2010 PTD 2602

Citation2010 PTD 2602

CourtINLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN

ORDER

KHALID WAHEED AHMED (CHAIRPERSON).--- The above titled departmental appeals are directed against the combined order dated 24-10-2008 of CIT(A), Islamabad in the case of Mr. Abdullah Khan, Messrs Rawalpindi Public School, Rawalpindi and the other against the order dated 21-7-2008 of CIT(A), Gujranwala in the case of Mst. Rehana Firdous c/o Punjab Petroleum, Gujrat.

2. This Full Bench has been constituted to resolve certain legal issues arising from the orders passed by the Taxation Officer under the provisions of subsection (1) and subsection (5) of section 122 and clause (d) of subsection (1) of section 121 of the Income Tax Ordinance, 2001 (hereinafter called the Ordinance). First of all we shall like to state the relevant facts of both the cases in hand so that issues being dealt with could be properly identified. Brief facts of the two cases are narrated as hereunder:

I.T.As. Nos. 30 to 32/IB/2009

3. In the first case titled above the taxpayer an individual filed returns for the tax years, 2004, 2005 and 2006 declaring net income at Rs.1,15,247, Rs.1,16,500 and Rs.1,20,000 respectively. The case was selected for audit by the Commissioner under section 177(4) of the Ordinance for the reason that the claim of expenses was on much higher side as well as irrational. The books of accounts and other documents/ evidence required to be maintained under sections 32 and 174 of the Ordinance read, with Rules 29 and 30 of the ITAT Rules, 2004 were statedly not produced by the taxpayer. The taxpayer was confronted through notice issued under section 122 of the Ordinance with the proposed estimate of receipts and income etc. worked out on the basis of the history of the case. Consequently, the assessments were framed under sections 121/122(5) of the Ordinance at net income of Rs.17,69,822, Rs.24,84,578 and Rs.16,66,931 respectively for the three years under consideration. The above figures of income were arrived at by enhancing the receipts and curtailment of P&L expenses on estimate basis. The assessment orders passed by the Taxation Officer were challenged by the assessee before the First Appellate Authority. It was the contention of the assessee before the First Appellate Authority that the case has been wrongly assessed under section 121 as the notices issued by the Assessing Officer were complied with and all the required documents/details as asked for were provided by the Assessing Officer. The CIT(A) annulled the assessment framed by the Assessing Officer with the following observations:--

"Assessment orders passed by the Assessing Officer have been examined which reveal that the assessee responded to the notices issued by the Assessing Officer under section 122. The contents of these notices and the reply of the assessee have been discussed at pages 1, 2 and 3 of the assessment order. The reply of the assessee at page 2 is reproduced as under:--

`that proper books of accounts, evidence of tuition fee, admission fee register and allied evidences as required under law were duly filed with your office, while hearing of the case. that in the presence of proper books of accounts and without mentioning any defect in the same, no estimation of receipts can the made.'

From the above position the passing of the order under section 121 does not seem to be justified in view of the fact that required details were provided by the assessee. It means that the Assessing Officer has resorted under section 121 in the order to justify the estimation of income. In the opinion of the undersigned the case has not been properly handled by the Assessing Officer by estimating the receipts of the assessee on the basis of the history of the case as he has been unable to bring out any definite information to substantiate the estimate of the assessee's income."

4. As per above quoted findings of CIT(A) the assessment was annulled with observation that the Assessing Officer could not bring on record any definite information to substantiate addition in the assessee's income. Although it has been stated by the First Appellate Authority in the impugned order that the Assessing Officer resorted to section 121 in order to justify the estimate of income however no findings were given by him on the issue regarding the validity of order passed by the Assessing Officer through simultaneous invoking of the provisions of section 121(1)(d) while passing the order under section 122(5) of the Ordinance. In the present case the CIT(A) has also not given any finding on the legal issue relating to jurisdiction of the Assessing Officer to invoke the provisions of section 121 in the presence of assessments deemed to have been framed under subsection (1) of section 120 of the Ordinance and decided the appeals on the merits of the case only.

5. The above findings of CIT(A) are challenged by the department on the following grounds:

(i) That the order of the CIT(A) is bad in law and against the facts of the case.

(ii) The CIT(A) was not justified to annul the assessment as the Taxation Officer passed order under sections 122(5)/121 of the Income Tax Ordinance, 2001 for the tax years 2004, 2005 and 2006. Section 121 of the Ordinance was invoked in the light of provision contained in section 174 of the Ordinance and rules 29 and 30 of the ITAT Rules, 2004 and as taxpayer failed to comply with conditions contained in Rules 29(1)(a)(b)(c) and (d) as well as 30(1)(a)(i).

I.T.A. NO. 12/IB/2009

6. In this case the taxpayer is an AOP deriving income from running a petrol pump, and service station. Return for the tax year, 2003 was filed declaring net income at Rs.1,60,000 arrived at in the following manner--

Commission

Rs.29,50,400

Less expense's

Rs.27,90,400

Net income:

Rs.1,60,000

The case was selected for audit under section 177(1)(d) by the Commissioner of Income Tax, Sialkot Zone, Sialkot with the intimation to taxpayer vide letter dated 17-5-2004. During audit proceedings, taxpayer in pursuance of C.B.R's. Circular C.No.1(1)S(ITAS)/2004 dated 11-6-2004 filed revised income tax return declaring income of Rs.1,83,601 to avail the option for closure of audit proceedings by paying 20% more tax in comparison to the tax payable on the basis of original return. This request of taxpayer was however not accepted by the Assessing Officer for the reason mentioned in the assessment order that the facility to avail the benefit as per above mentioned circular of C.B.R. dated 11-6-2004 by filing revised return with 20% in the tax on the basis of original return was available in those cases where no element of concealment was involved. However audit proceedings were closed because no reason for selection of case for audit was given in the notice issued to the taxpayer. However, later on in the light of the judgment of the honourable Supreme Court of Pakistan delivered in C.As. No.1962/2005/ete. dated 1-3-2006 whereby it was held "that let appellants issue fresh notices to the respondents in terms of section 177 of the Ordinance, as was prevailing at the relevant time, disclosing criteria/reasons for selecting their cases for purpose of audit", a fresh intimation disclosing criteria/reasons for selection of the case for audit under section 177(1)(d) vide letter, No. J-21/2007/175 dated 14-7-2007 was issued to the taxpayer. The objection of taxpayer against the Audit proceedings initiated though notice issued under section 176 of the Ordinance was rejected by the department as being legally invalid. Statedy the books of accounts, vouchers and other documents requisitioned through notice under section 176 were not produced by the assessee. A show-cause notice under section 176 read with section 121(1)(d) of the Ordinance was issued on 24-5-2008 confronting the assessee with the discrepancies in the commission, declared by the-taxpayer on the basis of information provided by the principal company i.e. Pakistan State Oil Company Ltd. The taxpayer was also confronted through the above mentioned notice with the proposed addition to be made on account of understatement of commission as well as because of excessive claim under various heads of P&L account. Because of the non-compliance of the above mentioned show-cause notice and for the non-production of books of accounts as well as other required documents and evidence the Assessing Officer framed the assessment under section 121(1)(d) of the Ordinance. Addition of Rs.2,67,578 on account of understatement of commission was made by the Taxation Officer to the income declared by the taxpayer which was worked out in the following manner:--

Purchase

Rs.7,72,30,041

Commission

@ 4%

Sales = Purchases x 100 100-G.P. Rate Rs.8,04,47,959 G.P./Commission @ 4% Rs.32,17,918 Less declared. Rs.29,50,400 Understatement commission:- Rs .2,67,578.

The addition out of the expenses claimed under the heads evaporation and wastage, salary, entertainment, repairs, travelling, and staff welfare were also made by the Assessing Officer curtailing the same under the provisions of section 174(2) of the Ordinance for the reason of non-production of documentary evidence by the assessee. Total income was assessed at Rs.9,11,132 by making addition of Rs.7,51,132 to the income of Rs.1,60,000 declared as per original return. The order passed by the Taxation Officer Audit unit-2, RTO, Sialkot was challenged by the assessee before the first appellate authority. The CIT(A) Gujranwala order vide dated 21-7-2008 annulled the order passed under section 121(1)(d) of the Ordinance with the following observations:

(i) That the appellant was not informed regarding closure of audit proceedings originally initiated under section 177 of the Ordinance vide intimation letter dated 12-5-2004. Fresh proceedings were initiated by the Assessing Officer through issuance of first information notice dated 14-7-2007 regarding selection of case for audit under section 177(4) of the Ordinance read with section 120(1A) of the Ordinance. It was done by the Assessing Officer without obtaining any explanation from the taxpayer on the issue that the upward revision of income was not sufficient to cover the discrepancies as detected on the basis of information collected from the principal company. According to the CIT(A) the above position clearly indicates that legal requirements as stipulated under section 177(6) of the Income Tax Ordinance, 2001 were never complied with and subsequent proceedings propped upon such illegal foundation were therefore without any lawful authority and ab initio null and void.

