ADVANCE PROFESSIONAL DEVELOPMENT
PROGRAM 2016/17
CASE STUDY
Karachi Tax Bar Association
February 23, 2017
Contact Address:
4th Floor, Central Hotel Building
Civil Lines, Mereweather Road
Karachi - Pakistan
Phone: 021 – 35644872-7
Fax: 021 – 35694573
E-mail: [email protected]
Presented by:
Mohammad Rehan Siddiqui
Partner
FCA, ACMA, LLB
Brief of the Company
The ABC company is a medium sized private
limited company incorporated in Pakistan under
Companies Ordinance, 1984. The company is
involved in marketing consultancy business. Other
companies appoint the company as its marketing
consultant.
Selection of case under section 176 of the
income tax ordinance, 2001
The ABC company was selected in audit under
section 176(1) by the deputy Commissioner
Inland Revenue. He called upon the records
regarding various expenses and income which he
deemed suitable for audit.
2
AUDIT PROCEEDINGS CONDUCTED BY DEPUTY
COMMISSIONER INLAND REVENUE (DCIR)
DCIR initiated the proceedings by calling records
and finalized its order thereafter. The Company
appropriately furnished sufficient documentary
evidence before DCIR and went to the
Commissioner Inland Revenue, Appeals, Karachi
[CIR(A)] against the order finalized by the DCIR.
On certain issues which the company consider
arbitrary and unjustified.
TAX DECLARED
Tax paid and claimed by the company in return
was Rs. 495,000/- and allowed by the DCIR in
order was Rs. 395,000/-
3
Notice Under Section 176(1) of the Income Tax Ordinance, 2001
To,
The Principal Officer
ABC Company Limited
Tax Year: 2016
NTN-9999997-8
Dated: 01 January 2017
SUBJECT:
Document No. 3789589
NOTICE UNDER SECTION 176 OF
THE INCOME TAX ORDINANCE, 2001
FOR OBTAINING INFORMATION AND RECORDS
Dear Sir
Please refer to the subject cited above.
During the course of scrutiny, we have observed certain discrepancies in your return of
Income for the Tax Year, 2016. With reference to the powers referred to me under section 176 of
the Ordinance, I am empowered to call following mentioned details/documents on or before, 10
January, 2017.
i)
Your returns of income reveals that the sales of your company for Tax year 2014 was
Rs. 1,000,000/- and Sales for Tax year 2015 is declared Rs. 2,500,000/- You are
required to furnish the appropriate reason for this huge difference in Sales for two
consecutive years.
ii)
Details/Breakup Entertainment Expenses of Rs. 220,000/- as claimed in Return
along with evidence.
iii)
Evidence of annual withholding statements submitted timely.
iv)
Bad Debts written off and claimed at Rs. 50,000/-. You are required to explain the
admissibility of same.
v)
Donations of Rs. 150,000/- as claimed in the Return along with documentary
evidence.
Looking forward for your co-operation with the revenue administration.
Mr. Inland Revenue
Additional Commissioner Inland Revenue
Regional Tax Office-III, Karachi
4
T-0075/2017
January 03, 2017
The Principal Officer
ABC Company Limited
Tax Year: 2016
NTN-9999997-8
Subject
:
DETAILS OF THE ACCOUNTS
Dear Sir
We are enclosing herewith notice no 3789589 date January 01, 2017 issued under section 176 of
the Ordinance received on your behalf from the office of the Additional Commissioner Inland
Revenue which is self-explanatory. The compliance date in this regard is January 10, 2016. You
are requested to provide us details in relation to the above notice on or before January 8, 2016.
(i)
Explain why your sales have increased 150% during the course on only one year.
(ii)
Party Wise Income Details
(iii)
Subsidiary ledgers of parties
(iv)
Analysis of Income and expenses
(v)
Party Wise Invoices Details/Breakup of Entertainment Expenses
(vi)
Acknowledgement of annual withholding statements submitted
(vii)
Justification of Bad Debts written off and claimed also produce evidence that bad
debts fulfilled the conditions laid down under section 29 of the Ordinance.
Conditions laid down under section 29 are as follows:
(vii)
Donation claimed along with evidence of payments to approved institution.
Yours truly
AUTHORIZED REPRESENTATIVE
5
T-1785/2017
January 10, 2017
Mr. Inland Revenue
Additional Commissioner Inland Revenue
Unit-01, Zone-III
Regional Tax Office-III
Karachi
Dear Sir
ABC COMPANY (PRIVATE) LIMITED
NOTICE UNDER SECTION 176 OF
THE INCOME TAX ORDINANCE, 2001
TAX YEAR 2016
NTN 9999997-8
We refer to the Notice No. 3789589 dated January 01, 2017 which is fixed for hearing for
today. In this connection, we would like to apprise you that the required details are still
awaited from our above client. You are, therefore, requested to kindly adjourn the case at
least for fifteen days and oblige.
