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Petitioner: (M/s.) Multinet Pakistan (Pvt) Ltd., Karachi VS Respondent: The CIR, Zone-III, LTU, Karachi
Court Name: Appellate Tribunal Inland Revenue Judge(s): Muhammad Jawed Zakaria, Syed Ayaz Mehmood Title: (M/s.) Multinet Pakistan (Pvt) Ltd., Karachi vs The CIR, Zone-III, LTU, Karachi Case No.: ITA Nos, 134 & 12/KB/2015 Date of Judgment:2018-08-20 Reported As: 2019 PTD (Trib.) 2162, 2019 P.C.T.L.R. 90 Result: Appeals disposed of
Judgment ORDER MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER. --- By this single order, we intend to dispose of above titled cross appeal filed by the both parties against the combined impugned order No,06 dated 01-10-2014 delivered by the learned CIR(Appeals-II), Karachi pertaining to the tax years 2012 on the separate grounds of appeal as set-forth in the memo of appeal. 2. Brief fats as reported in the impugned order are that the taxpayer is a private limited company, is a subsidiary of Malaysian Company. Return of income filed and treated as deemed assessment u/s. 120 stood revised on 12-08-2013, which resulted in deemed amended order u/s. 122(3). The said deemed amended order was considered as erroneous in so far as prejudicial to the interest of revenue by the ADCIR, Range-A, Zone-Ill, LTU, Karachi. Accordingly, a show cause notice u/s.122(9)/(5A) was issued. The taxpayer responded and filed explanation. After obtaining necessary reply, proceedings were culminated by passing amended order under section 122(5A) of the Income Tax Ordinance, 2001. Being aggrieved and dissatisfied by the order of the Addl.CIR the taxpayer filed appeal before the learned CIR (A) who vide order mentioned supra, maintained the addition u/s. 21(c) ibid and directed to allow adjustment of carry forward amount as envisaged u/s. 113(2)(c) of the Income Tax Ordinance, 2001. Hence, both the taxpayer as well as department has come up in appeal before this Tribunal on the grounds set-forth in the memo of appeal. 3. This Court issued notices to the both parties. In response thereto Mr. S.M. Rehan (FCA) appeared on behalf of the taxpayer while Mr. Abdul Salam appeared on behalf of the department as D.R. 4. Firstly, we take-up, taxpayer appeal. Initially, learned counsel for the taxpayer has argued that the disallowance u/s. 21(c) is a factual controversy and cannot be decided unless factual inquiry is done. Learned counsel for the taxpayer further contended that twin conditions should come from
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admitted facts and not from disputed facts gathered through fishing inquiries. Twin conditions are to be proved at the time of issuance of notice u/s. 122(5A) and not on the basis of record submitted and subsequent inquiry. He has further pleaded that in the repealed Act, 1922 and Repealed Ordinance, 1979 powers of assessm ents were with the ITO/DCIT and therefore powers of IAC u/s. 34A and 66A were of supervisory authority as quality controller and the scope was large. In the 2001 Ordinance powers are with Commissioner through delegation and therefore, scope of (5A) is narrow. He further explains that in 2001 Ordinance there are two schemes 177-122(1)(5) for inquiries and factual controversies and 122(5A) for legal controversies on admitted facts with twin conditions. He placed reliance on the judgment reported as 113 Tax 53. Learned counsel for the taxpayer further asserted that the words -after making or causing to be made, such enquires as he deems necessary" are from tax year 2013 and are not retrospective, reliance is placed on 109 Tax 85. Even after amendment inquiry does not mean inquiry from the taxpayer. The inquiry should be independent and not from tax payer. After insertion of words "if he considers that the assessment order is erroneous in so far as it is prejudicial to the interest of revenue. The question arises as to which of the two expression is of a controlling nature to arrive at the correct construction of error of law and its prejudicial effect in terms of revenue. Question also arise as to the scope of the key words "such inquiries" can it be read within the confines of the amendment provision or can it be so enlarged as to equate with and entail all types of factual inquires. If this be the case the whole scheme of audit under section 177 becomes redundant. Such a conclusion which renders redundant another provision of law is against the principle of harmonious construction of a tax statute. Thus, even after the amendment in section 122(5A), inquiry cannot be conducted from the taxpayer. It only empowers the Additional Commissioner to make independent inquiry at his own end and not from the taxpayer, reliance is placed on the judgment reported as 109 Tax 85. In support of his argument he has also relied upon the following reported and unreported case law: (1). 2013 PTD (Trib) 900. (2). 2013 PTD (Trib) 788. (3). 2012 PTD (Trib) 1739 (4). 2010 PTD (Trib) 111. (5). 2012 PTD (Trib) 1593. (6). 2013 PTD (Trib) 1557 (7). 