W.T.A. NO.622/1_13 OF 1995 VS W.T.A. NO.622/1_13 OF 1995, 1997 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 164 (1996)

(a) Income-tax---

----Fiction of law---General principles---Income-tax is an annual charge and the income, profits or gains and the taxes leviable thereon are independent and self-contained unit---Income-tax is levied on the real income and not on the imaginary income---Even if tax is levied on any deemed or notional income, the same income is deemed to be the real income by fiction of law.

Two principles are the most established principles of law relating to income-tax. First that the income is an annual charge and the income, profits or gains and the taxes leviable thereon are independent and self-contained unit. Secondly, that income-tax is levied on the real income and not on the imaginary income. Even if tax is levied on any deemed or notional income the said income is deemed to be the real income by fiction of law. Even if something does not exist the Legislature has authority to declare the said thing to be deemed to exist and thereafter all the attributes of an existing reality are to be attached to such fiction of law and it is to be taken to its logical conclusion. Such fiction of law is not to be deemed for, the purpose of levy of tax only. If any benefit, allowance or deduction flows from such deeming provision it is to be equally allowed to an assessee as well. The view entertained by the I.A.C. that the assessment proceedings are not a magic wand by which the Assessing Officer may convert the assessed income into real income cannot be upheld as it would be negation of the very principle of taxation that the income-tax can be levied on real income only.

(b) Interpretation of statutes---

---- Fiction of law---Even if something does not exist the Legislature has authority to declare the said thing to be deemed to exist and thereafter all the attributes of an existing reality are to be attached to such fiction of law and it is to be taken to its logical conclusion.

(c) Income Tax Ordinance (XXXI of 1979)---

----S.26(b) & Fifth Sched., Part I, paras. 3 & 4(1)---Exploration and production of petroleum---Computation of profits and gains- --Expression "profits and gains" in paras. 3 & 4(1) of Part I of Fifth Sched. to the Income Tax Ordinance, 1979, Connotation---Expression is to be given same connotation and same meaning while levying tax and allowing depletion allowance to the assessee---Assessment proceedings do increase the real profits and gains of the assessee and the assessment income is the real income---Income Tax Department cannot levy the tax on the assessed income which allow the benefits and allowances on the basis of declared income because that would amount to blowing hot and cold at the same time which is not permissible in law.

The expression "profit or gain" used in Rules 3 and 4(1) of Part I to the Fifth Schedule to the Income Tax Ordinance, 1979 are to be given same connotation and same meaning Chile levying tax and allowing depletion allowance to the assessee. The assessment proceedings do increase the real profits and gains of the assessee and the assessed income is the real income, it is not available to the Income-tax Authorities to say that assessed income is not the real income and that they will levy the tax on the assessed income while they will allow the benefits and allowances on the basis of declared income. It would amount to blowing hot and cold at the same time which is not permissible in law.

The assessment order whereby the profits and gains taken for the purpose of levy of tax and for the purpose of depletion allowance were assigned same meaning, was neither erroneous nor prejudicial to the interest of revenue as the revenue is entitled to levy the tax in accordance with the law only.

(d) Income Tax Ordinance (XXXI of 1979)---

----S.32(3)---Income---Estimated income---Addition---Principles---If the addition is made by the Income-tax Authorities to the income of an assessee over and above the income as disclosed by the assessee, on estimate basis, the amount so added must be treated as the real income of the assessee-- come-tax Authorities cannot take the view that the addition was only for the purpose of taxation and that it should not be regarded as the true income of the assessee.

If the addition made by the Income-tax Authorities to the income of an assessee over and above the income as disclosed by the assessee, on an estimate basis, the amount so added must be treated as the real income of the assessee. It is not open to the authorities to take the view that the addition was only for the purpose, of taxation and that it should not be regarded as the true income of the assessee.

If the Income-tax Authorities made additions to the assessable income of the assessee in the previous year as income from undisclosed source, the assessee shall be entitled to take advantage of the past intangible additions to explain the source of what was considered by the Income-tax Department as income from undisclosed sources. It was fair and equitable w allow the assessee to do so because the assessee had already paid the necessary income-tax on that amount. Thus the principle is that once department levies income-tax on any assessed income then it cannot turn around and say that the assessed income, profit or gains is not the real or true income of the assessee or it was assessed for the purpose of levy of tax only.

Where the Income-tax Authorities made an addition to the income of the assessee over and above the income as disclosed by the assessee on an estimate basis the amount so added must be treated as the real income of the assessee and it was not open to the authorities to take the view that the addition was only for the purpose of taxation and it would not be regarded as the true income of the assessee.

