1994 P T D 675
[Karachi High Court]
Before Syed Haider Ali Pirzada and Akhtar Ali G. Kazi, JJ
Syed AKHTAR ALI
Versus
COMMISSIONER OF INCOME TAX, HYDERABAD
Income Tax Reference No. 31 of 1988, 17 of 1989 and 89 of 1992, decided on 19/12/1993.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 2(11) & 22---Business income---Revenue receipts---Adventure in the nature of trade ---Connotation---Assessee purchased agricultural land and the idea behind the purchase was to sell the land which was a strong indication that the sole intention in purchasing the land was reselling it on a profit---Such purchase, and sale of agricultural land constituted an "adventure in the nature of trade" and profit derived from. said sale being revenue receipt was liable to be taxed as business income.
Section 2(11) of the Ordinance purports to define what business is but actually does no more than to say that it "includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade; commerce or manufacture". Thus not only income derived from trade, but income derived from any adventure in the nature of trade is also to be regarded as business income and therefore taxable under section 2(11) of the Ordinance.
The primary section is section 22 which provides that the tax shall be payable by an assessee under the Head "Profits and gains" of any business or profession carried on, or deemed to be carried on by him. This section provides for taxation of income derived from business.
An adventure connotes a stray operation. It is true that the source need not be trade but it must nevertheless be an adventure in the, nature of trade and, if trade connotes or implies some continuous activity aimed at producing the profits, such activity must be found even in a case of adventure if the resultant profit is to be treated as taxable business income.
Even a single and isolated transaction can be held to be capable of falling within the definition if it bears clear indicium s of trade.
The fact that the transaction is not in the way of business of the assessee does not in any way alter the character of the transaction.
Where an adventure in the nature of trade is involved, it is the net result of all the feature surrounding the transaction that should be had regard to. No set rule or principle can be laid down -in reaching such a conclusion.
In the present case right from the beginning the assessee intended to sell the land. This was a very strong indication that the sole intention in purchasing the land was of reselling it at a profit. He did not want to keep it to utilize it for agricultural purpose. In fact; he did not have even enough money to pay to the owners and entered into sale agreements with Co-operative Housing Society to be able to pay to them. If he had held the land making full payment to the owners, probably the situation would have been different. The owners learnt of his sales and realised that they had suffered in the deals. Therefore, they went back on the agreements. But the intention of the assessee was evident from the inception, to make profit through sales at higher price. He was aware about the Government policy. He appeared to have intended to develop the land to break into plots and to dispose of the same, or to construct on part of it for business purpose. It clearly showed that the whole idea in purchasing the land was to make profit.
The purchase of agricultural land and the sale thereof constituted an adventure in the nature of trade and the profit from sales was liable to be taxed as business income.
Californian Copper Syndicate v. Harris 5 Tax 159; Martin v. Lowny 11 Tax Cases 297; Commissioner of Inland Revenue v. Livingston and others 11 Tax Cases 538; G. Venkataswami Naidu & Co. v. Commissioner of Income Tax (1959) 35 ITR 594; Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 26 ITR 765; Kishan Prasad & Co. Ltd. v. Commissioner of Income Tax, Punjab (1955) 27 ITR 49); Saroj Kumar Mazumdar v. Commissioner of Income Tax, West Bengal (1959) 37 ITR 242; (1965) 57 ITR 21; Dalmia Cement Ltd. v. Commissioner of Income Tax, New Delhi (1976) 105 ITR 633; Hydri Construction Co. Ltd., Karachi v. Commissioner of Income-tax, Central Karachi 1967 PTD 242; Commissioner of Income Tax, Bombay City III v. Himalayan Tiles and Marbles Private Ltd. (1975), 100 ITR 177 and Rukmani Company (Pvt.) Ltd: v. Commissioner of Income Tax, Madras. (1964) 52 ITR 599 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.12(7)---Total income---Interest income---Deemed interest income Where an assessee had made any loan or advance to any person on which no interest had been charged or the rate at which interest had been charged, was less than the rate arrived at adding two percent to the bank rate notified by the State Bank of Pakistan as applicable on the date on which the loan or advance was made, the amount not charged or the amount equal to the interest computed at the said rate as reduced by the interest actually charged, shall be deemed to be the income of the assessee and shall be included in his total income.
