Income Tax Ordinance (XXXI of 1979)---

----S.59---Self-Assessment Scheme (1992-1993), para. 4(ii)---C.B.R. Circular No. 16 of 1982----Object and purpose of Scheme---Selection of return of assessee for total audit---Condition precedent---Jurisdiction and powers of departmental officers---Where according to the Assessing Officer he got local enquiries conducted after receiving the return and then on the basis of that enquiry the case was excluded from the purview of Self-Assessment Scheme, the procedure was not in consonance with the letter and spirit of law---Assessment order in pursuance of setting apart of the case for total audit was cancelled by the Tribunal and Assessing Officer was directed to process the case of assessee under the provisions of Self-Assessment Scheme (1992-93).

Under para. 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93 a return may be selected for audit with the approval of Regional Commissioner of Income-tax where gross understatement of income is suspected on the basis of definite information based on material evidence. This provision is to be considered in the totality of the scheme for self-assessment and the spirit contained therein. The Self-Assessment Scheme has been devised by reposing confidence in the assessee and provisions have been made whereby an assessee can be deprived of this benefit, if the department receives information that the confidence reposed in the assessee has been betrayed. However, this does not mean that any provision contained in Self-Assessment Scheme including para. 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93, has vested discretion in the departmental officers for perusing any concealment or mala fides on the part of assessees. The departmental officers have no jurisdiction to initiate any enquiry or probe, for the purpose of excluding any return from the purview of Self-Assessment Scheme, meaning thereby that no enquiry or probe could be initiated and no roving and fishing enquiries could be made prior to the selection of case for total audit for the purpose of excluding the case from the purview of Self-Assessment Scheme. The condition precedent is that there should be definite information based on material evidence and once this definite information based on material evidence is available of the level and standard fixed by Supreme Court, then only the departmental authorities can suspect gross understatement of income. This suspicion of gross understatement should also be reasonable and it should not be a mere surmise or conjecture and without any justification. One of the reasons of introducing Self-Assessment Scheme was to curtail the discretion of the departmental officers and reduce contacts between the assessees and the assessing officer. Now if the assessing officer is allowed to initiate enquiry in a case otherwise qualifying for Self Assessment Scheme without any definite information available with him based on material evidence on the point of gross understatement of income then the entire purpose of Self-Assessment Scheme shall be frustrated. The assessees shall be at the mercy of the assessing officers as local enquiries through Income Tax Inspectors in every case would be to the peril of an assessee and shall always hang on his head like Sword of Damocles. The law has never envisaged any enquiry for collecting any information on mere suspicion of understatement of income. The information should not follow the suspicion of, gross understatement, but on the other hand the suspicion of gross understatement should follow the definite information which is based on material evidence. The enquiries through the Income Tax Inspectors are the incidence of regular assessments and not the Self-Assessment Schemes. The assessing officers can conduct the enquiries after they assume jurisdiction to make regular assessment and not prior to that. Thus the condition precedent for the selection of case for total audit is the prior availability of definite information and once this information is available then only the case can be set apart for total audit and not otherwise. In the present case according to the assessing officer he got local enquiries conducted after receiving the return and then on the basis of that enquiry the case was excluded from the purview of Self-Assessment Scheme. This procedure is not in consonance with the letter and spirit of law.

The condition precedent for having recourse to the provisions contained in para. 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93 is the receiving of information by the assessing officer. This condition cannot be fulfilled by collection of evidence as a result of holding enquiry for this purpose only and, therefore, in addition to the fact that even after local enquiry the assessing officer could not get any definite information based on material evidence, the procedure adopted for having recourse to the provisions contained in para. 4(ii) of the Self-Assessment Scheme for the assessing year 1992-93 was unwarranted and unjustified.

The departmental officers were not justified in selecting the case of assessee for detailed scrutiny under para 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93.

The assessment order in pursuance of setting apart of the case for total audit was cancelled and the assessing officer was directed to process the case of assessee under the provisions of Self-Assessment Scheme for the assessment year 1992-93.

Farogh Nasim for Appellant.

Muhammad Yousuf Butt, D.R. for Respondent.

Date of hearing: 17th August, 1995.

ORDER

The above appeal is directed against the order dated 22-6-1994 by the learned C.I.T.(A), Zone-VI, Karachi in I.T.A. No. 491/A-VI, relating to the assessment year 1992-93.

2. The appellant a registered firm running jewellery shop has objected to the selection of case for total audit by the Regional Commissioner of Income-tax under Para. 4(ii) of the Self-Assessment Scheme, 1992. In the alternative the appellant has further objected to the estimate of sales, application of gross profit rate and disallowance under the head telephone in the profit and loss account.

