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Petitioner: Messrs CH. MUSHTAQ AND CO., JAIL ROAD, SIALKOT VS Respondent: C.I.R, R.T.O., SIALKOT
Court Name: Appellate Tribunal Inland Revenue Judge(s): Ch. Anwaar-ul-Haq, Muhammad Raza Baqir Title: Messrs CH. MUSHTAQ AND CO., JAIL ROAD, SIALKOT vs C.I.R, R.T.O., SIALKOT Case No.: MA(Stay) No,827/LB of 2014 and I.T.A. No,1845/LB of 2012, Date of Judgment:2014-07-14 Reported As: 2015 PTD (Trib.) 1926 Result: Appeal accepted
Judgment ORDER ' The titled appeal pertaining to tax year 2011, has been preferred at the instance of the taxpayer calling in question the impugned order dated 30-5-2012 passed by the learned CIR(Appeals), Gujranwala. 2. Relevant facts in brief are that the taxpayer in the instant case is an AOP, deriving income from distribution of food, beverage and cigarettes items of Messrs Uni-Lever Pakistan and Messrs Pakistan Tobacco Company, Limited. Return for the tax year, 2011 was filed declaring income of Rs,1,661,136 which was deemed to be treated as an assessment in terms of section 120 of the Income Tax Ordinance, 2001. Subsequently proceedings in this case for the tax year 2011 was initiated under section 221 of the Income Tax Ordinance, 2001 by issuing show-cause notice dated 7-3-2012, alleging therein that scrutiny of the return in the light of amendment brought in section 113 of the Income Tax Ordinance, 2001 through Finance Act, 2010 reveals that the taxpayer has failed to deposit the tax required under section 113 read with Part-III of 2nd Schedule of the Income Tax Ordinance, 2001 and this mistake is apparent from the record and rectifiable under the grab of section 221 of the Income Tax Ordinance, 2001. The taxpayer filed reply to the show-cause notice submitting that being distributor he earned only commission income in lieu of services provided and the figures of turnover declared in the original return was a corresponding entry to justify the figures declared in the sales tax returns for the period under reference. It was further informed that the return of income has been revised on 22-3-2012 in accordance with the provisions of section 114(6) of the Income Tax Ordinance, 2001. The submission of the taxpayer as well as revision of the return were rejected and the assessment order deemed to be issued under section 120 was rectified under section 221 of the Income Tax Ordinance, 2001 vide order dated 31-3-2012.
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3. Being aggrieved, the taxpayer went in appeal before the learned CIR(A), Gujranwala and assailed the scope of rectification, rejection of the revised return and the application of minimum tax under the provisions of section 113 and certain other issues. The learned CIR(A), Gujranwala dismissed the appeal of the taxpayer vide order dated 30-5-2012. Felt aggrieved with this order the taxpayer filed appeal to this Tribunal on the following grounds of appeal:-- (a) That the initiation of proceedings which culminated into rectification order under section 221 of the Income Tax Ordinance, 2001 as confirmed by the worthy CIR(A) is ab initio void, illegal, perverse, arbitrary, capricious, inoperative, incompetent, mala fide, without jurisdiction and in excess of jurisdiction. (b) That the order passed by the learned Deputy Commissioner as confirmed by the Learned First Appellate Authority is glaring example of non application of judicious mind, thereby reaching absurd and unwarranted results. (c) That the learned CIR(A) has miserably failed to consider the documentary evidence, Case-Law and verbal submissions of the appellant and passed the impugned order without proper and judicious application of mind on the basis of irrelevant facts, hence, the impugned order is not maintainable in the eye of law. (d) That the order passed under section 221 of the Income Tax Ordinance, 2001 is beyond the scope of rectification and the worthy CIR(A) has miserably failed to adjudicate this ground of appeal. (e) That rectification under the provisions of section 221 of the Income Tax Ordinance, 2001 is restricted only to the mistake which are so apparent on face of record and do not require any debate or argumentation for their resolution, therefore, the rectification order as confirmed by the worthy CIR(A) is unlawful, without jurisdiction and liable to be annulled. 