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

----Ss. 111 & 116---C.B.R. Circular No.2 of 1958, dated 11-3-1958---C.B.R. Circular No.2 of 1959, dated 21-1-1959---Penalty---Principles governing the proceedings relating to imposition of penalty under S.111.

Following are the principles governing the proceedings relating to imposition of penalty under section 111 of the Income Tax Ordinance, 1979:--

(i) The assessment proceedings and penalty proceedings stand on two different footings. In a proceeding relating to assessment the onus is on the assessee to prove that income returned by him is his true income. In proceedings for imposition of penalty for concealment of income the onus is on the Department to establish that the assessee had concealed his income.

(ii) The penalty proceedings are criminal in nature and the standard of proof, which is required in a criminal case, is also required to sustain the order imposing penalty.

(iii) A definite finding by the I.T.O., AA.C., C.I.T. (Appeals) or the Income Tax Appellate Tribunal on the point of concealment of income or furnishing of inaccurate particulars of income is sine qua non for initiating penalty proceedings.

(iv) Whenever penalty proceedings are sought to be initiated by an Assessing Officer, there should be a finding to this effect in the assessment order indicating the intention of initiating penalty proceedings.

(v) The notice under section 116 should contain in clear terms the alleged act of concealment of income or furnishing of inaccurate particulars of income in clear and unambiguous- terms and such notice should contain the necessary particulars indicating the charge to be proved against an assessee.

(vi) The assessment proceedings and penalty proceedings being different in nature, no penalty can be imposed merely on the basis of finding on the point of concealment in the assessment proceedings. The onus lies on the Department in the penalty proceedings to prove independently the guilty intent by showing deliberate commission or omission on the part of the assessee resulting in concealment of income or furnishing of inaccurate particulars of income, which may result in avoiding of tax if the returned version is accepted.

(vii) The assessee should be given reasonable opportunity of being heard without violating the principles of natural justice.

(viii) In all cases where version of taxpayer is not accepted the penalty proceedings shall not be attracted ipso facto although the rejection of taxpayer's version may justify the addition to his total income. A reasonable difference of opinion on the point of law or principles of accountancy shall not attract the imposing of penalty. Mere lack of evidence in support of a claim in Trading or Profit and Loss Account or substantiating a transaction shall not entail the levy of penalty though it may be considered sufficient for making disallowance and consequent addition to the total income. A bona fide belief on the part of an assessee on a point of factor law shall entitle him for extending benefit of doubt. However, a deliberate suppression of a transaction or fact or concealment of income or furnishing of inaccurate particulars of income resulting in the loss of revenue shall give presumption of guilty intent on the part of assessee and Assessing Officer shall be justified in drawing adverse inference. All these observations are subject to all the deeming provisions contained in the statute or enacted by the legislature from time to time. However, each case is to be decided on its own merits in the light of its own peculiar facts and circumstances.

(ix) The penalty proceedings should be finalised immediately after the assessment is completed without waiting for the disposal of the appeal, if any, filed by the assessee against the assessment.

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

----Ss. 111 & 116---Penalty---Concealment of income---Notice under S.116--?Essentials ---Onus of proving guilty intent of assessee---Burden on department.

The onus of proving guilty intent lies squarely on the Department as the penalty proceedings is in the nature of quasi-criminal proceedings. There should be specific finding on the point of concealment of income or furnishing inaccurate particulars of income with the mens rea for evading the tax and this finding should be contained in the assessment order forming basis for initiating penalty proceedings and, thereafter the fact should be proved to the hilt in the penalty proceedings independently. Last assessment order, which held the field did not contain any finding on the point of concealment of income or furnishing of inaccurate particulars of income. The very issuance of notice under section 116 of the Income Tax Ordinance, 1979 was void ab initio. The reason being that the mandatory requirement of law had not been complied with.

The first condition for the imposition of penalty is that the I.T.O., Appellate Assistant Commissioner or the Appellate Tribunal be satisfied that in the proceedings relating to an assessment in respect of same income year any person has concealed his income or furnished inaccurate particulars of such income. Thus, the first and foremost condition which is sine qua non for the initiation of penalty proceedings, is that there should be finding to the effect in the assessment order or appellate order that an assessee has concealed his income or has furnished inaccurate particulars of such income. If there is no such finding in the assessment order or the appellate order, the penalty proceedings under section 111 cannot be initiated. In the present case there was such finding in the assessment order but this order stood merged in the first appellate order, as all the findings relating to the concealment in both the assessment years under appeal were assailed before the first appellate authority and some of the additions more particularly relating to alleged unrecorded sales were deleted. A few additions were maintained but there was no finding on the point of concealment. Thus, the first appellate order, which was the ultimate final order was silent on the point of concealment of income or furnishing of inaccurate particulars of income.

