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Petitioner: Messrs BAHRIA TOWN, RAWALPINDI and others VS Respondent: TAXATION OFFICER (AUDIT- III), ISLAMABAD and another
Court Name: Appellate Tribunal Inland Revenue Judge(s): Munsif Khan Minhas, Ikram Ullah Ghauri Title:Messrs BAHRIA TOWN, RAWALPINDI and others vs TAXATION OFFICER (AUDIT-
III), ISLAMABAD and another Case No.: I.T.As. Nos.170/IB and 183/IB of 2009 Date of Judgment:2011-01-15 Reported As: 2011 PTD (Trib.) 1771 Result: Order accordingly Judgment ORDER MUNSIF KHAN MINHAS (JUDICIAL MEMBER).---These are two cross appeals; one each by the assessee as well as the Department against the combined order dated 30-12-2008 passed by the learned CIT(A-I) Islamabad for the tax year 2005 on the following common grounds:-- Assessee 's Appeal: (1) That the said learned CIT(A) was not at all justified in confirming the selection of the case under section 177 valid and in accordance on the following grounds:-- (a) that the selection of the case under clauses (b) and (c) of subsection (4) of section (177) was made without issuing show-cause notice is illegal and ab initio void. (b) that the selection of the case under clauses (b) and (c) of subsection (4) of section 177 of the Income Tax Ordinance, 2001 for the audit on May 19th, 2007 is hit by limitation as held by learned Islamabad High Court in case reported at 2008 PTD 1440. (c) that the selection of the case under clauses (b) and (d) of subsection (4) of section (177) was made in the absence of selection of the cases to be made under subsection (2) of section 177 is illegal and ab initio void. (d) that there is contradiction among section 120 section 12 and section 177 of the Income Tax Ordinance, 2001 as such the selection of the case is illegal and against the basic theme of the Income Tax Ordinance, 2001. (2) That the said learned CIT(A) was not at all justified in not annulling the assessment order passed under section 122(1) in spite of the fact that mandatory notice under 122(5) was not issued
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by the taxation officer which in view of the facts and circumstances of the case is void ab initio, illegal and without jurisdiction. (3) That the said learned CIT(A) was not at all justified in not allowing appropriate relief in respect of addition of Rs,21,850,000 made on account of capital expenditure claimed in Development Cost which in view of the facts and circumstances of the case is illegal, unjustified and unwarranted. Departmental appeal: (1) That the learned CIT(A) was not justified to delete addition made under section 21(1) of the Income Tax Ordinance, 2001 on account of payments made in cash in respect of development work in process. (2) That the learned CIT(A) is not justified to delete add back made under section 21(c) of the Income Tax Ordinance, 2001 on account of payment made to employees in respect of special allowance. (3) That the learned CIT(A) failed to appreciate that the taxpayer was unable to establish that the payments on account of special allowance were exempt under clause (39) of Second Schedule to the Income Tax Ordinance, 2001. (4) That the learned CIT(A) was not justified in restricting addition made on account of capital expenditure claimed in development cost to Rs,17,900,000. (5) That the learned CIT(A) was not justified to delete add back made on account of expense claimed in respect of purchase of land or executive lodges as receipts against the same were not declared. 2. Brief facts leading to these appeals are that the taxpayer is private limited company which derives income from town planning and real estate business. The taxpayer company filed return of income for the tax year under consideration declaring net income of Rs,52,629,223. The case was selected for audit under section 177 of the Income Tax Ordinance, 2001 on the grounds narrated in amended order. Related issues were confronted to the taxpayer company through detailed notices issued time to time and having been found unsatisfactory reply on some issues, the Taxation Officer amended the order under section 122(1) of the Income Tax Ordinance, 200L 3. Being aggrieved with the treatment given by the learned Taxation Officer the taxpayer preferred appeal before learned CIT(A). After examination of the assessments record the learned First Appellate Authority held that the objection of the learned AR that no notice under subsection (5) of section 122 read with subsection (9) of section 122 was issued is also unfounded as notice under section 122(9) was duly issued and was served upon the taxpayer. The observation made by the Commissioner Appeals is reproduced as under:-- "The case has been examined in the light of arguments of the learned AR. The plea of the learned AR that selection of case is hit by limitation is not acceptable as honourable Lahore. High Court in its judgment in Writ Petition No,2663 of 2007 dated 5-3-2008 has held that a case can be selected for audit any time and that selection of a case for audit is not time specific. The arguments of the learned AR that there is contradiction in sections 120, 122 and 177 of the Income Tax Ordinance, 2001 is also misconceived as the provisions of these sections are quite clear and do not suffer from any ambiguity. His contentions that show-cause notice was required to be issued the taxpayer before selection of his case for audit is also misconceived as section 177 does not require issuance of any such notice. The assertion of learned AR that CIT can only select a case for audit according to criteria laid down by F.B.R. Is also misconceived as CIT can select a case for audit on his own under the provision of section 177(4) of Income Tax Ordinance, 2001. The objection of the learned AR that no notice under subsection (5) of section 122 read with subsection (9) of section 122 was issued is also unfounded as notice under section 122(9) was duly issued and was served upon the taxpayer." Addition of Rs,21,850,000 on account of Capital Expenditure claimed in Development Cost.
