THE COMMISSIONER OF INCOME-TAX, WEST ZONE, KARACHI VS ANWERALY HAJI NOOR MOHAMMAD
1992 P T D 347
[Supreme Court of Pakistan]
Present: Muhammad Haleem, C.J., Shafiur Rahman, Zaffar Hussain Mirza, Saad Saood Jan and Naimuddin, JJ
Civil Anneal No K-246 of 1980
THE COMMISSIONER OF INCOME-TAX, WEST ZONE, KARACHI
versus
ANWERALY HAJI NOOR MOHAMMAD
(From the judgment of the High Court of Sindh at Karachi dated 11-3-1979 passed in I.T.C. No.23 of 1971).
Civil Anneals Nos. 248-K to 250-K of 1980
COMMISIONER OF INCOME-TAX, EAST ZONE, KARACHI
versus
Seth GHULAM ABBAS ADAM ALI
(From the judgment of High Court of Sindh at Karachi dated 22-3-1978 passed in I.T.Rs. Nos. 93 to 95 of 1969).
Civil Anneals Nos. 251-K to 253-K of 1980
COMMISSIONER OF INCOME-TAX, EAST ZONE, KARACHI
versus
Seth SAIFUDDIN GHULAM HUSSAIN
(From the judgment of High Court of Sindh at Karachi dated 22-3 1978 passed in Income Tax References Nos.90, 91 and 92 of 1969).
Civil Appeals Nos. 291-K to 293-K of 1980
THE COMMISSIONER OF INCOME-TAX, CENTRAL ZONE `A' KARACHI
versus
Mir YUSUF ALI
(From the judgment of High Court of Sindh at Karachi dated 30-4-1979 passed in I.T.Cs. Nos.95, 96 and 97 of 1972).
Civil Anneals Nos. 294-K to 296-K of 1980
THE COMMISSIONER OF INCOME-TAX, CENTRAL ZONE `A', KARACHI
versus
Qazi MUHAMMAD ISMAIL
(From the judgment of High Court of Sindh, at Karachi dated 16-4-1979 passed in I.T.Cs. Nos.100,101 and 102 of 1972).
Civil Appeals Nos.246-K, 248-K to 253-K and 291-K to 296-K of 1980, decided on 02/05/1989.
(a) Income-tax Act (XI of 1922)---
----S.66(1) & (2)---Constitution of Pakistan (1973), Art.185(3)---High Court, in exercise of the powers possessed by it under S.66(2) of the Act and on a refusal to make the necessary reference by the Income-tax Appellate Tribunal under S.66(1) of the Act, framed the two questions of law arising in a number of connected appeals and decided them---Leave to appeal was granted to the department, in all the said appeals to examine the correctness of the view taken by the High Court and to resolve by an authoritative pronouncement the differences of opinion expressed m these judgments and another judgment of another High Court in the case of Messrs Schazoo Laboratory Ltd. v. Commissioner of Income-tax 1976 P T D 361.
Messrs Schazoo Laboratory Ltd. v. Commissioner of Income-tax, Lahore 1976 P T D 361 ref.
(b) Finance Ordinance (XXIV of 1961)---
----Third Sched., Part I, proviso (ii)---Income-tax Act (XI of 1922), S.2(15)-- Expressions "total income" and "his share of income"---Definition.
(c) Income-tax Act (XI of 1922)---
----S.16---Exemption and exclusion in determining total income---Share of the super-tax allowable to the partner is to be in the same proportion as his share in the "total income"---Share of the partner has in this context not the artificial, restricted and purposive meaning as is given in S.16(1)(b) of the Act---No statutory mandate for linking expression "his share" to S.16(1)(b) exists.
(d) Income-tax Act (XI of 1922)---
----Ss.29, 23(1) & 23(4)---Expression "under or in pursuance of this Act" in S.29 exhausts the totality of the actions permissible or possible conformably to or in accordance with the provisions of the Act---Application of mind followed by an order on the basis of which notice of demand can be issued is must---Mere incorporation of the demand in the notice is not sufficient to satisfy the requirement of law.
