I.T.AS. NOS.65(IB) TO 68(IB) OF 1992-93, DECIDED ON 16TH MAY, 1995. VS I.T.AS. NOS.65(IB) TO 68(IB) OF 1992-93, DECIDED ON 16TH MAY, 1995.
1996 P T D (Trib.) 25
[Income-tax Appellate Tribunal Pakistan]
Present: Junejo M. Iqbal, Accountant Member and Rasheed Ahmad Sheikh, Judicial Member
I.T.As. Nos.65(IB) to 68(IB) of 1992-93, decided on 16/05/1995.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.156---Rectification of mistake---Scope.
The scope of rectification order would extend to the cases where there is a patent mistake both of law and fact staring a person in the face requiring no further investigation or enquiry. Therefore, the I.T.O. while rectifying the mistake or an error in the assessment or refund order under section 156 of the Income Tax Ordinance need not confine himself to the consideration of only those errors which are apparent on the face of the order but also he could refer to the record of proceedings of assessments or refund order to discover an error which is noticed by him or which is pointed out to him by the assessee. An error in the assessment resulting from the failure to apply indisputable state of law could be corrected by I.T.O. under section 156 of the Ordinance provided an error was apparent from the record of the assessment.
C.B.R. v. SITE PLD 1985 SC 97; T. S. Bala Ram v. Volkart (1981) 82 ITR 50 and Additional Commissioner of Income Tax, Delhi v. Motors and General Finance Ltd. (1983) 142 ITR 424 ref.
C.I.T. Karachi v. Adam Limited Karachi PLD 1969 Kar. 300; Khalid `Adamji's case (1983) 48 Tax 56 (H.C. Kar.) and 1993 PTD (Trib.) 1100 distinguished.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.2 (16)---"Public company"---Definition---Determination of status of a company as public company---Essentials.
I.T.O. v. National Rubber Manufacturers (1975) 98 ITR 377 quoted.
(c) Income Tax Ordinance (XXXI of 1979)---
----S.156, First Sched., Part IV, para. B (2)---Rectification of mistake---Mistake apparent on face of record---Company---Status of company was treated as "public company"---Record showed that company's 51.75% shares were owned by another company which was registered under the Companies Ordinance, 1984 and the remaining shares were held by a non-resident company and its shares were not transacted on the stock exchange nor was it a trust ---Income tax Officer, however, accepted the status of said company as public company as declared in the return of income filed by assessee and calculated the tax liability accordingly but subsequently realised that assessee did not qualify as a public company for tax purposes as defined under para. B (2) of Part IV of the First Schedule to the Income Tax Ordinance, 1979 and issued notice under S.156 of -the Income Tax Ordinance, 1979 asking the assessee company to explain as to why a mistake which was apparent from the record should not be rectified ---Validity---Held, it was an omission on the part of I.T.O. to appreciate the facts available on record and when he realised the mistake, he rectified the same after giving to the assessee an opportunity of placing its point of view---Application of tax rate leviable on public company in term of First Sched., Part IV, para. B (2) of the Income Tax Ordinance, 1979, when it was not such a company, was definitely a mistake apparent, from the record, which was to be rectified under S.156 of the Ordinance---Income Tax Officer, therefore, was legally competent to have rectified the assessment under S.156 Income Tax Ordinance, 1979.
Muhammad Khan D.R. for Appellant.
Khalid Majeed, F.CA for Respondent.
ORDER
These are four departmental appeals relating to the assessment years 1983-84 to 1986-87 filed against a consolidated order passed by the learned C.I.T. (Appeals), Rawalpindi on 21-7-1991 in Income Tax Appeals Nos.247 to 250/1745-1748, whereby I.T.O.'s combined order under section 156 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance) for the years 1983-84 to 1985-86 was annulled while his finding with regard to change of status of the respondent company recorded under section 62/132/156 of the Ordinance for the year 1986-87 was cancelled.
