PAKISTAN HERALD LIMITED VS INSPECTING ASSISTANT COMMISSIONER AND CHAIRMAN, PANEL-02,
COMPANIES-III;
1996 P T D 186
[Karachi]
Before Salahuddin Mirza and Agha Rafiq Ahmed Khan, JJ
PAKISTAN HERALD LIMITED
Versus
INSPECTING ASSISTANT COMMISSIONER AND CHAIRMAN, PANEL-02,
COMPANIES-III;
KARACHI and another
Civil Petitions Nos. D-199, 200, 201 and 202 of 1990, decided on 20/09/1995.
Income Tax Ordinance (XXXI of 1979)---
----Ss. 65 & 34--A---Constitution of. Pakistan (1973), Art.199---Constitutional petition---Re-opening of assessment---Definite information---Notice under S.65, Income Tax Ordinance, 1979 for re-opening assessment---Validity---No concealment of any fact by assessee and return filed by it clearly showed losses---Where assessee bad disclosed all material facts without any concealment and assessment had been consciously completed by Income Tax Officer, then in absence of discovery of any new fact, which could be treated as "definite information", there could not be any scope for re-opening assessment under S.65, Income Tax Ordinance, 1979---Assessee having not concealed any material fact while submitting its return and Income-tax Officer having decided that the transaction in question by assessee was not hit by provision of S.34-A, Income Tax Ordinance, 1979, subsequent change of opinion of Income Tax Officer would not authorize him to re-open assessment under S.65, Income Tax Ordinance, 1979, without fresh material or evidence having come into his possession---Where there was no fresh material, available, notice under S.65, Income Tax Ordinance, 1979, was declared to have been issued without lawful authority and of no legal effect.
Central Insurance Company's case 1993 SCMR 1232; 1989 PTD 478 and PLD 1989 Kar. 337 rel.
Car Tunes v. Income Tax Officer PLD 1989 Kar. 337 = 1989 PTD 478; Jeson International (Pvt.) Ltd. v. Income Tax Officer 1989 PTD 1141; Arfat Woollen Mills Ltd. v. Income Tax Officer 1990 SCMR 697; Edulji Dinshaw Limited v. Income Tax Officer 1990 PTD 155; Pakistan Oil Mills v. The Sales Tax Officer 1969 SCMR 175; M/s Central Insurance Co. v. The Central Board of Revenue 1993 SCMR 1232; Commissioner of Income Tax Bengal v. M/s Maliliram Ramjidas 1940 (8) ITR 442 (Privy Council) and M/s Burhan Engineering Co. v. Income Tax Officer 1985 PTD 465 ref.
Rehan Hasan Naqvi for Petitioner.
Shaikh Haider for Respondents.
Date of hearing: 17th August, 1995.
JUDGMENT
SALAHUDDIN MIRZA, J.---The petitioner is a Public Limited Company engaged in the printing and publishing of Newspapers and periodicals, including the daily Dawn. On 4th April, 1968 the petitioner entered into an agreement with a Private Limited Company M/s Matri Publications (Pvt.) Ltd., which-was publishing daily Huriyat, where under the management, policy and financial control of daily Hurriyat was taken over by the petitioner and the profits earned by daily Hurriyat were to be shared by the petitioner and M/s Matri Publications in the ratio of 60 : 40 but if the paper suffered losses, they were to be exclusively borne by the petitioner. The agreement is Annexure `B-1'.
2. In the subsequent years the, daily Hurriyat suffered losses which were borne by the petitioner and shown as such in the income-tax returns and this loss was accepted by the Income-tax Department either at the initial stage or on appeal. The assessment of the petitioner for the assessment year 1984-85 was passed by the I.T.O. under section 62 of the Income Tax Ordinance in December 1985 but on 16-8-1989 the Inspecting Assistant Commissioner (Respondent No.l) issued notice to the petitioner under section 65 of the Ordinance reopening assessment for the year 1984-85 on the ground that the lossess of M/s Matri Publications could not be shown as lossess of the petitioner-company. The lossees were also not allowed for the Assessment year 1988-89 against which the petitioner filed appeal before the Commissioner of Income Tax, Appeals-III Karachi. During the pendency of this appeal, action under the notice under section 65 in respect of the assessment for the year 1984-85 was stayed but the said appeal has now been dismissed on 14-1-1990 and stay of proceedings under section 65 stands vacated. Hence this petition which was filed on 4-3-1990 against the said notice, dated 16-8-1989 under section 65 of Income Tax Ordinance. It is contended that there is no concealment of any fact on the part of the petitioner and no new material has come before respondent No.l to re-open the assessment for the assessment year 1984-85.