Where an assessee had made any loan or advance to any person on which no interest had been charged or the rate at which interest had been charged, is less than the rate arrived at by adding two per cent to the bank rate notified by the State Bank of Pakistan as applicable on the date on which the loan or advance was made, the amount not charged or the amount equal to the interest computed at the said rate as reduced by the interest actually charged, shall be deemed to be the income of the assessee and shall be included in his total income.
Section 12(7), Income Tax Ordinance, 1979 envisages "deemed interest income", where an assessee makes any loan, or advance to any person, which is either interest free or on which interest at a nominal rate is charged. In such a situation, interest worked out at the rate of two per cent above the bank rate as reduced by the interest, if any, charged by the assessee shall be deemed to be interest income of the lender.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. ' 111---Object of S.111, Income Tax Ordinance, 1979---Imposition of penalty under S.111---Essentials---Assessee must discharge the initial onus of proving that there was no fraud or gross or wilful neglect on his part while submitting return---Failure to return what the revenue had determined as the correct income of the assessee which was not as a result of any fraud' or gross or wilful neglect on part of the assessee, penalty under S.111 was not attracted.
Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioner (1942) AC 643: (1942) AER 619: 24 TC 328 ref.
Applicant in person.
Nasrullah Awan for Respondent.
Dates of hearing: 17th May and 5th December 1993.
JUDGMENT
SYED HAIDER ALI PIRZADA, J: --These are three references. The Income Tax Appellate Tribunal has referred the following three questions under section 136(1) of the Income Tax Ordinance, 1979 (hereinafter referred to as `the Ordinance') for opinion of this Court:---
"(1) Whether in the facts and circumstances of the case, the Tribunal was justified in holding the decretal amount received through the compromise decree of Sindh High Court in Suit No. 11/72 as revenue receipt?
(2) Whether the Tribunal was justified and right in declaring the decretal amount received by M/s. Agra Co-operative Society under compromise decision in Suit No.8/72 as a result of withdrawal of suit against defendants No. (3) and (4) being in satisfaction of advances received by applicant from the said Society?
(3) Whether in the facts and circumstances of the case, the Tribunal was justified to hold that the loan of Rs. 9,66,229 given to M/s. Akhtar Ali Bhurgari Associates Limited was chargeable under section 12(7) of the Income Tax Ordinance, 1979?"
The assessee filed an application under section 136(2) of the Ordinance stating that the following questions of law arise out of the decision of the Tribunal and the same were omitted:---
"(1) Whether in the facts and circumstances of the case, the Tribunal was justified in holding the decretal amount received through the compromise decree of Sindh High Court in Suit No. 11/72 as revenue receipts?
(2) Whether in the facts and circumstances of the case, the Tribunal was justified to hold that the loan of Rs. 9,66,229 given to M/s. Akhtar Ali Bhurgari Associates Limited was chargeable under section 12(7) of the Income Tax Ordinance, 1979.
This application was allowed by order dated 8-12-1987.
The relevant assessment year is 1981-82 corresponding to the financial year ending 30-6-1981. The applicant declared income of Rs.33,000 as Director of M/s. Akhtar Bhurgari Associates Limited and perquisite and free accommodation from M/s. Akhtar Bhurgari Associate, Ltd. The return was accordingly processed and assessment was finalised under section 59(1) (Self Assessment Scheme) but while examining the case of the said concern, it was noticed that the applicant received Rs.12 lac in lieu of decision of Suit No.11 of 1972, in the High Court, regarding purchase and sale of agricultural land. Further an amount of Rs.9 lacs was paid to M/s. Agra Cooperative Housing Society Limited '(applicant creditor regarding sale. of agricultural land) in a statement before this Court in lieu of sale of 'the agricultural land under litigation. The amount of Rs.9 lac was paid to M/s. Agra Cooperative Housing Society Ltd. because the applicant had received from the society an amount of Rs.8,75,101 as advance against sale of agricultural land. In addition to the above receipts, it was also observed that the applicant had advanced business loan of Rs.9,66,229 to M/s. Akhtar Bhurgari Associates. But he did not declare notional income, required to be declared under the provisions of section 12(7) of the Ordinanc4iAccordingly, the Assessing Officer proceeded to re-open the case under section 65 of the Ordinance.
