W.T.A. NO.622/1_13 OF 1995 VS W.T.A. NO.622/1_13 OF 1995
1997 P T D (Trib.) 146
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Mujibullah Siddiqui, Judicial Member and Manzur-ul-Haque, Accountant Member
I.T.A. No. 1872/KB of 1987-88, decided on 25/06/1988.
(a) Income Tax Ordinance (XXXI of 1979)---
----First Sched., Part IV, para. B(2)---Economic Reforms Order (1 of 1972), Arts. 7-B, 7-D, 7-E & 3(1)---Public limited company---Majority shares of th.9 assessee-company were acquired by the Federal Government under Arts.7-B(1) of Economic Reforms Order, 1972 and thereafter the management and the shares of the assessee-company were transferred to a Corporation in exercise of the powers conferred by Ait.7-E(1) of the Order thus by fiction of law the Federal Government was deemed to have held majority of shares of the asses see-company, notwithstanding the fact that the shares stood transferred to a Corporation by Federal Government---Majority shares of the assessee-company shall be deemed to have been acquired by the Government thus qualifying the condition of the definition of "public limited company" as defined in para.B(2) of Part IV of the First Sched. of Income Tax Ordinance, 1979.
(b) Income Tax Ordinance (XXXI of 1979)---
----Ss.156 & 65---Rectification of mistake---Re-opening of assessment-- Change of opinion---Effect---Principles---Reasonable balance is to be struck in the concept of finality of assessment and exercise of authority vested in the Assessing Officer in re-opening/rectifying the assessment order---Change of opinion cannot be allowed in the garb of re-assessment/rectification.
1985 PTD (Trib.) 742 ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 156 & 66-A---Rectification of mistake---Powers of Inspecting Assistant Commissioner to revise Income Tax Officer's order ---Principles-- Intricate and complicated question requiring lengthy process of arguments and long drawn reasoning on debatable point of law are not within the ambit of mistake apparent on record---If the Assessing Officer makes any order which is erroneous and prejudicial to the interest of revenue same can be revised by his I.A.C. by virtue of authority vested in him under S.66-A, Income Tax Ordinance, 1979---Where no change had taken place either on the factual or legal plane rejecting the assessment, Assessing Officer was not justified in re-opening/rectifying the assessment on the basis of mere change of opinion.
The intricate and complicated questions requiring lengthy process of arguments and long drawn reasoning on debatable point of law are not within the ambit of mistake apparent on record. If the Assessing Officer makes any order which is erroneous and prejudicial to the interest-of revenue it can be revised by his Inspecting Assistant Commissioner by virtue of authority vested in him under section 66-A of the Income Tax Ordinance. Thus the law has taken care of situation in which an erroneous order prejudicial to the interest of revenue can be corrected without disturbing the concept of finality of assessment at the level of Assessing Officer. Since, in the present case no change had taken .place either on the factual or legal plane regarding the assessment, therefore the Assessing Officer was not justified in re-opening/rectifying the assessment on the basis of mere change of opinion.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 32---Method of accounting---Stock-in-trade---Valuation---Basis on which the stock-in-trade is valued is part of "method of accounting" and change in the method of valuation of stock-in-trade can be allowed.
Treatise on Law of Income Tax in India by V.S. Sundaram, Vo1.III, (11th Edn.) p.2392; Kanga and Law and Practice of Income Tax by Palkhiwala, Vol. I, 7th Edn., p.877; Indo Commercial Bank Limited v. CIT 44 ITR 22 and Rathna Tea Estate, Dacca v. CIT, Dacca 1965 PTD 203 ref.
(e) Income Tax Ordinance (XXXI of 1979)---
----S.32---Method of accounting---Valuation of stock-in-trade---Change in the method of accounting for the purpose of valuation of stock-in-trade on the part of assessee is permissible with the conditions that it should be bona fide and not for a particular year only---While the assessee can change the method of accounting of valuation of stock-in-trade but at the same time the Assessing Officer is to see that it is bona fide and not a casual change.
Akbar G. Merchant, C.A. for Appellant.
Muhammad Farid, D.R. for Respondent.
Date of hearing: 15th June, 1988.
ORDER
The above appeals are directed against the orders of learned Commissioner of Income Tax (Appeals), Zone-II, Karachi. Since common questions of facts and law are involved, therefore, all the appeals have been heard jointly and are disposed of by this single consolidated order.