Record further showed that the Assessing Officer issued notice under section 116 on 21-3-1988 which was served on the appellant on 22-3-1988, by placing reliance on the findings relating to concealment in the assessment order dated 30-6-1987, which was -no more in existence on 21-3-1988 having been merged in the first appellate order dated 6-12-1987. Thus, the reliance on assessment order, which was no more in existence was improper and unjustified. In fact after the first appellate order dated 6-12-1987 the I.T.O. ought to have first framed fresh assessment order under section 62/132 and after recording a finding in the assessment order on the point of concealment could have initiated penalty proceedings. Record showed that the Assessing Officer started penalty proceedings on 21-3-1987 by issuing notice under section 116 and framed the assessment order under section 132 on 2-8-1988 and this assessment order was admittedly silent on the point of concealment of income. Thus, the position, which emerged was that in between 7-12-1987 and 2-8-1988, there was no formal assessment order in existence. The penalty proceedings were, however, continuing in the absence of any assessment order, which was not proper. In addition to the fact that the final appellate order dated 6-12-1987 was silent on the point of concealment of income and so was the assessment order dated 2-8-1988 and that the penalty proceedings were initiated, in the absence of formal assessment order in existence the basic requirements of law were not fulfilled in other aspects as well. The penalty proceedings under section 111 of the Income Tax Ordinance, 1979, are of criminal nature and, therefore, the standard of evidence required for sustaining order imposing penalty should be same as in criminal proceedings. In a criminal proceedings the burden of proving the guilty intent on the part of accused and the commission of offence lies squarely on the prosecution and, therefore, in the penalty proceedings under section 111, on the-Department.

The penalty proceedings under section 111 of the Income tax Ordinance,. 1979 (section 28(1)(c) of the repealed Income-tax Act, 1922) are criminal in nature and the standard of proof which is required in a criminal case should be required here also to sustain an order imposing penalty. In criminal proceedings an accused person is entitled to know in very clear terms and without any ambiguity the charge which is sought to be established against him and the offence, which is alleged to have been committed, as well as the points on which he has to furnish defence. Thus, a notice under section 116, the service of which is a mandatory requirement is, in fact, similar to the charge framed against an accused in criminal proceedings and it is an established principle of law that the charge should clearly contain the exact offence and the necessary particulars there. Likewise in the penalty proceedings the notice issued under section 116 should 'contain specific act of concealment alleged against an assessee and it should not be in general terms. Notice in the present case was issued containing a general statement that the assessee concealed the particulars of income and furnished inaccurate particulars thereof without specifying the concealment and without giving particulars thereof. The assessee requested, time and again to know on which points they had concealed the particulars of their income and on which occasion they had furnished inaccurate particulars thereof but no such particulars were ever furnished to the assessee. This treatment is manifestly against the principles of natural justice and particularly all the canons of criminal administration of justice. Since such course of action causes serious prejudice to an assessee facing serious allegation of committing fraud entailing grave consequences, therefore, the practice of serving notice under section 116 in a printed pro forma containing stereotyped and general observation cannot be approved. Opinion that every notice under section 116 should contain specific allegations of concealment of income or furnishing of inaccurate' particulars of income and the necessary particulars thereof should also be contained in such notice so that an assessee may have an opportunity of defending the charge properly. Where this basic requirement of law had not been complied with penalty orders were not maintainable.

In the present case the penalty proceedings were fraught with a mala fide intention. Any action taken with mala fide intent vitiates even the most solemn proceedings.

1970 PTD 75;1994 PTD 232;1980 PTD 26;1981 PTD (Trib.) 15; 1982 PTD 71; PLD 1982 Kar. 679 and 1983 PTD 105 ref.

Mashallah Khan, CA. for Appellant/Assessee.

Muhammad Aslam, D.R. for Respondent/Department.

Date of hearing: 17th February 1992.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).---The above cross-appeals at the instance of assessee (hereinafter referred to as appellant) and the Department (hereinafter referred to as respondent) are directed against the order dated 20-2-1989 by the learned C.I.T. (Appeal II), Lahore, in Income Tax Appeals Nos.335, 336/1B.

