MESSRS UNITED BUILDERS CORPORATION, MIRPUR vs THE COMMISSIONER, INCOME-TAX, GOVERNMENT OF AZAD JAMMU & KASHMIR, MUZAFFARABAD

ORDER

ABDUL MAJEED MALLICK, C. J.-This reference has been made by the petitioner under section 136(2) of the Income-tax Ordinance, 1979.

2. The reference has been directly made by the assessee for the opinion of the Court on the questions of law said to have arisen from the order of the Appellate Tribunal, dated 3rd of March, 1982, and order of the Inspecting Assistant Commissioner, Income-tax, under section 34-A, of the Income-tax Act, 1922, dated 6tb of April, 1980. The application of the petitioner for making reference to this Court on the questions of law, was rejected by the Appellate Tribunal, on the 7th of July, 1982.

The following questions of law are said to have arisen in the case:-

(i) That the order of the Inspecting Assistant Commissioner, dated 6th of April, 1980, was non judicial, vague and arbitrary,

(ii) That the Inspecting Assistant Commissioner was not justified to set aside the order of the Income-tax Officer who assessed the income-tax of the petitioner.

(iii) That the Inspecting Assistant Commissioner failed to confront the petitioner with the result of his inquiry, so as to afford opportunity to the petitioner to meet issues and points found against him.

(iv) That the petitioner was not confronted with the local inquiry, alleged to have been made by the Inspecting Assistant Commissioner, during proceedings under section 34-A of the Act.

(v) That Inspecting Assistant Commissioner was not empowered to set aside the order of Income- tax Officer, merely on account of his dis--agreement in the conclusion. Difference of opinion in assessm ent, was not a ground for interference in an order of Income-tax Officer.

(vi) That the Inspecting Assistant Commissioner travelled beyond the objections raised in the notice under section 34-A and thereby expressed opinion on the items not included in the said notice. Such items were mentioned as price of the fur wood (shuttering), (2) finding on the contract rates, (3) mobilization of loan from the bank, and (4) reference to escalation clause of the contract.

(vii) That the Appellate Tribunal failed to apply its mind to the objec--tions raised in the memorandum of appeal, as such refused to exercise the vested jurisdion.

3. The aforesaid questions of law raised by the petitioner are divided into two parts :--

(I) Part-I pertains to the issuance of notice under section 34-A and subsequent inquiry made by the Inspecting Assistant Commissioner, including its ultimate result.

(2) Part-II confines to failure of the Appellate Tribunal to record its decision on all the objections raised in the memorandum of appeal.

4. We propose to take up the questions relating to the proceedings carried by the Inspecting Assistant Commissioner, resulting in setting aside of the order of the Income-tax Officer and re- assessm ent of the tax levied on the petitioner, for the year 1976-77.

5. Section 34-A empowers the Inspecting Assistant Commissioner to call for and examine the record of any proceeding under the Act if he considers that any order passed therein by the Income-tax Officer was erroneous in so far as it was found prejudicial to the interests of the revenue. He was authorised to pass such order thereon as the circumstances of the case justified including an order enhancing or modifying the assessment, or cancelling the assessment and directing afresh assessm ent to be made, after giving the assessee an opportunity of being hoard and after making or causing to be made such inquiry as he deemed necessary. The Legislature introduced this check on the powers of Income-tax Officer to safeguard the interests of the revenue of the State and also to avoid the use of arbitrary exercise of powers by Income tax Officer.

The provisions were supervisory in nature. In order to exercise the powers under this section, it was incumbent upon the Inspecting Assistant Commissioner to determine that an order sought to be interfered, was erroneous and prejudicial to the interests of the revenue. The word "erroneous", as defined in Oxford Dictionary, means; mistaken, incorrect; in the legal sense, an order was considered erroneous if it deviated from the law. This suggested that it was a condition precedent to declare the impugned order erroneous by reference to definite violation or deviation from law.

Applying the principle to the instant case, the Inspecting Assistant Commissioner issued notice to the petitioner under section 34-A, on 14th of April, 1977. The first part of the notice pertained to the status of the firm as at that time, the firm was not shown registered. We are not called upon to discuss this part of the notice, as the counsel for the parties disclosed that the firm was registered and dispute on this point was already settled. The second part of the notice relates to the assessm ent under section 23(3) of the Act. The Inspecting Assistant Commissioner expressed his personal knowledge and mentioned that according to his knowledge, the contract was sanctioned on most reasonable, attractive and profitable rates, as such there was no apprehension of sustaining the loss, as declared by the petitioner to the tune of Rs. 2,05,825. The gross profit rate of 19.7 % against total payment of Rs. 25,77,504 according to him, was quite law. It was pointed out that the assessm ent of the Income-tax Officer was not found convincing due to various reasons mentioned in the notice. All the reasons advanced for cancellation of the order of the Income-tax Officer were hypothetical, vagueand conjectural. It appears that at the time of issuance of notice, the Inspecting Assistant Commissioner was not in possession of definite facts, sufficient to negate the assessm ent order of the Income-tax Officer. As a matter of fact, the notice was issued on arbitrary, fanciful and vague assumptions, based on the hypothesis of personal knowledge. This was a clear negation of provisions of section 34-A. The powers conferred under section 34-A, indicated that such powers were exercisable only on the proof and satisfaction that the order of the Income-tax Officer was unlawful, as such erroneous, so as to be prejudicial to the interests of the revenues. Unless tech a condition was not fulfilled, powers under the section could not be invoked. In the present case, the close study of the notice under section 34-A reflects that the Inspecting Assistant Commissioner was not in possession of sound facts leading to the inference that the assessm ent made by the Income-tax Officer was in any manner erroneous.

