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

----S. 154---General Clauses Act (I of 1897), S.27---Noticeunder the Ordinance may be served either by post or by such other manner as is provided for the service of a summon issued by the Court under C.P.C.---Income Tax Ordinance, 1979 having not explained as to whether the notice required to be served by post was to be made through registered post or unregistered post-- Presumption cannot justifiably be raised regarding the service of notice of demand sent to the assessee through letter which was not registered post-- Service and the date of service of notice sent through unregistered post, however, could be proved before the forum through direct evidence in form of postman's statement or the statement of any other person in whose presence the notice was served upon the assessee---Where the Commissioner of Income-tax (Appeal) was not justified in raising a presumption regarding the date when the notice of demand was sent to the assessee through unregistered post and in dismissing the assessee's appeal as barred by time, without bringing on record any direct evidence regarding the date of service of the notice, Income-tax Appellate Tribunal instead of remanding the case decided same on the merits.

1. ITC 21; Law & Practice of Income Tax in Pakistan, Vol. II (4th revised Edition 1972 by Raza Naqvi and Kanga and Palkhivala's "The Law and Practice of Income Tax 8th Edition, VoL I, p.1696 ref.

(b) Interpretation of statutes ---

----Definition of expression---Where any statute is silent regarding the definition of any expression used in that statute the definition of the expression used in the General Clauses Act, 1897 was to be read into that statute.

(c) General Clauses Act (X of 1897)--

----S. 27---Purport of S.27---Section 27 by itself does not render the service of a document legal or illegal on account of the fact that the letter which carried the document was sent through registered post or unregistered post-- Presumption---Onus of proof in cases of registered and unregistered posts.

The plain reading of the language of section 27, General Clauses Act, 1897 would show that it does not say that any document served (sent or given) on the assessee through post, which is not registered will be illegal. Section 27 only answers the question when, in the absence of direct evidence regarding the service, a letter sent through post will be deemed to have been served on the addressee. Section 27 only raises a presumption regarding the service of letter sent through registered post. It does not refer to illegality of a letter sent through post, which is not registered. The purport of section 27 is that when the question is whether a document sent through post which was registered at post has been served on the addressee or not the Court shall presume that the document has been served on the addressee on the date on which it would have reached the addressee in ordinary course of post, but, if the document was sent through a letter which was not registered at post the Court will not assume its service without direct evidence. In the first case if the addressee contends that the document was not served on him the onus will lie on him to show that the letter was not delivered to him. But, in the second case, the onus will lie on the sender to prove that the document was served on the addressee by actual delivery of the letter. Section 27 by itself does not render the service of a document legal or illegal on account of the fact that the letter which carried the document was sent through registered post or unregistered post.

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

----S. 59---C.B.R. Circular No.5 of 1990, dated 25th June, 1990---Self Assessment Scheme for the Assessment Year 1990-91, para. 3(b)(ii)-- Assessee, a registered firm deriving income from sale of coal extracted from mines obtained on lease from the Government and as consideration of the grant of the lease assessee paid royalty to the Government which was charged and levied at special rates on each ton of the coal extracted from the mines-- Income-tax Officer added the amount paid by assessee as royalty to the income of assessee relying on para. 3(b)(ii) of the Self-Assessment Scheme, 1990-91 on the ground that expenses had been claimed under the P&L Account instead of trading account---Validity---Held, since in practice the actual amount of royalty payable by assessee was determinable when the coal was qualified for sale the payment of royalty became a part of profit and loss expenses-- Whatever may be the nature of the expenses on account of the payment of royalty, its admissibility out of the P & L account was not regulated by any provision of the Ordinance---Admissibility in one account and its non admissibility in other account was only based upon accounting practice-- Paragraph 3(b)(ii) of the Self-Assessment Scheme referred only such amounts as were inadmissible under any specific provision of the Ordinance and not to any amount which was inadmissible out of one head of account on account of accounting practice.

Ghulam Abbas Chatha, for Appellant.

Mrs. Zareen Saleem Ansari D.R. for Respondents.

Date of hearing: 5th December, 1992.