2. Briefly stated the relevant facts giving rise to these appeals are that the appellant a registered firm, deriving income from import and supply of scientific instruments to various departments, declared loss of Rs.64,006 in the assessment year 198-84 and loss of Rs.67,456 in the assessment year 1984-85. The I.T.O. did not accept the declared version and assessed income at Rs.400,468 for the assessment year 1983-84. and Rs.703,945 for the assessment year 1984-85. The appellant preferred appeals before the learned C.I.T. (Appeals) who set aside the assessment orders with certain directions. On re?assessment the I.T.O. assessed the total income at- Rs.377,658 for the assessment year 1983-84 and at Rs.697,454 for the assessment year 1984-85. In both the assessment orders the I.T.O. held that the appellant has committed concealment of income by suppressing sales and under-estimating the closing stock and that the penalty proceedings hall be initiated separately. Notice under section 116(b) were ordered to be issued for concealment of income and furnishing inaccurate particulars of income. The second assessment orders were completed on 30-6-1987. The appellant again preferred appeal before the learned C.I.T. (Appeals) who vide his order dated 6-12-1987? deleted certain additions and maintained the additions on account of tax deducted at source, under-valuation of closing stock and disallowances in the profit and loss account in assessment year 1983-84. Likewise, for the assessment year 1984-85 the learned C.I.T. (Appeals) upheld the additions on account of under-valuation of stock and disallowances out of Profit and Loss Account. The I.T.O. gave appeal effect under section 132 and framed fresh assessment orders on 2-8-1988. After giving appeal effect the total income for the assessment year 1983-84 was assessed at Rs.214,237 and for the assessment year 1984-85 at Rs.252,681. On 8-8-1988 a revised demand-note and order under section 132 was served on the appellant according to which a refund of tax amounting to Rs.2,918 and Rs.168,864 was determined for the assessment years 1983-84 and 1984-85 respectively. In the meanwhile on 21-3-1988 the I.T.O. issued notices to the appellant under section 116 and thereby initiated penalty proceedings. It was alleged in the notice that the Appellate Authority was satisfied that in the course of proceedings relating to the two assessment years under consideration the appellant concealed the particulars of his income by furnishing inaccurate particulars of his income. The appellant replied vide his letter dated 23-2-1988 that the learned C.I.T. (Appeals) accepted their appeal granting relief to them and as such no offence of concealment of income or furnishing of inaccurate particulars of income was made out. The appellant requested for withdrawal of the notices and further requested to expedite the refund proceedings, which were already pending. The respondent again addressed a letter dated 5-4-1988 to the I.T.O. asking the Assessing Officer to inform on which points he thought that the particulars of income were concealed or inaccurate particulars of income were furnished. The letter addressed by the appellant to the I.T.O. is reproduced below:

Re: ROSS BROTHERS (NT N0.06-07-1456370) NOTICE

?UNDER SECTION 116 AST. Years 1983-84 and 1984-85-

?SUBMISSION REGARDING.

Sir,

We are in receipt of your printed Notice under section 116 alleging that--

"during the course of our assessment proceedings for the years 1983?84 and 1984-85, we have concealed the particulars of our income etc. and furnished inaccurate particulars thereon."

without ever pointing out at to on which of the points we have either concealed the particulars of our income and/or furnished inaccurate particulars thereabout? We have thus the right to know, as to--

(1) On which points you think have. we concealed the particulars of our ??????????? income?

(2) On which occasion, in your opinion, we have furnished inaccurate particulars thereabout?

without knowledge thereabout, we are neither in a position to acknowledge the contents of your Notice under reference nor you are in a position to penalise us.

If you carefully go through the contents of the Appellate Orders and compare the same with the Orders appealed against you would rind that there is a vast difference between the assessment orders passed by your predecessor and the Appellate Orders passed by the learned C.I.T. (Appeals).

There were definite findings in the Appellate Orders about the sales, that the amounts alleged to have been "concealed sales" did in fact represent the amounts deposited in the Banks during the normal course of the business activities and similarly it was also the considered opinion of the learned C.I.T. (Appeals) that the impugned additions were not rightly made hence the same were deleted.

Regarding the alleged under-valuation of the closing stocks by your predecessor, it was merely a matter of "opinion" and not a "definite findings".

Be as the case may, the learned C.I.T. was pleased to order the deletion of impugned additions in the subsequent years and had the assessment continued for another year, the additions of the latest assessment year would also have met the same fate in the subsequent year but as you know, the Firm was later converted into a private limited company and its assessments as upto-date stand completed without any adverse opinion against the assessee.

The nutshell of the present discussion is that the Department does not have any case for which the impugned Notice under section 116 has been issued and it is requested that the same should be withdrawn, proceedings riled and the assessee be issued the refund to which it is entitled to and for which an appropriate application has already been made since long, besides various reminders from time to lime. .

We are further to request you that it is the lawful right of the assessee to demand for the refund as and when due and the Department is not justified in withholding the same for no evident reason at all, whatsoever.

An earlier response shall be much appreciated.

Thanking you, we remain.

Yours faithfully

(Sd.)

The appellant has been perusing proceedings on two points, one relating to the refund and the other pertaining to the penalty proceedings. During the course of these proceedings various notices from the I.T.O. and explanation of the notices from .the appellant were exchanged. The appellant had been perusing the refund proceedings before the higher Income Tax Authorities as well as with Wafaqi Mohtasib. It is not possible to reproduce all the correspondence in this behalf but a letter dated 15-9-1988 to the I.T.O. is very relevant and is, therefore, reproduced below:

Re: ROSS BROTHERS LAHORE (NT N0.06-07-1456370) Ast. Years

?1983-84 and 1984-85---Refund of Income Tax in the sum of Rs.171,782.