6. The subsequent proceedings carried by the Inspecting Assistant Commissioner were equally defective, as after conducting the inquiry and finding out the defects, he failed to provide opportunity to the petitioner---firm to meet such objections and issues by providing evidence or otherwise. The order dated 6th April. 1980, indicates that during inquiry, the assessee---firm was unable to provide answer to certain questions, in consequence of which, an opportunity was provided to it to furnish the details on such questions and on its doing so, the Inspecting Assistant Commissioner was pleased to record fresh assessment in the light of his own estimation. The requirement of law was that in case of his coming to a different conclusion, he should have confronted the assessee with such conclusions and asked it to show cause or to meet such issues or objections, to the satisfaction of the inspecting Assistant Commissioner. The order is silent on this score, rather it supports the objections raised before the Appellate Tribunal as well as before this Court. Thus, in our view, failure on the part of the Inspecting Assistant Commissioner to confront the assessee with the result of his inquiry, is prejudicial to the assessee, as such unlawful.

The rule of income-tax is that when the accounts maintained by an assessee are rejected, the Income-tax Officer or assessing authority, is under an obligation to assign reasons for rejection of the accounts version of assessee. It is equally necessary that the finding of the income-tax Officer, or authority must be based on reasons. He is Pot allowed just to take leap in darkness and indulge in pure guess by making arbitrary and capricious additions, alterations or reductions in the expenditure or income of the. Assessee. He is under a duty to endeavour to the best of his ability to ascertain income, profits and gains of the assessee, nearest to his true income, profits and 'gains, shown under the circumstances of that case. Such an obligation was protected by first proviso to section 13 of the Act. It was true that the onus was on an assessee to provide correct accounts but in a case where accounts of an assessee were rejected, in order to assess the tax, it was an equal duty of Income-tax Officer in fairness and to meet the ends of justice, to disclose to 'he assessee the formula, criterion and the material on which be based his estimate. In case his estimate was based on private inquiry, it was essential to communicate to the assessee the substance of information, which he utilized, so as to enable the assessee to meet the case against him.

7. One of the objections was that the Inspecting Assistant Commissioner recorded his opinion on some of the facts, which were not incorporated in the notice under section 34-A. Those facts were enumerated in questions mentioned above. A perusal of the impugned notice reflects that points raised by the petitioner in this behalf, were, infact, not included in the notice. As the assessee was not supposed to explain those points in reply to the notice, inference was that he was taken by surprise. Such an act of the Inspecting Assistant Commissioner was obviously biased to the assessee.

8. It was noticed that Inspecting Assistant Commissioner, felt advised to discard the assessment order of Income-tax Officer, as in his estimation, Income-tax Officer accepted low income of the assessee and allowed concession on various items. It is well-accepted that provisions of section 34-A were not available on the ground of mere disagreement in assessment. Such powers can be invoked only when an order of Income-tax Officer is found deviating from law. Thus, only that Inspecting Assistant Commissioner was not in agreement with the result of assessment made by the Income-tax Officer, was not a genuine reason for resort to section 34-A. The other aspect of the case is that power conferred on Inspecting Assistant Commissioner under section 34-A, is just in the nature of supervisory power. In exercise of ' supervisory authority, Inspecting Assistant Commissioner was not expected to indulge in deep inquiry by assuming the role of Income-tax Officer. The distinction between their positions was obvious. It was in view of their respective positions that- assessm ent made by an Income-tax Officer who was conversant with local conditions and working of other neighbouring works and contracts, was given more weight. In the present case, the Inspecting Assistant Commissioner acted in derogation to the aforesaid principle.

9. The second part of the reference pertains to the finding of the Appellate Tribunal. It is evident from the memorandum of appeal that the assessee raised as many as 20 objections in the memorandum of appeal The learned Appellate Tribunal felt advised to exercise on four objections mentioned in the impugned order. Failure of the Appellate Tribunal to apply its mind and decide the objections raised before it, obviously, tentamount to refusal to exercise the vested jurisdiction.

We do not go in detail. Of the point as we had already quashed the order of Inspecting Assistant Commis--sioner.

10. Mr. Javed Qureshi, the learned counsel for the respondent very frankly conceded the aforesaid position and agreed for remand of the case, for re-assessment. We were also inclined to quash the order and send back the case for fresh assessment under law, but after going through the relevant provi--sions of law and record, pertaining to the proceedings under section 34-A of the Act, - we felt persuaded to quash the proceedings recorded under sec--tion 34-A and to restore the assessm ent order of the Income-tax Officer, as the same were found violative of mandatory provisions of law. Therefore, we do not feel convinced to remand the case, as agreed by the learned counsel for the respondent. The reference, therefore, stands answered accordingly.