Relevant facts leading to the present appeals are that the respondent company deriving income from the sale of dynamites and blasting material was assessed under section 59(1) of the Ordinance for the year s 1983-84 to 1986-87 in the status of a public company. This status was accepted by the I.T.O. as declared in the returns of income calculating the tax liability at 50% (income tax at 30% and super tax at 20%). Subsequently, it was realised that the respondent company did not qualify as a public company for tax purposes as defined under para B (2) of Part IV of the First Schedule to the Ordinance which reads as under:--
"(a) A company in which not less than fifty per cent of the shares are held by the Government;
(b) A company whose shares were the subject of dealings in a registered stock exchange in Pakistan at any time during the income year and remained listed on the stock exchange till the close of that year; or
(c) A trust formed by or under any law for the time being in force;"
As 51.75% shares were owned by the Wah Industries Limited which is a company registered under the Companies Ordinance, 1984 and the remaining shares were held by M/s. Nobel Nami AB Sweden, a non-resident company and its shares were not transacted on the stock exchange nor was it a trust the I.T.O. issued a show-cause notice under section 156 of the Ordinance asking the respondent company to explain as to why mistake which was apparent from the record should not be rectified and the tax rate at 55% be applied. In response to the said notice, the respondent company replied vide letter dated 16-2-1988, the relevant portion whereof reads as under:--
"Wah Industries Limited which holds 51% shares in the assessee company is wholly owned by Pakistan Ordnance Factories Board. Majority of the directors on the Board of Director of the assessee company are also nominees of Pakistan Ordnance Factories Board; therefore, the Government through Pakistan Ordnance Factories Board holds 51% of shares in the assessee company.
`In treating the assessee company, as a public company in the various assessments finalized by them in the past you predecessors were guided by the concept of lifting the veil as held by the Supreme Court in Reference No.3 of 1970 PLD SC 585, pp. 616/617.
`Any rectification as proposed will amount to change of opinion because ever since the company was incorporated, there has been no change in the facts of the case on the issue now raised while assessment have been framed being mindful of the provisions of the Income Tax Ordinance, 1979,"
The respondent company further elaborated their point of view through a separate letter bearing No.5598 dated 23-2-1988 relying on a judgment of the Supreme Court of Pakistan in the case of CBR v. SITE reported as PLD 1985 SC 97. the relevant portion whereof may be quoted for ready reference as under:--
"The respondent company was carrying on the functions of Industrial Development and the trade and business connected therewith for and on behalf of the Government. The truth is that the lifting of veil has revealed that for the relevant purposes in this case it was doing so just like a department which as explained earlier will not make any difference regarding the relevant constitutional provision on exemption from Federal Taxation."
It was contended that although the effects of the judgment of Supreme Court of Pakistan were nullified by the Constitution (Amendment) Order, 1985 and no corporation owned directly or indirectly by a Provincial Government or the Federal Government was exempt from the tax regardless of the destination of its income the first part of the judgment whereby the SITE had been held to be Department of the Provincial Government was not disturbed. It was, therefore, contended that the Wah Industries Limited which was wholly owned by the Pakistan Ordnance Factories Board was a Department of the Federal Government. It was also contended by the respondent company that a mistake apparent from the record must be an obvious and patent mistake and a decision on the point of law, could not be a mistake apparent from record. In this context, the respondent company also quoted a decision of the Supreme Court of India in the case of T. S. Bala Ram v. Volkart reported as (1981) 82 ITR 50 as also of the Bombay High Court in the case of Alloo Investment Company Private Limited.
The I.T.O. after considering the reply of the respondent company, rejected this contention in the following words:--
"Regarding the assessee's objection to the applicability of the provisions of section 156 in this case, it is obvious from the foregoing discussion that the application of tax rate applicable to a public company when the assessee was not a public company within the meaning of para. B(2), of Part IV of the First Schedule to the Income Tax Ordinance, 1979 was definitely a mistake apparent from the record which was to be rectified under section 156. The cases as referred by the assessee in his reply are clearly distinguishable from its own cases. The case of T.S., Bala Ram v. Volkart Brothers as referred to by the assessee is obviously not relevant in the instant case. In the said case, the I.T.O. had assessed the firm which was duly registered in India in accordance with tax rates applicable to resident and had taxed the non-resident partners as per the rates applicable to the non-residents. The question whether the rates applicable to non residents could be applicable to the case of a registered firm which was duly registered in India merely because its partners were not residents was a debatable issue and the Supreme Court of India rightly held that it was not a mistake apparent from record. In the instant case, there can be no two opinions that the majority shares of the assessee company are not held by the Government and, therefore, action under section 156 is quite valid.