Dear Sir,

Rightly or wrongly, your predecessor had initiated action under section 116 despite our repeated protests that the impugned action was unwarranted an law for the reason that--

(1) As a result of our appeal against the impugned assessment orders, dated June 1987 the learned C.I.T. (Appeals) vide his orders, dated December 1987 altogether altered the pattern of the orders appealed against the result that the original income and the tax demanded, both considerably changed.

(2) Appellate Orders having been delivered in December 1987 by your predecessor in March 1988 MUCH AFTER THE DATE, now issued us Notice under section 116 when neither the pattern of assessment, nor any finding to the contrary authorizing any punitive action against us ever existed.

It was only after months long paper battle with your predecessor, and that too, only after an interference by the worthy C.I.T. that in August 1988, we were (reluctantly and hesitantly) allowed the appeal effect.

?Our earlier protests before him were further strengthened by his own findings at the end of the revised orders under section 132 wherein he categorically stated, that

"assessed as per IT-30. Issue revised Demand Notice only"

Had his authority to invoke action under section 116 been still alive, he should have recorded his "definite" finding at the end of order under section 132 which observation having ever been recorded, any further action in this regards renders all subsequent proceedings/actions as illegal and unwarranted in law and with a mala ride intentions.

In support of our contention we rely upon the following authorities--

1983 PTD 105; PLD 1982 Kar. 679; 1982 PTD 71; 1980 PTD 26; 1994 PTD 232 and 1970 PTD 75.

Be as the case may, the decisions of Superior Courts are self-contained that in Penalty proceedings, it is for the Department to "prove" beyond any shadow of doubt, that-- .

(1) The assessee did "conceal" his income (concealment here means an income escaping charge of tax).

(2) If an amount is detected as having "escaped" assessment and that amount is omitted to be assessed to tax only then a "concealment" is warranted, if any.

(3) Mere fact that an amount of capital nature has been charged to Revenue, or the stocks have been under-valued, in the "opinion" of the Income Tax Officer, are no ground to invoke action under section 116 to ones liking and moods.

Whether or not you are also authorised to proceed in the illegal manner as your predecessor had, our demand before you is to issue us Refund Voucher in the sum of Rs.171,782 and not to MIX up the refund issue with the Notice under section 116, if any.

We hope you would not deny us our right to what we are legally entitled to.

Please acknowledge receipt of this letter and obliged,

Thanking you, we remain,

Yours faithfully,

?(Sd.)

The appellant has produced copies of various complaints made to the Commissioner of Income Tax, Regional Commissioner of Income Tax and Wafaqi Mohtasib. Ultimately the I.T.O. imposed penalties under section 111 at Rs.1,15,030 in the assessment year 1983-84 and at Rs.1,37,060 in the assessment year 1984-85. In the penalty orders the I.T.O. held that the latest assessment orders establishing concealment were passed on 30-6-1987, which stood merged with the order of the learned C.I.T. (Appeals) dated 6-12-1987 wherein the fact of concealment was confirmed. The ITO further observed that it flows from the C.I.T.'s order that the appellant concealed the closing stock, tax deducted at source and sales and, therefore, the concealment stood established. The appellant preferred first appeals before the learned C.I.T. (Appeals). The learned C.I.T. (Appeals) observed that "it was upheld in appeal by the C.I.T. (Appeals) that the assessee had concealed his income for these two years". It was contended on behalf of the appellant that the penalty has been imposed out of annoyance caused with the complaint made to the Wafaqi Mohtasib against the Department for not issuing refund. The learned C.I.T. (Appeals) reduced the penalties with the following finding:---

?"....The case has been looked into carefully.. There are some extenuating circumstances. Opening stock of the assessee for assessment year 1983-84 was under-stated by Rs.90,000 at Rs.107,836 against closing stock of the preceding year at Rs. 197,836. Sales adopted as income of the assessee could not be mere income and only a portion of the same constituted profit. Under valuation of the closing stock could not be intentional as apparent from the example of opening stock for 1983-84, which enhanced income of the assessee by Rs.90,000. In view of these facts it appears fair and proper to impose penalty at 100% or equal to tax sought to be evaded by the assessee. Thus, the penalty for both these years stands reduced by half."

The appellant as well as the respondent both felt aggrieved about the above findings and hence these cross-appeals before us. The objection of the appellant is that no case of concealment was made out and, therefore, the Department failed to discharge onus of proving guilt of concealment and ?consequently the penalty orders ought to have been cancelled while the grievance of the Department is that the learned C.I.T. (Appeals) is not justified in reducing the penalty.

