I.-T. A. NO. 1943/LB OF 1984-85, DECIDED ON 4TH SEPTEMBER, 1985. Versus I.-T. A. NO. 1943/LB OF 1984-85, DECIDED ON 4TH SEPTEMBER, 1985.
ORDER
1. For the charge year 1981‑82 the department has come up in appeal against the order of the learned A. A. C. of Income‑tax Range‑C, F dated 2‑7‑1984 on the issue of deletion of penalty imposed under section 111 of the Income‑tax Ordinance, 1979 (hereinafter called the Ordinance).
2. The brief facts of the case are that on 30‑9‑1981 the assessee, an individual, filed return declaring net income of Rs. 17,000 from dealings in hardware goods. Alongwith this return copy of trading/ profit and loss account was furnished. The assessee's returned income was accepted under section 59(1) of the Ordinance on 27‑2‑1982. There after it transpired that the assessee was also having an agency of Maple‑leaf Cement Factory and for the year under review he had not declared any income from that source. I. T. O. obtained information from the assessee's principal's regarding extent of supplies of cement made in this year. It was reported that from 1‑7‑1980 to 30‑6‑1981 the assessee had purchased 1317 tons of cement in the form of 26,340 bags for Rs. 11,88,137. As the assessee had not declared any income from cement dealings in the trading account furnished alongwith the return and the I. T. O was having sufficient material regarding the assessee's business of dealings in cement. A notice under 'section 65 of the Ordinance was issued on 19‑4‑1982. In response thereto on 27‑4‑1982 the assessee filed return declaring income "as before". Thereafter the I. T. O. issued specific notices under section 61/62 of the Ordinance on 27‑4‑1982 intimating the fact that the assessee's principals * had confirmed supply of cement made in this year at Rs. 11,88,137. Realizing the gravity of situation regarding availability of true facts about purchase and sale of cement the assessee on 10‑5‑1982 submitted a trading account regarding cement business showing sales of 6340 cement bags @ Rs. 55 per bag at Rs. 14,48,700. G. P. was evolved therein at Rs. 72,436 by applying profit rate of 5%. After deducting total expenses at Rs. 61,499, the assessee declared net income from cement business at Rs. 10,937. Prior to submission of trading account regarding cement business, the I.T.O. had recorded the assessee's statement on 3‑5‑1982. In that statement the assessee very frankly admitted that no income from dealings of cement could be declared in the original return. Trading account filled alongwith original return declaring income at Rs. 17,000 was admitted to be of hardware business only. On 2‑6‑1982 the I.‑T. O. recorded the following entries on the order sheet :‑
2. "Present assessee alongwith Mr. Mujahid Arshi. Advocate. Case discussed and finalised. They have consented to be assessed at net income at Rs. 55,000 as detailed on the agreement order for approval."
3. On 15‑6‑1982 the I. A. C. returned the draft assessment order directing that notice be issued to creditors. Finally on 19‑6‑1982 following entry was recorded on the order sheet:‑
4. "The above creditors attended. Their statement recorded on S. A. and cross‑examined. The assessee also attended and the case was discussed in detail. Malik Abdul Majid Prop. Majid Iron Store finally confessed the default of concealment for not showing cement dealing and has consented to be assessed on the following income:‑
(i) Hardware business already shown under section 59(1).
5. Rs. 17,000.00
(ii) Cement business not shown and concealed
6. Rs. 44,125.00
7. Total
8. Rs. 61,125.00"
9. On the margin of this order sheet entry assessee's signatures were obtained who categorically recorded in Urdu as under:‑
10. "Net income is acceptable to me as follows :‑
11. Hardware
12. Rs. 17,00000
13. Cement
14. Rs. 44,12500
15. Total
16. Rs.61,12500
17. Underneath the recorded compromise, following directions were also made:‑
18. "Assessed as per I. T.-30. Issue notice under section 116 for conceal ment of income and 117 and 118 for prosecution alongwith Demand Notice and Challan and copy of order."