The Income Tax Officer treated receipts of Rs.12 lac and Rs.9 lac as revenue receipts. It was noticed that a sum of Rs.9,66,229 was advanced as business loan by the applicant to M/s. Akhtar Bhurgari Associates Limited. The Income Tax Officer found that it attracted provisions of section 12(7) of the Ordinance with reference to loan advanced M/s. Akhtar Bhurgari Associates:
The applicant being aggrieved against the order of the Income Tax Officer went in appeal before the Appellate Assistant Commissioner of Income Tax. Hyderabad Range, Hyderabad. The Appellate Assistant Commissioner found that the receipts in the hands of the applicant could not be claimed as exempt from levy of income tax because the transaction was in the applicants' ordinary line of business. He further observed "the applicant had made purchase agreements as proprietor of Messrs Construction Corporation and has also made sale-deeds in the same name even up to now he is engaged in construction and development work. It is well settled that if a transaction is in the assessee's ordinary line of business there could be no difficulty in holding that it is in the nature of trade". In that view of the matter, it was held that the lands were purchased with the intention of making profits and therefore, the amount of Rs.12 lac received by the applicant from Khatedars is profit and taxable under the Ordinance. He held that there could be no doubt against applicability of the provisions of section 12(7) of the Ordinance. The action under section 12(7) of the Ordinance was justified.
The assessee took the second appeal before the Income Tax Appellate Tribunal. The plea of the applicant before the Tribunal was that payments before the Court could not be termed as revenue receipts because results of the Court proceedings were always uncertain. He submitted that payments were made to end the protracted litigation and not to compensate the assessee.
It was a windfall gain and not a revenue receipt. The Tribunal upheld the decision of the Appellate Assistant Commissioner of Income Tax and found as a fact that the applicant did not want to hold the land for agricultural purposes. The Tribunal in coming to the above conclusion was greatly impressed by the fact that the land was taken for development, sale and plotting for the purpose of housing scheme. The purchase was made by the applicant not in his individual capacity; but as a proprietor of the construction concern viz. M/s. Construction Corporation. It observed that before even his own deals could complete he started disposing of the land on high rates. It also observed that he made two agreements with M/s. Agra Cooperative Housing Society Limited for sale, second part payment of the price from them and out of the same made his own payment to Khatedars. It reproduced table of payments received and made by him in the order and it also observed that will show how he intended. to proceed about the land.
It found that it is apparent that "right from the beginning he intended to sell the land. He did not want to keep it to utilize it for agricultural purpose. In fact, he did not have even enough money to pay to the owner and entered into sale agreement with M/s. Agra Cooperative Housing Society Limited to be able to pay to them. If he had held the land making full payment to the owners probably the situation would have been different. The owners learnt of his sales and realised that they had suffered in the deals. Therefore, they went back on the agreements. But the intention of the assessee was evident from the inception, to make profit through sales at higher rates. He was aware that the land had commercial importance. He knew about the Government policy and this is why in para.8 of sale agreement dated 29-9-1966 the land was shown as part of the residential belt of North-East Karachi, Zonal Scheme. He appears to have intended to develop the land, to break it into plots and to dispose of the same, or to construct on part of it for business purpose. The dominant intention was clearly to re-sell the land either- in the shape of plots or after raising construction. No better proof to this effect could be seen than the fact that even before completion of the sale transaction in his favour he made agreements to sell the land. As earlier observed, had he exercised restraint for a while, he might have gained much bigger profit. Why did he not or could not wait? May be he did not have adequate funds to immediately pay the whole sale consideration. Whatever reason he did not lose but gained in the deals. He got several times more. The dominant intention was to earn profit and where; such is case, the adventure is regarded as one in the nature of trade". In that view of the matter, the Tribunal came to the conclusion that the assessee/applicant had no intention other than making profit out of the deal.