We have heard Mr. Mashallah Khan, CA. the learned A.R. for the appellant and Mr. Muhammad Aslam, the learned representative for the Department. Mr. Mashallah Khan has contended that the entire proceedings are mala fide and have been initiated with the intention to frustrate the efforts of the appellant for seeking refund. He has next contended that penalty proceedings are not justified for the reason that the last assessment order which is in existence is dated 2-8-1988 which has been framed after giving appeal effect in consequence of order, dated 6-12-1987 by the learned C.I.T. (Appeals). In this assessment order there is no finding that the appellant committed any concealment of income or furnished any inaccurate particulars. Mr. Mashallah Khan has drawn our attention to the following observation of the I.T.O. at the end of the assessment order:

"Assessed as per I.T. 30 for both the years. Issue revised Demand Notice and Challan."

Mr. Mashallah Khan has submitted that in the earlier assessment orders there was a finding that the concealment of income has been committed and notice under section 116 shall be issued. In the assessment order for the assessment year 1983-84, following observations were made:---

"The above discussion indicates that the assessee has committed concealment of income by suppressing sales and under-estimating closing stock."

"Assessed as per I.T. 30 issue DN&C alongwith Notice under section 116(b) for concealment of income."

In the assessment order for the assessment year 1984-85, dated 30-6-1987 the ITO observed as follows:

"As is evident the assessee has committed default of concealment of income by suppressing sales and under-estimating closing stock advertently. Penalty proceedings are being initiated separately.

Assessed as per I.T. 30. Issue DN&C alongwith notice under section 116(b) for default of concealment of income and furnishing inaccurate particulars of income."

3. ??????? Mr. Mashallah Khan has submitted that while levying penalties under section 111 the I.T.O. has referred to the observations in the assessment orders dated 30-6-1987 but the reference to the assessment order, dated 30-6-1987 is not justified in law because that order stood merged in the-first appellate order as rightly observed by the I.T.O. and after first appellate order, dated 6-12-1987 the only assessment order which occupied the field is the assessment order, dated 2-8-1988 in which there is no finding on the point of concealment of income or furnishing inaccurate particulars of income. The last assessment order, which is existing in law, do not contain any reference to the initiation of penalty proceedings and issuance of notice under section 116. Mr. Mashallah Khan has further taken us through the order, dated 6-12-1987 by the learned C.I.T. (Appeals) to shoal us that the learned C.I.T. (Appeals) has not given any finding to the effect that the appellant committed any intentional concealment of income or furnishing any inaccurate particulars of income. He has submitted that the learned C.LT. (Appeals) maintained the addition in respect of the amount representing tax deducted at source on imports with the consent of the representative for the appellant but there is no finding that any inaccurate particulars were furnished or any attempt for concealment was made in this behalf. Likewise the addition on account of under valuation of stock was maintained for the reason that the appellant was not able to furnish any documentary evidence regarding his plea that the imported items were not serviceable: The learned counsel has further drawn our attention to the findings of the learned C.I.T. (Appeals) whereby the addition on account of suppressed sales were deleted in both the assessment years under appeal. Mr. Mashallah Khan has pointed out that in the assessment order, dated 30-6-1987 the I.T.O. had made additions on account of unrecorded sales after suppressing sales and had observed that the appellant committed default of concealment of income by suppressing sales and underestimating the closing stock advertently. The learned C.I.T. (Appeals) deleted the additions made on account of alleged suppressed sales and so far the confirmation of addition on account of under-valuation of closing stock is concerned it was made for want of proof of unserviceability of items and not for furnishing of inaccurate particulars or concealment of income. Mr. Mashallah Khan bas submitted that penalty proceedings are quasi-criminal in nature and the burden of proving mens rea guilty intent, lies squarely on the Department. In the absence of any such finding in the last assessment order, which is holding the field, the initiation of penalty proceedings was unjustified and uncalled for. He has submitted that in these circumstances the penalties are liable to be deleted. On the other hand the learned D.R. has contended that the learned C.I.T. (Appeals) was not justified in reducing the quantum of penalty. We asked him to show the finding on the point of concealment in 'the last assessment order dated 2-8-1988. The learned D.R. had no option but to concede that there was no such finding in this assessment order. However, he has submitted that in the assessment order, dated 30-6-1987 there is such funding but again he had to concede that the assessment order, dated 30-6-1987 was no more in existence as one assessment order only can remain in existence at one time. He has further contended that in the first appellate order, dated 6-12-1987 the learned C.I.T. (Appeals) has confirmed the addition on account of under valuation of stock and, therefore, it amounts to furnishing of inaccurate particulars by the appellant and as such the initiation of proceedings under section 116 and levy of penalty under section 111 of the Income-tax Ordinance, 1979 is justified and the learned C.I.T. (Appeals) has misdirected in reducing the penalties.