Your confirmation in this regard would be highly appreciated.
Yours truly
AUTHORIZED REPRESENTATIVE
6
Notice Under Section 176(1) of the Income Tax Ordinance, 2001
To,
The Principal Officer
ABC Company Limited
Tax Year: 2016
NTN-9999997-8
Document No. 3789690
Subject
:
Dated:15 January 2017
EXTENSION GRANTED
Dear Sir
Refer to your letter No. T-1785/2017. Wherein, you have required extension in
time for submission of documents/details. In this connection, I would like to inform you
that the extension has been granted till 25 January 2017. Kindly note that no further
extension shall be granted.
Inland Revenue
Additional Commissioner Inland revenue
Unit-01, Zone-III
RTO-III, Karachi
7
T-1799/2017
January 25, 2017
Mr. Inland Revenue
Additional Commissioner Inland Revenue
Unit-01, Zone-III
Regional Tax Office-III
Karachi
Dear Sir
ABC COMPANY (PRIVATE) LIMITED
NOTICE UNDER SECTION 176 OF
THE INCOME TAX ORDINANCE, 2001
TAX YEAR 2016
NTN 9999997-8
We refer to the Notice No. 3789589 dated January 01, 2017 wherein you have required
our above client to provide certain details and documents in respect of finalization of the
audit for the tax year, 2016. In this connection our submissions are as under: 1.
INCREASE OF SALES
The company is involved in the business of marketing consultancy. The business
of our company has grown rapidly during the financial year 2014. Due to stability
in law enforcement condition of the country companies have expanded their
businesses. Most of the clients of the Company including MNC’s which are
outsourcing their marketing strategy and other marketing related activates to
professional marketing consultants. Further, we would like to apprise you that the
sales are made through banking channel and party wise monthly details of bank
account are attached herewith for your perusal and records. You may analyze the
ratios of expenses to sales for confirmation in this regard. We are of the view that
the ratios of expenses to sales are almost same as they were in last year.
We are enclosing following for your perusal and records.
-
Month wise breakup of sale.
Receipt for the hotel
Other documents evidences verified from bank
Party wise breakup of sales.
Verification of sales from bank statements.
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2.
ENTERTAINMENT EXPENSE
Entertainment expense relates purely to the sales promotion activities of the
company. The company arranged two seminars in five star hotel for Rs. 187,000/wherein, directors and senior managers of other companies were invited.
Remaining amount comprises of several small payments on account of
entertainment and hi tea provided to customers inside our office premises. We are
enclosing following evidence for you perusal and consideration.
3.
ANNUAL WITHHOLDING STATEMENTS
We would like to apprise you that we have submitted annual withholding
statements for the tax year, 2015 on time. Copy of acknowledgements obtained
after submission are enclosed along with other evidences for your perusal and
records.
4.
BAD DEBTS
Bad debts written off and claimed at Rs. 50,000/- In this connection, we would
like to apprise you that bad debts of Rs. 25,000/- were written off after approval
from board. Remaining bad debts are claimed in the return but they are still
required to be approved by directors in upcoming general meeting. But accountant
of the company has booked them as bad debts due to certainty of failure in
recovery. Copy of Company secretary intimation in this regard is enclosed
herewith for your perusal and consideration.
5.
DONATIONS RECEIPTS
Donations were made to the approved institution Shaukat Khanum Memorial
Hospital which is an approved institution under the Ordinance and the receipt of
which is enclosed herewith for your perusal and records.
We hope that the above would suffice your need. We therefore, request you to finalized
the audit at an early date and oblige.
Yours truly
AUTHORIZED REPRESENTATIVE
9
ENTERTAINMENT EXPENSES ARE AS FOLLOWS
1.
G. Meeting Marriot Hotel
2. On Costumers
TOTAL
Rs.
187,000
Rs.
33,000
220,000
10
ABC COMPANY LIMITED
OFFICE OF THE
COMPANY SECRETARY
Phone 021-399-8563
Mobile 033-322-55421
TO WHOM IT MAY CONCERN
It is to confirm that the board has approved bad debts to be written
of amounting Rs. 25,000/- for the Financial Year, 2016.
