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

----S. 13---Deemed income---Contingencies in which S. 13 can be pressed stated. Section 13 of the Ordinance created income by fiction of law commonly known as "deemed income". It arises from undisclosed sources not connected with the business, in contrast to straight additions made on account of undisclosed income from known sources. More often than not it has been noticed that assesses not subjected to tax properly either on account of under- declaration of their own income or under-assessment find themselves in a quandary when sufficient funds are required for smooth running of their business, or investments are made in the purchases of movable or immovable property or expenditure is incurred for any purpose which cannot be explained' satisfactorily from the sources available, cash kept outside the books of accounts is introduced under fictitious names. Such cash credits appear in balance-sheet and it is then for the assessing officer to find out as to whether such credits are bogus or are trading liabilities of the assessee. When investment is made in the property, sometime the entire investment is not disclosed to the Income-tax Department or the value thereof is understated. Similarly expenditure incurred is either understated or omitted altogether. It is to meet such eventualities that section 13 has been incorporated in the Ordinance to cater to such situations.

Various circumstances where the provisions of section 13 are attracted are explained hereunder--

When unexplained cash credit is discovered in the books of accounts maintained, it is "the sum so credited" which has to be treated as deemed income of the assessee:

(a) When investment is found to have been made or the assessee is found to be owner of any money or a valuable article which remains unexplained, it is the value of such investment or article or money which will be treated as the deemed income of the assessee.

(b) When an assessee makes investment but does not record it in the books or the wealth statement, it is the value of the investment made which will be treated as deemed income of the assessee.

(c) When an assessee is found to be the owner of any money or any valuable article, not recorded in the books of accounts or in the wealth statement, it is the money or the value of such article which is to be treated as the deemed income of the assessee.

(d) When an assessee makes an investment or is found to be the owner of a valuable article and the amount spent exceeds that recorded in the books of accounts, such excess amount will be treated as the deemed income of the assessee.

(e) When the assessee incurs any expenses but does not disclose the same, the amount of such expenditure is to be treated as the deemed income.

(2) When the declared value of investment or article of value or the extent of expenditure is considered to be

low, after providing an opportunity to the assessee of being heard, a reasonable value has to be determined, and the relevant provisions of clauses (aa), (b), (c), (d) or (e), of subsection (1) would be attracted.

It would therefore be seen that. clauses (a), (aa), (b), (c), and (d) are attracted when any investment is made or the assessee is found to be the owner of any money or article of value while clause (e) would be invoked when any unexplained expenditure is made which has not been disclosed to the Department. Subsection (2) of section 13 deals with the investments, acquisition of valuable article, and expenditure which are not accepted by an assessing officer at their face value but the I.T.O. himself opts to determine their reasonable value. It may further be clarified that clause (aa) visualises a similar situation in a no account case as contemplated by clauses (b) and (c) where books of accounts are maintained. Non disclosure of expenditure will be considered only when any expenditure is either understated or is entirely omitted to be disclosed in the statement. As for instance in the wealth statement.

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

----S. 13---Deemed income ---Suo motu disclosure by assessee or discovery made by Assessing Officer---Emergent position stated.

When section 13 is viewed from the angle of suo motu disclosure, or discovery made by the Assessing Officer, the following position emerges:-

(i) When the case credit or investment etc. is found to be in existence clause (a) would be applicable when books of accounts are maintained, and clause (aa) would be attracted when the books of accounts are not maintained. The addition can be made to the extent of the "sum so credited" or "investment made".

(ii) When the investment made is totally omitted to be declared clause (b) would be applicable. Clause (c) is attracted when the money or value of article possessed is not recorded in the books of accounts or not reflected in the wealth statem6nt. The addition can be made to the extent of the entire amount discovered.

(iii) When the investment made or value of article possessed is partly recorded in the books of accounts and partly omitted, clause (d) is attracted. Here, additions to the extent of omission or suppression are to be made.

(iv) When the expenditure disclosed or admitted or incurred is suppressed entirely, clause (e) is pressed into service. The addition to the extent of the amount spent is to be made.

(v) Subsection (2) of section 13 is attracted in all the above cases, when the investment or value or expenditure incurred are understated. After adopting a reasonable value, relevant clause of subsection (1) is to be invoked. Here it would be appropriate to observe that the Assessing Officer has to record reasons for rejecting the explanation offered by the assessee or the conclusion drawn by him failing which an addition may not be able to stand the test of appeal.