19. The assessment order as well as Demand Notice was served on the On 19‑6‑1982 i.e. date of completion of assessment the I.‑T. O, issued notice tinder section 116 of the Ordinance which was served on the assessee on 20‑6‑1982. In reply filed on 22‑6‑1982 the assessee stated as follows:‑
20. "With reference to your notice under section 116 of the Income‑tax Ordinance, 1979 in connection with my assessment for the charge year 1981‑82 it is submitted that I have already explained my position and have very frankly confessed that the income from dealings in cement has not been declared to the original return as well as statements furnished due to mistake.
21. It is submitted that in view of my own clear and frankly explanation, and coming out with the truth, a lenient view of the matter may *, kindly be taken for the imposition of penalty."
22. As the I. T. O. had also issued notices under sections 118 and 119 simultaneously, the assessee on 22‑6‑1982 filed the following reply.
23. "With reference to your notice under section 118 and 119 of the Income‑tax Ordinance, 1979 for the charge 1981‑82, it is submitted that r have already very frankly conceded the mistake that the income from dealings in cement has not been declared in the original return as well as statements furnished to the department, though it is not done wilfully.
24. It is, therefore, prayed that lenient view of the matter may kindly be taken and instead of the prosecution the offence may kindly be compounded and. minimum composition fee levied which I am ready to pay."
25. On the basis of these facts, the I.‑T. O. on 12‑3‑1983 imposed penalty at Rs. 19,283 under section 111 of the Ordinance with prior approval of the I. A. C.
3. On appeal the learned A. A. C. accepted the assessee's plea that portion of the I. T. O. 's order regarding issuance of notice under section 116 for concealment of income and 117 and 118 for prosecution etc. was not written at the time of making of compromise and be same was without any knowledge of the assessee. Relying on various decided, cases on the issue of levy of penalty, imposed penalty was deleted.''
4. The appellant I.‑T. O. has taken up the following grounds :‑‑
26. "That the learned A. A. C. was not justified in deleting the penalty on the sheer ground that the assessment was framed to agreement with the assessee. He failed to examine and appreciate the evidence discussed in the penalty order to establish concealment in the case. There is overwhelming evidence in this case to prove concealment, hence it is clearly distinguishable from the cited cases."
5. I have heard the representatives of the parties at considerable length. I have also gone through the entries of the I. T. O.'s order sheet with help of the D. R. In the facts and circumstances of this case I feet that the learned A. A. C. has rightly deleted penalty levied under section 111 of the Ordinance. The assessee's version about quantum of purchases with sale price at Rs. 55 per bag yielding G. P. rate of 5% was neither discarded nor doubted by the I. T. O. In the revised computation chart the assessee had declared gross profit from cement business at Rs. 72,436 by applying G. P. rate of 5%. Therefrom expenses were deducted at Rs. 61,499 declaring net income at Rs. 10,937 from cement business. There is no doubt that in the original return the assessee had concealed his source of income from cement dealings. It is also true that in the revised return the assessee was guilty of same omission as no income from cement dealings was shown. It was on the I. T. O.'s notices issued under section 61/62 of the Ordinance on 27‑4‑1982 that the assessee came out with the trading account for cement dealings. I fail to appreciate that thereafter what prompted tine I. T. O. to make an agreement with the assessee for adopting income from cement dealings at Rs. 44,125. By adopting that income from cement business the assessee has been allowed expenses at Rs. 17,374 against claimed at Rs. 61,499. There was no occasion for the I. T. O. to make any compromise for determining income from cement business as complete details of purchases were before him. The I. T. O. should have applied usual G. P. rate and allowed reasonable expenses. In that event it was a clear case of concealment of business income from cement dealings. The I. T. O. unnecessarily reverted towards the agreement. While reprocessing assessment income from cement dealings could have been very conveniently worked out even more than adopted on agreement basis. I fail to appreciate the I.‑T. O.'s intention and action in negotiating for entering into an agreement. The I.