ORDER

The assessee, a registered firm, derives income from sale of coal extracted from mines obtained in lease from the Government of the Punjab. As consideration of the grant of the lease, the assessee, like every other lessee of coal mines, is obliged to pay royalty to the Government which is charged and levied at specified rates on each ton of the coal extracted from the mines. The coal extracted from the mines is stocked and is kept under joint wardship of the lessee and the Government before it is sold. The actual amount of the royalty that becomes to the Government is determined when the coal is intended to be removed by the lessee from the stock for sale.

The lessee in the return of income for the assessment year 1990-91 filed under the self-assessment scheme for the year 1990-91 (circulated under CBR's Circular No.5 '.of 1990 dated 5-6-1990) (the scheme) declared its net income at Rs.59,000. As per requirement of the Scheme (para.2., (d)(ii) the return was accompanied by trading and profit and loss account on estimate basis. In the profit and loss account, the assessee has shown an expense of Rs.13,930, which amount, he had, during the period relevant to the aforementioned assessment year paid to the Government as royalty. The assessing officer forming the view that the payment made by the assessee to the Government as royalty was a "trading expense" and as such could not be claimed as an expense in the " P&L account" and relying on sub-clause (ii) of clause (b) of paragraph 3 of the Scheme added the amount of the royalty to the income of the assessee.

The assessee objected to the order of the I.T.O. through an appeal before the CIT (Appeals), Rawalpindi, who, by his order dated 4-5-1992, rejected the same on the ground that it was barred by limitation. The CIT (Appeals), while rejecting the appeal as time barred had assumed that the notice of demand sent to the assessee by the I.T.O. through post on 17-9-1991 would be deemed to have been served on the assessee on 24-9-1991, and reckoning the period of 30 days within which an appeal against an assessment order made by an ITO could be riled before the Appellate Commissioner from 24-9-1991 found that the appeal riled on 5-11-1991 was beyond limitation by 12 days.

The assessee through this further appeal has objected to the orders of--

(i)the CIT (Appeals) on the ground that the CIT (Appeals) erred in law in dismissing the assessee's appeal on the ground that it was barred by limitation; and

(ii)the ITO on the ground that the ITO erred in law in adding the amount of royalty paid by the assessee to the Government to his income relying on sub-clause (ii) of clause (b) of paragraph 3 of the Scheme.

I have heard Mr. Ghulam Abbas Chatha, Advocate for the appellant assessee and Mrs. Zareen Saleem Ansari, D.R. for the respondent I.T.O.

Issue of limitation.

Learned counsel for the assessee contended that the CIT (Appeals) had not raised the issue of limitation when the appeal was heard by him. The counsel contended that if later, the CIT (Appeals), on the basis of the date when the notice of demand was posted by the ITO to the assessee, formed the view that the assessee's appeal was barred by limitation, proper course to be adopted by the CIT (Appeals) was that the assessee was issued a notice to show cause as to why his appeal should not be rejected as barred by time. If it is true what the counsel for the assessee has stated ordinarily I would have remitted the case to the CIT (Appeals) for deciding the question of limitation afresh after affording an opportunity of being heard to the assessee. But, the above course would make the matter shuttle cock between one forum and another. Where possible remand of cases should be avoided. I have, therefore, decided to examine the issue whether on the fats of the case, the CIT (Appeals) was justified to hold that the appeal riled by the assessee was barred by limitation. Before examining the legality of the CIT (Appeals)'s order with regard to the limitation of the appeal filed before him, it would be appropriate that the facts noted by the CIT (Appeals) and his holding regarding the issue of limitation are set out. It is an accepted position that the notice of demand relating to the assessment referable to section 130 of the Ordinance was sent to the assessee on 17-9-1991 through ordinary post. The CIT (Appeals) noted that earlier a letter sent by the I.T.O. to the assessee through ordinary post on 3-6-1991 was received by the latter on 11-6-1991. The CIT (Appeals), therefore, concluded that in ordinary course of post a letter posted by the I.T.O. reaches the assessee within eight days. Accordingly, the CIT (Appeals) assuming that the notice of demand posted on 17-9-1991 will be deemed to have been served on the assessee on 24-9-1991 and reckoning the period of limitation for riling of appeal from that date found that the appeal filed on 5-11-1991 was clearly out of time. The counsel for the assessee has contended that where an assessing officer chooses to serve the notice of demand on the assessee through post he is required to send the notice through registered post otherwise the sending and the service of the notice will not produce any legal consequence for the purpose of Income Tax Ordinance, 1979 (the Ordinance). In support of his submission that the service of notice through post would mean only service through registered post, the learned counsel referred to section 27 of the General Clauses, Act, 1897.