3. Heard Mr. Farogh Nasim, Advocate for the appellant and Mr. Muhammad Yousuf Butt, learned representative for the department. Mr. Farogh Nasim has submitted that the appellant filed return under the self assessment scheme which was set apart for total audit under Para. 4(ii) by the Regional Commissioner of Income-tax, Southern Region, Karachi. He has submitted that initially the reason for setting apart the return for total audit was not intimated to the appellant but subsequently, the reason was communicated to the appellant vide letter, dated 5-8-1993. In this letter it was stated as follows:

"As you are well aware that your return for the above assessment year has been set apart for total audit under Para. 4(ii) of the C.B.R.'s Circular No. 16 of 1992 intimation of which has already been conveyed to you alongwith notice under section 61. No compliance of the said notice under section 61 has been made by you however a letter has been received from your A.R. M/s. Muhammad Farooq & Co., raising certain objections to setting apart of the case, The objections raised by your A/R are of general nature and do not specifically pertain to the particular facts of your case. As a matter of fact your case has been set apart on the basis of material evidence as collected through local and spot enquiries conducted by this office. The following facts emerged during the course of local enquiry justify setting apart- your case for total audit: ---

(1) Your shop is located in Hussain Centre, Zaibunnisa Street, Karachi which is one of the most prominent and busiest Centres of jewellery business. During the course of local enquiries jewellery on display in your shop alone was found of an estimated vale of Rs.8,00,000 whereas you have declared your stocks at only Rs.3,02,500. This is a sufficient evidence to prove that you have not correctly declared your stocks. It also shows that total capital employed in business shown at Rs.3,89,334 does not reflect the actual amount of capital employed in the business and as such extent of your business has deliberately been minimised.

(2) You have declared furniture in balance-sheet as on 31-12-1991 at Rs.26,500 whereas during the course of local and spot enquiries a huge investment in furniture and fittings was found which shows that you have not correctly disclosed actual value of furniture and fittings.

(3) It has been noticed that the working partner Mr. Abdul Wahab lives at Nishtar Road, Karachi which is at a considerable distance from your business premises. However no conveyance expense has been claimed by you which shows that the same has been suppressed and is being met out from undisclosed profits. Similarly miscellaneous expenses have been omitted which also show that these are being met out from suppressed income.

(4) It has been found that you have not correctly declared your sales. This is also obvious from the record itself which shows that in terms of quantity of gold sold by you your declared sales have been falling from year-to-year. For example, for the immediately preceding year you had declared sales. of Rs.3,07,168. The increase over this has been only 'Rs.17,582 for the year 1992-93 which viewed in the light of increase in gold prices shows decline in quantity. Your declared sales give average daily sales at Rs.1,082 which in terms of quantity of gold come to about 3.5 grams of gold taken at Rs.3,000 per 10 grams of gold (22 Carate). However the quantity is further reduced if cost of stones etc. and making charges are also taken into consideration. Your declared sales are almost equal to the average stock whereas in general course of business sale are generally seven to ten times of stock. From the above discussed facts it is quite evident that your case has been set apart for audit on the basis of material evidence. "

4. Mr. Farogh Nasim has further submitted that the above reasons were assigned by the assessing officer in reply to the objection raised on behalf of the appellant to the effect that the return can be set apart for total audit on definite information based on material evidence from which gross understatement of income could be suspected. Mr. Farogh Nasim has argued that a perusal of the above reasons intimated by the assessing officer shows that. no definite information based on material evidence was available with the assessing officer justifying the selection of case for total audit under para.4(ii) of the Self Assessment Scheme for the assessment year 1992-93. Mr. Farogh Nasim has urged that the expressions "definite information" and "material evidence" have been considered by the Hon'ble Sindh High Court in judgments 1993 PTD 804 and 1994 PTD 494. The relevant provision has been considered by a Division Bench of this Tribunal as well in the judgment as 1995 PTD (Trib.) 1152 and in similar circumstances it has been held by the Tribunal that, "the income-tax return filed by the assessee under self-assessment scheme has been wrongly selected for audit under para. 4(ii), C.B.R. Circular referred to above". He has further submitted that the letter of I.T.O., dated 5-8-1993 shows that the reasons prevailing for setting apart of the case for total audit were based on the local enquiry conducted by the Income Tax Inspector. He has contended that the assessee's income year is-ending 31-12-1991 and the enquiry has been conducted after the close of the income year, therefore, it is not relevant and cannot form basis for suspecting gross understatement of income. He has argued that the worth of the assertions regarding huge investment in the furniture and fittings and low drawings of the partner. Mr. Abdul Wahab is evident from the fact that no such addition has been made on these accounts. He has further maintained that in the ultimate analysis the only reason which appears to have inflicted the departmental authorities for setting apart the case for total audit is the declaration of sale at lower level than expected or desired by the departmental authorities. Mr. Farogh Nasim has contended that this cannot amount to definite information based on material evidence as defined by the Hon'ble Sindh High Court in the judgment cited above. At the most it can be treated as a gross work which does not provide justification for setting apart a case for total audit as it would amount to travelling beyond the letter and spirit of the law. Mr. Farogh Nasim has further submitted that in similar circumstances in Division Bench of this Tribunal at Lahore has held in the judgment 1995 PTD (Trib.) 1152 that the selection of the setting apart of the case was not justified.

