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

----S. 59---Self-Assessment Scheme (1987-88)---C.B.R. Circular No.9 of 1987-- Setting apart a case for normal assessment ---Essentials---Assessee's, case could be set apart from normal assessment only if there was evidence of concealment in the case.

(1961) 4 Tax 238; 1969 PTD (Trib.) 64 (Trib.); 1991 PTD 702; 1987 PTD (Trib.) 36;1988 PTD 991 and 1991 PTD 578 ref.

1988 PTD 987 (Trib.) rel.

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

----S.13(1)(aa) & (2)---Deemed income---Addition---Meagre capital of assessee---Calculation of income---Income-tax Officer, during the assessment proceedings sought explanation from assessee regarding the meager capital of the assessee---Income Tax Officer by completely ignoring the explanation of the assessee observed in the assessment order that the assessee had failed to furnish any explanation---Such action of the Income Tax Officer, held, was undesirable and amounted to suppression of facts.

(c) Income-tax---

----Peak credits---Concept---Concept of peak credit, is applicable only in cases of simple purchase and sale which indicates magnitude of the capital in a case.

(d) Income-tax--

----Capital position of assessee---Mode of appraisal---Time---If I.T.O has to consider the capital position of assessee; he should consider it in the beginning of the financial year and not at the end of financial year.

Dr. Ilyas Zafar- for Appellant.

Imtiaz Ali Khan, D.R. for Respondent,

Date of hearing: 9th June, 1994

MUHAMMAD MUSHTAQ (ACCOUNTANT MEMBER).--This appeal has been filed on behalf of M/s. Habibullah & Co. (hereinafter also referred to as the assessee) challenging the order of learned CIT (Appeals) Zone-IV, Lahore vide A.O. ~4os. 1451 and 1452, dated 16-1-1990.

2. The brief facts leading to this appeal are that the assessee in this case filed Income Tax Return in the status of an individual declaring net income at Rs.224,000. This Income Tax Return was filed by the assessee under SAS and assessee claimed immunity from Total Audit under SAS. However, the Income Tax Department selected this case for Total Audit. Later on, on the representation of the assesee, this case was taken out of the list of the Total Audit but this case was set apart for completion of assessment under normal law by the Commissioner of Income-tax vide his Letter No.J-149/DS-87 88/CC-IV, Vol. II/6070/J, dated 31-5-1988. In pursuance of this letter of the Commissioner of Income-tax concerned; the ITO started proceedings for completion of assessment under normal law. The assessee contested these proceedings. The ITO issued notices under sections, 61 and 62 on 18-9-1988 for 24-9-1988. As per the assessment order the assessee did not comply with these notices and ITO completed assessment under section 63 of the Income Tax Ordinance, 1979.

3. A perusal of the record indicates that the assessee in this case earns his income from contract business. For the year under consideration the assessee declared contract receipts at Rs.52,27,750 and declared GP rate at 10.09%. As per assessment order the assessee furnished the following documents alongwith the Income Tax Return:---

(1)Income and Expenditure Statement.

(2)Wealth Statement.

(3)Payment Certificates.

(4)Photostat copies of dissolution deed, dated 9-7-1986 in respect of the firm M/s. Habibullah & Co. Jathoke, Tehsil Daska, District Sialkot.

4. As mentioned above, the ITO completed the assessment under section 63 for non-compliance of notices under sections 61 and 62 and estimated the contract receipts at Rs.55,00,000. These were subjected to a GP rate at 17.5%.

5. In addition to estimate of receipts and application of GP rate the ITO also made an addition under section 13(1)(aa) of the Income Tax Ordinance, 1979 on account of unexplained capital. With the following observations:---

"The Wealth Statement 3 on 30-6-1987 filed by the assessee with the return reflects that net working capital has been disclosed at Rs.69,783 besides, securities deducted at Rs.440,096, advance tax deducted at Rs.15,383 and bills receivable at Rs.20,965. A perusal of payment certificate has revealed that peak payment of Rs.684,723 was received by the assessee. From the above comparison, it was observed that working capital declared by the assessee did not commensurate with the declared receipts and peak payment. A specific notice under section 13 was issued to the assessee vide this office letter, dated 18-9-1988 in writing as to why the working capital should not be adopted under section 13(2) of the Income Tax Ordinance at Rs.600,000 and addition made amounting to (Rs.600,000) minus Rs.69,683 = 530,207 be made under section 13(1)(aa) as unexplained investment. The assessee has failed to furnish any document or explanation which goes to prove that the assessee has nothing to say in the matter. Addition under section 13(1)(aa) of the Income Tax Ordinance, 1979 is being made at Rs.500,600 by adopting the working capital at Rs.600,000 with the prior approval of the IAC Range-I, Zone-A, Lahore accorded. by him vide his Order No. 716/RI, dated 29-9-1988 as under:--

5-A. Aggrieved by this treatment the assessee went into appeal. The learned CIT (Appeals) rejected the appeal of the assessee on all grounds except the estimate of contract receipts. The assessee declared contract receipts at Rs.52,27,750. These were adopted at Rs.55,00,000 by the ITC. The learned CIT (Appeals) directed that the receipts declared by the assessee should be accepted. Besides, some relief was also allowed by the learned CIT (Appeals) out of P&L Account expenses.

