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

----S. 65---Re-opening of assessment---When all the facts are placed before the department/Revenue nothing is concealed and nothing does actually come into the knowledge or possession of the department to belie the facts already placed before it, re-opening of the assessment is not legal.

1990 PTD 155 fol.

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

----S. 65---Re-opening of assessment---Fresh material---Change of opinion-- Assessing Officer reopening the assessment on the ground that while calculating income-tax and super-tax, liabilities rates were charged inadvertently allowing rebate on super-tax; provision for "Worker's Profit Participation Fund" had been allowed on net profit arrived at after accounting for the subsidy/price differential received/receivable from the Government and depreciation on roads, bridges and culverts was allowed as per depreciation chart filed by the assessee though such items were not included in the definition of "factory building", with the result that excess depreciation was allowed to assessee---Held, Assessing Officer, in circumstances, did not come into possession of any fresh information which was not available with him when the assessments were framed---Reasons given by the Assessing Officer did not justify the re-opening of the assessment and it was a clear case of change of opinion of the Assessment Officer---Assessments so made, therefore, were not sustainable and Assessing Officer could not make the kind of additions he made.

Edulji Dinshaw Limited v. ITO 1990 PTD 155; Central Insurance Company v. CBR 1993 PTD 766 = 1993 SCMR 1234; Geminis Leather Store v. ITO, Agra (1976) 34 Tax 173 SC; ITA s. Nos. 961 to 963/KB of 1984-85; Indian and Eastern Newspaper Society v. CIT New Delhi (1979) 119 ITR 996; Ashoke Kumar Sen v. ITO, New Delhi and another 1982 PTD 225; Dilal Consultants and Engineers Private Limited v. Miss D.V. Bapat 1983 PTD 317; Dawood Harcules v. ITO, Central Circle, Lahore 1987 PTD 289; M/s. Car Tune v. ITO, Hyderabad and others 1989 PTD 478; Arafat Woollen Mills v. CIT 1986 PTD 316; Josen International (Private Limited) v. ITO, Companies Circle, Karachi and others 1989 PTD 1141; M.R. Sons v. ITO 1989 PTD 1010; Republic Motors v. ITO and others 1990 PTD 889 and Arafat Woollen Mills v. IRO, Supreme Court of Pakistan 1990 SCMR 691 ref.

I. N. Pasha for Appellant (in ITA s. Nos. 373/LB to 378/LB of 1986-87).

Mirza Ghazanfar Baig, D.R. for Respondent (in ITAs. Nos. 373/LB to 378/LB of 1986-87).

Mirza Ghazanfar Baig, D.R. for Appellant (in ITAs. Nos. 408/LB to 413/LB of 1986-87).

I. N. Pasha for Respondent (in ITAs. Nos. 408/LB to 413/LB of 1986-87).

Date of hearing: 10th April, 1994.

ORDER

NASIM SIKANDAR (JUDICIAL MEMBER): --These cross-appeals pertain to the assessment years 1978-79 to 1982-83, 1984-85 and assail a consolidated order rendered by C.I.T.(A), Zone-I, Lahore on 30-4-1986.

2. The assessee is a company limited by shares and is engaged in manufacture and sale of fertilizers. It is stated to be one of the several projects of National Fertilizer Corporation of Pakistan (Private) Limited which in turn is owned by Government of Pakistan. Original assessments in the years 1978-79 to 1982-83 and 1985-86 were framed on various dates respectively under section 23(3) of the Late Act of 1922, sections 62, 59(A), 59(1), 62 and 59(1) of the Income Tax Ordinance. The assessment framed in respect of years 1978-79 to 1982-83 were reopened and additional assessments were framed on 30-11-1985 for the reasons which can be described in the words of the Assessing Officer:--

-----While calculating income and super-tax liability rates of 30% and 20% were charged inadvertently allowing rebate of 5% on super-tax. Moreover, provisions for workers' profit participation fund has been allowed on net profit arrived at after accounting for the subsidy/price differential received/receivable from the Government. As per definition of net profit in section 87(C) of Companies Act, 1913 the amount of subsidy had to be deducted from net profit for calculation of workers profit and participation fund. Depreciation Roads, Bridges and culverts was allowed as per depreciation chart filed by the assessee. These are not included in the definition of factory building therefore excess depreciation has been allowed. The case was reopened under section 65 of the Income Tax Ordinance, 1979 with the prior approval of Inspecting Assistant Commissioner of Income Tax, Range II, Central Zone, Lahore vide Letter No.J.43/1386 dated 26-3-1985."