Kuppuswami Mudaliar v. CIT (1964) 51 ITR 757; CIT v. Ram Sanehi Gyanchand (1972) 86 ITR 724; CIT v. Sahu Brothers (1978) 115 ITR 438; 1968 PTD (Trib.) 146 and 1995 PTD (Trib.) 289 ref.

Shabbar Zaidi, FAC for Appellant

Shaheen Aziz Niazi, D.R. for Respondent,

Date of hearing: 20th March, 1996.

ORDER

The above appeal is directed against the order, dated 29-6-1995 by the learned I.A.C. Income-tax, Range-1, Companies-III, Karachi under section 66-A.

2. Briefly stated .the relevant facts are that the appellant is a non?resident company engaged in the exploration and production of petroleum oil in Badin area. The appellant company, is operator of joint venture comprising itself, Occidental petroleum (Pakistan) Inc. and Oil and Gas Development Corporation representing Government of Pakistan. During the Assessment year 1993-94 the appellant declared profit at Rs.10,84,45,215. The depletion allowance was claimed at Rs.19,45,96,518 being the 15% of the gross receipts representing well head value of the production under rule 3 of the 5th Schedule to the Income-tax Ordinance, 1979. The assessing officer allowed the depletion allowance as claimed. Subsequently, the learned I.A.C. formed opinion that by allowing depletion allowance as claimed the assessing officer passed an erroneous order which was prejudicial to the interest of revenue. The learned I.A.C. observed that the depletion allowance under Rule 3 of the Fifth Schedule to the Income Tax Ordinance, 1979 is admissible at the rate of 15 % of the gross receipts representing the well head value of the production provided that such allowance does not exceed 50 % of the profit or gain of such undertaking before deduction of such allowance. The profit or gain as declared for the year amounted to Rs.10,84,45,215. The learned I.A.C. further observed that in order to work out the admissible depletion allowance under Rule 3 of the Fifth Schedule the allowance claimed by the assessee at Rs.19,45,96,518 is to be added to the declared profit or gain, the total whereof comes to Rs.30,30,41,733 and the depletion allowance to the extent of 50 % under the proviso to the Rule 3 would work out to Rs.15,15,20,866. Thus the learned I.A.C. formed opinion that an amount of Rs.4,30,75,651 was deliberately claimed by the assessee in excess of amount admissible under the law. In the words of learned I.A.C. the assessing officer failed to take notice of this bare fact of grossly exaggerated, distorted and hyper inflated claim. The revenue has been clearly and deliberately deprived of due tax at the time of filing of return which amounts to furnishing of inaccurate particulars calling for action under sections 66-A and 111(2) of the Income Tax Ordinance, 1979". The I.A.C. thus issued a show-cause notice to the assessee and the assessee through letter, dated 22-3-1995 replied as follows:---

" ....the position of 'depletion allowance' as per the assessment order passed under section 62 of the Ordinance for the above year is as under:

From the above facts, apparently from the assessment order you would note that depletion allowance has rightly been allowed and there is no case of the proceedings under section 66-A of the Ordinance.

Without prejudice to the facts and legal provisions as stated above and not conceding to your argument that depletion allowance should have been claimed on returned income there is no loss of Revenu due to this treatment as there was a huge refund of Rs.134,144,22 as per the return of income. Needless to say, proceedings under the Ordinance could only be initiated if the order is erroneous in so far as it is prejudicial to the interest of revenue and not otherwise.

Further, we would also like to clarify that for the purposes c calculation of depletion allowance profit and gains refers to profit and gains as computed under the Ordinance and not that shown i the return. The difference as you are aware is on account of certain disallowances, considered allowable by the assessee, which a] however not allowed by the department i.e. Head Office expense and on which appeals are pending at various stages.

It is trite law and practice that where an allowance or deduction is allowed on the basis of profit and gain or income in that case such profit and gain represent amount as computed under the Ordinance, e.g. Workers' Welfare Fund, special allowance under section 23(ix) for financial institutions etc. and not the one return..... "

3. The above explanation furnished on behalf of the assessee could not impress the learned I.A.C. who issued another letter, dated 20-6-1995 calling for any other explanation/evidence in support of the contention. It was contended on behalf of the appellant/assessee as follows:

"It is a universal principle of law confirmed by all superior Courts that the same word occurring more than once in statute should be given the same meaning unles3 the context indicates a contrary intention. If the Legislature wanted the words 'profits or gains' in Rule 3 to have a meaning different from that used in Rule 4, it would have been expressly stated in the statute. There is no doubt or ambiguity about the meaning to be assigned to the said words. "

