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Petitioner: GHANI BUILDERS AND DEVELOPERS (PVT.) LTD., KARACHI VS Respondent: COMMISSIONER INLAND REVENUE, ZONE-I, RTO-II, KARACHI, .
Court Name: Appellate Tribunal Inland Revenue Judge(s): Ambreen Aslam, Faheem-ul-Haq Khan Title:GHANI BUILDERS AND DEVELOPERS (PVT.) LTD., KARACHI vs COMMISSIONER
INLAND REVENUE, ZONE-I, RTO-II, KARACHI, . Case No.: I.T.A. No,809/KB of 2015 Date of Judgment:2016-01-20 Reported As: 2016 PTD (Trib.) 1238 Result: Order accordingly Judgment ORDER MRS. AMBREEN ASLAM, (JUDICIAL MEMBER).---Through this Order, we intend to dispose of the captioned appeal filed by the taxpayer company against the Order No,04 dated 21-05-2015, passed by the learned Commissioner Inland Revenue (Appeals-IV), Karachi on the following grounds:-- i. "The order passed by the Learned CIR(A) is bad in law and on facts and is in violation of the principle of natural justice. ii. That the Learned CIR(A) was not justified to pass the order relying on the para wise comments obtained from the DCIR which were never confronted to the appellant or his AR as such the appellant has been prevented to file rebuttal on para wise comments and thus the principle of natural justice has been grossly violated. iii. That without prejudice to above the Learned CIR(A) was not justified to ignore his decision on the addition of Rs,175,000,000/- which was made without issuing any specific notice under section 111 of Income Tax Ordinance. The addition thus made besides being unjustified was illegal liable to be deleted. iv. That the Learned CIR(A) has erred in not giving any decision on the point of allowing the setting off the declared loss of Rs,1,647,873/- while computing the income. The declared loss is liable to be set off against addition under the provisions of Income Tax Ordinance. v. Without prejudice to above the Learned CIR was not justified to confirm the proceedings under section 122(1)(5) initiated by the DCIR which were merely on change of opinion. The DCIR is not in
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possession of any titled document or any document transferring the ownership rights of the land as such the order under section 122(1)(5) is without having definite information. vi. That the Learned CIR(A) has erred in appreciating the fact that the initiation of proceedings under section 122(1)(5) is not based on the basis of receipt of any fresh definite information as required by section 122(8) of Income Tax Ordinance. The information relied was available on record and examined by his predecessor during the course of audit proceedings for the Tax year 2010. vii. That the Learned CIR(A) was not justified to confirm that the provisions of section 32(2) are applicable on builders and that circular number 2/1975 is not applicable on builders in accordance with the provisions of section 36 of Income. Tax Ordinance, 2001. viii. Without prejudice to above the Learned CIR(A) was not justified to hold that the provisions of section 75 are applicable in the case of the appellant and that the appellant has parted with the ownership of the land. ix. The Learned CIR(A) was not justified to confirm that the unregistered Partnership Deed is a sale document and that the properly and ownership in the land has been transferred. x. That the Learned CIR(A) has failed to appreciate that the transfer of ownership is governed by the Transfer of Property Act/Registration Act as adopted by the Government of Pakistan. xi. That the Learned CIR(A) was not justified to confirm the order ignoring the facts that any explanation/document contrary to legal ownership documents have no value in the eyes of law. Xii. That the Learned CIR(A) was not justified to confirm the applicability of section 34(1) which are not at all applicable. The Learned CIR(A) has totally ignored that provisions of section 34(1) provides that accrual will take place when the income is due to the appellant and in terms of clause 10 of the Deed of Partnership the 40% of booking/collection is to be received by the appellant as sale proceeds as such the due date of/accrual is the date of booking of fiats plots or shops. Xiii. That the Learned CIR(A) has failed to appreciate that in Taxing Act when two interpretation are equally possible then the interpretation favorable to the tax payer will be adopted. Xiv. That the Learned CIR(A) was not justified to pass the order ignoring the provision of clause 12 of the Deed of Partnership which provides that appellant is wholly and solely responsible for the valid, marketable, undisputed and unencumbered title of the land and if there is any dispute from the claimants (the allotters) the appellant shall be solely responsible who is the owner and has not parted with the ownership. Xv. That the Learned CIR(A) was not justified to pass the order ignoring the clause 4 of the Deed of partnership which provide that physical possession of the land shall be maintained by the appellant and its partner. By putting into possession the ownership is not parties in any case. Xvi. That the Learned CIR(A) was not justified to confirm the levy of WWF ignoring the charging provisions of WWF Ordinance. xvii. The appellant craves permission to add, amend, alter and substitute the grounds of appeal on or before the time of hearing." 