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Petitioner: Messrs DJM SECURITIES (PVT.) LTD., KARACHI VS Respondent: C.I.T., RIO, KARACHI
Court Name: Appellate Tribunal Inland Revenue Judge(s): Jawaid Masood Tahir Bhatti, Zarina N. Zaidi Title: Messrs DJM SECURITIES (PVT.) LTD., KARACHI vs C.I.T., RIO, KARACHI Case No.: I.T.A. No,938/KB of 2010 Date of Judgment:2011-03-29 Reported As: 2011 PTD (Trib.) 1824 Result: Appeal accepted
Judgment ORDER The Appellant through this appeal has objected against the impugned order of the learned CIR(A) dated 1-12-2010 on the following grounds:-- "(2) That the learned CIR was not justified in confirming the order passed under section 122(5) of the Ordinance by the Deputy Commissioner Inland Revenue (DCIR), Audit Division-II, RTO, Karachi which is ab initio illegal and is based on misinterpretation of statutory provisions of law and misreading of facts and evidence and lacks valid jurisdiction. (3) That the learned CIR was not justified in confirming the order passed by the DCIR without having any definite information as required under section 122(5) of the Ordinance, hence the entire action is without jurisdiction. (4) That the CIR was not justified in confirming the impugned order whereby the DCIR has amended the original order which is deemed to have been passed under section 120 of the Ordinance, by the Commissioner and as such the DCIR being his subordinate cannot amend the same in terms of section 122(5) of the Ordinance, it is therefore prayed that the orders passed by both the authorities are not sustainable in the eye of law. (5) That the learned CIR was not justified in confirming the order passed by the DCIR who made an addition, of Rs,577,500,000 under section 111(1)(b) of the Ordinance, for alleged non-recording of certain payments made to Mr. Dawood Jan Muhammad (DJM) in its books of accounts. (6) That without prejudice to Ground No,6 above, the learned CIR failed to tax cognizance of the fact that the DCIR predecessor has already closed the audit proceedings during the tax year under appeal after seeking details, documents and explanation in respect of certain issues (including
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verification of inflow and out-flow of cash vis-a-vis nature of transactions) raised by the then Commissioner Inland Revenue, Audit Division-I, Karachi. That the learned CIR has failed to appreciate the fact that the ;)CIR did not have valid jurisdiction for passing the amended order under section 122(5) of the Ordinance, for the 'reason that desk audit proceedings in the instant case had already been loosed by his predecessor with prior approval of learned additional Commissioner-A(AC).S (8) That the learned CIR was not justified in confirming the action of we DCIR who has misdirected himself while making an addition of Rs,577,500,000 under section .111(1)(b) of the Ordinance by attempting to cross match the payment made by the appellant from the customer ledger account which was specifically meant for keeping track records of transaction of shares of listed securities. (9) That the learned CIR was not justified in confirming the action of the DCIR who has erred in making addition of Rs,577,500,000 under section (111)(1)(b) for alleged non-appearance of certain payments in the customer ledger account of Mr. Dawood Jan Muhammad without appreciating the facts that the subject payments represent return of loan amount for which the appellant was maintaining separate ledger account. (10) That the learned CIR was not justified in confirming the action of the DCIR who has misdirected himself while treating the repayment of loans by the appellant as loan advanced to its director for the purpose of invoking provisions of section 111(1)(b) of the Ordinance. (11) That the learned CIR was not justified in confirming the action taken by the DCIR under section 111(1)(b) of the Ordinance, in respect of repayment of loan amount made by the appellant without appreciating that such transaction does not fall within the ambit of provisions of section 111(1)(b) of the Ordinance. (12) That the learned CIR was not justified in confirming the addition made by the DCIR under section 111(1)(b) for alleged non-declaration of loan aggregating to Rs,577,500,000 by the appellant without appreciating the fact that he has not drawn any adverse inference conversely in the hands of its director i,e, Mr. Dawood Jan Muhammad for alleged non-declaration of above loan amount payable to the appellant whose audit proceedings was in his hands." 