THE INCOME-TAX OFFICER, CENTRAL CIRCLE III, KARACHI VS ERUCK MANECKJI
1991 P T D 663
[Supreme Court of Pakistan]
Present: Ajmal Mian, Sajjad Ali Shah and Nasir Aslam Zahid, JJ
THE INCOME-TAX OFFICER, CENTRAL CIRCLE III, KARACHI
versus
ERUCK MANECKJI and others
Civil Appeal No.270-K of 1980, decided on 24/03/1991.
(From the judgment of the Sindh High Court dated 24-4-1979 passed in Constitutional Petition No.456 of 1969).
(a) Income-tax Act (XI of 1922)---
----S. 18-A---Non-payment of advance tax---Assessee entered into at: agreement with a foreign Company for purchase of two cement factories---Agreement showed that vendor was to run the business even after the agreement on behalf of the assessee till the completion of sale---Vendor deposited advance tax in his name for the period in which it was running the affairs of business on behalf of assessee---income-tax Officer accepted the plea that the vendor was running the business on behalf of the assessee and taxed the profits in the hands of assessee but treated the advance tax paid by the vendor in their own account and imposed a penalty on the assessee for non-payment of advance tax---Order of Income-tax Officer while accepting and taxing the profits in the hands of assessee, not treating the advance tax paid by vendor as tax paid by assessee, held was arbitrary and perverse.
(b) Income-tax Act (XI of 1922)---
----S. 18-A---Constitution of Pakistan (1973), Art. 199---Constitutional petition, maintainability of---Income-tax Officer by passing an order under S. l8-A had acted in an arbitrary, perverse and oppressive manner against the assessee---No appeal though lay against the order under S. 18-A` but the revision was competent---Constitutional petition, held, was maintainable against the order of Income-tax Officer being arbitrary, perverse and oppressive.
Murree Brewery Co. Ltd. v. Pakistan PLD 1972 SC 279 rel.
Nasrullah Awan, Advocate Supreme Court and M.S. Ghaury, Advocate- on-Record for Appellant.
Khalid Anwar, Advocate Supreme Court and S.M. Abbas, Advocate-on- Record for Respondents.
Date of hearing: 17th March, 1991.
JUDGMENT
NASIR ASLAM ZAHID, J.---This appeal by leave of this Court, is directed against the judgment dated 24-4-1979 of the Sindh High Court allowing the Constitutional Petition filed by the respondents.
2. The respondents, Eruck Maneckji, Nawroz Maneckji and Pakistan Progressive Cement Industries Limited, had tiled the Constitutional petition impugning the order dated 5-7-1969 passed by the Income-tax Officer, Central Circle III, Karachi (the appellant) under section 18-A of the Income-tax Act, 1922, imposing a penalty of Rs.4,86,186 on the respondents for their failure to pay advance income-tax during the assessment year 1964-65 (accounting year ending 30-9-1963). Respondents Nos.1 and 2 are the directors of respondent No.3 company. By an agreement dated 24-7-1962 between respondent No.l and Dalmia Cement Limited (hereinafter referred to as "Dalmia"), an Indian company, respondent No.1 agreed to purchase two cement factories of Dalmia located in Karachi and Jhelum alongwith the business and all the properties and assets of the Dalmia in Pakistan. By a supplementary agreement dated 6-11-1962, the main agreement was modified. Under the terms and conditions of the agreement as modified, respondent No.1 agreed to buy and Dalmia agreed to sell all the said properties at a price which was to be valued on 30-9-1962. On 30-9-1962, the fixed and current assets and investments of Dalmia were valued at Rs.2,33,66,678.20 and this was deemed to be the purchase price payable by respondent No.1 (or his assigns) upon completion of the sale transaction. It was, inter alia, agreed that though the administration of the business was to remain with Dalmia even after 30-9-1962 till the completion of the sale, the profit and loss arising from operation of Dalmia business in Pakistan during the period subsequent to 30-9-1962 upto the date of sale was to be on account of the vendee and all the liabilities of Dalmia relating to the period until 30-9-1962 were to be the sole responsibility of Dalmia and the vendee was to be responsible for all such liabilities for the period commencing 1-10-1962. The sale was to be completed in favour of respondent No.1 or any body corporate, formed and controlled by respondent No.1. The agreement required sanction of the Government of Pakistan and India and other statutory authorities and on account of this reason it took some time before the sale could be finalized. Pakistan Progressive Cement Industries Limited (respondent No.3) was incorporated as a company under the Companies Act, 1913 on 18-4-1964 and it was promoted by respondents Nos.1 and 2 as the nominee of respondent No. 1 in order to take over the business of Dalmia in Pakistan. Ultimately a sale-deed in favour of respondent No.3 company was executed on 30-9-1964 pursuant to the agreement between respondent No.1 and Dalmia.
