I.T.AS. NOS. 762/IB, 763/IB OF 1992-93, 795/IB TO 797/IB OF 1994-95, DECIDED ON 15TH JANUARY, 1996. VS I.T.AS. NOS. 762/IB, 763/IB OF 1992-93, 795/IB TO 797/IB OF 1994-95, DECIDED ON 15TH JANUARY, 1996.
1996 P T D (Trib.) 492
[Income-tax Appellate Tribunal Pakistan]
Before Ch. Irshad Ahmad, Judicial Member and Junejo M. Iqbal, Accountant
Member
I.T.As. Nos. 762/IB, 763/IB of 1992-93, 795/IB to 797/IB of 1994-95, decided on 15/01/1996.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 80-C & 14---Tax on income of contractors and importers ---Exemption-- Payment received by an assessee on account of supply of goods shall be deemed to be his net income on which he shall pay tax at the rate of 3 percent. ---Federal Government, however, is empowered under S.14, Income Tax Ordinance, 1979 to exempt any person or class of persons from the operation of any provision of the Income Tax Ordinance, 1979---Federal Government by its Notification dated 24-8-1991, has provided that provision of S.80-C, Income Tax Ordinance, 1979, shall not apply in respect of any person, being a manufacturer of goods, who opts out of the presumptive tax regime and furnishes a declaration of final and irrevocable option in writing alongwith the return of total income under S.35, Income Tax Ordinance, 1979.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss: 66-A(1-A) & 80-C---Scope of powers of Inspecting Assistant Commissioner under S.66-A(1-A), Income Tax Ordinance, 1979 is determinable in the background to the "principle of merger" under which on appeal the I.T.O.'s order merges into the order of Appellate Authority---Power conferred on the Inspecting Assistant Commissioner by S.66-A(1-A), Income Tax Ordinance, 1979 is limited and qualified power, confined to the point or issue which has not been subject-matter of an appeal or reference---Inspecting Assistant Commissioner can give only such direction as will, be an independent of, and not inconsistent with or not in derogation of, any determination made by the Appellate Authority---Inspecting Assistant Commissioner, however, cannot give any direction which shall be repugnant to any determination made by the Appellate Authority---Test---Where the assessment had been made on the assessee on the basis of estimation of sales made or approved by the Appellate Authority, I.A.C.'s directions that fresh assessment shall be made on the assessee was beyond the scope of S.66-A, Income Tax Ordinance, 1979.
The scope of the IAC's power under subsection (1A) of section 66A of the Income Tax Ordinance is determinable in the background to the 'principle of merger' under which on appeal the ITO's order merges into the order of Appellate authority. Before the power was conferred on the IAC by subsection (IA) of section 66-A of the Ordinance to revise that part of ITO's order which had not been subject-matter of any appeal or reference the view was that once an order of the ITO has been subject-matter of appeal before the Appeal Commissioner/Tribunal the ITO's order ceases to exist and merges into the Appellate Authority's order and the IAC has no power to revise the order. The power conferred on the IAC by subsection (IA) of section 66-A of the Ordinance by the language to the statute itself is limited and qualified power. Clearly it is limited to the point or issue which has not been subject-matter of an appeal or reference. The object of conferring limited and qualified power on the IAC to revise the ITO's order which as upon appeal has merged into the order of the Appeal Commissioner or Tribunal is to preserve and to maintain the full effect of the determination made or approved by the Appeal Commissioner or Tribunal who within the hierarchical system of tax administration are at higher tier than the IAC. It is also in accord with well-established principle that in a hierarchical system of administration it is necessary for lower tier to defer to the opinion or determination of higher tiers. Thus in exercise of his power under subsection (IA) of section 66-A of the Ordinance the IAC may give only such direction as will be an independent of, not inconsistent with or not in derogation of, any determination made by the Appellate Authority. The IAC cannot give any direction which shall be repugnant to any determination made by an Appellate Authority. In cases raising the question whether any direction given by the I.A.C. cinder subsection (1-A) of section 66-A of the Ordinance is in any manner inconsistent with or repugnant to any determination made by an, Appellate Authority, the basic question that would seek answer is : whether or not full effect can be given or maintained in respect of any determination made or approved by an authority if the ITO's order is revised as directed by the IAC. If the answer is that full effect cannot be given or maintained in respect of any such determination after the ITO's order has been revised as directed by the IAC, his (IAC's) direction shall be plainly beyond the scope of his power conferred on him under subsection (IA) of section 66A of the Ordinance albeit the direction is based on the ground which has not been subject-matter of appeal in any sense that it was not raised, taken, examined or determined by the Appellate Authority.