In section 29, the expression "under or in pursuance of this Act" exhausts the totality of the actions permissible or possible conformably to or in accordance with the provisions of the Act. The Act being a fiscal statute takes care and makes special provision for not only application of mind but also of making of a determinative order before a liability under the law is created. The object of this provision being beneficial and protective of the rights of the assessee ful effect must be given to it.
The express language of section 29 is that there must be an application of mind followed by an order on the basis of which notice of demand can issue. Mere incorporation of the demand in the notice is not sufficient to satisfy the requirement of the law.
P.C. Dwadesh Shreni & Co. Ltd. v. Income-tax Officer A-Ward, Aligarh (1962) 46 ITR 586; Dwadesh Shreni & Co. Ltd. case 1972 PTD 440; Rasiklal Amritlal Doshi's case (1961) 42 ITR 35 and N.N. Kotak's case (1952) 21 ITR 18 ref.
Nasrullah Awan, Advocate Supreme Court, M.S. Chaudhry, Advocate -on-Record and for Appellants (in all Appeals).
M.A.I. Qarni, Advocate-on-Record for Appellants (in Civil Appeals Nos.248 to 250 of 1980).
Nemo for Respondents (in all Appeals).
Date of hearing: 25th January 1989.
JUDGMENT
SHAFIUR RAHMAN, J: --The High Court of Sindh in exercise of the powers possessed by it under section 66(2) of the Income-tax Act (hereinafter referred to as the Act) and on a refusal to make the necessary reference by the Income-tax Appellate Tribunal under section 66(1) of the Act, framed the two questions of law arising in a number of connected appeals and decided them. Leave to appeal was granted to the appellant/Commissioner of Income-tax, in all these appeals to examine the correctness of the view taken by the High Court and to resolve by an authoritative pronouncement the difference of opinion expressed in these judgments and another judgment of the Lahore High Court in the case of M/s. Schazoo Laboratory Ltd. v. Commissioner of Income Tax, Lahore (1976 PTD 361).
The assessees in all these appeals have the status of individual but were deriving income from diverse sources including income as partners of various firms. The assessment years to which the dispute relates cover the period from l9W to 1966. Individual assessment orders in respect of each assessee and the assessment year was passed and no grievance with regard to the assessment of the income-tax as such was made. Appeals were taken and these were confined to the benefit of ceiling placed on income-tax by various Finance Acts then in force, whereby the income-tax leviable could not exceed 75% or 70% of the total income. In some of the appeals another question arose and it was, whether penal interest could be levied under section 18-A(8) of the Act without passing an order as envisaged under section 29 of the Act. The Tribunal accepted the appeals and answered both these legal questions arising in the cases in favour of the assessees. The Commissioner of Income tax applied to the Tribunal for making a reference under section 66(1) of the Income-tax Act but the Tribunal declined to make such a reference on the ground that the point of law stood decided by it earlier in a case reported in (1967) 16 Taxation (Tribunal) 119. It was then that the matter was taken to the High Court under section 66(2) and the following questions of law were framed by the High Court itself----
(1) Whether on the facts and circumstances of the case, the computation of tax by the Tribunal for purposes of the proviso (ii) of para. A of Part I of the Schedule to the relevant Finance Act, without regard to the provisions of section 16(1)(b) of the Act, is according to law?
(2) Whether on the facts and circumstances of the case, the Tribunal was justified in holding that an order was a pre-requisite for the levy and demand of penal interest under section 18A(8) of the Act?"
As regards the first question, it was answered by the High Court in the following words:--
"The total income of a firm is assessed under section 23, like that of an individual person and thereafter the super-tax payable by the firm is determined on the total income so assessed. In other words, the assessment of the total income of the firm is before deduction of super-tax payable by the firm. The share of the partner in the total income of the farm so assessed (before deduction of super-tax payable by the firm), is determined under section 23(5)(a). I am, therefore, in agreement with the view expressed by the Appellate Tribunal that the partner's share of super-tax payable by a registered firm under the proviso is not to be' apportioned with reference to the share of the partner as computed under section 16(1)(b). It is, however, not necessary to consider the additional reason given by the Appellate Tribunal that if the Department's contention is accepted, it would patently create a lacuna inasmuch as a portion of the super-tax would remain unadjusted against the income of any of the partners."