3.Assessment in the year 1985-86 was framed under section 59(1) of the Ordinance accepting net income as per profit and loss account. However, additions under the heads "Workers' profit participation fund" and "provision for gratuity" were made. Also part of the depreciation claimed was disallowed. In case of first addition, the assessing officer observed:--

"The profit and loss account shows provisions for workers' profit participation fund at Rs.23,12,091. This has been charges on profit of Rs.4,63,40,386 before Managing Agency Commission. The scrutiny of profit and loss account shows that profit has been arrived at after accounting for subsidies/price differential of Rs.10,60,36,048 which would mean that there was not profit before taking into consideration the amount of subsidies and hence no workers' profit participation fund was chargeable. In the circumstances the provision made for workers' participation fund is added back as per history of the case. Workers' participation fund bf Rs.28,43,544 has been deducted on subsidy of Rs.5,68,70,871 received under the head prior years adjustment. WPPF is chargeable on profit before subsidy. This means that no such participation fund was chargeable on subsidy itself. Deduction claimed at Rs.28,43,544 is, therefore, added back."

In case of "provision for gratuity" the addition resulted for the reason that "Total provision for gratuity has been made at Rs.23,05,723. It has been claimed that actual payment during the year to the recognized provident fund was Rs 21,71,130 leaving the balance provision of Rs.1,34,593 which is added back being inadmissible as in the past". As regards depreciation the Assessing Officer found that an excess claim of Rs.43,03,690 was made. Accordingly the same was also added towards the income of the assessee.

4. Learned first appellate authority by way of the impugned order confirmed the treatment meted out to the assessee in all these years except, however, that in case of depreciation the claimed allowance, on roads, bridges and culverts was allowed. This claim was earlier disallowed by the Assessing Officer on the ground that these items were not covered by the definition of word `building'.

5. In the appeals filed by the assessee for the years 1978-79 to 1982-83 objections have been directed against the treatment given to the price differential allowed by the Government of Pakistan as a subsidy, disallowance of the claim of workers' profit participation fund including the mode of its calculation and the status assigned to the assessee company. In the year 1985-86 the assessee-company also feels aggrieved of the disallowance of claimed rebate under section 107 of the Income Tax Ordinance as well as the treatment of engineering, front and fee commitment charges as installation charges.

6. The departmental appeals, on the other hand question the legality of the Appellate order in allowing depreciation on roads, bridges and culverts.

7. Parties have been heard. Learned counsel for the appellant Mr. I. N. Pasha besides the above-stated factual objections also raised a preliminary legal objection to the reopening of the assessments in the assessment years 1978-79, 1979-80 and 1982-83. It is submitted that the aforesaid reasons (as reproduced above) which resulted in reopening of the assessments were by no means justifiable to entitle the assessing officer to reopen the assessments for these years. In case of other assessment year involved viz. 1985-86 it is submitted that the return filed having been accepted under section 59(1) of the Income Tax Ordinance, the Assessing Officer was not competent to make additions under the heads workers' profit participation fund, gratuity or to partly disallows depreciation claimed on various capital assets. The order of the first appellate authority allowing depreciation on roads, bridges and culverts in all the years, however, is supported.

