1996 P T D (Trib.) 1069
[Income-tax Appellate Tribunal Pakistan]
Present: Muhammad Mujibullah H. Siddiqui, Chairman and S.M. Sibtain,
Accountant Member
I.T.A. No.941/KB of 1995-96, decided on 18/04/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
-----S. 129---Appeal to Appellate Assistant Commissioner---Appeal under S.129, Income Tax Ordinance, 1979 against an assessment order can be preferred by an assessee only---No first appeal can be filed at the instance of department.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Powers of revision by Inspecting Assistant Commissioner---Scope Ad extent---Jurisdiction under S.66-A, Income Tax Ordinance, 1979 is vested exclusively in I.A.C. and, therefore, an Assessing Officer after completing the assessment becomes functus officio, of course, subject to the provisions contained for rectification and re-opening of assessment and on fulfilment of conditions provided in the relevant law--- Issuance of notice under S.66-A, Income tax Ordinance, 1979 by Assessing Officer, therefore, was in excess of jurisdiction and without any authority vested in him---Issuance of such notice by Assessing Officer, however, will not vitiate proceedings initiated by the I.A.C.
The power of revisions vested in I.A.C. under section 66-A is much limited in scope as compared to the first appeal before A.A.C. provided under section 129 of the Income Tax Ordinance, 1979. However, Legislature felt that some mechanism is to be evolved to protect the interest of Revenue in the cases of erroneous orders being prejudicial to the interest of revenue made by the Assessing Officers, the possibility whereof was always there and, therefore, in the repealed Income-tax Act, 1922, section 34-A was inserted by Finance Act, 1959 and a similar provision was inserted in Income Tax Ordinance, 1979 by Finance Ordinance, 1980. There is no restriction placed in section 66-A that the jurisdiction shall not be exercised at the instance of Assessing Officer or the Assessing Officer could not bring such cases to the notice of I.A.C. for exercising the power of revision under section 66-A. An I.A.C. can exercise power vested under section 66-A on his own motion or at the instance of Assessing Officer. However, before exercising jurisdiction under section 66-A, the I.A.C. is required to call for and examine the record of any proceedings under the Income Tax Ordinance, apply his own mind to the facts and proceedings and thereafter consider if any order passed in the said proceedings by the Deputy Commissioner is erroneous, causing prejudice to the interest of revenue and before coming to the final conclusion he shall give assessee an opportunity of being heard and shall also make such enquiries as deemed necessary before making such order as the circumstances of the case justify. The jurisdiction under section 66-A is vested exclusively in an I.A.C. and, therefore, an Assessing Officer after completing the assessment becomes functus officio, of course, subject to the provisions contained for rectification and reopening of assessments and on fulfillment of conditions provided in the relevant provisions. He has no authority to issue any notice under section 66-A.
In the present case the Assessing Officer had issued a notice under section 66-A to the assessee, which was in excess of jurisdiction and without any authority vesting in the Deputy Commissioner, Income-tax. It is an established principle of law that any proceedings in law can be initiated by an authority empowered in this behalf and normally having jurisdiction to proceed with the matter and take it to its logical conclusion. An Assessing Officer cannot exercise a power of revision and, therefore, no notice can be issued by him calling upon an assessee to show cause as to why a revision proceeding may not be initiated. This is an undesirable practice as it is not in consonance with the law. Higher authorities in the administrative hierarchy of the Income-tax Department are expected to take note of it and issue necessary instructions that no such notice may be issued by the Assessing Officer. While disapproving the issuance of notice under section 66-A by the Assessing Officer, Income-tax Appellate Tribunal observed that merely because a subordinate official has committed an act not warranted in law it shall not vitiate the proceedings initiated by the revisional authority vested with jurisdiction and acting in accordance with the law. Although the Assessing Officer should not issue any notice under section 66-A but if any such notice is issued by the Assessing Officer as in the present case it is to be just ignored taking the same as nullity in law and it shall not have the effect of vitiating the proceedings initiated by the revisional authority in accordance with the law. Because of issuance of show-cause notice by the Assessing Officer the proceedings initiated by the I.A.C. under section 66-A did not stand vitiated.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Revision by Inspecting Assistant Commissioner---Assessing Officer had fully considered the issue, appreciated the relevant facts and thereafter allowed the financial expenses claimed by the assessee---Record full proved that assessment order was not prejudicial to the interest of revenue-Held, in circumstances it was not proper for Inspecting Assistant Commissioner to observe that the assessment order was erroneous---Assessment order being neither erroneous nor prejudicial to the interest of revenue, initiation of proceedings under S.66-A, Income Tax Ordinance, 1979 was not sustainable in law and thus was ordered to be quashed by Income Tax Appellate Tribunal.