The Tribunal found that the loan of Rs.9,66,229 to M/s. Akhtar Bhurgari Associates Limited was a business loan chargeable with interest under section 12(7) of the Ordinance. Notional income from the same, therefore, will require to be added to other incomes of the assessee/income. On the application of the applicant, the above questions were referred to us.
We have gone through the written arguments carefully and also heard the applicant and Mr. Nasrullah Awan. We have carefully considered the decisions cited by them in their written judgments.
Section 2(11) of the Ordinance purports to define what business is but actually does no more than- to say that it "includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce or manufacture". It will be seen not only income derived from trade, but income derived from any adventure in the nature of trade is also to be regarded as business income and therefore taxable under section 2(11) of the Ordinance.
The primary section is section 22 which provides that the tax shall be payable by an assessee under the Head "Profits and gains" of any business or profession carried on, deemed to be carried on by him. This section provides for taxation of income derived from business.
The first enquiry must, therefore, be what are the elements, which must be sought among the facts in a case of this kind in order that the question may be decided in one way or the other? An adventure connotes a stray operation.
It is true that the source needs not be trade, but it must nevertheless be an adventure in the nature .of trade and, if trade connotes or implies some continuous activity aimed at producing the profits; such activity must be found even in a case of adventure if the resultant profit is to be treated as taxable business income.
In Californian Copper Syndicate v. Harris (5 Tax 159) a company was formed for acquiring and reselling a mining property. That company acquired some mining property and sold it to a second company, consideration for the sale being paid-up shares of the latter company. It was held by the Court of Exchequer (Scotland) Second Division, that the difference between the purchase price and the value of shares for which property was exchanged was a profit assessable to income tax. It was observed that the case involved a deal which was a proper trading transaction, one within the company's power under their articles, and contemplated as well as authorised by their articles. It would thus be noticed that though it was a case of single transaction, it was an adventure in the nature of trade because it was in the line of business adopted by the company.
In Martin v. Lowny (11) Tax Cases 297), a wholesale agricultural machinery merchant, who never had any dealing in linen trade purchased from the Government its surplus stock of aeroplate linen about 44 million yards. If, order to sell this huge stock, the assessee advertised on a very large scale, rented offices and engaged expert staff to organise sales. The member o1 transactions of sale of that huge stock of linen ran into transaction. On these facts the House of Lords held that the transaction amounted to the carrying on of a trade of which the profits were chargeable to income tax and excess profits duty.
In the Commissioner of Inland Revenue v. Livingston and others (11 Tax Cases 538) a ship-repairer, a blacksmith and a fish salesman, employee who joined in the venture of purchasing a large vessel with a view to coveting it into a show-drifter, and selling it, it was held that a new line of business for them. Expensive repairs and alterations to the ship were carried out, and the result was a sale of the converted vessel at profit. It was found that the transaction was an isolated one. But it was held that it was a venture in the nature of trade and liable to income tax.
In G. Venkataswami Naidu & Co. v. Commissioner of Income Tax ((1959) 35 ITR 594), the Supreme Court of India observed -that the expression "adventure in the nature of trade" appearing in the definition of "business" implies the existence of certain elements in the adventure which in law would invest it with the character of trade and that renders the question whether a transaction is in the nature of trade, a mixed question of law and fact.
The questions in this case are whether the transaction was an "adventure" in the "nature of trade" within the meaning of the definition? Some decisions have been rendered by the Supreme Court of India on the point, and our attention has been invited to the decisions reported as Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax ((1954) 26 ITR 765), Kishan Prasad & Co. Ltd. v. Commissioner of Income Tax, Punjab ((1955) 27 ITR 49), Saroj Kumar Mazumdar v. Commissioner of Income Tax, West Bengal ((1959) 37 ITR 242), (1965) 57 ITR 21, Dalmia Cement Ltd. v. Commissioner of Income-tax, New Delhi ((1976) 105 ITR 633). No general principle can be laid down to cover all cases of this kind because of their varied nature, so that each case has to be decided on the basis of its own facts and circumstances. It is, however, well settled that even a single and isolated transaction can be held to be capable of falling within the definition if it bears clear indicium of trade (vide Hydri Construction Co. Ltd. Karachi v. Commissioner of Income-tax, Central, Karachi 1967 PTD 242). It is equally well settled that the fact that the transaction is not in the way of business of I the assessee, does not in any way alter the character of the transaction. (See (1959) 37 ITR 242).