"Similarly, in the case of Alloo Investment, the point was that under section 23-A of the Indian Income Tax Act, Super tax @ 50% of undistributed profits was leviable in the case of a company whose business consisted of investment in shares, house property, loan and advances and deposit and @ 37% in the case of any other company. In the original order, the I.T.O. had applied the rate of 37% apparently for the reason that the business of the assessee company did not consist of holding investment etc. Subsequently, his successor tried to revise the findings and to hold that the business did consist of dealings in certain assets of the company were investments for the purpose of said provisions. The Bombay High Court rightly held that there was no mistake apparent from record in the case. This case is again clearly distinguishable from the case of the assessee company. There is no doubt whatsoever that the shares of the company were not held by the Government but were held by Wah Industries Limited, a company registered under the Companies Act, 1913. There is no controversy with regard to this fact. There is also no controversy regarding the rates applicable to companies as per the First Schedule to the Income Tax Ordinance, 1979. The analogy drawn from the assessee with the case of Alloo Investment company is, therefore quite misplaced."
A combined order under section 156 of the Ordinance in respect of charge years 1983-84 to 1985-86 was therefore passed on 25-2-1988 changing the status of the respondent company from a public company to a private limited company and the tax demand was recalculated at 55% after withdrawing the tax rebate of 5%.
The same treatment was accorded in respect of the charge year 1986-87 where the status of a private limited company was accorded through a separate order.
The matter was agitated in appeal before the CIT (Appeals) who after a lengthy discussion and relying on various decisions of Indian jurisdiction, came to the conclusion that there was no mistake apparent from the record as such and the issue of change of status required investigation and was a debatable issue. Therefore, the I.T.O. had acted beyond his jurisdiction. All the four orders were annulled vide order, dated 28-2-1989.
Feeling aggrieved, the Department contested the decision of the lower appellate authority in further appeal before the Tribunal. This Tribunal noticed that two distinct orders one relating to the rectification for the charge years 1983-84 to 1985-86 and the other in respect of the assessment year 1986-87, were passed by the assessing officer. Therefore, the CTT (Appeals)'s order dated 28-2-1989 annulling the rectification orders for the four years was not justified. The case was remitted back to him for a decision after appreciation of facts relevant to the first three years and the fourth appeal separately dealt with.
The learned CIT (Appeals) vide his consolidated order dated 21-7-1991 after examining the record, came to the conclusion that the I.T.O: s order under section 156 for all the years 1983-84 to 1985-86 and 1986-87 was legally not sustainable as the issue of change of status involved further enquiry and was a debatable issue. Therefore, section 156 was not attracted as it was not a case of rectification of a mistake apparent from the record but was a case of application of section 65 of the Ordinance. He, therefore, annulled the orders under section 156 for the first three years and cancelled the order under section 156 relating to the year 1986-87.
Four miscellaneous applications were moved by the assessee requesting the Tribunal that its earlier order dated 6-2-1991 may be recalled and mistakes be rectified since the department had presumably not filed the appeals against the combined order dated 21-7-1991 passed by the learned CIT (Appeals) whereby, findings of his predecessor were endorsed. These applications were rejected by the Tribunal vide order dated 11-8-1992.
The assessee then filed four reference applications under section 136(1) of the Ordinance for the respective years on the same facts as mentioned in the miscellaneous applications which were not pressed on' the ground that the grievance of the assessee had been removed and the issue had been settled.
It appears the assessee had been labouring under the misconception that the Department had given up the idea of filing any second appeals against the CIT (Appeals)'s order dated 21-7-1991.