(ii) That in presence of the returns original as well as revised having been filed by the taxpayer the provisions of section 121(1)(d) were not attracted and the order passed by the Assessing Officer was illegal and arbitrary.

(iii) It was also observed by the CIT(A) that in any case an action if warranted should have been taken in its existing status through an order of amendment passed under section 122 of the Ordinance.

(iv) That the Revenue has failed to take cognizance of the fact that proceedings under section 177 of the Ordinance, 2001 were declared void by the High Court and that stage action under section 122(5) of the Ordinance, 2001 had become imperative for further amendment.

7. The impugned order of CIT(A) is assailed by the Revenue through the present appeal on the following grounds:

(i) That the order of the CIT(A) is bad in law and contrary to the facts and circumstances of the case.

(ii) That the CIT(A) was not justified to annul the order passed under section 121(1)(d) of the Ordinance without any cogent reason.

(iii) That the CIT(A) was not justified to annul the order passed under section 121(1)(d) holding that the same should have been passed in terms of section 177(6) whereas audit proceedings were rightly concluded under section 12(1)(d) as the taxpayer had failed to comply with the notices issued by the Taxation Officer and to provide the information/documents requisitioned by him.

(iv) That the CIT(A) was not justified to observe that there was no definite information, for selection of case for audit whereas the case was selected for audit on the basis of the definite information obtained from Principal Company.

(v) As to whether the Taxation Officer was not justified to finalize the audit proceedings in terms of section 121(1)(d) when the taxpayer did not provide the requisite information/documents in spite of proper service of the notice.

(vi) That the CIT(A) was not justified to rely upon the decision of the honourable High Court given on the issue of selection for audit under section 177 as the instant case was selected for audit giving reasons as held by the honourable Apex Court in the case reported as PLD 2006 SC 787 2006 PTD 2502.

8. The common issues raised through the grounds of departmental appeals in both the cases are as following:--

(i) Whether any order under clause (d) of subsection (1) of section 121 of the Ordinance can be passed in presence of an order already deemed to have been made by the Commissioner under the provisions of subsection (1) of section 120 of the Ordinance.

(ii) Whether the provisions of sections 122(1)45) and 121(1)(d) of the Ordinance can be invoked and applied simultaneously.

In addition to above legal questions, the following issues have also been raised through the departmental appeal in I.T.A. No.12/IB of 2009:

(i) Whether the Assessing Officer was justified in passing the order under section 12(1)(d) of the Ordinance instead of section 122(5) of the Ordinance.

(ii) Whether the Revenue was justified in selecting the case for audit under section 177(1)(d) of the Ordinance as intimated vide notice dated 14-7-2007 without closing the audit proceedings initiated earlier vide letter dated 17-5-2004 and also without calling any explanation from the taxpayer on the issue that the discrepancies noted from the information obtained from. the Principal Company were not covered by the upward revision of income as per revised return.

(iii) Whether on the facts and, circumstances of the present case the selection of the case for audit under section 177 as well as the completion of assessment on the basis of original return ignoring the revised return filed by the assessee was justified.

(iv) Whether the information available with the Revenue could be treated as definite information in terms of provisions of section 122(5) read with section 177 of the Ordinance.

9. Learned representatives from both the sides in the above titled cases have put forth detailed arguments supported by case-law.

10. Learned DRs in their arguments defended the orders passed by the Assessing Officers in both the cases. According to viewpoint expressed by the Departmental Representatives the order under section 121(1)(d) could be passed even in presence of the return treated to be an order made by the Commissioner as provided under subsection (1) of section 120 of the Ordinance. It was the contention of learned DR that since the definition of assessment includes the amended assessment, therefore, assessment under section 121 when read with section 122 also means the amended assessment as well. Thus according to viewpoint of learned DR an order for amendment of the assessment could also be passed under section 121(1)(d) of the Ordinance in respect of an order treated to have been made under section 120(1) of the Ordinance. Learned DR submitted that provisions of section 121(1)(d) were audit specific provisions consequent upon filing of return and were meant for dealing with audit cases selected on the basis of return. According to learned DR the section 121(1)(d) could be invoked in cases where, the taxpayer who have furnished the return fails to produce the accounts and record required to be maintained under section 174 of the Ordinance or the evidence and documents etc. required by the Assessing Officer during the course of Audit proceedings under section 177 of the Ordinance. It was the contention of learned DR that the accounts and documents can only be called for where a return is filed. Learned DR Mrs. Rakhshanda Aziz Babar put forth another argument that since an order under clause (a) of subsection (1) of section 121 could be passed in the case of default of a person to furnish a return required to be filed in response to notice issued under subsection (3) or subsection (4) of section 114 without there being any mention of the same in the corresponding provisions of subsection (4) of section 114 of the Ordinance, therefore, on the basis of same analogy the order under section 121(1)(d) could be made without there being any mention of the same in subsection (6) section 177 of the Ordinance. This strange kind of argument of learned DR is totally irrelevant and based on misconception. She has tried to confuse the very clear and explicit provisions of law by putting forth an illogical argument' in a complicated manner. Subsections (3) and (4) of section 114 empowers the Commissioner to issue notice requiring a person to furnish the return in certain cases as provided therein. On the other hand the provisions of subsection (t) of section 121 empowers the Commissioner to frame the assessment to the best of his judgment on the basis of information or material available with him in case of failure of a person to comply with the notice issued under subsections (3) and (4) of section 114 of the Ordinance. The analogy put forth by learned DR has no relevancy to the issue under consideration. Subsections (3) and (4) of section 114 provide for issuance of notice for submission of return. On the other hand the provisions of subsection (6) of section 122 specifically refers to the amendment of the assessment to be made under the provisions of section 122 on the basis of information acquired through audit or otherwise. The procedure for the selection and carrying out of the audit by the Commissioner is also provided under the provisions of section 177 of the Ordinance. Learned DR further contended that the provisions of section 121(1)(d) could not be applied in the case of a person who has not filed the return because according to him the case of a person who has not filed the return could not be selected for Audit under section 177 of the Ordinance. Learned DRs further contended that the intention of the legislature to introduce clause (d) in subsection (1) of section 121 through Finance Act, 2003 was not to go unchecked the non-compliance of the different provisions of the Ordinance by the persons whose cases are selected for Audit under section 177 of the Ordinance. According to them the provisions of section 121(1)(d) were introduced to cover the cases where the return has been filed but the account books and documents etc. mandatory to be maintained are not produced before the Assessing Officer during the Audit proceedings. Learned DRs further contended that there was no legal bar in simultaneous application of the provisions of section 121(1)(d) and section 122(1)1(5) of the Ordinance, 2001. It was the contention of learned DRs' that section 121(1)(d) covers the eventuality of non-compliance by the taxpayer whose cases after filing of return are selected for audit under section 177 of the Ordinance meaning thereby that the said provision has been introduced to cover the deficiencies of the provisions of subsections (1)' and (5) of section 122 of the Ordinance. Learned DR also expressed the viewpoint that all the provisions of clauses (a), (b), (c) and (d) of subsection (1) of section 121 are independent of each other and meant to cover the different eventualities. Learned DRs further contended that the assessment as defined in subsection (2) of section 5 of the Ordinance includes reassessment as well .as amended assessment, therefore, according to them an order of amendment could also be passed under the provisions of section 121(1)(d) of the Ordinance. Another contention of learned DR was that introduction of subsection (IA) to section 120 made through Finance Act, 2005 provided exception to subsection (1) of section 120 of the Ordinance. In this context learned DRs quoted the judgment of Islamabad High Court reported as 2008 PTD 1440. It was also .contended by learned DRs when a case of taxpayer is selected for audit the return no more remains covered by the subsection (1) of section 120 in view of the introduction of subsection (1A) of section 120 of the Ordinance vide Finance Act, 2005.