In Commissioner of Income-Tax, Bombay City III v. Himalayan Tiles and Marbles Private Ltd. ((1975) 100 ITR 177), a Division Bench of the Bombay High Court held that the sutrplus realised from a venture was liable to be included in the income of the assessee under section 10 of the Income Tax Act, 1922.
In Rukmani Company (Pvt.) Ltd. v. Commissioner of Income-tax, Madras ((1964) 52 ITR 599), a Division Bench of Madras High Court observed that in every case where an adventure in the nature of trade is involved, it is the net result of all the features surrounding the transaction that should be had regard to. It was further observed that no set rule or principle can be laid down in reaching such a conclusion.
It is true that in the case before us the full material is available on the record.
We have earlier set out the various facts and circumstances, which have been established in the instant case. It is true that the applicant set up a concern for the purpose under the name of M/s. Constriction Corporation. On 27-11-1964 he entered into an agreement whereby two joint owners namely, Siddique and Zehri Khan, agreed to sell to him their 15-anna share in Field Nos. 84, 85, 86, 87, 88, 89, 97 and 98 situated in Deh Songal, District Karachi at a rate of Rs.3,250 per acre. Again on 5-1-1965 he made another agreement to purchase the one anna share of Mst. Iainat w/o Qadir Gabole in the said land. A total area of 161 acres and 14 ghuntas thus was agreed to be sold to the applicant on the basis of said two agreement deeds. But before the deals could go through, the applicant himself made sale agreements regarding the same very land with M/s. Agra Co-operative Housing Society Ltd. Two agreements he made with the said Society, one on 29-9-1968 and the other on 4-5-1970. By the first agreement, he agreed to transfer an area of 54 acres and 16 ghuntas out of Survey Nos. 84 to 86, 89, 90 and 91 to the Society. In the next agreement, an area of 57 acres and 11 ghuntas from Survey Nos. 84, 85 and 86 was agreed to be transferred. The owners somehow came to know about these deals and the price settled to be paid to the applicant. A substantial gain was accruing to the applicant from the deals and they declined to transfer the land to him. They in fact themselves started negotiating with other parties for sale of the land. To find out their move to sell away the land to other parties, the applicant filed a suit in this Court being Suit No.11 of 1972 against the owners praying for specific performance of the agreements. He also obtained an order from this Court restraining the owners to go ahead with their motive to transfer the land during the pendency of the suit. M/s. Agra Co-operative Housing Society Ltd. also came forward and sued the applicant along with owners. A settlement took place in this Court during the pendency of these suits whereby a pay-order of Rs.12 lac was paid by the owners to M/s. Agra Co-operative Housing Society Ltd. was regarded as on behalf of the applicant, because he had received from the Society a sum amounting to Rs.8,75,101 as advance for the land agreed to be transferred to them which he did not pay back when the deals with them fell through.
It is apparent that right from the beginning the applicant intended to sell the land. This is a very strong indication that the sole intention in purchasing the land was of reselling it at a profit. He did not want to keep it to utilize it for agricultural purpose. In fact, he did not have even enough money to pay to the owners and entered into sale agreements with M/s. Agra Co operative Housing Society Ltd. to be able to pay to them. If he had held the land making full payment to the owners, probably the situation would have been different. The owners learnt of his sales and realised that they had suffered in the deals. Therefore, they went back on the agreements. But the intention of the applicant was evident from the inception, to make profit through sales at higher price. He was aware about the Government policy. He appears to have intended to develop the land to break into plots and to dispose of the same, or to construct on part of it for business purpose. It clearly shows that the whole idea in purchasing the land was to make profit.
