MA. (STAY) NO.7/KB, AND I. T. AS. NOS. 7310/KB AND 7311/KB OF 1992-93, VS MA. (STAY) NO.7/KB, AND I. T. AS. NOS. 7310/KB AND 7311/KB OF 1992-93,
1993 P T D (Trib.) 689
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mushtaq, Accountant Member and Syed Kabirul Hasan, Judicial Member
MA. (Stay) No.7/KB, and I. T. As. Nos. 7310/KB and 7311/KB of 1992-93, decided on 17/01/1993.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss.13, 62 & 59---Self-Assessment Scheme (1990)---C.B.R. Circular No.5 of 1990, para. 4(ii)---Selection of case for audit---Income Tax Officer while taking the case out of Self-Assessment Scheme had not to prove conclusively the understatement of income as mere suspicion of understatement of income was sufficient for selection of case for audit.
The word used in clause (ii), para. 4 of C.B.R. Circular No.5 of 1990 is "suspected" that is mere suspecion of understatement of income is sufficient for selection of -case for audit. The I.T.O. has not to prove conclusively the understatement of income because once the I.T.O. has conclusive proof of understatement of income that return filed by the assessee will not qualify for Self-Assessment Scheme it will be a case of concealment. Perhaps this was the reason the C.B.R. was careful to introduce the word "suspected" in the clause. However, this suspicion should be based on material evidence. In the present case the assessee purchased property and on the basis of enquiry the I.T.O. came to the conclusion that there was understatement of investment in the property.
Understatement of investment has to be assessed to tax under section 13 in the year in which the property was purchased by the assessee and by considering it as deemed income. While completing the assessment the I.T.O. cannot ignore the deemed income.
If the I.T.O. has to ignore the valuation of the Collector then he has to give some valid reasons.
The I.T.O. had adopted the cost of construction of first floor at Rs.300 per sq. ft. but on what basis the cost of construction had been adopted, had not been clarified. Total covered area of the first floor was 623 sq. ft. and I.T.O. had adopted the value of construction of two rooms at Rs.2,00,000 which comes to Rs.321 per sq. ft. Normally cost of construction of the first floor is lesser than cost of construction of ground floor but if the valuation adopted by the I.T.O. was upheld then cost of construction of upper floor would be more than the cost of construction of ground floor.
Valuation adopted was on the basis of enquiries made by the Inspector from the estate agents but this enquiry report was never confronted to the assessee. Another point which had been not agitated by the assessee but could not be ignored was that in the year under consideration important fact was that law and order situation was not good and prices of the properties were generally low in the year under consideration. The assessment order was set aside and I.T.O. was directed to make addition if any after providing some reasonable basis and after allowing the assesses an opportunity to prove its case.
(b) Income Tax Ordinance (XXXI of 1979)---
-----S.13---Deemed income---Purchase of property---Understatement of investment in purchase of property has to be assessed to tax under S.13 in the year in which the property was purchased by the assessee by considering it as deemed income.
Muhammad Farid for Appellant.
Naseer Ahmad, D.R. for Respondent.
Date of hearing: 13th January, 1993.
ORDER
In this case the assessee M/s. Saddal Engineering Co. has moved two applications for stay of income-tax demand. In one application the assessee has prayed that income-tax demand created by I.T.O. vide order under section 62, dated 29-2-1992 at Rs.5,24,230 be stayed. In another application the assessee has prayed that demand created as a result of penalty order, dated 31-3-1992 creating income-tax demand of Rs.4,40,738 be stayed.
2. We have discussed these applications with the A.R. of the assessee Mr. Muhammad Farid and the D.R. and with their consent the main appeals filed by the assessee for the year under consideration are being taken up today for hearing hence two applications moved by the assessee for stay of demand have become infructuous.
Appeal against order under section 62:
3. The assessee in this case is an individual. For the year under consideration the assessee?? filed return of income-tax declaring net income of Rs.61,436. This return was filed by the assessee under Self-Assessment Scheme. However, the assessment in this case was not completed under section 59(1) of the Income Tax Ordinance because this case was selected for audit vide clause (ii) Para. 4 of CBR Circular 51 of 1990, dated 25-6-1990. Consequently, assessment was completed under section 62 of the Income Tax Ordinance and income was determined at Rs.11,66,385.