2. Brief facts of the case are that the appellant/taxpayer is a private limited company incorporated with Securities and Exchange Commission of Pakistan (SECP) having registration number 00000013079/20060707 dated 26-07-2006. According to Articles of Association/Memorandum of Association approved by the SECP; the taxpayer has declared its principal activity as builders and developers. Besides this the taxpayer has got Builder Litense No,BL-2836 issued by the Sindh Building Control Authority. In addition to above, the taxpayer is also registered as builder with the Association of Builders and Developers (ABAD) Karachi with membership No,931 FM. 3. The appellant/taxpayer e-filed his return of income at loss Rs,1,647,873/- as business loss for tax year 2009; which was considered as deemed assessment order under section 120(1) of the Income
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Tax Ordinance, 2001. During audit proceedings of tax year 2012 it was revealed that a Deed of Partnership was signed on 20-06-2009 between the appellant/taxpayer and Messrs Rufi Builders and Developers. The contents of that agreement revealed, inter alia, that at the date of agreement the taxpayer sole and undisputed owner of land seized and possessed of all that piece of land measuring 19-20 acres in Sector No,49-A, Deh Thoming, Scheme No,33, Karachi by virtue of VF-II, vide entry No,118 dated 07-05-2008 held for business purposes. Through the said agreement the taxpayer agreed to sell the referred land to the joint project Rufi Pearl City; a joint venture (JV) of the taxpayer and Messrs Rufi Builders, at the rate of Rs,9,000,000 per acre total consideration amounting to Rs,175,500,000/-. Thus the taxpayer sold the referred land for business purposes against the total consideration of Rs,175,500,000/-. Contrary to this, the taxpayer in its return of income for tax year 2009 and accounts declared total revenues as gross profit/receipts at Rs,3,769,412/-; which did not include receipts from sale of above mentioned land. Being an AOP the taxpayer has been declaring the receipts from sale of the land on cash basis in accordance with provisions of the partnership deed. 4. In the light of above facts, show cause notice under section 122(9) of the Ordinance along with prescribed notice under Rule 168 of the Income Tax Rules, 2002 issued and served upon the appellant/taxpayer for intending to amend its deemed assessment order under section 122(1)/(5) (i) of the Ordinance and calling the taxpayer/ appellants explanation that why such treatment should not be given to it on the basis of facts of the case and the relevant provisions of the law. In response to the show cause notice the learned representative of the taxpayer/appellant submitted a detailed reply on 07-01-2015. Which deem not satisfied with the contentions/replies submitted by the appellant/taxpayer the DCIR amended the assessment order by passing Order No,1125 dated January 30, 2015 with the following observations:-- "9. The replies/explanations submitted by the taxpayer through its AR have been perused, examined and considered in the light of facts of the case and relevant provisions of the Income Tax Ordinance, 2001 and rules there under. The taxpayer's replies are without any appropriate reference to the legal provisions which allow it to adopt. Accounting method other than mentioned in section 32(2) of the Ordinance. Further, on one hand the taxpayer has accounted receipts against the sale of land on case basis, but on the other hand he says he has not sold the land. The facts of the case and relevant legal provisions are once again discussed in the following paras. 10. The taxpayer is a private limited company registered with the Security and Exchange Commission of Pakistan having Registration No,0000013079/20060707. Section 32 of the Ordinance makes mandatory for a company to adopt method of accounting on accrual basis unless the Board prescribes otherwise. There is nothing on record that the Board has allowed the taxpayer to adopt cash basis accounting method, therefore, the taxpayer's accounting method must be on accrual basis. Section 34 is about accrual basis of accounting. 5.34. Accrual-basis accounting.---(1) A person accounting for income chargeable to tax under the head - Income from Business on an accrual basis shall derive income when it is due to the person and shall incur expenditure when it is payable by the person. (2) Subject to this Ordinance, an amount shall be due to a person when the person becomes entitled to receive it even if the time for discharge of the entitlement is postponed or the amount payable by installments. Accordingly, the taxpayer being a private limited company is required to prepare accounts on accrual basis. The taxpayer's reference to section 33 of the Ordinance is totally irrelevant as the Section 33 provides for method of recognizing revenue or expenditures on cash basis and it is for those persons to whom the cash basis accounting method is applicable. The AR's references to