2. Briefly stated the relevant facts are that the appellant is a nationalized taken-over industry under the provisions of Economic Reforms Order, 1972. Since very beginning, the appellant was being assigned the status of Public Limited Company and the tax rate as applicable to the Public Limited Company was being applied. On 26-2-1987 the Income Tax Officer issued a notice to the appellant requiring to explain as to why the tax rate as applicable to Private Limited Company may not be applied for the reasons that majority shares of the appellant were not held by the Government but were held by Pakistan Automobile Corporation Limited. The I.T.O. treated the previous treatment to the appellant as mistake apparent from record and resorted to the provision of section 156 for the Assessment years 1982-83 and 1983-84. So far the Assessment years 1977-78, 1978-79. 1980-81 and 1981-82 are concerned the same view was held by the Income Tax Officer, but notice was issued under section 65 of the Income Tax Ordinance on 14-3-1987 due to limitation of period. An explanation was furnished or, behalf of the appellant as under:---
"(1)In First Schedule in Part IV under paragraph B Public Limited Company has been defined to mean a company in which not less than 50 % of shares are held by Government. It is respectfully submitted that Federal Government is the owner through Pakistan Automobile Corporation Ltd. (PACO) owning 99.998 shares and M/s. Sindh Engineering Ltd. another PACO company is the owner of 2 shares, making an aggregate of 1,00,000 shares owned by the said two entities. As both these entities are ultimately owned by Federal Government and fulfilling, the prerequisites of the definition of (Public Company) as such, are accordingly entitled to rating of tax of a Public Company, as envisaged in the aforesaid provision of law.
(2)The said provision of law, since introduced, envisages 'Public Company' definition to include all companies managed by Government through Federal Corporations, such as, Pakistan Automobile Corporation, Federal Light Engineering Corporation, Federal Chemicals and Ceramics Corporation etc. It is submitted that the provision of law itself envisages definition to mean and include such companies as AWAMI AUTOS Ltd. and this is the position since introduction of this provision of law.
(3)Without prejustice to foregoing (1) and (2) even the Tax Department has been consistently interpreting the said provision of law in a manner so as to allow relief to AWAMI AUTOS, treating it as a PUBLIC Company. Therefore, Tax Department has been consistently interpreting in this manner for many years and now without any amendment in the law, no different interpretation mid stream even if the earlier interpretation was contrary to law.
(4)In reported case PTDC 1984 CL 20 of Sindh High Court, it has been ruled that same provision of law when consistently interpreted over a period of time cannot be interpreted unfavorably to assessee, without specific change in the provision of law, depending upon the judgment of Supreme Court of Pakistan, reported in PLD 1970 Supreme Court 453. Photo copy of the case-law is annexed herewith.
(5)Under Economic Reforms Order of 1972, the Government has taken over 100% ownership and control of above company, which clearly shows and reflects the ownership and the management of the Federal Government since such law was promulgated. Therefore, such ownership and control ultimately got reflected through ownership of shares of the assessee-company being controlled by Federal Government through machanism of PACO.
The case history, if traced since Economic Reforms till date, will categorically reveal the Federal Government control and management, through PACO under Ministry of Production, Government of Pakistan. It is submitted that veil of a Corporate entity needs to be lifted to reveal Federal Government ownership and control.
It is the provision of law, as you are seeking to interpret, will frustrate the whole objective of the said provision and therefore, such interpretation as you seek to give cannot be permitted.
It is usual and customary practice for Federal Government to exercise ownership right and control through Federal Corporations of various companies managed and controlled by Federal Government. Even the main object of the definition, since introduced, .is to cover such companies, as the assessee whose ownership is of Federal Government, through Federal Corporation. "
3. The Income Tax Officer repelled the contentions of appellant holding as under:---
"It is an admitted position that the shares are not held by the Government but by a Corporation. The definition of public limited company in Part IV under paragraph B of First Schedule is very clear, unambiguous and does not involve any complex phenomenon of interpretation. There is no question of lifting a veil of the incorporation as the definition of 'Company' whether private or public is very clear not only under Company's Ordinance, but also in Income Tax Ordinance. Moreover the contention of the assessee that by applying a rate of public limited company for many assessment years the department has followed the consistent practice and thus could not be changed in view of the judgment in case PLD 1970 Suprett6 Court 453 is also untenable and unfounded. The case referred by the learned counsel for the assessee is also clearly distinguishable as it is not the question of looking into the practice of the tax authority but the question under consideration here in interpretation of a tax statute. "