2014 PTD (Trib) 2085 (8). ITA No,799/K B/201 4 (9). ITA No,1236/KB/2016. He has further submitted that the assessments for the year under review had been passed after detailed scrutiny as such the same cannot be said to be erroneous being prejudicial to the interest of revenue and recourse cannot be had to section 122(5A) of the Income Tax Ordinance, 2001 thus, learned ADDL.CIR is debarred and precluded from indulgence in such like position as held by the Hon'ble Superiors' Courts. The learned counsel , therefore, vociferously, further went on to stress that in view of the submissions made hereinabove and case laws decided by the Learned ATIR on the subject and principles of interpretation settled by Hon'ble Apex Court, the order under section 122 (5A) is not sustainable in law and may be annulled. He further went on to urge that the order passed U/s. 122(5A) is an illegal order and without jurisdiction as the queries raised and the additions made are in excess of powers vested U/s. 122(5A). He contended that the Additional Commissioner was not conducting audit proceedings hence, the queries raised are in excess of jurisdiction. The powers U/s. 122(5A) is restricted and limited to issues resulting in the assessment being erroneous and prejudice to the interest of revenue, hence can neither disallow nor make addition on disputed issues by applying subjective standard of reasonableness or on the basis of his opinion. As the order passed U/s. 122(5A) is beyond the scope and jurisdiction, the additions
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made are liable to be deleted. Reliance is placed on the decisions reported as (2004) 89 Tax 452 (Trib.) and (2001) 84 Tax 45 (Trib.). As this issue has been settled by the Tribunal, the order passed U/s. 122(5A) may kindly be cancelled and annulled. He further objected that prior to initiating proceedings U/s. 122(5A), the Additional Commissioner has to prove that the deemed or amended order passed was erroneous and as well as prejudicial to the interest of revenue which has caused loss of revenue. Thus, both the conditions are to be fulfilled simultaneously. But if either of the conditions are not fulfilled, the order passed. U/s. 122(5A) is not sustainable in law. This issue has already been decided by various forum while adjudicating on proceedings initiated U/s. 66A of Repealed Ordinance, 1979 which is in pari materia to Section U/s.. 122(5A) of Ordinance, 2001. Further reliance is placed on the following reported decision. (a) 1992 PTD 932 (SC Pak) in the case of Glaxo Laboratories Limited. (b) 2004 PTD 330= (2004) 89 Tax 252 (KHC) in S.N.H. Industries (Pvt.) Limited V/s. Income Tax Department & Others (c) 1984 PTD 137 (HC A.J. & K) in M/s. United &Alders Corporation, Mirpur V/s. Commissioner of Income Tax, A.J. & K143 (d) (1999) 79 Tax 29 (Trib.) (e) (2004) 89 Tax 452 (Trib.) (f) (2001) 84 Tax 45 (Trib.) (g) (1969) 20 Tax 51 (Trib.) In the above decisions it has been held that if both the conditions are not fulfilled simultaneously and there is no loss of revenue or if only one of the conditions are fulfilled, the order passed U/s. 34A of Repealed Act 1922, Section 66A of Repealed Ordinance, 1979 and Section U/s. 122(5A) of Ordinance, 2001 which are in pari materia" to each other provisions of law, the order passed has been cancelled and annulled. 3. The learned counsel lastly, submitted that in the case of the taxpayer, as neither of the conditions have not been fulfilled simultaneously and the queries raised and additions made are beyond the jurisdiction and power vested U/s. 122(5A), the order passed by the Additional Commissioner of Inland Revenue is without and in excess of jurisdiction, nor the deemed orders was either erroneous, nor prejudicial to the interest of revenue, the order passed U/s. 122(5A) is not sustainable in law. He also invited the attention of this court on the order of the Tribunal in taxpayer own case bearing ITA No, 526 to 531/2014 dated 21.12.2017 whereby under similar facts and circumstances of the case, the orders of the officers below were annulled by the Division Bench of this Tribunal. 6. The learned counsel for the Taxpayer further, relied upon the judgments of the Tribunal bearing ITA No, 1236/KB/2016 dated 03.4.2017 in the case of Quality Dyeing & Finishing (Pvt) Ltd. Vs. the CIR and another case bearing ITA No, 799/KB/2014 the CIR vs. Ace Travels (Pvt) Ltd dated 5.6.2017 wherein after exhaustive and elaborate discussion knocked down orders passed under section 122 (5A) of the Income Tax Ordinance, 2001. The learned counsel, therefore, prayed that in view of ratio decidendi of above reported decisions, the orders passed may kindly be cancelled and annulled. 7. The learned DR, on the other hand, strongly defended the impugned order and contended that the assessm ent proceedings have been made strictly in accordance with law. The learned D.R. continued to argue that main additions have been made by invoking section 21(c) of the Income Tax Ordinance 2001 as withholding tax has not been withheld by the taxpayer at the time of making payments. He particularly referred to Inter Connected Cost and Inter Operator Lease Line Expenses after properly confronting the appellant through notice u/s.122(9) in the proceedings initiated u/s.122(5A). He relied on the case laws of ATIR in ITA No,726/IB of 2009 for tax year 2007 decided on 15-02-2011 and order of Honourable Islamabad High Court in Writ Petition No,2518 of 2015 dated 15- 10-2015. He further vehemently argued that while amending the order the department needs