Signature
11
Notice Under Section 176(1) of the Income Tax Ordinance, 2001
To,
The Principal Officer
ABC Company Limited
Tax Year: 2016
NTN-9999997-8
Dated: 26 January, 2017
Subject
:
Document No. 3789695
FINAL SHOW CAUSE NOTICE UNDER SECTION 176 OF
THE INCOME TAX ORDINANCE, 2001
FOR OBTAINING INFORMATION AND RECORDS
Dear Sir
Please refer to the subject cited above.
Kindly refer to the notice issued under section 176 of the Ordinance, 2001. I intend to disallow
the following expenses due to unavailability of sufficient evidence. You are once again provided the final
opportunity to show cause on the following.
1.
Why shall not amount of entertainment expense Rs. 33,000/- be added back to the income.
2.
Why shall not amount of bad debts amounting Rs. 25,000/- be added back to the income.
Looking forward for your co-operation with the revenue administration.
Mr. Inland Revenue
Additional Commissioner Inland revenue
Regional Tax Office-III, Karachi
12
INCOME TAX DEPARTMENT
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
Year of Assessment
National Tax Number
Name of Assessee
Address
Status
Whether Resident/Non-resident
Method of Accounting
Income Year Ending
U/s which the assessment is made
D/C No.
Date
:
:
:
:
:
:
:
:
:
:
:
2016
9999997-8
M/s. ABC Company Limited
Shahrah-e-Faisal, Karachi
Company
Resident
Accrual
30 June, 2016
122(1) of the Income Tax Ordinance 2001
00123211
29 January, 2017
ORDER UNDER SECTION 122(1) OF THE INCOME TAX ORDINANCE, 2001
The taxpayer is a company and derives income form Marketing Consultancy business. The head office is
situated near Lal QIlla, Shahrah-e-Faisal, PECHS, Karachi. During the course of audit proceedings and in response
to various letters and notices issued by this office Mr. Muhammad Afzal Khan as Authorized Representative (AR)
of the taxpayer and submitted the following details and documents:
-
Copy of Details of entertainment expenses
Copy of Acknowledgement obtained under section 165 and 149
Evidence of Bad debts written off and claimed
Copy of receipts of Donations
The reply of the AR was as under,
We refer to the Notice No.3789589 dated January 01, 2016 wherein you have required our above client to provide
certain details and documents in light of finalization of the audit for the tax year, 2015. In this connection our
submission is as under: 1.
Increase of Sales
You must aware of the fact that our company is involved in the business of marketing consultancy most of
the companies including MNC’s are outsourcing their marketing strategy and other marketing related
activates to professional marketing consultants. Due to stability in law enforcement condition of the
country companies have expanded their businesses. The business of our company has grown rapidly during
the financial year 2014. Further we would like to apprise you that the sales are made through banking
channel and party wise monthly details of bank account are attached herewith for your perusal and
records.
2.
Entertainment Expense
Entertainment expense relates purely to the sales promotion activities of the company. Our company
arranged two seminars in five star hotel for Rs. 187,000/- wherein, directors and senior managers of other
companies were invited. Remaining amount comprises of several small payments on account of
entertainment and hi tea provided to customers inside our office premises. We are enclosing herewith the
sufficient evidence for you perusal and consideration.
3.
Annual Withholding Statements
We would like to apprise you that we have submitted annual withholding statements for the tax year, 2015
on time. Copy of acknowledgements obtained after submission are enclosed along with other evidences for
your perusal and records.
13
4.
Bad Debts
Bad debts written off and claimed at Rs.50,000/- In this connection we, would like to apprise you
that bad debts of Rs. 25,000/- were written off after approval from board. Remaining bad debts
are claimed in the return but they are still required to be approved by directors in upcoming
general meeting. But accountant of the company has booked them as bad debts due to certainty of
failure in recovery. Copy of Company secretary intimation in this regard is enclosed herewith for
your perusal and consideration.
5.
Donations Receipts
Donations were made to the approved institution Shaukat Khanum Memorial Hospital which is
approved under the Ordinance and the receipt of which is enclosed herewith for your perusal and
records.
We hope that the above would suffice your need. We therefore, request you to finalized the audit at an
early date and oblige.
In view of the documentary evidences submitted by the AR and after careful examination following
incomes and expenses were found unsatisfactory.
Sales Increase
Increase in sales was examined logically and found that the Sales to expenses ratios were almost same as
they were in last year. The point in defense of the tax payer raised by the A.R is accepted and duly
acknowledged.
Entertainment Expense
Entertainment expenses were examined along with the invoices against which payments were made to the
different hotels. Total amount claimed as deduction in respect to the entertainment expense was Rs.
