I. T. A. NO. 1459/KB OF 1997-98, DECIDED ON 15TH APRIL, 1998. VS I. T. A. NO. 1459/KB OF 1997-98, DECIDED ON 15TH APRIL, 1998., 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 3478 (1998)

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

----S.25(c)---Addition---Amount subsequent recovered in respect of deduction---Trading liability---Exemption period---Addition was made by the Assessing Officer under S.25(c), Income Tax Ordinance, 1979-- Rectification was sought by the assessee on the ground that trading liabilities remained unpaid for the period relating to exemption period which could not be taxed under the provision of S.25(c) of the Ordinance---Rectification application was rejected by the Assessing Officer---Validity---First Appellate Authority deleted the addition made by the Assessing Officer but the same was upheld by the Appellate Tribunal.

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

----S.156---Rectification of mistake---Mistake of law and fact---Mistake of law and fact could be rectified under 5.156, Income Tax Ordinance, 1979.

1983 PTD 240 ref.

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

---S.156---Rectification application ---Disposal of ---Assessee brought facts to the notice of Commissioner ofIncometaxpaving that the 'assessing Officer directed to dispose of rectification application ---C.I.T. disposed of said application by himself---Held, C.I.T. usurped jurisdiction vested in Assessing officer by deciding rectification application and, thus, made a void order ---C.I.T. ought to have issued instructions to Assessing Officer for disposal of application pending before him in circumstances.

Misri Ladhani, D. R. for Appellant.

M. Tanauli for Respondent.

Date of hearing: 15th April, 1998.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN). ---The above appeal at the instance of department is directed against the order, dated 15-10-1997 by the learned C.I.T.(A), Zone-II, Karachi in I.T.A. No.14 of 1997.

2. The grievance: of department is that the learned C.I.T.(A) has erred in directing/holding that the addition made under section 25(c) of the Income Tax Ordinance, 1979 may be treated as deemed to have been rectified under section 156(3) of the Income Tax Ordinance. It is further averred in the grounds of appeal that the provisions contained in section 156 are not attracted to the addition made under section 25(c) at Rs.3,75,31,923.

3. Heard Mr. Misri Ladhani, learned representative for the department and Mr. S.M. Tanauli, learned counsel for the respondent. The appeal arises out of chequered facts, which are very lengthy. For the sake of brevity we will give a summary of the facts which is as follows.`

4. The Assessing Officer made assessment order for the assessment year 1992-93 under section 63 on 19-10-1993. In the said assessment order the Assessing Officer made addition under section 25(c) with the following finding:

"The assessee has been specifically confronted on the addition under section 25(c). The contents of the same are again reproduced hereunder:---

You have shown liabilities of Rs.544,57,644 as interest to M/s. I.D.B.P. The record shows that the interest liabilities remained unpaid since the inception of bank loan. Further record shows that the unpaid interest covers the assessment years 1984-85 to 1992-93. Please show cause as to why not the unpaid trading liabilities for assessment years 1984-85 to 1990-91 may be added to your income under section 25(c) of the Income Tax Ordinance, 1979 which amounts to Rs.3,75,31,923.

Since the assessee has not paid the trading liabilities of the financial charges allowed to the assessee in the previous years within three years of expiry of allowing the trading expenses to the assessee, therefore, the addition on account of 25(c) of Rs.3,75,31,923 are added to the assessee's income as unpaid trading liabilities."

5. Immediately on receiving the copy of assessment order a rectification application, dated 29-12-1993 was submitted before the Assessing Officer on 30-12-1993. The receipt of application in the office of D.C.I.T., Circle 5, Companies II, Karachi is duly acknowledged in the peon book of the assessee. The application under section 156 is reproduced below:

"871/M.6/IT/93 December 29, 1993.

The Deputy Commissioner of Income-tax,

Circle 05, Companies-II,

Karachi.

Dear Sir,

Re: MAS Dairies Ltd. -- Request for rectification of order under section 156 assessment year 1992-93, A/C. year 30-6-1992.

We refer to the assessment order passed by you in the case of our above named client for the assessment year under reference.

On going through the above order we observed that the following mistakes are apparent from record and require rectification under section 156:---

1. Erroneous Add back of Interest under section 25(c) Rs.3,75,31,923

1.1 Addition under section 25(c) has been made at Rs.3,75,31,923 allegedly on account of trading liabilities outstanding for. more than 3 years. As rightly mentioned in the assessment order the amount of Rs.3,75,31,923 represents interest liability in respect of A.D.B.P. loan remaining unpaid since inception.