In the present case the assessment had been made on the assessee on the basis of estimation of sales made/approved by the Appellate Authorities. Various add-backs out of the P&L Account expenses made by the ITO had been modified/affirmed by the Appellate Authorities. The IAC had directed that the said assessments shall. be cancelled and the tax shall be charged on the assessee's presumptive income. Thus to give effect to the IAC's direction the assessments will have to be substituted by new assessments and the effect of substitution would be that the determinations made by the Appeal Commissioner and Tribunal regarding the estimation of sales and various add backs in the P&L expenses shall stand stultified. The determinations made by the Appellate Authorities can neither be preserved nor maintained which is the fundamental object of conferring limited and qualified power on the IAC to revise an ITO's order which upon appeal merged into an appellate order.
The IAC's direction that fresh assessments shall be made on the assessee in accordance with the provision of section 80-C of the Ordinance, was, therefore, was on the facts and in the circumstances of the case, plainly beyond the scope of section 66-A of the Ordinance.
Abdul Hafeez, D.R. for Appellant (in ITAs. Nos. 762/IB and 763/IB of 1992-93).
Javed A. Qureshi for Respondent (in ITAs. Nos.762/IB and 763/IB of 1992-93).
M. Javed A. Qureshi for Appellant (in ITAs. Nos. 795/I3 to 797/IB of 1994-95)
Abdul Hafeez, D.R. for Respondent (in ITAs. Nos. 795AB to 797/IB of 1994-95)
Date of hearing: 16th August, 1995.
ORDER
CH. IRSHAD AHMAD (JUDICIAL MEMBER).--This order disposes of income Tax Officer's (ITO) appeals relating to the assessment years 1990-91 and 1991-92 and assessee's appeals relating to the assessment years 1991-92, 1992-93 and 1993-94. The ITO's appeals are against the Appeal Commissioner's Order passed on assessee's appeals relating to the assessments made under section 63 of the Income Tax Ordinance, 1979 (the Ordinance). The assessee's appeals are against the Inspecting Assistant Commissioner's (IAC) order made under section 66A of the Ordinance whereby the assessments made by the ITO for the said years have been cancelled and he (ITO) has been directed to make fresh assessments on the assessee in accordance with the provisions of section 80-C of the Ordinance. On the facts and in the circumstances of the case set down below it would be appropriate if the assessee's appeals are taken first.
Section 80-C inserted in the Ordinance by Finance Act, 1991 so car as material provides that notwithstanding anything contained in the Ordinance or any other law for the time being in force, any payment received by an assessee on account of supply of goods shall be deemed to be his net income on which he shall pay tax at the rate of 3 percent. The Federal Government in exercise of its powers under section 14 of the Ordinance which, among others, empowers the Federal Government to exempt any person or class of persons from the operation of any provision of the Ordinance, by its notification dated 24-8-1991 provided that the provision of section 80-C shall not apply in respect of any person, being a manufacturer of goods, who opts out of the presumptive tax regime and furnishes a declaration of final and irrevocable option in writing alongwith the return of total income under section 55 of the Ordinance.