4. The Income Tax Officer thus re-assessed/rectified the assessments already made and applied the tax rate as applicable to a private limited company. In the Assessment years 1984-85 and 1985-86 the appellant was assigned a status of private limited company in the very original assessment order. The appellant feeling aggrieved with the treatment meted out to them in all the years under consideration preferred appeals before the learned CIT(A) agitating the question of status assigned to them and assailing the respective assessment orders on various other grounds which shall be discussed separately by us presently. The appellant challenged jurisdiction of Income Tax Officer for re-opening/rectifying of assessment contending that there was no justification for re-opening/rectification because of merger of assessment in the appellate orders and that no definite information came in the possession of Income Tax Officer as the entire facts remained unchanged and thus it is a case of change of opinion which was not permissible in law. So far the rectification in two assessment years is concerned it was contended that a point involving interpretation of complicated question of law, lengthy process of argument and intricacy cannot be deemed to be mistake apparent on record as envisaged under section 156 of the Income Tax Ordinance. All these objections were overruled and it was held that the ITO rightly re opened/rectified the original assessment. Regarding the contention that the appellant was public limited company, it was held that since the appellant shares were owned and held by a public corporation, the equity of which was held by the Government, therefore, it did not fall within the scope of public company as defined in para. B(2) of Part IV of the First Schedule to the Income Tax Ordinance, 1979. The learned CIT(A), therefore, observed as under:---
"Regarding the issue dealing with the company being treated as a private limited company of the purpose of levy of super-tax at 25 with all due respects. to the decision relied upon and the elaborate written arguments but forward on this issue I find that taking into consideration the provisions of law and the term 'public company' as defined in Part IV of the Income Tax Ordinance, 1979 which reads as follows:---
'Public company' means--
(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 the years; or
(c)
The question of interfering with the action of the ITO does not arise. Besides the definition as stated above it is obvious that in the case of the appellant para. (b) is not applicable. The contention raised by the appellant pertains only to para. (a). The fact that the appellant's shares were owned and held by a public corporation the equity of which was held by the Government is not sufficient to fall within the scope of para. (a). The Government and such Public Corporations are two distinct and separate entities in law and in fact. While Government is exempt from tax even the wholly owned Public Corporations are not exempt. The Public Corporations even though wholly owned by the Government are 'Companies' nevertheless, as defined in section 2(16) of the Ordinance. The definition of 'Company' under section 2(16) includes Provincial Government by clause (d) but it does not include the Federal Government. The Public Corporation (whether wholly owned by Government or not) are separate juridical persons liable to be sued in its own name and not in the name of the Government. This distinction has always been brought out in taxation matters by the superior Courts: Reference may be made to the British Broadcasting Corporation v. John 41 TC 471 and the cases reported as 52 ITR 524 and 51 ITR 440. The contention of the appellant that since more than 50% of shares of the appellant are held by another parent company which in its own turn is Government-owned Corporation, it should be assumed that indirectly, these shares are also held by the Government has, therefore, no force. Fiction of law cannot be assumed. Nor it is there any intendment relevant in tax law. The contention is, therefore, rejected and the ITO's action in treating the assessee/appellant as a private company is confirmed. "
The other objections to the assessments in different years shall be reflected in the grounds of appeals which will be enumerated separately.
5. The following issue is common to all the assessment years and, therefore, we would like to decide this issue first:---
"Whether the assessee/appellant is not a public limited company as defined in Para. B(2) of Part IV of First Schedule to the Income Tax Ordinance, 1979. "
6. It is admitted position that out of 1,00,000 shares of the appellant, 99,998 are held by Pakistan Automobile Corporation Limited (PACO), a corporation established by the Federal Government, and 2 shares are held by M/s. Sindh Engineering Limited another PACO company. The contention of appellant is that Federal Government is owner of the majority of shares through Pakistan Automobile Corporation Limited Company as defined in Para. B(2) of Part IV of the First Schedule to the Income Tax Ordinance, 1979. On the other hand the contention of the department as supported by the learned D.R. before us is that the Corporation and the Federal Government are. distinct entities. Thus the shares held by a Corporation cannot be treated to be held by the Federal Government and as such the qualifying condition of public limited company is not fulfilled. The public company is defined in Para. B(2) of Part IV of First Schedule to the Income Tax Ordinance, 1979 as under:---
"(2) 'public company' means---
(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 dealing 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."
7. The point which clinches the issue is whether majority of shares of the appellant are held by the Government or not. It is admitted position that the appellant is Government taken-over Industry under the provision of Economic Reforms Order, 1972. The relevant provisions of the Economic Reforms Order, 1972 are as under:---
"4. Power to appoint Managing Director.--(1) The Federal Government may, if it considers necessary in the public interest so to dog by order to appoint a Managing Director in respect of an establishment.
(2) On the appointment of a Managing Director in respect of an establishment, the administration of the affairs of that establishment shall vest in him and any person or authority exercising or having the right to exercise immediately before such appointment, any power or function in relation to the establishment shall cease to exercise or to have the right to exercise such power or function and, on and from such date as the Federal Government may, by notification in the official Gazette, specify, the establishment shall be known by such name as may be so specified.
