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

----S. 156---Rectification of mistake apparent from the record---Order can be amended by any tax authority including Income Tax Appellate Tribunal to rectify any mistake that is apparent from the record---Exercise of powers to rectify any mistake apparent from the record---Essential conditions.

Commissioner of Income Tax v. National Food Laboratories 1992 PTD 570 fol.

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

----S.156---Order of Commissioner of Income-tax purporting to rectify a mistake in the order passed by his predecessor entered into controversy, investigated into the matter and reassessed the evidence which was plainly beyond the scope of S.156 of the Ordinance.

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

----S.156---Where a Court, Tribunal or other Authority finds that its earlier decision suffered from some legal infirmity it should not exercise its powers to remove the infirmity if the party complaining of the infirmity has the right of appeal against the order complained of before a higher forum and particularly when such a party had already gone in appeal and the appellate forum is competent to rectify any mistake or remove any infirmity from the order of the lower Authority or to undo any injustice done to any party---Lower Authority thus should refrain from passing any order that would be affecting the appeal before the higher forum.

No general inherent powers vested in a Court, Tribunal or other judicial or quasi-judicial Authority to revise its earlier order unless Authorised by the statute establishing or constituting the Court, Tribunal or the authority except where the earlier order is a nullity in law. Right of appeal is a substantive right and it does not exist unless conferred by the statute.

Even in a case where a Court, Tribunal or other Authority finds that its earlier decision suffered from some legal infirmity it should not exercise its powers to remove the infirmity if the party complaining of the infirmity has the right of appeal against the order complained of before a higher forum. Particularly, when such a party had already gone in appeal and the appellate forum is competent to rectify any mistake or remove any infirmity from the order of the lower Authority or to undo any injustice done to any party the judicial practice demands the lower Authority to refrain from passing any order that would be affecting the appeal before the higher forum.

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

----S.156---Commissioner of Income-tax passing order during the pendency of appeal before the Income Tax Appellate Tribunal---Order being absolutely devoid of any legal backing was to be treated as non-existent.

(e) Income tax---

----Void order---Such order need not formally be set aside, it is not only the right or discretion but, is the duty of every Authority coming across a void order to ignore it.

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

----S. 132---Provision of S.132 does not restrict the power of an Appellate Commissioner to give direction to the Assessing Authority to make reassessment regarding that part of the assessment order which suits the assessee---When Appellate Commissioner would decide to set aside an assessment and to direct that the assessment shall be made afresh the Assessing Officer while reassessing the income shall, subject to such specific directions as the Appellate Commissioner might have given in his order, re?examine the entire case and while doing so arrive at a conclusion both favourable and unfavourable to the assessee--Appellate Commissioner thus can direct that while making re-assessment the Assessing Officer shall examine the documentary evidence in support of the claimed expenses.

(g) Income-tax---

----Question of law---Manner in which the income of an assessment for any year is deduced is not a question of law.

???????? (1990) 183 ITR 130 distinguished.

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

----S.62---Assessment---Duty of Assessment Officer---Treatment meted out to an assessee in making assessment for any year does not operate as res judicata or estoppel by record between the assessee and the Assessing Officer---If the income of an assessee for one year is deduced in one way there is no bar or res judicata to deduce the income for another year in another way ---Assessee's own history---Relevance as a fact---Discretion of Assessing Officer to deduce profits and gains of an assessee in a particular way---Extent---Doctrine of "fairness"---Application---Assessee's insistence that his assessment of the income for the present year should be made by the method by which it was made for the last year---Assessee's obligations.