It seems irresistible that the applicant had no intention other than making profit out of the deals. The reason that the deals fell through was that he showed an unnecessary haste in the matter. We agree with the observation of the Tribunal that "still he did not lose any thing. As against the payment of Rs.2,79,861.19 made to the owners he got about Rs.21 lac in return. A pay order of Rs.12 lac was given to him when he patched up with the owners in Suit No.11 of 1972 before this Court. The balance he got through different payments earlier made as advance by M/s. Agra Co-operative Housing Society Ltd. On the agreement in their favour failing, when the owners declined to complete the transactions, they could have got back the advance money, as the assessee was in no wise entitled to withhold the same. But instead they got the money from the owners, also paid before the High Court of Sindh in Suit No.8, instituted by them against the owners and assessee. It does not negate the conclusion strongly supported by other circumstances that the assessee purchased the land with a view to earn income by selling the same and by constructing on part of the plot".
Having considered the totality of the circumstances, we are of the opinion that the purchase of agricultural land and. the sale thereof constituted an adventure in the nature of trade and the profit from sales was liable to be taxed as business income.
For the reasons given above, we answer the questions as follow:
Question No.l. The Tribunal was justified in holding the decretal amount received through the compromise decree in Suit No.ll/72 as revenue receipts. The question No.l is in the affirmative.
The question No.2 is answered in the affirmative; in favour of the revenue and against the applicant.
The applicant has advanced a loan of Rs.9,66,229 to M/s. Akhtar Bhurgari Associates, a registered firm. It appears that in the firm, his wife and sons are partners. The firm was engaged in business and therefore, loan was advanced for business purpose.
Section 4(1) of the Income-tax Act, 1922 is in the following terms:---
"Section 4(1). Application of Act: --(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which:---
(a) are received or are deemed to be received in (Pakistan) in such year by or on behalf of such person; or
(b) if such person is resident in (Pakistan) during such year:---
(i) accrue or arise or are deemed to accrue or arise to him in (Pakistan) during such year, or
(ii) accrue or arise to him without (Pakistan) during such year, or
(c) if such person is not resident in (Pakistan) during such year, accrue or arise or are deemed to accrue or arise to him in (Pakistan) during such year:
Provided that where any amount consisting of either the whole or a part of any income, profits and gains has been included in. the total income of an assessee for any previous year under clause (b), it shall not be included in any other previous year under clause (a):
Provided further that, in the case of a person not ordinarily resident in (Pakistan), income, profits and gains, which accrue or arise to him without (Pakistan) shall not be so included unless they are derived from a business controlled in or a profession or vocation set up in (Pakistan)-or unless they are brought into or received in (Pakistan) by him during such year:
Explanation 8:
Where a company has made any loan to any person and has not charged any interest thereon, or the amount charged is at a rate, which is less than the specified rate. then interest calculated at the specified rate, as reduced by the amount of interest, if any received by the purposes of this Explanation:---
(i) `Specified rate' means rate of interest two per cent above the bank rate notified by the State Bank of Pakistan, as applicable on the date the loan is made by the company; and
(ii) 'loan' does not include any loan made by the company to any of its employees for a specific purpose and in accordance with the terms and conditions of service."
The language of section 12(7) of the Ordinance is nearly identical with the provisions of Explanation 8 to section 4(1) of the repealed Act.
A bare reading of the above provisions shows that where an assessee has made any loan or advance to any person on which no interest has been charged or the rate at which interest has been charged, is less than the rate arrived at by adding two per cent to the Bank rate notified by the State Bank of Pakistan as applicable on the date on which the loan or advance was made, the amount not charged or the amount equal to the interest computed at the said rate as reduced by the interest actually charged, shall be deemed to be the income of the assessee and shall be included in his total income.
Section 12(7) envisages "deemed interest" income, where an assessee makes any loan or advance to any person which is either interest free or on which interest at a nominal rate is charged. We are of the view that in such a situation, interest worked out 4t the rate of two per cent above the Bank rate as reduced by the interest, if any, charged by the assessee shall be deemed to be interest income of the lender.