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"The addition made of Rs,21,850, 000 on account of Capital Expenditure claimed in Development Cost is therefore restricted to Rs,17,900,000. Regarding the addition on account of Capital Expenditure claimed in Development Cost, the learned CIT(A) restricted the addition up to Rs,17,900,000 for the tax year 2005. Being dissatisfied with the treatment accorded by the learned CIT(A) the assessee and the Department have come in appeal before this Tribunal on the grounds raised in para 1. 4. During arguments the learned DR has submitted that the taxpayers have challenged the selection of their case for audit under section 177(4) of the Income Tax Ordinance, 2001 by taking the grounds as follows:-- (0 Whether a notice was necessarily required to be issued before selecting a case for audit under section 177(4) of Income Tax Ordinance, 2001? (ii) Whether the Commissioner could select a case for audit under section 177(4) without issuance of "audit selection criteria" by the F.B.R.? (i,e, the interpretation of words "in addition to" appearing in the beginning of subsection (4) of section 177 of Income Tax Ordinance, 2001. (iii) Whether mentioning of specific clause of subsection (4) of section 177 of Income Tax Ordinance, 2001 was necessarily required for the purpose selecting a case for audit? The AR has contended that up till today so many judgments of Higher Appellate Courts are in the field. In the presence of these judgments what is the status of these legal issues. The back ground of history of section 177 and judgments are as under:-- (1) First time the selection under section 177 was made in the tax year 2003. The same was challenged in the honourable High Courts through Writ Petitions. Apart from so many other judgments a judgment in case of Muhammad Hussain v. CIT was passed by the Lahore High Court reported as 2005. PTD 152. (2) The said judgment along with many other judgments were assailed before honourable Supreme Court of Pakistan through Civil Appeals No,1962 to 2205 of 2005. The honourable Supreme Court had decided the above cited appeals vide his judgment reported as 2009 SCMR 444 = 2009 PTD 37 titled as Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur and others. A principle was laid down by the honourable Supreme Court that the issuance of notice is mandatory. Relevant portion of judgment is as under:- "With the observation that let appellants issue fresh notices to the respondents in terms of section 177 of the Ordinance, as it was prevailing at the relevant time disclosing criteria/reasons for selecting their cases for purpose of audit." (3) After Tax Year 2003 the department had not selected the cases for audit for few years. However 2/3 years back the selection of cases were again started. That through Finance Act, 2004 the section 177 was amended and subsections (1),. (2), (3) and (4) were introduced which are reproduced as follows: "[177. Audit:---(1) The [Board], may lay down criteria for selection of any person for an audit of person's income tax affairs, by the Commissioner. (2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the [Board] under subsection (1). (3) The [Board] shall keep the criteria confidential. (4) In addition to the selection referred to in subsection (2) the Commissioner may also select a person for an audit of the person's Income Tax Affairs having referred to- (a) The person's history of compliance or non-compliance with this Ordinance. (b) The amount of tax payable by the person; (c) The class of business conducted by the person; and