2. The appellant in this case is a private limited company incorporated under the company Ordinance, 1984 on 17-6-2002, primarily engaged in the business of brokerage, portfolio management and investment consultancy. Original return of income was filed on 14-1-2008 for the tax year under review declaring taxable income at Rs,5005805. Subsequently, the taxpayer company revised its return on 1-3-2009, declaring income at the same amount of Rs,5005805 but claiming refund at Rs,19,188,879. The Taxation Officer on the basis of alleged acquired definite information from Messrs Muslim Commercial Bank Ltd., confronted the appellant regarding ten copies of bank cross cheques drawn on Account No,1063-01-01-004175-8 maintained by Mr. Dawood Jan Muhammad, as six out of the ten cheques has not been recorded in its books of accounts. The ledger of Mr. Dawood Jan Muhammad maintained with the Taxpayer company which was provided by him during the course of his, audit proceedings for the tax year 2007 does not reflect following six cheques issued by the appellant company in favour of Mr. Dawood Jan Muhammad:-- Date Cheque No. Amount 20-11-2006 588281 Rs.2,500,000 2-3-2007 589899 Rs,60,003,000 3-5-2007 289909 Rs,100,000,000 29-5-2007 818150 Rs,50,000,000 6-6-2007 818256 Rs,85,000,000 30-6-2007 456900095 Rs,250,000,000
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Total Rs,577,500,000 Being not satisfied with the reply of the appellant the Taxation Officer arrived at the conclusion that out of ten cheques issued to its Director, six cheques containing an aggregate payment of Rs,577.000(M) referred above were not recorded in the ledger account of the appellant and therefore he has drawn the inference that the appellant has under reported the debit side of the balance sheet to the extent of this amount to off-set the credit side of the balance sheet and hence resorted to addition under section 111(1)(B) of the Ordinance, 2001. Against this treatment the appellant filed first appeal before the learned CIR(A) which has also been dismissed. Hence this appeal before this Tribunal. 3. The Learned Counsel representing the appellant on the facts of the case has contended that in the present case, action under section 111 of the Ordinance has been taken merely on presumption and without giving due consideration to the fact of the case. As a matter of fact, the impugned order shows that the DCIR has not considered the case records of the appellant. According to learned counsel he has also not given sufficient opportunity of being heard. He has contended that such action is not only violative of the principles of natural justice but it is also against the dispensation of justice. He has argued that a huge addition has been made Under section 111 without any definite information and by ignoring the evidence available on record which action shows the arbitrariness and mala fide on the part of the DC1R. It is submitted that in respect of the amount on account of which addition under section 111 has been made was not an investment rather different intervals of time during the tax year under appeal. As such, the action of the DCIR with regard to treating the repayment of loan as investment is totally illegal and void. It is contended that the DCIR cannot in law make addition under section 111 by misconstruing the nature of payment made by the appellant through normal banking channel as an unexplained investmentmerely on the basis of his assumptions. It is argued that the scheme of the law also shows that no addition under section 111 in the facts and circumstances of the 'present case can be made for the reasons that in terms of section 111, the alleged unexplained amount has not been treated as income by the statute itself unlike the provisions of section 13 of the repealed Ordinance where such unexplained nature of transaction was firstly deemed to be income and thereafter to be added under section 13 referred above. It is submitted that under the scheme as contained in the Ordinance, where ever the legislature wanted to treat an item which was not actually an income, the legislature has firstly treated such item as income and thereafter it has been made chargeable to tax. Reference in this regard can be made to section 39(3) of the Ordinance where the amount received as a loan, advance, deposit or gift by a person other than through cross cheque drawn on a bank or through banking channel has been treated as income chargeable to tax. It should be noted that, such treatment has not been provided in section 111 of the Ordinance. In this connection the well-established principle of law has been referred that if the words of a taxing statute fails, then so must the tax. In a taxing statute, one can only look at the language, since there is no room for intendment. The same rule of taxation i,e, a person sought to be taxed can only