1.2 In this connection we wish to state that as you are already aware, this company was established to set up a Dairy Unit at Kotri, District Dadu and this area being exempted from tax, our client enjoyed tax holiday for five years. The exemption period expired on 31-1-1989 and, therefore, assessment year 1989-90 comprised of the periods as under:--

Period from 1-7-1988 to

31-1-1989 (7 months) " Exemption period.

Period from 1-2-1989 to

30-6-1989 (5 months)Taxable period.

The Income-tax assessment of the company for the assessment year 1989-90 was accordingly made comprising of two periods as mentioned above.

1.3 From the above it will be evident that since our client enjoyed exemption from tax up to 31-1-1989 the trading liabilities remaining unpaid for the period relating to exemption period cannot be subjected to tax under the provisions of section 25(c) as no deduction of such interest can be considered to have been allowed to our client, whereas as per assessment order the same have been subjected to tax under the aforesaid provision. You are aware that according to C.B.R. Circular No.21 of 1988, dated 24-10-1983 (copy enclosed herewith for your ready reference) and the judicial pronouncement vide ITAT decision I.T.A. No. 1221/KB of 1982-83, dated 13-9-1984 (copies enclosed) income or loss of tax holiday period cannot be determined under the Income Tax Ordinance, 1979 as losses, if any, are not allowed to be carried forward.

1.4 In this connection it is also worth mentioning here that our client is an A.D.B.P. and B.E.L. financed unit. The loans advanced by these financial institutions stood as under:

Agricultural Development Bank LtdRs. 2,90,00,000

Bankers Equity Ltd. (BEL)Rs 84,90,000

Bankers Equity Ltd. (BEL)Rs. 1,24,97,000

Rs. 4,99,87,000

1.5 Since the company suffered heavy losses in the initial years, their factory was closed in February/March, 1986 and BEL declared it to be a sick unit. The A.D.B.P. has conducted rescheduling of the entire account by making repayment to be effective w.e.f. 7-1-1993 by capitalising the entire amount of interest.

1.6 From the above it will be evident that the interest liability for the period relating to exemption period cannot be subjected to tax under section 25(c), as such trading liability was not allowed in income-tax assessments for the relevant year. Furthermore, the interest liability having been rescheduled, the same amounts to payment of the liability, hence the same does not attract the provision of section 25(c).

1.7 As regards the interest liability relating to the period 1-2-1989, the same could be added back in the assessment year 1993-94, being the assessment year falling after expiry of three years to which the provisions of section 25(c) are attracted. Similarly the interest liability relating to assessment year 1990-91 can be added back in the assessment year 1994-95.

1.8 Thus it will be observed that the entire addition on account of trading liability under section 25(c) made at Rs.3,75,31,923 has been wrongly made which may please be deleted .by rectifying the order under section 156. "

6. The above application remained pending before the assessing officer and, therefore, the assessee submitted an application before the C.I.T. Companies-II, Karachi on 31-8-1994 apprising him of the entire facts. Copy of the letter was forwarded to the concerned D.C.I.T. also, but to no avail. Thereafter the assessee brought facts to the notice of R.C.I.T. Southern Region, Karachi vide letter dated 22-11-1994 bringing entire facts to his notice with a request that direction may be issued to the Assessing Officer for the disposal of rectification application. Copies were forwarded to the C.I.T. Companies-II, Karachi, I.A.C. Range-II, Karachi and D.C.I.T., Circle 5, Companies 1, Karachi. Strangely enough the assessee received a letter from Mr. Abrar Ahmed, C.I.T., Companies Zone-II, Karachi, dated 9-1-1995, stating that rectification cannot be allowed. The relevant part in the letter is reproduced below:---

"Assessment year 1992-93:

Addition of Rs.3,75,31,923 under section 25(c) of the Income Tax Ordinance, 1979 on account of being liability of interest which stood unpaid for more than three years is a legal issue, and, therefore, cannot be rectified under section 156. Therefore, the arrear demand of Rs.28,04,230 for this year is to be recovered from you.

7. At this juncture -we would like to pause and express our shock and surprise on the state of affairs and the manner in which the assessees are being treated in the Income-tax Department. The learned C.I.T. usurped the jurisdiction vested in the Assessing Officer for deciding the rectification application which was submitted before him and thus made a void order, without jurisdiction. The learned C.I.T.(A) ought to have issued instructions to the Assessing Officer for disposal of rectification application instead of giving finding himself on the application which was not pending before him and thus adversely affecting the independent exercise of jurisdiction by the Assessing Officer.