3. Subsequent to the agreement made in 1962 but before the sale-deed executed on 30-9-1964, Dalmia paid advance income-tax for the assessment year 1964-65 (accounting years 1-10-1962 to 30-9-1963) under section 18-A of the Income-tax Act, 1922 as follows:--
| 14-9-1963 | Rs. 3,76,240.50 |
| 14-12-1963 | Rs. 3,11,348.50 |
| 16-3-1964 | Rs. 3,76,240.50 |
| 11-6-1964 | Rs. 3,70,240.50 |
| | Rs.14,40,000.00 |
The controversy between the respondents and the Income-tax Department has been whether the aforesaid payments towards advance income-tax were made by Dalmia on their own account or on behalf of the respondents. The Income-tax Officer, by his order dated 5-7-1969, made under section 18-A of the Income-tax Act, 1922, held that the aforesaid advance income-tax had been paid by Dalmia on its own account as an existing assessee and the respondents though required to pay advance income-tax did not make any payment on this account. The Income-tax Officer, therefore, imposed a penalty of Rs.4,86,186 on the respondents for their failure to pay advance income-tax during the assessment year 1964-65. The case of the respondents was that the aforesaid amount was paid on their behalf by Dalmia.
4. It has been noticed that the sale-deed was executed as late as 30-9-1964 but, according to the agreement between Dalmia and the respondents, w.e.f. 1-10-1962 the profit and loss of the business was to be on account of the respondents. Under the terms of the agreement, Dalmia continued to run the business of Dalmia in Pakistan after 1-10-1962 on behalf of the respondents. Initially Dalmia filed an. income-tax return for the year in question showing the income from its business in Pakistan as Dalmia's income but then in February 1965 a revised income-tax return was filed by Dalmia showing their income as nil, inter alia, stating about income in the revised return as follows:-
"Does not arise in view of the fact that the working of the two factories and the business activity in Pakistan after 30th September, 1962 as already submitted had been for and on account of Mr. Eruck Maneekji and or his nominee Pakistan Progressive Cement Industries Limited, Karachi. Statements giving all necessary details already filed."
5. The respondents were assessed separately by the Income-talc Officer for the assessment year in question. The stand taken by Dalmia and respondents that Dalmia had been-carrying on the business w.e.f. 1-10-1962 on behalf of the respondent was accepted by the Income-tax Officer. However, by a separate order under section 18-A(8) he held, as observed earlier, that no advance income-tax was paid by the respondents during the assessment year in question and levied penal interest on the respondents totalling Rs.4,86,186 as follows:--
ORDER UNDER SECTION 18-A (81
"The assessee is a new tax-payer and should therefore have deposited tax under section 19-A (3). This has not been done. Originally there was a legal question as to who was assessable for this year -- the assessee association of persons i.e. the promotors or the company viz. Pakistan Progressive Cement Industries Ltd. A point had been raised by the company that 18-A payments had been made by Dalmia Cement Ltd. on their behalf. Since according to sale agreement Dalmia were carrying on business on behalf of the intending purchasers the 18-A payments should be deemed to have been paid on behalf of the company or the present assessee. This claim cannot however be accepted because Dalmia Cement Ltd. was an existing assessee and they paid the tax under section 18-A in their own name and not in the name of the intending purchasers. Secondly even if the factories were intended to be sold, Dalmia Cement Ltd. knew that they would have substantial income during the period in the form of interest and profits under section 10(2)(vii). In fact not only they knew it but acted on that knowledge and apart from paying the tax under section 18-A made further payments of Rs.15,00,000 as P. deposit (Deposit for obtaining transfer of property certificate). The 18-A deposit as well as the P. Deposit have already been adjusted against the provisional tax liabilities of Dalmia Cement Ltd. It is therefore clear that the assessee in default of section 18-A(3). Penal interest is accordingly charged under section 18-A(3) read with 18-A(6) as under:--
From 1-7-1964 to 30-6-1969 (5 years) on Rs.16,20,621 @ 6% = Rs.4,86,186.
6. The respondents challenged the order under section 18"-A levying penal interest byfiling a Constitutional petition which was allowed by the impugned judgment of the Sindh High Court dated 24-4-1979. The Department has come in appeal. We have heard Mr. Nasrullah Awan, learned counsel for the Department and Mr. Khalid Anwar, learned counsel for the respondents.