11. Learned ARs of the taxpayer in both the cases on the other hand, in their arguments, defended the impugned orders of First Appellate Authority. The main and foremost contention of learned ARs has been that in presence of an assessment order treated to have been made by the Commissioner under the provisions of subsection (1) of section 120 only an order of amendment could be passed under the provisions of section 122 of the Ordinance. According to them the provisions of section 121(1)(d) were not applicable in such cases because of a valid assessment order already existing in the field. Learned ARs further contended that to understand scheme and intention of the legislature the clauses of subsection (1) of section 121 were to be read as a whole. According to viewpoint of learned ARs subsection (1) of section 121 caters with the situation where the return or statement has not been filed. However according to learned ARs clause (d) appearing in subsection (1) of section 121 introduced vide Finance Act, 2003 is not superfluous quoting the principle that no redundancy can be attributed to any legislation. According to learned AR the provisions of section 121(1)(d) have been introduced to cater the situation where not only the return has not been filed but also the accounts books or other documents are not produced by the taxpayer on being requisitioned by the Assessing Officer. It was the contention of learned ARs of the taxpayer that under the\provisions of section 177 of the Ordinance the case of a person could be selected for audit even if no return is furnished by him. According to learned AR section 177 provided for the conducting of audit of the Income tax affairs of a person and further that it is not necessarily to be the audit on the basis of the return only. Learned AR submitted that as soon as a person is served with a notice under subsections (3) and (4) of section 114 he becomes a taxpayer as defined in subsection (66) section 2 of the Ordinance. It was the 'contention of learned AR that all the provisions of the Ordinance, 2001 including section 177 becomes applicable on a person as soon as he becomes a taxpayer as stated above. Thus according to viewpoint of learned AR the audit of the affairs of the income of a person who becomes covered by the definition of taxpayer could be carried out under section 177 even if no return of income filed by him. According to learned AR it was in this background that the provisions of clause (d) of subsection (1) of section 121 have been introduced. In this context learned AR also referred to case law reported as 2009 PTD 284 (Kar. H.C.) of which the paras. 12, 13 and 14 being relevant are reproduced as hereunder:-

"Coming to the arguments of the learned counsel that section 120(1-A) provides that only' those cases shall be selected for audit in which return had been filed and had been assessed. We would like to observe that a plain reading of subsection (1-A) of section 120 reveals that this subsection only provides that even those cases can be selected for audit in which the return filed has been accepted and has been converted into an assessment order. This subsection, however, does not provide that, except these persons who have filed returns which have been deemed to have been assessed under section 120, no other person can be selected for audit of his tax affairs.

The Tribunal has very exhaustively dealt with the arguments of the learned counsel and has stated that all categories of persons irrespective of the fact whether they have filed return or not can be selected for audit under section 177. The judgment relied on by the learned counsel for the applicant is also distinguishable as in that case no reasons were spelt out for selection of total audit whereas in this case a very valid reason has been given for selecting the case of applicant for audit on the grounds that sales have been reduced by more than 50 per cent and it was necessary to audit to verify these sales.

We are, therefore, of the considered opinion that despite the fact that the learned counsel had very ably tried to infuse life in a lost cause but his arguments are misconceived and the law is so much clear that we can place no other interpretation on this section that the one placed by the Tribunal."

12. Another contention of learned AR of the taxpayer was that the provisions of subsection (1) of section 121 are conjunctive in nature and thus according to him the provisions of clause (d) are to be read in continuity with the earlier clauses (a), (b) and (c) of subsection (1) of section 121 of the Ordinance. Hafiz Muhammad Idris, Advocate the learned AR expressed the viewpoint that when all the provisions of subsection (1) of section 121 are read together it becomes clear that under clause (d) of subsection (1) of section 121 the Assessing Officer is provided with jurisdiction to proceed for framing the best judgment assessment only in cases where no return under subsections, (3) and (4) of section 114 or sections 143 and 144 is filed and the taxpayer also fails to produce the accounts books or other documents on being requisitioned by the Assessing Officer. To support the viewpoint that the word "or" used between the clauses (a), (b), (c) and (d) of subsection (1) of section 121 is to be read as a conjunctive learned AR referred the judgment of Lahore High Court reported as 1999 PTD 1060. In this judgment it has been observed by the High Court that the word "and" used in sub-rule (3) of rule 8 of Wealth Tax Rules regarding power of the Deputy Commissioner to estimate the value of land and building was to be considered as disjunctive. According to learned AR the word "or" used between clauses of subsection (1) of section 121 of the Ordinance is to be considered as conjunctive. This argument of learned DR is however not convincing. It is pointed out here that the words like "and" "or" and "either" are ordinarily used in disjunctive sense and these are often used interchangeably. However this cannot be done in case the statute's meaning is clear or if the, alteration operates to change the meaning of the law as laid down by the Karachi High Court in its judgment reported as 2003 PTD 1805 (Kar.H.C.). This judgment of Karachi High Court was also cited by the learned AR in support of his contention that the provisions of clause (d) of subsection (1) of section 121 should not be read in isolation, which in our opinion is however not of any help to him. The facts of the quoted case which are different from those of instant case are that following question was referred by the Income Tax Appellate Tribunal of Pakistan for the opinion of Lahore High Court under the provisions of section 17(1) of Sales Tax Act, 1951:--

"Whether on the facts and circumstances of the case; the Tribunal was justified in holding that the Gear Boxes and axles produced by the assessee fall within the definition of machinery as defined in S.R.O. 125(I)/70, dated 28th June, 1970, hence were exempt from sales tax under head '84.63'."

For the sake of convenience the extract from the relevant part of the S.R.O. 125(I)/70 dated 29-6-1970 as amended by Notification No.S.R.O. 540(I)/71 dated 23-11-1971 is reproduced as hereunder:

"Exemption of capital goods (machinery etc.) imported into

(a) .

(b) .

Definition of machinery:-

(i) Machinery, operated by power of any description (excluding agricultural machinery or implements imported into Pakistan) such as is used in any industrial process, including the generation, transmission and distribution of power or used in process directly connected with the extraction of minerals and timber, construction of buildings, roads, dams, bridges and similar structure and the manufacture of goods;

(ii) Apparatus and appliance, including metering and testing apparatus and appliances specially adapted for use in conjunction with machinery, specified in item (i) above;

(iii) Mechanical and electrical control and transmission gear adapted for use in conjunction with machinery as specified in item (i) above;

(iv) Component parts, including spare parts of machinery as specified in items (i), (ii) and above, identifiable as for use in or with such machinery".

Learned DR submitted that Judges of the Karachi High Court after observing in para. 15 that in the matter of interpreting and applying the provision pertaining to the exemption, the provisions of a fiscal statute are not to be interpreted liberally as in the case of levy of tax but have to be interpreted and applied strictly. The question referred was answered in negative with the observations as per para. 16 of the said Judgment the relevant part of which is reproduced as hereunder:-

"Here, we would like to hold that if more than one conditions have been prescribed for availing an exemption and they are not in the alternative, then all those conditions should be satisfied simultaneously, for availing the exemption. It is, therefore, held that, in order to bring a machinery or component parts used in any such machinery, within the definition of machinery given in the Notification S.R.O. 125(I)/70, the two conditions must be satisfied at one and the same time i.e. (i) a machinery, should be operated by power of any description and it should be such machinery which is used in any industrial process. The second condition is admittedly lacking in the case of manufacture and sale of gear boxes and axles produced by the respondents/ assessee, as they being admittedly used for automotive vehicles, therefore, the exemption was not available to the respondents and the Sales Tax Officer had rightly refused the exemption while the CIT(A) and ITAT misdirected in extending exemption to the respondent."

It is obvious from the perusal of above that the facts and the issues involved in the above quoted judgment of Karachi High Court relied upon by learned AR of the assessee is distinguishable from those of the case under consideration before us therefore not relevant. The observation of Karachi High Court, as per para. 16 of the above quoted judgment and the principle laid down therein are not relevant to the issues involved in the present case. The main emphasis of learned AR of the taxpayer is however on the argument that in presence of an order treated to have been made by the Commissioner in terms of section 120(1) of the Ordinance only an order of amendment under section 122(5) could be passed and the Assessing Officer has no jurisdiction to invoke the provisions of section 121(1)(d) of the Ordinance, in such cases.

13. Arguments of learned representatives of both the parties have been heard. The case law cited in support of their contentions as well as the relevant provisions of law have also been perused. It may be at the cost of repetition but for the sake of convenience and clarity the legal issues to be resolved through this order are as followings:

(i) Whether in view of the provisions of subsection (IA) inserted in section 120 vide Finance Act, 2005 a return of income stands excluded from the ambit of subsection (1) of section 120 of the Ordinance on selection of case of the person for audit under the provisions of section 177 of the Ordinance?

(ii) Whether the provisions of clause (d) of subsection (1) of section 121 can be applied in the case where the taxpayer has filed a return which qualified to be accepted under the provisions of subsection (1) of section 120 of the Ordinance?

(iii) Whether in the case of return filed and qualified to be accepted under subsection (1) of section 120 including a revised return filed and treated to be an assessment order under subsection (3) of section 122 the Assessing Officer could only pass an order of amendment under the relevant provisions of section 122 of the Ordinance?

(iv) Whether the provisions of clause (d) of subsection (1) of section 121 and that of subsection (5) of section 122 could be simultaneously applied?