However, when judged from the point of view of maintenance of accounts, clauses (a), (b), (c) and (d) are attracted. For application of clause (e) it is immaterial whether accounts are maintained or not. Clause (aa) is invoked only in a no account case and is meant to cater to different situations where the assessee is found to have made any investment or is found to be. owner of any money or valuable article in any year.

It would be worthwhile to mention here that:--

(i) Approval is required only when the entire amount credited to books of accounts is treated as deemed income and added under clause (a) of section 13(1).

(ii) Only single approval is required under clauses (aa), (b), (c), (d) and (e) when the quantum of investment or amount of money or the value of article is not under dispute and the entire sum or the excess over the disclosed amount is to be treated as deemed income.

(iii) Two approvals are required, when the Assessing Officer is of the view that the amount of investment or expenditure involved as declared is not reasonable and that such value or amount spent has to be determined.

(iv) The Legislature has taken the precaution that the Inspecting Assistant Commissioner should remain involved in the assessment proceedings. This conclusion is further fortified by the requirements of two approvals as envisaged by section 13(1) and section 13(2) of the Ordinance. An Income Tax Officer is firstly required to ask an assessee to show cause as to why an, addition should not be made under section 13 of the Ordinance according to the facts and circumstances of each case which -is contemplated in clauses. (aa) to (e) of section 13(1) of the Ordinance. When such explanation is offered and if I.T.O. comes to the conclusion that an addition should be made he should seek the approval of his Inspecting Assistant Commissioner. Here the law requires him to offer his proposal regarding quantum of addition so that Inspecting Assistant Commissioner may scrutinize it in the light of the explanation. It appears from perusal of subsection (2) that if the Inspecting Assistant Commissioner agrees to the proposal of the Income Tax Officer, the latter should then once again serve a notice on the assessee so that he could be given a reasonable opportunity of being heard. If after giving the opportunity of hearing to an assessee the Income Tax Officer comes to the conclusion that the amount originally proposed by him and approved by his Inspecting Assistant Commissioner was in his opinion justifiable even then he should again seek the approval of his inspecting. Assistant Commissioner. This procedure emerges out from the use of the words "after giving a reasonable opportunity to the assessee of being heard" as used in subsection (2) of section 13 of the Ordinance. From the use of these expressions it appears that firstly the Income Tax, Officer calls for an explanation of the assessee to form his opinion about the quantum of the addition. Here the assessee does not know what is in the mind of the assessing officer, except that he was not satisfied with his drawings. However, when he gives the assessee an opportunity of being heard, he does so after disclosing his mind regarding the quantum of the proposed addition. At the first instance the Legislature has insisted merely on calling for an explanation but on the second occasion the opportunity of being heard is given to an assessee. But as far as the Inspecting Assistant Commissioner is concerned, he has got power to superimpose his opinion on that of the Income Tax officer on both occasions. He can issue such directions to Income Tax officer as he deemed fit but surely the Income Tax Officer is supposed to follow the procedure discussed above.

1987 PTD 300 quoted.

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

----S. 13(1)(b)---Deemed income---Books of accounts were not maintained by assessee---Provision of S. 13(1)(b) would not be attracted and S. 13(1)(aa) could be invoked.

Abdul Hamid, D.R. for Appellant.

Nemo for Respondent.

Date of hearing: 5th August, 1991.

ORDER

These are two departmental appeals in respect of the assessment year 1984-85, one against the main assessment order and the other against the penalty imposed under section 111 of the Income Tax Ordinance (for short "the Ordinance"). The impugned orders were passed by the learned CIT (Appeals), Gujranwala on 21-11-1990 in Income Tax Appeals Nos.863 and 1442. The first objection of the department relates to the deletion of the addition of Rs.24,508 made 'by the ITO under section 13(l)(aa) of the Ordinance, and the other is in fact a corollary to the first objection.

2. The department has further urged that the penalty under section 111 of the Ordinance was rightly imposed as there was deliberate act of concealment which was wrongly deleted by the learned CIT (Appeals).