7-B. Power to acquire shares or business of an establishment.--(1) The Federal Government may, if it considers necessary in the public interest so to do, by an order---
(a)in the case of an establishment which is a company or an establishment owned by a company--
(i)acquire the entire shares held in the company by the sponsors and directors of the previous management thereof, the family members of such sponsors and directors and the associated undertakings and managing agents which were the associated undertakings and managing agents of the company at the time at which a Managing Director was appointed or a portion of the shares from all or any of the shareholders of such company and, as from the date of such order- the shares so acquired shall vest in the Federal Government, or
(ii)acquire the whole or a portion of the proprietary interest of such company in such establishment as from the date of such order, the interests so acquired at all vest in the Federal Government, or
(b)in the case of an establishment owned by a person, acquire the whole or a portion of the proprietary interests of such person and, as from the date of such order, the interests so acquired shall vest in the Federal Government.
7-D.Re-organization of establishment.--(1) Where, in respect of any managed establishment which is a company or an establishment owned by a company, the Federal Government holds or has acquired the whole or a majority portion of the shares in the company carrying the controlling vetting rights, or where the Federal Government has acquired the whole or a controlling portion of the proprietary interests it may at any time re-organise such establishment with a view to increasing its efficiency and nationalizing its operations.
(2)The re-organization may include provision for amalgamation of a managed establishment with other such establishment or with under takings owned or managed by the Federal Government or by a corporation set up under the authority of the Government and, in the case of establishments which are companies or establishments owned by companies may provide for the reconstruction of any such company or any such two or more companies and for all or any of the matters contained in section 153 or section 153-B of the Companies Act, 1913 (VII of 1913), or for alteration of shares capital or loan structure and alteration of existing or adoption of fresh, Articles of Association of such Companies.
(3)The re-organization shall be implemented and take effect in such manner and at such time as the Federal Government may, by notification in the official Gazette, specify.
Explanation.--For the purposes of this Article 7-E and Article 7-F, the Federal Government shall be deemed to have a majority portion of shares in a company carrying control in voting rights or the controlling proprietary interest in an establishment if the aggregate face value of the shares or proprietary interests in such establishment owned by the Federal Government and by an institution owned or controlled the Federal Government exceeds 50% of the total voting rights in the issued and paid up share capital of the company. or 50% of the proprietary (sic) that establishment."
"7-E. Vesting of management etc. acquired by Federal Government in a corporation.--(1) Where the Federal Government acquires the whole or a majority portion of the shares or proprietary interests of a company or other person under Article 7-B, the Federal Government may transfer the management of, and such shares or proprietary interests in, such establishment to any corporation wholly owned or controlled by the Federal 'Government or a corporation to be set up for the purpose.
(2) A corporation to which the management of, or shares or proprietary interest in an establishment is or are transferred under clause (1) shall, in the exercise of its powers and performance of its functions, be subject to the general supervision and control of such Board or other authority the Federal Government may set up for the purpose. "
8. By virtue of the authority vested in the Federal Government under the provisions of Economic Reforms Order, 1972 the Federal Government acquired whole of the shares from the share-holders of the Awami Autos Limited with effect from 29th November, 1973. The decision was communicated to the Managing Director of M/s. Awami Autos Limited, Karachi by the following letter:--- .
GOVERNMENT OF PAKISTAN
PRODUCTION DIVISION
No.13/(B)/44/2/73Islamabad, the 29th Nov. 1973
From
M. Aslam Janjua,
Deputy Secretary to the
Government of Pakistan
To
The Managing Director,
Awami Auto Limited,
West Wharf, Karachi.
Subject:Acquisition of shares under the Economic Reforms Orders, 1972
Dear Sir,
Please find enclosed Federal Government Order No. PD/(B)/44/73 26, dated 29th November, 1973 under which the Federal Government has acquired the whole of the shares from the shareholders of the Awami Autos Limited.
Please inform immediately the shareholders, whose shares have been acquired, by registered post acknowledgement due.
2. You shall make arrangements to exchange the existing certificates with the certificates of entitlement for compensation for acquired shares. For the purpose of issuing certificates of entitlement for compensation, please issue a public notice giving two weeks from the date of publication of such notice by which date of shares should be lodged with you.
3. Your attention is invited to the Economic Reforms (Acquisition and Compensation) Rules, 1973 for strict compliance.
Your truly,
(Sd.)
M. Aslam Janjua,
Deputy Secretary to the
Government of Pakistan."