4. The contentions raised on behalf of the appellant could not find favour with the learned I.A.C. who held that the analogy of workers welfare fund was not available to the appellant as workers' welfare fund is levy whereas the depletion allowance is a benefit to the assessee. He further held that these two items cannot be placed on the same footing for the purpose of having a concept of total income. Regarding the special allowance under section 23(ix) it was held that the allowance under this provision is available to an assessee on the profits and gains as per profit and loss account. The financial institutions claimed deduction of 10 % on the profits and gains as per profit and loss account and credit the same to the special reserve. The balance is declared in the return of income. Subsequently the income is assessed at a higher figure on account of inadmissible expenses the proportionate allowance cannot be taken into the reserves. He further observed that only those profits are taken into the account books as they appear in the profit and loss account. The excess profit resulting from the assessment proceedings cannot be credited in the account books of the assessee. He further observed that assessment proceedings do not increase the real profits and gains of the assessee. According to the learned I.A.C. "these if assessed at a higher figure are solely for the purpose of levy of the taxes. The position of the actual profit remains unchanged. After all the assessment proceedings are not a magic wand by which the assessing officer may convert the assessed income into real income. The assessee has also taken the plea that the excess claim of depletion allowance is not prejudicial to the interest of revenue as according to him they have huge refunds available to them. This argument can hardly be accepted as increase in refund or generation of lesser demand, both will ultimately result in loss of revenue."

5. The contention that the same words occurring more than once in a statute carry the same meaning was also held to be untenable as according to the learned I.A.C. the same words are always interpreted in the context of the subject under consideration: He held that the word "person" shall have the meaning of an individual or registered firm or company etc. as the circumstances may call for.

6. With the above observations the learned I.A.C. modified the assessment order with the direction that excess amount of Rs.4,30,75,651 on account of depletion allowance be added towards the total income of appellant.

7. Being aggrieved with the above treatment the appellant has preferred this second appeal before us. We have heard Mr. Shabbar Zaidi, FCA, learned counsel for the appellant and Mr. Shaheen Aziz Niazi, learned representative for the department.

8. Mr. Shabbar Zaidi, learned counsel for the appellant has submitted that the original assessment order framed by the assessing officer was neither erroneous nor prejudicial to the interest of revenue. He has cont6nded that the assessing officer assessed the profits and gains before depletion allowance at Rs.53,99,71,770 and the 50% thereof worked out to Rs.26,99,85,585. The depletion allowance claimed at 15 % of the sale representing well head value of production was Rs.19,45,96,518 which was less than 50% of the profits and gains before the depletion allowance and consequently the assessing officer had correctly allowed the depletion allowance in accordance with the law. He has further submitted that the learned I.A.C. misdirected in calculating the profits and gains of the appellant by adding the depletion allowance at Rs.19,45,96,518 to the profit or gain as declared by the appellant for the year under consideration at Rs.10,84,45,215 and thereby holding that the total profit or gain comes to Rs.30,30,41,733 and the depletion allowance to the extent of 50 % under the proviso to rule 3 would work out to Rs.15,15,20,866 and thereby out of the total depletion allowance claimed at. Rs.19,45,96,518 an amount of Rs.4,30,75,651 was inadmissible under the law. Mr. Shabbar Zaidi has vehemently argued that the learned I.A.C. has assigned two different meanings to the words "profits or gains" used in Rule 3 and Rule 4 of Part I of the 5th Schedule to the Income Tax Ordinance, 1979. Mr. Shabbar Zaidi has maintained that for the purpose of payment to Government and taxes the learned I.A.C. has interpreted the expression "profits or gains" as used in Rule 4 referred to above to mean the profit and gain assessed by the department while for the purpose of allowing depletion allowance under Rule 3 the same expression has been restricted to the income shown in the return of income. Thus the learned I.A.C. has applied one standard and interpretation for the purpose of levy of tax and other interpretation of the same purpose of levy of tax and other interpretation of the same expression for the purpose of allowing the allowance to the assessee. Mr. Shabbar Zaidi has drawn our attention to the finding of learned I.A.C. whereby he has tried to draw a line of demarcation whereby two different yardsticks are to be applied for the purpose of "levy" and for the purpose of "allowance" to the assessee. Mr. Shabbar Zaidi has further assailed the finding of learned I.A.C. to the effect that the "assessment proceedings do not increase the real profits and gains of the assessee. These if assessed at a higher figure are solely for the purpose of levy of the taxes. After all the assessment proceedings are not a magic wand by which the assessing officer may convert the assessed income into real income". Mr. Shabbar Zaidi has submitted that the income-tax is levied on the real income only and not on the imaginary income. He has contended that if any income is deemed or tax is levied on notional income by fiction of law it is to be taken at par with the real income and same treatment is to be given even to the deemed and notional income created under any fiction of law as to the real income for all intents and purposes and no distinction or discrimination is to be made between the actual income and a deemed income. He has further submitted that the income, profits and gains as assessed by the assessing officer as a result of additions in the trading account or profit and loss account are always taken to be the real income for all intents and purposes. Mr. Shabbar Zaidi has urged that two different figures of the income, profits or gains cannot. be allowed to be taken for the purpose of any allowance or benefit to the assessee and for the purpose, of levying income-tax by the department. The learned D.R. has supported the impugned finding of the learned I.A.C.