8. As observed learned counsel for the appellant vehemently challenges the reopening of assessments for the reasons described above. It is stated that assessments framed in the years 1978-79, 1979-80 and 1982-83 having been framed under normal law there was absolutely no scope for their reopening because the department did not come into possession of any fresh information which was not available with it when these assessments were framed. It is also submitted that even otherwise sufficient material was not brought on record to justify the reopening. It is further submitted that by now, after the issue having been decided by the superior most Courts of the country in a number of cases appears quite settled; that the facts aforementioned did not justify the reopening of the assessment in these years and that it was clearly a case of change of opinion on the part of Revenue. At best, learned counsel continues, the competent authority could revise the assessment under section 66-A of the Ordinance if the assessments framed in these years justified the grounds for exercise of the poors and conditions stated in that provisions of law. As regards the assessment years 1980-81, 1981-82 and 1985-86 when returns were accepted and assessments were framed under section 59(A) or section 59(1), the objection that in absence of any definite information, reopening could not take place, is repeated. In support of the aforesaid submissions learned counsel relies upon a number of reported cases from local as well as foreign jurisdictions.

9. The contentions made and the objections raised by the learned counsel for the appellant bear weight. The action of the Assessing Officer in reopening of the assessment in all these years either resulted on re consideration of the departmental position otherwise described as "change of opinion" or is in a total void and without availability of any fresh material worth the name. On legal plane it can be boldly stated that when all the facts are placed before the department/Revenue, nothing is concealed and nothing does actually come into the knowledge or possession of the department, to belie the facts already placed before it, reopening of an assessment is not legal. In the leading case of Edulji Dinshaw Limited v. I.T.O. reported as 1990 PTD 155 their Lordships examined the issue after considering the case-law from local and foreign jurisdictions to conclude:--

"Once all the facts have been fully disclosed by the assessee and considered by the Income Tax Authorities and the assessments have been consciously completed, and no new fact has been discovered, there can be no scope for interference with these concluded transactions under the provisions of section 65 of the Ordinance on the ground that the income chargeable to tax under the Ordinance has escaped assessment or has been under assessed, etc. in the meaning of clause (a) or (b) of subsection (1) of section 65 of the Ordinance."

10. Another recent judgment of the Supreme Court in Re: Central Insurance Company v. C.B.R. 1993 PTD 766 = 1993 SCMR 1234 also needs to be mentioned. In this case the Court ruled upon and discussed the connotation of word `definite information' as appearing in section 65 of the Ordinance. Their Lordships after having examined the suspetible meanings and discussing the case-law found that every information could not be treated as basis for reopening of the assessment and that words and expression `definite information' being not suspetible to a universal meanings these will have to be construed in the context of the circumstances of each case. It was ultimately found that an error discovered on reconsideration of the same material (and no more) did not give the Assessing Officer a power to reopen the case. In the case before us the grounds that weighed with the assessing Officer are stated to be "inadvertence" in calculation of super-tax liability, treatment allowed to the amount received as, subsidy for reaching at net profit for the purpose of determination of workers' profit participation fund and allowing of depreciation on roads, bridges and culverts as these were allegedly not included and covered within the definition of work `building'. We have been informed that in all these assessment years the assessing officer, in the first instance embarked upon to exercise his power under section 156 of the Ordinance. However, as the learned counsel for the appellant states, the amendments or rectifications brought about in the assessment orders under section 156 of the Ordinance were knocked off by this Tribunal in an earlier round of proceedings between the assessee and the Revenue. The learned counsel for the appellant further contends that even in these years where assessments were framed under sections 59(A) and 59(1) of the Ordinance all the facts were nakedly presented before the Assessing Officer, and therefore, he could not take benefit of his own `inadvertence' or re-consideration of the definition or legal connotation of the word `building' etc. In this aspect learned counsel again relies upon the ratio of the said case re: Central Insurance Company and others v. C.B.R supra to contend that placing of construction on a particular provisions of the Ordinance even by the highest authority in revenue matters viz. C.B.R could not amount to "definite information" justifying reopening of a case as held by their Lordships. It is submitted that it is not the case of the department that either fresh material was ever brought to its knowledge warranting pressing into service of section 65(1) of the Ordinance nor otherwise the reason that the assessee in any manner failed to give a true and correct picture of its affairs in the returns filed in these years. Reference in this connection has been made to a reported case from Indian jurisdiction cited as (1976) 34 Tax 173 (S.C. India) Re: Geminis Leather Store v. I.T.O., Agra. In that case the assessee failed to disclose some transactions evidenced by bank drafts. However, the assessing officer during the proceedings himself discovered these facts which were material for consideration. Nevertheless through oversight and inadvertence the Assessing Officer did not bring the amount represented by the drafts to tax. Subsequently he expressed his intention to assess the amounts as income from undisclosed sources. .For this purpose a notice under section 147(a) of the Indian Income Tax Act, 1961 was served upon the assessee. The notice was unsuccessfully challenged before the High Court through a writ petition. Their Lordships in the High Court found that while framing assessment the I.T.O. did not apply his mind to question whether the unrecorded amount could be treated as part of the total income of the assessee. Therefore, they held that conditions for invoking jurisdiction under section 147(a) of the Act were present and hence, the notice served upon the assessee did not suffer from any illegality. On appeal to the Supreme Court the decision of the High Court was reversed. Their Lordships of the Supreme Court of India held that afterc4iscovery of primary facts qua the transactions evidenced by bank drafts, it was for the Assessing Officer to make necessary inquiries and draw proper inference as to the taxability of the amounts represented by the drafts. This having not been done it was held to be a case of oversight, and therefore, it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly the material facts. Allowing the appeal, it was held that the Assessing Officer could not take recourse to section 147(a) of the Act to remedy the error resulting from his own oversight.

