I. T. A. No. 149/KB of 2000-2001, decided on 22nd June, 2001. Versus I. T. A. No. 149/KB of 2000-2001, decided on 22nd June, 2001.

ORDER

1. SHAHID IQBAL (ACCOUNTANT MEMBER).‑‑‑ This single, appeal has been filed by the Department against learned CIT(A)'s decision in two separate appeals, cancelling assessment framed under sections 65/62 and penalty under section 111 of the Income Tax Ordinance, 1979. The Department has taken objection against cancellation of both the orders as per following grounds of appeal:‑‑‑

2. "(1) That the CIT(A), Zone‑V, Karachi, is not justified to annul the impugned assessments order for the assessment year 1997‑98.

(2) That the CIT(A) is not justified to cancel the penalty order under section 111 of the Income Tax Ordinance, 1979.

(3) That the CIT(A) was not justified to opine that action under section 65 was based on change of opinion, the case was opined on the basis of definite information.

2. Briefly stated, the facts giving rise to the above grounds are that the respondent, Director of Pak Asia Fund Limited, had filed his return of total income for the income year ended 30‑6‑1997 declaring income of Rs.8,58,758. This return was accompanied by wealth tax return as well. The assessment was completed under section 59(A) on 27‑6‑1998. This wealth tax return was not looked into while accepting the Income Tax Return under the Self‑Assessment Scheme. However, during the processing of said wealth tax return for the purposes of wealth tax assessment, the same DOT who had accepted the Income Tax return under section 59(A) noticed that there was an accretion of Rs.19,56,851 during the year ended 30‑6‑1997, which was apparently not explainable. The accretion was worked out by comparing the two wealth tax returns as on 30‑6‑1996 and 30‑6‑1997:‑‑‑

ITEM

3. Declared A. YRS. value of Assets1996‑97/1997‑98

4. Addition

5. Deletion

6. Plot at

7. DHA,

8. 10,00,000

9. 10,00,000

10. ‑‑

11. ‑‑

12. House

13. 2,50,000

14. 2,50,000

15. Shares

16. 5,00,000

17. 42,72,300

18. 37,72,3000

19. FEBC's

20. 15,00,000

21. ‑

22. ‑‑

23. 15,00,000

24. Gold

25. 10,000

26. 10,000

27. Cash in hand

NIL

28. 3.00,000

29. 3,00,000

30. Cash at Bank

31. 48,19,181

32. 44,53,732

33. 3,65,449

34. Furniture

35. 1,00,600

36. 1,00,000

37. Prize Bond

38. 9,00,000

39. Nil

40. 9,00 ;000

41. Mercedez Benz

42. ‑‑

43. 6,50,000

44. ‑‑

45. 81,79,181

46. 1,01,36,032

47. 47,22,300

48. 27,65,449"

3. The assessee was required to explain the accretion by a case flow statement. The re‑conciliation and the cash flow statement wet submitted by the assessee for the two years, as under:‑‑‑

49. Assessment year 1996‑97

50. Reconciliation of Wealth

51. As on 30‑6‑1996

52. Net Asset as on 30‑6‑1995

53. 21,75,630

54. Add: Salary (Net of Tax deduction)

55. 7.54,030

56. Leave Encashment

57. 4,77,785

58. Gratutiy

59. 13,64,000

60. Provident Fund Balance

61. 30,31,039

62. Profit on Sale of Plot

63. 14,75,000

64. Profit on PLS Account

65. 51,954

66. 71,53,808

67. 93,29,438

68. Less: Deduction

69. Zakat on P.F.

70. 37,775

71. Zakat on PLS A/c.

72. 4,909

73. W/H Tax on PLS A/c.

74. 5,196

75. Tax on Leave Encashment

76. 123,125

77. Wealth‑tax/Income‑tax paid

78. 144.116

79. (3,15;121)

80. Gift to wife

81. (2,00,000)

82. Household Expenses including Travelling Expenses

83. (6,35,136)