be taxed when he comes within the letter of law is squarely applicable. The Hon'ble Supreme Court of Pakistan in the case of Sohail Jute Mills Ltd. v. Federation of Pakistan reported as PLD 1991 SC 329 at page 341 has approved the above dictum of England Judge Rowlatt J in Cape Brandy's case. The relevant findings read as under:-- The language, the context, and the impact of the various statutory provisions and instruments is clear enough and where it is so, the principle, laid down by Lord Cairns in Charles James Portington v. The Attorney-General(1869) L.R Vol. IV, H.L 100) in the following words gets attracted:- As I understand the principle of all fiscal legislation, it is this If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the crown seeking to recover the tax, cannot bring the
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subject within the letter of the law, the subject is free, however, apparently within the spirit of the law the case might otherwise appear to be. In other words if, there be admissible, in any statue, what is called on equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute." It is also a well-established principle of law that when there is substantial doubt created by the language of law, same is to be resolved in favour of the taxpayer. Reference in this respect is made to the case of Messrs Mehran Associates v. CIT reported as 1993 SCM R 274 = 1993 PTD 69. 4. According to the learned counsel in view of the above discussed legal position, it is seen that in the instant case, the DCIR has made the additions by taking recourse to the provisions of section 111(1)(b) on the basis of material/ information which was provided by the appellant itself during the course of audit proceedings relating to tax year 2007 without appreciating the facts of the case. Thus, the 'impugned order having being passed without any definite information is not sustainable in the eye of law. The DCIR was not justified in assuming jurisdiction for passing the impugned order under section 122(5) of the Ordinance, which exclusively rests with the Commissioner. It is contended that the return of income filed by the appellant is treated as deemed order passed by the CIR in terms of section 120(1) of the Ordinance. Accordingly, the DCIR being a subordinate officer cannot amend the order passed by the CIR. In support of the above contention reliance is placed on the judgment of the learned Income Tax Appellate Tribunal in I.T.A No,370/LB/09 (Tax year 2008) whereby the learned Tribunal while discussing the legality of the amendment of order under section 122(5A) has observed as under:-- "In terms of Article 189 of the Constitution, it is imperative for us to follow the above decision of the Supreme Court. The department in PTR 540/2007 posed a specific question of law (reproduced above) and its answer was given against it and in favor of the taxpayers by the High Court. On further appeal before the Supreme Court the Department did not succeed; hence the issue has attained finality. It is incontrovertible fact in this case, admitted by the Department as well, that original order under section 120(1) was passed by the Commissioner therefore, the Additional Commissioner could not exercise powers under section 122(5A). We, thus, hold the order unlawful on this point alone. Since we have adjudged the order unlawful and proceedings under section 122(5A) coram non judice, the adjudication of the case on merit is not required. Resultantly, we vacate the order passed under section 122(5A) for tax year 2008" Though in the above case, the invocation of the provisions of section 122(5A) was involved yet since the principle is same i,e, an order passed by the CIR cannot be amended by his subordinate officer, the view adopted in the above judgment is also applicable to the instant case. Since the DCIR has amended the deemed assessm ent under section 120 which is treated to be an order passed by the CIR, the same is not sustainable under the law. It is argued that the DCIR was not justified in initiating amended assessm ent proceedings under section 122(5) of the Ordinance thereby making an addition under section 111(1)(b) of the ordinance, for alleged non-recording of certain payments made to Mr, Dawood Jan Muhammad in its books of accounts without taking the cognizance of the fact that his predecessor has already closed the audit proceedings during the tax year under appeal after seeking details, documents and explanation in 'respect of certain issues (including verification of inflow and outflow of cash vis-a-vis nature of transactions raised by the then Commissioner. This fact can be duly verified from the copy of composite audit report dated 30th June, 2009 issued by the predecessor of the DCIR in respect of tax year 2008. The Learned A.R. Has pointed that from page 15 para 2 of the enclosed audit report it is clear that that the then DCIR while carrying out audit proceedings in respect of tax year 2008, has also carried out desk audit in respect of tax years 2006 and 2007 (under appeal) wherein he has duly discussed the sources of investment made by the appellant during the year and after seeking complete details