We have carefully considered the contentions raised by the learned representatives for the parties and have gone through the material available on record. We are persuaded to agree with the submission of Mr. Mashallah Khan that the onus of proving guilty intent lies squarely on the Department as the penalty proceedings is in the nature of quasi-criminal proceedings. We are further persuaded to agree with the contention of Mr. Mashallah Khan that there should be specific finding on the point of concealment of income or furnishing of inaccurate particulars of income with the mens rea for evading the tax and this finding should be contained in the assessment order forming basis for initiating penalty proceedings and, thereafter the fact should be proved to the hilt to nil in the penalty proceedings independently. We find that the last assessment order dated 2-8-1988 which holds the field does not contain any finding on the point of concealment of income or furnishing of inaccurate particulars of income. We have further noticed that very issuance of notice under section 116 of the Income Tax Ordinance 1979 was void ab initio. The reason being that the mandatory requirement of law had not been complied with. The penalty for concealment of income is levied under section 111 of the Income Tax Ordinance, 1979 which reads as follows: ---

"111. Penalty for concealment of income etc.---(1) Where, in the course of any proceedings under this Ordinance, the Income Tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal is satisfied that any person has, either in the said proceedings or in any earlier proceedings relating to an assessment in respect of the same income year, concealed his income or furnished inaccurate particulars of such income, he or it may impose upon such persons penalty not exceeding two and a half times but in no case less than the amount of tax which would have been avoided if the income as returned by such person had been accepted as the correct income."

A perusal of the above section shows that the first condition for the imposition of penalty is that the I.T.O., Appellate Assistant Commissioner or the Appellate Tribunal be satisfied that in the proceedings relating to an assessment in respect of same income year any person has concealed his income or furnished inaccurate particulars of such income. Thus, the first and foremost condition which is sine qua non for the initiation of penalty proceedings, is that there should be finding to the effect in the assessment order or appellate order that an assessee has concealed his income or has furnished inaccurate particulars of such income. If there is no such finding in the assessment order or the appellate order, the penalty proceedings under section 111 cannot be initiated. Now coming to the facts of the case we find that there was such finding in the assessment order dated 30-6-1987 but this order stood merged in the first appellate order, dated 6-12-1987, as all the findings relating to the concealment in both the assessment years under appeal were assailed before the first appellate authority and some of the additions as more particularity relating to alleged unrecorded sales were deleted. A few additions as already referred in the earlier part of this order were maintained but there was no finding on the point of concealment. Thus, the first appellate order dated 6-12-1987 which is the ultimate final order, is silent on the point of concealment of income or furnishing of inaccurate particulars of income.

4. A perusal of record further shows that the Assessing Officer issued notice under section 116 on 21-3-1988 which was served on the appellant on 22-3-1988, by placing reliance on the findings relating to concealment in the assessment order, dated 30-6-1987 which was no more in existence on 21-3-198." having been merged in the first appellate order, dated 6-12-198 7. Thus, the reliance on assessment order which was no more in existence was improper and unjustified. In fact after the first appellate order, dated 6-12-1987 the I.T.O. ought to have first framed fresh assessment order under section 62/132 and after recording a finding in the assessment order on the point of concealment could have initiated penalty proceeding. A perusal of record shows that the Assessing Officer started penalty proceedings on 21-3-1987 by issuing notice under section 116 and framed the assessment orders under section 132 on 2-8-1988 and this assessment order is admittedly silent on the point of concealment of income. Thus, the position which emerges is that in between 7-12-1987 and 2-8-1988, there was no formal assessment order in existence. The penalty proceeding was, however, continuing in the absence of any assessment order which. is not proper. In addition to the facts that the final appellate order dated 6-12-1987 is silent on the point of concealment of income ands so is the assessment order, dated 2-8-1988 and that the penalty proceedings were initiated, in the absence of formal assessments order in existence, we find that basic requirements of law were not fulfilled in other aspects as well. By now, it is an established proposition that the penalty proceedings under section 111 of the Income Tax Ordinance, 1979, are of criminal nature and, therefore, the standard of evidence required for sustaining should be same as in criminal proceedings. It is almost a settled proposition, and therefore, we need not to dilate on this point and would like to refer to one judgment only of this Tribunal reported as 1981 PTD (Trib.) 15. In a criminal proceeding the burden of proving the guilty intent on the part of accused and the commission of offence lies squarely on the prosecution and. therefore, in the penalty proceedings under section 111, on the Department. The issue has been considered from time to time at various levels and the Central Board of Revenue has also issued various circulars explaining corresponding provisions in the repealed Income Tax Act, 1922.1 would like to reproduce the extracts from two circulars issued by the Central Board of Revenue in this behalf. Circular No. 2 of 1958, dated 11th March, 1958 is as follows:

"In supersession of all previous orders issued on the subject, the Board directs that penalty proceedings under section 28 of the Income Tax Act should be started only when an Income Tax Officer has fairly strong reason to believe that there was wilful default or deliberate concealment and that such proceedings should be finalised immediately after the assessment is completed without waiting for the disposal of appeal, if any, filed by the assessee against the assessment. "