3. The respondents have filed counter-affidavit. According to them Notice under section 65 has been issued on the basis of "definite information received by the Department" subsequent to the making of the original assessment in the relevant year. It is also their case that section 34-A of the Income Tax Ordinance (which was inserted through Finance Act 1980) directly applied to the Agreement between the petitioner and M/s Matri Publications but the income-tax authorities, misled by their earlier decisions for the period when section 34-A did not exist ignored this provision and did not apply it and this mistake came to light when the assessment for the year 1988-89 was being finalised and therefore notice under section 65 was issued at that stage.
4. Learned counsel of the petitioner has argued that the agreement between the petitioner and M/s Matri Publications was accepted by the respondents and was acted upon by them as would appear from the original assessment order by the I.T.O. in respect of the income year ending 30-6-1984 (Assessment year I984-85) at page 3 whereof 60% of the income of Hurriyat is added to the income of the petitioner and the Department could not change its opinion in this regard and in the absence of any new evidence, notice under section 65 could not be sustained. In support of this view he has relied upon the following reported judgments:
(1) Car Tunes v. Income Tax Officer PLD 1989 Kar. 337 = 1989 PTD 478; (2) Jeson International (Pvt.) Ltd. v. Income Tax Officer 1989 PTD 1141; (3) Arfat Woollen Mills Ltd. v. Income Tax Officer 1990 ' SCMR 697; (4) Edu1ji Dinshaw Limited v. Income Tax' Officer 1990 PTD 155.
5. The gist of the above-noted judgments is that where assessment is finalised by the I.T.O. in accordance with law, it cannot be re-opened on the ground that the I.T.O. on, a second thought has changed his opinion on the factual or legal aspect of the case or that a successor in office taken a different view of the material considered by his predecessor. According to the learned counsel of the petitioner, legal aspect as to whether the agreement between the petitioner and M/s. Matri Publications was or was not governed by section 34-A of the Ordinance had been determined by the I.T.O. and when he acted upon the agreement he impliedly held that the agreement was valid and was not hit by section 34-A and decision on this point cannot be re-opened under section 65. On the other hand, -the view of the Department is that the Agreement became void and inoperative after the incorporation of section 34-A into the Ordinance and there is no finding of the I.T.O. on the point as to whether the agreement was hit by section 34-A, that this point was neither discussed nor taken into consideration by the I.T.O. at the time of assessing the petitioner and therefore there is no question of change of opinion and consequently the above judgments are not applicable. Learned counsel of the respondent has relied upon the following judgments in support of his arguments.
(1) Pakistan Oil Mills v. The Sales Tax Officer 1969 SCMR 17.5; (2) M/s Central Insurance Co. v. The Central Board of Revenue 1993 SCMR 1232; (3) Commissioner of Income Tax Bengal v. M/s Maliliram Ramjidas 1940 (8) ITR 442 (Privy Council); (4) M/s Burhan Engineering Co. v. Income Tax Officer 1985 PTD 465.
6. Most of these judgments are in respect of section 30(1.A) of the Repealed Income-tax Act 1922 which is analogous to section 65 of the Income Tax Ordinance, 1979 and the ratio of these cases has been summarised in the above-noted last judgment in which in para-8 it is observed as follows:
"Para. 8. From the above-cited cases the following principles of law ' are deducible: ---
(i) That by the use of the words "reason to believe" in section 34(1-A) of the Act, the legislature intended that the belief must be based upon reasonable grounds and not on mere suspicion, gossip and rumour.
(ii) That the expression "reason to believe" does not mean a purely subjecting satisfaction on the part of the Income Tax Officer but the reason must be held in good faith and cannot be a mere pretence.
(iii) That it is open to the Court to examine whether the reasons for the formation of the belief have a national connection with or a. relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose.
(iv) That before an Income Tax Officer issues a statutory notice under section 34(1)(a), he must have reason to believe that by reason or omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for the years in question, income, profits or gains chargeable to income-tax have escaped assessment during those years.
(v) That the notice of the Income Tax Officer under section 34(1-A) would be without jurisdiction if the reason for his belief that the conditions are satisfied, does not exist or is not material or relevant to the belief required by the section.
