Taxhelpline Case No. 2017/133 APPELLATE TRIBUNAL INLAND REVENUE I.T.A. No. 469/IB of 2013, 28/07/2016 PRESENT: MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER QAISER PERVAIZ VS COMMISSIONER INLAND REVENUE, R.T.O., RAWALPINDI APPELLANT BY: CH. NAEEM UL HAQ THIS ORDER PASSED BY: MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER:--This appeal has been filed by the taxpayer against the impugned Order No, 112/2012 dated 12.12.2012 passed by the learned Commissioner Inland Revenue (Appeals-III), Islamabad. The Appellant/Taxpayer has agitated the grounds of appeal as put-forth iii the memo of appeal. 2. Brief facts of the case as transpired from the record are that the case of the taxpayer, an individual, derives income from sale of Medicines on wholesale basis. Return for Tax Year 2010 was filed declaring income (Net Profit Rs,1,75,000/-). The case was selected for audit under section 177(4) of the Income Tax Ordinance, 2001 for the Tax Year 2003, sales were declared at Rs,9,666,000/- and net profit at Rs, 140,000/-, while passing ex parte order under section 122(1) read with section 122(5) of Income Tax Ordinance, 2001, DCIR made A additions in trading account rejecting 25% (Rs, 35,16,250/-) claim of purchases of Rs, 14,065,000/-. The DCIR further disallowed 50% of claim of rest of Profit and Loss expenses. Being aggrieved from the order of the DCIR, the Taxpayer filed appeal before the CIR (A), who vide order mentioned supra, maintained the disallowance of 25% of the trading account expenses while deleted the 50% disallowance made by the DCIR out of the P&L expenses. Hence, the instant appeal before this forum. 3. On the date of hearing, Mr. Naeem-ul-Haq, Advocate appeared on behalf of the taxpayer/appellant while the Department was represented by Mr. Muhammad Jawad, DR. 4. During the preceding before this Court, learned AR of the taxpayer/appellant assailed the impugned order on the basis of the following arguments: The learned Deputy Commissioner has erred in and miss-directed himself under the

facts/law and circumstances of the case by invoking section 122(5) of the Income Tax Ordinance, 2001. 'There was no definite information available such Taxation Officer nor obtained from any other source as such action under section 122(5) is not sustainable so the order is illegal. 'The learned DCIT was not justified to disallow 25% purchases to the Taxpayer when the revenue has accepted the entire Sales of the appellant, therefore, entire action of the Taxation Officer is contradictory as he has accepted the sales which fact itself testifies that there were purchases which turned into sales. If there were no purchases, where from sates came. 'If trading account is re-tasted after rejecting purchases, the G.P rate will go as high as 50% which in this line of business is just impossible. Hence, the disallowance is illegal all the expenses claimed relate to business activities are fully allowable under section 20 so the disallowance is baseless and is against the provisions of Ordinance. 'The Learned Taxation Officer is not justified to disallow the Profit and Loss expenses, same is against the judgment of Humble ITAT. 'The selection of case for Audit by the Commissioner is illegal and without jurisdiction as after amendment through Finance Act, 2010 in section 177(1) and insertion of section 214C in the Income Tax Ordinance, 2001, the commissioner can only start audit proceedings when the Federal Board of Revenue, will select the case for audit as empowered through section 214C. 5. On the other hand, learned DR vehemently opposed the contentions made by the learned AR. He strongly supported the orders passed by both the officers below. Accordingly, he prayed that the order of the learned CIR(A) may be confirmed. 6. The parties have been heard and the case records perused. From perusal of the impugned order of the DCIR, it is found that he had passed an ex parte order under section 122(1) read with section 122(5) and made 25% lump-sum addition out of Trading Account without evolving any basis, method and mode. It is the basic canon of accounting that sales are made through purchases made, if the sales are verifiable then how purchases can be termed as unverifiable. It is also an admitted fact that the assessing officer has not interfered with the sales, hence, principally he had accepted the sales therefore terming the purchases as disallowance @ 25% by the assessing officer is unjust and improper. It appears that assessing officer is not well cognizant with basic generally accepted accounting principles. 7. Further section 122(5) was invoked by the OIR which speaks about "definite information". However, it is not ascertained as to what was the definite information that