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(d) Any other matter which in the opinion of Commissioner is material for determination of correct income." (4) These current selections were again challenged before honourable High Courts throughout Pakistan. Islamabad High Court, Karachi High Court and Different Benches of Lahore High Courts interpreted the section 177 differently, not only the issue of show-cause notice but also other issues. (5) That the petitioners had raised four following objections:-- (a) Issuance of show-cause notice. (b) Selection of case under subsection (4) without invoking the subsection (2). (c) Non-mentioning of sub-clauses of subsection (4) i,e, a, b, c or d. (d) Basis and criteria of selection. (6) That as explained above the different High Courts interpreted the issues differently in their own way. (7) That Islamabad High Court and Karachi High Court upheld the selection in accordance with law and rejected the writ petitions/reference of the Taxpayers, citation are Writ Petitions Nos. 960 of 2008, 550 of 2009, 99 of 2009 and 1006 of 2009 dated 14-7-2009 (Islamabad High Court) and 2009 PTD 284. (8) That Lahore High Court vide Writ Petition No,2663 of 2007 dated 5-3-2008. (2010) 101 Tax 177 (H.C. Lah.) i,e, Writ Petition No,1858 of 2009 dated 8-6-2009. Writ Petition No,20306 of 2009 dated 18-10- 2009. Writ Petition No,20339 of 2009 dated 16-10-2009. Writ Petition No,20340 of 2009 dated 16-10-2009 and 2009 PTD 1507 titled as Mohsin Raza v. Chairman F.B.R. Etc. Accepted the writ petitions of the taxpayer. In judgment of Mohsin Raza's case the honourable Lahore High Court Lahore accepted, all the four objections of the petitioners. The above three issues (questions of law) have been decided after elaborate discussion in favour of either party as follows: (1) By Mr. Justice Irfan Qadir, Lahore High Court dated 29-6-2009 in favour of the taxpayers and against the procedure as adopted by the department. (2) By Mr. Justice M. Munir Peracha, Islamabad High Court dated 29-6-2009 through a Writ Petition No,960 of 2008 decided in favour of the Department and against the appellants i,e, taxpayers. This judgment is absolutely in contrast to that delivered by. Mr. Justice Irfan Qadir, Lahore High Court as far as in interpretation of the above three points of law are concerned. (3) Whereas another judgment of Lahore High Court issued by Mr. Justice Sheikh Azmat Saeed while deciding the Writ Petition. No,I1166 of 2009 on 2240-2009 has also interpreted the above three questions of law explicitly and unambiguously in favour of the department. (i) In this judgment the honourable Mr. Justice Sheikh Azmat Saeed has not specifically referred to the already delivered judgment by Mr. Justice lrfan Qadir through which the above three questions of law were interpreted but said that two single Benches of this Court had struck down the notice under section 177. However all of the issues dealt in case of Mohsin Raza v. Chairman F.B.R. Etc. Have been thoroughly discussed and answered otherwise. (ii) It was held that there was no requirement of Pre-selection notice for selection of a case for audit under section 177(4) rather, a notice under section 177(4) i,e, intimation letter communicating reasons/basis of audit selection was enough. (iii) That a case could be selected for audit under section 177(4) without any criteria by the Board under section 177(1) of Income Tax Ordinance, 2001 i,e, criteria by the Board was not essential. (iv) The order says that mention of specific clause i,e, a, b, c or d of subsection (4) of section 177 of Income Tax Ordinance, 2001 is the jurisdiction basis, however, it has to be seen on a case to case basis after hearing each petitioner separately and granting them opportunity to produce the material to displace the case of the department.