The second Circular which is more elaborate and exhaustive is Circular No.2 of 1959, dated January 21,1959 and reads as follows: ---

"Some misunderstanding seems to exist regarding the principles governing the imposition of penalty under section 28(1)(c) of the Income Tax Act. Assessment and penalty proceedings stand on two different footings. In a proceeding relating to assessment, the onus is on the assessee to prove that the income returned by him is his true income. In a proceeding for imposition of penalty for concealment of income, the onus is on the Revenue to establish that the assessee gas concealed his income. The well-known decision of the house of Lords in Fattorini (Thomas) (Lancashire) Ltd. 1943 Supp. ITR 50 contains some very pertinent observations on this issue. In course of this judgment Lord Atkin remarked: ---

?The section is highly penal and I feel no doubt that the onus is originally and remains on the Revenue to show that the company acted unreasonably.'

Another of the Lord Wright in his concurring judgment used stronger language and said. "It is obvious that the section is penal in character and in my opinion the onus is finally on the Crown to prove its right to impose what is a very severe penalty. At the end of the day it is for the Crown to establish the fact."

(2) The High Courts in this sub-continent have also taken the same view in 1943 ITR 308 Sir Lionel Leach (C.J.) remarked: The imposition of penalty under section 28 is not a matter or guesswork. In another case it was observed `fraud cannot be presumed. It must be proved'.

(3) A decision of the Australian High Court contains some very interesting discussion on this issue. It was argued on behalf of the tax?payer that a proceeding for the imposition of penalty for concealment of income was in the nature of a criminal proceeding and that the standard of proof which is required in a criminal case should be required here also to sustain an order imposing penalty. Therefore, it should be necessary for the appellate Court to be satisfied beyond reasonable doubt of the guilt of the taxpayer. Dixen (J) delivering the judgment observed:

?In the view which I have ultimately taken of this case, this question does not appear to be important. But, I may say that, in my opinion, the proceeding is civil and not criminal in character. The procedure is by, action to recover a penalty and the rules of Civil Procedure apply. But this of course, does not affect the position that, when the law requires proof of any fact, the tribunal must feel an actual pursuasion of its occurrence of existence before it can be found. An intention to defraud the revenue is a seriousness of allegation made or the gravity of the consequences following from a particular finding are considerations which must affect answer to the reasonable satisfaction of the tribunal ??..In such matters reasonable satisfaction should not be produced by inexact proofs, indefinite testimony and indirect inferences?."

4. It will thus be seen that all cases where the taxpayer's version of his profit or income is not accepted do not attract penalty under section 28(1)(c). In cases of simple cash credit or in cases where the cash credit is co-related with the reasonable profit computed on a flat rate basis, penalty under section 28 is not ordinarily eligible. For a sound order under section 28, there must be evidence amounting to proof that the assessee deliberately omitted to account for some of his income or some of his transactions. The Board, therefore, desires that all cases through a specific transaction, proceedings under section 28(1)(c) should not be initiated.

A perusal of the above Circulars shows that the Central Board of Revenue is also of the view that the penalty proceedings under section 111 of the Income Tax Ordinance, 1979 (section 28(1)(c) of the repealed Income-tax Act, 1922) are criminal in nature and the standard of proof which is required in a criminal case should be required here also to sustain an order imposing penalty. There can be no cavil to the proposition that in criminal proceedings an accused person is entitled to know in very clear terms and without any ambiguity the charge which is sought to be established against him and the offence which is alleged to have been committed, as well as the points on which he has to furnish defence. Thus, a notice under section 116, the service of which is a mandatory. requirement is, in fact, similar to the charge --framed against an accused in criminal proceedings and it is an established principle of law that the charge should clearly contain the exact offence and the necessary particulars there: Likewise is the penalty proceedings the notice issued under section 116 should contain specific act of concealment alleged against an assessee and it should not be in general terms as has been done in this case. We find that in this section a printed notice under section 116 (in accordance with general practice prevailing in the Department was issued containing a general statement that the assessee concealed the particulars of income and furnished inaccurate particulars thereof without specifying the concealment and without giving particulars thereof. The appellant requested, time and again to know on which points they had concealed the particulars of their income and on which occasion they have furnished inaccurate particulars thereof but not such particulars were ever furnished to the appellant. This treatment is manifestly against the principles of natural justice and particularly all the canons of criminal administration of justice. Since such course of action causes serious prejudice to an assessee facing serious allegation of committing fraud entailing grave consequences, therefore, we do not approve the practice of serving notice under section 116 in a printed pro forma containing stereotyped and general observation. We are of the considered opinion that every notice under section 116 should contain specific allegations of concealment of income or furnishing of inaccurate particulars of income and the necessary particulars thereof should also be contained in such notice so that an assessee may have an opportunity of defending the charge properly. In the present case this basic requirement of law has not been complied with. In addition to the reasons already recorded for non-maintainability of penalty order, it is held that the penalty orders are not maintainable on this count as well.