3. Relevant facts forming the background of these appeals are, that a cement stockist declared his income at Rs.18,800 from the sale of 10,000 cement, bags. The margin of profit earned per bag was shown at Rs.3 giving gross receipts of Rs.30,000 against which P & L expenses were claimed at Rs.14,000 yielding a net income of Rs.16,000 to which amount of Rs.2,800 was added to reflect a net total income of Rs.18,800 in order to avail the benefit of self-assessment scheme. The declared version was accepted under section 59(1) of the Ordinance. However, on verification from M/s. Gharibwal Cement Factory Ltd. the ITO found out that the respondent had a credit balance of Rs:84,508 including security deposit of Rs.10,000 as on 30-6-1984 with the principal company. Since the wealth statement of the respondent showed a capital of Rs.60,000 and no liability was reflected therein to indicate that loans were obtained for utilisation in the affairs of the business, the assessing officer concluded that the excess amount of Rs.24,508 belonged to the respondent himself which was not shown in the wealth statement. He therefore, issued a show-cause notice on 10-6-1989 and finding the explanation furnished unsatisfactory served a notice under section 65 with the approval of the IA.C. A return was filed in compliance therewith declaring the income "as before". The show-cause notice issued on 10-6-1989 required the respondent to explain the excess amount of Rs.24,508 as also how a total of 10680 bags were purchased, when the declared sales were only in respect of 10,000 bags and no closing stock was shown either in the computation chart or in the wealth statement. The explanation of the respondent that he was not clear as to how the ITO had arrived at the figure of the actual capital, and how the discrepancy with regard to 680 bags was covered by the addition of Rs.2,800 made to the income in order to avail the benefit of the self-assessment scheme did not find favour with the ITO and he added an amount of Rs.24,508 under section 13(1)(aa) of the Ordinance with the approval of the IAC. Feeling aggrieved by this dispensation an appeal was lodged with the learned CIT (Appeals), Gujranwala who after examining the case, concluded that section 13(1)(b) of the Ordinance was applicable to the facts of the case and that section 13(1)(aa) was wrongly invoked by the ITO. He therefore, deleted the addition of Rs.24,508. Further he directed for acceptance of the originally declared income at Rs.18,800. By virtue of this finding he cancelled the penalty order passed by the assessing officer under section 111 of the Ordinance. This time it is the department which feels aggrieved and has come up in further appeal before the Tribunal.

4. Mr. Abdul Hamid the learned DR submitted that the assessing- officer had rightly invoked the powers vested in him under section 13(1)(aa) of the Ordinance as this was a no account case which is an admitted position and section 13(1)(b) applies only in cases where books of accounts are maintained, as is evident from the perusal of the relevant provision. He then read out the provisions of law as under:--

13. Unexplained investments, etc. deemed to be income.-- (1) Where---

(a) any sum is found to be credited in the books of an assessee maintained for any income year; or

(aa) the assessee is found to have made any investment or is found to be the owner of any money or valuable article, in any year; or

(b) the assessee is found to have made any investment in any income year which is not recorded in the books of account maintained for the income year or is not shown in the wealth statement furnished under section 58 in respect of that year; or

(c) the assessee is found in respect of any income year to be the owner of any money or valuable article which is not recorded in the books of account, if any, maintained by him or is not shown by him in any wealth statement furnished under section 58 in respect of that year; or

(d) the assessee has made investment in any income year or is found in respect of any such year to be the owner of any valuable article and the Income Tax Officer finds that the amount expended on making such investment or in acquiring such valuable articles exceeds the amount recorded in this behalf in the books of account maintained by, him or shown in the wealth statement furnished under section 58 in respect of That year, or

(e) an assessee has, during any income year, incurred any expenditure, and the assessee offers no explanation about the nature and source of such sum, investment, acquisition of the money or valuable article, excess amount or the money from which the expenditure was met, as the case may be, or the explanation offered by him is not, in the opinion of the Income Tax Officer satisfactory, the sum so credited, the value of the investment, the money or the value of the article, the excess amount or the amount of the expenditure, as the case may be, shall be deemed to be the income of the assessee of such income year chargeable to tax under this Ordinance:

Provided that, where any act referred to in clauses (a) to (e) is discovered after the assessment of income of the income year to which the said act relates has been made, the income chargeable to tax under this section shall be included in the total income of the income year relevant to the assessment year in which the said discovery is made:

Provided further that in cases referred to in clauses (aa) to (e) such income shall not be chargeable to tax unless prior approval of the Inspecting Assistant Commissioner has been obtained.

(2) Where the value of any investment or article referred to in clauses (aa), (b), (c) or (d) or the amount of expenditure referred to in clause (e) of subsection (1) is, in the opinion of the Income Tax Officer, too low, the Income Tax Officer may determine after giving a reasonable opportunity to the assessee of being heard and with the prior approval of the Inspecting Assistant Commissioner, a reasonable value or the amount thereof, as the case may be, and all the provisions of subsection (1) shall have effect accordingly."