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(v) The most important point is that in this judgment/order of the famous case viz. "Fatima Sharif v. CIT" decided by the honourable Supreme Court of Pakistan has been made as the basis and it has been discussed in detail in (para 16 on page 11) (Para 17 on page 12) mentions that the portions pertaining to pre-selection notice were expunged and the honourable Supreme. Court of Pakistan observed that fresh notices be issued in terms of section 177 of Income Tax Ordinance, 2001 as it was prevalent at the relevant time. (4) 2009 PTD 284 Mohd Umer v. CIT (Division Bench of High Court Karachi that no prior notice is required before selection of case for audit. (5) 94 Tax 317 of 2006 decided on 1-3-2006 (CIT v. Fatima Sharif Textile Mills, Kasur) "That the department may issue notices in terms of section 177 of Income Tax Ordinance, 2001 as it was applicable at the relevant time disclosing criteria/reasons of selecting their cases for the purposes of audit. Further citations in favour of department's point of view are as follows:-- (i) 2007 PTD 239 (H.C. Lahore) (ii) 2009 PTD 20 (H. C. Lahore.) (iii) 2009 PTD 284 (H.C. Lahore.) (iv) 2007 PTD 2188 (H.C. Lahore.) (v) 2008 PTD 1440 (H.C. Islamabad) (vi) PLD 1963 Karachi 182 (vii) 2000 SCMR 1017 (viii) I.C.A. No, 1250 of 2007 (unreported) (ix) Writ Petition No, 7146 of 2008 (unreported) (x) Writ Petition No, 2928 of 2008 (unreported) INTERPRETATION OF THE WORDS "IN ADDITION TO" AND "ALSO" 4. In case of Mohsin Raza v. Chairman F.B.R. Etc. It is held that:- "33. In a nutshell, the laying down of criteria for selection of any person for his income tax affairs in terms of subsection (1) of section 177 is an essential pre-requisite for the Commissioner to select a person for audit. Once the Commissioner has selected a case for audit in accordance with the criteria laid down by the Central Board of Revenue in terms of clause (1) of section 177 then additionally, the Commissioner can also select a person for an audit of the person Income Tax affairs having regard to the factors enumerated in clauses (a), (b) and (c) of subsection (4) of section 177. It would be seen that subsection (4) will come into play only when the Commissioner in the course of proceeding with the audit of a person under subsection (2) of section 177 discovers that in addition to the selection of person in subsection (2) the Commissioner now requires to select another person for audit of Income Tax affairs. This is exactly what is envisaged in subsection (4) of section 177 wherein it is clearly mentioned that in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of Income Tax affairs. As such subsection (4) of section 177 is secondary in character in relation to subsections (1) and (2). It therefore follows that if subsection (4) is not capable of being isolated from subsections (1) and (2), then clause (d) of subsection (4) cannot also be detached from its preceding clauses or subsections. (34) This court is therefore of the opinion that different clauses of section 177 are inter related and the sequence or order in which these have been mentioned by the Legislature in its wisdom must be observed by the executive authorities in letter and spirit as an obligation since each clause augments the order. Clause (d) of subsection (4) of section 177 cannot be isolated from its preceding clauses or subsections in a manner; that primary part of section 177 becomes redundant in view of such isolation thereby paralyzing the main body of the provision in question in order to make the residual or secondary clause extra potent."
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In case of Writ Petition No,11166 of 2009 dated 22-10-2009 passed by Mr. Justice Sheikh Azmat Saeed, subsection (4) of section 177 of the Income Tax Ordinance, 2001 has been reproduced as follows:- "Section 4. In addition to the selection referred to in subsection (2) the Commissioner may also select a person (or classes of persons) for an audit of the person's income tax affairs. " Stress has been laid down on the word 'also':-- (22)It appears to be the case of the petitioners that phrase 'in addition topresupposes existence of criteria in terms of subsection (1) of section 177 of the Ordinance. In this behalf great emphasis has been laid on the meaning of the said phrase. (23)Learned counsel on both sides are in agreement that phrase 'in addition tomeans "furthermore or moreover". However, learned counsel for the petitioners have lost sight of the word 'alsowhich occurs in subsection (4) reproduced ibid, which as per Words and Phrases Permanent Edition means: besides, in addition thereto and too. (24)In view of above it is clear and obvious that provisions of subsections (1) and.(4) are disjunctive and not conjunctive. A case can always be selected for audit on the basis of criteria as laid down by the F.B.R. Besides which and in addition thereto, persons can also be selected for audit by Commissioner under subsection (4) of section 177 of the Ordinance. The plain reading of subsection (4) leaves no room for any doubt that it clearly empowers the Commissioner Income Tax to issue notice on the basis of criteria spelt out in sub-clauses a, b, c and d of subsection (4) of section 177 of the. Ordinance Not only is the weight of authorities against the petitioners but also to accept the contentions of the learned counsel for the petitioners would require ignoring the word 'alsofrom the said provision. Unfortunately, for the petitioners they cannot wash away any word from a provision. To accept the interpretation of the petitioners would require more violence to be done to the language of subsection (4) than this Court is prepared to do. 5. After hearing the arguments of the learned counsel at length and going through cited judgments of the higher courts, I also feel