Tel. 041-9210397
Fax.041-9210404
No.CC/RTO/FSD/
Email:ccir.rto.fsd@fbr.gov.pk
Dated. October 28, 2014
SEMINAR ON IMPROVING THE QUALITY OF ASSESSMENT
BY COMMISSIONER INLAND REVENUE (APPEALS),
REGIONAL TAX OFFICE, FAISALABAD ON 22.10.2014
A seminar was conducted by the Commissioner Inland Revenue (Appeals), Regional Tax Office,
Faisalabad with all officers of RTO, Faisalabad to discuss improving the quality of assessment
orders under all the three statutes Inland Taxes (I.Tax, S. Tax & FED). The main topics discussed
included the following:
i. Service of notices/documents.
ii. Natural justice, due process of law & opportunity of being heard.
iii. Best judgment of assessment u/s 121(1)(d) of the Income Tax Ordinance, 2001.
iv. Annulment of assessment & consequence(s) thereof.
v. Penalties against non compliance.
vi. Unexplained income & assets u/s 111 of the Income Tax Ordinance, 2001.
vii. Common defects in assessment orders.
2. The Seminar was presided over by Chief Commissioner IR and attended by all the officers of
Regional Tax Office, Faisalabad. The seminar started with recitation from the Holy Quran. The
Chief Commissioner IR emphasized importance of the topics covered especially at the time when
cases have been selected for audit under all the three IR statutes (I. Tax, S. Tax & FED).
Thereafter, Dr. Muhammad Khalid Malik, Commissioner IR (Appeals), RTO, Faisalabad discussed
the topics in detail. Practical aspects of the above issues were emphasized in a participatory and
interactive mode. All the practical problems relating to above topics were pointed out and real-life
situations were brought into discussion. Common mistakes in the assessment orders were
identified & discussed at length.
3. The seminar was concluded by the CCIR. It was hoped that the discussion on the topics would
enable the assessing officers to improve quality of assessment orders and mistakes pointed out will
be avoided specially while finalizing the pending/selected cases of audit.
(SAJJAD AMJAD)
Deputy Commissioner (HQ)
Distribution:
1. The Commissioner Inland Revenue (Appeals), Faisalabad.
2. The Secretary (FATE), Federal Board of Revenue, Islamabad (with the request to post the
same at FBR Web Portal alongwith photographs).
1
IMPROVING QUALITY
OF ASSESSMENT
ORDERS
2
DR. KHALID MALIK
Commissioner (Appeals)
MBBS
Allama Iqbal Medical College,
Lahore
LLM
(Intl’l Economic Law)
University of Warwick,
3
UK
FOR WHOM WE WRITE
ASSESSMENT ORDERS?
4
 taxpayer and ARs
 Appellate authorities
 Authorities within IRS:
 Successor
 Addl CIR [Amendt u/s 122(5A)]
 CIR [Revision u/s 122A & 45A]
 FBR [u/s 214B & 45A]
 Internal Audit
I&I
Authorities outside IRS:
 External
Audit
 FTO
 President
5
Sequence
•
•
•
•
•
•
•
Service of notice
Opportunity of being heard
best Judgement u/s 121(1)(d)
annulment of asst and consequences
Penalties
deemed income u/s 111
common defects in assessment orders
6
SERVICE OF NOTICE
7
Legal provisions
(1)Section 218 of
Income Tax Ordinance, 2001
(2) section 56 of
Sales Tax Act, 1990
(3) section 47 of FED Act, 2005
(4) Rule 74 of IT Rules, 2002
(5) Order V of CPC, 1908
8
ON WHOM?
Status
Person for service
Individual
Individual himself
Non-individual
Representative
9
Representatives
sections 172 & 58A
Person
Representative
Company
Principal Office [u/s 2(44A) of IT Ord]
AOP
Principal Office [u/s 2(44A) of IT Ord]
Firm
Any partner
Trust
Any trustee
Federal Govt.
Any individual responsible for accounting for receipts of
moneys of funds on behalf of Govt.
Provincial
Govt.
-do-
Local Govt
-do-
10
 a director,
 a manager,
 secretary,
 agent,
 accountant or
 any similar officer
any person connected with the management
or administration of the company or AOP
upon whom the Commissioner has served a
notice of treating him as the principal officer
thereof
[u/s 2(44A) of IT Ord]
11
HOW?