5. Finally we would like to observe that the appellant has vehemently contended that entire proceedings are mala fide as the same have been initiated to frustrate refund proceedings. In support of his contention the learned A.R. for the appellant has produced the correspondence with the I.T.C., Commissioner of Income Tax, Regional Commissioner of Income Tax, and complaint with the Wafaqi Mohtasib. A perusal of the correspondence shows that after the order of learned C.I.T. (Appeals), dated 6-12-1987 the appellant started making request for refund and requested for giving appeal effect. On the other hand the I.T.O. instead of giving appeal effect started penalty proceedings from 21-3-1988, in pursuance of the assessment order, dated 30-6-1987 which was no more in existence and gave appeal effect on 2-8-1988 only. The refund was withheld and the appellant sought relief from Wafaqi Mohtasib. The proceedings before the Wafaqi Mohtasib were also frustrated as in the meanwhile the I.T.O. imposed the penalty. On perusal of entire material produced by the learned counsel for the appellant we are inclined to agree with him that the penalty proceedings were fraught with a mala fide intention and it is an established principle that any action taken with mala fide intent vitiates even the most solemn proceedings. It is held that in addition to the infirmities pointed out earlier the penalty proceedings are vitiated on account of mala fide intent, on the part of Assessing Officer actuated with the purpose of withholding refund created in favour of the appellant in consequence of the appellate order dated 6-12-1987.

6. In the end we would like to summarize the principles governing the proceedings relating to imposition of penalty under section 111 of the Income Tax Ordinance, 1979: --

(i) The assessment proceedings and penalty proceedings stand on two different footings. In a proceeding relating to assessment the onus is on the assessee to prove that income returned by him is his true income. In proceedings for imposition of penalty for concealment of income the onus is on the Department to establish that the assessee had concealed his income.

(ii) The penalty proceedings are criminal in nature and the standard of proof which is required in a criminal case is also required to sustain the order imposing penalty.

(iii) A definite finding by the I.T.O., AA.C., C.I.T. (Appeals) or the Income Tax Appellate Tribunal on the point of concealment' of income or furnishing of inaccurate particulars of income is sine qua non for initiating penalty proceedings.

(iv) Whenever penalty proceedings are sought to be initiated by an Assessing Officer, there should be a finding to this effect in the assessment order indicating the intention of initiating penalty proceedings.

(v) The notice under section 116 should contain in clear terms the alleged act of concealment of income or furnishing of inaccurate particulars of income in clear and unambiguous terms and such notice should contain the necessary particulars indicating the charge to be proved against an assessee.

(vi) The assessment proceedings and penalty proceedings being different in nature; no penalty can be imposed merely on the basis of finding on the point of concealment in the assessment proceedings. The onus lies on the Department in the penalty proceedings to prove independently the guilty intent by showing deliberate commission or omission on the part of the assessee resulting in concealment of income or furnishing of inaccurate particulars of income which may result in avoiding of tax if the returned version is accepted.

(vii) The assessee should be given reasonable opportunity of being heard without violating the principles of natural justice.

(viii) In all cases where version,, of taxpayer is not accepted the penalty proceedings shall not be attracted ipso facto although the rejection of taxpayers version may justify the addition to his total income. A reasonable difference of opinion on the point of law or principles of accountancy shall not attract the imposing of penalty. Mere lack of evidence in support of a claim in Trading or Profit and Loss Account or substantiating a transaction shall not entail the levy of penalty though it may be considered sufficient for making disallowance and consequent addition to the total income. A bona fide belief on the part of an assessee on a point of fact or law shall entitle him for extending benefit of doubt. However, a deliberate suppression of a transaction or fact or concealment of income or furnishing of inaccurate particulars of income resulting in the loss of revenue shall give presumption of guilty intent on the part of assessee and assessing officer shall be justified in drawing adverse inference. All these observations are subject to all the deeming provisions contained in the statute or enacted by the legislature from time to time. We would like to clarify that each case is to be decided on its own merits in the light of its own peculiar facts and circumstances.

(ix) The penalty proceedings should be finalised immediately after the assessment is completed without waiting for the disposal of the appeal, if any, filed by the assessee against the assessment. (Circular No. 2 of 1958, dated March 11, 1958).

6. For the foregoing reasons we are of the considered opinion without any scintila of doubt in our mind that the penalty imposed by the I.T.O. is not sustainable in law and consequently the penalty order stands cancelled. Both the appeals at the instance of the appellant are allowed accordingly. The appeals at the instance of the Department stand dismissed.

M.B.A./26/T.T.???????????

Order accordingly.