(v) Whether for non-production of accounts/documents/evidence etc. required by the Assessing Officer during the audit proceedings carried under section 177 of the Ordinance any order under section 121(1)(d) could be passed?

(vi) Whether while disallowing any claim of expenditure under subsection (2) of section 174 the order is to be passed under section 122 or under section 121(1)(d) of the Ordinance?

14. Before proceeding any further we shall first like to reproduce here the provisions of sections 120 and 121 of the Ordinance which are as hereunder:-

"120. Assessments .---(1) Where a taxpayer has furnished a complete return of income (other than a revised return under subsection (6) of section 114) for a tax year ending on or after the 1st July of July, 2002,-

(a) the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified, in the return; and

(b) the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished.

[(1 A) Notwithstanding the provisions of the subsection (1), the Commissioner may select a person for an audit of his income tax affairs under section 177 and all the provisions of that section shall apply accordingly.]

(2) A return of income shall be taken to be complete if it is in accordance with the provisions of subsection (2) of section 114.

(3) Where the return of income furnished is not complete, the Commissioner shall issue a notice to the taxpayer informing him of the deficiencies (other than incorrect amount of tax payable on taxable income, as specified in the return, or short payment of tax payable) and directing him to provide such information, particulars, statement or documents by such date specified in the notice.

(4) Where a taxpayer fails to fully comply, by the due date, with the requirements of the notice under subsection (3), the return furnished shall be treated as an invalid return as if it had not been furnished.

(5) Where, in response to a notice under subsection (3), the taxpayer has, by the due date, fully complied with the requirements of the notice, the return furnished shall be treated to be complete on the day it was furnished and the provisions of subsection (1) shall apply accordingly.

(6) No notice under subsection (3) shall be issued after the end of the financial year in which return was furnished, and the provisions of subsection (1) shall apply accordingly.

"[121. Best judgment assessment .---(1) Where a person fails to--

(a) furnish a return of income as required by a notice under subsection (3) or subsection (4) of section 114; or

(b) furnish a return as required under section 143 or section 144; or

(d) produce before the Commissioner, or any person employed by a firm of chartered accountants under section 177, accounts, documents and record required to be maintained under section 174, or any other relevant document or evidence that may be required by him for the purpose of making assessment of income and determination of tax due thereon. the Commissioner may, based on any available information or material and to the best of his judgment, make an assessment of the taxable income of the person and the tax due thereon.

(2) As soon as possible after making an assessment under this section, the Commissioner shall issue the assessment order to the taxpayer stating

(a) the taxable income;

(b) the amount of tax due,

(d) the time, place and manner of appealing the assessment order.

(3) An assessment order under this section shall only be within five years after the end of the tax year or the income year to which it relates.]"

From the bare perusal of the provisions of subsection (1) of section 120 of the Ordinance, it is apparent that as soon as a complete return of income is furnished it is taken to be an assessment order issued to the taxpayer by the Commissioner on the day the return is furnished. Obviously it is nowhere provided in subsection (1A) of section 120 inserted vide Finance Act, 2003 that the operation of subsection (1) of section 120 shall be suspended on selection of the case of a person for audit under section 177 of the Ordinance. Subsection (1A) supra provides for the powers of the Commissioner to select any person for the audit of his income tax affairs under section 177 of the Ordinance and in which case the operation of the provisions of subsection (1) of section 120 is not effected. The viewpoint that in case of selection of a person for audit the return is automatically excluded from the ambit of subsection (1) of section 120 of the Ordinance do not appear to be plausible being practically not workable. In our opinion it will also be negating the basic concept of universal self-assessment introduced by the new law i.e. Income Tax Ordinance, 2001. Under new Income Tax Ordinance of 2001 neither any authority has been empowered, nor any procedure has been provided to frame the assessment on the basis of return filed by a taxpayer. This fact is also obvious from the non-existence of any corresponding provisions in the Income Tax Ordinance, 2001 to those of the provisions of section 61, 62 or 63 of the Income Tax Ordinance, 1979 (hereinafter called the Repealed Ordinance, 1979). Under the provisions of subsection (1) of section 120 of the Ordinance, 2001 a complete return filed by the taxpayer fulfilling all the requirements of subsection (2) of section 114 is unexceptionally taken as an assessment order issued by the Commissioner. Only a return not fulfilling the requirements of subsection (2) of section 114 and not an assessment order deemed to have been passed under subsection (1) of section 120 of the Ordinance on the basis of a complete return could be declared invalid. In this context, department mainly relied upon the observations made by the Islamabad High Court while passing the judgment in the case reported as 2008 PTD 1440. The relevant part of the para 5 of the judgment is reproduced as hereunder:--

"In my view, subsection (1-A) of section'120 of the Ordinance is an exception to section 120(1). The return filed by a taxpayer shall be deemed to be an assessment order only if the case of the taxpayer has not been selected for an audit under section 177 of the Ordinance. In case a taxpayer has been selected for an audit his return shall not be deemed to be an assessment order because under subsection (1-A), the commissioner has been given a power to select a person for an audit notwithstanding the provisions of subsection (1). Section 122 of the Ordinance empowers the Commissioner to amend the assessment. Subsection (1-A) was inserted in section 120 by Finance Act, 2005. By insertion of subsection (1-A), the legislature conferred a power in addition to the powers under section 122 already possessed by the Commissioner. No limitation has been provided in section 120 for invoking subsection (1-A). Although, subsection (6) of section 120 is confined to notice under section 120(3), however, by analogy, it can be assumed that Commissioner, may not select a person for an audit under subsection (1-A) after the end of the Financial Year. The legislature may examine the necessity of enacting an express provision for the purpose."

In our opinion, the above mentioned viewpoint of the Department expressed on the issue under consideration based on misconception of the above cited judgment of the Islamabad High Court does not appear to be a plausible interpretation of the provisions of section 120 of the Ordinance. The Judgment of the Islamabad High Court should be read as a whole and to be interpreted in the light of the provisions of Income Tax Ordinance, 2001 relating to procedure of assessment. We do not subscribe to the viewpoint expressed by the Department that on selection of the case of a person for Audit under section 177 the return is automatically excluded from the purview of subsection (1) of section 120 and that it is not to be treated as a deemed order. In our opinion, the above contention of the Department is not a plausible interpretation of the provision of law. We have carefully perused the provisions of sections 120 and 177 of Ordinance as well as the above quoted judgment of Islamabad High Court. We are of the considered view that a return is not automatically excluded from the purview of subsection (1) of section 120 on selection of the case of a person for Audit under section 177 because of the following reasons:

(i) Unless declared invalid under section (4) of section 120 a return filed by a taxpayer is to be taken as an assessment order under subsection (1) of section 120 of the Ordinance.

(ii) It is nowhere provided in the Incomes Tax Ordinance, 2001 that on selection of a case for Audit under section 177 the return in such case shall stand excluded from the ambit of section 121(1) of the Ordinance.

(iii) Even otherwise a valid return could not be taken as excluded from the purview of subsection (1) of section 120 because there is no provision in the Income Tax Ordinance, 2001 for framing of assessment on the basis of the return furnished by a taxpayer.

(iv) The answer to the question that in case after selection of case for Audit 177 if the return is taken to be excluded from the operation of section 120(1) and it is not to be treated as a deemed order then how and under which provision of Income Tax Ordinance, 2001 the assessment will he framed in the following situations will itself clarify the whole matter:

(a) In case after carrying out of Audit no discrepancy or defect is found in the income declared as per return then what will be the status of the return and under which provision the assessment shall be made in such cases?

(b) In case declared version as per return is not supported with complete evidence and it is found to be partially defective requiring only some additions or alterations to be made in the declared income which in the absence of any order in field will not be possible to be made.

There is no answer to the question in both the above mentioned cases. In the first case there being no provision in Ordinance, 2001 like those of sections 59-A and 59 (1) of Repealed Ordinance of 1979 no order could be passed to frame the assessment by accepting declared income. In the second case if the return is already considered to be excluded from the purview of section 120(1) there will be no order in field, therefore, the provisions of section 122(5) will also not be attracted. It is also pointed out here that no procedure for assessment of income like those of sections 61, 62 and 63 of the Repealed Ordinance having been provided in the Ordinance, 2001 no assessment order could be passed in such cases by the Assessing Officer.

(c) There is nowhere provided in the Ordinance, 2001 that on selection of a case for Audit under section 177 the return shall be excluded from the ambit of section 120(1) and if after the completion of Audit no discrepancy is found it shall again become under the Purview of section 120(1) of the Ordinance.

(iv) The observations of the learned Islamabad High Court that a case may not be selected for audit under subsection (IA) of section 120 after the end of the Financial year in which the return is furnished in view of the provisions of subsection (6) of section 120 of the Ordinance also supports our viewpoint that to exclude the return from the ambit of section 120(1) it has to be first declared invalid which could only be done within the year of its filing under section 120(4) of the Ordinance, 2001.