Section 129 of the Ordinance provides that any assessee objecting to any order by which an assessment has been made by an I.T.O. may prefer an appeal to the Appellate Assistant Commissioner of Income Tax against such order. Section 130 of the Ordinance provides that every appeal against the assessment order shall be riled within 30 days of the date on which the service of notice of demand relating to the assessment is served on the assessee. Section 154 of the Ordinance provides that notice under the Ordinance may be served on the person therein named either by post or in the manner provided for service of a summons issued by a Court under the Code of Civil Procedure, 1908. As stated earlier, in this case the notice of demand was sent to the assessee through unregistered post. Now the question that arises for consideration is whether the notice of demand that 'was sent by the I.T.O. to the assessee through unregistered post can be assumed to have been served on the assessee on the day it would have reached the assessee in the ordinary course of post. The learned counsel for the assessee referring to the judgment of Allahabad High Court reported 1 I.T.C. 21 contended that where a notice under Ordinance is sent through ordinary post and not through registered post the notice itself would be illegal and the service or no service of that notice on the assessee would not create any legal consequences. The learned counsel for the assessee also supported his arguments by referring to the well-known treatises on income tax law: firstly, the Law and Practice of Income Tax in Pakistan (4th revised Edition 1972) Vol. II by Raza Naqvi in which the learned author at page 1492 has noted that if any notice under the Income Tax Act, 1922 (now the Ordinance) is "served by post it shall have to be effected by registered post", and secondly, Kanga and Palkhivala's "The Law and Practice of Income Tax, 8th Edition, Vol, I in which the author at page 1696 have noted that "where service (of a notice) is effected by post it should be by registered post".

As noted earlier section 154 of the Ordinance provides that a notice under the Ordinance may be served either by post or by such other manner as is provided for the service of a summon issued by the Court under the Code of Civil Procedure, 1908. The Ordinance however does not explain whether the service required to be made by post shall be made through registered post or unregistered post. The learned counsel contended that where any statute is silent regarding the definition of any expression used in that statute the definition of the expression given in the General Clauses Act, 1897, shall be read into that statute. There is no cavil with the proposition stated by the counsel. The counsel, therefore, referring to section 27 of the General Clauses Act, 1897, submitted that the notice of demand required to be served or sent to the assessee by post shall be served by properly addressing, pre-paying and posting by registered post a letter containing the notice and if the notice is not served by registered post, it cannot be held that the notice was ever served on the assessee And where the notice is not served the limitation to file appeal does not start running, and where the limitation does not start running it cannot expire. Unfortunately, I have not been able to read that in section 27 of the General Clauses Act, 1897, what the counsel for the assessee suggests me to read. Before, I express my disagreement with the submission of the counsel, it would be appropriate to reproduce section 27 of the General Clauses Art, 1897, which reads as follows:--

"27.Meaning of service by post: --Where any Central Act or Regulation made after the commencement of this Act authorises or requires any document to be served by post, whether the expression `service' or any other expression is used, then, unless a different intention appears, the service shall be deemed to be effected by properly addressing, pre paying and posting by registered post, a letter containing the document, and, unless the contrary, is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post."

The plain reading of the language of section 27 ibid would show that it does not say that any document served (sent or given) on the assessee through post which is not registered will be illegal. Section 27 ibid only answers the question when, in the absence of direct evidence regarding the service, a letter sent through post will be deemed to have been served on the addressee.