As regards the second question, it was answered in the following words:--
"An order implies the application of mind by the officer passing the order. In the absence of any mention in the assessment order for penal interest, it cannot be said that the I.-T.O. had applied his mind to the levy of penal interest for failing to pay the advance tax in accordance with the provisions of section 18-A. It has not been shown that the respondent had admitted his liability to pay penal interest. Mere mention of it in I.T. 30, which is merely an assessment form, is not a substitute for an order under subsection (8) of section 18-A of the Act. A Division Bench of this High Court in I.T.C. 78/79 comprising one of us (ZA. Channa, J.) also took the same view that, as the assessment order was silent as regards any liability of the assessee for his failure to pay advance tax, the assessment form I.T. 30, in which the penal interest was included, was not an order under subsection (8) of section 18-A of the Act."
Mr. Nasrullah Awan, Advocate, the learned counsel for the appellant, has taken us through the various provisions of the law to sustain the viewpoint advanced by the Department before the Tribunal and the High Court and rejected by them.
The specific law under which the question No.l was to be decided is to be found in the Finance Ordinance of 1961 in the Third Schedule under section 7, Part 1, providing for the `Rates of Income-Tax' and thereafter giving the provisos. Proviso No.(ii) reads as hereunder:--
"the income-tax payable shall in no case exceed (a) the amount by which the total income exceeds Rs.6,000 or (b) the amount representing seventy-five percent. of the total income, whichever, amount is the less, and, where such income includes any income from a share of the income, profits and gains of a firm to which paragraph C of Part II applies, such portion of the super-tax payable under the said paragraph as bears to the total amount of such super-tax the same proportion as his share of income, profits and gains of the firm bears to the total income of the firm shall be added to the income-tax payable by such partner under this paragraph and, if the sum so arrived at exceeds seventy-five percent. of the total income of such partner (including his share of income, profits and gains of the firm), the amount of income tax payable by him under this paragraph shall be reduced by the amount of such excess."
Paragraph C, Part II, of which a reference has been made prescribed the rates of super-tax, not required to be reproduced. The departmental view on the first question has been illustrated in the memo. of Civil Petition for Leave to Appeal No.K-90 of 1978 (converted into Civil Appeal No.K-247 of 1980) in the following words:
| "Firm's net income | |
| (4 Partners-equal shares) | Rs. 10 lacs |
| Super-tax paid by the Firm | Rs. 2 lacs |
| Net income of the Firm | Rs. 8 lass |
| Partner's share in total income (20%) | Rs. 2 lacs |
| Maximum liability being 75% income-tax/super-tax cannot exceed | Rs.1,50,000 |
By reference of the above illustration the respondent asserted:
| 25% of super-tax paid by firm i.e. Rs.50,000 (in proportion to share of the partner in the firm): | Rs. 50,000, |
| But the I.T.O. maintained the following: | |
| Not 25% but the percentage as the partners share bears to total income of the firm before deduction of super tax i.e. in this case (2 lacs: 10 lacs = 1/5th or 20% | Rs.40,000 |
The error in the departmental view is that while the expression total income has a definition in the Act and has been given a meaning, the expression "his share of income" etc. has no such inhibited meaning. Clause (15) of section 2 of the Act defines "total income" as hereunder:-
"total income' means total amount of income, profits and gains referred to in subsection (1) of section 4 computed in the manner laid down in this Act:'
The relevant portion of section 16 of the Act is also reproduced hereunder:--
"16. Exemption and exclusions in determining, the total income.--(1) In computing the total income of an assessee--
(a) any sums exempted under the first proviso to subsection (1) of section 7, the second and third provisos to section 8, subsection (2) of section 14, section 15, section 15-A, section 15-AA, section 15-C, section 15-D, section 15-E and section 15-F shall be included;
(b) when the assessee is a partner of a firm, then whether the firm has made a profit or a loss his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of super-tax payable by the firm, if any, and any interest, salary, commission or other remuneration payable to any partner in respect of the previous years:
Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24."
