I. T. AS. NOS. 1523/ KB TO 1526/KB OF 1982-83,.DECIDED ON 8TH JUNE, 1988. Versus I. T. AS. NOS. 1523/ KB TO 1526/KB OF 1982-83,.DECIDED ON 8TH JUNE, 1988.
ORDER
1. MANZURUL HAQUE (MEMBER).- -These four departmental appeals have been filed against the order of the learned C.I.T. (A) , Zone/4, Karachi. The only ground taken for all the four years under appeal being common, they are disposed of by this single order.
2. None appeared on behalf of the respondent. The assessee/ respondent, a registered firm, is a manufacturer of art silk cloth. Mr. Mohammad Farid, the learned D.R. while giving brief history of the case stated that the assessment for the years 1975-76, 1976-77 and 1978-79 were finalised under section 23(3) of the Income Tax Act.
3. During the assessment year 1975-76 sales were disclosed at Rs.4,27,111 with G.P. at 17.2%. The I.T.O. discovered that the sales were partly cash and unverifiable and no loomwise production record was maintained. He, therefore, rejected the trading results and estimated sales at Rs.4,70,000 and applied G.P. at 18% which resulted in an addition of Rs.7,665. In 1976-77 sales were disclosed at Rs.8,67,586 with G.P. at 17%, keeping in view the past history of the case the I.T.O. rejected the trading version and estimated sales at Rs.8,90,000 with G.P. at 18% which resulted in an addition of Rs.12,900. Assessment for the year 1977-78 was finalised under section 59(1) of the Income Tax Ordinance, 1979. In 1978-79 sales were disclosed at Rs.10,00,189 with G.P. at 17.95% for the same defects. as pointed out in earlier years, the I.T.O. rejected the trading version and estimated sales at Rs.10,50,000 and applied G.P., at 15% which resulted in an addition of Rs.9,428.
2. It appears that on a subsequent date the file was inspected by the Directorate of Inspection (Taxes) who discovered the production results to be inadequate and passed on the report to the Assessing Officer. The Assessing Officer re-opened the finalised assessments under section 65 of the Income Tax Ordinance, 1979 with prior approval of the I.A.C. The respondent filed returns disclosing the same income as returned originally. While making re-assessment the I.T.O. observed:
3. " ..The above chart shows that the production of art silk fabrics has fallen frost 11.3 yards per pound in 1974-75 to 5.84 yards per pond in 1975-76 ...."
4. Similarly the fall in yardage for all the subsequent years, according to the I.T.O. was not properly explained by the respondent. He, therefore, re-assessed the income 4s under:-
5. 1975-76
6. Sale was estimated at Rs.7,00,000 with G.P. at 18% resulting an addition of Rs.41,400.
7. 1976-77
8. The I.T.O. made an addition of Rs.1,40,000 in total sales and by applying G.P. at 18'% made an addition of Rs.25,200.
9. 1978-79
10. In 1978-79 sales were estimated at Rs.11,70,000 with G.P. at 18% which resulted in an addition of Rs.21,600.
11. Aggrieved by the above order an appeal was carried to the learned C.I.T.(A) and the case was argued by the learned A.R. that the reassessment framed by the Assessing Officer, on the basis of change of opinion, was harsh and arbitrary and there was no justification for reopening the assessment as there was no evidence available before him to justify the same. The report of the Director of Inspection (Taxes) was termed as a mere change of opinion as it did not contain any material evidence in support of the contention. Depending on an Indian High Court's judgment 129 I T R 718 the learned C.I.T.(A) observed:-
12. "The arguments on which the case has been built up are quite sound and the contentions of the learned counsel for the appellant appear to be quite well-founded. No material evidence appears to be available on record to warrant the reopening of the case except the, report of the Director of Inspection (Taxes) which is based on the facts and figures already available at the time of original assessment,"
13. The learned C.I.T.(A)., therefore, annulled all the assessments under appeal.
14. The department now feels aggrieved and has come to us in appeal. Mr: Mohammad Farid, the learned D.R., argued that section 65(2) of the Income Tax Ordinance, 1979 as it stood before the amendment in 1987 was as under:-
15. "65(2) No proceedings under subsection, (1) shall be initiated unless definite information has come into the procession of the I.T.O. or he has obtained the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing to do so."
16. In the present case he argued that although definite information had come to the knowledge of the I.T.O., he also used the alternate weapon available to him i. e. approval of the I.A.C. to reopen the assessment. At this juncture it is pertinent to note the amendment brought about by the Finance Ordinance, 1987, in subsection (2) of section 65 of the I.T. Ordinance, 1979 which reads as under:-
17. "(a) in subsection (2) for .the word 'or' the word 'and' shall be substituted."