07 That the learned Deputy Commissioner was not justified to reject the revised return and the worthy CIR(A) has confirmed this illegal action without proper appreciation of the provisions of law and facts of the case. ' That the learned Deputy Commissioner Inland Revenue has erred in rectifying the original return as prior to passing the impugned order the appellant has revised its return of income in accordance with the provisions of section 114(6) of the Ordinance, 2001. Therefore, in the presence of deeming order under section 122(3) the learned Deputy Commissioner was not justified to rectify the order under section 120 which has ceased to its existence. (h) That the impugned appellant order has been passed beyond the limitation provided in section 129 of the Income Tax Ordinance, 2001, hence not sustainable in the eye of law. ' Without prejudice to what has been stated above. (i) That the worthy CIR (A) was not justified in holding that the appellant was under legal obligation to pay minimum tax under section 113 on turnover/sales instead of commission. (j) That while charging and confirming minimum tax under section 113 of the Ordinance, 2001, both the authorities below have miserably failed to consider the fact that the appellant is a distributor and duly authorized to distribute the products on behalf of principal companies within the specified territory at the consumer end price and earn nominal commission in lieu of services provided for distribution of the product. (k) That it has been settled by the superior courts that the margin of profit earned by the distributor is amenable to minimum tax under section 113 of the Ordinance, 2001 instead of turnover. Therefore, the action of the Deputy Commissioner as confirmed by the worthy CIR(A) in treating the sales as amenable to minimum tax is unlawful and contrary to the dictates of the superior courts. (l) That the charging of minimum tax at Rs, 32,98,058 under section 113 and surcharge of Rs,144,290 under section 4A and default surcharge of Rs,2,24,614 under section 205 of the Income Tax
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Ordinance, 2001 as confirmed by the worthy CIR(A) are highly excessive, unjustified, illegal and without any basis, hence liable to be deleted. (m) That the worthy CIR (A) has not discussed the case-law submitted during the hearing and also not adjudicated all the grounds of appeal. Hence, non speaking order is liable to be annulled. 4. The learned AR on behalf of the taxpayer has attacked the impugned order as well as rectification order passed under section 221 of the Income Tax. Ordinance, 2001 on legal and factual grounds at a length. The learned AR has also made written submissions before us in respect of each and every stance taken by the appellant. On the other hand the learned DR appearing on behalf of respondent has strongly opposed the arguments of the learned AR of the taxpayer. 5. Learned AR representing the taxpayer, in addition to his arguments on factual grounds, has also raised legal issues. The first legal argument is that the rectification order is illegal, without jurisdiction and the same is beyond the scope of rectification in view of the provisions of section 221 of the Income Tax Ordinance, 2001 as according to him, firstly, the assessment was rectified on the ground that the appellant has failed to deposit the minimum tax under section 113 of the Income Tax Ordinance, 2001 in the light of amendment brought in section 113 through Finance Act, 2010, therefore, scrutiny of return and consequent rectification in the light of amending provisions of law is outside the scope of rectification. Secondly, the taxpayer is a distributor of Messrs Unilever Pakistan Limited and Messrs Pakistan Tobacco Limited whereas the revenue rectified the order with the observation that the taxpayer is a wholesaler dealer of food, beverage and tobacco items and this factual controversy requires investigation, inquiry and through probe which does not fall in the ambit and scope of rectification and, thirdly, he submitted that the learned Appellate Tribunal Inland Revenue in a decision dated 24-2-2012 passed in I.T.As. Nos. 1293-1296 and 1578/LB/2011 in the case of an other distributor i,e, Messrs Allied Marketing (Pvt.) Ltd. And other judgments on the identical issue held that the margin of profit earned by the distributor is amenable to minimum tax under section 113 of the Income Tax Ordinance, 2001 instead of turnover, therefore, the issue before the revenue was as to whether the commission is amenable to minimum tax or turnover and this being a debatable/arguable issue was beyond the scope of rectification under section 221 of the Income Tax Ordinance, 2001. He has submitted that rectification is restricted only to the mistakes which are so apparent on face of record and do not require any debate, argumentation or probe for their resolution. He has in this regard placed reliance on the judgments reported as 2004 PTD (Trib.) 2491; 2008 SCMR 204 = 2008 PTD 253, 2011 PTD (Trib.) 901, 2009 PTD (Trib.) 521 and 2013 PTD 508 (H.C.S.). 