9. Thereafter by an order, dated 24-7-1974, the Management of Awami Autos Limited and the shares acquired by the Federal Government were transferred to Pakistan Automobile Corporation Limited (PACTO), in exercise of the powers conferred by clause (1) of Article 7-E of the Economic Reforms Order, 1972. The said order reads as under:---
"No. 1/18/74/OP. 3
GOVERNMENT OF PAKISTAN
MINISTRY OF PRODUCTION AND PRESIDENTIAL
AFFAIRS (PRODUCTION DIVISION)
24th July, 1974
ORDER
WHEREAS, in exercise of the powers conferred by clause (1) of Article 7-B of the Economic Reforms Order, 1972 (P.O. No. 1 of 1972), the Federal Government has acquired a majority portion of the shares or proprietary interests of the establishments specified in the Schedule below:---
NOW, THEREFORE, in exercise of the powers conferred by clause (1) of Article 7-E of the aforesaid Order, the Federal Government is pleased to order that the management of each of the establishments specified in the first column of the aforesaid Schedule, and the shares of proprietary interests acquired by the Federal Government therein, shall stand transferred to the Corporation specified in the second column of the Schedule against such establishment.
SCHEDULE
Name of the EstablishmentName of the Corporation
(1) ... ... ... ... ... ... ... ... ...
(2) ... ... ... ... .. ... ... ... ....
(3) ... ... ... ... ... ... ... ... ...
(4) ... ... ... ... ... ... ... ... ...
(5) ... ... ... ... ... ... ... ... ...
(6) Awami Autos LimitedPakistan Automobiles
Sindh Engineering Ltd.Corporation Limited."
10. From the contents of the above letters, it appears that the majority i portion of the shares of the appellant were acquired by the Federal. Government under clause (1) of Article 7-B of the Economic Reforms Order, 1972, and thereafter the management and the shares of the appellant were transferred to Pakistan Automobile Corporation (PACO) in exercise of. the powers conferred by clause (1) of Article 7-E of the Economic Reforms Order, 1972. A perusal of the explanation in Article 7-D of the Economic Reforms Order, 1972 shows that for the purposes of Articles 7-D, 7-E and 7-B the Federal Government shall be deemed to have a majority portion of shares in a company carrying the controlling voting rights, or the controlling proprietary interest is an establishment if the aggregate face value of the shares or proprietary interests in such establishment owned by the Federal Government and by an institution owned or controlled by the Federal Government exceeds 50% of the total voting rights in the issued and paid-up share capital of the company or 50% of the proprietary interests of that establishment. The department has not disputed the fact that the Pakistan' Automobile Corporation (PACO) is controlled by the Federal Government and that the majority of the shares of the Awami Autos Limited held by Pakistan Automobile Corporation Limited, therefore, by virtue of explanation to Article 7-D of the Economic Reforms Order (supra) the Federal Government shall be deemed to have majority portion of shares in Awami Autos Limited. Thus by fiction of law the Federal Government is deemed to have held majority of shares of the appellant, notwithstanding the fact that the said shares stand transferred to PACO by Federal Government. The provisions contained in the Economic Reforms Order, 1972 shall override the provision of any other law for the time being in force by virtue of provision of Article 3(1) which reads as under:--
"Order to over-ride other laws.--(1) This order shall have effect notwithstanding anything contained in the Provisional Constitution Order or any law for the time being in force or in any law for the time being in force or in any agreement, contract, memorandum or articles."
11. We are, therefore, of the opinion-that the arguments that veil of the Corporation is to be lifted for revealing Government ownership and control was totally irrelevant and the learned CIT(A) fell in error by entering into the discussion "if a corporation was separate entity distinct from the Government or not?". The learned CIT(A) did not advert to the relevant provisions of Economic Reforms Order, 1972 cited above, and, therefore, wrongly concluded that fiction of law cannot be assumed. There, is no question of assuming any fiction of law as explanation to. Article 7-D of Economic Reforms Order, 1972 (supra) clearly provides that for the purpose of Articles 7-D, 7-E and 7-B of the Economic Reforms Order, 1972 the Federal Government shall be deemed to have majority portion of shares in a company, if the said shares are owned by an institution owned or controlled by the Federal Government. For the aforesaid reasons and on the facts and in the circumstances shown above, the majority of shares of the appellant shall be deemed to have acquired by the Government and, therefore, qualifying condition of the definition of 'public limited company' as defined in para. B(2) of Part IV of the First Schedule of Income Tax Ordinance, 1979 is fulfilled. The appellant is, therefore, held to be a 'public limited company'. The learned two officers below have erred in holding otherwise. Mr. Muhammad Farid, learned D.R. referred to Articles 165 and 165-A of the Constitution of Pakistan for making a distinction between 'corporation' and 'Government' but we are of the opinion that in view of fiction of law referred to above the general provision of law relating to the status of corporation is to be left out of consideration and becomes irrelevant, and therefore, we need not to dilate on the contention raised by Mr. Muhammad Farid, in this behalf.