9. We have carefully considered the contentions raised by the learned representatives for the parties before us. We have perused the assessment order framed by the assessing officer and the order under section 66-A by the learned I.A.C.

10. The admitted facts are that the appellant showed income at Rs.10,84,45,215 in the return of income. The assessing officer assessed profit and gains before depletion allowance at Rs.53,99,71,770 and after allowing depletion allowance at Rs.19,45,96,518 worked out the profits and gains at Rs.34,53,75,252. The assessing officer for the purpose of allowing depletion allowance took the profit and gains before depletion allowance at Rs.53,99,71,770 while the learned I.A.C. took the same at Rs.30,30,41,733 on the basis of returned profit and gains. Thus the point for consideration before us is whether the assessing officer was correct in taking the profit and gain before depletion allowance for the purpose of Rule 3, Part 1 of the 5th Schedule to the Income Tax Ordinance, 1979 and assigning same connotation to the expression "profits or gains" used in Rule 3 and Rule 4(l) of Part 1 to the 5th Schedule or the view than by the assessing officer was erroneous and prejudicial to the interest of revenue and the learned I.A.C. was justified in revising the said order under section 66-A by giving two different meanings and connotations to the words "profits or gains" used in Rules 3 and 4 of Part 1 of the 5th Schedule to the Income-tax Ordinance, 1979.

11. It would be proper to reproduce rules 3 and 4(1) of Part l of the 5th Schedule to the Income Tax Ordinance, 1979 which reads as follows:

"3. Depletion allowance.---In determining the income of such undertaking for any year ending after the date on which commercial production has commenced, an allowance for depletion shall be made equal to fifteen per cent. of the gross receipts representing the well-head value of the production:

Provided that such allowance shall not exceed fifty per cent. of the profits or gains of such undertaking before the deduction of such allowance.

4.???????? Limitation on payment to Government and taxes.---(1)' The aggregate of the taxes on income and other payments to the Government in respect of the profits or gains derived from an undertaking to which this part applied for any assessment year shall not exceed the limits provided for in the agreement:

Provided that the said aggregate shall not be less than fifty per cent. of the profits or gains derived from the said undertaking before the deduction of the payment to the Government. "

12. A perusal of the above rules shows that proviso to both the rules speak of profits or gains of the undertaking. The assessing officer while working out the aggregate of taxes on income and other payments to the Government in respect of the profits or gains derived from an undertaking under Rule 4 above took the profits or gains as assessed by him and again while working out 50 % of the profit or gains assigned the same meaning to the expression "profits or gains" of such undertaking, while the learned I.A.C. held that for the purpose of levy of taxes the profits or gains are to be taken as assessed by he assessing officer and for the purpose of depletion allowance under Rule 3 above, the profits or gains are to be taken as declared by the appellant/assessee. In coming to this conclusion the learned I.A.C. has held that a distinction is to be made to the expression total income for the purpose of levy of tax or any charge while for the purpose of giving any allowance or benefit to an assessee the total income or income; profit or gain is to be taken as declared by the assessee in the return. Thus two different yardsticks are to be applied for the purpose of charging the income, profit and gains and allowing any benefit or allowance or, the income, profit or gains. The learned I.A.C. has further observed as pointed out by Mr. Shabbar Zaidi that an allowance is to be allowed to an assessee on the profits and gains as per profit and loss account and if subsequently income is assessed at a higher figure on account of inadmissible expenses the proportionate allowance is not to be allowed to an assessee. He has further observed that only those profits are taken into account books as they appear in the profit and loss account and the excess profit resulting from the assessment proceedings cannot be credited in the account books of the assessee. We have given our very anxious consideration to the impugned finding of learned I.A.C. that the assessment proceedings do not increase the real profits and gains of the assessee and if the profits and gains are assessed at a higher figure they are solely for the purpose of levy of taxes and that the assessment proceedings are not a magic wand by which the assessing officer may convert the assessed income into real income.