4. In first appeal the learned C.I.T. (Appeals) confirmed the order made by the I.T.O.
5. Before points agitated by the learned A.R. of the assessee and counter-arguments given by the D.R. are discussed it is relevant to mention the facts of the case briefly as under:
As mentioned above the assessee in this case is an individual earning its income as mechanical contractor. Total receipts declared by the assessee were Rs.11,00,350. G.P. rate declared was 19.14%. The I.T.O. estimated the receipts at Rs.15,00,000 and applied G.P. rate of 20%. The I.T.O. also made additions out of various Profit and Loss account expenses claimed by the assessee. Besides these additions the I.T.O. also made an addition of Rs.9,90,000 to the income determined as above from estimate of receipts, application of G.P. rate and disallowances out of P&L account expenses. This addition was made by the I.T.O. because the assessee has purchased a house during the year under consideration. The purchase value was shown at Rs.5,10,000. However, the I.T.O. estimated the value at Rs.15,00,000. It was this treatment accorded to the assessee that resulted into the present appeal.
6. The learned A.R. of the assessee has objected to the assessment made by the I.T.O. on a number of grounds. First point raised by the A.R. of the assessee is that return filed by the assessee under Self-Assessment Scheme was complete in all respects. There was no defect in the return hence it could not be selected for audit under clause (ii) Para. 4 of the C.B.R. Circular No.5 of 1990. According to the A.R. of the assessee return under provisions of above Circular could be selected for audit for the following reasons:
"with the approval of Regional Commissioner of Income Tax, where gross understatement of income is suspected on the basis of definite information based on material evidence:"
The A.R. of the assessee contended that in this case return filed by the assessee was selected for total audit manifest on the ground that assessee had made understatement of investment in the house. According to the A.R. of the assessee there is great difference between the understatement in the investment in a property and understatement of income for the year under consideration because understatement of investment by an assessee is not necessarily from the income earned in the year under consideration. According to the A.R. of the assessee the house in question was purchased in June, and assessee could not earn Rs.9,90,000 in a period of six months hence the very basis on which this case was selected for understatement of income was incorrect, invalid and return filed by the assessee qualified for processing under Self-Assessment Scheme. However, if the I.T.O. had any evidence he could take action under section 65 subsequently. Primarily he had to accept the return filed by the assessee under Self-Assessment Scheme because there was no defect in the return as envisaged in the relevant provision of Self?-Assessment Scheme for the year under consideration. The second argument given by the A.R. of the assessee is that the I.T.O. does not have any definite information in this case. The A.R. of the assessee contended that the word `definite information' was not defined in Income Tax Ordinance. However, the word `definite information' has been discussed by the Hon'ble AJK High Court in the case cited as 1988 PTD 324 (Paras. 22 to 24). According to the A.R. of the assessee definite information should be such that no further inquiries are required to prove the information but in this case no such information was available with the I.T.O.
7. The third argument of the A.R. of the assessee was that while discarding the value of house purchased by the assessee the I.T.O. has mis?stated the facts. According to the A.R. of the assessee it has been observed in the assessment order that House No.3-Q/6 P.E.C.H.S., Karachi purchased by the assessee was located on main Shahra-e-Faisal which is a posh locality. The A.R. of the assessee has contended that this house is not situated on main Shahra-e-Faisal. It is 800 yards away from main Shahra-e-Faisal. This incorrect presumption was in the mind of the I.T.O. while determining value of the house.
8. The fourth leg of the argument of the A.R. of the assessee was that the I.T.O. had discarded the mutation deed without any valid reason or collateral evidence. According to the A.R. of the assessee the assessee produced sale-deeds of other two houses in the same area with the details of total 'covered area and purchase price but the I.T.O. did not accept the value of this house. According to the A.R. of the assessee higher appellate Courts time and again have observed that without any valid reason the value indicated in the mutation deed has to be accepted.
9. The fifth argument given by the A.R. of the assessee was that estimate of investment in the house adopted by the I.T.O. was excessive and arbitrary because in the concerned area Collector of Karachi has determined the rate for valuation of the property at Rs.1,300 per sq. yd. by Circular Letter No.P-10/12/86-CSO, dated 11-11-1986. The A.R. of the assessee also relied on a case decided by Ombudsman vide letter No.Reg.II/1618/90-780-E, dated 26-2-1991. The A.R. of the assessee has contended that in similar circumstances Wafaqi Mohtasib observed as under:
" It is felt that the Agency has not so far dealt with the case in its true perspective. The Agency is, therefore, advised to decide the case of the complainant either by accepting the declared value of the property or by estimating its value in accordance with the rates specified by KDA vide Gazette Notification."