Mr. Muhammad Khan, represented the Department and submitted that the assessee company had made a wrong claim about its status as a public company. The fact of the matter was that Wah Industries Ltd. owned 51.75% shares of the respondent company, `and Pakistan Ordnance Factories Board held 100% shares of Wah Industries Ltd. which was being assessed to tax all along. There was, therefore, no question of the respondent company being a public company as Wah Industries Ltd. was not a Government department. This position remained a part of the assessment record and the I.T.O. realised his mistake, which was so apparent. He, therefore, issued a show-cause notice on 2-2-1988 to the respondent company as required under section 156 of the Ordinance, asking it as to why its correct status as a private limited company should not be adopted. After considering a reply, dated 16-2-1988, followed by an other reply, dated 23-2-1988, the I.T.O. rectified the mistakes floating on the face of the record. This did not require any enquiry or investigation in the matter. The action of the I.T.O. was, therefore, fully justified and within the four corners of law.
Responding to the arguments of the learned D.R. the learned A.R. submitted that under the facts and circumstances of this case, section 156 was not attracted at all, as investigation was required as to whether the respondent company was a public company within the meaning of para. B (2) of Part IV of the First Schedule to the Ordinance or it was a private limited company. This was no doubt a debatable issue. Section 65 of the Ordinance had to be pressed into service as the company was assessed at the rate of 50% as a public company instead of 55% applicable in the case of private limited company. In this regard, he placed reliance on s decision of Sindh High Court in the case of CIT, Karachi v. Adam Limited Karachi reported as PLD 1969 Kar. 308, wherein it was held that the I:T.O.'s order in rectifying his earlier order for excluding the value of land from the value of building which stood on it for purposes of allowing depreciation when there was nothing on record to show that the land had independent value was not valid in law.
He further cited a case of Khalid Adamji reported as (1983) 48 Tax 56 (H.C. Kar.) where the scope of section 35 of the Repealed Income-tax Act, 1922 which corresponds to section 156 of the Ordinance came up for consideration: While making an assessment the I.T.O. wished to treat dividends received from Tax Holiday Companies as the income of the assessee. It was held that this would not be done under section 35 of the Act as it required further enquiry to ascertain the relevant facts.
The learned A.R. also placed reliance on a decision of Delhi High Court in the case of Additional Commissioner of Income Tax, Delhi v. Motors and General Finance Ltd. reported as (1983) 142 ITR 424, wherein it was held that the I.T.O., could not rectify the status in an order under section. 154 because that needs enquiry and arguments as to whether public we re or were not substantially interested. Any such change of status on a debatable point of fact, which remained to be investigated, could not be corrected by way of an order under section 154 of the Ordinance. Therefore, the I.T.O. could not rectify the mistake by describing the status of the assessee as a "public limited company in which the public was not substantially interested.
The scope of rectification order has been examined by the Superior Courts of Pakistan and Indian jurisdiction and have held synonymous views that the scope of rectification order would extend to the cases where there is a patent mistake staring into the eye both of fact and law requiring no further investigation or enquiry. Therefore, the I.T.O. while rectifying the mistake or an error in the assessment or refund order under section 156 of the Ordinance, need not confine himself to the consideration of only those errors which are apparent on the face of the order but also he could refer to the record of proceedings of assessments or refund order to discover an error which is noticed by him or which is pointed out to him by the assessee. An error in the assessment resulting from the failure to apply indisputable state of law could be corrected by I.T.O. under section 156 of the Ordinance provided an error was apparent from the record of the assessment.
Justice Saeeduzzaman Siddiqui speaking for the Sindh High Court in the case of Khalid Adamji ibid observed as under:--
"We are in respectful agreement with the view taken by the Indian Supreme Court on the scope of power of Income-tax Officer under section 35 of the Indian Income-tax Act which is identical to section 35 of our Act and accordingly hold that while rectifying a mistake or an error in the assessment or an order of refund, the Income-tax Officer need not confine itself only to the errors which are pointed out in the order but such errors as are pointed out from the proceeding and record of assessment or refund or as the case may be, may also be taken into consideration for correcting or rectifying the assessment or the refund order. We are, therefore, of the view that an error in the assessment order resulting from failure to apply the indisputable state of law could be corrected by the I.T.O. under section 35 of the Act provided the mistake or error is apparent from the record of assessment proceedings. It, therefore, follows that if the I.T.O. failed to give effect to a provision of law as interpreted by the High Court or the Supreme Court at the time of making of assessment or refund order and such mistake is discoverable from the record and proceeding of assessment of refund order then such error could also be corrected by the I.T.O. under section 35 of the Act."
