Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: M/s. Mahvash and Jahangir Siddiqui Foundation, Karachi VS Respondent: The Commissioner Inland Revenue, Zone-I, Corporate RTO, Karachi
Court Name: Appellate Tribunal Inland Revenue Judge(s): Muhammad Jawed Zakaria, Saif Ullah Khan Title:M/s. Mahvash and Jahangir Siddiqui Foundation, Karachi vs The
Commissioner Inland Revenue, Zone-I, Corporate RTO, Karachi Case No.: ITA No. 142/KB of 2019 Date of Judgment:2019-10-30 Reported As: 2021 PTD (Trib.) 1456, 2020 PCTLR 754 Result: Appeal allowed Judgment ORDER MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER-- The above-titled appeal has been filed by the Appellant calling in question the impugned orders No. 06 & 07/2018 dated January 18, 2019 passed by the learned Commissioner (Appeals - III) - CIRA, Karachi for tax year 2011---Through the order , the learned CIRA upheld the order D.C. No. 28/11, dated June 30, 2017 passed by the Officer Inland Revenue (OIR), Audit Unit-04, Zone-I, Corporate Regional Tax Office, Karachi, under Section 122(1)1(5) of the Income Tax Ordinance, 2001 (the 'Ordinance')---Being dissatisfied with the impugned order , the Appellant has filed present appeal before this forum and assailed the order of the CIR(A) on the following grounds:-- "1. That the order passed by the learned Commissioner Inland Revenue (Appeals-III) (CIR-A), Karachi is bad in law and on the facts of the case. 2. That the learned CIR-A maintained the order of the learned Officer Inland Revenue (OIR) despite it was pleaded before him the requirements of Rule 231F(4) & (5) of the Income Tax Rules, 2002 read with sections 177(6) and 122(9) of the Income Tax Ordinance, 2001 were not met and followed. Nor any show- cause notice was served as mentioned in the body of the order for complianc e on June 23, 2017 therefore, did not provide proper opportunity for compliance of the same was given which is against the natural justice as held by number of judgments of honourable Superior Courts of Pakistan. 3. That the taxpayer submitted representations before the Chief Commiss ioner Inland Revenue of the Regional Review Panel stating that out of fourteen criteria spelt out by FBR, no single criteria attracted for the above taxpayer and decision are pending. 4. Whereas the learned OIR himself allowed extension of time till June 23, 2017 for compliance of his first notice not 122(9), dated June 14, 2017. The learned OIR failed to fulfill the mandatory requirement of sub-
---
## Page 2
rules (4) and (5) of Rule 231F of the Income T ax Rules, 2002. 5. That the learned CIR-A erred to confi rm the treatment adopted by the learned OIR to prorate expenses on the basis of ratio of income between NTR, FTR & Exempt income. 6. That the learned CIR-A erred to confirm the treatment adopted by the learned OIR not taking profit on debt of Rs. 86,077,356 for the purpose of allocation of expenses whereas no income can be earned without any expenditure as held in decided case-law on the subsequent reported as: 1(2009) 100 T ax 390 (T rib.)] 7. That the learned CIR-A erred to confirm the treatment adopted by the learned OIR to take dividend income as FTR income for proration of expenses whereas the year under consideration dividend income is under normal tax regime for Company and subject to reduced rate of tax (Ref 2005 PTD (Trib.) 2041), (2011 PTD (T rib.) 352 ) 8. That the learned LIRA erred to confirm the treatment adopted by the learned OIR to add 'diminution in value of investments' of Rs. 23,268,445 in the income of the taxpayer . This treatment tantamount to convert the expenditure into income itself. That the learned CIR-A erred to confirm the treatment adopted by the learned OIR to disallow advertisement expense of Rs. 1,309,264 under section 21(c) of the Income Tax Ordinance, 2001 being failed to deduct tax. 10. The appellant craves permission to add, amend, alter or disregard the above grounds on or before the hearing of appeal. ADDITIONAL GROUNDS OF APPEAL: "That the learned Commissioner Inland Revenue (Appeals-Ill) erred to confirm the order passed under section 122(1)7(5) of the Income T ax Ordinance, 2001 by the ACIR. That the order of the ACIR was passed without application of his independent mind without mentioning or pinpointing any violation of sub-rule of Rule 220A of the Income Tax Rules, 2002. The appellant did not violate the applicable income tax rules to it." 2. The above additional grounds of appeal go to the very root of the case and pertain to main grounds of appeal which are necessary for deciding the appeal. Therefore, we admit the above additional grounds of appeal and would be decided in the subsequent paragraphs of this order . A.R.'s Arguments 2A. On the due date, Mr. Khaliqur Rahman , being the Authorized Representative (AR) appeared for the, Appellant/T axpayer , while Mr. Malik W aqas, DR appeared on behalf of the Respondent/T ax department. 