Abdul Qadir Memon, I.T.P. for Appellant.
Shaheen Aziz Niazi, D.R for Respondent.
Date of hearing: 6th February, 1996.
ORDER
This appeal is directed against the order under section 66-A, dated 28-9-1995 by the learned I.A.C. of Income-tax, Range-1, Cos. I, Karachi.
2. Briefly stated the relevant facts are that the appellant is a private limited company deriving income from manufacture and sale of Cotton yarn. The assessment for the assessment year 1993-94 was completed by the assessing officer under section 62 on 4-8-1994 on total income of Rs.31,91,507. During the assessment proceeding the Assessing Officer had issued notice under section 61 on 28-4-1994 and had inter alia made query in respect of investment in Special Saving Certificates etc. para. 25 of the said notice reads as follows:---
"You have shown investment in Special Saving Certificates, Defence Saving Certificates, Foreign Exchange Bearer Certificates and U.S. Dollar Bearer Certificates and also advanced money to sister concerns. The amounts have been given from banks accounts which have funds from loan facilities, I, therefore, intend to disallow certain portion of bank interest, if you do not prove to my satisfaction that there were funds available other than bank loans. "
3. The appellant furnished explanation and thereafter assessment was completed and the claim on account of financial expenses were allowed. However, after completing assessment on 4-8-1996 the assessing officer had second thought and issued a show-cause notice, dated 13-2-1995 which reads as follows:--
Sub: Show-cause notice Assessment year 1993-94 perusal of assessment records shows that you have claimed financial expenses at Rs.79,80,137 being interest on loans. However, you have also shown investments in Special Saving Certificates, D.S.C., F.E.B.C., U.S. Dollars at Rs.12,150,000 out of borrowing. Since the investment is made in source where income is exempt under the schemes, and investment is made out of borrowed funds, proportionate disallowance out of financial expenses claimed at Rs.79,80,137 ought to have been made.
You are, therefore; requested to please explain as to why the provisions of section 66-A may not be invoked through the I.A.C.
Please file objection if any by 24-2-1995. Please note in case of failure adverse inference would be drawn."
4. The appellant submitted explanation, dated 6-4-1995 and invited attention of the assessing officer to the balance-sheet which showed that the paid up capital was increased from Rs.15,00,000 to Rs.1,50,00,000 and share application money was received from shareholders against share allotment at Rs.1,21,50;000 while the total investments were to the tune of Rs.1,21,50,000 only. It was further asserted that the proposed action amounted to change of opinion, which is not permitted in law. However, it appears that the D.C.I.T. was not satisfied with the explanation, dated 6th of April, 1995 and therefore, he moved the learned I.A.C. to invoke the jurisdiction under section 66-A of the Income Tax Ordinance 1979, who issued the show-cause notice on 12-6-1995 which reads as follows:---
"Subject: Show-cause notice for action under section 66-A Assessment year 1993-94. Reference above. The assessment in your case for the Assessment year 1993-94 was originally completed under section 62 at total income of Rs.1,364,233 vide order, dated 4-8-1994. On perusal of the assessment order and the assessment records it was revealed that the company had claimed financial expenses of Rs.79,80,137 on account of mark up/interest etc. on short term long term financials. While completing the assessment the assessing officer allowed the entire claim without appreciating that the company had also made the following investment from the available borrowed funds which were exempt from income tax.
| Special Saving Certificates | Rs.88,42,500 |
| Defence Saving Certificates | Rs.21,31,900 |
| F.E.B.Cs. | Rs.8,22,600 |
| US Bearer Certificates | Rs.3,53,000 |
| Total | Rs.1,21,50,000 |
The proper course for the assessing officer was to proportionately 'disallow the financial expenses claimed at Rs.79,80,137 as the borrowed funds had been partly invested in tax exempt certificates---
In the light of above facts, I consider that assessment framed for the Assessment year 1993-94 is erroneous in so far as it is prejudicial to the interest of revenue. I, therefore, intend to take remedial action under the powers and functions provided by section 66-A of the Income Tax Ordinance, 1979, if you have anything to say in defense you are afforded an opportunity to appear before the undersigned through your A.R on 25-6-1995. You may also bring any supporting evidence/documents which shall be considered before arranging at any conclusions."