18. Immediately below subsection (2) to section 65 the following explanation was also added:-
19. "Explanation .-- As used in this subsection, 'definite information' includes information, made by the assessee, of any goods, and any information regarding acquisition, possession or transfer, by the assessee, of any money, asset or valuable article, or any investment made or expenditure incurred by him;" and Since, the above amendment was not available during the four years under appeal the learned D.R. argued that mere approval of the learned I. A. C. was sufficient. He also argued that wide powers were given td the Income-tax Department to reopen any case without assigning any reasons just by obtaining approval of the I.A.C. and he beefed up his argument relying on 'the following cases:-
(1) (1973) 28 Tax 164
(2) (1984) P T D 171
(3) (1976) 102 I.T.R. 287
(4) (1979) 119 I.T.R: 996
(5) (1985) P T D 465
20. Briefly stated the facts obtaining in each case were recorded as under:
21. (1973) 28 Tax 164 (H.C. Lah.) C.I-.T. v. Dr. Khurshid Alam Malik, Sheikhupura.--
22. "The case of the Department, however, is that although the fact of the construction of the house property was within the knowledge of the first I.T.O. but the quantum of investment in it had not been disclosed to him therefore he was not in a position to assess or at least correctly assess the individual to tax in the absence of such information."
23. 1984 P T D 171 (H. C. Lah) Muhammad Hanif Monno v. I.T.O, "Records of the Income Tax Officer, however, must show that definite information has come into his possession or has obtained previous approval of the Inspecting Assistant Commissioner of Income-Tax in writing before initiating the proceedings under this section. This section does not deal with proof. It merely deals with definiteness of information or prior approval of the Inspecting Assistant Commissioner."
24. (1976) 102 I.T.R. 287 Kalyanji Mavji & Co. v. Commissioner of Income Tax West Bengal II.-
25. "Section 34 (1) (b) would apply to the following categories of cases:
(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions:
(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income Tax Officer;
(3) where the information is derived from an external source of any kind; such external source would include discovery of new and important matters on knowledge of fresh facts which were not present at the time of original assessment; and
(4) where the information-may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law.
26. Where however, the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the original Assessment without any fresh facts or materials or without any enquiry into the materials which from part of the original assessment, section 34 (1) (b) would have no application."
27. 1979 119 I.T.R. 996 Indian and Eastern Newspaper Society, v. Commissioner of Income-tax, Delhi.
28. "The assessee society registered under the Companies Act, a professional association of newspapers established with the principal object of promoting the welfare and interest of all newspapers, owned a building in which a conference hall and rooms were let out on rent to its members as well as to outsiders and also provided certain services to its members. All along the assessee's income from that source was assessed to tax as income from business and it was so assessed for the assessment years 1960-61 to 1963-64 also. In the course of audit, and internal audit party expressed the view that the money realised by the assessee on account of the occupation of its conference hall and rooms should have been assessed under the head "Income from property" and not as business income. Treating the contents of the audit report as 'information'; the I.T.O. initiated re-assessed proceedings for these four years under section 147 (b). On appeal, the A. A. C. held that it could not in law be said that the I. T .O. had any 'information' in his possession enabling him to take action under section 147(b), but, on further appeal, the Tribunal, after noticing a difference of opinion between the High Courts, followed the decision of the Delhi High Court in the case of Smt. Chand Kanwarji (1975) 84 I.T.R. 584, and held that an internal audit report could be regarded as 'information' on a direct reference to the Supreme Court."
29. 1985 P T D 465 (H.C. Kar.) Burhan Engineering Co. Ltd. v. I.T.O. --
30. "It was also held that the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. It was further held that the expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Income Tax Officer but the reason must be held in good faith. It cannot be merely a pretence and that it is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose."
31. Perusal of the above decisions leads us to the unescapable conclusion that there must either be some "definite information" which has came to the knowledge of the assessing officer or he must have A obtained "prior approval of the I.A.C." for reopening the assessment.
32. Mr. Mohammad Farid, the learned D.R. argued that Director of Inspection's report was treated as piece of definite information on the basis of which assessments were reopened. Alternatively, he submitted, the assessments were reopened after obtaining IAC's approval, which fulfilled the requirements of law. Let us examine both of his contentions.
33. His first argument that D.I.T's. report be treated as a piece of information, can easily be judged to the light of explanation added to subsection (2) to Section 65 by the Finance Ordinance, 1987.
34. " Explanation .-- As used in this subsection, 'definite information' includes information in respect of sales and purchases, made by the assessee, of any goods, and any information regarding acquisition, possession or transfer, by the assessee, of any money, asset or valuable article, or any investment made or expenditure incurred by him."