10. The sixth argument of the A.R. of the assessee was that while estimating the value of property the discretion was not used by the I.T.O. judiciously. The I.T.O. does not have unfettered discretion in making estimate of the property. The A.R. of the assessee relied on a case cited as 1979 ITR 759 Todarmal Safarishmal Lashkar v. Commissioner of Income Tax, Nagpur (M.P. High Court India). In this case the Hon'ble High Court observed as under;
"In Susannah Sharp v. Wakefield (1891) A.C. 173 - (HL), Lord Halsbury's classical observations may be recalled.
Discretion means when it is said that something is to be done within the discretion of the authorities that that something is to be done according to the rules of reason and justice, not according to private opinion "according to law" and not "humour". It is to be not arbitrary, vague and fanciful, but legal and regular. And it must be exercised within the limit, to which an honest man competent to the discharge of his office ought to confine himself."
According to A.R. of the assessee the estimate of value of property by the I.T.O. was arbitrary, vague and fanciful without any justification.
11. The seventh argument given by the A.R. of the assessee was that addition was made by the I.T.O. under section 13(1)(d) of the Income Tax Ordinance but I.T.O. failed to obtain two approvals of the 1AC as envisaged in various judicial pronouncements of Hon'ble Courts. In this connection the A.R. of the assessee relied on a case cited as 1987 PTD 300 (Trib.)
12. The assessee has also agitated his grievance regarding estimate of sales adopted by the I.T.O. and estimate of G.P. rate. The A.R. of the assessee contended that the assessee in this case was a contractor. The entire receipts were through cheques and supported by necessary certificates hence estimate of receipts was without any rhyme or reason.
13. The A.R. of the assessee has also contended that G.P. rate declared by the assessee was 19.14% but the I.T.O. applied G.P. rate at 20%. According to the A.R. of the assessee the G.P. rate declared by the assessee could not be considered as "too low" arbitrarily as there was hardly any difference between the G.P. rate declared by the assessee and that applied by the I.T.O. According to the A.R. of the assessee applying G.P. rate of 20% against declared G.P. rate of 19.14% was mere tinkering of the assessment order by the I.T.O.
14. The A.R. of the assessee has also agitated add backs out of Profit and Loss account expenses. The A.R. of the assessee contended that additions made by the I.T.O. out of salaries and rent are excessive and without any justification. The other add backs from Profit and Loss account expenses are not pressed by the A.R. of the assessee.
15. The D.R. vehemently opposed the contentions made by the A.R. of the assessee. Regarding first objection of the A.R. of the assessee that there was great difference between the understatement of investment in the property and understatement of income for the year under consideration as indicated in the return of income for the year under consideration the D.R. has contended that arguments of the A.R. of the assessee are misplaced because for understatement in investment in the property special provisions have been made in the Income Tax Ordinance. According to D.R. investment in property was to be assessed under section 13 as deemed income in the year in which investment was made irrespective of the fact whether investments are out of income of the earlier years or not. According to D.R. investment in property was covered by provisions of section 13 of the Income Tax Ordinance hence understatement of investment in property was valid ground for selection of the case for audit.
16. As far as second argument of the A.R. of the assessee that there was no definite information for selection of this case for audit was concerned this according to the D.R. was also not correct. According to D.R. the A.R. of the assessee was not correct when he said that the word `definite information' was not defined in the Income Tax Ordinance, 1979. According to D.R. the word `definite information' was defined in Income Tax Ordinance in section 65. The D.R. invited our attention to the amendment made in section 65 by Finance Act, 1987 whereby an explanation was added to subsection (2) of section 65 of the Income Tax Ordinance. This explanation is reproduced as under:
"As used in this subsection, `definite information' includes information in respect of sales and purchases, made by the assessee, of any goods and any information regarding acquisition, possession or transfer by the assessee of any money, asset or valuable article, or any investment made or expenditure incurred by him."
According to D.R. since the word information has been clarified in section 65 of the Income Tax Ordinance this definition was applicable in this case The D.R. contended that if the above explanation is correctly considered then it ill be quite evident that the ITO has definite information regarding understatement of investment in property.
17. The D.R. rebutted the argument of the A.R. of the assessee regarding obtaining of two approvals by the I.T.O. before addition under section 13(1)(d). The D.R. contended that the I.T.O. had obtained two approvals in this case before making addition.
18. The next argument was that in this case the assessee had purchased a property in the year under consideration. The I.T.O. got enquiries conducted and enquiries were mode by the Inspector from various estate agents. According to the report of the I.T.O. enquiries were made from Popular Estate Agency indicating that price of a similar house in the area in which the assessee's house was situated was approximately Rs.13,00,000 to Rs.17,00,000 in the year under consideration. Enquiries made from Lakhani Associate indicated that approximate price of similar house in the same area was Rs.13,00,000 to 16,00,000. This enquiry was got conducted by the ITO. The D.R. argued that from the enquiry report it was quite evident that the assessee had understated the purchase price of the house. Thus there was definite material available with the I.T.O. The ITO issued show-cause notice to the assessee to explain his position and furnish necessary details in support of his contention but the assessee did not do so hence the treatment given to the assessee was in accordance with law.