11. To press that in the given circumstances the Assessing Officer was not competent to reopen the assessments, support has also been sought from a Division Bench decision of this Tribunal in I.T.As. Nos.961 to 963/K.B. of 1984-85 (Assessment years 1977-78 to 1979-80), decided on 22-4-1991. The assessee in that case was a non-resident banking company. In the original assessments framed in respect of three assessment years the profits on sale of Government securities were not taxed and were treated as capital gain. The Assessing Officer proceeded to initiate the re-opening proceedings for the reasons stated as under:--

"In the original assessment order for the year under review finalized on 18-6-1979 the profit on sale of investment (Government Securities) escaped assessment to tax due to the oversight, inadvertent and mistake of my predecessor and after necessary enquiry and research into facts and law and the investigation of the materials on the record discussed in detail in the assessment order for assessment year 1980-81 it was found that such profit on sale of investments was liable to tax as it did not fall in the ambit of exemption provided to capital gains. Relying upon the judgment of Supreme Court of India in the case of Kalyanji and Mavji (1976) 102 ITR 287 assessment proceedings in this case for the relevant accounting years have been reopened under section 65 of the Income Tax Ordinance, 1979. Notice under section 65 was accordingly served upon the bank. In compliance with the said notice the bank filed return of income under pretext on 17-4-1982."

Ultimately the Assessing Officer made additions of the amounts treating profits on sale of Government Securities as revenue income. Learned Division Bench, agreed with the contention raised before it that the aforesaid judgment of the Supreme Court of India relied upon by the Assessing Officer was overruled by the same Court in a subsequent case re: Indian and Eastern Newspaper Society v. C.I.T., New Delhi (1979) 119 ITR 96. Before the Division Bench it was also argued that the Revenue failed to show the kind and nature of information which fell into its hands providing justification for reopening of the assessments. It was also argued that entire material and evidence was placed before the Assessing Officer at the time of original assessments and the Assessing Officer having framed the assessment after due consideration of these materials, no justifiable reason existed to reopen the assessment. Learned Division Bench after having considered the contentions made before it held that reopening of assessment was not justified and that entire subsequent proceedings were without jurisdiction and consequently of no legal validity at all: the three assessments framed on re-opening were annulled and the original assessments restored.