was available with the OIR. The term "Definite Information" has elaborately been discussed in the judgment reported as 2013 PTD 884, the relevant extracts of which are reproduced as under: "The honorable Lahore High Court, Lahore in the case law reported as CIR v. Messrs Khan CNG and Filling Station 2013 PTD 884 has explained the scope of the term "definite information" with special reference to section 122(5) in the following words: "12. The term "definite information" in Section 122(5) of the Ordinance is not just any information but definite enough to satisfy the concerned officer that income chargeable to tax of an assessed has escaped assessment or total income of an assessed has been underassessed, etc. "Definite" means indisputable, known for certain, explicitly precise, clearly defined, leaving nothing to implication, established beyond doubt and cut and dried. Definite information is, therefore, that select information which falls within the restrictive meaning of the word "definite" explained above. The law also provides that definite information must be acquired from audit or otherwise. Applying the interpretative tool/doctrine of judder generis which literally means "of the same kind or class" and the doctrine provides that where general words follow an enumeration of two or more things, they apply only to persons or things of the same general kind or class specifically mentioned the word "otherwise" appearing next to the word "audit" in section 122(5) of the Ordinance on the basis of above doctrine means a methodology akin or similar to audit where some determined, final, certain, indisputable, calculated information is picked up from any available record of the assesse. "Otherwise", therefore, does not mean putting information through further process of calculation by the department. The word "acquired" used in section 122(5) of the Ordinance which literally means to "gain possession of" in the present context connotes that the information already exits and has to be picked up from the records or documents. This acquisition provides no margin for incomplete, imprecise and inexact information to be completed through further calculation or processing as that would not be acquiring information but analyzing it. 13. Reading of Section 122(5) of the Ordinance, / therefore, shows that information in a definite, final and conclusive form must already exist in some document or record at the time of acquisition. Any information which is incomplete or requires further processing falls outside the domain of definite information and can best pass for a departmental opinion, judgment, guesstimate, approximation or estimate. 14. In the present case the department itself completed the information by working out the total sales by applying the OGRA Formula, which requires feeding of different variables and then arriving at a figure of total sales made by the assesse. This does not constitute "definite information" acquired through audit or otherwise but more so a departmental opinion evolved on the basis of a self-styled formula. Reliance with advantage is placed on Messrs.' E.F. U. General Insurance Co. Limited v. The Federation of Pakistan and others ".PLD 1997 SC 700 = 1997 PTD 1693 Income Tax Officer and

another v. Messrs.' Chappal Builders (1993 SCMR 1108), Inspecting Assistant Commissioner and Chairman Panel 20 Companies and another v. Pakistan Herald Ltd. Through Director, Finance and Corporate Affairs (1997 SCMR 1256), Messrs.' Citibank N.A.Through Resident Vice President v. Commissioner of Income Tax (2007 PTD 1560), A.N. Lakshman Shenoy v. The Income Tax Officer, Ernakulam and another (AIR 1958 SC 795), Messrs.' Central Insurance Co. And others v.The Central Board of Revenue, Islamabad and others (1993 SCMR 1232), Messrs.' Pakistan Educational Society v. The Government of Pakistan through Chairman and Secretary, Revenue Division, Islamabad and 2 others (1993 PTD 804), Republic Motors Ltd. v. Income Tax Officer and others (1990 PTD 889), Philips Electrical Company of Pakistan (Pvt.) Limited v. Income Tax Officer, Companies Circle B3, Karachi and another (1990 PTD 389) and Abdul Hamid and others v. Deputy Collector, Excise and Taxation/Income-Tax Officer and CIT and others (1988 PTD 324) in support of the above contentions". 8. It is, therefore, hereby held that it is a trite law that the provisions of subsection (5) of section 122 of the Income Tax Ordinance, 2001 allows amendment of any assessment only when the department is in possession of definite information and not otherwise, and in this context the DCIR was under legal obligation to specifically identify the nature of suppressed income and issue also notice with specification in which terms notice issued and under which clauses (i), (ii) and (iii) of subsection (5) of section 122 of the Income Tax Ordinance, 2001 highlighting the fact under which category appellant's case falls. None issuance of such notice clearly meant that while passing the amended assessment order DCIR was not in possession of definite information and the reason assigned for additions/disallowances while passing the amended assessment order, cannot be termed as definite information. Thus, the law has rendered the entire proceedings void a initio, and illegal. Even otherwise the simple issuance of notice under section 122(9) just after conducting audit of the taxpayer and prior to 'confrontation audit report/objection/charge sheet for obtaining rebuttal/Explanation by the taxpayer was not enough to further proceed in the matter for amending under section 122 already completed under law. Before making any additions and disallowances to the assessed income under the garb of audit under section 177 and amended assessment under sections 122(1)/122(5). The tax department is required to acquire legal jurisdiction under the provisions of section 122(5). This can only be done to modify or alteration or amend the already assessed income only by establishing that taxpayer's income is either under assessed or assessed at too low rate or subject to excessive relief or refund and to be on definite information. However, we also find that there is no specific finding in terms of "definite information. The IR Department has to qualify through audit that the deemed assessment is under assessed or as the case may be in terms of Section 122(5) [subject to definite information]. The requirement of section 122(5), are to be strictly fulfilled in letter and spirit. This view is further fortified by the judgment authored by me and reported as [2015 PTD (Trib.) 1242]. The relevant extracts of which are reproduced hereunder for the benefit of all of sundry:-