The Income Tax Ordinance, 1979, and its precursor the Income Tax Act, 1922, provide for I.T.O. to make assessment in individual tax-payers year by year. One Income Tax Officer cannot bind another Income Tax Officer. When an assessment is disputed a familiar and well lubricated machinery exists to resolve the dispute. The Appellate Commissioners, Income Tax Appellate Tribunal, and on question of law, The High Courts and the Supreme Court are the ultimate arbiters. The treatment meted out to an assessee in making assessment for any year does not operate as res judicata or estoppel by record between the assessee and the assessing officer: The I.T.O. is a tax collecting authority and not tax imposing authority. The assessee's legitimate expectation is, prima facie, that he is taxed according to law, not according to wrong view of the law. The assessee would appreciate the truth of aphorism; one should be taxed by law and not be untaxed by concession. The relevancy of "assessee's own history" as a fact to deduce an assessee's profits and gains should not diminish or emasculate the relevancy of `assessee's own history as a fact to deduce an assessee's profits and gains. "The assessee's own history" as a relevant fact is based on assessee's "legitimate exception" which in its turn is rooted in "fairness". But fairness is not a one-way street. It imports notion of equitableness, of fair and open dealing. The assessing officer's managerial discretion to deduce profits and gains of an assessee in a particular way is limited to be exercised only in the presence of relevant facts and availability of relevant material. The fairness would, therefore, require that the assessee, who insists that his assessment of income for this year should be made by the same method by which it was made for the last year, is able to show that the method was adopted by the assessing officer after full disclosure of the facts by the assessee, and the said method was the fairest among the methods not only to deduce the income of the assessee but also all those who were engaged in the line of business similar to that of the assessee.

The primary duty of the tax authority is to deduce correct income of the assessee to be charged to tax. By what method the said authority deduces that income depends upon the facts of each case and the circumstances relevant to each year. If the income of an assessee for one year is deduced in one way there is no bar or res judicata to deduce the income for another year in another way. The principle of res judicata does not apply strictly in tax cases.

1992 SCMR 523 = 1992 PTD 523 fol.

Sikandar Hayat Khan for the Assessee.

Pervez Akhtar, D.R. for the Department.

Date of hearing: 26th July, 1992.

ORDER

CH. IRSHAD AHMAD (JUDICIAL MEMBER). ---The assessee, a private limited company, derives income from running a hotel which also includes restaurant facilities. In the returns of income for the assessment years 1988-89, 1989-90 and 1990-91 the assessee declared its net income at Rs.306,518, Rs. 196,084 and Ts. 725,869 respectively which had been computed as follows: ---

For the assessment years 1988-89 and 1989-90 the Assessing Officer accepted the gross receipts but the declared version regarding the operating expenses was not accepted and various addbacks were made to the income out of the said expenses. The assessment for the year 1990-91 came for consideration before an assessing officer other than that who had finalized assessments for the last two years. This time the assessing officer proceeded to compute the income from hotel business and restaurant business separately. He allotted the common utility expenses like electricity, natural gas and water etc., in the ratio of the declared receipts from hotel business and restaurant business. The re-easting of trading account of the restaurant business, as stated above, resulted in loss of Rs.4,850. In view of the unvouched and unverifiable expenses, the assessing officer rejected the declared trading version in respect of the restaurant business and computed the gross income by applying 30% GP rate. The expenses claimed under the heads new director's salary `bad debts' and `bonus paid to the staff' were disallowed in toto. Various addbacks out of the remaining expenses were also made.

The assessee objected to the orders of the Income Tax Officer through appeals before the Commissioner of Income Tax (Appeals). In the appeals relating to the assessment years 1988-89 and 1989-90 the addbacks out of various expenses made by the assessing officer were contested. In the appeal relating to the assessment year 1990-91 besides the very method of computation of income, the disallowance of expenses and addbacks to the income were also contested. All the three appeals of the assessee were disposed of by the CIT (Appeals) by a common order dated 26-10-1991. So far as the assessments for the years 1988-89 and 1989-90 were concerned the CIT (Appeals) did not touch the question of acceptance of declared gross receipts by the assessing officer. He however, set aside the order with the direction to the assessing officer to re-examine the documentary evidence produced in support of the claimed expense including kitchen expenses. The CIT (Appeals) also confirmed the method of assessment adopted by the Income Tax Officer for the assessment year 1990-91 but set aside the assessment with the direction to the assessing officer that the claim regarding the expenses shall be re?examined.