The assessment year was 1981-82 ending with June 30, 1981. Original assessment was completed at an income of Rs.33,000. On the basis of information that the applicant has concealed income from sale of land and interest income worth Rs. 16,38,759. Case was re-opened under section 65 of the Ordinance. Thus as against originally assessed income of Rs. 33,000, total income of the applicant was determined at Rs.16,71,759 for the reason as elaborately discussed in the assessment order, dated 30-6-1986. On 30-6-1986, a penalty proceeding was initiated under section 111 of the Ordinance by the Income Tax Officer, Companies Circle, Hyderabad. The matter was referred to the Inspecting Assistant Commissioner. A penalty of Rs. 10,76,024 was imposed on a finding that the applicant concealed income. The applicant appealed against the penalty imposed on him. He observed that it is established that the assessee/applicant has deliberately furnished inaccurate particulars of his income and consciously concealed the particulars of his income. In that view of the matter, the appeal was dismissed.
The applicant appealed to the Income Tax Appellate Tribunal. It observed that "clearly it is a case of furnishing inaccurate particulars and concealing substantial income. A penalty accordingly would be leviable. As imposed, it cannot be called excessive. In fact it is much less than the permissible limit". In that view of the matter, the order was upheld and declined to interfere. At the request of the applicant the following question was referred to us:--
"Whether on the facts and in the circumstances of the case, the Income Tax authorities were justified in imposing penalty on the assessee under section 111 of the Income Tax Ordinance, 1979."
During the assessment proceedings, the 'Income Tax Officer issued notice under section 116 of the Ordinance on June 30, 1986. The applicant denied the allegations of concealment of income or inaccurate particulars. He stated that the amounts were not taxable and the amounts were disclosed in the wealth statement.
The Income Tax Officer imposed a penalty amounting to Rs.10,76,024. The Appellate Assistant Commissioner affirmed the penalty of Rs.10,76,024 imposed by the Income Tax Officer. The Tribunal affirmed the order and dismissed the appeal. Under the Income Tax Act, 1922, penalty could be imposed under section 28. The relevant portion of section 111 of the Ordinance reads:
"if the Income Tax Officer or 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."
The first point, which falls for determination is whether the imposition of penalty is in the nature of a penal provision. One of the objects in enacting section 111 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent, which will put a stop to practices, which the legislature considers to be against the public interest. In England it has never been doubted that such proceedings are penal in character. Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioner (1942) AC 643: (1942) AER 619: 24 TC 328).
The proceedings under section 111 are of a penal nature and the burden is on the Revenue to prove that a particular amount is a revenue receipt. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false, does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately; furnished inaccurate particulars.
We shall proceed to consider the facts of the instant case after pointing out one more matter and that is this. It is always to be remembered that the standard of proof applicable to prove a positive fact and the one, which is required to prove a negative fact cannot be the same. A high standard is always applied for the proof of a positive fact while the standard of preponderance of probability is sufficient to prove a negative fact. The assessee is required to prove that the failure to return correct income did not arise from any fraud or gross or wilful negligence on his part, that means, there is absence. of fraud or gross or wilful neglect. The assessee merely has to place materials of the primary facts or the circumstances, which in all reasonable probability would show that he was not guilty of any fraud or gross or wilful neglect. He may discharge this onus by placing the facts found in the assessment order to show that the facts found therein had not in the least given an inkling of fraud or gross or wilful neglect on the part of the assessee and, therefore, it must be held without proof of any other fact that there was no fraud committed by the assessee in his failure to return the correct income nor was he acting grossly or wilfully negligently.
Coming to the facts of this case now, it would be noticed that in the assessment order, the Income Tax Officer has found that the assessee has concealed the income. The applicant has submitted that he gave the details of income of his wealth statement.
In the circumstances, the applicant must be held to have discharged the initial onus of proving that there was no fraud or gross or wilful neglect on his part while submitting the return. On the materials placed before the Income Tax authorities, we are satisfied that the failure to return what the revenue has determined as the correct income of the applicant, is not as a result of any fraud or gross or wilful neglect on the part of the applicant and in the circumstances of the case we are of the view that penalty is not attracted in this case.
For the reasons stated above, we would answer the question under reference in the negative, in favour of the applicant and against the Revenue and hold that, on the facts and in the circumstances of the case, the Tribunal was not justified in imposing penalty on the applicant under section 111 of the Ordinance.
M,B.A./A-1430/T Reference answered.