HOECHST PAKISTAN LTD. VS COOPERATIVE INSURANCE SOCIETIES
1993 P T D 717
[Lahore High Court]
Before Irshad Hasan Khan and Muhammad Arif, JJ
Messrs TUFAIL MUHAMMAD & BROTHERS
versus
COMMISSIONER OF INCOME TAX, RAWALPINDI, ZONE, RAWALPINDI
Civil Tax Reference No. 119 of 1974, decided on 24/02/1993.
(a) Income Tax Act (XI of 1922)----
----Ss. 34(2) & 25(1)---Assessment---Limitation---Year of account of assessee firm used to close on 31st July every year---Assessment for the year 1966-67 relevant to the accounting year ended on 31st July, 1965, had already been made ---Assessee firm was dissolved on 30-6-1966 and the business of the firm discontinued from that date---Income for the account period 1-8-1965 to 30-6-1966 remained to be in process for assessment year 1966-1967 --- Assessee filed return on 14-9-1966 which was followed by another return for accounting period 1-8-1965 to 30-6-1966 relevant to the next year 1966-67 showing the same figure---Contention of assessee was that firm having dissolved on 30-6-1966 income which accrued to it during the year ending 30-6-1966 could not be subjected to tax for the assessment year 1967-1968 and the assessment should have been made for the year 1966-67 for the period between 1-8-1965 to 30-6-1966---Factually Income Tax Officer had concluded the assessment for the year 1972 and the period of four years had lapsed by that time---Objection of limitation specifically pleaded by the assessee in the appeal was not pressed before the Tribunal ---Assessee never contended that the accounting period or any part of it had formed an integral part of the previous year---Return submitted by the assessee for the assessment year 1967-1968 had to be processed according to law and the inclusion of the period between 1-8-1965 and 30-6-1966 was taken into account for the first time while passing the order, dated 30-6-1972---Held, question of limitation did not arise in the proceedings.
(b) Income Tax Act (XI of 1922)---
----Ss. 25 & 3---Premature assessment---Provision of S.25 contemplates a departure from the normal scheme of charge referred to by the charging section 3 of the Act---Where any business, profession or vocation is discontinued in any year, the Income Tax Officer can make assessment during that year for the period from the end of the previous year and the date of discontinuance of business---Scope of S.25 analysed.
Section 25(1) is a special provision and has been designed to meet a particular exigency, namely, in case of dissolution, or stoppage of business which is the source of income, in the middle of an accounting year.
Section 25 of the Act provides that where any business, profession or vocation is discontinued in any year, the Income Tax Officer can make assessment during that year for the period from the end of the previous year and the date of discontinuance of business. This provision contemplates a departure from the normal scheme of charge referred to by the charging section 3 of the Act. It is true that the charge is always on the total income of the previous year, which can only be made after the close of that year, but section 25(1) of the Act is an exception to the general law. It permits an assessment in or before the expiry of previous year itself, in addition to the assessment of the income of previous year preceding the particular accounting year.
All that the section authorises the Income Tax Officer to do is that it gives him an option to make a premature assessment on the profits earned upto the date of discontinuance in the year of discontinuance itself instead of in the usual financial year.
M/s Easso Easter Inc. v. Commissioner of Income Tax (1989 PTD 178 and CIT v. Surinivasan and Gopalan (1958) 23 ITR 87 (CS) ref.
Ali Bin Abdul Qadir for Applicant.
Muhammad Ilyas Khan for Respondent.
Date of hearing: 22nd February, 1993.