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relevant data to give correct legal effect on factual points, therefore, seeking such information which is necessary for working of correct amount is not a Ishying enquiry. Continuing his arguments he stated in both these case law issue that application of section 21(c), on non deduction of withholding tax has been held to be valid. In the instant cases, appellant has not deducted the tax while making payments. He therefore prayed that orders of the below officers be upheld. 8. We have given our earnest consideration to the rival arguments addressed by the contending parties and have also been perused all the relevant facts/record/impugned order and statutory law and case laws submitted by the learned representatives of both the parties. First we take up the legal pleas taken by the learned counsel for the appellant / taxpayer. 9. Perusal of the reasons assigned for making the additions shows that the same have been made by the Additional CIR by requiring the taxpayer to file explanations, ledgers supported with bank statements which means that the Additional CIR was seeking details, documents and explanations to justify his action u/s I 22(5A) which in our view is against the spirit of section 122(5A). This further shows that the impugned order u/s 122(5A) was passed on whims, guess work and assumptions, hence, in our view there was nothing erroneous and prejudicial to the interest of revenue in the order u/s 120 that has been amended by the Additional CIR. This Tribunal has already disapproved such practices on part of the Additional CIRs in the proceedings u/s 122(5A). Reliance could favourably be made on the following decisions of this Tribunal: ITA No, 1034-1037 "We hold that right from the beginning that is from the date of initiation of proceedings and issuing show cause notice the action of the Additional Commissioner IR is ab initio void, illegal and corm non judice. The case laws quoted by the learned DR in fact support the case of the appellant. The learned AR is also correct in stating that in proceedings u/s 122(5A) the Additional Commissioner cannot enter into enquiry and call for the record, the books of accounts, the list of machinery, the production reports etc. case law on the point reported as 109TAX-85 (Trib) wherein after following a number of cases the Learned ATIR has held that the calling for the explanation and details, information is outside the ambit of the proceedings u/s 122(54)." ITA No, 648/KB/2014 M/s. Bani Apparels "In the instant case, the Additional Commissioner (IR) misdirected himself in initiating proceedings u/s 122(5A) by seeking clarifications/explanations from the taxpayer instead of pointing out any error and prejudice to the interest of revenue.. Further, through his subsequent notices he admittedly. engaged in seeking details, documents, evidences and explanation which too is against the spirit of section 122(5A), as discussed above. Accordingly, we find force in the arguments of learned A.R. that there was nothing erroneous and prejudicial to the interest of revenue in the deemed order under: section 120 of the Income Tax Ordinance, 2001 sought to be amended by the Additional Commissioner (1R). He clearly engaged in making fishing and revoking inquiries by seeking details, documents, evidences and explanations on whims, assumption, apprehensions and surmise which is against the spirit of section 122(5A) therefore impugned order of the Additional Commissioner (IR) is not sustainable in the eyes of law and is hereby annulled. The Additional. Commissioner has made an addition of Rs. 12,111,000/- under section 21(c) if the Income Tax Ordinance, 2001 which has been arrived at by working back the amount of tax deduction under section 231A shown at Rs. 24,222/- on cash withdrawals from bank. Apart from the explanation offered by the taxpayer, that "cash withdrawals from bank represents withdrawal of investment by the partners hence, it is not hit by the mischief of section 21(c), the addition of Rs. 14,111,000/- under section 21(c) was made which is not sustainable jiff the reason that the same has been based on hypothetical working and has nothing to do with the actual 'claim or payment
