‘Tax liability on estimations’: FTO asks FBR to revisit its order

ISLAMABAD: While disposing of a complaint, the Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to revisit its order of imposing tax liability made on estimations and without any definite information that is a basic requirement in terms of section 122(5) of the Income Tax Ordinance, 2001.

Briefly, the complainant is a stock brokerage private limited company and engaged in sale/ purchase of client’s share as well as its own shares. The complainant filed the return of income for the tax year 2016 declaring business loss of Rs336 million.

The department amended the deemed order under section 122(5A) of the Ordinance on 09.06.2022 creating tax liability of Rs1.042 million on appeal, the Commissioner (Appeals-III), annulled the order for re-examination, reconsideration, re-verification; re-adjudication with the specific directions to confront the third-party information. The department issued remand back order repeating the same original order by estimating commission of Rs0.10 per share without physically sharing the information.

State revenue: FTO directs FBR to implement effective mechanism

The FTO referred the complaint to the secretary revenue division for comments. In response, CTO Karachi stated that the brokerage commission was not estimated but computed on the basis of third-party information as mentioned in the order.

During the hearing, the author of the order was asked to explain the source of definite information from third party related to the number of shares traded and imposition of commission @ Rs0.100 per share.

The author of the order contended that the brokerage commission was computed on the basis of third-party information and commission was estimated @10 paisa per share shares under section 18(1) of the Ordinance. On the contrary, the complainant argued that the definite information from NCCPL on the basis of which the tax was imposed, was not shared violating the direction of CIR Appeals. Further, there is no provision for taxation on estimation.

While concluding the proceedings, the FTO observed that the department obtained third-party definite information shares by the complainant. The examination of this definite information reveals that the complainant conducted trading of 109.96 million shares on behalf of his clients. But the department did not share a copy of this information before issuing an adverse order violating the clear-cut direction of the CIR (Appeals) On the contrary, the complainant himself declared trading of 375.48 million shares more than triple the number of shares confronted in show cause notice as acknowledged by the department in the impugned order.

Further, the department estimated commission @ Rs0.10 per share on its own and made addition of Rs10.99 million, whereas, no definite information was available in this regard. Therefore, the department made assumption/ presumption on commission income for which there is no provision in Income Tax Ordinance to estimate business income.

Further, in case of definite third-party information as admitted by the department; the legal course of amendment should have been proceedings under section 122(5) of the Ordinance which states:“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 —(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 mis-classified.”

Therefore, the impugned order without considering the argument of the complainant, violating the directions of CIR (Appeals) is not only contrary to law, rules or regulations but also is perverse, arbitrary, unreasonable, unjust, biased and oppressive causing administrative excesses, contrary to the principle of natural justice hence, unlawful per se.

Accordingly, the tax ombudsman has directed the FBR to direct the Commissioner CTO, Karachi to revisit the impugned order in terms of Section 122A of the Ordinance in the light of discussions after affording proper opportunity of hearing to the complainant and in accordance with the law.

Copyright Business Recorder, 2023