M/s Capital Strategies (Pvt.) Ltd.
Tax Year 2016
Appeal No.
Date of Filing
Order u/s
:
:
:
Date of Order
Name of Assessing Officer
:
:
Name of Authorized
Representatives (ARs)
:
647/2022
30.06.2022
122(5A) of the Income Tax
Ordinance, 2001 (Ordinance).
11.06.2022
Ms. Salma Shaheen,
Additional Commissioner Inland
Revenue (Audit-I), Range-I, ZoneI, CTO, Islamabad.
Mr. Habib Fakharud Din, FCA and
Mr. Naisr Malik, Advocate.
None attended
10.10.2022.
Rs. 1,239,609/-
Name of Departmental Representative :
Date of Hearing
:
Revenue Involved
:
Appellate Order u/s 129 of the Income Tax Ordinance, 2001
This appeal is filed by M/s Capital Strategic (Pvt.) Ltd. During the desk
audit of the return, the Additional Commissioner IR (ADCIR) allegedly
observed that the taxpayer made refund adjustment of Rs. 1,239,609/- whereas
no refund order u/s 170(3) of the Income Tax Ordinance, 2001 (Ordinance) was
found on record. Consequently, ADCIR issued notice u/s 122(9) read with
section 122(5A) of the Ordinance on 29.04.2022 for compliance by 09.05.2022.
On due date nobody attended the office nor any application for adjournment
was received. Another notice was issued for compliance by 10.06.2022, but no
compliance was made. Consequently, the proceedings were finalised vide
impugned order whereby refund adjustment was disallowed on the basis of
decision of honourable ATIR in ITA No. 141(PB) 2019 dated 24.02.2022
(discussed later in the appellate order). The taxpayer is agitating the impugned
order on the basis of following grounds of appeal:-
1
2.
Grounds of Appeal:
i.
That the order of the learned Assistant Commissioner IR, Audit-I, Range-I, City
Zone, Rawalpindi is bad in law and against the facts of the case.
ii. That the assessing officer is not at all justified in passing an ex-parte order, which in
view of the facts and circumstances of the case is illegal.
Adjustment of Tax Refunds by the taxpayer against tax payable
iii.
In order under reference, relying on the provisions of section 170 of the Income Tax
Ordinance, 2001, emphasis has been placed on that:
•
•
iv.
v.
Only a refund determined as per procedure laid down in the said section
can be adjusted and in the absence of any such order the adjustment of
refund claim is invalid; and
Only the Commissioner has the authority to adjust the refund after its
determination under the said section against any tax payable by the
taxpayer.
We understand that section 170 of the Income Tax Ordinance, 2001 is attracted
where a taxpayer desires to obtain the refund (through a refund voucher) and not
where the taxpayer desires to adjust the same against the tax payable for any
subsequent year.
We also understand that section 170(3) of the Income Tax Ordinance, 2001 is being
misinterpreted. For ease of reference the said section is reproduced:
“(3) Where the Commissioner is satisfied that tax has been overpaid, the
Commissioner shall(a)
apply the excess in reduction of any other tax due from the
taxpayer under this Ordinance;
(b) apply the balance of the excess, if any, in reduction of any
outstanding liability of the taxpayer to pay other taxes;
and
(c) refund the remainder, if any, to the taxpayer.
Firstly in clause (a) the word used is due and not payable
Secondly, question arises, how the Commissioner would know the tax payable
along with the return before filing of the return by the taxpayer and as per current
FBR systems a return could not be filed unless tax payable along with the return
has been paid.
This means that adjustment of refunds due by the taxpayer against tax payable is
permissible, which fact has been taken cognizance by the Rules making powers of
the Board and for this purpose a separate row titled as “Refund Adjustment of
Other Year(s) against Demand of this year – Code 92101” is provided in the
prescribed return forms as well as on FBR tax return filing systems.
vi.