12. After holding that the appellant is a 'public limited company', the objection relating to the jurisdiction for re-opening/rectifying the proceedings under section 65/156 of the Income Tax Ordinance respectively becomes a question of academic interest only. Without going into further details we would like to observe that the consistent view of this Tribunal has been that a reasonable balance is to be struck in the concept of finality of assessment and exercise of authority vested in the Assessing Officer in re opening/rectifying the assessment orders. We have been holding 'that the change of opinion cannot be allowed in the garb of re assessment/rectification. The principle has been elaborated by a Division Bench of this Tribunal in the case reported in 1985 PTD 742 (Trib.) as follows:---
"If one I.T.O. arrives at conclusion 'E' after due enquiry on the basis of the facts A, B, C, D, made available to him his successor cannot come to conclusion ' F' if the facts A, B, C, D, remain un changed. If he does so, this would be case of change of opinion and his order would not be upheld. However, he comes to conclusion ' F' because additional facts ' X' and ' Y' were brought to his notice, on top of fact A, B, C, D, which were made available to his predecessor, he would be justified in issuing notice under section 65. This is the principle of law emerging from the two decisions of the Tribunal (supra) cited by Mr. Pasha and of course, from the judgment of a Division Bench of K .....High Court in Abdullah's case (supra)."
13. So far the rectification of mistake apparent on record is concerned, there is consensus of opinion that the intricate and complicated questions requiring lengthy process of arguments and long drawn reasoning on debatable point of law are not within the ambit of mistake apparent on record. If the Assessing Officer makes any order which is erroneous and prejudicial to the interest of revenue it can be revised by his Inspecting Assistant Commissioner by virtue of authority vested in him under section 66-A of the Income Tax Ordinance. Thus the law has taken care of situation in which an erroneous order prejudicial to the interest of revenue can be corrected without disturbing the concept of finality of assessment at the level of Assessing Officer. Since, no change had taken place either on the factual or legal plans regarding the assessment, under consideration, therefore we are of the opinion that the Assessing Officer was not justified in re-opening/rectifying the assessment on the basis of mere change of opinion.
GROUND N0.2.--The appellant claimed allowance of Rs.44,67,244 on the basis of valuation of stock-in-trade. Income Tax Officer disallowed the claim holding that the assessee has changed valuation of spare parts without any permission and without a cogent reason. According to the audited statement the stock-in-trade was undervalued by Rs.44,67,244. While deciding the first appeal, learned Commissioner of Income Tax (Appeals) held that the addition on account of stock-in-trade was made by the Income Tax Officer without examining the issue. The addition was, therefore, set aside as it was made without giving any reason as to why explanation of appellant was being rejected. The learned CIT(A) directed the Income Tax Officer to re-examine the issue and see that the change as made is bona fide and also to see that similar method has been adopted up to Assessment year 1986-87 and in case the change is found to be bona fide and this method of valuation of stock-in-trade continues up to 1986-87, then no addition is to be made. The grievances of Mr. Akbar Merchant is that instead of setting aside, she sought to have given the direct relief. He has further taken plea that the direction that change of method of valuation should continue up to Assessment year 1986-87 is not tenable. On the other hand Mr. Muhammad Farid, learned D.R. has contended that the valuation of stock-in-trade is method of accounting and it should not be allowed to be changed without permission. In support of his contention that the valuation of stock-in-trade is method of accounting, Mr. Muhammad Farid has placed reliance on the opinion in the treatise on Law of Income Tax in India by V.S. Sundaram, Volume III (11th Edition) page 2392. Mr. Akbar Merchant, learned counsel for the appellant has maintained that valuation of stock-in -trade is made on the basis of continuous survey by the experts on scientific basis and on proper method of accounting. He has contended that the valuation of stock-in-trade is the choice of the assessee and the department is bound to accept it so long it is maintained on proper method of accounting.