84. Net Assets as on 30‑6‑1996

85. 81,79,181

86. Cash Flow Statement

87. Opening Cash and Bank Balance (1995)

88. 5,40,630

89. Inflow Salary Income (Net)

90. 7,54,030

91. Leave Encashment

92. 4,77,785

93. Gratuity

94. 13,64,000

95. Provident Fund

96. 30,31,039

97. Sale Proceed of PIA

98. 16,50,000

99. Sale of F.E.B.C.

100. 5,00,000

101. Profit on PLS A/c.

102. 51.954

103. 78,28,808

104. 83,69,438

105. Out flow S

106. Zakat & Tax Deductions

107. 3,15,121

108. Gilt to Wife

109. 200,000

110. Household and Personal Expe.

111. 6.35,136

112. Deport in FC (& A/c.)

113. 37,85,0.00

114. Purchase of FEBC (from market)

115. 15 00.0011

116. 64 35,257

117. Closing Balance Cash & Bank

118. 30‑6‑1996

119. 19,34,181

120. Assessment year 1997‑98

121. Reconciliation of Wealth as on 30‑6‑1997

122. Particulars

123. Net Assets as on 30‑6‑1996

124. 81,79,181

125. Add: Salary (Net of Tax Deduction)

126. 9,05.662

127. Encashment of F.E.B.C.

128. 15,00,000

129. Profit on F.C. A/c.

130. 2,61,520

131. Profit on PLS A/c.

132. 26.268

133. 26,93,450

134. 1,08,72,631

135. Balance Brought Forward

136. Less: Deduction

137. Zakat on PLS A/c.

138. 20,842

139. W/H Tax on PLS A/c.

140. 2,621

141. Wealth Tax Paid

142. 55.000

143. (78,469)

144. Household Expenses including

145. (6,58,130)

146. Travelling Expenses

147. 1,01,36 ,032

148. Cash Flow statement

149. Opening, Cash and Bank Balance (1996)

150. 19,34,181

151. Inflow

152. Salary Income (Net)

153. 9,05,662

154. Sale of FEBC's (Market)

155. 15,00,000

156. Encashment of FEBCs

157. 15,00,000

158. Profit from F.C. & A/c.

159. 2,61,520

160. Profit from PLS A/c

161. 26,268

162. 41,93,450

163. 61,27,631

164. Our Flow

165. Zakat & Tax Deductions

166. 78,469

167. Household & Personal Exp.

168. 6,58,130

169. Purchase of Shares

170. 37,72.300

171. Purchase of Car

172. 6,50,000

173. 51,58,899

174. 9,68,732"

4. The re‑conciliation and the Cash Flow Statement for the assessment year 1996‑97 indicated retirement benefits and profit on sale of plot obtained by the assessee at Rs.71,53,808, and after adjustment of tax, Zakat, household expenses and gift to wife, there was an net accretion of Rs.60,3,551 over and above the, net wealth as on 30‑6‑1995. Assessee had invested an amount of Rs.15,00,000 out of his retirement benefits and other resources, in the purchase of RE.B.C's. from the open market. During 1997‑98 assessee again purchased F.E.B.C's. worth As. 15,00,000 from Prudential Commercial Bank Ltd. on 31‑10‑1996 and encashed it on the same date, as well as converted his previous F.E.B.C.s into cash by selling it in the market. Thus he generated cash resources of Rs.30,00,000 from F.E.B.C's. Consequently, the accretion in wealth during 1997‑98 was Rs.19,56,851. The DCIT had a hunch that the F.E.B.C's: which assessee had purchased from the open market during the assessment year 1996‑97 was never sold as is evident from his notice under sections 62/65 of the Income Tax Ordinance, dated 12‑10‑1998:‑‑

175. "This office believes that you have not sold the aforesaid (Series 693408‑693422) at all and still hold the same. You have failed to negate the contention of this any positive evidence. Such dubious sale of before, is not acceptable as a genuine explanation for increase is net wealth."

