I.TA. NO. 461/KB AND 465/KB OF 1992-93 Versus I.TA. NO. 461/KB AND 465/KB OF 1992-93
ORDER
In these two cross appeal relating to assessment year 1990-91, the appellant-assessee has challenged the legality of the imposition of penalty under section 108 of the Income Tax Ordinance, 1979, whereas the department is aggrieved by the order of the learned CIT (A) whereby he has reduced the penalty imposed under section 108 of the Ordinance from Rs.100 per day to Rs.25 per day.
2. The facts necessary for the disposal of these appeals are that, as during the assessment year the assessee had suffered loss, therefore, the assessee did not file any return. The Income Tax Officer issued notice under section 56 of the Ordinance and thereafter the assessee filed return on 30-8-1992 showing loss of Rs.3,89,070. The ITO issued notice under section 116 for the levy of penalty under section 108 for non-filing of voluntary return. According to the facts mentioned in the assessment order the assessee did not offer any explanation, therefore, the ITO imposed penalty under section 108 @ Rs.100 per day from 11-10-1990 to 30-8-1992 amounting to Rs.68,900.
The assessee preferred appeal against the order of the ITO to the learned CIT(A) who reduced the penalty to Rs.25 per day.
3. In support of his appeal the learned counsel for the assessee has submitted that during the year the assessee had suffered loss, therefore, it was not incumbent upon the assessee to file voluntary return under section 55 of the Ordinance, therefore, the ITO had no jurisdiction to, levy penalty. It is also stated by him that this was the first year of the business of the assessee. In support he has supplied the copy of the assessment order for the assessment year 1990-91.
4. ? In addition to above he has also submitted that reply to show-cause notice was given to the ITO on 10-10-1992 and the ITO has conveniently ignored to mention the contents of that letter in his order.
5. The learned D.R. on the other hand, in support of his appeal has submitted that in view of definition of "income" contained in section 2(24) wherein loss of such income, profits or gains is also included, the assessee was required to file voluntary return under section 55 of the Ordinance even if he suffered loss, therefore, penalty imposed by the ITO was proper.
6. In order to understand this factual controversy it would be pertinent to reproduce the provision of section 55 which is as under: ---
"55. Return of total income.---(1) Every person, (a) whose total income or the total income of any other person in respect of which he is assessable under this Ordinance for any income year (hereinafter referred to as the said income year) exceeds the maximum amount which is not chargeable to tax under this Ordinance; or
(b) who has been charged to tax for any of the four income years immediately preceding the said income year. shall furnish a return of his total income or the total income of such other person, as the case may be for the said income year."
(only relevant portion has been reproduced).
7. Thus from perusal of subsection 1(a) of section 55 it would appear that a person whose income exceeds the maximum amount which is not chargeable to tax under the Ordinance is required to file his return, but according to subsection 1(b) a person who has been charged to tax for any of the four income years immediately preceding the income year is also required to file a return. Therefore, the condition precedent for filing of voluntary return by a person is that his income must exceed the maximum amount which is not chargeable to tax or he should have been charged to tax for any of the four income years immediately preceding the subject income year. In simple, in view of section 55(1)(a) if a person has been charged to tax for any of the four income years immediately preceding the subject income year then he is required to file his return irrespective of the fact that his income is not chargeable to tax at all. This section, therefore, envisaged two possibilities: ---
(a) A person has to file voluntary return if his income exceeds the maximum amount which is not chargeable to tax under the Ordinance, and
(b) notwithstanding the above if the said person was charged to tax for any of the four income years immediately preceding the subject income year then he is required to file voluntary return irrespective of the fact that his income is not chargeable to tax.
The above point has been elaborately explained by the learned Chairman, Farhat Ali Khan, in case reported as 1989 PTD (Trib.) 617.
8. Now after having considered the above proposition of law if the facts of this case are scrutinised then it would appear that the assessee had suffered loss during the year, therefore, he did not file his voluntary return. The return was filed when a notice under section 56 of the Ordinance was issued. This fact is mentioned in assessment order. In the same assessment order it is also mentioned that the assessment year was the first business year of the assessee.
8-A. Before giving findings on this issue, let ' me consider the rival arguments of the learned D.R. The contention of the learned D.R. is that the definition of income contained in section 2(24) of the Ordinance includes loss of income also, therefore, even if the assessee had suffered loss then, still he was required to file voluntary return. The fallacy of this contention is manifestly too clear to require any consideration, yet to thrash out the issue, it would be proper to dilate upon this point.
9. The definition of income contained in section 2(24) of the Ordinance is as under:
2(24).--"Income" includes -
? (a) any income, profits or gains, from, whatever source derived, chargeable to tax under any provision of this Ordinance under any head specified in section 15;
(b) any loss of such income, profits or, gains; and
(c) any sum deemed to be income, or income accruing or arising or received in Pakistan under any provision of this Ordinance. but does not include in the case of -a shareholder of a domestic company, the amount representing the face value of any bonus shares or the amount of any bonus declared, issued or paid by the company to its shareholders with a view to increasing its paid up share capital."
