Inland Revenue Tribunal strikes down audit proceedings against M/s Ahmed Medicose

KARACHI: Inland Revenue Appellate Tribunal Muhammad Javed Zakarya has set aside the order of DC Inland Revenue who had rejected 25 percent of the claim of purchases in the trading account of M/s Ahmed Medicose Jhelum during an audit.

According to the details of the case, M/s Ahmed Medicose, an individual taxpayer, derives income from sale of medicines on wholesale basis. Return for Tax Year 2010 was filed declaring income (Net Profit Rs. 1,75,000/-). The case was selected for audit, sales were declared at Rs. 9,666,000/- and net profit at Rs. 140,000/-.

While passing exparte order DC Inland Revenue made additions in trading account rejecting 25 percent (Rs. 35,16,250/-) claim of purchases of Rs.14,065,000/-. The DC-IR further disallowed 50 percent of claim of rest of Profit and Loss expenses.

Being aggrieved from the order of the DC-IR, the taxpayer filed appeal before the Commissioner Appeals, who maintained the disallowance of 25 percent of the trading account expenses while deleted the 50 percent disallowance made by the DC-IR out of the Profit & Loss expenses.

M/s Ahmed Medicose approached Tribunal praying that DC-IR was not justified to disallow 25 percent purchases, but he ad accepted the sales, which itself testifies that there were purchases which turned into sales.

The taxpayer submitted the selection of case for Audit by the Commissioner was illegal and without jurisdiction as after amendment through Finance Act, 2010 in section 177(1) and insertion of section 214C in the Income Tax Ordinance, 2001, the commissioner can only start audit proceedings when the Federal Board of Revenue (FBR), will select the case for audit.

Member Judicial after due deliberation observed that from perusal of the impugned order of the DC-IR, it is found that he had passed an exparte order and made 25 percent lump-sum addition out of Trading Account without evolving any basis, method and mode.

It is the basic cannon of accounting that sales are made through purchases made, if the sales are verifiable then how purchases can be termed as unverifiable. It is also an admitted fact that the assessing officer has not interfered with the sales, hence, principally he had accepted the sales, therefore, terming the purchases as disallowance of 25 percent by the assessing officer is unjust and improper.

It appears that assessing officer is not well cognizant with basic generally accepted accounting principles, Member Judicial noted and also found the selection for audit void.

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