Both the assessee and the Department have objected to the order of the CIT (Appeals). Regarding the assessment years 1988-89 and 1989-90 the objection of the assessee is that CIT (Appeals) could not set aside the assessments on the point of re-examination of kitchen expenses which point had not been taken by the assessee before him. The precise grounds on which the Department is objecting to the order of the CIT (Appeals) relating to the above two assessment years are not clear. So far as the assessment year 1990?91 is concerned, the assessee objects that the tax authorities could not adopt a new method of computing its income other than that adopted for the previous years, The Department objects to the order of the CIT (Appeals) on the ground that the CIT (Appeals) was not justified to observe that 30% G.P. rate applied by the assessing officer in computing the restaurant income was excessive.

This order disposes of all the six appeals filed by the Department and the assessee.

We have heard Mr. Sikandar Hayat Khan, Advocate, for the assessee and Mr. Pervez Akhtar, D.R. for the Department.

Before the points in controversy regarding each year raised in the relevant cross-appeals are identified, discussed and disposed of, it would be appropriate to take notice of an order which the CIT (Appeals) has passed during the pendency of these appeals on 26-3-1992. The assessee, during the pendency of these appeals, made two miscellaneous applications to the CIT, (Appeals). Through one application the CIT (Appeals) was asked to modify his order dated 26-10-1991 (the order which is under appeal before this Tribunal) by which the assessing officer had been required to re-examine the documentary evidence in support of the claimed expenses including the kitchen expenses. The basis for the request was that since the assessee had not contested in appeal before the CIT(A) the part of the kitchen expenses disallowed by the assessing officer, the CIT (Appeals) could not direct the re?examination of the said expenses. Through the second application the CIT (Appeals) was asked to modify his order dated 26-10-1991 and to give his decision regarding disallowance made by the assessing officer of the expenditure amounting to Rs.198,600 allegedly paid to a new director of the Company. According to the assessee the point was raised before the CIT (Appeals) in appeal but he did not dispose it of in his above order.

The learned counsel for the assessee was asked to state under what provision of law the said miscellaneous applications were made to the CIT (Appeals) and under what powers the CIT (Appeals) passed the orders by which the order under these appeals was modified. It may be pointed out that the CIT (Appeals) who had passed the order on 26-10-1991 and the CIT (Appeals) who modified the said order by his order dated 26-3-1992 passed on miscellaneous applications were two different persons. The learned counsel for the assessee submitted that the CIT (Appeals) has modified the earlier order in exercise of the powers conferred by section 156 of the Income Tax Ordinance, 1979 which empowers the tax authorities including this Tribunal to amend any order passed by it to rectify any mistake. According to the learned counsel for the assessee there was a mistake in the CIT (Appeals)'s order dated 26-10-1991 because the CIT (Appeals)---

(i) relating to the assessment years 1988-89 and 1989-90 had given directions regarding a point (kitchen expenses) not contested by the assessee; and

(ii) relating to the assessment year 1990-91 had omitted to dispose of a point (disallowance of new director's salary) raised in the appeal before him.

We are unable to accept the proposition that in exercise of the powers conferred by section 156 of the Income Tax Ordinance, 1979 the CIT (Appeals) was competent to pass an order of the nature he passed on 26-3-1992. Under section 156 of the Ordinance an order can be amended by any tax authority including this Tribunal to rectify any mistake that is apparent from the record. The question is whether the mistake, the CIT (Appeals) was asked to rectify and which he actually rectified was a mistake `apparent from the record'. The scope of the powers of tax authorities to rectify a mistake apparent from the record has been considered recently by the Supreme Court of Pakistan in case Commissioner of Income Tax v. National Food Laboratories, 1992 PTD 570. The Court held that the "essential conditions for exercise of such power (powers to rectify any mistake which is apparent from the record) is that the mistake should be apparent on the face of record; mistake which may be seen floating on the surface and does not require any investigation or further evidence. A mistake should be so obvious that on mere reading the order it may immediately strike on the face of it. Where an officer exercising powers to rectify any mistake apparent from the record enters into controversy, investigates into the matter, reassesses the evidence or takes into consideration additional evidence and on that basis interprets the provision of law and forms an opinion different from the order then it will not amount to "rectification of the order". To see whether the CIT (Appeals)'s rectification order, dated 26-3-1992 does or does not qualify to be a rectification order as explained by the Supreme Court it will be appropriate to refer to the relevant parts of the said order. Paragraph 5 of the order which disposed of the first application reads as follows:---