3. At the very outset, the learned. AR briefly stated the facts of the case that M/s. Mahvash and Jahangir . Siddiqui Foundation (the `Foundation') is a Non-Profit Organization (NPO). The Foundation was incorporated on January 2003 as an association limited by Guarantee and not having share capital under section 42 of the Companies Ordinance, 1984. The principal activities of the Foundation are to promote educa tional activities, health facilities and social activities all over Pakistan. The Foundation utilises its income towards its objectives and prohibits the payment of any dividend or income to its members. The case of the appellant was selected for audit u/s. 214C of the Ordinance on February 25, 2013 and the proceedings were culminated in passing of an order under section 122(1)(5) of the Ordinance. 4. The AR had agitated during the hearing s on June 19, 2019 and June 25, 2019 that the CIRA was not justified to confirm the impugned order of the. OIR. He assailed the impugned order of the CIRA on the legal grounds as well on the facts. 5. The AR provided to this Bench the following set of documents that is:--- (a) Right from the stage of the creation of the Foundation i.e. under section 42 when company was registered with the Securities & Exchange Commission of Pakistan (SECP) as a company limited by Guarantee. A copy of the License under section 42 of the Companies Ordinance, 1984 issued by SECP; (b) The approval of Commissioner of Income Tax Ws. 2(36) of the Ordinance read with Rule 212 of the Income Tax Rules, 2002 dated November 4, 2004 followed by renewal letter dated July 12, 2006;
---
## Page 3
(c) Notification of the Office of the Chief Commissioner Inland Revenue Regional Tax Office dated February 2, 2010 in respect of approval under Clause 58(3) of Part-I of Second Schedule to the Ordinance; (d) Three certificates from time to time issued by the Pakistan Centre of Philanthropy; and (e) Income tax exemption certificates issued by the Commissioner of Inland Revenue (CIR) for the tax years 2011, 2012 and 2013 for which tax exemption was subsequently withdrawn by the Chief Commissioner Inland Revenue vide order dated June 17, 2017. 6. The AR argued that the case of the appellant was selected for audit under section 214C of the Ordinance on February 25, 2013. Upon receipt of the intimation of the selection of the audit, the appellant through its AR on May 2, 2013 filed written representation before the Chief Commissioner Inland Revenue (who was the Chairperson of the Regional Review Panel RTO-III), stating that none of the criterion, for selection of audit under section 214C given by the Federal Board of Revenue (FBR) were applicable on the appellant. The appellant is an NPO, therefore, the appellant's name be withd rawn from the selection list for audit under 214C of the Ordinance. The copy of the representation was produced before this bench which has also been placed on record. 7. The AR further argued that the Chief Commissioner did not dispose the represe ntation from the date of filing on May 2, 2013 till the date the passing of impugned order despite the fact that the office of well as the Chief Commissioner was given reminders vide letter dated May 22, 2013. 8. The AR drew our attention towards the reported judgment 2015 PTD 2538 on the subject-matter , wherein the Honourable Islamabad High Court had directed the Member Audit, FBR, to examine each case upon request of the applicant and dispose-of the same on merits. The above judgment states: "9. These cases are referred to Syed Ijaz Hussain Shah, Member (Audit) for his examination and decision in his personal capacity . All the petitioners shall send their representations alongwith supported documents to the Member . The Member (Audit) shall examine each case at his end and in case he forms an opinion that taxpayer was wrongly selected, he shall pass order accordingly---If his opinion is otherwise, he shall summon the taxpayer and shall provide an opportunity of being heard and thereafter a speaking order shall be passed. The needful shall be done within 60 days. If in his opinion, after hearing a taxpayer a parameter is not highly risk based, he shall drop the selection, on such parameter ." 