Section 27 ibid only raises a presumption regarding the service of a letter sent through registered post. It does not refer to illegality of a letter sent through post which is not registered. Let me explain the purport of section 27 ibid. If the question is whether a document sent through post which was registered at post has been served on the addressee or not the Court shall presume that the document has been served on the addressee on the date on which it would have reached the addressee in ordinary course of post, but, if the document was sent through a letter which was not registered at post the Court will not assume its service without direct evidence. In the first case if the addressee contends that the document was not served on him the onus will lie on him to show that the letter was not delivered to him. But, in the second case, the onus will lie on the sender to prove that the document was served on the addressee by actual delivery of the letter. Section 27 ibid by itself does not render the service of a document legal or illegal on account of the fact that the letter, which carried the document was sent through registered post or unregistered post. Under the circumstances, I am of the view that the CIT (Appeals) was not justified to raise presumption regarding the service of notice of demand which was sent to the assessee through letter which was not registered at post. I would like to clarify that I may not be understood having said that the service of the notice of demand sent through unregistered post could not bring about any legal consequences. The service and the date of service of notice sent through unregistered letter could be proved before the CIT (Appeals) through direct evidence in the form of postman's statement or the statement of any other person in whose presence the notice was served upon the assessee.

After reaching the conclusion that the CIT (Appeals) was not justified in raising any presumption regarding the date when the notice of demand that was sent to the assessee through post that was not registered at post and in dismissing the assessee's appeal as barred by time without bringing on record any direct evidence regarding the date of the service of the notice, I have two options: either to remit the appeal to the CIT (Appeals) for decision on merits including the question regarding the limitation after bringing on record the evidence regarding the service of notice on the assessee or myself to decide the appeal on merits. Since the departmental representative is not in a position to state and ultimately to prove by direct evidence on which date the notice was actually served upon the assessee, the remitting the case to the CIT (Appeals) would not, in my view, serve any useful purpose. Therefore, I take the second option of deciding the appeal on merit.

Issue of addition of the amount of royalty to the income of the assessee.

For proper answer to the question whether the assessing officer was justified to add to the income of the assessee a sum of Rs.13,930 which the assessee had paid as royalty to the Government and had claimed as expense in the Profit and Loss Account filed with the return of income, it would be appropriate to reproduce sub-clause (ii) of clause (b) of paragraph 3 of the Scheme on which the assessing officer relied for making the addition. It reads as follows:--

"Where the taxpayer fails to addback legal inadmissible expenses appearing in the statement of account or deemed income or agricultural income under various--provisions of the Income Tax Ordinance, 1979, the I.T.O. shall be authorised to make such add backs or addition as the case may be, while completing assessment under section 59(1) of the Income Tax Ordinance, 1979."

The counsel for the assessee contended that under paragraph 3(b)(ii) of the Scheme only such expense can be added to the income of the assessee as is inadmissible under any provision of the Income Tax Ordinance, 1979, and, since none of the provisions of the Ordinance provides that the royalty paid by an assessee to the Government is an inadmissible expense of the assessee the I.T.O. could not make the addition of the said amount to the income of the assessee. According to the counsel the amounts which can be addedback under paragraph 3(b)(ii) of the Scheme are those which are referred to in section 24 of the Ordinance, or any other amount which is specifically held an inadmissible under the provisions of the Ordinance. The counsel also contended that whether the amount of royalty payable by a lessee of mines to the Government is trading expense or an expense relating to Profit and Loss account is only a question pertaining to accounting practice. The inadmissibility of the expense incurred on the payment of royalty out of Profit and Loss account is not regulated by any provision of the Ordinance. The counsel further submitted that whether the payment of royalty is a trading expense or a Profit and Loss account expense is a debatable issue. Some accountants hold the view that it is a trading expense because it becomes payable as soon as the coal is extracted from mines whether the coal is sold or not. However, some accountants hold the view that notwithstanding that the liability of lessee to pay the royalty as soon as the coal is bucketed out of the mines, since in practice the actual amount of royalty payable by the lessee is determined when the coal is quantified for sale the payment of royalty becomes a part of P&L expenses. Whatever may be the nature of the expense on account of the payment of royalty, I am clear in mind that its inadmissibility out of the P&L Account is not regulated by any provisions of the Ordinance. Its admissibility in one account and its non-admissibility in other account is only bases upon accounting practice. Paragraph 3(b)(ii) of the Scheme refers only such amounts as are inadmissible under any specific provision of the Ordinance and not to any amount which is inadmissible out of one head of account on account of accounting practice.

In my view, therefore, the I.T.O. fell clearly in error in adding the amount of royalty to the income of the assessee relying on paragraph 3(b)(ii) of the Scheme. The appeal of the assessee is accepted and the ITO is directed to accept the declared income of the assessee.

M.BA./2418/TAppeal accepted.