JUDGMENT
IRSHAD HASAN KHAN, J.---This reference under section 66(1) of the Income Tax Act, 1922 (hereinafter referred to as the Act) has arisen in the background that the petitioner a firm of partners was doing business at Layallpur in the manufacture and sale of cloth made of art silk and cotton yarns on power looms. The year of account of the assessee firm used to close on 31st of July every year. An assessment for the tax year 1966-67, relevant to the accounting year ended on 31-8-1965, had already been made. Thereafter, the assessee firm was dissolved on 30-6-1966 and the business of the firm discontinued from that date. The income for the accounting period 1-8-1965 to 30-6-1966, remained to be in process for assessment year 1966-67. The assessee filed the tax return on 14-9-1966. This was followed by another tax return for accounting period 1-8-1965 to 30-6-1966, relevant to the next tax year 1966?67, showing the same figure. It is alleged that the Income Tax Officer ignored the earlier tax return filed by the assessee for the assessment year 1966-67. When the assessment proceedings for the taxing year 1967.68 relating to the subsequent return dated 1-2-1968 concluded, the assessee raised the objection that as the Income Tax Officer had concluded the assessment for the year 1972 and period of four years had since lapsed, therefore, the assessment was barred by virtue of section 34(2) of the Act, which provides that no order of assessment under section 23 or assessment or re-assessment under subsection (1) of the said section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were made first assessable. The Income Tax Officer, after considering the return, raised the amount of recorded sales from Rs.1,12,243.00 to Rs.2,00,000.00 vide order, dated 30-6?1972. The applicant filed appeal against this order before the Income Tax Appellate Tribunal Lahore on the ground that the assessment was barred by time, the accounts have been incorrectly rejected; the sales assessed at Rs.2,00,000.00 were against the facts; the salaries Rs.1,619 had been impliedly added back; application of G.P. rate at the rate of 25% was excessive; the expenses should have been allowed in full and that the, penalty imposed was against the facts. The Income Tax Appellate Tribunal, after hearing the applicant and perusing the material available before it, accepted the contention of the applicant that the omission of purchase related to the accounting year ended on 31-7-1965 for which the relevant assessment year was 1965-66 and therefore, these amounts could not be validly used for the year of appeal. The Tribunal in its order dated 10-12-1973 further observed as follows:----
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"??The rest of the objections are not disputed but we find that on identical defects the appellant's sales had been raised by maximum of 67% in the preceding years whereas in the year in appeal such enhancement is of the order of about 78%. These are thus somewhat excessive and we reduce the same to Rs.1,90,000."
2. The applicant filed the present application under section 66(1) of the Income Tax Act, 1922, and a number of questions were raised. It is, however, not necessary to deal with all the questions, in that, during the course of arguments Mr. Ali Bin Abdul Kadir, abandoned all the points and confined his submissions to questions No.l and 4, which read as under:---
(1) Whether on the facts and the circumstances of the case the assessment for the accounting period from 1-8-1965 to 30-6-1966 should have been made in the assessment year 1966-67 or 1967-68? In either case,? whether the assessment as made is barred by limitation?
(2) Whether a charge of tax on the income of the assessee for the period 1-8-1965 to 30-6-1966 for the assessment year 1967-68 had been created in law, and such assessment could be legally made?
3. Mr. Ali Bin Abdul Kadir, learned counsel for the applicant, contended that the applicant firm was dissolved on 30-6-1966 and, therefore the income which accrued to it during the year ending 30-6-1966, could not be subjected to tax for the assessment year 1967-68. According to him, the assessment should have been made for the year 1966-67 for the period between 1-8-1965 and 30-6-1966.
4. As to the above contention raised by learned counsel for the applicant, the admitted position is that the Income Tax Officer had concluded the assessment for the year 1972 and period of four years had lapsed by that time, The objection of limitation specifically pleaded by the assessee in the memo of appeal was not pressed before the Tribunal. It is not the case of the applicant that the accounting period or any part of it had formed an integral part of the assessment of the previous year. The return submitted by the assessee for the assessment year 1967-68 had to be processed according to law and the inclusion of the period which formed part of applicant's earlier return for the period between 1-8-1965 to 30-6-1966 was taken into account for the first time while passing the order, dated 30-6-1972. Thus visualised, the question of limitation did not arise in these proceedings.