13. We are not persuaded to agree with the above findings of learned I.A.C. for the simple reason that two principles are the most established principles of law relating to income-tax. First, that the income-tax is an annual charge and the incomes, profits or gains and the taxes leviable thereon are independent and self-contained unit. Secondly, that income-tax is levied on the real income and not on the imaginary income. Here we would like to clarify that Mr. Shabbar Zaidi has very rightly contended that even if tax is levied on any deemed or notional income the said income is deemed to be the real income by fiction of law. By now it is established principle of the interpretation of statutes that even if something does not exist the Legislature has authority to declare the said thing to be deemed to exist and thereafter all the attributes of an existing reality are to be attached to such fiction of law and it is to be taken to its logical conclusion. Such fiction of law is not to be deemed for the purpose of levy of tax only. If any benefit, allowance or deduction flows from such deeming provision it is to be equally allowed to an assessee as well. The view entertained by the learned I.A.C. that the assessment proceedings are not a magic wand by which the Assessing Officer may convert the assessed income into real income cannot be upheld as it would be negation of the very principle of taxation that the income-tax can be levied on real income only.

14. The point came for consideration before Madras High Court in the case of Kuppuswami Mudaliar v. CIT (1964) 51 ITR 757, if the additions made by the Income-tax Authorities to the income of an assessee over and above the income as disclosed by the assessee, on an estimate basis, the amount so added must be treated as the real income of the assessee. It was held that it is not open to the authorities to take the view that the addition was only for the purpose of taxation and that it should not be regarded as the true income of the assessee. The point again came for consideration before Punjab and Haryana High Court in the case of C.I.T, v. Ram Sanehi Gyanchand (1972) 86 ITR 724 and it was held that if the Income-tax Authorities made additions to the assessable income of the assessee in the previous year as income from undisclosed source, the assessee shall be entitled to take advantage of the past intangible additions to explain the source of what was considered by the Income-tax Department as income from undisclosed sources. It was further held that it was fair and equitable to allow the assessee to do so because the assessee had already paid the necessary income-tax on that amount. Thus the principle was decided that once department levies income-tax on any assessed income then it cannot turn and say that the assessed income, profit or gains is not the real or true income of the assessee or it was assessed for the purpose of levy of tax only. The point in issue again came for consideration before Madhya Pradesh High Court in the case of CIT v. Sahu Brothers, (1978) 115 ITR 438 and the principle was reiterated that where the Income-tax Authorities made an addition to the income of the assessee over and above the income as disclosed by the assessee on an estimate basis the amount so added must be treated as the real income of the assessee and that it was not open to the authorities to take the view that the addition was only for the purpose of taxation and it would not be regarded as the true income of the assessee.

15. There are several other rulings but we need not to cite all the judgments available on the point. The point if the addition on account of estimate basis to the declared total income of an assessee and the assessed income, profits or gains is to be treated as real income or not has been considered in the context of intangible addition and the set off against the cash credits in various judgments by this Tribunal. Two judgments from the Pakistan jurisdiction may be cited with benefit which are as follows:

(1) 1968 PTD (Trib.) 146.

(2) 1995 PTD (Trib.) 289.

16. After a very careful consideration of the impugned order by the learned I.A.C. and the contentions raised by Mr. Shabbar Zaidi we are of the considered opinion that the expression "profit or gain" used in Rules 3 and 4(l) of Part 1 to the Fifth Schedule to the Income Tax Ordinance, 1979 are to be given same connotation and same meaning while levying tax and allowing depletion allowance to the assessee. It is held that the learned I.A.C. fell in error by coming to the conclusion that the assessment proceedings do not increase the real profits and gains of the assessee and that the assessed income is not the real income. It is not available to the Income?tax Authorities to say that assessed income is not the real income and that they will levy the tax on the assessed income while they will allow the benefits and allowances on the basis of declared income. It would amount to blowing hot and cold at the same time which is not permissible in law.

17. For the foregoing reasons it is held that the assessment order whereby the profits and gains taken for the purpose of levy of tax and for the purpose of depletion allowance were assigned same meaning, was neither erroneous nor prejudicial to the interest of revenue as the revenue is entitled to levy the tax in accordance with the law only. The assessing officer correctly appreciated and applied the law to which no exception could be taken. The learned I.A.C. misdirected in taking the view otherwise and prescribing two different yardsticks for the purpose of levy of tax and for the purpose of allowing the depletion allowance. The impugned order of learned I.A.C. under section 66-A is not sustainable in law and is hereby vacated. The depletion allowance as allowed by the assessing officer is hereby restored.

18. The appeal at the instance of appellant is allowed as above.

M.B.A./231/Trib. ??????????????????????????????????????????????????????????????????????????????? Order accordingly.