20. We have carefully considered the arguments of both the sides at length. However, before any conclusion is derived it is pertinent to reproduce the relevant clause of Self-Assessment Scheme under which this case has been selected for audit. The relevant clause is clause (ii), Para 4 of CBR Circular No. 5 of 1990 which is reproduced as under:
"Selection of case for Audit
4. From amongst those qualifying for the Self-Assessment Scheme, returns may be selected for audit,
(i) . ???.????
(ii) with the approval of Regional Commissioner of Income Tax, where gross understatement of income is suspected on the basis of definite information based on material evidence."
21. The A.R. of the assessee vehemently contended that for taking the case out of Self-Assessment Scheme the I.T.O. must have definite information based on material evidence. But he has forgotten the word used in the above clause is "suspected" that is mere suspicion of understatement of income is sufficient for selection of case for audit. The I.T.O. has not to prove conclusively the understatement of income because once the I.T.O. has conclusive proof of understatement of income then that return filed by the assessee will not qualify for Self-Assessment Scheme, it will be a case of concealment. Perhaps this was the reason the C.B.R. was careful to introduce the word "suspected" in the above clause. However, this suspicion should be based on material evidence. In this case the assessee purchased property and on the basis of enquiry the I.T.O. came to the conclusion that there was p understatement of investment in the property.
22. The A.R. of the assessee has also made distinction between the understatement of income and understatement of investment but as pointed out by the D.R. understatement of investment has to be assessed to tax under section 13 in the year in which the property was purchased by the assessee and by considering it as deemed income. While completing the assessment the I.T.O. cannot ignore the deemed income. The other arguments of the A.R. of the assessee have already been rebutted by the D.R.
The D.R. has contended that the ITO also got inquiries conducted regarding purchase price of house in the locality. An opportunity was also provided to the assessee to produce necessary evidence but the assessee had failed to do so. Because of these reasons the I.T.O. was justified in selecting the case for audit. However, from this point onward the story is quite different. The I.T.O. estimated the value of house at Rs.15,00,000. The I.T.O. calculated the investment in the house as under:
| (i) Cost of land at Rs.2,500 per sq.yd. | Rs.7,75,000 |
| (ii) Cost of construction of first floor at Rs.300 per sq.ft. | Rs.5,58,000 |
| (iii) Cost of construction of two rooms on upper floor. | Rs.2,00,000 |
| | Rs.15,33,000 |
The A.R. of the assessee has raised a number of objections regarding the above valuation. At first it has been pointed out by the A.R. of the assessee that the I.T.O. totally ignored the valuation fixed by the Collector in the concerned area in the year under consideration. If the I.T.O. has to ignore the valuation of the Collector then he has to give some valid reasons. Secondly, the I.T.O. has adopted the valuation at wrong presumption that house was situated on main Shahra-e-Faisal. As pointed out by the A.R. of the assessee it was 800 yds. away from main Shahra-e-Faisal. Thirdly, the covered area taken by the I.T.O. is also not correct. The total covered area of the house is as under:
(i) Ground floor 1986 sq. ft.
(ii) Upper floor 628 sq. ft.
The I.T.O. has adopted the cost of construction of first floor at Rs.300 per sq. ft. but .on what basis the cost of construction has been adopted, has not been clarified. Total covered area of the first floor is 623 sq. ft. and I.T.O. has adopted the value of construction of two rooms at Rs.2,00,000 which comes to Rs.321 per sq. ft. Normally cost of construction of the first floor is lesser than cost of construction of ground floor but if the valuation adopted by the I.T.O. is upheld then cost of construction of upper floor will be more than the cost of p construction of ground floor.
23. The I.T.O. has contended that valuation adopted was on the basis of enquiries made by the inspector from the estate agents but this enquiry report was never confronted to the assessee. Another point which has not been agitated by the assessee but cannot be ignored is that in the year under consideration important is that law and order situation was not good and prices of the properties were generally low in the year under consideration. Because of these reasons the assessment order is set aside and I.T.O. is directed to make addition if any after providing some reasonable basis and after allowing the assessee an opportunity to prove its case.
[The remaining part is omitted].
M.BA./2248/T???????????????????????? ??????????????????????????????????????????????????????????? Order accordingly.