The assessee, a private limited company, derives income from the manufacture and sale of wooden furniture. In its return of income for the assessment year 1991-92 filed on 31-8-1991 the assessee declared its net income at Rs.181,261. The assessee, however, revised its return and alongwith the revised return furnished the declaration opting out of the presumptive tax regime. The trading account submitted with the return showed the following results:--
| Shop sales | Rs. 11,33,484 |
| Supplies | Rs.1,26,84,690 |
| Total sales: | Rs.1,38,18,174 |
| G.P. @ 19.53% | Rs. 27,03,772 |
The ITO rejected the declared trading account results and computed G.P. as follows:--
| Shop sales: | Rs. 14,00,000 |
| G.P. 0 25% | Rs. 3,50,000 |
| Supplies (as declared) | Rs.1,26,84,690 |
| G.P. a 20% | Rs.25,36,936 |
| Total G.P.: | Rs.28,86,936 |
and, after making various add-backs out of the P&L Account expenses by his order dated 21-1-1992 under section 62 of the Ordinance made assessment on the assessee at net income of Rs.6,34,902. On assessee's appeal the Appeal Commissioner by his order, dated 6-2-1993 reduced the shop sales to Rs.13,00,000 and also made certain reductions in the add-backs out of the profit and loss account expenses. Both the assessee and the ITO objected to the Appeal Commissioner's order before this Tribunal. Unfortunately both the appeals were not consolidated, and the assessee's appeal was heard by this Tribunal alongwith assessee's other appeals relating to the assessment years 1987-88, 1989-90, 1990-91 and 1992-93. This Tribunal disposed of the assessee's above appeals by a consolidated order dated 20-1-1994 and rejecting the assessee's appeal affirm the Appeal Commissioner's order so far as it related to the assessment order 1991-92. (The ITO's appeal for this year is still pending and is being disposed of by this order).
The assessee's return for the assessment years 1992-93 was also processed by the ITO under normal law. The assessee had, declared the trading results as follows:--
| Sales | Rs.1,96,28,302 |
| G. P. @ 18.51 % | Rs.27,16,396 |
The ITO rejected the declared results and computed the trading results as follows:--
| Shop sales | Rs.15,50,000 |
| G.P. @ 25% | Rs.3,87,500 |
| Supplies (as declared) | Rs.85,05,527 |
| G.P. @ 20% | Rs.17,01,105 |
| Sales of furniture purchased | |
| from local market | Rs.48,50,000 |
| G. P. @ 15% | Rs. 7,27,500 |
| Total G.P. | Rs.28,16,105 |
and, after making various add-backs out of the P&L Account expenses by his order dated 5-1-1993 made under section 62 of the Ordinance made assessment on the assessee at net income of Rs.6,75,195. The assessee objected to the assessment order before the Appeal Commissioner but its appeal was rejected by the Appeal Commissioner by his order dated 6-5-1993. On further appeal by the assessee this Tribunal by its order dated 20-1-1994 however reduced shop sales to Rs.14,50,000. The remaining parts of the assessment order were confirmed.
In its return of income for the assessment year 1993-94 the assessee declared its net income at Rs.2,97,762. Trading results were declared as follows:
| Sales | Rs.1,57,20,046 |
| G.P. @ 19.33% | Rs.30,45,075 |
The ITO rejected the declared trading results and deduced G.P. as follows:--
| Shop sales | Rs.16,00,000 |
| G.P. @ 25% | Rs.40,00,000 |
| Rs.97,66,234 | |
| Rs.19,53,246 | |
| | |
| from local market | Rs.50,00,000 |
| G.P. @ 15% | Rs.7,50,000 |
| Total: | Rs.31,03,246 |
and, after making various add-back out of the P&L Account expenses by his order dated 27-6-1993 under section 62 of- the Ordinance made assessment on the assessee at net income of Rs.7,61,918. The assessee objected to the assessment order before the Appeal Commissioner. The Appeal Commissioner by his order dated 8-3-1995 rejected the assessee's appeal and affirmed the assessment order.
The IAC called for the record of the case and by his order dated 27-4-1995 under section 66A of the Ordinance has cancelled the assessment for the assessment years 1991-92, 1992-93 and 1993-94 for de novo proceedings with the directions to the ITO that fresh assessments shall be made on the assessee. The ground on which the IAC has cancelled the assessment is that the assessee had not validly opted out of the presumptive tax regime introduced by section 80-C to the Ordinance. The assessee has objected to the order of the IAC on the grounds that the IAC had no jurisdiction to cancel the assessment orders passed by the ITO which having been subject of appeal before the Appeal Commissioner and this Tribunal had merged into the orders made by me said Appellate Authorities; and also that the IAC was not justified to hold that the assessee had not validly opted out of the presumptive tax regime.