220,000/- taxpayer failed to produce breakup and documents/ details of Rs. 50,000/- therefore the said
amount is added back to the Income under section 21 of the Ordinance.
Bad Debts
Tax payer failed to satisfy the authority that the bad debts of Rs. 25,000/- claimed in return are fulfilling
the conditions laid down under section 29 of the income Tax Ordinance, 2001. Therefore this amount is
added back to the income. Tax payer failed to furnish the evidence that the remaining amount of bad
debts has fulfilled the condition as specified under section 29 of the Ordinance produced below;
(1)
A person shall be allowed a deduction for a bad debt in a tax year if the following conditions
are satisfied, namely:(a)
The amount of the debt was –
(i)
Previously included in the person’s income from business chargeable to tax; or
(ii)
in respect of money lent by a financial institution in deriving income from
business chargeable to tax;
(b)
the debt or part of the debt is written off in the accounts of the person in the tax year;
and
(c)
there are reasonable grounds for believing that the debt is irrecoverable.
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Donations
Evidence produced by the tax payer was duly examined and found appropriate therefore, remained
allowed as deduction.
In light of the above mentioned facts and circumstances of the case, I am assessing the Income of the
taxpayer as under.
Rupees
Income For the Year As Per Computation Of Income Files With Return
ADDITIONS MADE AS DISCUSSED ABOVE
Entertainment Expense
Bad Debts
TOTAL TAXABLE INCOME
Rupees
1,500,000
Add:
33,000
25,000
58,000
1,558,000
Tax on Rs. 1,575,000/-
@
33%
514,140
Tax on Rs. 1,500,000/BALANCE PAYABLE
@
33%
395,000
119,140
You are requested to pay the said amount on or before 15th February, 2017.
Deputy Commissioner Inland Revenue
Regional Tax Office-III
Karachi
15
T-1785/2017
January 31, 2017
Mr. Inland Revenue
Additional Commissioner Inland Revenue
Unit-01, Zone-III
Regional Tax Office-III
Karachi
Dear Sir
ABC COMPANY (PRIVATE) LIMITED
RECTIFICATION APPLICATION UNDER SECTION 221 OF
THE INCOME TAX ORDINANCE, 2001
TAX YEAR 2016
NTN 9999997-8
We refer to the order No.00123211 dated January 29, 2016 finalized under section 122 of the
Ordinance for the tax year 2016. In this connection, we would like to apprise you that you have
allowed tax already paid and deducted at Rs. 395,000/- instead of actual amount of tax claimed and
paid by the company of Rs. 495,000/-. The rectification point is apparent from records and
rectifiable under section 221 of the Ordinance. After rectification final position would be as follows.
RUPEES
Tax payable as per order
Less: Tax Allowed As Per Order
Tax Claimed But Not Allowed
TOTAL TAX PAYABLE AFTER RECTIFICATION
395,000
495,000
RUPEES
119,140
100,000
19,140
After rectification adjustment of Rs. 100,000/- an amount of Rs. 19,140/- is payable. We therefore,
request you to kindly rectify the order under section 221 of the Ordinance at an early date and
oblige.
Yours truly
AUTHORIZED REPRESENTATIVE
16
BEFORE THE HONORABLE
COMMISSIONER OF INCOME TAX (APPEALS-II)
M/S. ABC COMPANY LIMITED
GROUNDS OF APPEAL
INCOME TAX ASSESSMENT YEAR 2016
UNDER SECTION 176 OF THE INCOME TAX ORDINANCE, 2001
1.
That the order of the Learned Deputy Commissioner Inland Revenue (DCIR) is bad
in law and on facts.
2.
That the order of the Learned DCIR is illegal, ultra vires, void and without any
justification.
3.
That the Learned DCIR has erred in disallowing the Entertainment expense of Rs.
33,000/- under section 21 of the Income Tax Ordinance 2001. It is contended that
the action of the Learned DCIR is bad in law and on facts.
4.
That the Learned DCIR has erred in disallowing the Bad debts expense of Rs.
25,000/- under section 21 of the Income Tax Ordinance 2001. It is contended that
the action of the Learned DCIR is bad in law and on facts.
5.
That the DCIR has erred in allowing credit of tax paid at Rs. 395,000/- instead of
actual claim of Rs. 495,000/- It is contended that the action of the Learned DCIR is
bad in law and on facts.
6.
The appellant craves leave, to add to amend, to alter or to substitute the above
ground of appeal before or at the time of hearing.
APPELLANT
17
Thank You
for Your
Time and Participation
18