The case of the learned CIT, Karachi v. Adam Limited Karachi relied upon by the learned AR, is distinguishable inasmuch as in that-case, the value of land had to be determined which needed an enquiry whereas, in the instant case, all the facts with regard to the correct status were on record, but escaped the attention of the I.T.O.. Similarly, the case of Khalid Adamji is of no assistance to the respondent company as it very clearly lays down that the scope of powers of an I.T.O. under section 35 of the Income-tax Act is much wider than the powers of a Civil Court under Order XLVII, Rule 1, C.P.C., and that the I.T.O. need not confine himself only to the errors which are pointed out in the order, but also such errors which form a part of the proceedings of assessment or refund order. Besides, the facts were different in that case as the income from dividends received out of Tax-Holiday Companies was not separately shown in the returns of income, neither was any exemption claimed by the assessee. The High Court and the Tribunal held that it was not a case for rectification as further enquiry was required.
Coming to the next case relied upon by the learned A.R. namely that of Additional Commissioner of Income Tax Delhi v. Motors and General Finance Ltd. ibid, this also does not bail out the assessee as the facts were distinguishable. In that case, the question with regard to correct status required a further probe as to whether, it was a company in which the public were substantially interested within the meaning of section 23-A of the Income-tax Act (since repealed and no corresponding provision exists in the Ordinance).
Applying the above yardsticks to the facts of this case, there are two broad questions, the answers to which, would clinch the issue:--
(1) Whether Wah Industries Ltd. holding 51.75% shares in the respondent company was a Government Department or it was an organization managed on commercial considerations and subjected to tax on its commercial activities; and
(2) Whether all the facts were available on record or any debatable issue was involved calling for further investigation to ascertain the relevant facts in this case.
As far as the first question is concerned, it has already been answered by this Tribunal while dealing with the issue of its correct status in ITA No.250(IB) of 1989-90, decided on 14-9-1992 while disposing of the appeal forty the year 1987-88. The decision would obviously cover the earlier years, the facts having remained the same with regard to correct status of the company. It would be of advantage to reproduce the relevant extracts from that decision:--
"As stated earlier, a company is a public company if 50% or more of its shares are held by the Government. There is no dispute that the shares of the assessee company are not held by the Government as such but by an other company which admittedly is cent percent owned by the Government. The question is whether the expression `Government' used in the definition of the company includes a company owned by the Government. As stated earlier, the assessee asks us to read the expression `Government' in the definition as a pro company owned by the Government and in that context a reference is invited to the judgment of the Supreme Court and' of the Lahore High Court already noted. Neither the Supreme Court nor the High Court has held that a company owned by the Government shall for all purposes mean a Department of the Government owning such company. The holdings of the Supreme Court and of the Lahore High Court proceed on the basis of immunity granted under the Constitution to the Federation to be taxed by or under a Provincial law and to the provinces to be taxed by or under a Federal law. The basis of that holding is that since under the Constitution the income of a Province is exempt to be taxed by or under a Federal law the income of the Province shall remain exempt whether the Province earns that income through its executive limb or through an instrumentality incorporated in the form of a company or a corporation. The holding of the Supreme Court and for that purpose any jurisprudential rule does not lay down that a company owned by a government shall for all purposes be deemed to be a Government Department. The Supreme Court explained that "in a controversy like the present one the final decision would reset on the facts and circumstances of the case. "On facts, the Supreme Court found that the Government in that case was carrying on functions of- industrial development on behalf 'of the Provincial Government and the income of that company in fact was destined to be the income of the Province. In the case before us, it is no one's case that the assessee, company's income is the income of the Federation. If one accepts the proposition that a company cent per cent owned by the Federal Government is a Government Department as- contended by the assessee., the one has to accept that all the employees of such company are the Government servants, all the properties owned by that company are owned by the Government and all the contracts made by that company will be made only by the President as required by Article 173 of the Constitution of Pakistan. No one will be ready to contend or accept the above proposition. After going through the judgments of the Supreme Court and of the Lahore High Court and pe3using the jurisprudential principles, we are, of the view that the holding of the Supreme Court that a company or a Corporation owned by the Government shall be deemed to be a' Department of the Government was confined for the purposes of its immunity to tax granted by Article 165 of the Constitution. The broad contention that a company owned by the Government shall-be deemed to be the Government in all purposes including the definition of the company cannot be accepted. We would, therefore, hold that the assessee is not a public company within the meanings of its definition given in the Income Tax Ordinance, 1979.