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of expenses. Perusal of return of income, produced by the learned A.R. during the course of hearing shows that the taxpayer has not claimed or paid any expenses to the tune of Rs.12,111,000/- in his return of income whereas provisions of section 21(c) clearly envisage that payment on account of any salary, rent, brokerage or commission, profit on debt, payment to non-president, payment for services or fee paid by the person shall not be allowed as deduction, if the tax so required under the. Ordinance has not been deducted or paid by the taxpayer. 10. In view of the above facts, we are of the considered opinion that the action of the Additional Commissioner to treat a hypothetical figure of Rs. 12,111,000/- as inadmissible expenditure/deduction in terms of section 21(c) in his order under section 122(5A) is totally misconceived and in complete disregard of the provisions of section 21(c) read with section 122(5A) of the Income Tax Ordinance, 2001. The taxpayer has not claimed or paid any expenditure to the tune of Rs. 12, 111.000/- therefore question of its disallowance under section 21(c) of the Income Tax Ordinance, 2001 does not arise." 10. From cumulative reading of provision of section 122(5A) as well as above referred judgments explicitly provide that the queries raised by the ACIR under Section 122(5A) constitute fishing and roving inquiries which are not permitted in the proceedings u/s 122(5A). From perusal of record and impugned notice suggests that the department/ACIR were engaged in seeking details, documents and explanations as fishing enquiries which is not permissible in the proceedings u/s 122(5A). Similarly, perusal of notice further shows that queries raised by department are based on guesswo rk, assumptions, apprehensions, estimates, conjectures which is against the express provision of law as well as decision of superior appellate fora on the subject. Seeking of details documents and explanations through a notice u/s 122(9)/122(5A) means that there is nothing erroneous and prejudicial to the interest of revenue in the order u/s 120 and the Assessing Officer/ACIR had proceeded under Section 122(5A) on whims, guesswork, assumptions, surmises and conjectures which is not permissible in the proceedings u/s 122(5A). 11. As the core issue involved in this appeal pertains to exercise of jurisdiction u/s. 122 (5A) of the Income Tax Ordinance, 2001, under which the proceedings have been initiated, we deem it proper to reproduce the same for better perception: "Section 122(5A)- subject to sub-section (9), the Commissioner may after making, or causing to be made, such enquires as he deems necessary, amend, or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue." 12. From perusal of the sub-section(5A) question also arise as to the scope of the key words "such inquiries" can it be read within the confines of the amendment provision or can it be so enlarged as to equate with and entail all types of factual inquires. In the instant case before making addition u/s. 21(c), the department has started calling for information from appellants which had nothing with regard to two mandatory conditions to invoke Section 122(5A). Calling of information's and thereafter finalizing order u/s 122(5A) without presence of twin mandatory conditions is not permissible. If this be the case the whole scheme of audit under section 177 becomes redundant. Such a conclusion which renders redundant another provision of law is against the principle of harmonious construction of a tax statute. The addition u/s. 21(c) had been made after making fishing inquiries from the taxpayer. Twin conditions i,e, erroneous and prejudicial should come from the admitted fact and not from the disputed fact and at the time of issuance of notice u/s. 122 (5A) and not on the basis of record submitted and subsequent inquiry. Seeking details, documents records etc are outside the scope of section 122(5A). Thus, even after the amendment in section 122(5A), inquiry cannot be conducted from the taxpayer. It only empowers the Additional Commissioner to make independent inquiry at his own end and not from the taxpayer, reliance is placed on the judgment reported as 109 Tax 85
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13.Further perusal of above section shows that presence of prerequisite twin conditions of "erroneous and prejudicial to the interest of revenue there are two limbs of "erroneous and Prejudicial" is a must as envisaged in section 122(5A). These are simultaneously co-exist, if one limb is missing then proceedings initiated under this Clause (5A) would become null and void. This view has already been upheld in so many cases while delivering the judgments under section 66-A of the repealed Income Tax Ordinance, 1979. Reliance is placed on the full bench of this Tribunal, the relevant extract is reproduced hereunder: Full Bench decision of Appellate Tribunal Inland Revenue in ITA No, 181-185, 893, 1051, 1096 Meezan Bank Limited "We therefore agree with the views expressed by learned authorized representatives that this is not the spirit of enquiries as mentioned in the relevant provision. Calling of information and thereafter finalizing the order u/s 122(5A) without the presence of twin mandatory conditions is not permissible. This act of the departmental