that in the judgment Mohsin Raza v. Chairman F.B.R. Etc. Word 'alsohave lost sight. The rule of literal construction is that an interpretation which renders any part of provision as surplus age in not correct. "A construction which would leave without effect any part of the language of a statute will normally be rejected". Provisions subsections (2) and (4) are disjunctive and not conjunctive. Subsection (4) of section 177 clearly empowers the. Commissioner Income Tax to issue notice on the basis of criteria spelt out in sub-clause a, b, .c and d of subsection (4) of section 177 of the Ordinance. This issue is accordingly answered in favour of the department and against the taxpayer. PRE-SELECTION NOTICE: 6. In case of Mohsin Raza v. Chairman F.B.R. Etc., it was held that selection of a case for audit in itself tantamount to an adverse order since it undermines the sanctity of an assessment order issued by the Commissioner of Income Tax in terms of clause (b) of subsection (1) of section 120 of the Income Tax Ordinance, 2001. So pre-audit notice is an essential requirement since audit of person's income tax affairs result in prejudice being caused to the assessee, who becomes subjected to scrutiny and that the return filed by him is re-opened. It is because of this reason that/honourable Supreme Court of Pakistan has always laid its utmost stress on strict observance of norms of natural justice in general and the principles of audi alteram partem is to be read in every statute/and reliance in this regard was placed on PLD 2008 SC 663; 2007 SCMR 330, 2005 SCMR 678, 2005 SCMR 1814 and PLD 2004 SC 441. 7. On the other hand,. Mr. Justice Sheikh Azmat Saeed is of the view that section 177 of the Income Tax Ordinance, 2001 does not provide for a pre-selection notice. In the absence of an express provision in law words cannot be added to the statute so as to employ a notice to the petitioner prior to invoking the section 177 of the Income Tax Ordinance, 2001. It is one of the arguments of the
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learned AR that under the Income Tax Ordinance, 2001 return on filing is deemed to be an assessm ent and to reopen the same by selection and audit constitute action adversely affecting the rights of the assessee. 8. On the other hand the learned DR states that selection of audit does not mean that deemed assessm ent order is going to be disturbed for example, if the selection of the case is on the basis of inflated expenses and the assessee shows the documentary evidence reflecting these expenses, the Commissioner can drop the proceedings of the audit subject to his satisfaction. It is not essential that if the case has been selected for audit; deemed assessment is to be disturbed and is to be amended at each and every cost. That is why that subsection (6) of section 177 provides a mandatory provision of notice and asking for explanation of the taxpayer on all the issues raised in audit. This is a stage where assessee can challenge the objections raised in audit on legal as well as on the factual side. The general practice is that after the selection of the case for audit, department sends intimation letter regarding selection of the case then as per audit manual initial conference comprising of one or more sessions is held to debate the controversy. If required IDR (Information Documentary Request) is sent for requesting requisite document as per standard operating procedure laid down in Audit Manual. Assessee has not been deprived of his natural right of being heard. Subsection (6) of section 177 of the Ordinance, 2001 specifically provides for the said right of furnishing explanation on all issues raised in the audit. Before making the final opinion to amend the assessm ent the department was required to issue notice to the assessee indicating therein the basis of proposed selection to confront them with relevant material and provide due opportunity of being heard as embodied in subsection (6) of section 177 of the Income Tax Ordinance, 2001. Therefore, the interest of the taxpayers have been adequately safeguarded despite they were not heard by the Commissioner at an early stage. The rules of natural justice are not inflexible. They yield to and change with the exigencies of different situations. They do not apply in the same manner to situations which are not alike. These rules are not cast in a rigid would nor can they can be put in a legal strait-jacket. They are not immutable but flexible. They can be adopted and modified by the Statutes. The need to act in an emergency may also exclude at least a prior hearing or where a decision affects so many people that a hearing would be impracticable. Depending upon the facts and circumstances of each case, there is no mandatory requirement of natural justice that in every case the other side must be given a notice before preliminary steps are taken. It might suffice if reasonable opportunity of hearing is granted to a person before an adverse action or decision is taken against him. However, it is not possible to lay down an absolute rule of universal application governing all situations as to the exclusion or otherwise of the audi alteram partem rule during the course of preliminary inquiries or investigations. In the case of Parry Jones v. Law Society and others (supra), the Court of Appeal took the view that where the only inquiry was as to whether there was prima facie evidence, natural justice did not require that the party should be given notice of it. In Christopher John Moran (supra), the Court of Appeal observed that it was no good for the tactician to appeal to the rules of natural justice. They had no application to a preliminary inquiry of that kind. The inquiry was made with a view to seeing whether there was a charge to be made. It did…
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