8. On receipt of letter, dated 9-1-1995 from Mr. Abrar Ahmad. C.I.T. Companies-II, Karachi and finding no other remedy the assessee submitted application to Member (Income-tax), Central Board of Revenue, Islamabad, on 18-(-1995, narrating the entire facts and requesting for suitable instructions for the rectification of mistake. The letter addressed to Member (Income-tax), C.B.R. is a lengthy one and a perusal thereof shows that how desperately the assessee was seeking justice and how blatantly it was being denied to it. For the sake of brevity we are not reproducing the entire letter However, we will reproduce few sentences only as under:

"Justice demands that the Assessing Officer who has added back this huge sum of Rs.3,75,31,925 under section 25(c) without applying his mind should have been reprimanded on such careless and thoughtless action and on the slipshod manner in which he has created this imaginary and arbitrary tax demand.

For the reasons as explained above, it is requested that the C.B.R. may kindly consider our above submissions and may issue proper directions to the tax authorities below who rectify this obvious mistake under section 156 as has been requested vide our counsel's Letter No.871/M.6.IT/93, dated 29-12-1993 and the subsequent request made to C.I.T. and the Regional Commissioner as mentioned above.

9. The sky had still not fallen and nobody was moved from D.C.I.TR to Member (Income-tax), C.B.R., with the result that the bewildered assessee filed an appeal before the learned C.I.T. (A-II), Karachi against the order of Mr. Abrar Ahmad, C.I.T. Companies-II, Karachi dated 9-1-1995 which was rightly dismissed by the learned C.I.T.(A) on 8-4-1995. The learned C.I.T.(A) after considering the entire facts dismissed the appeal for the following reasons:

I have considered the appellant's case in terms of section 156 of the Income Tax Ordinance and I am of the view that whatever may be the merits of the case, an order under section 156 can only be passed by the authority, who has passed the original order which is sought to be rectified. In the present case the order under section 63 in ,; respect of assessment year 1992-93 was passed by the D.C.I.T.. Circle 5, Companies-II, Karachi, and as such, the order of refusal torectify under section 156 should also have been passed by him. Under these circumstances in the eye of law the order passed under section 156 by the CIT cannot be deemed to be an order passed by the D.C.I.T. concerned. The A.R. contention that C.I.T. being administratively a Senior Officer in the hierarchy, his order should 'be considered a valid order under section 156 cannot be accepted as the language of section 156 does not permit such an interpretation. I, therefore, cannot adjudicate upon an order which is not legally valid. Even otherwise I am not competent to pass judgment against an order framed by an authority who enjoys the same status in the hierarchy as myself.

The appeal, therefore, stands dismissed in limine as the same has been preferred against an order which at best be construed an administrative and not a judicial order."

10. After receiving above order of learned C.I.T.(A) the assessee again submitted an application before the D.C.I.T. on 30-7-1995 requesting for the disposal of application under section 156 particularly drawing his attention to the observation of learned C.I.T.(A) that an order under section 156 can only be passed by the authority who has passed the original order. No action was taken even on the application dated July 30, 1995 and, therefore, the assessee submitted another application before the D.C.I.T. on 13-8-1996 stating that in spite of their actively perusing the matter the rectification order was not made so far. In this application provisions contained in section 156(3) were brought to the notice of D.C.I.T. which provides, that "if no order is passed by such authority before the expiration of the financial year next following the date on which it was brought to the notice, mistake shall be deemed to have been rectified and all the provisions of this ordinance shall have effect accordingly". It was further stated that since the rectification application was not disposed of, therefore, mistake pointed out stands automatically rectified in terms of section 156(3) of the Income Tax Ordinance, 1979. It was further requested to delete the tax demand of Rs.28,04,230 as a consequence of automatic rectification. In reply of letter/application dated 13-8-1996 the D.C.1.T. Circle 6, Companies-II (to whom jurisdiction was subsequently transferred) stated that the rectification application dated 29-12-1993 was not available on his record. The assessee replied vide letter, dated 30-10-1996 that the rectification application, dated 29-12-1993 was duly submitted in the office of Assessing Officer. The photo copy of the acknowledgment in the peon book was fetishes to him. It was further intimated that the rectification application, dated 29-12-1993 has been throughout referred in the correspondence with the tax authorities. The assessee again requested the concerned D.C.I.T. to pass any order deemed fit by him, but to no effect. Thereafter the assessee again submitted an application to the R.C.I.T. Corporate Region, Karachi on 21-11-1996 narrating the entire facts. It was requested that the D.C.I.T. concerned should pass an order refusing to rectify the mistake so that appeal may be filed before the C.I.T.(A). It appears that for the first time the learned R.C.I.T. Corporate Region. Karachi considered the request and thereafter the D.C.I.T., Circle 6, Companies-II, Karachi passed order under section 156 on 18-12-1996, specifically referring to the letter dated 21-11-1996 addressed to the R.C.I.T. Corporate Region. It was informed that although application dated 29-12-1993 is not available on record but it was noted from the photo copy of the application produced before him that the request for rectification was not covered by the provisions of section 156. According to the D.C.I.T. it was outside the ambit of section 156 of the Income Tax Ordinance and, therefore, request was not acceded to.