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provisions of sections 2(59A), 32(3), 2(47) of the Income Tax Ordinance, 2001 and 4th and 5th Schedules to Companies Law have also no relevance to the issue/proceedings under discussion. 11. Finally, the sale of land by the taxpayer is again discussed. As per facts of the case available on the record and provided by the taxpayer; the taxpayer entered into agreement with Messrs Rufi Builders and Developers to run a joint business in the name and style of "Rufi Pearl City". Both parties are competent to enter into the said partnership. The taxpayer sold its hand, a stock in trade in the case of builders and developers, against the settled and agreed total sale consideration at Rs,175,500,000/-. So far the taxpayer has also received Rs,24,775,690/- against the sale consideration. Accordingly, the facts has also received Rs, 24,775,690/- against the sale consideration. Accordingly, the facts submitted by the taxpayer and available on record confirm and verify that the taxpayer has sold the land, that was stock in trade in its case, and also received sale consideration in terms of the agreement; in violation of provisions of section 32(2) of the Ordinance but recognized the transaction to the accounts on cash basis. The taxpayer had ignored mandatory provisions of the law for the company; unless the Board prescribes otherwise. 12. The law is very clear about disposal of any business asset. Section 75 of the Income Tax Ordinance, 2001 states that a person who holds an asset shall be treated as having made a disposal of assets at the time the person parts with the ownership of the assets including when the asset is sold, exchanged, transferred or distributed, or cancelled, redeemed, relinquished, destroyed, lost, expired, or surrendered. In the taxpayer's case, the taxpayer has parted with the ownership of its business assets when it sold to another person against a certain consideration amount; part of which has also been received by the taxpayer. The taxpayer has parted with the ownership of the land as it has no right to use, manage or enjoy the same. The Black's Law Dictionary (9th Edition) is referred to consider meaning of sale, ownership and transfer as: "Sale 1. The transfer of property or title for a price. 2. The agreement by which such a transfer takes place. The four elements (of sale) are (1) Parties competent to contract (2) Mutual assent, (3) a thing capable of being transferred, and (4) a price in money paid or promised. Conditional Sale: A sale in which the buyer gains immediate possession but the seller retains titles until the buyer performs a condition, esp. Payment of the full purchase price. Ownership: The bundle of rights allowing one to use, manage and enjoy property including the right to convey it to others. Ownership implies the right to possess a thing, regardless of any actual or constructive control. Transfer: Any mode of disposing of or parting with an asset or an interest in assets, including a gift, the payment of money, release, lease or creation of a lien or other encumbrance. The term embraces every method-direct or indirect absolute or conditional, voluntarily or in voluntarily- of disposing off or parting with property or with an interest in property including retention of title as a security interest and foreclosure of the debtors equity of redemption. 13. The sale of land by the taxpayer fulfills all four basic elements of a sale i,e, both parties are competent to enter into the partnership deed, both parties had mutual assent to sell and purchase the land, the land sold is capable of being transferred and apprise in terms of money amounting to Rs,175,500,000/- was promised to be paid. Further, the taxpayer has parted with the ownership of the land as it has no possession or control over the said land and consequent upon the partnership deed the rights of other people have been created. Further, the land has been transferred to another person i,e, Messrs Ruffi Pearl City against the sale consideration (which has partly been received by the taxpayer). 14. To conclude, the taxpayer being a company is liable to prepare its accounts on accrual basis under section 32(2) of the Ordinance. The taxpayer sold land which is disposal of as business asset in terms of provisions of section 75 of the Ordinance. However, the taxpayer accounted sale
