2010 PTD 2140
ORDER
MUHAMMAD SAEED (ACCOUNTANT MEMBER).--- Being aggrieved and dissatisfied with the order passed by the Commissioner Inland Revenue (Appeals-II). Karachi dated, 26-12-2009, the Appellant/taxpayer Tokai Industries (Pvt.) Ltd., filed this appeal on the following grounds:
"...(2) That the learned Commissioner Inland Revenue (Appeals) has erred in confirming the action of the Assessing Officer under section 121 of the Income Tax Ordinance, 2001.
(3) That the learned Commissioner (Appeals) has erred in not taking cognizance of the fact that relevant subsection/clauses of section 121 have not been confronted to the appellant in the notice under section 121 of the Ordinance.
(4) That the learned Commissioner (Appeals) has erred in treating the order under section 121 as the "best judgment assessment."
(5) That the learned Commissioner Inland Revenue (Appeals) has erred in confirming the action of the Assessing Officer regarding estimation of sales, application of GP rate and profit & loss add back in a case where entire imports and exports have been treated under PTR.
(6) That without prejudice to the above the learned Commissioner Inland Revenue (Appeals) has erred in treating the imports of Rs.19,424,217 as commercial imports covered under PTR.
(7) That the learned Commissioner Inland Revenue (Appeals) has erred in ignoring various factors which go on to show that the appellant was a manufacturer such as purchase of packing material expenses on fuel power, oil and gas, electricity, water charges, depreciation and details of assets/plant and machinery as per depreciation schedule.
(8) That without prejudice to above learned Commissioner Inland Revenue (Appeals) has erred in confirming the estimate of local sales; application of GP rate and various add backs out of P&L account which are harsh, excessive, unreasonable, against the facts and history of the case."
2. Brief facts of the case are that the appellant/taxpayer is a private limited company deriving income from manufacturing of electrical and household appliances. The return for the year under consideration was filed by the taxpayer declaring loss at Rs.304,282. Subsequently, the case was selected for audit of income tax affairs under section 177(4)(d) of the Income Tax Ordinance, 2001 by the Commissioner of Income Tax Companies Zone-I. Karachi. Resultantly, Taxation Officer estimated the local sales enhanced GP rate and also treated raw material as a commercial import as well as made disallowances out of P&L expenses. Appellant/taxpayer being aggrieved with the order of the Taxation Officer filed appeal before the First Appellate Authority who vide impugned order confirmed the action of the Taxation Officer. Appellant/ taxpayer dissatisfied with the treatment meted out by the Commissioner Inland Revenue (Appeals), preferred appeal before this Tribunal.
3. Syed Riazuddin, Advocate learned counsel for the appellant/ taxpayer argued that the learned Commissioner Inland Revenue (Appeals) has erred in confirming the action of the Assessing Officer under section 121 of the income Tax Ordinance, 2001. The learned Commissioner (Appeals) has erred in not taking cognizance of the legal, infirmity that even relevant subsection/clauses of section 121 have not been confronted to the appellant in the notice under section 121 of the Income Tax Ordinance. He further argued that the learned Commissioner Inland Revenue (Appeals) has erred in confirming action of the Assessing Officer regarding estimation of sales application of GP rate and profit and loss add backs. The learned AR, relying various decisions of this Tribunal such as [(2010) 101 Tax 153 (Trib.)], 2010 PTD 1067, 2004 PTD 1052 and 2010 PTD 30, has vehemently contended that in a case where the taxpayer has filed a valid return and Income Tax affairs of .this taxpayer have been selected for audit under section 177 on the basis of such return assessment under section 121(1)(d) cannot possibly be framed. He has further contended that in the Income Tax Ordinance, 2001 there is no provision of law under which the Assessing Officer could enhance the declared GP rate or estimate the declared sales. The learned AR has referred to the provision of section 174(2) of the Income Tax Ordinance, 2001 and argued that this section authorizes the Taxation Officer to simply disallow or reduce claim of an expense or deduction but does not authorize him to estimate the sale or enhance the declared GP rate. Therefore, Assessing Officer's action to estimate the sale and apply GP rate in the appellant's case is without lawful authority and not sustainable in the eyes of law. Regarding add-backs/disallowances out of profit and loss account expenses it has been argued by the learned AR that the disallowances are not only unjustified, excessive and made by using stock phrases but 'also no provision of law has been quoted by the Assessing Officer under which disallowance have been made by him. Action of the Assessing Officer is unlawful on this score too. The learned AR vehemently argued that the learned Commissioner Inland Revenue (Appeals) was not justified in confirming the above actions of the Taxation Officer which are in gross violation of relevant provisions of law and in contravention of the authoritative judgments of the superior appellate fora relied upon by him. He argued that the learned Commissioner Inland Revenue (Appeals) has erred in ignoring various factors which go on to show that the appellant was a manufacturer such as purchase of packing material, expenses on fuel, power, oil and gas electricity, water charges, depreciation and details of assets/plant and machinery as per depreciation schedule.
4. On the other hand Mr. Gohar Ali DR learned representative of the department supported the order of Commissioner Inland Revenue (Appeals) Karachi.
5. I have heard representatives of both the parties and perused the record including impugned order, as well as assessment order, and the case law cited by the learned AR.
6. The findings of the Commissioner Inland Revenue (Appeals) in his impugned order regarding the single ground taken before him by the appellant are as follows:--
"The learned AR of the appellant in the aforesaid written arguments has not assailed the action under section 121(1)(d) of the Income Tax Ordinance, 2001 taken by the Taxation Officer which is hereby maintained."
7. It has been observed that in appeal before the learned Commissioner (Appeals) the taxpayer had taken only one ground that the Assessing Officer erred in passing the order under section 121. However, learned Commissioner did not consider for the reason that the AR did not press it in his written arguments. It has been rightly pointed out' by the learned AR that grounds of appeal are the statutory requirement written arguments are not. The learned Commissioner appeals was under obligation to decide the appeal on the basis of ground taken before him irrespective of what has been stated in the written arguments. I have further found force in the arguments of learned AR that so far as this Tribunal is concerned the matter of finalizing assessment under section 121(1)(d) in a case where a valid return is available, stand settled now. The learned Larger Bench headed by the then Chairman in its decision reported as [(2010) 101 Tax 153(Trib.)] has been pleased to hold as under:--
"In the case where return furnished only situation in which Assessing Officer could proceed to frame the assessment under the provisions of subsection (1) of section 121 is whereafter selection of case under the provisions of section 177 during the audit proceedings it is discovered by him that return filed by the taxpayer did not fulfil the requirements by subsection (2) of section 114 of the Ordinance and the Assessing Officer declares it as an invalid return under subsection (4) of section 120 of the Ordinance 2001. However, this obviously could not be done after the end of the financial year in which return furnished in view of the provisions of subsection (6) of section 120 of the Ordinance according to which no notice under subsection (3) of section 120 could be issued after the prescribed limitation period as mentioned above. The action of the Assessing Officer for framing of a new assessment by invoking the provisions of clause (d) or subsection (1) of section 121 without first declaring the return invalid is thus legally not sustainable because of already existence of a valid order deemed to have been passed under section 120 of the Ordinance."
8. Perusal of other judgments relied upon by the learned AR in support of his contention further shows that similar findings have been given by the other Benches of this Tribunal on this issue.
9. In view of foregoing and in respectful agreement with the findings of learned brothers in the cited cases, I do not find orders of both the authorities below sustainable in the eyes of law. Accordingly both the orders are vacated and appeal of the taxpayer is accepted.
The appeal succeeds as above.
H.B.T./145/Tax(Trib.) Appeal accepted.