It would equally be critical to highlight here that refund becomes due when the
deemed assessment order under Section 120 of the Ordinance comes into existence
and thereafter the refunds of previous years can very much be adjusted against the
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liability of current year. This legal notion has been endorsed by the judgments of the
superior courts as well. Hon'ble Lahore High Court has held in a case reported as
2021 SLD 48 LHC as under.
"Examination of provisions, contained in Section 170, has itself answered the
confusions noted supra. The proviso to subsection (1) of Section 171 is required
to be read with Section 170 After collective reading of these provisions, we
are not convinced by the arguments of learned counsel for the respondents
that word "may" used in subsection (1) of Section 171 makes filing of
application for refund as optional. The word "may" is used for applying to the
Commissioner for refund within two years. It appears that option to apply
for refund in two years is given for the reason that taxpayer can also opt for
adjustment of refund against his future tax liability or for adjustment against
demand under other taxing statutes.”
In another decision the hon'ble Appellate Tribunal in a case reported as 2010 PTD
519 (Trib.) has held as under.
“….we are constrained to observe that section 171 is to be read in the light of
section 120 as refund becomes due the moment an assessment order creating
the said refund comes into existence. As a corollary of this fact, we can
safely hold that all the proceedings conducted in pursuance of completion
of assessment should be considered to have been made along with the actual
assessment, which stands completed on the day complete return is filed.”
vii.
Another aspect of this issue is the past practice. Since inception, in the post and pre
era of the Income Tax Ordinance, 2001, such tax adjustments are being recognized,
without going into the fact that such adjustments are permissible or not under the
law. As per principles pronounced by the superior courts, an established past
practice has the force of law. Reliance in this regard is placed on the judgment of
the Supreme Court of Pakistan reported as 1989 SCMR 353 titled Radaka
Corporation and Others Vs. Collector of Customs, wherein the relevant extract is as
under:
“7. The above interpretation of the recovery was always acted upon by the
Department and Mr. S.K. Rahim Collector of Customs, in his letter described it
as a standing practice". Now it is settled law that where the departmental
practice has followed a particular course in the implementation of some rule
whether right or wrong, it will be extremely unfair to make a departure from it
after a lapse of many years and thereby disturb rights that have been settled
by a long and consistent course of practice; see Nazir Ahmad v. Pakistan
and others (PLD 1970 SC 453).”
viii.
All these aspects of the issue in hand have been elaborately discussed in a latest
judgment of the Appellate Tribunal of Inland Revenue in ITA 200/MB/2022 dated
13-04-2022. some of the relevant extracts from this judgment are as under:
“6.
We have examined the record and have gone through the rival
arguments. It is admitted position that the format of return of total income is
prescribed under the Income Tax Rules, 2002. Perusal of format of the return
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for Tax Year 2019 indicates that under the head computation there is a column
with description "Refund Adjustment of Other Year(s) against Demand of this
Year" at Code [92101]. In this column the adjustment in question has been
made. As per format of return and instructions thereof contained in the Rules
there is no requirement or additional documentation for making the above
adjustment.”
“8.
In the impugned order, the expression used by the OIR is "unverified
refund as basis for impugned rectification. The term "refund" has not been
defined in the Ordinance. Reference can, however, be made to section 170
which reads as under:
170. Refunds.- (1) A taxpayer who has paid tax in excess of the
amount which the taxpayer is properly chargeable under this
Ordinance may apply to the Commissioner for a refund of the
excess."
“9.
From the above language, it transpires that "refund" means payment of
tax in excess of tax chargeable. When a taxpayer claims refund in return of
income, it means tax paid by him is in excess of his tax liability for that
relevant year. As per format of acknowledgment of return of total income, this
is shown as "refundable income tax at Code [9210] and assessment is treated
to be made under section 120 on the date of filing. In our considered
opinion, unless refund claimed by a taxpayer is found inadmissible,
after due verification under the law, the same cannot be disallowed merely
on basis that it was "unverified" In the case in hand, the Department has
neither disputed tax overpaid for preceding year nor was there any
verification process employed by DCIR to declare it as inadmissible.
Therefore, disallowing adjustment of prior year's refund is not found justified
under the circumstances and that too through rectification proceedings.”