6. The assessee still feels aggrieved and as per grounds of appeal, the assessee has agitated the following points:---

"(1)That the Income Tax Return filed by the assessee under SAS was covered by immunity.

(2)That the learned CIT was not justified in directing to complete the assessment under the normal law in this case.

(3)That the ITC was not justified in holding that there was no positive concealment in this case.

(4)That the ITC was not justified in completing assessment under section 62.

(5)That the ITC was not justified in making addition under section 13(1)(aa) at Rs.500,600,

(6)That ITC was not justified in holding that the assessee was doing business with capital of Rs.69,783.

(7)That the ITC was not justified in applying a GP rate of 17.5%"

7. Dr. Ilyas Zafar, the learned counsel of the assessee gave lengthy arguments in support of appeal. The learned counsel has also relied on case extensively. His contentions briefly are as under:--

"(1)That in this case the ITC issued a notice under section 61 to the assessee for 24-9-1988. However, the assessee made a representation to the RCIT for acceptance of the return under SAS. The ITC did not wait for the reply of the RCIT and completed ex parte assessment on 29-9-1988.

(2)That the reply of RCIT was received by the assessee on 7-10-1988 that since in this case assessment had been completed no further action could be taken by the RCIT which reply was totally unjustified.

(3)That ex parte assessment completed by the ITC was unjustified, as the ITC did not provide sufficient time to the assessee for furnishing reply.

(4)That return filed by the assessee qualified for SAS under CBR Circular No.4 of 1987.

(5)That the assessee made a representation to Commissioner of Income tax regarding selection of case f6r Total Audit. The learned CIT accepted the contention of the assessee but directed the ITC to complete the assessment under normal law.

(6)That return filed by an assessee under SAS could be taken out of the purview of SAS if during the pendency of assessment it is found by the ITC that there is a concealment in this case but since in this case no proceedings were pending before the ITC and the decision having then made by the CIT for completion of assessment under normal law action of the authorities below was not justified because in this case powers of ITO were exercised by the CIT although in the case reported as PLD 1972 Lah. 316 it had been decided by the Hon'ble High Court that powers of ITO have to be exercised by the ITO.

(7)That there was no concealment of suppression of income as alleged by the ITO.

(8)That ITO has incorrectly taken the capital ofthe assessee at Rs.69,783.

(9)That ITO had taken the capital at Rs.69,783 at the End of the financial year whereas he should have adopted the capital in the beginning of the financial year.

(10)That this case was taken out of the SAS only on the ground with a meagre capital with the assessee could not do the business and could not earn the receipts of Rs.52,27,750.

(11) That under rule 191 of the Income Tax Rules, 1982 the assessee had to declare net capital after adjustment of securities, tax deducted etc.

(12) That ITO had wrongly applied GP rate at 17.5% on the basis of parallel cases while doing so the ITO ignored the past history of this case.

(13)That lower GP declared as compared to other parallel cases is no ground for rejection of accounts as held in the case reported as (1961) 4 Tax 238.

(14) That as held in the following reported cases the assessee s own history should be relied upon---

(16) That notice under section 13(2) was given by the ITO for addition of Rs.530,207 whereas actually addition was made by the ITO at Rs.500,600 under section 13.

(17) That although ITO indicated in the assessment order that lie was completing ex parte assessment on 24-9-1988 but actually ex parte assessment was completed by the ITO on 29-9-1988.

(18) That I T 0 did not obtain prior approval of the IAC under section 13(1). Hence, the addition made by the ITO was unjustified as held in the following cases--

1987 PTD (Trib.) 36; 1988 PTD 991 and 1991 PTD 578.

8. The learned DR appearing on behalf of the Income Tax Department contended that this case was first selected for total audit as new assessee because there was no previous record of the assessee in the Circle concerned. However, subsequently, on the basis of facts available the case was kept for assessment under normal law. The learned D.R. further pointed out that ITO issued notice to the assessee to explain the capital but assessee did not furnish any explanation. Hence, ITO was justified in completing ex parte assessment also because no compliance was made by the assessee in respect of the notices issued under sections 61 and 62.

