PARAS COMMERCIAL COMPANY VS COMMISSIONER OF INCOME TAX, CENTRAL ZONE-A, 1993 PTD-SUPREME-COURT 1629 (1992)

(From the judgment dated 18-8-1987 passed by the High Court of Sindh in C.P. No. D-599 of 1987).

Income Tax Ordinance (XXXIX of 1979)---

----S. 138---Interpretation, scope and application of .S. 138---Revision by Commissioner- --Any action taken by the Commissioner under S. 138, Income Tax Ordinance, 1979, be it suo motu or on an application by the assessee, the order in no case should be prejudicial to the -assessee-Only such orders can be passed in such proceedingswhich are in favour of the assessee and do not adversely affect its interest, business or any tangible or intangible right-- Words "not being an order prejudicial to the assessee"---Connotation.

Section 138 of the Income Tax Ordinance, 1979 authorises the Commissioner to call for the record of any proceeding in which order has been passed by any authority subordinate to him, suo motu or on an application by an assessee and pass order subject to the provisions of the Ordinance with the limitation that no order shall be passed which i` prejudicial to the assessee. Any action taken by the Commissioner under section 138, be it suo motu or on an application by the assessee, the order in no case should be prejudicial to the assessee. Only such orders can be passed in such proceedings which are in favour of the assessee and do not adversely affect its interest, business or any tangible or intangible right. The words "not being an order prejudicial to the assessee" supply the guiding rule for interpreting section 138. The word "prejudicial" means:

Detrimental or derogatory to a party;

Detrimental, injurious, harmful, damaging, hostile, antagonistic and inimical.

In the scheme of the Ordinance and the phraseology used "prejudicial" means adverse, not beneficial, damaging or an order, which adversely affects rights and obligations of an assessee.

Therefore any order which may be harmful to the assessee adversely affecting his right, property, business, goodwill or credit will fall within this category. This provision has been designed to grant relief to the assessee and not to pass an order which may go against him. It confers quasi-judicial power on the Commissioner and there he has to act judiciously, reasonably and in accordance with the principles guiding the determination of any issue judiciously.

The order passed under section 138 is not appeal able either under section 129 or section 134 before the Tribunal therefore the Commissioner has to pass his order cautiously and within the limitations imposed by the section.

It is not only the increase in tax liability, which is the only factor for determining whether the order passed by the Commissioner is prejudicial to the assessee. The business of a firm carries with it the reputation, goodwill and credit, which can be adversely affected by an order. A firm carrying on business and having public dealing depends upon its goodwill and reputation as well. Goodwill is the property of the firm. Where a firm has acquired goodwill if it is affected adversely by an order then it will be prejudicial to the interest of the assessee. If a firm is held to have entered a collusive transaction with intention to avoid tax it is bound to suffer in loss of reputation, credibility and a stigma is attached to the history of the case.

(1948) 16 ITR 214 .ref.

Muhammad Naseem, Advocate Supreme Court and M. Shabbir Ghaury, Advocate-on-Record for Appellants.

Sheik Hyder, Advocate Supreme Court and S.M. Abbas, Advocate-on= Record for Respondent.

Date of hearing: 23rd December, 1992.

JUDGMENT

SALEEM AKHTAR, J.-The appellants challenge the judgment passed by the Division Bench of the High Court of Sindh dismissing the Constitution petition filed by them in which order passed by the respondent in pursuance of proceeding under section 138 of the Income Tax Ordinance, 1979 was assailed.

Appellant No.l is a registered partnership firm and the remaining appellants are its partners. The returns of income-tax for the assessment years 1984-85 and 1985-86 were finalised after detailed inquiry by the Income Tax Officer. The appellant No.l was served with a notice under section 138 of the Ordinance by the Commissioner of Income Tax, Central Zone, Karachi, the respondent herein stating that he had "reasons to believe that assessments in your case for the assessment years 1984-85 and 1985-86 have not been correctly made" and therefore "I intend to cancel these assessments". Appellant No.l was given opportunity of hearing and to file objections. The appellants submitted a detailed reply but the respondent passed the following order:--

"ORDER UNDER SECTION 138 OF THE INCOME TAX ORDINANCE, 1979:

The assessee-company got ground floor of Ghadially Building owned _by Homes (Pvt.) Limited on annual rent. Thereafter the assessee gave a contract for construction of 24 shops on the premises to the landlord company (Homes (Pvt.) Limited) attributing the cost of construction contract to deposits received from the tenants. The directors of Homes,(Pvt.) Limited and Paras Commercial Company are most common and the whole arrangement of giving the premises on rent and the construction is a collusion between the landlord and the tenant. In fact the cost of construction has been borne by Homes (Pvt.) Ltd. Therefore, the income should also be assessed in the hands of Homes (Pvt.) Ltd. and not in the hands of Paras Commercial Company.