1) Personal service
2) postal or courier service
3) service by affixation
4) substitutive service
12
Personal service
(1) Individual taxpayer
Only on taxpayer personally
(2) non-individual taxpayer
On representatives
13
postal or courier service
Mode: Registered post or courier
Sent to:1) individual’s usual or last known address in
Pakistan;
2) registered office or address for service of
notices under this Ordinance in Pakistan
3) any office or place of business of the person in
Pakistan
14
substitutive service
1)Electronic
Communication:
Email, telephone, telegram
1) publication in press
2) beat of drum
3) any other mode the Court
may deem fit
4) service by affixation
15
SERVICE BY AFFIXATION
16
 When taxpayer cannot be found out even after
repeated visits by N/S
-ORWhen he refuses to receive
 N/S to visit again and again & make enquiries
about whereabouts
 Detailed report to be submitted to Assessing
Officer (AO) narrating his efforts for service and
reasons for non-service
 satisfaction of AO that service is not possible in
ordinary manner
17
 order to effect the service by affixation
 Notice to be affixed on:(i) on outer door or conspicuous part of the
house of business premises
(ii) a copy to be posted on notice board
Office copy to bear signatures of two witnesses
with CNIC
 Report of IIR:
(a) circumstances of service
(b) time and date
(c) identification of the house
18
 AO to satisfy himself that notice by affixation
served
 IIR to be examined on oath by AO
19
e-service of notice U/R 74
(1) e-doc considered served, if sent on e- address notified
by taxpayer
(1) e-doc considered served to e- address, if sender
receives:(a) In case of facsimile number, confirmation from the
sending facsimile machine that transmission sent
(b) In case of email, confirmation from server of the
recipient that the msg has been received
(c) From FBR, digitally signed e-mail acknowledgment
receipt of return or WH statement
(3) e-address: fascimille number or email
(4) document: notice, order or requsition
20
Electronic service of notice
Rule 74 of IT Rules, 2002
(1)e-doc considered served, if sent on e- address
notified by taxpayer
(2) e-doc considered served to e- address, if sender
receives:(a) In case of facsimile number, confirmation from the
sending facsimile machine that transmission sent
(b)In case of email, confirmation from server of the
recipient that the msg has been received
(c) From FBR, digitally signed e-mail
acknowledgment receipt of return or WH statement
21
How to ensure proper service
 training
of NS & IIR
 identify representative for servic
simultaneous use of different modes of service
(i) personal service on taxpayer
(ii) personal service on AR
(iii) email to taxpayer
(iv) email to AR
(v) fax to taxpayer and AR
(vi) postal service
 Service by affixation where so warranted
22
 Record all such events of service on Order Sheet
 prints of online tracking of postal service &
POF
 Print Emails & POF
23
Opportunity of being heard
Audi Alteram Partem
24
[hear the other side]
The Hearing Rule:
taxpayer be provided reasonable time &
adequate opportunity of being heard
 The Bias Rule:
no predetermined, preconceived intentions
 The Evidence Rule:
decision must be based upon logical proof or evidence
material.
25
•
•
•
•
•






Procedural fairness
Objective decision making process
Fair decision
Quasi-judicial proceedings
No extraneous influence:CIR or AdCIR
External audit
Internal Audit
I&I
Complaint
CREST
26
• opportunity of being heard to be provided even
when certain provision of law does not specifically
requires
e.g sections 121, 122C, 205 of income tax
• reasons for non-acceptance of the declared version
• basis for amendment u/s 122 or for estimation/asst
u/s 121
• Addition based on issues not confronted—
not sustainable
27
How much is too much?
 variable from case-to-case
 at least 2-3 notices with 7-10 days compliance
time before ex parte decision
28
BEST JUDGEMENT ASSESSMENT
U/S 121
Ex Parte Assessment
29
When:
 failure to provide books of account or
any other document or evidence
 failure to file wealth statement
Procedural aspects:
 notice u/s 121(1)(d)--- must
(though specifically not provided in the section)
 to be finalised on the due date of hearing
(and not on any subsequent date)
30
 mandatory obligation of AO, despite use of word
“may”
 cannot be equated with “ex parte” proceedings
under civil law
 The object and the purpose: to arrive at a fair and
proper estimate of the turnover and income
 best judgment assessment and
not penal assessment
(not retaliatory, vindictive, capricious or even
arbitrary) [(1985) 51 Tax 181 (SC Pak)]
Prefer phrase “best judgment” to “Ex parte” asst
31
Amendment v assessment
 not discretionary but based on best judgment and
documents available on record
 penalty Para to be included in the body of AO
 Speaking order
 basis of assessment must be communicated and
discussed in the body of assessment order
32
Basis of assessment
 taxpayer’s own documents where partial
compliance made
taxpayer’s own history
 parallel cases
 3rd party information
 work back of withholding tax like that on cash
withdrawal
 comparison with sales tax returns
 industrial notes
 input (wages, electricity, raw material consumed,
gas) vis-à-vis output
33
 capital vis-à-vis turnover
average stock vis-à-vis turnover
aggregate credit entries and peak credit entry in
bank account statement
 any inference from wealth statement or
wealth reconciliation statement
 any information on personal expenditure
 settled commercial practices
34
Commercial practices
 processing receipts = 4 times consumption of gas
 retail sale= 5 times rotation of average stock
 wholesale=10-11 times rotation of average stock
 GP Rates
 NP Rates
 Formula assessments:
o ice factory and cold storage
o bricks kiln
o oil mill
35
o Flour mill
 open-ended use of best judgement
 credit side of trading account
 debit side of P&L a/c
where P&L a/c furnished, head-wise disallowance with
reasons e.g.
Telephone
Personal and non-business use by proprietor
Vehicle running
-do-
stationery
Excessive, unvouched, unverifiable
salary
Disallowed u/s 21(l)
Rent
Disallowed u/s 21(c)
 Add any other legal addition like:
o u/s 111
o u/s 39(3)
o u/s 34(5)
36
Sample best judgment ASST.