35. Before examining the issue we will have to go back to the original assessments, which were framed under section 23 (3) (except 1977-78) under section 23 (i) with the following observations:
36. Assessment year 1978-79:
37. "Scrutiny of books of accounts for the year under reference shows that the purchases are imports which are supported with import documents but the sales are mainly in cash and unverifiable. In absence of stock register quantitative and qualitative details are not available and the assessee also regretted his inability to supply the quantitative details showing consumption of per pound yarn with reference to yield of cloth. The basis of valuation of opening and closing stock is also not available. Day to day production precord showing daily consumption of yarn corelating with daily output is also not maintained. In this background the trading result as declared cannot be accepted, hence rejected."
38. Almost the same observation has been made while rejecting the trading results of the previous years (1975-76 and 1976-77) under appeal. It would appear that the books of accounts were rejected primarily due to non-maintenance of production account and stock register. Production of cloth was, therefore, considered to be unsatisfactory and trading results rejected.
39. Now we have to see what piece of information came into the possession of the I.T.O. It was a report from the D.I.T. stating that yield of cloth per pound of yarn was less than the one shown immediately before the year under appeal (1974-75). The assessing officer [not the same who had finalised the earlier orders under B section 23(3)] estimated the sales at still higher figures for all the years under appeal and applied the same G.P. rate i.e. 18%. It appears that the assessing officer considered the earlier estimate of sales to be inadequate. If this process is allowed to continue, there will be no end to the estimates and the sky would be the limit. If this is not a change of opinion what else it could be?
40. The alternate argument of the learned D.R. that the assessing officers, prior to amendment in 1987 had unlimited powers to reopen the case under the income Tax Ordinance, 1979. The I.A.C. too had unlimited powers to accord or to withhold approval for reopening any case under section 65 of the Income Tax Ordinance. If this is so, we consider it to be our painful duty to point out what Chief Justice John Marshall of U.S.A. wrote that "the power to tax involves the power to destroy". In order not to let learned D.R's. fancy run free, we consider it worthwhile to dilate on this issue and remove his doubts.
41. Legislature has not delegated unfettered authority to any of/ its functionaries muchless to the Income Tax Department. Even section 63 which gives wide powers to the I.T.O. to make assessment for non-compliance of statutory notices, has been termed as "Best) Judgment assessment". The words 'best judgment' are very significant as volumes have been written by judicial authorities on this topic, which in substance, mean that the orders of the assessing officers should not be arbitrary in nature. Even the Propounders of authoritiarian rule who conceive Man as 'semi-animal' 'semi-human' have been very careful in prescribing the rules of the game. "Man. when perfected is the best of animals, but when separated from law of justice, he is the worst of all", said Aristotle, a political philospher. An arbitrary assessment, therefore, could be made when "Man' is at his worst separated from "law or justice". He is at his best when he acts within the four corners of law. When his findings are not arbitrary. The Income Tax Ordinance, 1979, nowhere has given unfettered discretion to any of its authorities described in section 3 of the Income Tax Ordinance:
42. Even the I.A.C. before according approval to a case for reopening u/s 65 of the Income Tax Ordinance has to examine it with a view to find out whether sufficient justification exists to allow the I.T.0 to proceed. In other words, before according approval, the I.A.C. has to see whether approval is being sought on the basis of some definite information, which has come to the knowledge of the I.T.O. If he finds that permission is being sought without any basis, he must refuse to give the approval. The two Income Tax authorities are thus armed with similar powers in section 65 of the Income Taxi Ordinance. The words 'or he has obtained the previous approval of the I.A.C. of Income Tax in writing to do so' do not suggest a "blind approval". The I.A.C. must be aware of what he is going to do. To sum up the argument the I.A.C. must ensure:
(a) that there is a proposal from the I.T.O.;
(b) that the proposal contains material to warrant consideration for approval;
(c) that he must apply his mind properly to the said proposal and
(d) issue written approval for reopening the assessment u/s 65 of the Income Tax Ordinance.
43. This will thus meet the ends of justice. Now turning to the appeal in hand we find that approval was accorded by the learned I.A.C. for reopening the case, it is not known whether he had applied his mind g properly to the issue involved - whether the proposal submitted by the assessing officer contained any material or any 'new information', to warrant accord of approval. Our contention gets direct support from a decision of the Tribunal reported as (1985) P T D (Trib.). 742.
44. "If one I.T.O. arrives at conclusion 'E' after due enquiry on the basis of the facts ABCD, made available to him, his successor cannot come to conclusion 'F' if the facts ABCD remain unchanged. If he does so, this would be case of change of opinion and his order would not be upheld. However, if he comes to conclusion 'F' because additional facts 'X' and 'Y' were brought to his notice, on top of facts ABCD, which were made available to his predecessor, he would be justified in issuing notice under section 65."
45. What we find in this case is that nothing on top of facts already available on file came to the possession of the assessing officer. He was, therefore, not justified to reopen it notwithstanding approval of the I.A.C. In view of above discussion the order of the C.I.T. (A) is upheld.
46. M.B.A./530/T Order upheld.'