The share of the super-tax allowable to the partner is to be in the same proportion as is his share in the total income. The share of the partner has in this context not the artificial, restricted and purposive meaning as is given in clause (b) of subsection (1) of section 16 of the Act. The third step in exercise is again taken care of by the statute in the following words:--
"If the sum so arrived at exceeds seventy five percent. of the total income of such partner (including his share of income, profits and gains of the firm) the amount of income-tax payable by him under this paragraph shall be reduced by the amount of such excess."
It is clear therefore, that the departmental view is entirely based on and gives a restricted, referential meaning to the expression "his share" by linking it to section 16(1)(b). There being no statutory mandate for that, such curtailment cannot be permitted as it is to the prejudice of the assessee.
The second question to be considered is the effect of section 29 of the Act in respect of the interests leviable under section 18-A(8) of the Act. Section 29 is reproduced hereunder:--
"29. Notice of demand.---When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable. to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable."
The relevant provision of section 18-A, namely its subsection (8) is also reproduced hereunder:--
"Where, on making the regular assessment, the Income-tax Officer finds that no payment of tax has been made in accordance with the foregoing provisions of this section, interest calculated in the manner laid down in subsection (6) shall be added to the tax as determined on the basis of the regular assessment."
Subsection (6) of section 18-A referred to was as hereunder:-
"Where in any year an assessee has paid tax under subsection (2) or subsection (3) on the basis of his own estimate and the tax so paid is less than eighty percent. of the tax determined on the basis of the regular assessment and calculated in the manner laid down in subsection (1), so far as such tax relates to income to which the provisions of subsections (2), (2-A) and (2-B) of section 18 do not apply and so far as it is not due to variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made, simple interest at the rate of six percent. per annum from the Ist day of April in the year in which the tax was paid up to the date of the said regular assessment shall be payable by the assessee upon the amount by which the tax so paid falls short of the said eighty percent.:
Provided that where a provisional assessment is made under section 23-B, interest shall be calculated in accordance with the fore going provisions up to the date on which the tax as provisionally assessed is paid, and thereafter interest shall be calculated at the rate aforesaid on the amount by which the tax as so assessed and calculated in the manner laid down in subsection (1) (in so far as it relates to income to which the provisions of subsections (2), (2-A) and (2-B) of section 18 do not apply) falls short of the said eighty percent.:
Provided further that, where, as a result of an appeal under section 31 or section 33 or of a revision under section 33-A or of a reference to the High Court under section 66 the amount on which interest was payable under this subsection has been reduced the interest shah be reduced accordingly and the excess interest paid, if any, shall be refunded together with the amount of income-tax that is refundable:
Provided further that, where a business, profession or vocation is newly set up and is assessable on the income, profits and gains of its first previous year in the year following that in which it is set up, the interest payable shall be computed from the Ist day of July of the said year."
The High Court followed an earlier decision in I.T.C. 78/79, distinguished the case of Messrs Schazoo Laboratory Ltd., and rejected the view taken in P.C. Dwadesh Shreni & Co. Ltd. v. Income-tax Officer, A-Ward, Aligarh (1962) 46 I.T.R. 586, also reported in 1972 PTD 440.