We have considered the contentions raised by the representatives for the parties. We are of the opinion that there is sufficient force in the contention of Mr. Muhammad Farid that the basis on which the stock-in -trade is valued is part of the method of accounting. It is so observed by Kanga and Palkhiwala as -well in the Law and Practice of Income Tax, Volume I (7th Edition) at page 877 on the basis of ruling in the case of Indo Commercial Bank Limited v. CIT, 44 ITR 22. However, we are not inclined to agree with the contention of Mr. Muhammad Farid that the change in the method of valuation of stock-in-trade cannot be allowed. We would not like to examine the issue at length because the department is not in appeal before us against the findings and directions of the learned Commissioner of Income Tax (Appeals) to the effect that the Income Tax Officer may re-examine the issue and see that change as made is bona fide and if the same method of valuation of stock-in-trade continues up to 1986-87 then no addition is to be made. In this appeal we are seized of the objection of the appellant that the direction of learned CIT(A) is not tenable and she ought to have given direct relief. The issue in question is governed with the provision on section 32 of the Income Tax Ordinance, 1979 relating to the method of accounting. The analogous provision was contained in section 13 of the Repealed Income Tax Act, 1922 section 145 of the Indian statute is pari materia with section 32 of the Income Tax Ordinance, 1979. While examining the question of change in the basis of valuation of stock-in-trade it is observed by V.S. Sundaram in his commentary on Law of Income Tax in India, Volume III (11th Edition) pages 2400-2401 as under:---
"This section does not preclude a change in the basis of accounting by the assessee, but if the change disturbs the true figure of profits as a consequence, it is open to the Income Tax Officer to make his own computation on such basis as would reflect the true profits. `Ordinarily unless(a) the opening balance of stock in a year coincided with the corresponding closing balance of the preceding year (b) the opening and closing balances of the same year were valued on the same basis; the true profits of the year would not emerge. In certain cases, however, noted below, these conditions were not insisted on. In other words, the distortion of profits in the year of change seems to have been condoned. The reason was as below. Closing balances may be valued at cost or market-value whichever is lower. Therefore; if the assessee changes over from one basis to another, then will be no objection if this change is bona fide and the new basis is adhered to for the future i.e. the basis is not altered from year to year merely to reduce the figure of profit. The closing balance of the preceding year should agree with the pending balance of the year in question. "
Kanga and Palkhiwalas have expressed their views in the Law and Practice of Income Tax, Valume I (7th Edition), page 879 as follows:---
"Whichever basis of valuation of stock in hand is adopted; it may be adhered to consistently; casual departure from the regular basis of valuation cannot be permitted. The one thing that is essential is that there should be a definite method of valuation adopted which should be carried through from year to year, so that in case of any deviation from strict market value is the entry of the stock at the close of one year it will be, rectified by the accounts in the next year. The onus of proving that the regular basis of valuation has been departed from is on the Department. But it is open to an assessee to make a clean change of the regular method of valuation. Likewise, it is open to the revenue to reject a basis of valuation which had been accepted by it consistently in the past, provided there are overriding reason for effecting a change. "
While dealing with section 13 of the Repealed Income Tax Act, it has been observed by Raza Naqvi in his book Law and Practice of Income Tax in Pakistan, Volume. 2 (Fourth Edition), page 573 as under:--
"An assessee is entitled to change his method of valuation provided it is bona fide and provided further it has method of valuation for regular employment by the assessee and not merely for the year in question.
It has been held by Dacca High Court in the case of Rathna Tea Estate, Dacca v. CIT, Dacca 1965 PTD 203 pp. 205 to 207 as follows:---
"Mr. Huda appearing for the department contends that such a change over is not permissible when the assessee had been following the method of accounting in the matter of the valuation of the closing stock by reference to the market rate. The word 'regularly' has nowhere been explained. But certainly it is not synonymous with the word, 'perpetual: or 'permanent'. In our view it seems the intention underlying this expression is that if it appears that the assessee concerned means to adopt the changed method of accounting for the year under assessment as also for subsequent years at the relevant time then it cannot be contended that it would be departure from the rule underlying the principal clause of section 13. The section does not indicate by an express language or by implication that the assessee is not permitted to adopt a changed method of accounting provided he does not mean to adopt such a changed course only for a casual period and he does not mean to evade collection of taxes. The proviso under section 13 is there to safeguard the interest of the department concerned. If by reason of such changed mode or method of accounting it becomes un intelligible to the Income Tax Officer and if in his opinion the income, profits and gains cannot properly be deducted therefrom then it will be in his discretion to make the computation upon such basis and in such manner as the Income Tax Officer may determine. The decision of the Privy Council in the case of Commissioner of Income Tax Bombay Presidency v. Ahmadabad New Cotton Mills Company Limited reported in I.A. 21 does not, in our view, lay down that it is not permissible to adopt a changed method of accounting even though it might be bona fide and there might not be any prejudice to the interest of the department concerned in the matter of collection of taxes. Their lordships simply laid down that when in a return of the profits of a business for the year of assessment the opening and closing stocks have both been undervalued by the assessee, the real profits for the particular year cannot be ascertained by merely raising the valuation of the closing stock without taking into account a similar under valuation of the opening stock. The under valuation having been discovered the Income Tax Officer re-valued the closing stock at its proper value with the result that the assessment for the year was raised from Rs.2,49,142 to Rs.7,66,450. The High Court held that the assessment should be varied by valuing at their true valuation the company's stock at the beginning or at the end of the year in question and not by revaluing the stock at the end of the year. Their Lordships of the Privy Council agreeing with the opinion of the High Court observed at page 23:---
"When, therefore, there is under valuation at one end, the effect is to cause both a smaller debit in respect of the stock introduced into the next account and a larger sum for profits realized by the sale, change in market values being immediately reflected in the price obtained for the goods that are sold; in these circumstances to contend that there should be under valuation at one end and not at the other is to raise an argument which their lordships cannot accept."