‑T. O's action has created some doubts. The assessee's narration of agreed assessment at net income of Rs. 44,125 on the order sheet also gives the impression that the matter regarding cement business was being finally concluded. If the I. T. O. was making an agreed assessment he should have made it clear to the assessee that proceedings for levy of penalty being of independent nature penalty shall be leviable irrespective of the agreed income. In that event the assessee may not have agreed and the reassessment made under section 65 of the Ordinance could have been challenged to appeal The I.‑T. O.'s recording of directions for issuance of notices under section 116, 117 and 118 seem to have been made without disclosure to the assessee. The fact that the assessment order and demand notice was served on the assessee on 23‑10‑1982 also makes the situation fairly doubtful. On the one hand after completion of reassessment on 19‑6‑1982, the I ‑T. O. issued notice under section 116 of the Ordinance on that very date but delayed the service of the assessment order as well as demand notice till 23‑10‑1982. The assessee had concealed particulars of his income from cement dealings but the I ‑T. O.'s conduct of entering into an agreement and delaying service of assessment order alongwith demand notice has made the situation more fishy. It was a clear case of concealment where normal assessment should have been processed by applying usual G. P. rate and after allowing reasonable expenses particularly when the I.‑T. O. had successfully laid down his hands on the assessee's purchases even before issuance of notice under section 65 of the Ordinance. The I. T. O.'s conduct after 19‑6‑1982 gives the impression that the assesses was being lulled in a trap. As the assessee had agreed fur assessment at net income of Rs. 44,125 from cement dealings, he in his humbleness in reply to notice under section 116 of the Ordinance immediately became apologetic. In response to notices under section 116, 117 and 118 due to fear of prosecution the assessee went to the extent of requesting for compounding of the alleged offence by imposition of nominal composition fee. In this case on the basis of available material there was no occasion for agreed assessment. For the reasons best known to the I. T. O. he made a compromise on assessment. Penalty proceedings being criminal in nature are not to be taken lightly, To an agreed assessment the I.‑T. O. is one of the parties. In fact an agreement is a contract between two parties. In case the I.‑T. O. opts to cut short the matter of detailed scrutiny by entering into an agreement with the assessee for assessment at net income, the agreed income shall tantamount to a consent decree. The I.‑T. O. cannot blow hot and cold in the same breath by making agreed assessment as well as by resorting to all the penal provisions provided in the Ordinance. Initiation of penal provisions under the Ordinance is the discretion of the I.‑T. O. In an agreed assessment the I.‑T. O. shall be deemed to have waived his discretion of initiation of penal provisions. Law does not provide for any agreement for penal provision. In the event of agreed assessment the I. ‑T. O.'s discretion of initiation of penal provisions shall be deemed to have been waived. Assessment at an agreed income is no provided in law and at is being made just for the convenience of both the parties. When an assessee makes compromise he gets the impression that he will not be further harassed in the matter by resorting to penal provisions. The I.‑T. O. is supposed to a make it clear to the assessee that agreed income is subject to penal provisions of the Ordinance. Object of law is neither to harass the assessee nor to lull him into a trap.
7. In these circumstances I feet no hesitation in concluding that the assessee came out with honest intention of making compromise for agreed assessment from income of cement dealings without realising that the I.‑T. O. also had the discretionary powers under different sections of the Ordinance for levying penalty and ordering prosecution. The compromise recorded in the assessee s hand clearly shows that only net income from cement business was being agreed and the assessee was not even conscious of the penal provisions available in the Ordinance. I feel that no case could be made out for my interference in the impugned order. For the forgoing reasons after an agreed assessment neither any penalty nor any prosecution was called for. As a result the impugned order does not suffer from any illegality. The departmental appeal being devoid of any merits is dismissed. .
27. M. Y. H. Appeal dismissed.