9. We have carefully considered the facts of the case and arguments advanced from both the sides. Notwithstanding, the lengthy arguments given by the learned counsel of the assessee, the learned D.R. and grounds of appeal, the dispute in this case boils down to the following points:---

"(1)Whether the Income, Tax Return filed by the assessee was qualified to be accepted under SAS or not?

(2)Whether there was sufficient evidence of concealment in this case to justify completion of assessment under normal law?"

10. In order to judge the issues it is essential to examine the SAS for the assessment year 1987-88. The learned counsel of the assessee has contended that the assessee's case is covered by Circular No.4 of 1987 issued by the CBR. This is not correct because CBR subsequently revised its instructions and cases of SAS were governed by CBR Circular No.9 of 1987 dated 20-10-1987. In order to see whether the Income Tax Return filed by the assessee did qualify for SAS or not we have to examine para. 1 of the CBR Circular No. 9 of 1987 which is reproduced as under:---

"Scope of claim---

Returns filed for assessment year 1987-88 qualify for acceptance under SAS except the following:---

(a)All Returns which are not filed voluntarily by the due dates includingextended dates;

(b)Returns where the assessee declared income before any adjustment orbrought forward assessed less does not exceed Rs.24,000;

(c)Returns of existing tax payers in whose case a legal issue is pending in respect of any appeal/reference in respect of a previous assessment and the same issue exists for the assessment year 1987-88 unless the appeal/reference is withdrawn by the Tax payer or the Department;

(d)Returns selected for total audit;

(e)Returns in cases where evidence of concealment is available;

(f)Returns where the requirements as specified in para. 2 are not fulfilled and the tax payer fails to provide such particulars/documents within one month of the date of service of a letter from the ITO."

The discussion whether the Income Tax Return filed by the assessee is covered by immunity or not is meaningless because the Income Tax Department has never disputed the claim of immunity enjoyed by the assessee. The Income Tax Return has been set apart for normal assessment and this could be done only if the assessee did not fulfil any of the above conditions laid down in para. 1 of the SAS for the assessment year 1987-88 as reproduced above. From the perusal of the above para. it is indicated that the assessee's case could be set apart for normal assessment only if there was evidence of concealment in this case of the assessee. Now we have to see whether there was any evidence for concealment of income in this case or not.

11. A perusal of the assessment order indicates that the relevant para. is as under:---

"The case was selected for total audit through random ballot and the assessee was informed accordingly. Notices under section 61 were issued time and again but no compliance whatsoever has been made. The selection of the case was contested by the AR of the assessee before the worthy CIT Zone-A, Lahore who vide his Letter NO.J.149/DS-8788/XX/IV/6070/J, dated 31-5-1988 has deleted from the. list of total audit and accorded permission to process the case under normal law."

Beyond above, there is no justification in the assessment order for completing the assessment under normal law. However, in the last paragraph of the assessment, which has been reproduced in the foregoing paragraphs above, the ITO issued a show-cause notice to the assessee. Since this para. is important for the point of view of decision of this appeal, it is reproduced again even at the cost of repetition:---

"The wealth statement as on 30-6-1987 filed by the assessee with the return reflects that net working capital has been disclosed at Rs.69,783 besides security deducted at Rs.440,096 advance tax deducted at Rs.15,383 and bills receivable at Rs.20,965. Perusal of payment certificate has revealed that peak payment of Rs.684,723 was received by the assessee. From the above comparison it was observed that working capital declared by the assessee did not commensurate with the declared receipts and peak payment. A specific notice under section 13 was issued to the assessee vide this office letter dated 18-9-1988 to show cause in writing as to why the working capital should not be adopted under section 13(2) of the Income Tax Ordinance, 1979 at Rs.600,000 and addition amounting to Rs.530,207 (Rs. 600,000--Rs. 69,683 be made under section 13(1) (aa) as unexplained investment. The assessee has failed to furnish any documents or explanation which goes to prove that assessee has nothing to say in the matter. Addition under section 13(1)(aa) of the Income Tax Ordinance, 1979 is being made at Rs.506,000 by adopting the working capital at Rs.600,000 with the prior approval of the IAC Range-1, Zone-A, Lahore accorded by him vide his Letter No.716/RO, dated 29-9-1988 as under:---

From the perusal of the above also it is quite evident that ITO did not have any evidence with him to show that the assessee had committed concealment. During the assessment proceedings the ITO sought explanation from the assessee regarding the meager capital of the assessee. But according to the ITO no explanation was furnished by the assessee. Hence, he made an addition of Rs. 506,000 under section 13(1)(aa) of the Income Tax Ordinance. Non -submission of an explanation by the assessee has resulted into this addition made by the ITO under section 13(1)(aa).