For the sake of convenience the provisions of section 177 of the Ordinance are also reproduced as hereunder:--

["177. Audit .---(1) The [Board] may lay down criteria for selection of any person for an audit of person's income tax affairs, by the Commissioner.

(2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the [Board] under subsection (1).

(3) The [Board] shall keep the criteria confidential.

(4) In addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of the person's income tax affairs having regard to:--

(a) the person's history of compliance or non-compliance with this Ordinance.

(b) the amount of tax payable by the person;

(d) any other matter which in the opinion of Commissioner is material for determination of correct income.

(5) [After selection of a person for audit under subsection (2) or (4), the Commissioner, shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that [person].

(6) After completion of the audit under subsection (5) or subsection (8) the, Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment under subsection (1) or subsection (4) of section 122 as the case may be.

(7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits in particular by having regard to the factor in subsections (4).

(8) They may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income tax affairs of any person and the scope of such audit shall be as determined by them on a case to case basis.

(9) Any person employed by a firm referred to in subsection (8) may be authorized by the Commissioners, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that subsection.]"

From the perusal of the above provisions of section 177 of the Ordinance as reproduced above it is obvious that the cases of persons who did not furnish return in response to notice issued under subsection (3) or (4) of section 114 the Ordinance for any reason including the one that according to taxpayers opinion the income is not chargeable to tax under the Ordinance can also be selected for Audit. We are of the considered view that the insertion of clause (d) of subsection (1) of section 121 vide Finance Act, 2003 provided for the Assessing Officer to call for record and other documents etc. and proceed for carrying out of Audit and framing of assessment in such cases. So far as the question that whether the clauses (a) to (d) of subsection (1) of section 121 are conjunctive or disjunctive it will be easier to find out the answer if we look into the provisions of section 121 as a whole. The purpose and meanings of the provisions can also play an important role in such cases. In support of our this viewpoint we will like to refer the judgment of Lahore High Court reported as 1999 PTD 1060 the relevant part of which wherein a reference has been made to paragraph 188 of the construction of statute by the Crawford is reproduced as hereunder:--

"In ordinary use the word 'or' is a disjunctive that marks an alternative which generally corresponds to the word' `either'. In face of this meaning, however, the word 'or' and the word `and' are often used interchangeably. As a result of this common and careless use of the two words in legislation, there are occasions when the Court, through construction, may change one to other. This cannot be done if the statute's meaning is clear, or if the alteration operates to change the meaning of the law. It is proper, only in order to more accurately express, or to carry out the obvious intent of the Legislature, when the statute itself furnishes cogent proof of the error of the Legislature, and especially where it will avoid absurd or impossible consequences, or operate to harmonize the statute and give effect to all of its provisions. Accordingly, the word 'or', as used in a statute which provided that the owner or operator of a motor vehicle should not be liable to a guest in case of an accident unless the accident was intentional on the part of the owner of operator, or caused by his headlessness 'or' reckless regard of the rights of others, was interpreted to mean 'and' since otherwise the statute would have effected no change in existing liability. The substitution of these two words for each other is also permissible in criminal statute, although some authorities hold otherwise. It is suggested, however, that a substitution' should not be made where it would aggravate the offence or increase the punishment. The court should be extremely reluctant in a criminal statute to substitute disjunctive words for conjunctive words, and vice versa if such action adversely affects the accused."

In the light of above quoted citation we are inclined to hold, the view that clause (d) of subsection (1) of section 121 is not to be read in isolation. In our opinion the provisions of section 121(1)(d) cannot be invoked in the absence of the default of clause (a) of subsection (1) of section 121. As already discussed above a person who has been served with a notice for furnishing of return issued under subsection (3) or (4) of section 114 of the Ordinance becomes and is a taxpayer as defined in subsection (66) of section 2 of the Ordinance. The case of such person can be selected for Audit under section 177 even if no return is filed by him. The taxpayer in this case may be required to produce record and documents etc. by the Assessing Officer under the provisions of clause (d) of subsection (1) of section 121 of the Ordinance. This concept of issuance of notice for production of documents etc. in the case where no return is filed in response to statutory notice issued for furnishing of the same is not alien to the Income Tax Law. Under the provisions of Repealed Ordinance a notice under section 61 was required to be issued even in case of passing of an ex parte order to frame the best judgment assessment under section 63 of the said Ordinance. It is however pointed out here that unlike section 63 of the Repealed Ordinance the provisions of section 121(1)(d) arc not universally applicable to other provision regarding the procedure for assessment of income such as section 122(5) of the Ordinance, 2001, which in itself provides for complete procedure and manner of assessment by making addition and alteration which can only be done in case of an existing order. On the other hand the provisions of section 121 of the Ordinance also in itself provides complete procedure of assessment of taxable income in case of taxpayer whose income has not been assessed earlier. Thus the provisions of section 121 and those of section 122 both of which laid down complete procedure of assessment in themselves are independent of each other for catering two entirely different situations. Our viewpoint that the provisions of clause (d) supra are applicable only in the cases of taxpayer in who's case there is no order existing in field either by way of return treated to have been made under section 120(1) or an order earlier passed under the provisions of section 121 or section 122 of the Ordinance is strengthened from the absence of any provisions under the Ordinance, 2001 providing for the procedure to frame assessment on the basis of return like those of provisions of sections 61 and 62 of the Repealed Ordinance. Thus no procedure for framing of normal assessment on the basis of return having been provided in the Ordinance, 2001 also no question of framing of an ex parte order in such cases arises.

15. For passing of an order to frame the assessment of income on the basis of results of audit we have to keep in mind the concept and procedure of assessment provided under the new law i.e. Income Tax Ordinance, 2001. Under the new scheme of assessment a valid return of income in all the cases of taxpayers is deemed to be an assessment order under the provisions of subsection (1) of section 120 on the day it is furnished without there being any exception. Similarly in case of a revised return filed under subsection (6) of section 114 it is treated to be an amended assessment order under the provisions of subsection (3) of section 122 of the Ordinance. In the cases where return is furnished only situation in which Assessing Officer could proceed to frame the assessment under the provisions of subsection (1) of section 121 is where after selection of case under the provisions of section 177 during the audit proceedings it is discovered by him that the return filed by the taxpayer did not fulfil the requirements of 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 the return is 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 Assessing Officer for framing of a new assessment by invoking the provisions of clause (d) of subsection (1) of section 121 without first declaring the return invalid is thus legally not sustainable because of already existence in field of a valid order deemed to have been passed under section 120(1) of the Ordinance.

16. The viewpoint expressed by learned DR that in every case of non-compliance of notice issued by the Assessing Officer under sections 122, 177 or in case of non-compliance of the provisions of section 174 irrespective of the return having been filed by the taxpayer, the provisions of section 121(1)(d) automatically become applicable is not correct. In our opinion the interpretation of the department is based on misconception of the provisions of clause (d) of subsection (1) of section 122 of the Ordinance, 2001 introduced through substitution of section 121 vide Finance Act, 2003. In the original provisions of section 121 of the Ordinance, 2001 it was provided that an order of best judgment assessment could only be passed where a person required to furnish a return of income for a tax year failed to do so by the due date. However after the substitution of section 121 vide Finance Act, 2003 the Assessing Officer is now also empowered to frame the best judgment assessment where a person fails to furnish a return in response to notice issued by the Commissioner under subsection (3) or (4) of section 114 or fails to file the statement under section 143 or sections 143 or 144 as well as for non-filing of statement under section 116 of the Ordinance. So far as the application of clauses (a) to (c) of subsection (1) of section 121 is concerned there is no dispute. However, the provisions of clause (d) of section 121(1) are misconceived by the Revenue in the manner that as if these empower the Assessing Officer to frame an ex parte assessment in every kind and in each case of default on the part of taxpayer to comply with and to produce the documents etc. in compliance of notice issued by the Assessing Officer like those of .the provisions of sections 61 and 63 of the Repeated Ordinance which in our opinion is not correct. As already discussed above the procedure of assessment has now totally changed under the Ordinance, 2001. According to the new scheme of assessment the Assessing Officer is no more empowered to frame the assessment on the basis of return filed by a taxpayer which is obvious from the fact that there are no corresponding provisions in the Ordinance, 2001 like those of sections 61, 62 and 63 of the Repealed Ordinance. Under the provisions of section 121 of the Ordinance, 2001 a best judgment assessment could be framed by the Assessing Officer in case of failure of the taxpayer to furnish a return or failure to file return as well as to produce documents etc. required by the Assessing Officer. According to universal self-assessment scheme introduced through the Ordinance, 2001 the assessment is made by the taxpayer himself in each and every case and not by the Assessing Officer as is obvious from the provisions of subsection (1) of section 120 of the Ordinance. The Assessing Officer could only make alteration or addition I in such cases on the basis of definite information as provided under section 122(5) of the Ordinance, 2001. Before proceedings further we will like to find out the purpose of clause (d) of subsection (1) of section 121 introduced through substitution of section 121 made vide Finance Act, 2003 which in our opinion is important to determining the scope of said provision. For this purpose even at the cast of repetition the various possible situations which could emerge as a result of Audit carried out after selection of a case under section 177 of the Ordinance are highlighted as hereunder:

(i) The accounts books, documents or record required to be maintained under section 174 or any other document or record requisitioned by the Assessing Officer relevant for purpose of making of assessment of income is not produced by the taxpayer.