7. Mr. Nasrullah Awan, learned counsel for the Department, based his submissions on the same reasons in support of this appeal as were given by the Income-tax Officer in his order imposing the penalty on the respondents. It was first submitted that the advance income-tax of Rs.14,40,071 did not represent advance tax payable by the respondents as the aforesaid payment had been made by Dalmia, an existing assessee, in their own name and not in the name of the respondents. On its face, this argument appears to be weighty and in a routine case this submission could have been accepted. However, we are dealing with a peculiar case. If Dalmia had been carrying on business in their own name during the assessment year in question and the stand of Dalmia and the respondents was that during that period Dalmia was carrying on business for and on behalf of the respondents and as such the income accruing from the business of Dalmia in Pakistan be treated as income of respondents under the Income-tax Act, the Income tax Officer might have been justified in rejecting such plea and treating such income as that of Dalmia. But, as admitted, the Income-tax Officer accepted the plea of the respondents and Dalmia that during the year in question Dalmia was running its business in Pakistan on behalf of the respondents and for their benefit. Accordingly, the profits made by Dalmia during the year in question were taxed in the hands of the respondents by the Income-tax Officer and all payments made by Dalmia in respect of its business in Pakistan during the year in question were accepted by the Department as payments made by the respondents. In the circumstances, the Income-tax Officer could not penalize the respondents on the ground that advance income-tax had not been paid by the respondents in their own name. The decision of the Income-tax Officer that as Dalmia was an existing assessee, any tax paid by them during the year in question and advance tax in their own name could not be treated as advance tax paid on behalf of the respondents was, in the admitted facts and circumstance, arbitrary and perverse.
8. The next ground given by the Income-tax Officer and pressed by Mr. Nasrullah Awan in his submissions was that Dalmia knew that they would have substantial income in the year in question in the form of interest and profits under section 10(2)(vii) of the Income-tax Act and for this reason the advance income-tax paid by Dalmia was on their own account. This point was replied on behalf of the respondents before the High Court and the reply was noted in para 12(ii) of the judgment of the High Court, which is reproduced here:--
"The profits under section 10(2)(vii) refer to these profits which arise when the assets are sold for an amount which exceeds their depreciated value. When the said payments were made that was certain was that income was being earned and what was uncertain was whether or not the transaction would go through. The transaction admittedly did not go through, during the assessment year in question which ended with the accounting period 30-9-1963.
The demand of Rs.14,40,971 was made during and for the assessment year 1964-65 as advance tax liability on the basis of previous years profits, The demand was acceded to and paid in four- instalments. The last three instalments were paid after 30-9-1963. The Company could not conceivably pay advance tax in anticipation of liability under section 1tJ(2)(vii) for the assessment year 1964-65, after its expiry and when the sale was completed not in that but in the succeeding assessment year.
As regards the interest 9 income of Dalmia, under the Agreement, Dalmia was entitled to 6% interest per annum from 1-10-1962 on the purchase price. During the assessment year, the total interest income of Dalmia under the Agreement would be Rs.13,00,000 whereas the advance tax paid was Rs.14,40,071. It is inconceivable that any one would pay more advance tax than his entire income for the period in question. In an event Dalmia would not be liable to a income-tax on the income since under section 18-III-B of the Income Tax Act it was the legal duty of a person paying interest to a non-resident to deduct income tax prior to making the payment."
The above submission was accepted by the High Court. Mr. Nasrullah Awan could not advance any argument to rebut the stand taken on behalf of the respondents and accepted by the High Court.
9. The third ground which weighed with the Income-tax Officer was that Dalmia had paid Rs.15,00,000 as deposi0towards obtaining a certificate under the Transfer of Property (Pakistan) Ordinance, 1947. The High Court rightly accepted the submission made on behalf of the respondent that this deposit had no relevance to the controversy regarding payment of advance tax.
10. The other submission made by Mr. Nasrullah Awan was that the Constitutional petition filed by the respondents before the High Court was not maintainable inasmuch as the respondents did not exhaust the other remedies of appeal and, revision for challenging the order of the Income-tax Officer available to them under the Income Tax Act. It was submitted by Mr. Khalid Anwar, learned counsel for the respondents, that at the time the impugned order dated 5-7-1969 had been passed by the Income-tax Officer under section 18-A of the Income Tax Act, 1922, no appeal lay against such order and only a revision was maintainable. Mr. Nasrullah Awan conceded that no appeal lay but submitted that as a revision was competent, the Constitutional petition was not maintainable. In this matter it was found that the Income-tax Officer had acted in an arbitrary, perverse and oppressive manner against the respondents. No appeal lay against the impugned order. The High Court relied upon the Murree Brewery Co. Ltd. v. Pakistan P L D 1972 SC 279 in rejecting the plea against the maintainability of the Constitutional Petition. We find no merit in the submission of the learned counsel for the Department that the Constitutional Petition was liable to be dismissed as not maintainable.
11. As a result this appeal is dismissed but with no order as to costs.
Z.S./I-142/SAppeal dismissed.