6. The second legal objection raised by the learned AR of the taxpayer is that in this case the rectification order was passed on 31-3-2012 whereas the appellant has revised its return on 22-3- 2012 prior to passing the order and this fact was duly acknowledged by the learned DCIR at page-3 of the rectification order. The learned DCIR has rejected the revised return on the ground that the same was not revised in accordance with the provisions of section 114(6) of the Income Tax Ordinance, 2001. He has contended that the observation of the learned DCIR in this regard is not correct for the reasons that originally the taxpayer filed its return electronically, therefore, the return can only be revised electronically, which was revised accordingly after getting permission from the concerned authority. The permission was accorded electronically in the manner and style that "Request for permission to revise the IT Return for Tax Year, 2011 has been approved". The learned AR submitted that though the said permission was sufficient to revise the return but the taxpayer by further fulfilling the conditions of section 114(6) of the Income Tax Ordinance, 2001 filed a letter on 26-3-2012 manually whereby revised accounts and reasons for revision, has been submitted. In this regard he has placed before us copies of electronic permission and letter dated 26-3-2012 filed manually. He has further submitted that the learned DCIR has not appreciated all the above letters/requests while rectifying the return/order, therefore, the taxpayer filed an application' under
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section 221 of the Income Tax Ordinance, 2001 on 25-4-2012 pointing out the above mentioned mistakes being apparent in the rectification order and this application is pending adjudication till to date. According to him the learned DCIR was legally bound to issue a notice under section 120(3) for want of information, if validity of the revised return was .To be questioned. He has contended that the revised return filed by the taxpayer cannot be considered invalid automatically. The learned AR has further submitted that even otherwise, the learned DCIR was erred in rectifying the original return/deemed order under section 120 of the Income Tax Ordinance, 2001 as prior to passing the rectification order under section 221 the taxpayer has revised its return of income (order to be treated as issued under section 122(3) of the Ordinance, 2001) in accordance with the provisions of section 114(6) of the Ordinance, 2001, therefore, in the presence of a deeming order under section 122(3) of the Income Tax Ordinance, 2001 the learned DCIR was not justified in rectifying the original return/order under section 120 which had been ceased to its existence. In this regard he has placed reliance on section 122(3) of the Income Tax Ordinance, 2001 and judgments of this Tribunal reported as 2012 PTD (Trib.) 170, 2011 PTD (Trib.) 2026 and 2013 PTD (Trib.) 1749. 7. On merits of the case regarding chargeability of minimum tax under section 113 of the Income Tax Ordinance, 2001 on turnover instead of commission/margin profit, the learned counsel has contended that both the authorities below have miserably failed to consider the fact that the taxpayer is a distributor and authorized to distribute the products on behalf of principal companies within the specified territory at the consumer end price and earned nominal commission in lieu of services provided for distribution of the product. The taxpayer was not involved in the sale and purchase of any product and the figure of alleged turnover declared in the original return was a corresponding entry only to justify the earned commission/margin. He has further contended that in response to show-cause notice the taxpayer submitted that there is no mistake apparent from the face of record/return and assessment cannot be rectified on the basis of change of opinion. In his reply the taxpayer has also explained that he is bound to distribute the goods to the end consumer on the price fixed by the principal companies, therefore, the earned commission/marginal discount is amenable to minimum tax instead of alleged turnover which he has declared in the original return only to justify the earned/declared commission as well as a corresponding entry of the figures declared in the sales tax returns. He has explained that neither the taxpayer has declared opening stock nor closing stock in the original return and non declaration of opening and closing stock itself indicates that the taxpayer was not involved in sale and purchase of goods and did not own any product. According to him both the authorities below are not justified to treat the figures mentioned in sales tax returns as turnover for the purposes of determination of minimum tax under section 113 of the Income Tax Ordinance, 2001 by declaring the taxpayer as wholesaler instead of distributor. He has submitted that while rectifying the return and charging the minimum tax on the alleged turnover, the learned DCIR has not appreciated the terms and condition settled between the principal and distributor in its letter and spirit. He has further contended that it has been settled by the Superior Courts that the commission/margin of profit earned by the distributor is amenable to minimum tax under section 113 of the Ordinance, 2001 instead of turnover. Therefore, the action of the DCIR as confirmed by the learned first appellate authority in treating the sales declared in sales tax returns and Income tax return as amenable to minimum tax under section 113 is unlawful and contrary to the dictates of the superior courts. He in this regard placed reliance on a decision of this Tribunal in the case of another distributor i,e, Messrs Allied Marketing (Pvt.) Ltd. Dated 24-2-2012 passed in I .T.As . Nos. 1293-1296 and 1578/LB of 2011 wherein it has been held that the margin of profit earned by the distributor is amenable to minimum tax under section 113 of the Income Tax Ordinance, 2001 instead of turnover. The AR has further relied upon certain unreported and reported judgments i,e, I.T.As. Nos. 463,