Amount (Rs.)
1
Sales estimated
5,000,000
2
GP assessed @ 15%
Less GP declared
Trading addition (4-5)
Additions out of P&L a/c (head-wise)
Add addition u/s 111(1)(b)
Add addition u/s 39(3)
Total additions [5+6+7+8]
Add declared income
Income assessed
750,000
(430,000)
320,000
150,000
300,000
500,000
1,270,000
560,000
1,830,000
37
4
5
6
7
8
9
10
11
ANNULMENT
OF
ASSESSMENT
38
Situations warranting annulment of asst
 time barred
 wrong person assessed
 wrong tax period or year assessed
 proper opportunity of being heard not
provided
 non-observance of mandatory legal
conditions
39
Remedial measures after annulment
 no difference b/w annulment, cancellation and
setting aside
 annulment is equal to “remand back” except
when because of limitation.
 “Barring some cases, annulled asst can also
be taken up if not hit by limitation”
FBR’s letter C. No.1(3)DT-14/91 dated
26.05.1991
 Fresh proceedings can be undertaken after
annulment [2013 PTD 1181 (Trib)]
40
41
tax
Penalty
Nature
Civil liability
Criminal liability
purpose
Source of revenue
Instrument of
compliance
Mens rea
Not necessary
mandatory
Onus probandi
On taxpayer and Deptt
On Deptt
42
Actus reus ("guilty act“) when proved in
combination with the“mens rea”( "guilty mind“)
produces criminal liability
43
Remember
•
•
•
•
assessment and penalty proceedings are separate.
Penalty para in the body of assessment order
mens rea mandatory for penalty
opportunity of being heard mandatory
44
SECTION 111
45
Unexplained cash credit in books of
account [section 111(1)(a)]
Any amount is credited in a person’s books
of account;
and
•The person offers no explanation about and
source of cash credit; or
• his explanation is unsatisfactory in opinion
of CIR
46
Purpose of the provision:
to restrict/control taxpayers’ attempt to
introduce their unaccounted income/black money
Under the guise of outside depositors
(Agriculturists, Non-tax payers, person having
exempt income and other such persons)
whose genuineness, capacity and
creditworthiness is required to be proved
beyond reasonable doubts.
47
3-ingadients for making
addition:-
a.
an amount is credited
b. in books of account of taxpayer
c. taxpayer offers no explanation or
unsatisfactory explanation
48
1) Books of accounts
It means books of a/c maintained by
taxpayer and not any such book maintained
by any other person
 bank account statement is not book of
taxpayer
 existence of books of a/c maintained by
taxpayer is pre-condition
49
2) Amount credited
amount credited in books of a/c
 existence of credit entry in books is
precondition
 represents income of taxpayer in
absence of any other source of income of
taxpayer

50
3) Nature and source
exact nature of the credit entry
 genuineness of transaction
 source of credit entry:
i) Identity: names, addresses, NTN
ii) supporting documentary evidence
iii) production of such person
 creditworthiness of such person
51
4) Onus probandi
1) On taxpayer:
primary onus on the taxpayer to prove the
source of a sum of money found to have been
received by him.
2) On Deptt:
after furnishing the explanation by taxpayer
52
5) No explanation
statutory presumption
in the event of unsatisfactory explanation
of cash Credits
is that these amounts represent taxpayer’s own
undeclared/unaccounted for income
 AO justified to draw an inference that the receipts
are of an income nature
 no onus on Deptt locate the exact source of the cash
credits
53
6) Unsatisfactory explanation
 The satisfaction of the AO –
basis of invocation of his powers
 such satisfaction must not be imaginative but
derived from relevant facts and factors, and is on
the basis of proper enquiry of all material before
him
 Examination of relevant record and documents
 enquiries and investigations
 summoning relevant persons
54
Unexplained expenditures
u/s 111(1)(d)
55
it must have incurred
 must be exact (not hypothetical estimate)
 onus on Deptt
 whether suppressed Purchases warrant addition
under this section?
56
Quadruple conditions u/s 111(4)a)
foreign exchange
 remitted from abroad
 through banking channel
 encashed in Pak Rupees
57
Common
in the assessment orders
58
o service
of notice defective
o opportunity of being heard not proper
Simultaneously invoking different provisions:
osection 11(2) & (3) are invoked simultaneously
o asst finalised u/s 121(1)(d) after issuance of notice
u/s 122 and vice versa.
Issues relating to dates:
o best judgment assessment u/s 121 is finalised on
the date subsequent to the date of compliance of
notice
o Date of order on 1st page and date of despatch on
last page of ONO are different
59
oapproval for condonation by CIR under
Sales Tax Act, 1990 not discussed in the body
of order
o Subsection of 11 of ST Act not identified
o subsections of section 122(5) and 111(1) of
IT Ord are not identified
olumpsum additions made out of P&L exp
o nature of business not discussed
o declared results not made part of Order
o long time-lag b/w issuance of order and its
service
60
What Next?
 Amendment u/s 122
 Recharacterization u/s 109
 Conductance and conclusion of audit where
books of account are produced
61
62