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and documentary evidences including bank statements, details of trade creditors and debtors, agreement of bank financing, details of capital gain etc., closed the audit proceedings for the above tax years. As such, initiation of amended proceedings at later stage on the basis of same material which the appellant has himself provided, tantamount to re-appraisal of the facts and change of opinion, which is unwarranted under the law. In support of his above contention learned A.R has placed reliance on the following reported judges decided by the appellate courts:-- 1990 PTD 389 (H.C) 2003 PTD 1068 (Trib.) 2004 PTD 1010 (Trib.) 2004 PTD 2749 (Trib.) In these cases while dealing with the issue of reopening of an assessment under section 65 of the repealed Ordinance which is para materia to the provisions of section 122(5) of the Ordinance has unanimously laid down the principle that where all the facts have been fully disclosed by the assessee which have been duly considered by the income tax authorities and assessment has been framed consciously and no new fact has been discovered, the assessment could not be reopened at later stage merely for the reasons of change of opinion, It is contended that in the instant case the appellant has duly provided the relevant material with regard to investment during the, course of desk audit proceedings to the predecessor of the DCIR This fact can be duly verified from the page 17 of the composite audit report issued by the DCIR wherein while concluding the audit proceedings, he has observed as under:- "The audit, thus; was conducted in detail and all practical and possible efforts were made for the verification of tax affairs of the tax payer. The findings are according recorded against each "Risk Areas" involved in this case. The necessary evidences, documents and explanation that were furnished during audit were duly retained and placed on file. But certain books of accounts being voluminous and in original were retained to the counsel of the taxpayer after verification. On the basis of audit whatever issues pope up were duly confronted to the taxpayer and explanation obtained. In view of the evidences produced duly audit, the audit proceedings are hereby finalized without any adverse finding accept on the issue of claim of expenses against it interest income on margin finance deemed assessment requires to be amended in terms of section 122(4)(5) of the Ordinance." According to the learned A.R. From the above observations of the then DCIR, it is evident that desk audit proceedings in respect of the tax year under appeal were concluded after obtaining documentary evidences and apprising the tax affairs of the appellant. As such, amending the assessm ent at a later stage on the alleged ground of making unexplained investment is unjustified and unwarranted under the law. He has argued that the DCIR has erred in initiating amended assessm ent proceedings during the tax year under appeal without having valid jurisdiction for the reason that desk audit proceedings in the instant case were concluded during the above tax year with prior approval of the Additional Commissioner (AC) who remained involved throughout the audit proceedings. In this respect he has referred to Page No,11 para 2 of the audit report wherein the predecessor of the DCIR has observed as under:-- "The desk audit reports for Tax years 2006 and 2007 were also submitted to the Commissioner of Income Tax Audit Division I, RTO, Karachi through Additional Commissioner-A for selection of the case for Audit under section 177 of the Ordinance, However, these two reports were returned unselected from office of the CIT, Audit Davison-I, RTO, Karachi vide Letter No,4043 dated 13-5-2009 with the direction to take up these two years tax years 2006 and 2007 after conclusion of audit tax year 2008 or otherwise take action under section 122(5A) of the Ordinance, if warranted. Therefore, to take up to this year also for verification of taxpayer's affairs involving similar issues as have been discussed above for tax year 2008, during the audit proceeding tax payer was also required to explain the risk areas for tax years 2006 and 2007."