(ii) The accounts books and documents required to be maintained under the relevant provisions of Ordinance, 2001 are produced but the evidence produced to substantiate the claims as per return is not complete meaning thereby that partial compliance is made.

(iii) The accounts and all the relevant documents are produced and no defect or discrepancy is found therein by the Assessing Officer as a result of audit proceedings.

The viewpoint expressed by the Revenue by relying on the above cited judgment of the Islamabad High Court reported as (2008) 98 Tax 178 (H.C. Isl.) = 2008 PTD 1440 that in case of selection for audit under section 177 the return automatically stands excludes from the operation of subsection (1) of section 120 is legally not tenable. As already discussed above our this conclusion is for the above obvious reason that in such a case there will be no answer to the question that what will be the status of return and how the assessment will be framed in case of eventualities pointed out at Serial Nos. (ii) and (iii) above. According to the interpretation made by the revenue of the provisions of subsection (1A) of section 120 that after selection of case for Audit under section 177 the return is no more an order in terms of subsection (1) of section 120 an order of assessment in cases falling in the situation mentioned at serial No.(i) could only be passed and does not provide any answer to the question that how the cases falling under the situations mentioned at Serial Nos.(ii) and (iii) above shall be dealt with. As already discussed above the Ordinance, 2001 does not provide any procedure for the assessment of income on the basis of return filed by a taxpayer. Also pointed out earlier in that case of situation mentioned at Serial No. (ii) above i.e. case of partial compliance the Assessing Officer can only proceed under the provisions of section 122 for amendment of the order deemed to have been made under section 120(1) by making, alteration and additions to the extent of discrepancies/deficiencies noted by the Assessing Officer as a result of the audit proceedings. This however will not be possible in the case if the return is considered to be excluded from the purview of section 120(1) of the Ordinance and not to be a deemed order under section '120(1) of the Ordinance. Similarly in case of there being no default on the part of the taxpayer of any provision of law or of the notices issued by the Assessing Officer during the audit proceedings and no deficiency is found in the declared income as a result thereof the Assessing Officer will not be able to frame the assessment of income even by accepting the declared income because of there being no such provisions in the Income Tax Ordinance, 2001 like those of sections 59-A or 59(1) of the Repealed Ordinance. The viewpoint of the department that a return stands excluded from the operation of subsection (1) of section 120 on selection of case for audit under section 177 is also not tenable because of the reason that even otherwise there is no provision in the Ordinance, 2001 under which the Assessing Officer could proceed to frame the assessment on the basis of return. Thus the result of above discussion is that a return in each and every case as soon it is furnished is treated to be an assessment order under the provisions of subsection (1) of section 120 and remains the same even after the selection of case for audit until and unless it is declared as an invalid return under subsection (4) of section 120 of the Ordinance. The observations of Islamabad High Court made in its judgment reported as 2008 PTD 1440 with regard to limitation of one year fixed subsection (6) of section 120 as reproduced above also indirectly supports our viewpoint that/provisions of section 121(1)(d) in case of taxpayer who furnished return could not be invoked after the end of relevant tax year because the return could not be declared invalid after the period as prescribed under section 120(6) of the Ordinance.

17. In our opinion the above controversy has arisen because of misconception and misunderstanding of the purpose and scope of the provisions of clause (d) of subsection (1) of section 121. It has been noticed that as if the field officers of the Income Tax department are not fully appreciating and understanding the new concept of universal self assessment scheme introduced through the Ordinance, 2001. Under the provisions of Income Tax Ordinance, 2001 the Assessing Officer is now only empowered to make addition or alteration under section 122 of the Ordinance in an existing order. However, the Assessing Officer can frame a best judgment assessment under section 121(1) only in a case where no return is filed in response to notice issued under subsections (3) and (4) of section 114. Since the officers of Income Tax Department have not yet reconciled themselves with the new law whereby the Assessing Officer has been stripped of the powers to frame the assessment in normal cases of taxpayers. In our opinion it is in this background that scope of clause (d) of section 121(1) is being stretched too far to assume the unlimited powers of assessment even in respect of the taxpayers who have furnished valid returns and whose cases are selected for Audit under section 177 of the Ordinance, 2001 which in our opinion is against the concept and spirit of universal self assessment scheme introduced through the Income Tax Ordinance, 2001. In our opinion, the above confusion is caused because of deficient and defective legislation. For example under the Ordinance, 2001 it is mandatory to maintain the complete accounts and record of business transactions without realizing that to get these provisions implemented in each and every case is almost practically impossible because of our social set-up where most of the transactions are made on cash basis and also considering the very low rate of literacy and non-awareness of tax culture. It would have been more feasible if at the initial stages such provisions were relaxed and are gradually implemented particularly in case of small taxpayers a simplified procedure for maintenance of record of business transaction could have been prescribed. Similarly there is no provision to deal with the cases whereafter the end of relevant tax year of furnishing of return the accounts, record and documents etc., are not produced during the course of audit proceedings in which case neither the return could be declared invalid because of prescribed limitations nor there is any other provision in the Income Tax Ordinance to render the assessment invalid in such cases on account of the above default. Here we will also like to refer to the deficiency in the provisions of subsection (2) of section 174 which deals with the disallowance or reduction of any claim for expenses in the case where no record or evidence is produced in support of any claim but do not provide for any treatment to be accorded in respect of declared, turnover or receipts in the cases where no accounts, record or evidence is produced but the same could not be touched by the Assessing Officer even if these are highly unreasonable. It is one of the reasons that the Assessing Officers feeling themselves helpless to estimate the receipt/turnover in such cases while passing the order of amendment under section 122(1)/(5) try to justify their action by bringing in the section 121(1)(d) which however is legally not maintainable. Another/reason for introduction of the provisions of clause (d) of subsection (1) or section 121 by the legislature appears to provide the adequate opportunity of being heard to the taxpayer before framing of the best judgment assessment. In this regard we can quote the example of the provisions of section 63 and section 13(1) of the Repealed Ordinance wherein a notice under section 61 was required to be issued even to the assessee who has not furnished return in response to notice issued under section 56 of the Repealed Ordinance. Our this viewpoint that the provisions of section 121(1)(d) have been introduced for the purpose of providing a fair treatment is further supported from the example of the provisions of subsection (1) of section 13 of the Repealed Ordinance under which no addition to the income was to be made even in respect of the undeclared investment etc. if the sources of same were explained by the assessee. On the basis of same analogy it could be inferred that one of the purposes of introduction of clause 121(1)(d) is to provide another opportunity to the taxpayer to establish his claim by producing accounts books, record or other evidence etc. that his income is not chargeable to tax. Thus a more judicious assessment can be framed irrespective of any return having been filed by him or not by confronting him with the information available with the Assessing Officer during the course of assessment proceedings.

18. The crux of the above discussion is that the scope of clause (d) of subsection (1) section 121 is limited to the case in which no return is filed and do not cover the cases of taxpayers who have furnished a return which has been treated to be an assessment order under section 120(1) of the Ordinance. In our considered opinion with the insertion of section 121(1)(d) the Assessing Officer is vested with the powers to call for the accounts, records and documents etc. from a taxpayer who has not furnished the return of income despite issuance of notice under subsections (3) or (4) of section 114 of the Ordinance. Thus we conclude on the issue with our findings that provisions of clause (d) of subsection (1) of section 121 are applicable only in the cases i.e. (1) where neither any return is filed in response to notice issued by the Commissioner under subsections (3) and (4) of section 114 nor the Accounts, record or any other document etc. requisitioned for the purpose of assessment of income are produced by the taxpayer and (2) also in the cases where after selection of case for Audit under section 177 no Accounts, record or documents etc. are produced by the taxpayer and for which default the return furnished by him is declared invalid under the provisions of subsection (4) of section 120 subject to provisions of subsection (3) and within the period prescribed under section 120(6) of the Ordinance, 2001.