(vi) That before issuing a notice under section 34 it is not necessary to hold a quasi-judicial enquiry but there should be material before the Income Tax Officer on the basis of which an honest and reasonable officer can form the opinion that there has been escapement of assessment.
(vii) That once it is shown to the Court there exists reasonable grounds for the Income Tax Officer to form the belief that there has been escapement of the income from the levy of tax, that would be sufficient to clothe him with jurisdiction to issue notice and the Court would not go into the question whether the grounds are sufficient or not nor it would go into the question of sufficiency of the reasons for the belief.
(viii) That a notice under section 34 of the Act need not contain the reasons or the material on the basis of which the Income Tax Officer formed the opinion that there is a reason to believe that the income, profits -or gains chargeable to income have escaped assessment during the relevant years.
(ix) That an assessee against whom a notice under section 34 of the Act is issued is not entitled in law at the stage of investigation to see the material on the basis of which the notice was issued or belief was formed but once the Income Tax Officer decides to act upon certain material for re-opening the assessment, the assessee is entitled to be confronted with the material to be used against him and is also entitled to an opportunity to explain and to place material in rebuttal to the above material to be used against him by the Income Tax Officer:
(x) That in a case falling within the ambit of the second part of the proviso to subsection (1) of section 34 of the Act, the Income Tax Officer cannot initiate proceedings under the above subsection capriciously and without any reason as the proviso is itself subordinate to that above main subsection.
(xi) That since section 34 is not the charging section but deals merely with the machinery of assessment, that construction should be preferred which makes the machinery workable, (ut res valet potius quam pereat)."
7. The factual position, however, is that no new material or evidence has come before the I.T.O., averment to that effect in para "3-a" of counter affidavit of respondent No.l notwithstanding. There was no concealment of any fact by the petitioner and the return filed by it clearly showed the losses of M/s Matri Publications. And in this regard the observations in the case of the Central Insurance Company (1993 SCMR 1232), on which learned counsel of the respondent had relied, are very pertinent and are quoted below:
"If an assessee discloses all the material facts without any concealment and the assessment has been consciously completed by the I.T.O., in such a case, in the absence of discovery of any new fact, which can be treated as `definite information', there cannot be any scope for re opening the assessment under section 65."
8. Now, it is true that an agreement is void and illegal if it violates any law, as insisted upon by learned counsel of the respondents. If section 34-A renders the agreement Annexure B-1 void and illegal, it would have no value in the eye of law with effect from the date on which section 34-A was incorporated in the Income Tax Ordinance (which date presumably is 1st July, 1980) and the profits or losses of M/s Matri Publications may not be incorporated in the assessments of the petitioner from that date onward but this is no ground to reopen the assessments under section 65. When the petitioner was originally assessed, it must be presumed that the I.T.O. look into consideration section 34-A and came to the conclusion, albeit incorrectly --- that the agreement was not rendered void due to the incorporation of section 34-A in the Ordinance seven though assessment orders did not say so. If now it is concluded that the agreement had become void since the incorporation of section 34-A into the Ordinance, it is decidedly a change of opinion on the basis of the same material and in view of the law laid down in PLD 1989 Kar. 337 = 1989 PTD 478 and other judgments relied upon by the learned counsel of the appellant, as well in view of 1993 SCMR 1232 which was referred to us by learned counsel of the respondents, assessment cannot be reopened under section 65. It could have been re-opened only if some additional material had come before the assessing authority. Section 65 cannot be, suffered to be used by the assessing authorities as a sword of Damocles hanging on the heads of the assessees. However, every assessment year is different and independent and the assessing authority may treat the agreement as void in view of section 34-A while making assessment for any subsequent assessment year in which case the petitioner shall be at liberty to challenge such decision in accordance with law.
9. In short, we are of the view that the petitioner did not conceal any material fact while submitting its assessment of the assessment year 1984-85 and the I.T.O. by taking into consideration the agreement Annexure B-1, had decided that it was not hit by section 34-A of the Ordinance and it amounts to a change of opinion if it is now held that section 34-A had annulled the agreement and while fresh assessments may be made on this basis, it cannot be used to re-open the assessment under section 65 as absolutely no fresh material or evidence has come before the assessing authority. We would, therefore, declare the notice dated 16-8-1989 under section 65 of Income Tax Ordinance (Annexure `A') as having been issued without lawful authority and therefore of no legal effect. There is no order as to costs.
A.A./P-333/K
Petition accepted.