“10. Perusal of appellate order shows that the learned CIR (Appeals) by relying
on section 170(3) of the Ordinance, observed that refund is only due when the
Commissioner is "satisfied" that tax has been overpaid and there is an adjustment
order under section 170(3)(a). It is, however, noted that the finding is misconceived
since aforesaid provision envisages issuance of refund or its adjustment by the
Department and not adjustment by the taxpayer.
“11.
Secondly, if the Commissioner in this case was not "satisfied
regarding excess payment of tax”, it also means that the Commissioner was not
"unsatisfied” as well on this account. From perusal of record, it is undisputed
that no order under any provision of the Ordinance had been made by the
Department to the effect that tax in this case had not been overpaid. The
verification of correctness of refund claim of a taxpayer is the responsibility of
Department. If this responsibility is not fulfilled, the taxpayer cannot be
punished for inaction of the Department.”
“12. We are of the considered view that before disallowing refund adjustment
in the case in hand, the OIR should have made attempt to verify refund claim of the
taxpayer for relevant year and if, after verification, tax paid in excess was not
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verified, only then he could issue notice for disallowing adjustment of the same
against tax payable for subsequent year. In the absence of any finding on record,
the observation that taxpayer had adjusted "unverified" refund is not sustainable.
When the ground on which rectification was sought is not established from
record, question of there being any mistake apparent from record does not
arise, hence, section 221 was wrongly invoked under the circumstances. We also
observe that mistake, if am could at best be attributed to the relevant tax year to
which the said unverified refund" pertained to and not this subsequent year under
appeal.”
“14. In view of the above observations made and case law relied upon, we hold
that the adjustment of prior year's refunds appearing in the acknowledgment
as "refundable income tax" was in accordance with law, rules and established
past practice. Therefore, there was no mistake apparent from record which
could be rectified through order under section 221.
ix.
In view of the foregoing submissions the refund adjustments claimed cannot be
denied unless it is proved that the refund adjustment claimed were not actually
due.
Amendment of Deemed Assessment under section 122(5A)
x.
xi.
We understand that the provisions of section 122(5A) of the Income Tax
Ordinance, 2001 and the powers vested in the Commissioner are to keep a check
and to further amend an assessment or amended assessment order passed by
his/her subordinates for any erroneousness in so far it is prejudicial to the interest
of revenue.
We also understand that powers vested under section 122(5A) of the Income Tax
Ordinance, 2001 cannot be invoked in respect of deemed order under section 120
of the Income Tax Ordinance, 2001. Our this understanding is supported by the
distinction in the provisions of section 122(5) and 122(5A) of the Income Tax
Ordinance, 2001 as explained hereinafter.
Section 122(1), 122(5) and 122(5A) of the Income Tax Ordinance, 2001 reads as
under:
“122(1) Subject to this section, the Commissioner may amend an
assessment order treated as issued under section 120 or issued under
section 121, by making such alterations or additions as the Commissioner
considers necessary.”
“122(5) An assessment order in respect of tax year, or an assessment year,
shall only be amended under sub-section (1) and an amended assessment for
that year shall only be further amended under sub-section (4) where, on the
basis of audit or on the basis of definite information the Commissioner is
satisfied that.........”
“122(5A)
Subject to sub-section (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.
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xii.
A plain reading of the foregoing provisions reveals as under:
a.
b.
Sub-section (1) empowers the Commissioner to amend an assessment
order treated as issued under section 120 or issued under section 121.
Sub-section (5) deals with the situations under which the Commissioner can
amend or further amend an assessment order. However, the amendment or
further amendment is to be made under sub-section (1), which covers order
treated as issued under section 120 or issued under section
121. Hence, under sub-section (5) the Commissioner has power to amend
or further amend an order treated as issued under section 120 or issued
under section 121.
c.
Sub-section (5A) is not linked with sub-sectio (1) and therefore amended or
further amended of an assessment under sub-section (5A) is to be made
independently under the said sub-section (5A) and not under sub-section (1).
This is quiet distinct to the powers vested in the Commissioner under subsection (5). Thus sub-section is an independent provisions except for notice
to the taxpayer under sub-section (9).
d.
The legislative intent is crystal clear that under sub-section (5), which is
linked with sub-section (1), that an order treated as issued under section
120 can also be amended or further amended under sub-section (5).
e.
