appellant therefore order is liable to be quashed, declared illegal, ab initio and void. 11. The learned D.R. on the other hand , supported the orders of the officers below. The learned D.R. vehemently contended that the additions were rightly made under section 174 (2) as the taxpa yer had failed to furnish evidence in support of his claim. He further argued that the expenses claimed in profit and loss account were disallowed for want of evidence as the taxpayer had failed to furnish evidence. He also argued that the taxpayer had failed to explain increase in the wealth and decrease in the liabilities, therefore, the addition was rightly made under section 111(1) (b) of the Income Tax Ordinance, 2001 12. 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 174 and 122(1) not fulfilled. Before modification under section 122(1) the finalized deemed assessment/ amended deemed order must be cancelled for the purpose of modificatio n. 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(1) 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 any mandatory notice(s) under section 122 (1) of the Income Tax Ordinance, 2001. That for passing order under section 122(1) the availability of the "definite information" is the precondition and submitted that section 122(1) 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) and (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 followe d 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
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dropped. However , after perusal of the reply , if the Commissioner considers that the deemed assessment needs some modification then he should proceed to amend the assessment 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(6) and 122(5) not fulfilled. That the mandatory independent separate and specific 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 superi or 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/KI3/2015 dated 6.6.2018 in the case of CIR v. Jawed Metal . 13. We have heard both the learned representatives and have also gone through orders of the authorities below and perused the records of the case. 14. At the very outset it is opined that the amended order was framed on mere presumption and assumption without adhering to audit procedure laid down by the Hon'ble Lahore High Court in its judgment reported as (2017 PTD 686) and 2015 PTD 1242 (Tribunal). 15. Further , perusal and examination of the amended order passed under section 122(1) and 122(5) of the Income Tax Ordinance, 2001 reveals 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 assessment under subsection (1) or subsection (4) of section 122, as the case may be." (underling for emphasis) 16. 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 considers necessary that the same is required to be amende d on the basis of definite information then he may invoke subsection (1) of Section 122 for 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 section 122(1) 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) of Section 122(5) of Income Tax Ordinance, 2001 or even before the…
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