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consideration on cash basis in violation to the mandatory legal provisions of the income tax law. Hence, it is established from the irrefutabl facts of the case and relevant -provisions of the law that the taxpayer being a limited company has violated the law while adopting accounting method on cash basis. The violation has resulted in loss of public revenue in tax Year 2009 while escaping the assessment of the income chargeable to tax. Accordingly, the accounts of the taxpayer prepared on cash basis are rejected and deemed assessed order of the taxpayer for the tax Year 2009 is amended under section 122(1) read with subsections (5)(i) of section 122 of the Ordinance. Computation of income and charging of tax thereupon is as: Particulars PK. Rs. Declared Net Profit/Loss 1,647,873/- Add. Escaped Income* 175 , 500,000/- Less cost of land/declared at fair market value23,000,000/- Total Income 152,500,000/- WWF 3,050,000/- Taxable Income 149,450,000/- Tax Payable 0 20% (small company) 29, 890,000/- Tax paid with return of income 0 Total Tax and WWF Payable 32,940,000/- 11' Separate orders will be passed under sections 182 and 205 of the Ordinance, where necessary." 5. Being dissatisfied with the order passed by the DCIR, the r preferred appeal before the learned Commissioner (Appeal), who confirmed the order of the DCIR and disallowed the appeal of the r by passing Order No,04 dated: 21-05-2015 on the following observations:-- "FINDINGS: - The grounds of appeal, written arguments and counter comments submitted by the department are examined and placed on record. My findings are as under:- 1. While conducting the appeal proceedings reasonable opportunities provided to the appellant as well as to the department to put forth their standpoint in response to the arguments raised by both the parties. Having considered the facts recorded in the impugned order in the backdrop of the appeal proceedings my findings on the instant appeal are as under. 2. Based on the scrutiny of peculiar facts of the case I am of the opinion that, primarily three issues are involved in the instant appeal which needs adjudication. These issues are; Whether the sale of land by the appellant constitutes disposal of business asset in terms of section 75 of the Ordinance. Whether the appellant being a Private Limited Company should recognize sale consideration from sale of business asset on cash or accrual basis? iii. Whether the information constitutes 'definite information' prompting interference (amendment) with taxpayer's deemed assessm ent order under section 122(1) 3. The issues are separately discussed as under: a. At the outset, the appellant has challenged the legality of the impugned order on the point of sale of land or disposal of asset provided in section 75(1) of the Ordinance. In order to adjudge the issue of disposal of asset it is pertinent to refer to the relevant provisions of the law. "75. Disposal and acquisition of assets.---(1) A person who holds an asset shall be treated as having made a disposal of the asset at the time the person parts with the ownership of the asset, including when the asset is -
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(a) sold, exchanged, transferred or distributed; or (b) cancelled, redeemed, relinquished, destroyed, lost expired or surrendered. (7) In this section, business asset means an asset held wholly or partly for use in a business, including stock-in-trade and a depreciable asset; and personal asset means an asset held wholly for personal use." The disposal of an asset as per above law shall be treated at the time when the person parts with ownership of the asset including when an asset is sold, exchanged, transferred or distributed; or cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered. The appellant has emphasized that it has not parted with the ownership of the asset as title of the asset rests with it. The parting with an asset did not mean maintaining the title only but alienation of the rights and benefits could determine the transfer. The possession, of the asset which in this case has been handed over to the other person who has started project and thus rights of the other people have also been accrued. The department correctly opines that assets stands transferred as ii is the disposal of an asset in terms of section 75(1)(a) of the Ordinance which determined the taxability if any. The sales other condionalities means that the title will be transferred to allotees, etc. Of the project at the time full consideration is paid. b. The departmental argument regarding sales is correct which is based on black law dictionary (9th edition): "Sale: I. The transfer of property or title for a price. 2. The agreement by which such a transfer takes place. The for elements (of sale) are (I) Parties competent to contract, (2) Mutual assent, (3) a thing capable of being transferred, and (4) a price in money paid or promised. Conditional Sale: A sale in which the buyer gains immediate possession but the seller retains titles until the buyer performs a condition, esp. Payment of the full purchase price. Further, the appellant has received part of consideration against the sale of land and recognized the same in its books of accounts in terms of partnership agreement entered into with Messrs Rufi Builders and Developers. This means the appellant has fulfilled all four necessary conditions which constitute a valid sale. Since, the appellant has sold its business asset to other person and received partly sale consideration against sale of the business asset (i,e, land) then it is a disposal of an asset in terms of section 75(1) (a) of the Ordinance. c. The Private Limited Companies always maintain accounts on accrual basis where payment is subsequent to sales. The Provision of section 32 have specifically been provided in the law which are reproduced as under:- "32. Method of .Accounting.