19. Now we come to another important issue that whether the provisions of sections 122 and.121(1) can be simultaneously invoked and applied. Although the issue partially stands discussed to some extent in the preceding paras of this order, however we shall like to add some further discussion on the issue. The provisions of section 121 has already been reproduced in para. 16 above. For the sake of convenience the provisions of section 122 are also reproduced as hereunder:-

"122. Amendment of assessment .---(1) Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121, [or issued under section 59, 59A, 62, 63 or 65 of the repealed Ordinance] by making such alterations or additions as the Commissioner considers necessary.

(2) An assessment order shall only be amended under subsection (1) within five years after the Commissioner has issued or is treated as having issued the assessment order on the taxpayer.

(3) Where a taxpayer furnishes a revised return under subsection (6) of section 114--

(a) the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and

(b) the taxpayer's revised return shall be taken for all purposes of. this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished.

(4) Where an assessment order (hereinafter referred to as the `original assessment') has been amended under subsection (1) or (3), the Commissioner may further amend, [as many times as may be necessary] the original assessment within the later of-

(a) five years after the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or

(b) one year after the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer.

[(4A) In respect of an assessment made under the repealed Ordinance, nothing contained in subsection (2) or, as the case may be, subsection (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time-limit specified in that section shall apply accordingly.

1(5) An assessment order in respect of tax year, or an assessment year shall only be amended under subsection (1) and 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) any income chargeable to tax has escaped assessment, or

(ii) total income has been under-assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or

(iii) any amount under a head of income has been misclassified.]

[(5A) Subject to subsection (9), the Commissioner may 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].

(5B) Any amended assessment order under subsection (5A) may be passed within the time-limit specified in subsection (2) or subsection (4), as the case may be].

(6) As soon as possible after making an amended assessment under [subsection (1), subsection (4) or subsection (5A)], the Commissioner shall issue an amended assessment order to the taxpayer stating---

(a) the amended taxable income of the taxpayer;

(b) the amended amount of tax due;

(d) the time, place, and manner of appealing the amended assessment.

(7) An amended assessment order shall be treated in all respects as an assessment order for the purposes of this Ordinance, other thy, for the purposes of subsection (1).

(8) For the purposes of this section, `definite information' includes information on sales or purchases of any goods made by the taxpayer, [receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance,] and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer.

(9) No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard.]"

From the bare perusal of the provisions of section 121 and section 122 it is obvious that the two provisions are independent of each other and both are complete in themselves providing the procedure for assessment in different manners for different situations. The assessment order passed under the provisions of section 121 is an order of original nature whereas the order of amendment passed by the Assessing Officer under the provisions of section 122 of the Ordinance is of revisional nature. For passing of an order of amendment under the provisions of section 122 there must an order existing in the field whereas for passing an order under the provisions of section 121 the filing .of .return or existence of any such order is not required. It is again pointed out here that the three main changes brought in the procedure of assessment under the scheme of new law i.e. Income Tax Ordinance, 2001 are:

(i) That there are no provisions for framing of assessment under the new Ordinance of 2001 like those of sections 61 and 62 of the Repealed Ordinance, 1979 nor there are provisions in Ordinance, 2001 for framing of an ex parte assessment like those of section 63 of the Repealed Ordinance.

(ii) Under the new scheme of Income Tax Law although the taxpayer is provided with the opportunity of being heard and to submit the documents etc. and for furnishing of his explanation, however his attendance personal or through AR is not compulsory as provided .in section 61 of the Repealed Ordinance.

(iii) That the Assessing Officer has no power to frame the assessment on the basis of return filed by the taxpayer which is deemed to be an assessment order under section 120(1) of the Ordinance in every case as soon it is furnished and to which no exception is provided therein.

20. The contention of learned DRs that since the amended assessment is included in the definition of assessment the provisions of section 121(1)(4 or section 122, can be applied simultaneously or one could be applied in place of the other is devoid of any force. The viewpoint expressed by learned DR that if the provisions of section 121(1)(d) and section 122(5) are not to be applied simultaneously the provisions of section 122 will become redundant is also not tenable. It is a settled principle of law that no redundancy could be attributed to any legislation. We have already discussed in detail the scope and purpose of the provisions of subsection (1) of section 121 which is entirely different from those of section 122 of the Ordinance.

21. Another question raised before the Tribunal is that whether the passing of an order under section 121(1)(d) instead of that under section 122(1)45) will render the assessment illegal and void. In this context, learned DR mainly relied upon the decision of honourable Supreme Court of Pakistan delivered in the case CIT Karachi v. Abdul Ghani reported as PLD 2007 SC 308 = 2007 PTD 967. The quoted decision of the honourable Supreme Court of Pakistan has been thoroughly perused. Before proceeding any further it will be relevant to give in brief the facts of the quoted case relevant to the issue involved therein. Brief of the quoted case are that the Tribunal in its original order dated 12-1-1989 on the issue that whether proceedings initiated on the basis of notice issued under section 56 of the Repealed Ordinance instead of that under section 65 were invalid gave the following findings vide order dated 12-1-1989:--

"We therefore hold that if the income of the assessee was assessable and the Assessing Officer had proper jurisdiction for making assessment or passing an order of the limitation period is not expired under section 65 of the Ordinance. Issuing of wrong form of notice is immaterial and the assessment framed and the order passed consequent upon the notice, warrant or other document would not vitiate that assessment order."

In light of the above mentioned observation quoted from the judgment, we overside the objection of the learned AR that proceeding against the assessee be void ab initio for the reasons that issuance of notice under different heading did not cause any prejudice to the assessee."

However subsequently on the application filed by the assessee under section 156 of the Ordinance the Tribunal rectified its own order under section 156 of the Repealed Ordinance accepting the application of the assessee. The relevant para of the order of Tribunal is reproduced as herein below:

"(7) Accordingly, we recall paragraphs; 6 to 15 and part of para 17 of the order in ITA No.1716/KB of 1996-97 (A.Y. 1991-92) dated 12-1-1999 and substitute thes same in the following manner:--

(23) Reverting to the facts of the case, instead of issuing notices under section 65 of the Ordinance, where previous approval of the IAC concerned in writing to do so was mandatory which is missing in the present case, admittedly two notices under section 65, one dated 11-5-1989 for assessment years 1961-62, 1963-64, 1964-65, 1965-66, 1967-68, 1969-70 to 1972-73 and 1974-75 to 1976-77 were issued by the Assessing Officer requiring the legal representatives of the assessee to furnish their returns of income. In this view of the matter, the proceedings initiated by the Assessing Officer under section 56 of the Ordinance for the assessment years under consideration, except for the assessment year 1988-89 are to be treated as coram non judice or he has committed an error of jurisdiction while passing a consolidated order under section 62 of the Ordinance, he therefore, annulled the assessment orders relating to assessment years, as mentioned in the instant pars` for having been made without lawful authority.

(8) On the foregoing facts we find that the impugned order is unsustainable because the proceedings initiated under section 56 were not ab initio in law.

(9) Accordingly, impugned assessment order passed under section 62 is hereby annulled."

However 'ultimately the viewpoint of the department was accepted by the honourable Supreme Court vide above quoted judgment delivered in the case of CIT Karachi v. Abdul Ghani with the observation that no reason on the face of the judgment was identified in the order of the Tribunal dated 12-1-1989, therefore, the Tribunal ought to refuse the rectification under section 156 of the Ordinance. These observations of the Honourable Supreme Court are also reproduced as hereunder:--

"From a bare perusal of the above paragraphs reproduced from the judgment of the Appellate Tribunal dated 12th January, 1999, it may be noted that the objection with regard to non issuance of notice under section 6$ of the Ordinance and the jurisdiction of the Assessing Officer to proceed with the assessment of income of the respondent for the previous assessment years had been overruled by the Tribunal. Such observation was made by the Tribunal after taking into consideration the facts of the case, the provisions of sections 56 and 65 of the Ordinance and the view expressed by a Full Bench of the Appellate Tribunal in the case reported in 1998 PTD (Trib.) 1998 PTD (Trib.) 1250. In this context it will be appropriate to refer to the judgment of this Court in the case of .Pakistan Fisheries Ltd. v. United Bank Ltd. PLD 1993 SC 109, wherein this Court pronounced that as long as power to hear and decide a matter vest in a Court, mere reference to a wrong provision of law for invocation of that power would not be a bar to the exercise of that power. Applying this pronouncement to the present case, there can be no doubt with regard to the power of the Assessing Officer to re-open the assessment for the previous assessment years under section 65 of the Ordinance, if he is satisfied that there has been escapement of assessment. Thus the fact that the Assessing Officer instead of issuing a notice under section 65, issued a notice under section 56 would neither invalidate the notice issued under section 56 of the Ordinance nor would render the assessment framed in pursuance of such notice as illegal and without jurisdiction. Viewed in the background of above legal and factual position, it is observed that the Tribunal had decided the above issue after application of mind, consciously and giving plausible and satisfactory reasons for the same: It, therefore, cannot be said to be a mistaken or inadvertent finding or an error floating on the face of the judgment so .as to be rectifiable under section 56 of the Ordinance. Rectification under section 156 of the Ordinance is permissible if the error is' apparently, obvious and floating on the face of the judgment and can be rectified without long drawn arguments and 'proceedings for appreciating facts and interpretation or application of any provision of law."