9. The AR contended that none of the required process stated in the above judgm ent was done by the Regional Review Panel RTO-111 in the case `under appeal. The AR questioned the sanctity of the amended order as to how such an order can be passed without first disposing of the representation made by the appellant. He also brought to the knowledge of the Bench as to why the audit under section 214C of the Ordinance was conducted:--- (a) From the point of selection of audit on February 2, 2013 till June 14, 2017 when Information Document Request (IDR) No. OIR/AU-04/Zone-I/CR TO/2017/904 was issued i.e., after a lapse of more than 4 years and during that intervening period, no audit proceedings were undertaken by the tax department. (b) Through the IDR dated June 14, 2017, which had the nature of seeking information regarding details of expenses, audited accounts and other information at a very short notice by June 17, 2017 i.e., hardly two working days and June 17, 2017 being Saturday was a non-working day . (c) Adjournment was sought till June 29, 2017 which was only allowed till June 23, 2017. (d) On June 22, 2017, the appellant informed the OIR, to keep the audit proceedings in abeyance as the representation of the appellant was pending decision of the Regional Review Panel at R TO-111. (e) The OIR, without serving any further notice and in undue haste, passed an amended order under section 122(1)/(5) on the basis of examination of return of income for tax year 2011. .Thus, the order passed under Section 122(1)1(5) was not based on definite information. The AR pointed out that the order u/s. 122(1)/(5) states that a Show-Cause Notice (SCN) under section 122(9) of the Ordinance was issued for compliance on June 23, 2017. However , the AR vehemently argued that no such SCN was issued and in support therefor , the appellant produced before this bench an Affidavit under oath. The AR agitated that the date of compliance to the IDR and the SCN were both on the same date i.e., June 23, 2017. By following the process of law, that once IDR is issued to the taxpayer and details are provided, then a SCNis issued identifying the defects, if any, in the information supplied in response to the IDR. In the instant case,
---
## Page 4
this has also never happened and the IDR and SCN both required the appellant to make compliance on the same date, which does not make any sense. (h) As per the AR, reference to the SCN in the amended order is an afterthought to cover up the legal deficiency as neither any reference to SCN number and date of issuance has been stated nor the date of serving of SCN on the appellant has been mentioned in the amended order . The amended order only mentions reference of IDR and in the light of this deficiency , it is quite clear that the SCN' was never issued to the appellant. (I) The AR apprised the bench that no notice was issued under section 122(5)(1), (ii) and (iii), which is a condition precedent to pass an amended order under section 122(1)(5) on the basis of definite information. 10. The AR vehemently argued that the order under section 122(1)/(5) of the Ordin ance, thus, suffers from number of legal infirmities and is totally an illega l order which does not meet the legal requirements stipulated in section 214C as well as requirements of Section 177 (6) and Section 122(9) of the Ordinance. 11. The AR stated that sub-rules (4) & (5) of Rule 231F of the Income Tax Rules, 2002 (the 'Rules'), in particular , stipulate the essential requirements of conducting audit of the affairs of the taxpayers under section 214C of the Ordinance, which read as under:-- "231F . Selection and conduct of audit.-- (1) This rule shall apply to selection of cases for audit by the FBR under section 214C of the Income T ax Ordinance, 2001 (XLIX of 2001). ....................................... ....................................... (4) On completion of examination of books of accounts, data or information under this rule the discrepancies, if found, shall be intimated to the taxpayer for obtaining taxpayers' explanation, in the form of audit report, seeking taxpayer's explanation on these points. (5) Explanations of the taxpayer , where found not acceptable, shall be intimated to the taxpayer , through a notice under section 122(9) of the Income Tax Ordinance, 2001 about the amendment in assessment alongwith the rationale or basis of such amendment and necessary amendment in assessment order shall be passed under section 122 of the said Ordinance after affording adequate opportunity of hearing to the taxpayer ." (Emphasis Supplied) 12. The AR also stated that the essentia l requirements of the section 177(6) were also not fulfilled in the instant case, which requires "that:--- "(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 sub-section (1) or sub-section (4) of section 122 as the case may be." 13. The AR argued that the confrontation under section 177(6) read with section 122(9) of the Ordinance as well as under Rule 231F of the Rules has to be made after 'completion of the audit'. This means that after obtaining replies of the taxpayer on the matters raised as a result of audit conducted are to be confronted to the taxpayer in an audit report. Such confrontation is to be made under section 122(9) based on requirement of Section 177(6) of the Ordinance as well as Rule 231F supra. 