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464/LB/2010 dated 1-12-2011, I.T.As. Nos. 01, 2/IB/2014 dated 14-3-2014, 2006 PTD 1699, I.T.A. No, 238/LB/2003 dated 16-8-2004, I.TAs. Nos. 4469-4470/LB/2002 dated 6-5-2004 and 2003 PTD 869. The AR further contended that the learned first appellate in other identical cases of the same nature has annulled the rectification order being beyond the scope of rectification vide his Orders-in-Appeal No,65 dated 30-8-2012 and R-60/236 dated 18-6-2013 and this discrimination caused serious prejudice to the interest of taxpayer. 8. The learned AR of the taxpayer has also raised certain other issues including that the learned first authority has passed the impugned order beyond the limitation provided in section 129 of the Income Tax Ordinance, 2001 as well as the impugned order is a non-speaking order. 9. We have heard the learned representatives from both the sides and have also perused the impugned order of the learned first appellate authority and the order passed by the learned DCIR under section 221 of the Income Tax Ordinance, 2001 as well as the documentary evidence, reported and unreported case-law submitted by the learned AR of the taxpayer. 10. As per the submissions and contentions of the AR of the taxpayer the following issues require our consideration and adjudication. (a) Whether the order passed under section 221 is beyond the scope of rectification? (b) Whether the learned DCIR is justified in rejecting the revised return and rectified the original return in the presence of revised return/deeming order under section 122(3) of the Income Tax Ordinance, 2001? (c) Whether the commission/margin of profit is amenable to minimum tax or turnover in the case of distributor? 11. So long as the scope of rectification is concerned, we have found that in this case the original return of income was filed on 7-12-2011 declaring net income of Rs,1,661,136 as well as figures of sales/purchase without mentioning of opening and closing stock. Subsequently, the DCIR has issued show-cause notice under section 221 of the Income Tax Ordinance, 2001 on 27-3-2012 alleging therein that as per amendment brought in section 113 and Part-III of Second Schedule of the Income Tax Ordinance, 2001 through Finance Act, 2010 the taxpayer is legally bound to pay minimum tax but scrutiny of return shows the taxpayer has failed to deposit the tax as required under section 113 of the Income Tax Ordinance, 2001. In response to show-cause notice the taxpayer submitted that there was no mistake apparent from the face of record/return and assessm ent cannot be rectified on the basis of change of opinion. In its reply the taxpayer has also explained that actually he earned commission income/margin of profit only being a distributor as he is bound to sell the goods to the end consumer on the price fixed by the principal companies, therefore, the commission/ marginal discount is amenable to minimum tax instead of alleged turnover which he has declared in the original return only to justify the earned/declared commission as well as a corresponding entry in connection of figures declared in the sales tax returns. The taxpayer has also revised his return on 22-3-2012 by omitting the figure of turnover. The revision of return has been declared invalid by the DCIR being not revised in accordance with the provisions of section 114(6) of the Income Tax Ordinance, 2001. The reply/submissions of the taxpayer has also been rejected on the ground that in view of the amendment brought in section 113 and Part-III of 2nd Schedule of the Income Tax Ordinance, 2001 the taxpayer being a wholesaler of food, beverage and tobacco was under legal obligation to pay minimum tax under section 113 of the Income Tax Ordinance. Accordingly the original return/deemed order under section 120 of the Income Tax Ordinance, 2001 was rectified under section 221 by charging minimum tax under section 113. Against this order the taxpayer has preferred appeal before the learned first appellate authority who has dismissed the same vide impugned order. We have found that the learned DCIR himself admitted at Page-1, Para-2 of the rectification order that "the return of the taxpayer was