5. Summing up the learned DR submitted that in this case, books of accounts were not maintained, therefore section 13(1)(b) would not be applicable. Since the finding of the first appellate authority with regard to the application of correct provision of law was erroneous, consequently order of deletion of the amount of Rs.24,508 and restoration of the income originally declared/assessed was also wrong. Naturally the penalty order passed by the ITO imposing a penalty of Rs.13,2.74 on 3-3-1990 was also wrongly cancelled.

6. No one appeared on behalf of the respondent individual although a notice under registered cover was despatched at the address indicated in the memo. of appeal. It is therefore presumed that the notice must have reached the respondent and the service is held as proper, and ex parte proceedings are taken against him. The appeals are being decided on merits.

7. After a careful consideration of the submissions made by the learned DR and after perusal of the record, it is clear that the only issue involved in the present departmental appeals. revolves around the correct interpretation of clauses (aa) and (b) of section 13(1) of the Ordinance. It will, therefore, only be appropriate if various contingencies are explained in which section 13 of the Ordinance is pressed into service. It will have a dual advantage. Firstly it would help resolve the issue involved in the present appeals and secondly it would also have the advantage of clarifying any confusion that may prevail in some minds.

8. At the very outset it may be stated that section 13 of the Ordinance creates income by fiction of law commonly known as "deemed income". It arises from undisclosed sources not connected with the business, in contrast to straight additions made on account of undisclosed income from known sources. More often than not it has been noticed that assessee not subjected to tax properly either on account of under-declaration of their own income or under assessment find themselves in a quandary when sufficient funds are required for smooth running of their. business, or investments are made in the purchases of movable or immovable property or expenditure is incurred for any. purpose, which cannot be explained satisfactorily from the sources available, cash kept outside the books of accounts is introduced under fictitious names. Such cash credits appear in balance-sheet and it is then for the assessing officer to find out as to whether such credits are bogus or are trading liabilities of the assessee. When investment is made in the property, some time the entire investment is not disclosed to the Income-tax Department or the value thereof is understated. Similarly expenditure incurred is either understated or omitted altogether. It is to meet such eventualities that section 13 has been incorporated in the Ordinance to cater to such situations.

9. Various circumstances where the provisions of section 13 are attracted are explained hereunder:--

13(1)(a). When unexplained cash credited is discovered in the books of accounts maintained.--It is "the sum so credited" which has to be treated as deemed income of the assessee.

(aa) When investment is found to have been made or the assessee is found to be the owner of any money or a valuable article which remains unexplained, it is the value of such investment or article or money which will be treated as the deemed income of the assessee.

(b) When an assessee makes investment but does not record it in the books or the wealth statement, it is the value of the investment made which will be treated as deemed income of the assessee.

(c) When an assessee is found to be the owner of any money or any valuable article, not recorded in the books of accounts or in the wealth statement, it is the money or the value of such article which is to be treated as the deemed income of the assessee.

(d) When an assessee makes an investment or is found to be the owner of a valuable article and the amount spent exceeds that recorded in the books of account, such excess amount-will be treated As the deemed income of the assessee.

(e) When the assessee incurs any expenses but does not disclose the same, the amount of such expenditure is to be treated as the deemed income.

(2) When the declared value of investment or article of value or the extent of expenditure is considered to be low, after providing an opportunity to the assessee of being heard, a reasonable value has to be determined, and the relevant provisions of clauses (aa), (b), (c), (d) or (e) of subsection (1) would be attracted.

10. It would therefore be seen that clauses (a), (aa), (b), (c) and (d) are attracted when any investment is made or the assessee is found to be the owner of any money or article of value while clause (e) would be invoked when any unexplained expenditure is made which has not been disclosed to the Department. Subsection (2) of section 13 deals with the investments, acquisition of valuable article, and expenditure which are not accepted by an assessing officer. at their face value but the I.T.O. himself opts to determine their reasonable value. It may further be clarified that clause (aa) visualises a similar situation in a no account case as contemplated by clauses (b) and (c) where books of accounts are maintained. Non disclosure of expenditure will be considered only when any expenditure is either understated or is entirely omitted to be disclosed in the statement. As for instance in the wealth statement.

11. When section 13 is viewed from the angle of suo motu disclosure, or discovery made by the assessing officer, the following position emerges:--

(i) When the case credit or investment etc. is found to be in existence clause (a) would be applicable when books of accounts are maintained, and clause (aa) would be attracted when the books of accounts are not maintained. The addition can be made to the extent of the "sum so credited" or "investment made".

(ii) When the investment made is totally omitted to be declared clause (b) would be applicable. Clause (c) is attracted when the money or value of article possessed is not recorded in the books of account or not reflected in the wealth statement. The addition can be made to the extent of the entire amount discovered.