14. In support of his stance, the AR placed reliance on some reported judgments of the Honourable Supreme Court of Pakistan (SCP), High Courts (HC) and Appellate Tribunal of Inland Revenue (ATIR). in which the above principle of law has been enunciated that a pre-req uisite for conducting audit of the affairs of the taxpayer is to be supported by issuance of a notice and thereafter , providing ample opportunity of being, heard to the taxpayer . The AR produced before us the copies of the below judgments, operative paras of which are as follows:--- 1971 SCMR 681 "The principle, so far as this country is concerned, is accordingly well-settled that where notice required to be given by the statute is a mandatory notice, then the failure to comply with such a mandatory requirement o the statute would render the act void ab initio as being an act performed in disregard of the provisions of the statute. Furthermore any further action taken on the basis of such a void order would also be vitiated and the defect at the initial stage would be incurable b a hearin at a subse uent sta t e." PLD 1965 S.C 90
---
## Page 5
"Held, that in all proceedings by whomsoever held, whether judicial or administrative, the principles of natural justice have to be observed if the proceedings might result in consequences affecting "the person or property or other right of the parties concerned". This rule applies even though there may be no positive words in the statute or legal document whereby the power is vested to take such proceedings, for, in such cases this requirement is to be implied into it as the minimum requirement of fairness." 2015 PTD 1242 (Trib) "45. The above findings may be summarized as under:-- Audit under section 177 read with sub-section (6) of section 177 is void rib initio and not in accordance with law having no legal effect. Amendment under section 122(1) without fulfilling legal. requirement of Section 177(6) is without jurisdiction or in excess of jurisdiction. Provisions of Section 122 of the Income Tax Ordinance, 2001 start with the language "subject to this section". Such language restricts all further proceedings for amendment of an assessment, which means it could only be amended if they were covered by the provisions of this section. Amendment of assessment for which this section has been prescribed cannot be made if the requirements and qualifications prescribed in this section were not completed before making suck amendment of the assessment. That once audit proceedings were initiated under section 177 of the Ordinance and amendment was required to be made. under section. 122(5), assumption of jurisdiction under section 122(5) was a condition precedent for amendment. DCIR failed to fulfill pre-requisite requirement under section 122(5) and has not brought on record "definite information". What to speak of "definite information" clauses (i), (ii) and (iii) of sub-section (5) of section 122 further stipulate three conditions for issuing of a notice that is any income chargeable to tax has escaped assessment; or total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or any amount under a head of income has been misclassified If "deemed assessment" selected for audit and conducted audit under section. 177; It may be amended by invoking jurisdiction under section 122(1) subject to ful-fillment of conditions as envisaged under sub- section (6) of section 177 and after fulfilling the pre-requisite requirement of "definite information" under sub-section (5) of section 122 and subject to execution of conditions of clauses (0, (ii) and (iii of section 122(5). No proper and valid notice issued under section 122(5) and no notice issued under which clause the DCIR had amended order under section 122(5) and what was the specific "definite information". No specific, separate and independent valid notice under section 111 issued for additions under sections 111(1)(a) and under section 111(1)(c). Moreover , there was no unexplained income or expenditure proved by the DCIR without any shadow of doubt." 2015 PTD 804 (Trib) "We have further noticed from the order of DCIR that after examination of details and information submitted by the appellant no notice under section 122(5) confronting the taxpayer with the defects, if any, in the said details and information was issued although issuance of this notice was mandatory ." 2016 PTD 2422 (Lahore HC) "9. As mandatory notice under proviso to Section 62(1) of the Repealed Ordinance was not issued, the entire subsequent proceedings and orders become illegal and wholly void. In the given circumstances, the learned CIT (A) and learned Tribunal were required to accept the declared version of the taxpayer instead of remanded the case back to the assessing officer to fill in the defects and lacuna in the assessment order . In similar situation, the august Supreme Court in case Commissioner of Income Tax v. Messrs Ayesha Woolen Mills (Pvt.) Limited (2014 PTD 215) accepted the declared version of the taxpayer on the ground that no notice under proviso to Section 62(1) of the Repealed Ordinance was issued and assessin g officer without pointing out any defect In the books of account rejected the same."