From the perusal of the above, it is obvious that the issue involved in the present case is distinct from that of the quoted case of the honourable Supreme Court of Pakistan which related to the scope of jurisdiction under section 156 of the Repealed Ordinance. No doubt the observations made by the honourable Supreme Court of Pakistan even on an issue not being the subject-matter of appeal lays down the principle of law on the issue. However the above quoted observations made in the specific background on an entirely different issue on different facts of the quoted case could not mean that a free licence has been given to the Assessing Officer for not to follow the procedure laid down in the relevant provisions of law for the specific purpose and to pass any order in the manner as he likes without applying his mind that which provisions of law he has to proceed and whether the provisions being invoked are applicable in the case before him. Even otherwise the facts and the issue involved in the present case are distinguishable in the manner that issuance of a notice under section 56 instead of section 65 of the Repealed Ordinance and charging of income under the relevant provisions of law are' matters relating to two different subjects. The provisions of section 65 of the Repealed Ordinance provided that for the reason mentioned in clauses (a), (b), (c) & (d) of subsection (1) of the said section a notice containing all or any requirements of notice under section 56 could be issued to the assessee. On the contrary both the provisions of sections 121 and 122 of the Ordinance, 2001 deal entirely with two different situations. An order of Best judgment is passed under section 121 when a taxpayer fails to comply with the requirement of the provisions of subsection (1) of the said section while under the provisions of section 122(1)1(5) an assessment order already existing in the field is amended on the basis of information obtained through audit or otherwise. In our opinion the department is not justified to stretch the above quoted Observations of honourable Supreme Court in the manner to cover each and every case of the negligence, non-application of mind by the Assessing Officer or failure on his part to proceed in accordance with the manner prescribed under the law. It is a settled principle of law that when a law requires a certain thing to be done in a specified manner it must be done in the said manner. The orders in contradiction of mandatory provisions of law are nullity in the eyes of law. Our this viewpoint is based on the authority of the case law reported as 1971 SCMR 681 and (2000) 82 Tax 135 (H.C. Kar.). In view of discussions 'made as above, we are of the opinion that neither the provisions of section 121(1)(d) and those of section 122(1)(5) could be simultaneously applied nor these could be applied in place of each other. Another thing which is important to be clarified here that issuance of simultaneous notice under section 177 along with notices under section 121 or 122 is also legally not sustainable. The provisions of sections 122(1)45) can only be invoked in the presence of any definite information which could be obtained through audit or by some other means. Unless such information is available with the Assessing Officer there will be no justification . for initiation of proceedings under section 122(1) of the Ordinance. Similar will be in the case of the provisions of section 121(1)(d) of the Ordinance which could not be initiated unless the default on the part of the taxpayer in filing the return and/or in producing the accounts books or other evidence etc. is committed. The Assessing Officer could only initiate proceedings under section 122 if he after conducting the Audit has found any defect constituting a definite information regarding the concealment or suppression of income or the Assessing Officer has obtained any information of concealment/ escapement of income etc. from any other source. In the like manner the invoking ,the provisions of section 121(1) shall not be justified unless taxpayer has failed to file a return or statement required to be furnished under the relevant provisions of law or the taxpayer has not produced the accounts books, documents etc. required by the Assessing Officer.

22. Another misconception on the part of the department is the application of the provisions of section 121(1)(d) in case of default of the assessee coming under the ambit of subsection (2) section 174. For the sake of convenience the provisions of section 174 is reproduced as hereunder-

"174. Records .---(1) Unless otherwise authorized by the Commissioner, every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed.

(2) The Commissioner may disallow [or reduce] a taxpayer's claim for a deduction if the taxpayer is unable, without reasonable [cause] to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction.

(3) The accounts and documents required to be maintained under this section shall be maintained for five years after the end of the tax year to which they relate.

[(4) For the purpose of this section, the expression `deduction' means any amount debited to trading account, manufacturing account, receipts and expenses. account or profit and loss account.]"

The provisions of subsection -(2) of section 174 are very explicit and unambiguous. It empowers the Assessing Officer to disallow or reduce a taxpayer's claim for deduction where accounts are maintained but the taxpayer fails to substantiate such claim by producing evidence in support thereof and does not in any way authorize the Assessing Officer to frame a best judgment assessment and determine the tax payable thereon by resorting to the provisions of clause-(d) of subsection (1) of section 121 of the Ordinance instead of passing an order of assessment under the provisions of section 122 of the Ordinance, 2001.

23. In view of discussions as made above our findings on various issues, under consideration are summarized in the following manner:

(i) On selection of a case for audit under section 177 of the Ordinance a return filed by a taxpayer does not automatically stand excluded from the operation of subsection (1) of section 120 of the Ordinance unless the return has been declared invalid under the provisions of subsection (4) of Section 120 of the Ordinance.

(ii) A return could be declared invalid under the provisions of subsection (4) of section 120 read with subsection (3) and (6) of the said section if after selection of case for Audit it is found by the Assessing Officer that the taxpayer has filed a false declaration under clause (h) of subsection (2) of section 114 of the Ordinance with regard to the maintaining of record.

(iii) A return could not be treated as an invalid return after the end of the finance year in 'which it is furnished under the provisions of subsection (6) of section 120 of the Ordinance. However we shall refrain from commenting upon the authority of the Commissioner or our view on the issue of time limitation for selection of case for audit under the provisions of section 177(4) of the Ordinance because of these issues not being the subject matter of present appeals.

(iv) The initiation of assessment proceedings through simultaneous issuance of notice under sections 177 and 122 or 121(1)(d) is legally not justified and orders passed in consequence thereof being unlawful are not sustainable and ab initio void. Unless any definite information comes in the hands of the Assessing Officer as a result of Audit carried out by him no proceedings for amendment of order under section 122 could be initiated. Similarly until the taxpayer has committed default in producing the accounts, record and other documents etc. required by the Assessing Officer for the purpose of assessment the provisions of clause (d) of subsection (1) of section are not attracted.

(v) The provisions of section 121(1)(d) and those of subsections (1) and (5) of section 122 are different in nature dealing with entirely different situations therefore could neither be simultaneously applied while passing an order in the case of taxpayer nor the application of one could be replaced by the other.

(vi) Provisions of clause (d) of subsection (1) of section 121 of the Ordinance are attracted only in the case of absence of a valid return i.e. either the return furnished by the taxpayer has been declared invalid under the provisions of subsection (4) read with subsection (3) and (6) of section 120 of the Ordinance or no return is filed in compliance of notice issued under sub-section (3) or (4) of section 114 of the Ordinance.

(vii) An order of amendment under section 122 of the Ordinance could be passed by the Assessing Officer even if no compliance of all or any statutory notices issued under section 177 or 122(9) is made by the taxpayer and/or no accounts, record or evidence etc. required by the Assessing Officer is produced by him.

24. In case of total non-compliance of statutory notice or non-production of accounts books or documents etc. by a taxpayer the options of the Assessing Officer could be the following:--

(a) The Assessing Officer could proceed to frame the best judgment assessment under clause (d) of subsection (1) of section 121 by declaring the return invalid in case the limitation period provided in subsection (6) of section 120 has not expired.

(b) For the cases not falling in the above category where the limitation period of section 120(6) has expired, the only option with the Assessing Officer is to proceed for amendment of assessment under the provisions of section 122. In such cases the 'Assessing Officer can disallow or reduce any claim of deduction as provided in subsection (2) of section 174 of the Ordinance and can also make the additions to the income under section 122 on the basis of definite information available with him.

25. As consequence of the our findings on the issues as mentioned and discussed above, all the appeals in both the cases under consideration stand decided in the following manners:-

(i) I.T.As. Nos.30 to 32/IB/2009

26. In view of the issues specified at Serial Nos. (i) & (ii) of para. (8) of this order having been decided in the favour of the taxpayer the order of the CIT(A) is hereby maintained. As a result, the departmental appeals for all the three years stand dismissed.

(ii) I.T.A. No.12/IB/2009

27. The appeals on all the legal issues mentioned in para. 13 above having been decided in favour of the assessee-respondent, the order of the CIT(A) is hereby maintained. The departmental appeals having been dismissed on the above mentioned legal issues, we do not feel any need to adjudicate upon the remaining grounds. As a result, the departmental appeal in this case also fails.

H.B.T./62/Tax (Trib.) Appeals dismissed.

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