5. Therefore, holding that accretion in wealth was not explainable to the extent of Rs.15,00,000 he issued notice under section 65, reassessed the total income by making addition of the said sum of Rs.15,00,000 under section 13(1)(aa) of Income Tax Ordinance, 1979 and also levied penalty under section 111 of the said Ordinance.

6. The assessee went in appeal against the above two assessments contending that the accretion in wealth was explained by re‑conciliation statement as well as cash flow statement, and further all these statements were before the DCIT while finalizing assessment under section 59(A), hence the reopening itself was not justified as it was based on presumptions and change of opinion. The learned CIT(A), agreeing with the appellant's contention disposed off the two appeals before him by cancelling the orders:‑‑‑

176. "The careful perusal of relevant records of Income Tax and wealth tax proceedings thereof, leaves no doubt in my mind that after passing the original assessment order, no fresh facts were either discovered by the Assessing Officer or were brought to his knowledge.

177. Penalty Order under section 111:

178. As the assessment order under sections 65/62 has been annuled, there is no justification for penalty orders under section 111 levying penalty at Rs.5,58,279 which cannot hold the field. Consequently, the penalty order passed under section 111 also stands cancelled."

7. The Department feels aggrieved by cancellation of the above two orders and hence this single appeal in which grounds have been taken against cancellation of assessment under section 65 as well as penalty under section 111 of the said Ordinance.

8. At the very outset of the hearing Mr. Javaid Zakaria, Advocate, for the respondent took preliminary objection against the above appeal on the ground that two separate orders were passed by the DCIT in, two separate proceedings, two separate orders were passed by learned CIT(A) and hence two separate appeals should have been filed. The Department could not raise grounds in the same memo. for an appeal relating to cancellation of order under sections 65/62 and III of the Income Tax Ordinance.

9. Mr. Zaki Ahmed, the Departmental representative, appearing in respect of the departmental appeal submitted that assessee had subtly, surreptitiously and intelligently camouflaged the entries with regard to sale and encashment of F.E.B.C's. He submitted that assessee had purchased F.E.B.C's. of Rs. 15,00,000 during the assessment year 1996‑97. The same F.E.B.C's. were sold during 1997‑98, and out of sale proceed F.E.B.C's. from Prudential Commercial Bank were purchased and encashed. By virtue of sale and encashment of those F.E.B.C's the converted amount available with the assessee was Rs.15,00,000 but by accounting it doubly, assessee claimed cash resources of Rs.30,00,000 which were reflected in the wealth tax return. He submitted that there was no proof that the assessee had extra amount of Rs.15,00,000 to invest in F.E.B.C's. which were encashed through bank. Thus there was no plausible explanation of 'increase in wealth and this was `definite information' within the meaning of given in Explanation to section 65 and DCIT was justified in. reopening the assessment and making addition of unexplained Rs.15,00,000.

10. Respondent to Mr. Javaid Zakaria's preliminary objection about one appeal filed in respect of two separate assessments, he submitted that normally a penalty order is passed after the assessment sets confirmed, but in this case the two orders were passed simultaneously and the appeal was also decided simultaneously by the same consolidated order. Hence a single appeal was filed to raise objection against cancellation of the two orders. He maintained that this was a technical mistake and Court may not take adverse view of it.