---
## Page 6
10. In view of the above discussion and law laid down by august Supreme Court as well as by this Court, the questions raised above are answered in negative. Resultantly , the declared version for both assessment years of the taxpayer shall be accepted. These reference applications are allowed in favour of applicant taxpayer in the terms stipulated above. 11. Office shall send copy of this judgment under the seal of the Court to the learned Appellate Tribunal Inland Revenue as per Section 133(5) of the Ordinance, 2001". 2017 PTD 686 (WP No. 32597 of 2015) on page 713 "Audit, being administrative proceedings, shall complete on issuance of Audit Report. If audit is not completed within the given time frame, the selection shall be deemed to have been dropped. After issuance of Audit Report; adjudication proceedings shall be carried out by some other taxation officer to satisfy command of the Constitution under Article 10A". 15. In support of his contention, the AR also placed reliance on the judgments bearing ITA No. 51/KB/2014 dated 3.10.2014 CIR vs. Dewan Steel Mills Karachi, ITA No. 2505/LB/2015 dated 28.4.2016 and ITA No. 373/KB/2012 dated 5.4.2017, Dr. Azeem Alamani reported as 2015 PTD 1242 and ITA No. 64/KB/2015 dated 6.6.2018 in the case of CIR vs. Jawed Metal and ITA No. 867/KB/2017 titled as The CIR, Karachi vs. Ws. A.O. Clinic, Karachi. 16. On the date of hearing on June 25, 2019, the AR also produced another judgment relevant on the subject- matter . The operative paras as part of addendum to his submissions of the said judgments are:-- "28. The above findings may be summarized as under: Audit under section 177 read with sub-section (6) of Section 177 is void ab-initio and not in accordance with law having no legal effect. Amendment under section 122(1) without fulfilling legal requirement of Section 177(6) is without jurisdiction or in excess of jurisdiction. Amendment proceedings initiated and notice issued' u/s. 122(9) prior to conduct of audit is ab initio Provisions of Section 122 of the Income Tax Ordinance, 2001 start with the language "subject to this section". Such language restricts all further proceedings for amendment of an assessment which means it could only be amended if they were covered by the provisions of this section. Amendment of assessment for which this section has been prescribed cannot be made if the requirements and qualifications prescribed in this section were not completed before making such amendment of the assessment." 29. In view of the foregoing discussion, we find no illegality or infirmity in the order . of the learned CIR (A) which is hereby maintained." 17. The AR argued that none of the legal requirements of issuing audit report/audit objection/audit charge-sheet was complied with nor any opportunity of being heard was given before passing of the order under section 122(1)1(5) of the Ordinance. Thus, the amended order is ab-initio void, illegal and not tenable in the eyes of law and it was prayed that the same shall be quashed. 18. Reverting to the other issues arising from the amended order , the AR stated that as a result of the said order , exempt income/non-taxable income of the Foundation was taxed in respect of profit on debt, income from the government securities and donations received. 19. The Leared counsel argued that the impugned order directly emanates from and has nexus with the Chief Commissioner's withdrawal order for approval granted under sub-clause (3) of Clause (58) of Part-I of the Second Schedule to the Ordinance read with Rule 220A of the Rules [now transposed in section 100C] of the Ordinance. 20. The AR went on to stress that section 100C of the Ordinance was inserted through the Finance Act, 2014, which is effective from the tax year 2015. In the instant case, the tax year involved under appeal is tax year 2011, thus, the Chief Commissioner had no jurisdiction to invoke the provisions of section 100C as he is not empowered under the law to apply the provisions of a prospective statute retroactively . 21. The AR explained that the appellant in the first place obtained approval from the Commissioner of Income Tax under Rule 212 of the Rules read with Clause (59) of Part I of the Second. Schedule to the Ordinance vide order No. CIT/COS.V/2004-05/1 170, dated November 4, 2004. The, said Clause (59) provides tax exemption to the following incomes: (a) Investment in the securities of Federal Government.
---
## Page 7
(b) Profit on debt from scheduled banks. (c) Grants received from Federal Government or Provincial Government. (d) House property . 22. The AR apprised that major part of the income of the appellant enjoyed tax exemption under Clause (59) except income from donations which was one of the source of its receipts, the approval for which was to be obtained from the Chief Commissioner . Therefore, the appellant applied for tax exemption under Clause (58)(3) of Part I of the Second Schedule to the Chief Commissioner who was authorized to provide tax exemption in respect of donations. The AR opined that tax exemption under Clause (59) is still intact as the recognition under Rule 212 by the Commissioner has not…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.