5. The appellant submitted explanation on 10-7-1995, which reads. as rider:--"Your honour intends to invoke the provisions of section 66-A on the plea that financial expenses claimed at Rs.79,80,137 being interest on loan invested in Special Saving Certificates, D.S.C., F.E.B.C. and in U.S. Dollars at Rs.12,150,000. Also stated that investment is made out of borrowing where income is exempt under the schemes, therefore, proportionate interest is to be disallowed. It is submitted that your attention is drawn towards balance sheet for the Assessment year 1993-94 which shows the following sources:--
| | 1993-94 | 1992-93 |
| Paid up Capital | 15,000,000 | 1,500,000 |
| Share application | 12,150,000 | |
| | | |
LOAN
| Obligation/loan under Finances loans | 29,787,707 |
| | |
| Short term loan Long term loan | 32,898,140 |
whereas the investment was made in the following:--
| D.S.C. | Rs.21,31,900 |
| S. S. C. | Rs. 88,42,500 |
| F.E.B.C | Rs. 8,22,600 |
| US Dollars | Rs. 3,53,000 |
| | Rs.1,21,50,000 |
Your honour will see from the above that we have increased the share capital by 13,500,000 from the share-sholders.
The break up of utilization of funds are as under:--
SOURCES OF FUND:
| Increased in paid up capital. | Rs.13,500,000 |
| Share application. | Rs.12,150,000 |
| Short term loan. | Rs.32,898,140 |
| Under finance lease. | Rs.29,787,707 |
| | Rs.88,335,847 |
UTILIZATION;
| DSC, SSC, FEBC and US $ | Rs.12,150,000 |
| Work in progress. | Rs.63,634,010 |
| | Rs.75,784,010 |
From the above your honour will see that we have sufficient funds investment in D.S.C., S.S.C., F.E.B.C. and U.S. Dollars and all the funds are invested out of share application money and not a single paisa out of borrowing has been utilized towards it.
It is further submitted that all the loans have been utilised towards establishment of factory and in Plant & Machinery. This fact is confirmed from the balance sheet.
It is further submitted that at the time of assessment all the relevant documents details and sources were filed. Therefore, any action would now tantamount to change of opinion which is not permitted in law."
On receiving the above explanation the learned I.A.C. again asked the appellant vide letter, dated 12-9-1995 to produce the copy of cash book containing entries in question and copies of ledger account for verification of the contentions. The cash book and ledger were not produced as required and therefore, the learned I.A.C. cancelled the assessment on the issue of allowance of financial expenses only and directed the assessing officer to examine the allowability of these expenses specially taking into consideration the material dates on which money was borrowed and the dates on which the investment of Rs.1,21,50,000 was made.
Being aggrieved with the above direction the appellant has preferred this second appeal before us contending that the learned I.A.C. was not justified in invoking jurisdiction under section 66-A because the assessment order was neither erroneous nor prejudicial to the interest of revenue. It is further contended that the assessment order has been cancelled without any concrete material or evidence on record and that the impugned order of the learned IAC is against the facts and law both.
8. We have heard Mr. Abdul Qadir Memon, learned counsel for the appellant and Mr. Shaheen Aziz Niazi, learned representative for the department. During the course of arguments Mr. Abdul Qadir has further submitted that the learned I.A.C. has not applied his own mind to the facts of the case but has initiated proceedings under section 66-A on the initiative of Deputy Commissioner of Income-tax who had no authority to issue any show cause notice with the intention of invoking provision contained in section 66-A of the Income Tax Ordinance, 1979. He has contended that after the completion of assessment order and without receiving any fresh information justifying the reopening of assessment the assessing officer became functus officio and had no jurisdiction to reconsider the same set of facts which have already been considered at length and had no authority to issue a show-cause notice as to why the provisions of section 66-A may not be invoked through the I.A.C. He has submitted that when the very initiation of proceedings under section 66-A is without jurisdiction and in contravention of the provisions contained in section 66-A the entire proceedings stand vitiated. Mr. Abdul Qadir Memon has maintained that his objection on the point of law is in addition to the contention that even on facts the learned I.A.C has not appreciated the issue correctly. On the other hand, the learned D.R has supported the impugned order by the learned I.A.C.