"I have gone through the appeals papers from which it transpires that R' the plea taken by the learned counsel of the appellant is correct because the addition made out of kitchen expenses was not contested. It is accordingly directed that my predecessor's findings relating to the setting aside of the case on this point may be treated to have been deleted."

It will be seen that the answer to the question whether the CIT (Appeals) disposing of the appeals by his order, dated 26-10-1991 should or should not have given any direction regarding the re-examination of kitchen expenses was not a mistake that was apparent from the record to show that the CIT (Appeals) could not have given any such direction. The real question was whether the holding of the CIT (Appeals) that the ITO shall re-examine the documentary evidence, produced in support of the expenses including? kitchen expenses was, on the face of the position that the assessee had not contested disallowance of kitchen expenses in appeal before the CIT (Appeals), legally correct or incorrect. The answer to the question could be given only after entering into legal controversy and forming a different opinion the adoption of which course has been prohibited by the Supreme Court in the precedent noted above. The relevant part of the CIT (Appeals)'s rectification order relating to the assessment year 1990-91 reads as under:-- ?????

"Coming to the assessment year 1990-91, the ITO had disallowed a sum of Rs.198,600 being the excess of the claim under the head `director's salary' over the assessment year 1989-90. It was observed by him that although the business of the appellant was properly established and there was no change in the nature or method of the operation of this business, the appellant had acquired the services of two more directors in addition of the six paid directors which were already successfully running this business. The ITO was of the opinion that this action of the appellant was aimed at nothing but artificially reducing the profitability of the company so that proper incidence of taxation could be avoided.

AR's plea is that this finding of the ITO was illogical and illegal. According to him, the reasonableness of the expenditure has to be adjudged from the point of view of the appellant and not the Department. Being fully aware of its commercial expediencies, it was only for the appellant to decide whether or not to incur a particular type of expenditure. In this connection reliance was placed by the counsel for the appellant on the case reported as (1974) 95 I T R 664 wherein Patna High Court was pleased to observe that "in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for purposes of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue."

He has also referred to case cited as 1972 (85) ITR 410 wherein Allahabad High Court had been pleased to hold that, "the Department was not concerned with the question whether the assessee acted diligently or carelessly. The question before the authorities was whether the expenditure was business expenditure or not."

Considered in the context of the decisions of these two superior Courts, ITO's action in disallowing the amount claimed by the appellant by way of directors' salary was not proper. Since the ITO has not disallowed this claim on the ground that it was either unverifiable or was not paid, its genuineness has remained undoubted. Since it was a business expenditure the same is ordered to be allowed."

It is apparent from the order itself that the CIT (Appeals) purporting? to rectify a mistake in the order passed by his predecessor entered into controversy investigated into the matter and reassessed the evidence which he was not entitled to do under section 156 of the Ordinance as expounded by the Supreme Court. We, therefore, hold that the CIT (Appeals)'s order dated 26-3-1992 purporting to be a rectification order was plainly beyond the scope of section 156 of the Ordinance.