5. On the other hand, the learned D.R. has supported the setting apart of the case for total audit.

6. We have carefully considered the material available on record and the contentions raised by the learned representatives for the parties. We are persuaded to agree with the contentions raised by Mr. Farogh Nasim. The contents of para. 4(ii) of the C.B.R. Circular No. 16 of 1992 containing self assessment scheme has already been considered in detail and depth by the Hon'ble Sindh High Court in at least three cases to wit, 1993 PTD 1007, 1993 PTD 804 and 1994 PTD 494, therefore, we need not to discuss the connotations of these expressions in detail. We respectfully follow the dictum laid down by the Hon'ble Sindh High Court. After following the Hon'ble Sindh High Court on legal plane we find that on factual plane the similar circumstances have already been considered by a Division Bench of this Tribunal in the judgment cited by us in earlier part of this order. We are in respectful agreement with the observations and finding of the Division Bench of this Tribunal and, therefore, hold that the reasons contained in the letter of assessing officer dated 5-8-1993 do not provide sufficient justification for selection of the case for the total audit.

7. Before parting with this order we would like to observe that under para. 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93 a return may be selected for audit with the approval of Regional Commissioner of Income-tax where gross understatement of income is suspected on the basis of 4 definite information based on material evidence. The purport, meaning and connotation of the expressions "definite information" and "material evidence" have already been considered threadbare by the Hon'ble Sindh High Court. We would like to observe that this provision is to be considered in the totality of the scheme for self-assessment and the spirit contained therein. The self-assessment scheme has been devised by reposing confidence in the assessee and provisions have been made whereby an assessee can be deprived of this benefit, if the department receives information that the confidence reposed in the assessee has been betrayed. However, this does not mean that any provision contained in self-assessment scheme including para. 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93, has vested discretion in the departmental officers for presuming any concealment or mala fide on the part of assessees. The departmental officers have no jurisdiction to initiate any enquiry or probe, for the purpose of excluding any return from the purview of self-assessment scheme, meaning thereby that no enquiry or probe can be initiated and no roving and fishing enquiries can be made prior to the selection of case for total audit for the purpose of excluding the case from the purview of self-assessment scheme. The condition precedent is that there should be definite information based on material evidence and once this definite information based on material evidence is available of the level and standard as held by the Hon'ble High Court in the cases cited above then only the departmental authorities can suspect' gross understatement of income. This suspicion of gross understatement should also be reasonable and it should not be a mere surmise or conjecture and without any justification. One of the reasons of introducing Self-Assessment Scheme was to curtail the discretion of the departmental officers and reduce contacts between the assessees and the assessing officer. Now if the assessing officer is allowed to initiate enquiry in a case otherwise qualifying for self-assessment scheme without any definite information available with him based on material evidence on the point of gross understatement of income then the entire purpose of self- assessment scheme shall be frustrated. The assessees shall be at the mercy of the assessing officers as local enquiries through Income Tax Inspectors in every case would be to the peril of an assessee and shall always hang on his head like Sword of Damocles. The law has never envisaged any enquiry for collecting any information on mere suspicion of understatement of income. The information should not follow the suspicion of gross understatement, but on the other hand the suspicion of gross understatement should follow the definite information which is based on material evidence. The enquiries through the Income 'Fax Inspectors are the incidence of regular assessments and not the self-assessment schemes. The assessing officers can conduct the enquiries after they assume jurisdiction to make regular assessment and not prior to that. Thus the condition precedent for the selection of case for total audit is the prior availability of definite information and once this information is available then only the case can be set apart for total audit and not otherwise. In this case we find that according to the assessing officer he got local enquiries conducted after receiving the return and then on the basis of that enquiry the case was excluded from the purview of self-assessment scheme. Similar procedure was adopted in the case decided by a Division Bench of this Tribunal at Lahore 1995 PTD (Trib.) 1152. This procedure is not in consonance with the letter and spirit of law. We are fortified in our views that the following finding of the Hon'ble Sindh High Court in the case 1993 PTD 1007:

"The I.T.O. in case any information is received by him is obliged to hold an enquiry and in case the assessee feels aggrieved he will have the departmental remedies as provided in the Ordinance available to him."

8. Thus condition precedent for having recourse to the provisions j contained in para. 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93 is the receiving of information by the assessing officer. This condition cannot be fulfilled by collection of evidence as a result of holding enquiry for this purpose only and, therefore, in addition to the fact that even after local j enquiry the assessing officer could not get any definite information based on material evidence, the procedure adopted for having recourse to the provisions contained in para. 4(ii) of the Self-Assessment Scheme for the assessing year 1992-93 was unwarranted and unjustified.

9. For the foregoing reasons it is held that the departmental officers were not justified in selecting the case of appellant for detailed scrutiny under para 4(ii) of the Self-Assessment Scheme for the assessment year 1992-93. In view of our findings as above we need not to dilate on the other issues touching the merits on the point of estimation of sales and application of gross profit rate etc. The order of the learned C.I.T.(A) is hereby vacated. The assessment order (' in pursuance of setting apart of the case for total audit is hereby cancelled and the assessing officer is directed to process the case of appellant under the provisions of Self-Assessment Scheme for the assessment year 1992-93.

10. The appeal is allowed as above.

M.B.A./201/Trib. Appeal allowed.