The facts, so far as relevant to the ITO's appeal for the assessment years 1990-91 and 1991-92, are these. The assessee in its return of income for the assessment year 1990-91 declared loss of Rs.58,578. The trading results were declared as follows:--
| Sales | Rs.1,16, 28, 747 |
| G. P. @ 24.5% | Rs.28,49,964 |
The ITO rejected the declared trading results and deduced G.P. as follows:--
| Sales (estimated) | Rs.1,19,00,000 |
| G.P. @ 25% | Rs.29,75,000 |
and, after making various add-backs out of the P&L Account expenses by his order dated 30-6-1991 made assessment at net income of Rs.2,41,770. On assessee's appeal the Appeal Commissioner by his order dated 2-6-1993 reduced the sales to Rs.1,17,50,000 and also made certain reductions in the add-backs out of the P&L account expenses. Both the assessee and the ITO objected to the order of the Appeal Commissioner before this Tribunal. Unfortunately both the appeals were not consolidated and heard together. The assessee's appeal was heard by this Tribunal alongwith its appeals relating to assessment years 1987 88, 1989-90, 1991-92 and 1992-93. The Tribunal by its order dated 20-1-1994 affirmed the Appeal Commissioner's order and rejected the assessee's appeal. The ITO's appeal is not before us. The ITO has objected to the order of the Appeal Commissioner on the ground that he was not justified to reduce the sales and the add-backs out of the P&L expenses.
The facts relevant to the ITO's appeal for the assessment year 1991-92 have already been given.
We have heard Mr. Javed A Qureshi, Advocate for the. assessee and Mr. Abdul Hafeez, D.R.
The assessee's appeal raise a question of importance relating to the scope of subsection (IA) of section 66-A of the Ordinance inserted in the said section by Finance Act of 1991. Section 66-A inserted in the Ordinance in 1980 which empowered the IAC to revise the ITO's order, enacted originally read as under:--
"66-A. Power of Inspecting Assistant Commissioner to revise order.- (1) The Inspecting Assistant Commissioner may call for and examine the record of any proceedings under this Ordinance, and if he considers that any order passed therein by the ITO is erroneous in so far as it isprejudicial to the interests of revenue, he may, after giving the assessee an opportunity of being heard and after making, or causing to be made, such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment to be made.
(2) No order under subsection (1) shall be made after the expiry of four years from the date of the order sought to be revised. "
From the plain reading of the provisions of section 66A of the Ordinance it is obvious that the IAC has been empowered only to revise the ITO's order and not any order made by the Appeal Commissioner or this Tribunal. A question arose whether in exercise of his power under section 66-A of the Ordinance, the JAC was competent to revise the ITO's order which having been subject-matter of appeal before the Appeal Commissioner/this Tribunal has merged into the orders passed by the said Appellate Authorities. The question was considered by the Supreme Court of Pakistan in Glaxo Laboratories Ltd. v. IAC PLD 1992 SC 549 = 1992 PTD 932. The Supreme Court held: "It is settled principle that on appeal the original order merges in the appellate order" and the Supreme Court's earlier observations in Commissioner of Income Tax v. Farrukh Chemical Industries 1992 SCMR 523 = 1992 PTD 523 that "the order of the ITO upon appeal merged in the order of the Income Tax Appellate Tribunal" were quoted with approval. A submission was made before the Supreme Court that under section-66-A of the Ordinance the IAC was competent to revise that part of the ITO's order which had not been in issue before the appellate authorities. The Supreme Court rejected the submission and said:-
"In a case where there is only one order against which appeal has been provided, filed and decided then there does not seem to be a scope for argument that as some objections or plea which did exist but have not been taken, pressed or considered that part of the order which is covered by such plea does not merge in the appellate order. Such a view will create uncertainty and is bound to result in confusion and chaos. The law does not favour uncertainty in decisions and in matters one has to be very specific and certain."
While deciding the Glaxo Laboratories Ltd. the Supreme Court noticed that a new subsection (1-A) has been added to section 66-A of the Ordinance which authorizes the IAC to initiate action under section 66-A even if appellate and revisional order has been passed. The Supreme Court, however, reserved its opinion on the extent of the IAC's power to revise that part of the ITO's orderwhich has not been subject-matter of appeal before the appellate authority.