12. In re: Ashoke Kumar Sen v. I.T.O., New Delhi and others 1982 PTD 225 (H.C. India) the New Delhi High Court in similar circumstances answered in negative the question of competency of the assessing officer to reopen a case. The assessee in that case was a prominent lawyer, and was assessed to income-tax on his professional income. In the year 1962-63, after joining the Central Government as Minister of Law, he declared salary income at Rs.30,000 property income at Rs.6,000, interest income at Rs.2,795 and professional royalty income at Rs.8,085.42. He was assessed accordingly. In August 1974 he was served with a notice for, reopening of the assessment on the ground that his income had escaped assessment. The notice for re assessment was challenged before the High Court through a Constitutional petition. The Assessing Officer in his counter-affidavit stated that as in the preceding year personal and household expenditure of the petitioner were to the tune of Rs.40,000 to Rs.50,000 a year, it was difficult to believe that in the previous year, relevant to the assessment year 1962-63, the petitioner was able to meet his household expenses out of the declared net income of Rs.9,930. The Assessing Officer further stated that in these circumstances he had sufficient reasons to believe that income chargeable to tax had escaped assessment. Before the High Court for the assessee it was contended inter alia, that all the primary and necessary facts were stated by the petitioner 'in this return, accompanied statements and that all the relevant and necessary information was furnished by him to the I.T.O. to assess him for the year in question. Therefore, it was argued that there existed no material before the I.T.O. to have a reasonable belief or reasons to believe that the income had escaped assessment, the Court held the re-assessment notice to be illegal, and therefore, the proceedings initiated thereon as well.

13. The facts in re: Dilal Consultants and Engineers (Private) Limited v. Miss. D.V. Bepat, I.T.O. cited as 1983 PTD 317 (H.C. India) are quite similar to those before us. In that case the assessee-company carried on business as engineering and technical Consultant. During the assessment year 1974-75 the assessee claimed deduction at a certain percentage on gross fee received from consultancy contracts which was accepted by the Assessing Officer in the original assessment. Subsequently the case of the assessee was reopened on the ground that deduction was to be worked out on the basis of net receipts. On a Constitutional petition by the assessee the Bombay High Court held that the assumption of the Assessing Officer that certain deduction was to be allowed on the basis of net receipts was a case of change of opinion.

14. Another case on which the learned counsel has relied heavily is cited as 1987 PTD 289 re: Dawood Hercules v. I.T.O., Central Circle, Lahore wherein the Lahore High Court resumed the assessee placed in a similar situation. In that case too the assessee was a company engaged in manufacture of chemicals and fertilizer. In the returns filed for the years 1979-80 to 1981-82 it had computed and claimed certain amounts contributed under the provisions of the Companies Profits (Workers' Participation) Act, 1968 on the entire profits including the amount allegedly received by way of subsidy from the Federal Government. The assessment was framed accordingly. Subsequently, Ordinance. March 1985 the Assessing Officer issued a notice under section 65 of the Ordinance. The objections to the reopening as raised by the assessee were rejected by the Assessing Officer as also the Commissioner in his revisional jurisdiction, On challenge before the Lahore High Court, as aforesaid, the orders passed on re-assessment as well as revision and all the proceedings initiated in pursuance thereto were declared of no legal effect. The direction entailed after the learned Court accepted the contentions of the assessee both on facts as well as on legal plain.

15. In 1989 PTD 470're: M/s. Car-Tune v. I.T.O., Hyderabad and others the case of the assessee was proposed to be reopened on the ground that valuation of property accepted by the Assessing Officer in original return was not fair and that from the wealth statements of the three partners the source of wealth was not truly disclosed. A Division Bench of the Sindh High Court confirmed the ratio of a case earlier decided by that Court in 1986 PTD 316 re: Arafat Woollen Mills v. C.I.T. and the reopening proceedings were declared to be illegal.

16. In Jason International (Private) Limited v. I.T.O., Companies Circle, Karachi and others 1989 PTD 1141 a Division Bench of the Karachi High Court held that reaching another conclusion from the same document and material would amount to change of opinion by the Assessing Officer. Therefore, where facts had been fully disclosed and assessment had been made consciously and no new facts were discovered, additional assessment under section 65 could not be made.

17. In re: M.R. Sons v. I.T.O. 1989 PTD 1010, their Lordships of-the Karachi High Court after referring to a long chain of reported cases from local and foreign jurisdiction affirmed the view that provisions of section 65 of the Ordinance were not aimed at bringing to tax total income of the assessee which escaped assessment due to negligence of the officer concerned.