12. When the matter went to the learned CIT (Appeals) the complexion of the assessment was altogether changed. The learned CIT(A) confirmed the addition under section 13(1)(aa) with the following observation:--

"The appellant was confronted with the notice under section 13(2), dated 8-9-1988 as to why this capital should not be estimated at Rs.600,000 and an addition of Rs.530,207 should not be made under section 13(1)(aa). The appellant's AR vide his letter, dated 22-9-1988 submitted that actual capital available with the appellant was Rs.571,783 and not Rs.69,783. It was further submitted that capital of Rs.571,783 was duly shown in the wealth statement as on 30-6-1987. The wealth statement of the appellant shows capital as under:---

This plea of the appellant was not accepted by the ITO. He was of the opinion that securities deducted, tax deducted at source, bills receivable etc. were not available to the appellant for investment business. These amounts were locked up in securities, tax deduction and bills outstanding and the appellant had to conduct his day-to-day business only with the circulated capital and that was Rs.69,783. Cash shown at Rs.2,000 and bank balance at Rs.352. Even if all these three sources taken up together are too meagre to enable the appellant to run his business. The contention of the ITO is convincing. In my opinion this evidence is a definite evidence of concealment of income and the case falls under para. 8 of the SAS for the assessment year 1987-88 and has rightly been taken up. by the ITO for normal assessment. Hence, -the action of the ITO to process the case under normal law is upheld."

13. Much can be said about the observations made by the learned CIT(A). However, it is pertinent to point out that in the assessment order the ITO has stated on page 2 (relevant para. reproduced above) that the assessee has failed to furnish any document or explanation which goes to prove that the assessee has nothing to say in the matter. In other words, the ITO says that the assessee had not furnished any explanation. The learned CIT(A) in the appellate order (relevant para. reproduced above) categorically stated that the assessee furnished his explanation vide letter, dated 22-9-1988. In other words, while making the addition under section 13(1)(aa) the ITO completely ignored explanation of the assessee dated 22-9-1988 and simply observed in the assessment order that the assessee did not furnish 4ny explanation. This is highly undesirable and amounts to suppression of facts. Secondly, the relevant order of the CIT(A) is a sort of improvement over the order of the ITO. The learned CIT(A) has given arguments which were not stated before the ITO. Apart from this serious discrepancy, the assumption of the ITO regarding capital is not correct. The learned counsel of the assessee has rightly pointed out that if the ITO had to consider the capital he should have considered the capital in the beginning of the financial year whereas the ITO has proceeded from the figure of capital at the end of financial year. We agree with this contention of the learned counsel of the assessee because the assessee did business with the capital in the beginning of the year and not with the capital shown at the end of the year. Thirdly, the ITO has proceeded on the basis of peak credit. At page 2 of the assessment order in the last para. as reproduced in the foregoing paragraph, the ITO has observed that peak payment in this case are Rs.684,723. From this peak payment, the ITO has inferred that assessee did not have enough capital to warrant payment of Rs.684,723. This assumption is incorrect for. a number of reasons. Firstly, because the concept of peak credits is applicable only in cases of simple purchases and sale which indicates magnitude of the capital in a case. In the cases of contractors, payments are not received by a contractor simply on the basis of, single transaction. The assessee might have been working for a number of months and then bill is passed and payment is received by the assessee. May be in respect of one job or more than jobs completed by the assessee. Secondly, it is possible that assessee might have purchased goods on credit basis. Thirdly, the ITO has assumed that entire securities at Rs.4,40,096 were deducted from the capital in the very beginning of the year which assumption is not correct. The ITO has not examined on what dates these securities were deducted. Secondly, in some cases of contradiction concerned Government Departments also supply some material on credit basis to the Contractors and also provide mobilization advances. These elements were not considered by the ITO while completing the assessment and making the addition under section 13(1)(aa).

14. As far as the evidence for concealment is concerned, from the above facts it is quite evident that the ITO did not have any definite evidence regarding concealment. He issued notice under section 13(2) to the assessee to explain the capital and then assumed wrongly that the assessee did not have sufficient capital. In this regard, we are strengthened by the view expressed by the ITAT in a case reported as 1988 PTD (Trib.) 987. We reproduce with advantage the views expressed by our learned brother, in the above case:---

"Any return which is to be taken out of scope or denied facility of SAS or set apart for normal assessment has to be under exceptional circumstances and after careful examination of all aspects strict criterion has been prescribed, positive evidence is something more than information and something very near to establishing concealment."

In the above proceedings the same issues were under consideration as we are presently seized with.

14. Because of these reasons, we are of the view that the Income Tax Return filed by the assessee in this case qualifies for SAS and ITO had no evidence of concealment with him so as to justify setting a part this case for assessment under normal law.

15. Since we have decided appeal on the main issues we need not discuss' the other points raised by the assessee in his grounds of appeal.

M.BA./78/T Appeal allowed.