ISLAMABAD: The Federal Tax Ombudsman (FTO) while deciding a case regarding tax exemption, recommended the Federal Board of Revenue (FBR) to ensure that powers under Section 221 of the Income Tax Ordinance 2001 are invoked for rectification of a manifest error in the order of the Appellate authorities.
The Board has also been directed to report compliance within 30 days, according to the FTO order received here Wednesday.
According to the order, the FTO found manifest error in the decisions made by the CIT (Appeals-I), Karachi, and by the Appellate Tribunal which it said needs to be rectified by a resort to Section 221 of the Income Tax Ordinance 2001.
According to the FTO findings, the department cannot arrogate to itself the power to decide what it must implement or ignore.
Recourse must always be made to legal procedure, in such cases, it said adding, failure to follow procedures is tantamount to maladministration as defined under Section 2(3) of the Federal Tax Ombudsman Ordinance 2000.
Background details show that Bashir Ahmed Director (Admin) Mineral Development Project Islamabad in his case against Revenue Division had complained to FTO in Mid December 2011 against alleged refusal by FBR to allow basic tax exemption of Rs150,000 for calculation of tax payable for tax year 2007.
According to the complainant, while calculating his tax liability for tax year 2007, the Department did not allow the admissible basic exemption of Rs150,000.
Resultantly, tax demand of Rs8,825 was created instead of Rs1,450 under Division-I, Part-I of the First Schedule to the Income Tax Ordinance 2001 (the Ordinance).
Citing an identical case of a Muhammad Ashraf of Karachi (NTN 4-000-0828016), the Complainant contended that the assessment was annulled by CIT (Appeals-I), Karachi, vide order dated 13-02-2008.
According to FTO order, the Department filed appeal before the Income Tax Appellate Tribunal, who vide order dated 15-08-2009 upheld the findings of the CIT (Appeals-I), Karachi.
The complaint was referred for comments to Secretary, Revenue Division, in terms of Section 10(4) of the FTO Ordinance 2000 and the same were received on 02-05-2012.
The Complainant contended that in the light of FBR's Circular No.3 of 2006, the basic exemption of Rs100,000 was enhanced to Rs 150,000 for tax year 2007.
The Departmental viewpoint was reversed by the Commissioner Income Tax (Appeals), Karachi, and the Income Tax Appellate Tribunal as well, so failure to allow the basic exemption to the Complainant was, therefore, illegal, unjustified and amounted to maladministration.
On the other hand, the Department contended that while deciding the issue, the Commissioner (Appeals-I), Karachi and the Tribunal had not taken cognizance of the fact that a major change took place in First Schedule to the Income Tax Ordinance with regard to the application of tax rate for salaried persons through Finance Act, 2006.
It was further contended that prior to the amendment taxable income for salary used to be worked out after deducting certain allowances i.e. conveyance allowance, house rent allowance, utilities, etc., as provided in Income Tax Rules, 2002.
However, to simplify the computation of taxable salary, 21 slabs of salary income were provided through Finance Act, 2006, with tax rate ranging from 0% to 20%.
It was also contended that as no basic exemption was available for tax year 2007, the Findings of Appellate authorities were not in accordance with the applicable law.
According to the order, the contention of the complainant is that the Department is not willing to implement the Findings of Appellate authorities.
However, the Department contends that due to the amendment in Finance Act 2006 basic exemption was not available to the Complainant for tax year 2007 and the Findings of Appellate authorities passed through inadvertence and being violative of the law were not required to be implemented.
Admittedly, the computation of taxable income was amended through Finance Act 2006, and a major change was brought in the First Schedule to the Ordinance with regard to applicable tax rates for salaried persons.
Strangely, this point was neither canvassed nor placed before the Appellate authorities, and so both Findings were issued on misapplication of law, the FTO said.
It was in this context that FBR was directed to ensure that powers under Section 221 of the Income Tax Ordinance 2001 are invoked for rectification of a manifest error in the order of the Appellate authorities.
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