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examined keeping in view the amendments brought in section 113 and Part-III of 2nd Schedule of Income Tax Ordinance, 2001 through Finance Act, 2010" which itself proves that there is no mistake apparent and floating on the surface of return/record. The DCIR has tried to examine the return/deemed order in the light of amending provisions of section 113 of the Income Tax Ordinance, 2001. This type of exercise does not fall in the garb of rectification. The DCIR has unlawfully enlarged the scope of section 221 to the extent of erroneousness and prejudicial to the interest of revenue as provided in section 122 of the Income Tax Ordinance, 2001. It has been settled by the superior courts that where things are provided to be done in a particular manner the same has to be done in the same manner otherwise unlawful. We have also observed that the taxpayer is a distributor of Messrs Unilever Pakistan Limited and Messrs Pakistan Tobacco Limited whereas the revenue rectified the order with the observation that the taxpayer is wholesaler dealer of food, beverage and tobacco items raising an issue whether the taxpayer had a link of sale and purchase with the principal companies or not which requires a through probe and as to deal with the issue fair and proper investigation and probe was required and as such the case falls outside the purview of section 221 of the Income Tax Ordinance, 2001. It has also been noticed that in the case of another distributor i,e, Messrs Allied Marketing (Pvt.) Ltd. And other identical cases this Tribunal held that the margin of profit earned by the distributor is amenable to minimum tax under section 113 of the Income Tax Ordinance, 2001 instead of turnover, therefore, the issue before the revenue was as to whether the commission is amenable to minimum tax or turnover and being this a debatable/arguable issue was beyond the scope of rectification under section 221 of the Income Tax Ordinance, 2001. Perusal of section 221 of the Income Tax Ordinance, 2001 would reveal that only those mistakes can be rectified which are apparent and floating on the face of record/return. An error of law or fact, which having direct nexus with the question of determination, of rights of parties affecting their substantial rights or causing prejudice to their interest is not a mistake apparent from record to be rectified under section 221 of the Income Tax Ordinance, 2001. The mistake must be of the nature, which is floating on the surface of record and must not involve an elaborate discussion or detailed probe/inquiry or process of B determination in the light of amendment, law or facts. The determination of minimum tax liability in the light of amended provisions of law is a material question which cannot be brought within the purview of section 221 of the Ordinance for the purpose of rectification, rather in such a case the proper course was to invoke the provision of section 122 of the Income Tax Ordinance, 2001 or any other remedy provided under the law. Resultantly, it is evident that the revenue carried an amendment in the grab of rectification which cannot be endorsed as being legally sacrosanct. In this respect, we find ourselves convinced by the fact that subject issue fell outside the scope of rectification as has been lucidly explained by the superior courts through judgment referred by the AR of the taxpayer. The learned DCIR, in carrying out the rectification, did encounter a 'legal and factual controversy' and hence, no domain was available under section 221 of the Ordinance, 2001 to him to enforce the departmental contention. Consequently the orders passed by both the authorities below suffer from serious legal infirmities and hence, cannot be considered as valid in the eye of law. 12. The second legal objection is regarding the validity of the rejection of the revised return and rectification of the original return/ deemed order under section 120 in the presence of revised return/deemed order under section 122(3) of the Income Tax Ordinance, 2001. Admittedly the original return was revised on 22-3-2012 prior to the rectification order which was passed on 31-3- 2012. The 'DCIR has not accepted the same being not filed in accordance with the provisions of section 114(6) of the Income Tax Ordinance, 2001 and rectified the original return/deerned order under section 120. The learned CIR(A) has confirmed the rejection of the revised return on the ground that the same was not revised by addressing the issue raised and difference pointed out has no legal effect. According to the. Learned AR of the taxpayer the authorities below have erred in
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appreciating the true facts of the case as the taxpayer has revised its return in accordance with the provisions of section 114(6) of the Income Tax Ordinance. He has also placed before us certain documents in this regard. To know as to whether the taxpayer has revised its return in accordance with law and what the requirements are of a valid, revision it is better to reproduce the relevant provision of section 114(6) of the Income Tax Ordinance, 2001. 114(6) "Subject to subsection (6A), any person who having furnished a return, discovers any omission or wrong statement therein, may file revised return subject to the following conditions, namely:- (a) It is accompanied by the revised accounts or revised audited accounts, as the…
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