The learned counsel for the assessee contended that if the CIT (Appeals) was not competent to pass the order dated 26-3-1992 under section 156 of the Ordinance he was competent to pass the said order under general inherent powers to rehear the case. No general inherent powers vested in a Court, Tribunal or other judicial or quasi-judicial authority to revise its earlier order unless authorised by the statute establishing or constituting the Court, Tribunal or the authority except where the earlier order is a nullity in law. It is a trite rule of law that right of appeal is a substantive right and it does not exist unless conferred by the statute. The counsel for the assessee has not been able to demonstrate any basis for the holding that the CIT (Appeals)'s order dated 26-10-1991 was a null and void order. Even in a case where a Court, Tribunal or other Authority finds that its earlier decision suffered from some legal infirmity it should not exercise its powers to remove the infirmity if the party complaining of the infirmity has the right of appeal against the order p complained of before a higher forum. Particularly, when such a party has already gone in appeal and the appellate forum is competent to rectify any mistake or remove any infirmity from the order of the lower authority or to undo any injustice done to any party the judicial practice demands the lower authority to refrain from passing any order that would be affecting the appeal before the high forum. We have asked the counsel for the assessee whether or not this Tribunal, in these appeals, was competent to grant the relief the assessee had asked from the Commissioner of Income Tax (Appeals) through miscellaneous applications. The answer to the above question as it should obviously have been was in the affirmative. In view of this position we strongly disapprove the action of the CIT (Appeals) in passing his order, dated 26-3-1992. The order being absolutely devoid of any legal backing is treated as non-existent. The judicial authority is firm that a void order need not be formally set aside. It is not only the right or discretion but is the duty of every authority coming across a void order to ignore it. We do the same.

Coming to the points in controversy the learned counsel for the assessee has contended that in respect of the assessment years 1988-89 and 1989-90 the CIT (Appeals) could not give direction to the assessing officer to re-examine kitchen expenses which the assessee had not contested before the CIT (Appeals). It may be pointed out that the assessing officer had computed the income for the said years by deducting the expenses from the declared gross receipts. The question is whether the CIT (Appeals) could or could not direct the assessing officer to re-evaluate kitchen expenses after he had decided to set aside the assessment and remit the case for re-examination. The learned counsel for the assessee contends that the point which is not contested by an assessee before the C.I.T. (Appeals) the C.I.T.`A') cannot reopen it in its appellate order. In view of the amplitude of the powers conferred by section 132 of the Ordinance on the C.I.T. (Appeals) in disposing of an appeal we are unable to agree with the submission of the counsel for the assessee. If the submission of the assessee's counsel is taken to its logical conclusion it would mean that the assessing officer while re-examining the expenses as directed by the CIT (Appeals) will not be in a position to disallow any expense to the extent more than that was done by the assessing officer while originally making the assessment. Since section 132 of the Ordinance does not restrict the power of an Appeal Commissioner to give directions to the assessing officer to make reassessment regarding that part of the assessment order which suits the assessee therefore, when an Appeal Commissioner would decide to set aside an assessment and to direct that the assessment shall be made afresh the assessing officer while reassessing the income shall, subject to such specific directions as the Appeal Commissioner might have given in his order, re-?examine the entire case and while doing so arrive at a conclusion both favourable and unfavourable to the assessee. We, therefore, are of the view that the CIT(A) was right in directing that while making reassessment the assessing officer shall examine the documentary evidence in support of the claimed expenses including kitchen expenses. Appeals of the assessee relating to the years 1988-89 and 1989-90 are devoid of any force. The Departmental appeals relating to the above years in fact do not clearly demonstrate any relevant ground on which the CIT (Appeals)'s order could have been objected to.

So far as the appeal relating to the year 1990-91 is concerned, the assessee's counsel has contended that the assessing officer making the assessment for this year was not competent to change the method of computation of income that was adopted by his predecessor for the previous years. 1n support of the submission a reference has been invited to the judgment of Supreme Court of India reported as (1990) 183 ITR 130. The above ruling does not appear to be relevant to tile submission made by the counsel. The ruling refers to an opinion on a point of law and does not refer to the determination of a fact. The manner in which the income of an assessee for any year is deduced is not a question of law decided not to be changed for deducing his income for any subsequent year.