In section 29, the expression "under or in pursuance of this Act" exhausts the totality of the actions permissible or possible conformably to or in accordance with the provisions of the Act. The Act being a fiscal statute takes care and makes special provision for not only application of mind but also of making of a determinative order before a- liability under the law is created. The object of this provision being beneficial and protective of the rights of the assessee full effect must be given to it. Even in Schazoo Laboratory's case this object and the requirement of the law was fully recognized and the application of mind of the assessing officer was found to exist observing as hereunder:--
"It is admitted that the order imposing penalty needs mention no other reasons if the default is admitted. The default in the case in hand is not denied. A reference to the order of the Income-tax Officer, reproduced above, saying "assessed as per I.T. 30", does show that he instead of giving a specific verdict in the assessment order incorporated therein by reference the contents of the I.T. 30 which were contemporaneously complied by him. So the requirements of the law laid down by the Supreme Court in Gouranga Mohan Sikdar v. The Controller of Import and Export and 2 others (PLD 1970 SC 158) are fulfilled and the orders of Income-tax Officer does show his application of mind to the default in payment of advance tax, and calculation of the penal interest in the I.T. 10, instead of in the order itself, by making a specific reference to it. Thus an order imposing penal interest did exist and hence the question is misconceived. In deciding so we are not differing with the views expressed in the above three cases referred to in para. 3 above, which are distinguishable. In those cases the I: T.O. did not consciously apply his mind or showed his intention to impose penal interest, whereas in the case in hand he assessed the penal interest, in the I.T. 30 and said so specifically in his order."
In the case of Dwadesh Shreni & Co. Ltd. (1972 PTD 440) full effect was not given to the requirement of section 29 of the Act as would appear from the following observations in the judgment:--
"Admittedly, there is no order passed by the Income-tax Officer, awarding interest. It is clear from the language of subsection (8) read with subsection (6) of section 18-A that, in case of default of payment, interest shall be calculated in the manner provided in subsection (6) and the amount arrived at shall be added to the tax determined on the basis of the regular assessment. In the present case what has been done is that in the assessment form appended to the notice of demand issued under section 29 of the Act, the sum of Rs.4,805 has been added to the amount of tax on the basis of the regular assessment. Section 18-A(8) or any ether provision in the Act does not require a separate order awarding interest. Subsection (8) only provides that the amount calculated shall be added to the tax as determined on the basis of the regular assessment. Consequently, in our judgment, the law does not require the passing of a separate order awarding interest. The only order in such a case that is required to be made is the order of assessment and the law stands fully complied with when in the assessment form not only the amount determined in the regular assessment, but also the amount calculated under subsection (8) read with subsection (6) of section 18-A of the Act has been shown. It is not in dispute in the present case that both these amounts have been shown in the total column. We are, therefore, satisfied that there is no substance in the second submission of the learned counsel also."
In the context of sections 23(1) and 23(4) of the Act the requirement of section 29 of the Act was interpreted by the Bombay High Court in the case of Rasiklal Amritlal Doshi (1961) 42 ITR 35 as hereunder:--
"On a plain and proper reading of the language used in the section, therefore, it seems to us clear that it is only when a tax is due in consequence of any order passed under or in pursuance of the Act that the Income-tax Officer will be expected to serve on the assessee or other person liable to pay the tax, a notice of demand in the prescribed form-----it seems to us clear beyond doubt on a plain reading of section 29 itself that no notice of demand can be issued in the absence of an order passed under or in pursuance of the Act. In order that the tax determined under sections 23(1) and 23(4) should be recoverable by the issue of a notice of demand under section 29, an order declaring the tax to be due will have to be passed even in the cases covered by sections 23(1) and 23(4) of the Act."
In an earlier decision in N.N. Kotak's case (1952) 21 ITR 18 from the same High Court while considering the requirement of section 29 in the context of section 46(1) the following observations were made:-
"Now when we turn to section 29 what it provides is that when any tax, penalty or interest is due in consequence of any order passed under or in pursuance of the Income-tax Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable. Therefore the notice of demand can only be served under this section provided tax, penalty or interest is due in consequence of an order passed under the Act. Therefore, the condition precedent to the validity of the notice of demand under section 29 must be an order passed under the Act and the notice is merely consequential upon that order. Therefore if there is no order under the Act then no notice can be served under section 29 "
The sum and substance of these decisions and the express language of section 29 is that there must be an application of mind followed by an order on the basis of which notice of demand can issue. Mere incorporation of the demand in the notice is not sufficient to satisfy the requirement of the law. The impugned decision of the High Court correctly interprets the law and is upheld. The result is that all these appeals fail and are hereby dismissed with costs.
M.BA./C-97/SAppeals dismissed.