authorities is nothing but fishing and roving enquiries which is not legal and in accordance with the provision of law. We hold that section 21(c) of the Income Tax Ordinance, 2001 is not applicable in the situation where there is no proper evidence of tax deduction available before the officer. We also agree with the views of the learned authorized representatives that these are mere calling for information and conduct of such enquiries is not permissible and comes within the ambit of fishing and roving enquiries. The intent of provision is mainly related to the two mandatory conditions and enquiries have direct nexus to the mandatory conditions of the provision. The use of word of enquiries cannot be read in isolation and it does not mean calling for information from the taxpayers and thereafter proceeding to finalize the order u/s 122(5A). To our mind enquiries conducted without the presence of twin mandatory conditions as provided in the Provision are not permissible and come within the ambit of fishing and roving enquiries which we dispel and do not approve." 14. We may take further advantage of the Appellate Tribunal's decision in MA (AG) No 45- 46/KB/2013 ITA No 768/KB of 2010 and ITA No 163/KB of 2013 dated 30-04-2013 (M/s HBL Vs Additional Commissioner Audit --B, Zone-I, LTU, Karachi) reported as [(2014) 109 Tax 85, (Trib)]. In the identical circumstances this Tribunal has been pleased to hold as under: "8. We have considered the submissions of learned representatives and have perused the relevant record. From the perusal of the notices issued by the Additional Commissioner, order u/s 122(5A) and marathon details, documents and replies filed during the proceedings under section 122(SA) by the appellant for both the years under review there is no doubt that in the instant case the Additional Commissioner was indulged in seeking details, documents, information and evidences on whims, surmises, assumptions, suspicion, guesswork and apprehensions which supports the contention of the appellant that the order sought to be amended was not erroneous in so far it is prejudicial to the interest of revenue. In our view the Additional Commissioner miserably failed to establish erroneousness or prejudice to the revenue through his initial notice. Similarly the Additional Commissioner not only issued/made multiple notices/requests but required the taxpayer to file supporting evidences and justify the allowability of claim which suggests that he had not been able to identify any erroneousness or prejudice to the interest of revenue in the order u/s 120 sought to be amended The additional data, information, documents or records were required by him to establish erroneousness and prejudice to the interest of revenue which falls clearly out of the scope of section 122(5A). We have found arguments of the learned ARs convincing as the same are based on the 'ratio decidendi' of the following reported judgments of this Tribunal relied upon while delivering and the judgment in ITA No 1696, 1697, 1698, 1825, 1826, 1827/LB/2012 dated 09-01-2013.
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i. 1999 PTD (Trib) 2851 ii. 2009 PTD (Trib) 121 iii. 2010 PTD(Trib) 111 iv. 2012 PTD (Trib) 1593 v. (2009) 100 Tax 390 (Trib) In all these judgments the issuance of notices under section. 122(5A) seeking information from the taxpayer for evolving the basis for amending the assessment order under the said section has been disapproved. It would suffice to quote, verbatim the relevant portion at Para 13 on page 404 of the case law cited as (2009) 100 Tax 390 (Trib) which reads as under: The notice on the basis whereof the action under section 122(5A) has been upheld by the CIT (A) merely Pointed out certain deficiencies in the return while seeking information, explanations and evidence raising apprehensions. Therefore, we are of the view that initial notice was void, ll subsequent proceedings orders of the superstructures built thereon have become void and the order passed by the Taxation Officer is not sustainable in the eyes of law, accordingly, the impugned order of the learned CIT(t) is vacated and the order passed by the Taxation Officer under section 122(A) is annulled and the deemed amended assessment under section 122(3) of the Income Tax Ordinance, 2001 is restored." 15. The judgments quoted hereinabove are squarely applicable to the facts and circumstances of the instant case. In the present case too the Additional CIR has made additions / disallowances on hypothetical workings which is not permissible in the proceedings u/s 122(5A). The learned Additional CIR has thus made disallowances/add backs/ additions on whims, guesswork presumption and on assumptions which is not permissible in the proceedings u/s 122(5A). There could be no two opinions about the fact that in making imaginary disallowance which far exceeds the actual expenses claimed by the taxpayer the Additional CIR was proceeding on whims, guesswo rk and assumptions which is…
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