(iii) When the investment made or value of article possessed is partly recorded in the books of accounts and partly omitted, clause (d) is attracted. Here, the additions to the extent of omission or suppression are to be made.

(iv) When the expenditure disclosed or admitted or incurred is suppressed entirely, clause (e) is pressed into service. The addition to the extent of the amount spent is to be made.

(v) Subsection (2) of section 13 is attracted in all the above cases, when. the investment or value or expenditure incurred are understated. After adopting a reasonable value, relevant clause of subsection (1) is to be invoked. Here it would be appropriate to observe that the assessing officer has to record reasons for rejecting the explanation offered by the assessee or the conclusion drawn by him failing which an addition may not be able to stand the test of appeal.

12. However, when judged from the point of view of maintenance of accounts, clauses (a), (b), (c) and (d) are attracted. For application of clause (e) it is immaterial whether accounts are maintained or not. Clause (aa) is invoked only in a no account case and is meant to cater to different situations where the assessee is found to have made any investment or is found to be owner of any money or valuable article in any year.

13. It would be worthwhile to mention here that:--

(i) Only approval is required when the entire amount credited to books of account is treated as deemed income and added under clause (a) of section 13(1).

(ii) Only single approval is required under clauses (aa), (b), (c), (d) and (e) when the quantum of investment or amount of money or the value of article is not under dispute and the entire sum or the excess over the disclosed amount is to be treated as deemed income.

(iii) Two approvals are required, when the assessing officer is of the view that the amount of investment or expenditure involved as declared is not reasonable and that such value or amount spent has to be determined.

(iv) The procedure to be adopted by the assessing officer while making the additions under section 13 of the Ordinance has been explained in several decisions of this Tribunal. It would be pertinent to reproduce the same at the cost of the repetition as explained in a case reported as 1987 PTD 300:--

"The Legislature has taken the precaution that the Inspecting. Assistant Commissioner should remain involved in the assessment proceedings. This conclusion is further fortified by the requirements of two approvals as envisaged by section 13(1) and section 13(2) of the Ordinance. An Income Tax Officer is firstly required to ask an assessee to show cause as to Why an addition should not be made under section 13 of the Ordinance according to the facts and circumstances of each case which is contemplated in clauses (aa) to (e) of section 13(1) of the Ordinance. When such explanation is offered and if he comes to the conclusion that an addition should be made, he should seek the approval of his Inspecting Assistant Commissioner. Here the law requires him to offer his proposal regarding quantum of addition so that Inspecting Assistant Commissioner may scrutinize it in the light of the explanation. It appears from perusal of subsection (2) that if the Inspecting Assistant Commissioner agrees to the proposal of the Income Tax Officer, the latter should then once again serve a notice on the assessee so that he could be given a reasonable opportunity of being heard. If after giving C the opportunity of hearing to an assessee the Income Tax Officer comes to the conclusion that the amount originally proposed by him and approved by his Inspecting Assistant Commissioner was in his opinion justifiable even then he should again seek the approval of his Inspecting Assistant Commissioner. This procedure emerges out from the use of the words "and the assessee offers no explanation" in' subsection (1) and "after giving a reasonable opportunity to the assessee of being heard" as used in subsection (2) of section 13 of the Ordinance. From the use of these expressions it appears that firstly the Income Tax Officer calls for an explanation of the assessee to form his opinion about the quantum of the-addition. Here the assessee does not know what is in the mind of the assessing officer, except that he was not satisfied with his drawings. However, when he has given the assessee an opportunity of being heard, he does so after disclosing his mind regarding the quantum of the proposed addition. At the first instance the Legislature has insisted merely on calling for an explanation but .on the second occasion the opportunity of being heard is given to an assessee. But as far as the Inspecting Assistant Commissioner is concerned, he has got power to superimpose his opinion on that of the Income Tax Officer on both occasions. He can issue such directions to Income Tax Officer as he deemed fit but surely the Income Tax Officer is supposed to follow the procedure discussed above."

14. Reverting back to the facts- of the present case, it is an admitted position that books of accounts were not maintained by the respondent, therefore, section 13(i)(b) was not attracted as wrongly concluded by the CIT (Appeals), Gujranwala. The assessing officer has rightly invoked provisions of section 13(1)(aa) of the Ordinance while making addition of Rs.24,508. The order of-the assessing officer is restored and that of the learned CIT (Appeals) vacated.

15. Needless to say that penalty imposed under section 111 of the Ordinance would be automatically revived.

16. Consequently, the Departmental appeals succeed.

M.BA./1260/TAppeals accepted.