The Income Tax Ordinance, 1979, and it precursor the Income Tax Act, 1922, provide for I.T.O. to make assessment in individual tax-payers year by year. One Income Tax Officer cannot bind another Income Tax Officer. When an assessment is disputed a familiar and well lubricated machinery exists to resolve the dispute. The Appellate Commissioners, Income Tax Appellate Tribunal, and on question of law, the High Courts and the Supreme Court are the ultimate arbiters. The treatment meted out to an assessee in making assessment for any year does not operate as res judicata or estoppel by record between the asses see and the assessing officer: 1992 SCMR 523 --. 1992 PTD 523. By now majority of the assessees know that the I.T.O. is a tax collecting authority and not tax imposing authority. The assessee's legitimate expectation is, prima facie, that he is taxed according to law, not according to wrong view of the law. The assessee would appreciate the truth of aphorism; one should be taxed by law and not be untaxed by concession. In so stating we do not, we hope, diminish or emasculate the relevancy of "assessee's own history" as a fact to deduce an assessee's profits and gains. "The assessee's own history as a relevant fact is based on assessee's "legitimate exception" which in its turn is rooted in "fairness". But fairness is not a one-way street. It imports notion of equitableness, of fair and open dealing. The assessing officer's managerial discretion to deduce profits and gains of an assessee in a particular way is limited to be. exercised only in the presence of relevant facts and availability of relevant material. The fairness would, therefore, require that the assessee who insists that his assessment of income for this year should be made by the same method by which it was made for the last year is able to show that the method was adopted by the assessing officer after full disclosure of the facts by the assessee, and the said method was the fairest among the methods not only to deduce the income of the assessee but also all those who were engaged in the line of business similar to that of the assessee.

The primary duty of the tax authority is to deduce correct income of the assessee to be charged to tax. By what method the said authority deduces that income depends upon the facts of each case and the circumstances relevant to each year. If the income of an assessee for one year is deduced in one way there is no bar or res judicata to deduce the income for another year in another way. The principle of res judicata does not apply strictly in tax cases. If an authority is needed a reference may be made to quite a recent judgment of the Supreme Court of Pakistan in cases Commissioner of Income Tax v. Farrukh Chemical Industries 1992 SCMR 523 = 1992 PTD 523. The objection regarding deducing the income for the assessment year 1990-91 differently from previous years, is therefore, rejected.

The learned counsel for the assessee contended that since the CIT (Appeals) had not given any decision regarding the expenditure incurred for paying salary to a new director we may examine the issue and give our decision. Since the case is going back to the assessing officer it will be inappropriate that the case is decided in piecemeal at different levels. We, therefore, set aside that part of the assessing officer's order by which the expenses claimed as salary paid to the new director were disallowed. The assessing officer while re-examining the documentary evidence in support of various claimed expenses may also re-examine the claim regarding' payment of salary to a new director and its reasonableness in the light of well-established principles.

The Department has also impugned the order of the CIT (Appeals) relating to the year 1990-91 on the ground that the observation of the CIT (Appeals) that the application of GP rate of 30% was excessive was not justified. It appears from the tenor of the CTT (Appeals)'s order that the expression "that the GP rate of 30% was excessive" was in fact the submission of the assessee. The CIT (Appeals) has neither confirmed 30% GP rate nor reduced or modified it. We, therefore, direct that if the assessing officer would resort to deduce income by applying GP rate he will apply such GP rate as is fair and is generally applied in the line of business in which the assessee is engaged. The expression in CIT (Appeals)'s order that "the GP rate of 30% was excessive" will not debar the assessing officer to apply the same if he was satisfied that the said rate was the fair rate and was applied in this line of business.

The appeals of the assessee as well as of the Department are rejected subject to the observations made in this order.

M.BA./1910/T ??????????????????????????????????????????????????????????????????????????????????? Order accordingly.