(a) Income Tax Ordinance (XXXI of 1979)--

----S. 65---Income-tax Act (XI of 1922), S.34---Re-opening of assessment-- Scope of S.65, Income Tax Ordinance, 1979 was enhanced as compared to S.34, Income-tax Act, 1922 (Repealed)---Assessing Officer could go into other issues as well, if so warranted. Under section 65 of the Ordinance additional assessment proceedings fully authorise the assessing officer to determine "the total income of the Assessee or the tax payable by him" while he may have issued notice for "any reason" such as: income having escaped assessment, the total income being the subject of excessive relief or refund, or total income having been assessed (or determined) under subsection (1) of section 59 and no order of assessment has subsequently been made under any provision of the Ordinance. The enhanced scope of section 65 of the Ordinance flows from the words" ... .... may proceed to---- determine----the total income-------" which the legislature has now used in contradistinction to the words:-------- any proceed to----------- reassess such income------- " as were obtaining in section 34 of the repealed Act. It is evident that though reasons for notice under section 65 remain unchanged, assessment is no longer confined to the cause for which it may have been reopened. That is to say, the assessing officer may go into other issues as well, if facts so warrant. This is so because once an assessment is reopened what is to be determined (in contradistinction to "such income") is the total income, with the result that assessment as a whole is the subject of probe for purposes of additional assessment.

(1990) 61 Tax 170 (Trib.) ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----Ss. 65 & 154(6)---Where return in respect of notice under S.65 was filed declaring income `as before', the assessee was precluded from calling in question the additional assessment proceedings as provisions, of S.154(6) would stand in his way.

In re: J.L. Wei 1989 P T D 271 ref.

(c) Income Tax Ordinance (XXXI of 1979)---

----Second Schedule, Cl. 74 & S.17---Contractor--Deduction of predetermined percentage of payment as security by Paying Authority---Interest on such security amount---Exemption---Exemption at Cl. 74 of the Second Schedule relates to the income which falls for taxation under S.17 representing interest on securities of the Federal Government or the Provincial Government or on debentures of other securities issued for or on behalf of a local authority or a Pakistani company---Interest on security deducted by Paying Authority, held, would not fall in any of the categories mentioned in C1.74 of the Second Schedule and would not be exempted for payment of tax under Cl. 74 of the Second Schedule of the Ordinance.

(d) Income Tax Ordinance (XXXI of 1979)---

----Ss. 65, 17 & 54 & Second Schedule Cl. 74---Assessee, a contractor maintaining account on "mercantile system"---Practice of retaining, by the paying authority, some amount on account of security and its deposit in the account in a bank was a well-recognized system of which the assessee had full knowledge from the very beginning and was well aware that the interest accuring in such deposits belonged to them and was to be released alongwith principal amount of security---Held. neither on the basis of purported ignorance about accrual of interest nor on the basis of exemption available in the Second Schedule of the Ordinance, the assessee was divested of the responsibility for disclosure of interest income and was rightly taxed for the same---Initiation of proceedings under S.65 and the inclusion of the entire amount in the income of the assessee was valid and lawful in circumstances.

(e) Income-tax---

----Assessment---Agreed amount---Object.

Are agreement for assessment, represents a contract having element of offer, consideration and acceptance. The consideration for the department is the facility of quick realization of taxes and for the Assessee the consideration is the restraining of the assessing officer from doing something which he could do such as detailed examination of the accounts and determination of income which may result in much higher income than the figure offered for assessment.

Sh. Rashid Ahmed for Appellants (in ITAs. Nos. 1625/LB, 3453/LB and 1626/LB of 1984-85).

S. Roomi Shah, DR for Respondent (in ITAs. Nos. 1625/LB, 3453/LB and 1626 LB of 1984-85)

S. Roomi Shah, AC/DR for Appellant (in ITA. No. 3793/LB of 1984 85).

Sh. Rashid Ahmed for Respondent (in ITA. No. 3793/LB of 1984-85).

Date of hearing: 15th July, 1991.

ORDER

A.A. ZUBERI, ACCOUNTANT MEMBER.---Of these four appeals, three are at the instance of the Assessee and one (relating to assessment year 1982-83) by the Department. These assail separate orders dated 30-8-1984 for assessment year 1981-82, dated 20-2-1985 for assessment year 1982-83, and dated 30-8-1984 for assessment year 1983-84 passed by the learned AA.C. Multan in respect of the assessment year 1982-83 and by the learned AA: C. Sahiwal Range, in respect of the other two. The Assessee (a Registered Firm) is a contractor for roads and works for the Highway Department.