18. In Republic Motors v. I.T.O. and others 1990 PTD 889 (Kar.) original assessments were framed as Public Limited Company from the date of nationalization of assessee up to the year 1985-86. In March, 1987 the Assessing Officer issued a letter expressing his intention to rectify the assessment under section 156 of the Ordinance on the ground that the majority shares of the assessee were held by PECO and not by the Federal Government. Therefore, the treatment noted out to the assess--e in the original assessments by way of reduced surcharge was considered as mistake apparent from the record. The assessee controverted the reason assigned for the proposed action and also raised objections to the intended rectification on the basis of bar of limitation in some of the years and in others on the ground that the original assessment orders having merged into the Appellate order the same could not be rectified by the Assessing Officer. Therefore, the Assessing Officer proceeded to issue a notice of re-assessment under section 65 of the Ordinance. The issuance of notice was challenged before the Karachi High Court. Their Lordships, after referring to various earlier judgments of the Courts found as under:--

"It is, therefore, well-settled that receiving or obtaining certain interpretation of a particular provision of law from any department be it, Ministry of Law or C.B.R. or any Legal Advisor or from his own knowledge and reading of the law books would not constitute information as required by section 65. Bhagwati, C.J. (as he then was) has pointed out to the dangerous results which may follow from a liberal interpretation of the word information as sought by the Department as it will give unrestricted discretion in the hands of the Assessing Officer who may on their own interpretation of law set at naught the settled and final assessments."

19. In 1990 SCMR 691 re: Arafat Woollen Mills v. I.R.O., Supreme Court of Pakistan held a notice under section 65 of the Ordinance for reopening of the assessment on the basis of alleged oversight or mistake on the part of the Assessing Officer to be without lawful authority. In that case the company had not yet gone into production and the income earned by sale of fixed assets was claimed exempt as capital gains. The claim was accepted by the Assessing Officer after detailed scrutiny. Subsequently, when the department proceeded to reopen the case of the assessee the Supreme Court of Pakistan, as aforesaid held the proceedings to be illegal on account of the action being a mere change of opinion.

20. As far the assessment framed in the year 1985-86 wherein the above stated additions were made, reliance: has been placed upon a reported case of this Tribunal cited as 1985 PTD (Trib.) 247. It is stated that the only power conferred upon the I.T.O. under section 59(1) was to frame assessment on the basis of return, filed by the assessee and in accordance with the scheme notified for the year. It is further submitted that addition could only be made in respect of per se inadmissible expenses. On merits it is claimed that in the light of the ratio of the above-cited reported case viz. M/s. Dawood Hercules and Chemicals Limited v. I.T.O., Central Circle-9 1987 PTD 289 the claim of the assessee qua WPPF was not inadmissible and therefore could not be added back while framing the assessment under section 59(1) of the Ordinance. Likewise in case of disallowance out of claimed provisions for gratuity" reliance is placed upon 1992 PTD 668 to contend that the claim was legally in order.

21. Learned D.R. has not been able to bring home any legitimate reason to challenge the order of the first appellate authority in allowing depreciation nor he has been able to dislodge the contentions of the learned counsel for the appellant put forth in this regard. As discussed above, no legitimate reason justifying reopening of the assessment for the years 1978-79 to 1982-83 or to make additions in the year 1985-86 has been spelled out.

22. Accordingly, on applying the principle settled by the superior Courts in the aforesaid reported cases, we will agree with the submissions made for the appellant. The appeals of the assessee, therefore, are allowed and it is declared that reopening of the assessments in the years 1978-79 to 1982-83 are not legally sustainable and that the Assessing Officer could not make the kind of additions he made in the year 1985-86. The departmental appeals, as a consequence thereto, shall stand rejected. '

23. Before concluding we would like to record that grounds of appeal as framed by the assessee-company on facts are vague and in most cases do not bring out the real controversy or the actual grievance of the assessee. However, since we have decided the matter on legal issues, these grounds have otherwise become redundant.

M.BA/57/T.T.Order accordingly.