Contrary to the above, in sub-section (5A) the
words used are “the
Commissioner may, amend, or further amend, an assessment order” and
the legislator has intentionally not included or cover an order treated as
issued under section 120.
f.
Thus the purpose of sub-section (5A) as understood by us and stated in Para
12 above gets force from the distinction in sub-section (5) and (5A) as
explained hereinabove.
xiii.
In view of the foregoing submissions the proceedings finalized in the instant case for
alleged erroneousness as far as its is prejudicial to the interest of revenue in the
order treated as issued under section 120 is without jurisdiction, illegal,
unwarranted, without any basis and void ab-inito
3.
Appellate Hearing:
The appeal was fixed for hearing on 10.10.2022. In compliance,
Mr.Habib Fakhrud Din, FCA and Mr. Nasir Malik, Advocate, attended
proceedings as Authorized Representatives (ARs) whereas no one attended to
represent the department. The ARs argued the case on the basis of grounds of
appeal. The ARs relied upon the judgment of honourable ATIR Multan Bench
related to refund adjustment.
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4.
The impugned order is examined in light of the arguments. The ADCIR
disallowed refund adjustment on the basis of orders of learned ATIR in ITA No.
141(PB) 2019 Tax Year 2017 dated 24.02.2022. The relevant portion of which
is reproduced below:
“Arguments of both the parties have been heard. Learned AR has
admitted before us that refunds which was yet to be determined by the
department u/s 170 of the Ordinance, were adjusted against the tax
liability pertaining to tax years 2007 to 2013. Learned AR did not contest
the conclusions drawn in the impugned order by the learned CIR
(Appeals) that no refund has been determined by the department u/s
170(4), hence the adjustment of prior year’s liabilities against these
refunds was not in accordance with the law. With this much
understanding of the facts of the case, he conclude that OIR has rightly
invoked the provisions of section 122(5A) to establish that the deemed
assessment u/s 120 was erroneous in so far as prejudice to the interest of
revenue, and also that the impugned order passed by the learned CIR (A)
is in order and does not call for interference, which is confirmed.
Resultantly, the appeal is dismissed being devoid of merit.”
The impugned order to the extent of disallowing refund adjustment is valid.
5.
However, the honourable ATIR Multan Bench in its judgment in ITA No.
200/MB/2022 dated 13.04.2022, relied upon the ARs deals with the similar
issue with a different perspective. Following extract from the judgement is
relevant: 12.
We are of the considered view that before disallowing refund adjustment
in the case in hand, the OIR should have made attempt to verify refund claim of
the taxpayer for relevant year and if, after verification, tax paid in excess was
not verified, only then he can issue notice for disallowing adjustment of the
same against tax payable for subsequent year…
6.
A combined reading of both judgments suggests that both judgments
support and complement each other. While an order u/s 170(3) of the Ordinance
is necessary to claim adjustment of refund as held be honourable ATIR,
Islamabad Bench, it is the responsibility of the department to first verify the
claim of refund for the purposes of adjustment against the tax demand in light of
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orders of the honourable ATIR, Multan Bench. Perusal of the impugned order
shows that no attempt was made to address the fate of refund claimed by the
taxpayer, instead, proceedings were initiated for disallowing the claim of
adjustment which cannot be justified.
7.
It would therefore be judicious and professional to first address claim of
refund under the law and only then proceed with recoveries or disallowing
adjustment against tax demand of subsequent year(s).
8.
In view of the above, the impugned order is annulled.
9.
Appeal stands disposed of in the manner as indicated above.
NOTE:
Any Person or an Officer of Inland Revenue dissatisfied with this order
may file an appeal under section 131 of the Income Tax Ordinance 2001 to the
Appellate Tribunal Inland Revenue, Islamabad Bench Islamabad within 60
days of the date of receipt of this order. Any such appeal may be addressed to
the Assistant Registrar of the Appellate Tribunal, Inland Revenue, Islamabad
Bench, Islamabad bearing prescribed Court Fee under the law. A copy of such
an appeal may also be sent to this office for information and record.
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