2. The learned Counsel explained that receipts in the year 1981-82 were accepted (as declared) at a consolidated figure of Rs.6,25,152 but G.P. was enhanced from the declared 12.01% to 175% which the learned AA.-C confirmed. The assessment for 1982-83 was completed under section 62 read with section 65 in which consolidated receipts were accepted at Rs.71,14,776 and subjected to G.P. at 17.5% against the declared 9.96%. On appeal, the learned Commissioner reduced the G.P. rate in the year 1982-83 to 15% with which the Department is dissatisfied. Moreover, the assessing officer had disbelieved the arrangement of subletting of contracts worth" l s ^5,11,70 and treated the entire work as self-executed but the learned AA: C. accepted the arrangement declared by the Assesee hence the appeal by the Department.In 1983-84, the receipts were declared at Rs.32,04,372 and G.f. at 6.8%. This year income was determined at an "agreed" figure of Rs.4,80,650 against the declared Rs.2,37,000. The Assessee agitates against "agreed" assessment when the appeal was rejected by the learned A..A.-C.

3. Assessment year _1981-82.--The first issue in this year is the G.P. rate applied at 17.5% against the declared 12.01% was upheld by the learned AA: C. The learned Counsel brought on record this Tribunal's decision on I.T.A No.4185/LB/1986-87 dated 25-10-1988 where for road construction, G.P. rate was ordered to be applied at 15%. It was emphasised by the learned Counsel that the line of business activity of the appellant being the same as in the above referred decision, the same treatment should be ordered. We find validity in the arguments by the learned Counsel and recall that this treatment has been ordered by the Tribunal not only in decision dated 25-10-1988 but m other cases having similar nature of business and, therefore, unhesitatingly ORDER that the G.P. in the Assessee's case also should be BROUGHT DOWN to 15%.

4. Another issue involved in this year relates to a sum of Rs.155 representing interest on securities which the assessing officer treated as miscellaneous receipt to include in the income of the Assessee. A perusal of the order by the learned A.A.C. shows that this ground was not taken before him which appears to be reason that it has not been adjudicated by him. We, therefore, REFUSE to admit this ground at this belated stage.

5. Assessment year 1982-83: Assessment this year was initially made under S.A.S. on 30-1-1983 at an income of Rs.4,09,272. Additional assessment proceedings were initiated on 25-5-1983 vide notice under section 65. In response to this notice, return was duly filed declaring income "as before". The learned Counsel developed two fold arguments. It was placed that the notice under section 65 was issued alleging non-disclosure of interest at Rs.12,764 but the assessing officer, in addition to taxing the interest income interfered with the assessment inasmuch as the subletting arrangement in respect of receipts at Rs.25,11,740 was disbelieved and the entire value of the contracts aggregating Rs.71,14,766 was treated as the self-executed work and subjected to a consolidated G.P. rate. The learned Counsel emphasised that the assessment opened under section 65 was to remain confined to the situation specified in the notice and the assessing officer could not look into other aspects for which separate notice was necessary. We are not impressed by the argument of the learned Counsel because we have already held in several decisions that the scope of section 65 of the Ordinance is much wider than the scope of section 34 of the repealed Income Tax Act. Under section 65 of the Ordinance additional assessment proceedings fully authorise the assessing officer to determine "the total income of the Assessee or the tax payable by him" while he may have issued notice for "any reason" such as: income having escaped assessment, the total income being the subject of excessive relief or refund, or total income having been assessed (or determined) under subsection (1) of section 59. The enhanced scope of section 65 of the Ordinance flows from the words"--------may proceed to--------determine------the total income----" which the legislature has now used in contradistinction to the words: " ....may proceed to .... reassess such income " as were obtaining in section 34 of the repealed Act. It is evident that through reasons for notice under section 65 remain unchanged, assessment is no longer confined to the cause for which it may have been reopened. That is to say, the assessing officer may go into other issues as well, if facts so warrant. This is so because once an assessment is reopened what is to be determined (in contradistinction to "such income") is the total income, with the result that assessment as a whole is the subject of probe for purposes of additional assessment. This view has already been expressed by this Tribunal in serveral decisions such as (1990) 61-Tax-170 (Trib.) on which a question of law has already been referred by this Tribunal for the opinion by learned fudges of the Lahore High Court. Moreover, it is admitted that return in respect of notice under section 65 was filed declaring income "as before". The Assessee is, therefore, precluded from calling the additional assessement proceedings as provisions of subsection (6) of section 154 stand in the way. This verdict of this Tribunal has already been endorsed by the learned Judges of the Karachi High Court In re: J.L. Wei-1989 PTD 271. Therefore, adhering to our aforesaid view we REJECT this ground of appeal.

6. Coming to the exemption claimed for interest income and the argument that this income was declared in the succeeding year, the learned Counsel relied on serveral decisions such as (1960) 2-Tax-122 (sup]), (1966) 13 Tax-149, (19'711 24-Tax-82 and 1988-PTD-325. The learned Counsel explained that when contracts are executed, the paying authority does not make full payment to the contractors but deducts a predetermined percentage as "security" which is released when, on inspection, the work is found to have been carried out satisfactorily. This sum is deposited by the Executive Engineer in the National Bank of Pakistan in his own account C/o the Contractors. In this account, interest accrues but the same is not in the knowledge of the contractor (such as the Assessee) because they come to know of it when the security is released and payment received of principal amount of security together with interest thereon. Therefore, interest was declared on receipts in the succeeding year. The learned Counsel built up the argument that Interest on Securities is exempt under clause 74(a) of the Second Schedule and, therefore, could not form part of the Income of the Assessee. He was furthercontended that the books of accounts were maintained on "Receipt basis", hence accrued interest (event if known) could not be credited and was to be offered for taxation only in the year in which it was actually received. Although lengthy arguments were advanced by the learned Counsel we do not feel pursuaded by these. We are clear in our view that the exemption at clause 74 relates to the income which falls for taxation under section 17 of the Income Tax Ordinance representing Interest on Securities (of the Federal Government or the Provincial Government) or on debentures or other securities issued for (or on behalf of) a local authority or a Pakistani Company. The securities of the type and nature, as explained by the learned Counsel, do not fall in any of these categories and, therefore, not being entitled to exemption as per Second Schedule., interest was rightly included is the Income.