10. From the scrutiny of above provision it appears that the Ordinance contemplated two types of income, one is plus income the other is minus income; plus income includes profits and gains, whereas the minus income includes loss of such income, profits and gains. But the closer scrutiny of section 55 of the Ordinance would reveal that in subsection 1(a), it is clearly mentioned that only plus income will be considered for the purpose of filing of voluntary return because the words used are "every person whose total income or the total income of the other person in respect of which he is assessable under this Ordinance in any income year exceeds the maximum amount which is chargeable to tax under this Ordinance". Therefore, it would appear that only plus income compels a person to file voluntary return. The other provisions of subsection 1(b) are not applicable in this case, as admittedly this is the first year of business of the assessee.
11. Now the other question arises, what would happen if a unscrupulous assessee takes advantage of this provision and files with mala fide intention the `return of loss for escaping the penalty envisaged under section 108 of the Ordinance. The answer of this question lies in the wording used in section 55 itself. According to provision of section 55 the return is always filed by a person on the computation of income which is believed to be correct by him and not by the department. To substantiate this view point the cases of Indian jurisdiction may be referred.
In case reported as (1983) 142 ITR 428. (All.) CIT Bombay v. Allied Silk Mills, while deciding the similar issue it was observed that: ---
"The income contemplated by this provision is the income which the assessee believes to be his income and not the income as finally assessed by the ITO. It is possible that an assessee considered particular item to be his income and the ITO may hold otherwise. In such a case if what the assessee considers to be his income is less than the maximum not chargeable to tax, he is not required to file a voluntary return even if his income as finally assessed is more than such maximum and he will not be liable to penalty for failure to file his return. It is essential that the belief of the assessee must be bona fide."
In case reported as (1983) 142 ITR 180 Budhar Singh and Sons v. CIT has also observed in the following manner: ---
"In CIT v. N. Khan and Brothers (1973) 92 ITR 338 (All.), while construing this subsection, it was held by a Division Bench of our Court that now under section 139(1), a duty is cast upon any person to file a voluntary return if his income exceeds the maximum amount which is not chargeable to tax. The question arises as to which income is contemplated by this provision, the income which the assessee believes to be his income or which is finally assessed by the ITO. It is clear that at the time when a person is required to file a voluntary return, no assessment has yet been made against him. He is thus to be guided by what he himself believes to be his income. It is possible that it happens very frequently that an assessee may not consider a particular item to be his income and yet the ITO may hold otherwise."
12. It will not be out of place to have cursory glance at the penalty provisions contained in section 108 of the Ordinance, which are as under: ---
"108. Penalty for failure to furnish return of total income and certain statements.- -Where any person has, without reasonable cause, failed to furnish, within the time allowed for the purpose--
' (a) any return of total income under section 55 or 56, subsection (1) of section 65, subsection (3) of section 72 or subsection (3) of section 81; or
(b) any certificate, statement, accounts or information under section 51, 139, 140, 141, 142, 143, 143-A or 144, the Income Tax Officer may impose upon such person a penalty not exceeding one hundred rupees for every day during which the default continues."
13. From the bare reading of above provision it would appear that penalty can be imposed only when the explanation offered by the assessee is found unreasonable. In this case the explanation offered by the assessee vide letter dated 10-10-1992 which finds mention in assessment order was not considered at all by the ITO, on the contrary he has stated that no explanation was offered by the assessee. It would also be pertinent to point out that cases relied upon the learned CIT(A) of Indian Supreme Court are not relevant in this case they are on different points dealing levy of interest and not penalty.
14. The upshot of above discussion is that a person is required to file voluntary return if his income exceeds the maximum amount which is not chargeable to tax under the Ordinance or if he has been charged to tax in any of the four income years immediately preceding the said income year irrespective of the fact that his maximum income is chargeable to tax or not. Apart from this no duty is cast upon the assessee under the Ordinance to file voluntary return.
15. As regards the contention of the learned D.R. that unscrupulous assessee may file a wrong return showing income below taxable or loss, whereas actually he may have earned profits, it would be proper to point out that in order to meet such a situation, the Ordinance has provided other remedies. In section 56 it' is clearly mentioned: ---
"56. ???? Notice for furnishing return of total income.--- The Income Tax Officer may, at any time by notice in writing, require any person who, in his opinion, is chargeable to tax for any income year to furnish a return of total income for such year within thirty days from the date of service of such notice or such longer or shorter period as may be specified in such notice or as the ITO may allow."
Therefore, if the assessing officer is of the opinion that a person has not filed voluntary return whereas his income is chargeable to tax, then he may issue notice under section 56 of the Ordinance. In cases where the loss or below taxable income has been declared by the assessee but an. income is assessed by the ITO then he can invoke the provisions of levy of additional tax under sections 87, 88 and 89 of the Ordinance.
16. The idea of deliberately filing "loss return" is difficult to digest because when a person thinks that he has suffered loss and chooses not to file voluntary return, then he is doing so at the risk of loosing a valuable right of "set off losses" which a man of ordinary prudence would not do,
17. For the reasons aforesaid I am of the view that the assessee was not required to file voluntary return under section 55 of the Ordinance, and the ITO had no jurisdiction to levy penalty under section 108, therefore, in the result the penalty order hereby cancelled.
18. In terms of above this appeal is disposed of.
M.B.A./27/T.T. ???????????
Order accordingly.