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He is of the view that from the above observation of the then DCIR it is evident that the then DCIR has conducted composite audit proceedings, in respect of tax years 2006, 2007 and 2008 on the instructions of the then CIT. It is argued that during all the above tax years the then DCIR mainly focused on the sources of investment made by the appellant (as instructed by the CIT) and after making verification of sources of investment he did not draw any adverse inference with regard to the investment made by the appellant and closed the audit proceedings in respect of tax years 2006 and 2007 respectively with prior approval of the then Additional Commissioner vide Letter No, 'V Unit-I/Audit Div-I/RTO/2008-2009/dated 30th June 2009. He has argued that since, the audit proceedings in the instant case were closed with prior approval of the AC, hence under the law DCIR being a subordinate officer to AC cannot review the same issues from his own spectacle which have already been adjudicated upon by his supervising officer. In support of the above contention he has referred C.B.R. Circulars Nos.9 of 1988 and 15 of 1980 whereby it was directed that where the assessm ent proceedings are finalized with the approval of AC, that can only be reopened by the concerned Commissioner of Income Tax. In the instant case while passing the amended assessm ent order the DCIR has completely surpassed his jurisdiction, which warranted under the law. The learned counsel of the appellant has contended that while making the addition under section (111)(1)(b) of the Ordinance, the DCIR has misdirected himself by attempting to cross match the payment made by the appellant from the customer ledger account which was pacifically meant for keeping track records of transaction of shares of listed securities. It is contended that the DCIR has misconstrued the nature of payment of Rs,577,500,000 made by the appellant to its director i,e, Mr. Dawood Jan Muhammad as an investment without any basis and even without appreciating the facts of the case. It is submitted that Mr. Jan Muhammad besides being the director of the company has also been a customer of the appellant Company and therefore, was maintaining customer account with the appellant to carry out his proprietary transactions of shares of listed companies. According to the learned A.R the customer account which Mr. Jan Muhammad maintains with the appellant Company is exclusively meant for or keeping track records of his transactions of shares of listed securities, whereas the impugned payment of Rs,575,500,000 represents repayment of loans which Mr. Jan Muhammad has advanced to the appellant through normal banking channels during the tax year under appeal to meet the paucity of funds for meeting day to day routine expenses and to minimize the burden of financial shares. It is contended that for the purpose of keeping track record of such loan and advances, the appellant maintained separate ledger account of director loans/advances. He has contended that each and every transaction of loan/advances which the appellant obtained from Mr. Jan Muhammad and at the end of financial year i,e, 30th June, 2007 the appellant company has repaid all the loans/advances aggregating to Rs,575,500,000 to Mr. Jan Muhammad and no amount was payable by the appellant on this count conversely. Mr. Jan Muhammad has also not shown any amount to be receivable from the appellant in his books, on account of loan and advances. The learned counsel has contended that above facts were duly explained to the DCIR during the course of audit proceedings of Mr. Jan Muhammad relating to tax year 2007 whose individual case was picked up by the Commissioner Inland Revenue Audit. However, the. DCIR did not consider the above explanation despite the fact that all the transactions of advancement of loans/ advances and repayment of the same were made through normal banking channel. As such, there was no occasion for the, DCIR to cost any doubt about the nature of the above transaction and made addition under section 111(1)(b) of the Ordinance, on this score. It is contended that the DCIR has wrongly made the addition under section 111(1)(b) of the Ordinance without appreciating the fact that in the instant case neither the appellant has shown any receivable from Mr. Jan Muhammad nor he has shown any amount payable to the appellant on account of loans/ advances and the provisions of section (111)(1)(b) come into play where a
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taxpayer has shown any amount or investment in respect of which he has no explanation. Whereas according to learned counsel in the instant case the DCIR has made the, impugned addition without pointing out any specific amount which he found unrecorded in the books of accounts of the appellant. 5. None has appeared on behalf of the department. However on the last date of hearing i,e, 25-1- 2011 Mr. Muhammad Hanif Shaikh and Sajidullah Siddiqui representing the department have argued the matter at length supporting the impugned orders of the Officers below. It is contended that the Taxation Officer has acquired the information from Messrs Muslim Commercial Bank Limited, Karachi maintained by the appellant. The appellant has issued 10 cheques of various amounts to one of its Director Mr. Dawood Jan Muhammad. The Taxation Officer after examining the above bank statement arrived at the conclusion that out of ten cheques issued to its Director, six cheques containing an aggregate payment of Rs,577.500(M) were not recorded in the ledger account of the above appellant, and therefore he has drawn the inference that the appellant has under reported the debit side of the balance sheet to the extent of the above referred amount to off-set the credit side of the balance sheet and hence he resorted to addition under section 111(1) (b) of Income Tax Ordinance 2001. On behalf of the department it is contended that the Taxation Officer noticed from the perusal of record that Director of the appellant Company Mr. Dawood Jan Muhammad had provided copy of his ledger account maintained with DJM Securities (Pvt.) Ltd., showing debit…
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