Coming to the next question as to whether all the facts were available on record when the I.T.O. realised his mistake in not applying the correct state :of law on the facts available on record, it is not difficult to conclude, that all the relevant facts already existed in the record. As for instance, the fact that the Wah Industries Ltd. was not a Government Department, that the respondent company was not listed on the stock exchange, that it was not a trust. In fact, the whole edifice or superstructure on which the respondent company had built up its facade of a public company, crumbled to ground after the decision of this Tribunal with regard to the correct status of the respondent company. Indeed, these very facts were part and parcel of the record which agitated the mind of the I.T.O. before pronouncement of the Tribunal on 14.9.1992 when he passed rectification orders on 25.2.1988. The facts and the state of law reviewed unchanged during the period coveted by the appeals for all the four years. It was an omission on the part of the I.T.O. to appreciate the facts available on record. When he realised the mistake, he rectified the same after giving to the respondent company an opportunity of placing its point of view. Even if it be treated as an error of law, the pronouncements on the subject by the superior judiciary both in Pakistan and India, support the case of the Department for having invoked section 156 of the Ordinance to remedy the situation.
There is sufficient case-law in support of the departmental case. As far instance, Calcutta High Court supports the action of the I.T.O. in the case of I.T.O. v. National Rubber Manufacturer's, reported as (1975) 98 ITR 377. In that case, the I.T.O. treated the assessee company as one in which the public were substantially interested and allowed rebate of tax under para (d) of Part II of the First Schedule to the Finance Act, 1964. The list of shareholders filed before the I.T.O. showed that more than 500 shares were held by five groups of persons. In view of this, grant of rebate was treated as a mistake apparent on the face of record, which he sought to rectify by issuing notice under section 154 (corresponding to section 156 of the Ordinance). The assessee challenged the validity of the notice by a writ petition under Article 226 of the Indian Constitution. It was held that the notice was valid and the writ petition was dismissed.
Similarly, Gujrat High Court in the case of Chirmankhai K. Patel v. CWT (Guj.) reported as (1985) 156 ITR 373, held that the rebate granted under rule 3 of Part II of the First Schedule to the Wealth Tax Act to a person who is not an ordinary resident treating him as a non resident, is a rectifiable mistake and the rebate granted can be withdrawn.
Again, the Allahabad High Court in the case of A.H. Wheeler & Co. (P) Ltd. v. I.T.O. (All.) (1964) ITR 92 held that failure to reduce super tax rebate under the Finance Act, 1958 and 1959 in making assessment is a rectifiable mistake under section 34 of the Act.
From the foregoing discussion, it is clear that the application of tax rate leviable on a public company in terms of Para (B) 2 of Part IV of the First Schedule to the Ordinance, when it was not such a company, was a definite mistake apparent from the record, which was to be rectified under section 156 of the Ordinance. The I.T.O. was, therefore, legally competent to have rectified the assessments for the four years under appeal and the order of the first appellate authority annulling the rectification order for the years 1983-84 to 1985-86 and cancelling order for the year 1986-87 was not sustainable in law. We accordingly, restore the order of the assessing officer for all the four years under section 156 of the Ordinance and vacate that of the first appellate authority:
Consequently, the departmental appeal succeed for all the four years for the reasons recorded above.
M.BA./135/T
Order accordingly