"36. We are of the considered opinion that Section 177 does not in itself provide any power to modify assessment or re-determine the income of taxpayer. In this regard the key point which is to be kept in mind is that it is not a return of income which is being processed by the CIR/DCIR/OIR, doing audit. He is dealing with a 'deemed assessment' which by process of law has acquired a sanctity. The finalized assessment, therefore, cannot just be modified or disturbed in continuation of the proceedings of audit under section 177. 37. The selection of audit or even conducting of audit does not mean or include an assessment or amended assessment/alteration or modification of assessment. The selection of audit and thereafter conducting of audit proceeding is just process and audit authority before invoking provision of 'section 122 for amendment have to frame charge sheet/audit observation/audit qualification/audit report and the same ought to be communicated to the taxpayer for rebuttal and the explanation/reply/assertion/ contention/objections of taxpayer must be obtained and considered before proceeding for invoking Section 122. Then after acquiring jurisdiction and fulfilling all the requirements of subsections (1) and (5) of Section 122. Only thereafter assessment may be amended under section 122. The mere issuance of notice under section 122(9) read with section 122(1) after "selection and conducting audit of the taxpayer is not complete requirement of law. Department first has to reject the objection/rebuttal of taxpayer on audit report then require to acquire jurisdiction under sections 122(1) and then 122(5). However this having not been done so. We may conclude this Issue that the CIR/OIR after selection and conducting audit ought in every case to be able to give the taxpayer all the objection/issues raised in audit against taxpayer such as to enable him to answer/explain them before invoking provisions of section 122 and after obtaining and considering explanation of taxpayer on audit objection even if the CIR/OIR may consider necessary. The CIR/DCIR/OIR, may amend the assessment under sections 122(1), (4)/(5) after fulfilling all requirement of law subject to definite information and fulfillment of further condition of clause (i), (ii) or (iii) of subsection (5) of Section 122. 38. Adverting to the other aspect of the impugned order passed by the officers below that no definite information was found to have been available with the DCIR within the meaning of section 122 (5) read with section 122(8) of the Income Tax Ordinance, 2001. The Hummable Lahore High Court in its recent decision 2013 PTD 884 (H.C. Lhr) on the subject of "definite information" with reference to section 122(5) of the Income Tax Ordinance, 2001. [quoted Supra].. 38. We may also rely on the judgment reported as 2007 PTD (Trib.) 2601. The relevant extract of which is reproduced as under: "15. In most of the cases the Courts try to implement the provisions of law and avoid declaring it as redundant. It is obviously under the spirit that laws are always made for implementation and not to just remain as part of the statute without being of any benefit

to the public at large. However, this Tribunal has in many cases not allowed issuance of notices in slipshod manner without indicating the actual reason of issuance thereof. The Humble Lahore High Court has even gone to hold that issuance of a notice under section 65 without indicating the reason of issuance of notice in terms of subsections (1), (2 or (3) or (a), (b) or (c) of the said section to be as illegal. L this case notice under section 62 is stately issued which provisions does not exist in the scheme of new law. There is I provision under the title "amendment of assessment" and tin same is 122(1) and all other provisions are subject to the suit section 122. In the earlier part of our discussion we have already held that section 122(1) is the mother provisions what all other subsections are helping and the same determine that fitness of the amendment of the assessment to be made under section 122(1). The Assessing Officer in this case has not eve, bothered to mention the subsection in its notice. Hence even one is confident that section 122 could be enough for acquiring jurisdiction, non-mentioning of the other provision in ten'. Of subsection (5) of subsection (5A) is fatal as the parade each of the said provisions are entirely different from the other. Besides, erroneousness of the assessment for determining prejudice to the interest of revenue in a deemed assessment order shall also need a good deal of dilation and discussion There are certain more questions which would require answer fit a case like this. The Assessing Officer has proceeded to make the assessment under section 120. The provision of section 122 which has been titled as assessments and as a sub-title's an amendment of assessment, provides full authority for making an assessment. These provisions in fact are pair mater ia to the assessments under section 62 as well as 63 in addition to 65 an 66(A) etc. Section 120 does not come into picture for amendment of an assessment. Its application is only up to the deemed assessment order and has no extension beyond the Saia language. 16 The upshot of the above discussion therefore is obvious. The jurisdiction in this case could only be acquired by the Taxation Officer after receiving of information from the audit department by issuance of an notice under section 122(5). Since said notice have not properly been issued for acquiring jurisdiction over this case, one cannot agree with the department that the subsequent proceedings are justified". 40. We may further take support from the judgment of Appellate Tribunal vide order 2013 PTD 1083, 2013 PTD (Trib.) 1335 in the light of various cases decided by the Humble Supreme Court on the subject of "Definite Information" has held as under:"We are persuaded to agree with the arguments of learned Ali that pre-requisite for invoking section 122(5) of the Ordinance was definite information with regard to escapement or under assessment of income or assessment at too low a rate or subjection of excessive relief or refund. Further, the definite information must have come in the possession of Department after completion of assessment this dictum is elaborated in detail by the honorable Supreme Court in CIT v. Eli Lilly Pakistan (Pvt.) Ltd. 2009 SCMR 1279 = 2009 PTD 1392 and Central Insurance Co. And others v. CBR, Islamabad and others 1993 SCMR 1232 = 1993 PTD 766. We are also in agreement with the