7. Coming to the point of accrual and receipt, we entertain no doubt that the Assesse is maintaining account on "mercantile system" which is evident from the fact that the principal amount of security' which was retained by the paying authority and was not actually received was (in fact) taken credit of in the account and duly declared. On this criterion the accrued interest also should have been declared. Our view that the Assessee is maintaining account on `mercantile system' draws strength from the fast that the Balance Sheet (which was presented before us) contains `receivable' which is clearly indicative that the system followed is definitely `mercantile' in which Receipts and Expenses, both accrued quad incurred, are taken credit of or debit given. It also is to be remembered that the practice of retaining, by the paying authority, some amount on account of security and its deposit in the account in the National Bank of Pakistan is a well-recognised system of which the Assessee had full knowledge from the very beginning and was well aware that the interest accruing on these deposits belonged to there arid was to be released alongwith principal amount of security. Therefore, either on the basis of purported ignorance about accural of interest nor on the basis of exemption available in the Second Schedule of the Ordinance, the Assessee was divested of the responsibility for disclosure of this income hence was rightly taxed for the sane. We, consequently, UPHOLD the initiation of proceedings under section 65 and the inclusion of the entire amount of Rs.12,762 in the income of the Assessee as valid and lawful. The appeal on this issue FAILS.

8. The Department's appeal for this year relates to the G.P. rate which the learned A.A.C. had reduced to 15%. We have already held in preceding assessment year (1981-82) that the generally obtaining G.P. rate in the Assessee's line of business was 15% hence the verdict by the learned AA.C. is in line with the decision of this Tribunal which calls for NO INTERFERENCE. The Department's appeal on this issue thus FAILS.

9. Subletting of the contracts is yet another issue involved in the Department's appeal for this year. The facts, as these emerge, clearly indicate that the subletting arrangement is a practice coming from past years, and the parties who worked for the Assessee in the past, were subletees now also. These are known and verifiable inasmuch as they already pay income tax for petty works obtained by them from the (so-called) big contractors. If this arrangement was prohibited by the contract awarding agency, the default is to be taking cognisance of by that authority resulting in such penalty as may have, been envisaged but, as respects income tax assessment, the Assessee can only be taxed for the income earned by way of `commission' received on subletting (valid or otherwise). In this view of the matter, appeal by the Department is REJECTED.

10. Assessment year L983-84, --The learned Counsel relied on decision reported as (1990) 62-TAX-91 where it has been held that an "agreed" assessment does not fall within the ambit of the Income Tax Ordinance and, therefore, it was asserted that the assessment was unlawful. We do not feel persuaded by this argument firstly because the learned Judges of the Lahore High Court have not held the `agreed' assessment as unlawful ab initio and this finding was founded on several factual aspects which are not obtaining in the present appeal so as to extend to the Assessee any help from this reported decision. Moreover, this Tribunal has already expressed the view that an agreement for assessment, represents a contract having element of offer, consideration and acceptance. The consideration for the Department is the facility of quick realization of taxes and for the Assessee the consideration is the restraining of the assessing officer from doing something which he could do such as a detailed examination of the accounts and determination of income which may result in much higher income than the figure offered for assessment. This view, when examined alongwith order-sheet entry dated 21-2-1984 leads us to believe that when confronted with substantial defects in the books of accounts (on which these could be rejected) to frame assessment by applying a higher G.P. rate, as in the past, the Assessee offered for `agreed assessment' and proposed a figure which the assessing officer accepted. As a confirmation of this arrangement not only a partner of the Assessee-firm placed signature on the order-sheet but the learned Counsel (who attended the proceedings alongwith the partner) also signed the order-sheet. The fad that the Assessee themselves had offered for `agreement' is substantiated by a chit available on record in which the offer for assessment at Rs.4,80,560 was made under the signature of the Manager partner. On these facts we find no ERRONEOUSNESS in the decision by the learned A-A: C., hence MAINTAINING the same DISMISS the appeal.

CONCLUSION

11. For the reasons recorded hereinabove, the Assessee's appeal in the assessment year 1981-82 SUCCEEDS partly. In the assessment year 1982-83, the appeal by the Department as also by the Assessee FAILS. The Assessee's appeal for the assessment year 1983-84 also FAILS.

M.BA./1210/Trib.Order accordingly.