9. We have carefully considered the contentions raised by the learned representatives for the parties and the material available on record. Our findings are as under. We are not persuaded to agree with the contention of Mr. Abdul Qadir, learned counsel for the appellant that the learned I.A.C could not invoke jurisdiction vested in him under section 66-A at the instance of assessing officer. The reason being that an appeal under section 129 of the Income Tax Ordinance. 1979 against an assessment order can be preferred by an assessee only. There is no provision for filing any first appeal at the instance of department. At the same time there is always a possibility that an assessment order may be an erroneous order prejudicial to the interest of revenue causing grievance to the department I in the same manner as giving cause of grievance to an assessee. At this juncture I would like to clarify that the power of revisions vested in I.A.C under section 66-A is much limited in scope as compared to the first appeal before A.A.C. provided under section 129 of the Income Tax Ordinance 1979. However, legislature felt that some mechanism is to be evolved to protect to interest of revenue in the cases of erroneous orders being prejudicial to the interest of revenue made by the assessing officers, the possibility whereof was always there and, therefore, in the repealed Income-tax Act, 1922 section 34-A was inserted by Finance Act. 1959 and a similar provision was inserted in Income-tax Ordinance. 1979 by Finance Ordinance, 1980. There is no restriction placed in section 66-A that the jurisdiction shall not be exercised at the instance of assessing officer or the Assessing Officer could not bring such cases to the notice of I.A.C for exercising the power of revision under section 66-A. We, are, therefore, of the considered opinion that an I.A.C can exercise power vested under section 66-A on his own motion or at the instance of Assessing Officer. However, we are persuaded to agree with the submission of Mr. Abdul Qadir Memon that before exercising jurisdiction under section 66-A the I.A.C. is required to call for and examine the record of any proceedings under the Income-tax Ordinance, apply his own mind to the facts and proceedings and shall thereafter consider if any order passed in the said proceedings by the Deputy Commissioner is erroneous causing prejudice to the interest of revenue and before coming to the final conclusion he shall give assessee an opportunity of being heard and shall make such enquiries as well, as deemed necessary before making such order as the circumstances of the case justify. We further find substance in the contention of Mr. Abdul Qadir that the jurisdiction under section 66-A is vested exclusively in an I.A.C and, therefore, an assessing officer after completing the assessment order becomes a functus officio, of course subject to the provisions contained for rectification and reopening of assessments and on fulfillment of conditions provided in, the relevant provisions., He has no authority to issue any notice under section 66-A. In the present case we find that the assessing officer has issued a notice under section 66-A to the appellant, which is in excess of jurisdiction and without any authority vested in the Deputy Commissioner, Income-tax. It is an established principle of law that any proceedings in law can be initiated by an authority empowered in this behalf and normally having jurisdiction to proceed with the matter and take it to its logical conclusion. It is admitted position that assessing officer cannot exercise a power of revision and, therefore, no notice can be issued by him calling upon an assessee to show cause as to why a revision proceeding may not be initiated. This is an undesirable practice which has been f brought to our notice and we disapprove it as it is not in consonance with the law. It is expected that the higher authorities in the administrative hierarchy of the income-tax department shall take note of it and issue necessary instructions that no such notices may be issued by the assessing officers. While disapproving the issuance of notice under section 66-A by the assessing officer we are not prepared to go, to the extent that merely because a subordinate official has committed an act not warranted in law it shall vitiate the proceedings initiated by the revisional authority vested with jurisdiction and acting in accordance with the law. The upshot of the discussion is that although the assessing officer should not issue any notice under section 66-A but if any such notice is issued by the assessing officer as in the present case it is to be just ignored taking the same as nullity in law and it shall not have the effect of vitiating the proceedings initiated by the revisional authority in accordance with the law. We, therefore, repel the contention that because of issuance of show cause notice by the assessing officer the proceedings initiated by the I.A.C. under section 66-A stood vitiated.