The assessee was given an opportunity to explain the position.. The explanation has been considered and in view of the position discussed above, the assessments of Paras Commercial Company, for the assessment years 1984-85 and 1985-86 are hereby cancelled."

The appellants filed a Constitution petition challenging the validity of the notice and the order passed under section 138 of the Ordinance. The main grounds on which the appellants challenged the order was that notice issued to them was defective inasmuch as it did not contain the particulars on the basis of Which, it was proposed to cancel the assessment in question; and that the respondent was not competent to issue notice for the purpose as revealed in the order namely, to deprive the appellants of the income disclosed in their return and to have transferred the same as their income of the company with the Homes (Pvt.) Limited. The learned Judges of the High Court observed that as the proceedings under section 138 resulted in the cancellation of assessment of appellant No.l it was not prejudicially affected in any manner and therefore there was no legal infirmity or illegality in the proceedings of the order passed therein. On the question of lack of particulars in the notice while referring to (1968) 67 ITR 84 referred by the Advocate for the respondent it was observed as follows:

"Strictly speaking the above case is not applicable to the present case as in the instant show-cause notice no facts were mentioned. We were inclined to remand the case on the above question but since the above statement has been made by Mr. Sheik Haider namely, that there would be no increase in the tax liability of petitioner No.l firm and of its partners as a partner on account of the impugned order, we have not remanded the case. However, we may observe that a show-cause notice should contain particulars on the assessment which the Commissioner intends to cancel by the amendment order so that the assessee may have a fair chance to meet the allegation."

Leave was granted to consider the following contentions:

"(1) The learned Judges in the High Court failed to appreciate that the impugned orders of the Commissioner tantamount to denying the petitioners the income earned and to be earned by them from the capital invested in the petitioner No.l firm as the same would be rendered as unexplained and undeclared income and would thereby prejudice the assessee and its partners.

(2)That the learned Judges in the High Court failed to appreciate that the impugned orders of the respondent amount to denying the right of the petitioners to enter into lawful transactions and constitute a restraint on trade.

(3)That the learned Judges in the High Court failed to appreciate that the impugned orders of the respondents are mala fide, legally untenable, having been passed under erroneous presumption of collusion without any evidence and that in any case the orders are prejudicial to the interest of the petitioners under section 138 (1) of the Income Tax Ordinance, 1979.

(4)That the learned Judges in the High Court failed to appreciate that the petitioner No.l is admittedly a legally-constituted and genuine partnership firm and had every right to arrange its affairs in any manner that suited it as long as it was working in a lawful manner.

(5)That the learned Judges in the High Court failed to appreciate that he assessments made in 1984-85 and 1985-86 were framed after due and detailed scrutiny of the attendant facts.

(6)That the learned Judges in the High Court failed to appreciate that the term "prejudicial" appearing in section 138 of the Income Tax Ordinance, 1979, does not confine merely to enhancement of tax liability."

The entire controversy depends upon the interpretation of section 138 of the Income Tax Ordinance, which reads as follows:

"138. Revision by Commissioner.--(1) The Commissioner may, either of his own motion or on an application made by the assessee for revision, call for the record of any proceeding under this Ordinance in which an order has been passed by 'any authority subordinate to him and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Ordinance, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit.

(2)The Commissioner shall not revise any order under subsection (1)

(a)where an appeal against the order lies to the Appellate Assistant Commissioner or to the Appellate Tribunal, the time within which such appeal may be made has not expired, or the assessee has not waived his right of appeal; or

(b)the order is pending on appeal before the Appellate Assistant Commissioner or has been made the subject of an appeal to the Appellate Tribunal; or

(c)in the case of an application made by the assessee the application has not been made within ninety days of the date on which such order was communicated to him, unless the Commissioner is satisfied that the assessee was prevented by sufficient cause from making the application within the said period.

(3)No application for revision shall lie under subsection (1) unless the tax payable under section 54 has been paid,

(4)Every application by an assessee under subsection (1) shall be accompanied by a fee of twenty-five rupees.