---11(1) Subject to this Ordinance, a person's income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person.] (2) Subject to subsection (3), a company shall account for income chargeable to tax under the head - Income from Business on an accrual basis, while other persons may account for such income on a cash or accrual basis. (3) The 2[Board] may prescribe that any class of persons shall account for income chargeable to tax under the head - Income from Business on a cash or accrual basis. (4) A person may apply, in writing, for a change in the person's method of accounting and the Commissioner may, by 3[order] in writing, approve such an application but only if satisfied that the change is necessary to dearly reflect the person's income chargeable to tax under the head --- Income from Business. (5) If a person's method of accounting has changed, the person shall make adjustments to items of income, deduction, or credit, or to any other affected by the change so that no item is omitted and no item is taken into account more than once." From the provisions of the law reproduced above, it is understood that every company has to adopt accrual method of accounting except the Board prescribes otherwise. The appellant is a
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company; so method of accounting to be adopted by it is accrual unless it has been prescribed by the Board to adopt any other method. In the instant case there is no any record produced by tile appellant showing Board's prescription regarding its method of accounting, therefore, the method of accounting to be adopted by the appellant under the Ordinance is accrual method of accounting only. Any other method adopted by it not acceptable under the law and has been aptly disregarded by the Officer of Inland Revenue. In view of above facts and law the Sales stood executed when the asset were alienated and thus ownership was transferred to the benefit of the transferee. Hence, additions are confirmed on this point. 4. Finally, appellant has contended that its deemed order had been amended without proper jurisdiction. The AR of the appellant has argued that information providing basis of amendment was provided by the appellant in connection with audit proceedings for tax year 2012. So it was not a new information and if there is new information then provision of section 122(1)(5) of the Ordinance are attracted; otherwise for already available information provisions of section 122(5A) of the Ordinance are to be invoked. The Appellant has also relied upon following case laws:-- 2010 PTD (Trib) 1700, ii. 2011 PTD (Trib.) 321, iii. 2003 PTD (HC) 1093, Section 122(5A) of the Ordinance is reproduced for ready reference as under is understood the proper and valid applicability of law. "Section 122(5A) Subject to subsection (9), the Commissioner may, after making or causing to be made, such enquiries as he deems necessary, amend, or further amend, an assessm ent order, if he considers that the assessm ent order is erroneous in so far it is prejudicial to the interest of revenue" (emphasized). ' The provisions of the law reproduced above clearly mean that when an 'assessment order' is erroneous and prejudicial to the interest of revenue it is to be amended. This means error must be on the assessm ent order and should be prejudicial to the interest of revenue. The information warranting impugned amendment of assessment was not contained on 'the deemed assessment order' of the appellant. It is purely external piece of information in the shape of 'partnership deed'. Therefore appellant's contention is not correct appreciation of the law contained in section I22(5A) of the Ordinance. Accordingly, no any relevancy is also found of the referred case laws with the facts of the case. Without prejudice to this, reference is made to the Hon' ATIR's judgment reported as 2004 PTD (Trib.) 2300 where it has been held that However, the information contained in partnership deed fully constitutes definite information in terms of section 122(8) of the Ordinance and warranted action under section 122(1)/(5) of the Ordinance. The provisions of section 122(5) are reproduced for comparison as under:-- "Section 122(5) An assessm ent order in respect of tax year, or an assessment year, shall only be amended under subsection (1) an amended assessment for that year shall only be further amended under subsection (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that:-- (i)…
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