11. Responding to the arguments of Mr. Zaki Ahmed, the Authorised Representative of the respondent. Mr. Javaid Zakaria submitted that the first F..E.B.C's. were purchased out of retirement benefits obtained by the assessee. The source of purchase was never doubted by the Department. It is true that F.E.B.C's. were purchased from the market, but these were duly declared in the wealth tax return and exemption from wealth tax was claimed, as along as these were retained in F.E.B.C's. on sale thereof these were offered to wealth tax. No exemption ever was claimed in respect of Income tax as these were not purchased out of foreign remittance. No objection was either raised by the Department while finalizing the assessment for 1996‑97. These F.E.B.C's. were sold during 1997‑98 and cash was generated. Further to these assessee had purchased F.E.B.C's. No. FEE 714057 to 774071, in multiplus of Rs. 1,00,000, from Prodential Commercial Bank, on 30‑10‑1996 and encashed it on the same date. Necessary Certificates under rule 13 of the Foreign Exchange Bearer Certificates Rules, 1985 were submitted to the concerned D.C.I.T. Since these were purchased from the foreign remittances, and encashed as per Rules, this encashment amount was exempt under clause (171) of Part IV of the Second Schedule. There was no reasonable basis with the DCIT to presume that the amount invested in purchase of these F.E.B.C's were out of the sale proceed of previous F.E.B.C's. In any case assessee was not required to explain the source of F.E.F.C's. purchased and encashed from the bank, and it was none of the DCIT's jurisdiction to suspect cash generated through this encashment: As regards the previous purchase of F.E.B.C's. the source was not doubted, rather accepted: Hence there was no occasion to invoke section 13 for the addition and no jurisdiction to reopen the assessment under section 65, citing case Laws such as 1993 PTD 1108 and 2000 PTD (Trib.) 329, he submitted that there was no basis for invoking the provision of section 65.

12. We have heard the arguments at length. First we may refer to the preliminary objections raised by Mr. Javaid Zakaria. It is true that two separate orders were passed‑and two separate demand notices issued two separate appeals filed and two separate Appellate Orders passed, hence single appeal preferred by the Department, raising grounds against both the orders, is technically at fault, however, in the interest of justice and using our discretion, we have admitted the appeal against the main order under sections 65/62.

13. The issue in the main order before us is very simple. The DCIT suspected that the assessee introduced unexplained investment in his wealth tax return, as in his opinion he had not sold his previous F.E.B.C's. but claimed credit of Rs.15,00,000 as the same time. We do not find any evidence or material on record to substantiate this suspicion. The argument taken is rather self‑contradictory, on the one hand, learned D.R. submitted that assessee had sold his previous F.E.B.C's. invested the same amount in. obtaining fresh‑ F.E.B.C's. from Prudential Commercial Bank and encashed, it, drawing double benefit, on the other hand, the DCIT's contention as borne. in his show‑cause notice, is that the said F.E.B.C's. No.693108‑693422 were not sold at all. If these were not sold these should have been reflected in the wealth tax return of 1997‑98, in the similar manner as it was reported during the assessment year 1996‑97. As regards purchase and sale of these F.E.B.C's. the respondent was not under any obligation to produce evidence for the simple reason that no exemption was claimed on this transaction. The KIT failed to take any notice on the premium attached to these bearer Certificates. As for the source of investment, it was never questioned rather accepted, to be from the retirement benefits assessee had obtained. Thus the source of these F.E.B.C's was accepted. As regards the purchase of F.E.B.C.s. No.774057‑71, the source of investment, it was not questionable as these were covered under Clause 171 of Part IV of the Second Schedule. The encashment of these F.E.B.C's. was properly reflected in the wealth tax return: Now to initiate proceedings under section 65 on suspicion that these F.E.B.C's: were not sold and unexplained cash was introduced in the garb of sale of these F.E.B.C's. is not a definite information on which section 65 could be invoked. Besides the wealth tax returns and the re‑conciliation statement were before the DCIT before he finalised the assessments under section 59(A). No fresh material had come into his possession, therefore, there was neither any escapement or under assessment nor any information to that effect, and thus the proceedings initiated under section 65 were ab initio illegal. Therefore, we agree with learned CIT(A)'s cancellation of the order.

14. As for the penalty order we have already mentioned that we have not entertained this ground. Without prejudice to this even otherwise since the cancellation of the main order has been upheld, the penalty automatically cease to exist.

15. The appeal is disposed off in the manner indicated above.

179. M.B.A./615/Tax (Trib.) Order accordingly.