arguments of learned AR that in the presence of favorable judgments of higher courts on the issue the department could not invoke section 122(5) as mere disagreement with the decisions of higher courts did not constitute definite information. The honorable Lahore High Court in Sitix Spinning Mills Ltd. v. Commissioner of Income Tax 2003 PTD 808 disapproved reopening of a completed assessment for want of definite information. Moreover, mere disagreement over legal interpretation of section 67 and estimation of life of computer software was not definite information as wrongly assumed by the Department. We therefore decide the appeal for this year in favor of taxpayer by declaring invoking of section 122(5) of above issues as unlawful" 41. We, therefore, hereby hold that it is a trite law that the provisions of subsection (5) of section 122 of the Income Tax Ordinance, 2001 allows amendment of any assessment only when the department is in possession of definite information and not otherwise, and in this context the DCIR was under legal obligation to specifically identify the nature of suppressed income and issue notice in terms of clauses (i), (ii) and (iii) of subsection (5) of section 122 of the Income Tax Ordinance, 2001 highlighting the fact under which category appellant's case falls. None issuance of such notice clearly meant that while passing the amended assessment order DCIR' was not in possession of definite information and the reason assigned for additions/ disallowances while passing the amended assessment order, cannot be termed as definite information. Thus, the law has rendered the entire proceedings void a initio, and illegal. Even otherwise the simple issuance of notice under section 122(9) just after conducting audit of the taxpayer and prior to confrontation audit report/objection/charge sheet for obtaining rebuttal/ Explanation by the taxpayer was not enough to further proceed in the matter for amending under section 122 already completed under law. Before making any additions and disallowances to the assessed income under the garb of audit under section 177 and amended assessment under sections 122(1)/122(5). The tax department is required to acquire legal jurisdiction under the provisions of section 122(5). This can only be done to modify or alteration or amend the already assessed income only by establishing that taxpayer's income is either under assessed or assessed at too low rate or subject to excessive relief or refund and to be based on definite information. However, we also find that there is no specific finding in terms of "definite information". It appears that there was no grave error in deemed assessment. The IR Department has to qualify through audit that the deemed assessment is under assessed or as the case may be in terms of 'section 122(5) [subject to definite information]. The requirement of section 122(5), is to be strictly fulfilled in letter and spirit. The initiation of assessment proceeding through notices under sections 177 and 122(9) is legally not justified and order is passed in consequence thereof being unlawful are not sustainable and a-initio void. Unless any definite information acquired in the possession of the DCIR/OIR as a result/finding of audit conducted by the CIR under section 177 and the OIR/CIR is satisfied that on the basis of "Definite information" and not on the basis of "Miss-information" or "Doubtful information" that these further three pre-requisite requirement to be stretched in

pursuance to definite information but these are not cumulative or to be established together: (i) Any income chargeable to tax has escaped; or (ii) Total income has been under-assessed, or assessed at too low rate, or has been the subject of excessive relief or refund; Or (iii) Any amount under a head of income has been misclassified. 9. In view of the above elaborate discussion the lump-sum disallowance in purchases and profit and Loss Expenses is not tenable and the orders of the officers below in consequence thereof being unlawful hence not tenable being a initio void. 10. In the circumstances supra, we disapprove making the addition on percentage basis @ 25% in the trading account expenses and the same is directed to be deleted. 11. Consequently the appeal of the taxpayer is hereby allowed.

Note: The reader must study original text or certified true copy of the case/judgment or visit official website of the courts. However citations are as follow 2017 PTD 506

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