5. It was further argued that no charge of tax is created under section 3 of the Act to cover a period of less than twelve months and, therefore, the assessment for the year 1967-68 in the broken period of eleven months should not have been assessed under section 25 of the Act. Replying to the contention, Mr. Muhammad Ilyas, learned counsel for the respondent, Department has referred to the term "previous year" defined in clause (11) of section 2 of the Act which reads thus:---
"(11) "previous year" means--- .
(1) in respect of any separate source of income, profit and gains --
(a) the twelve months ending on the (thirtieth day of June) next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have been made up to a date within the said twelve months in respect of a year ending on any date other than the said (thirtieth day of June), then at the option of the assessee, the year ending on the date to which his accounts have been so made up:
Provided that where in respect of a particular source of income, profits and gains an assessee has once been assessed, or where in respect of a business, profession or vocation newly set up an assessee has exercised the option under sub-clause (c), he shall not in respect of that source or, as the case may be, profession or vocation, exercised the option given by this sub-clause so as to vary the meaning of the expression "previous year" as then applicable to him except with the consent of Income Tax Officer and upon such condition as the Income Tax Officer may think fit to impose; or
(b) In the case of any person, business, or company or class of person, business or company, such period as may be determined by the Central Board of Revenue or by such authority as the Board may authorise in this behalf; or
(c) where a business, profession or vocation has been newly set up in the financial year preceding the year for which the assessment is to be made, the period from the date of the setting up of the business or profession or vocation to the (thirtieth day of June) next following or to the last day of the period determined under sub-clause (b), or, if the accounts of the assessee arc made up in respect of a period not exceeding twelve months from the date of the setting up of the business, profession or vocation and the case is not one for which a period has been determined under sub-clause (b), then at the option of the assessee, the period from the date of the setting up of the business, profession or vocation to the date to which his accounts have been so made up:
Provided when the date to which the accounts have been so made up does not fall between the setting up of the business, profession or vocation and the next following (thirtieth day of June) inclusive, it shall be deemed that there is no previous year for the said assessment year and the previous year which would otherwise have been determined according to the option exercised by the assessee shall be deemed to be the previous year for the next succeeding assessment year;
(ii) in respect of the share of the income, profits, and gains of a firm where the assessee is a partner in the firm arid the firm has been assessed as such, the period as determined for the assessment of the income, profits and gains of the firm;".
According to the learned counsel for the respondent, the use of the term "previous year" in section 25 ibid should be treated ac reference to tile assessment year 1966-67. Viewed from this angle, it was argued that the assessment made by the Assistant Income-Tax Officer on 30-6-1972 was not beyond time.
6. It, is common ground that the applicant firm was dissolved and discontinued its business from 30-6-1966. For such a situation the principle envisaged in section 25 of the Act is applicable. It provide that where any business, profession or vocation is discontinued in any year the Income Tax Officer can make assessment during that year for the period from the end of the previous year and the date of discontinuance of business. This provision contemplates a departure from the normal scheme of charge referred to by the charging section 3 of the Act. It is true that the charge is always on the total income of the previous year, which can only be made after the close of that year, but section 25(1) of the Act is an exception to the general law. It permits an assessment in or before the expiry of previous year itself, in addition to the assessment of the income of previous year preceding the particular accounting year. The same view was taken in M/s. Esso Easter Inc. v. Commissioner c1l t Income-tax (1989 PTD 178), wherein it was observed that section 25 (1) is a special provision and has been designed to meet a particular exigency namely, in case of dissolution or stoppage of business which is the source of income in the middle of an accounting year. In CIT v. Surinivasan and Gopalan (1958) 23 ITR 87 (CS), it was held that all that the section authorises the Income Tax Officer to do is that it gives him an option to make a premature assessment on the profits earned upto the date of discontinuance in the year of discontinuance itself instead of in the usual financial year."
7. The upshot of the above discussion is that question No.l is answered in the negative and question No.4 in the affirmative. The reference stands answered accordingly. There shall be no order as to costs.
M.B.A./T-40/1 ??????????????????????????????????????????????????????????????????????????????????? Order accordingly.