(5)For the purpose of this section--

(a)an order by the Commissioner declining to interfere shall be deemed not to be an order prejudicial to the assessee;

(b)the Appellate Assistant Commissioner shall be deemed to be an authority subordinate to the Commissioner;

(c)where, in pursuance of an order by the Central Board of Revenue under clause (b) of subsection (1) of section 5, a Commissioner exercises the powers of an Appellate Assistant Commissioner, references to "Commissioner" shall be deemed to be references to "Regional Commissioner"; (and)

(e)where an order is passed under section 115, references to "Commissioner" shall be deemed to be references to `Regional Commissioner'." .

This provision authorises the Commissioner to call for the record of any proceedings in which order has been passed by any authority subordinate to him, suo motu or on an application by an assessee and pass order subject to the provisions of the Ordinance with the limitation that no order shall be passed which is prejudicial to the assessee. As subsections (2), (3), (4) and (5) are not relevant we need not discuss them here. The crux of the matter is that any action taken by the Commissioner under section 138, be it suo motu or on an application by the assessee, the order in no case should be prejudicial to the assessee. It follows that only such orders can be passed in such proceedings which are in favour of the assessee and do not adversely affect its interest, business or any tangible or intangible right. The words "not being an order prejudicial to the assessee" supply the guiding rule for interpreting section 138. The word "prejudicial" means:

(1)According to Black's Law Dictionary: Detrimental or derogatory to a party.

(2)According to the Double-day Roget's Thesarus in Dictionary Form:

"Detrimental, injurious, harmful, damaging, hostile, antagonistic and inimical."

In the scheme of-the Ordinance and the phraseology used "prejudicial" means adverse, not beneficial, damaging or an order, which adversely affects rights and obligations of an assessee. In Commissioner of Income Tax, Punjab, N.-W.F.P. and Delhi Provinces, Lahore v. Tribunal Trust, Lahore (1948) 16 TTR 214 while considering section 33 the words "otherwise prejudicial" to the assessee were interpreted as follows:--

"An order made by the Commissioner under section 33 can only be said to be prejudicial to the assessee when he is, as a result of it, in a different and worse position than that in which he was placed by the order under review."

Therefore any order which may be harmful to the assessee adversely affecting his right, property, business, goodwill or credit will fall within this category. This provision has been designed to grant relief to the assessee and not to pass an. Order, which may go against him. It confers quasi-judicial power on the commissioner and there he has to act judiciously, reasonably and in accordance with the principles guiding the determination of any issue judiciously.

The order passed under section 138 is not appeal able either under section 129 or section 134 before the Tribunal therefore the Commissioner has to pass his order cautiously and within the limitations imposed by the section. In the light of these principles we have to examine whether the order passed by the Commissioner was in any manner prejudicial to the appellant.

The learned counsel for the appellants contended that by cancelling the assessment the partners shall be affected adversely. Section 138 does not authorise the Commissioner to pass any order prejudicial to the assessee. In the assessment of a registered firm the assessee is the firm and not the partners. The partners are separately assessed on their total income in the manner provided by section 68.

The learned counsel then contended that if the assessment of appellant No.l is cancelled it will be prejudiced as its goodwill and reputation will be affected and further that it will be subjected to claim by those parties from whom it has obtained advances for construction and renting out the shops. The learned Judges of the Division Bench seem to have been impressed by the statement of Mr. Sheik Haider that on account of order of the Commissioner the liability of appellant No.l as a firm and its partners would not be increased. Beyond that the question was not considered at all. As observed earlier it is not only the increase in tax liability which is the only factor for determining whether the order passed by the Commissioner is prejudicial to the assessee. The business of a firm carries with it the reputation, goodwill and credit, which can be adversely affected by an order. A firm carrying on business and having public dealing depends upon its goodwill and reputation as well. Goodwill is the property of the firm. Where a firm has acquired goodwill if it is affected adversely by an order then it will be prejudicial to the interest of the assessee. If a firm is held to have entered a collusive transaction with intention to avoid tax it is bound to suffer in loss of reputation, credibility and a stigma is attached to the history of the case. According to the transaction shown by appellant No.l, it has collected deposits from several persons for providing them shops on rent. The Commissioner's order may make appellant No.l liable to refund the deposits and any other consequences, which may follow from it. After the order appellant No.l does not stand where it was before the order.

We, therefore, set aside the impugned judgment and declare that the order passed by the Commissioner was without lawful authority and of no legal effect.

The appeal is allowed with no order as to costs.

M.BA./P-214/SAppeal allowed.