10. This brings us to the contention that the learned I.A.C has not applied his own mind to the facts and material available on record and has not examined the record in its right perspective and has failed to consider that the assessment order was neither erroneous nor it was prejudicial to the interest of revenue. Mr. Abdul Qadir has drawn our attention to the show-cause notice issued by the learned I.A.C. under section 66-A which contained that. "while completing the assessment the assessing officer allowed the entire claim without appreciating that the company had also made the following investment from the available borrowed funds which are exempt from, income-tax. The proper course for the assessing officer was to proportionately disallow the financial expenses claimed at Rs.79,80,137 as the borrowed funds had been partly invested in tax exempt certificates".
11. Mr. Abdul Qadir Memon has vehemently argued that the above averment in show-cause notice clearly indicates that the learned I.A.C has not examined the record properly otherwise he' would have noticed the notice under section 61, dated 28-4-1994 in which a specific query was made in respect of investment in Special Saving Certificates etc. Para. 25 of the said notice under section 61 has already been reproduced by us in para. 2 of this order and, therefore, we need not to repeat the same. Mr. Abdul Qadir has contended that the assessing officer before completing the assessment considered this very fact and made specific query as to why the proportionate bank interest may not be disallowed if it was not proved to his satisfaction that there were funds available other than bank loans. In response to the above query detailed explanation was furnished, which was available on record and after fully satisfying himself that the investment in the sources generating exempt income, was made from the funds other than bank loans the claim on account of bank interest was allowed. Thus, it is absolutely incorrect to allege that the assessing officer allowed the entire claim on account of bank interest without appreciating that the company had made investment from borrowed funds in the sources generating exempt income. Mr. Abdul Qadir has maintained that the issue relating to proportionate disallowances was fully examined in detail by the assessing officer and as such the observation by the learned I.A.C that the assessment order is erroneous in this behalf is the result of non=examination of facts available on record and non application of mind to the material already available on record and this shows that the learned I.A.C formed erroneous view and it may be result of acting on the advice/initiation of assessing officer without application of mind to the material available on record by I.A.C himself. On perusal of entire record we find substance in the contention of Mr. Adbul Qadir that the Assessing Officer fully considered the issue appreciated the relevant facts and thereafter allowed the financial expenses claimed by the appellant and as such- it is not proper to say that the assessment order was erroneous as observed by the learned I.A.C.
12. Mr. Abdul Qadir Memon has next proceeded to argue that in addition to the fact that the order is not erroneous and on this very count the order under section 66-A is liable to be quashed as by now it is established proposition of law that for the purpose of invoking provision under section 66-A both the conditions, i.e., of an order being erroneous in nature and prejudicial to the interest of revenue should be satisfied. Mr. Abdul Qadir Memon has contended that it was fully proved before the assessing officer as well as learned I.A.C that the investment in the sources generating exempt income was not made from the bank borrowings but out of funds generated by increasing the share capital and by increasing the paid up capital. Mr. Abdul Qadir has submitted that in the original assessment proceedings entire record was shown to the assessing officer. He has further shown with the assistance of necessary record during the course of arguments before us that by allotment of 135,000 shares of Rs.100 each a fund of Rs.1,35,00,000 was generated in August, 1992 and investment in the sources generating exempt income was made in. September, 1992. On perusal of .R. has conceded to this fact. Thus, on perusal of fact we record the learned D .R. that when the assessing officer originally allowed the entire financial expenses in the assessment order he did so after appreciating the entire facts and the perusal of facts clearly proves that the act was not prejudicial to the interest of revenue because no investment in the sources generating exempt income was made from the bank borrowings. The assessing officer in his subsequent notice under section 66-A (which has been held by us to be without jurisdiction) unnecessarily and without any material in his possession disputed a settled issue and at his instance the learned I.A.C without applying his mind to the entire facts available on record and without any material or evidence in his possession initiated revision proceedings under section 66-A.
13. For the foregoing reasons it is held that the assessment order was neither erroneous nor prejudicial to the interest of revenue and, therefore, the initiation of proceedings under section 66-A by the learned LA.C is not sustainable in law and fact and is hereby quashed. The original assessment order stands restored.
14. The appeal is allowed as above.
M.B.A./219/Trib.Appeal allowed.