In that particular case their lordships also held that it was never suggested that the method employed by the assessee was not regularly or properly employed. Thus it appears that the question as to whether it was permissible to change the method of accounting was not before their lordships. As already indicated upon a reading of the language of section 13 it seems to us that there is no bar against a possible change in the method of accounting provided it does not prejudice the interest of the department concerned. In a Madras case reported in 44 ITR 22 in the case of Indo Commercial Bank Ltd. v. Commissioner of Income Tax, Madras, it has been held that the assessee has the option of valuing the closing stock either at cost price or at market value, if the market value is lower than the cost price. But it has been consistently held in all the decisions placed before us that the change should not be arbitrary. There is no finding in the, instant case that the change was arbitrary, On the other hand, on a query by the department it was replied by the assessee that the method of accounting in so far it showed in previous years, the valuation of the closing stock at the market rate, was wrong. In a Bombay case reported in 4 ITR 420 in the case of Saruchand v. Commissioner of Income Tax, Bombay, it was held that an assessee was entitled to change the method of accounting regularly employed by him. What he must alter, however, is his regular method, that is to say, he must abandon what up to that time, has been his regular method, and start a new regular casual period. Nowhere it has been suggested that the present change as from 1958 is only for a casual period. It goes without saying that it is the assessee and not the department which has the choice on the method of accounting in terms of section 13 of the Income Tax Act, and the Income Tax Officer can interfere only when it is likely to prejudice the interest of the department concerned and the changed method of according may not furnish proper materials upon which the income, profits and gains are to be ascertained. The department seems to be bound by the choice of the assessee in the matter of changing the method of accounting subject to the conditions as indicated above. In the case of Commissioner of Income-tax, Bombay v. Sarangpur Cotton Manufacturing Co. Ltd. reported in 6 ITR 36. Their lordships of the Judicial Committee of the Privy Council have stated at page 40 as follows:---
"Their lordships are clearly of opinion that the section relates to a method of accounting regularly employed by the assessee for his own purposes, in this case for the purposes of the Company's business and does not relate to a method of making up the statutory return for assessment to income-tax. Secondly, the section clearly takes such a method of accounting a compulsory basis of computation unless in the opinion of the Income Tax Officer, the income, profits and gains cannot properly be deducted therefrom.
We are, therefore, of the opinion that the Tribunal was not right in observing that, 'The modification now wanted by the assessee would be a departure from the method of accounting and cannot be permitted under section 13 of the Income-tax Act'. The only test which would make a change in the method of accounting permissible is that it would be a bona fide, not intended to evade taxes and that it would be intended to be employed regularly and not for a casual period. "
As a result of above discussion, we find that the change in the method of accounting for the purposes of valuation of stock-in-trade on the part of the assessee is permissible with the conditions that it should be bona fide and not for a particular year only. Thus while the assessee can change the method of accounting of valuation of stock-in-trade but at the same time the Assessing Officer is to see that it is bona fide and not casual change. I Applying the above principle to the facts of the present case we find that the Assessing Officer rejected the claim without examining the-bona fide of the assessee and without assigning any reason. In these circumstances the learned Commissioner of Income Tax (Appeals) was perfectly justified in giving direction to the Income. Tax Officer for re-examining the issue with reference to the bona fide of the assessee and further to see that the same method of valuation is continued till the assessment year 1986-87. In the facts and circumstances of the case the learned CIT(A) could not give the direct relief as contended by Mr. Akbar G. Merchant, and the direction given to see that the method of accounting is continued up to Assessment year 1986-87 is also justified and no exception can be taken to it. The finding of learned Commissioner of Income-tax (Appeals) is, therefore, confirmed.
M.B.A. /228/Trib. Order accordingly.