Before the extent of the IAC' power conferred on him by Subsection (1-A) inserted in section 66-A of the Ordinance by Finance Act of 1991 to revise the ITO's order which has been subject-matter of an appeal before the Appeal Commissioner/this Tribunal and has merged into the order of any of the above authorities in respect of any point or issue which was not subject matter of any appeal or reference is considered it would be appropriate to set down the said subsection which reads as under:-
(1A) The provisions of subsection (1) shall, in like manner, apply:
(a) where an appeal has been filed under sections 129, 134; 137, or a reference has been made under section 136, against an order passed by the ITO; and
(b) where an appeal or reference referred to in clause (a) has been decided, in respect of any point or issue which was not the subject matter of such appeal or reference.
It is obvious that the scope of the IAC's power under subsection (1A) of section 66A of the Ordinance is determinable in the background to the 'principle of merger' under which on appeal the ITO's order merges into the order of appellate authority as expounded by the Supreme Court of Pakistan in Glaxo Laboratories Ltd. Before the power was conferred on the IAC by subsection (IA) of section 66-A of the Ordinance to revise that part of ITO's order which had not been subject-matter of any appeal or reference the view was that once an order of the ITO has been subject-matter of appeal before the Appeal Commissioner/this Tribunal the ITO's order ceases to exist and merges into the appellate authority's order and the IAC has no power to revise the order. The power conferred on the IAC by subsection (1A) of section 66-A of the Ordinance by the language to the statute itself is limited and qualified power. Clearly it is limited to the point or issue which has not been subject-matter of an appeal or reference. The object of conferring limited and qualified power on the IAC to revise the ITO's order which as upon appeal has merged into the order of the Appeal Commissioner or this Tribunal is to preserve and to maintain the full effect of the determination made or approved by the Appeal Commissioner or this Tribunal who within the hierarchical system of tax administration are at higher tier than the IAC. It is also in accord with well-established principle that in a hierarchical system of administration it is necessary for lower tier to defer to the opinion or determination of higher tiers. Thus in exercise of his power under subsection (IA) of section 66-A of the Ordinance the IAC tray give only such direction as will be an independent of, not inconsistent with or not to derogation of, any determination made by the appellate authority. In lawyer's shorthand the IAC cannot, give any direction which shall be repugnant to any determination trade by the Appellate Authority. In cases raising the question whether any direction given by the IAC under subsection (IA) of section 66-A of the Ordinance is in any manner inconsistent with or repugnant to any determination made by an appellate authority the basic question that would seek answer it: whether or not full effect can be given or maintained in respect of any determination made or approved by an authority if the ITO's order is revised as directed by the IAC., If the answer is that full effect cannot be given or maintained in respect of any such determination after the ITO's order has been revised as directed by the IAC, his (IAC's) direction shall be plainly beyond the scope of his power conferred on him under subsection (1 A) of section 66A of the Ordinance albeit the direction is based on the ground which has not been subject-matter of appeal in any sense that it was not raised, taken, examined or determined by the appellate authority.
In this case the assessments have been made on the assessee on the basis of estimation of sales trade/approved by the appellate authorities. Various add-backs out of the P&L Account expenses made by the ITO have been modified/affirmed by the appellate authorities. The IAC has directed that the said assessments shall be cancelled and the tax shall be charged on the assessee's presumptive income. Thus to give effect to the IAC's direction the assessments will have to be substituted by new assessments and the effect of substitution would be that the determinations made by the Appeal Commissioner and this Tribunal regarding the estimation of sales and various add-backs in the P&L expenses shall stand stultified. The determinations made by the appellate authorities can neither be preserved nor maintained which is the fundamental object of conferring limited and qualified power on the IAC to revise an ITO's order which upon appeal has merged into an appellate order.
We, therefore, conclude that IAC's direction that fresh assessments shall be made on the assessee in accordance with the provision of section 80-C of the Ordinance is on the facts and in the circumstances of the case, plainly beyond the scope of section 66-A of the Ordinance.
In view of our above findings we need not enter into the controversy whether or not the assessee had validly opted out of the presumptive tax regime introduced by section 80-C of the Ordinance.
Accepting the assessee's appeal the IAC's order dated 27-4-1995 is vacated.
So far as the ITO's appeals against the Appeal Commissioner's order relating to the assessments framed under section 62 for the assessment years 1990-91 and 1992-93-are concerned we see that they have become redundant in view of this Tribunal's decision made upon the assessee's appeals relating to the above assessment years. The ITO's appeals are accordingly rejected.
The assessee's appeals are accepted while that of the ITO's are rejected.
M.B.A./174/TOrder accordingly