11. At last the assessee felt relieved by getting an order in writing from the Assessing Officer containing an intimation that the rectification application stood rejected. It is pertinent to note that the assessee was made to run from pillar to post for a period of about three years just to get an order intimating rejection of rectification application.

12. The assessee preferred appeal against the rejection of rectification application before the learned C.I.T.(A-II), Karachi which was allowed vide order, dated 15-10-1997. The finding of the learned C.I.T.(A) is reproduced below;

"Under the attending facts and circumstances as deliberated above, I have considered the appellant's claim minutely with regards to rectification of mistake under section 156 relating to the addition under section 25(c). The Assessing Officer is directed to verify from the inward register of his circle the Appellant's application for rectification of the mistake, vide letter No.871/M.6/IT/93, dated 29-11-1993 (served on 31-12-1993) which has throughout been referred to in the correspondence with the higher tax and Appellate Authorities. At no stage the receipt of application has been denied by the Department. The A.K. has produced before me the peon book entry, acknowledging the receipt of this application forcertification on 31-12-1993. If the same stands verified to be considered as rectified in view of the provision of subsection (3) of section 156. Thus the addition made will be deemed as deleted. If not so, then the Assessing Officer should refer to the record, and consider the appellant's claim and thereafter proceed in accordance with law after necessary verification."

13. The department is aggrieved with the above direction. Mr. S.M. Tanauli, learned counsel for the respondent/assessee has submitted that the receipt of rectification application is duly entered in the inward register of the, concerned circle of the Income-tax Department and, therefore, the department has not raised any objection in the grounds of appeal to the contention of assessee regarding submission of rectification application. The facts as narrated above are not denied by the learned D.R. His sole contention is that since the rectification application contained a point of law, therefore, the rectification application was beyond the scope of section 156 of the Income Tax Ordinance, 1979. However Mr. S.M. Tanauli has submitted that a mistake of law as well as fact can be rectified under section 156 of the Income Tax Ordinance and in support of his contention he has placed reliance on the judgment of Hon'ble Sindh High Court reported as 1983 PTD 246. It has been held by Hon'ble Justice Saeeduzzaman Siddiqui (as his Lordship then was) as follows:

"We are in respectful agreement with the view taken by the Indian Supreme Court on the scope of power of Income-tax Officer under section 35 of the Indian Income-tax Act which is identical to section 35 of our Act and accordingly hold that while rectifying a mistake or an error in the assessment or an order of refunds, the Income-tax Officer need not confine itself only to the errors which are pointed out in the order but such errors as are pointed out from the proceeding and record of assessment or refund or as the case may be, may also be taken into consideration for correction or rectifying the assessment or the refund order. We are, therefore, of the view that an error in the assessment order resulting from failure to apply the indisputable state of law could be corrected by the I.T.O. under section 35 of the Act provided the mistake or error is apparent from the record of assessment proceedings. It, therefore, follows that if the I.T.O. failed to give effect to a provision of law as interpreted by the High Court or the Supreme Court at the time of making of assessment or refund order and such mistake is discoverable from the record and proceeding of assessment of refund order then such error could also be corrected by the I.T.O. under section 35 of the Act."

14. We are persuaded to agree with the submission of Mr. Tanauli as by now it is established proposition of law that mistakes of law and fact both can be rectified in exercise of jurisdiction vested under section 156 of the Income Tax Ordinance, 1979.

15. Coming to the merits of the case we asked the learned D.R. if there was any disputed point of law in respect of addition under section 25(c), in the background of submission on behalf of assessee that no addition can be made under section 25(c) because no liability was allowed to the assessee in the assessment years during which assessee was enjoying exemption. The learned D.R. has conceded that there is no dispute on the proposition of law that only such liabilities can be added back under section 25(c) which were allowed under section 23 and subsequently remained un discharged. Thus, if no liability or expenditure was allowed it could not be added back and it is simple question of fact whether the expenditure on account of interest was allowed or not. The learned D.R. has further conceded that on perusal of record it is obvious that during the exemption period assessments were completed at nil income and as such there was no question of allowing any liability/expense on account of interest. The learned D.R. has further conceded that by virtue of the provisions contained in subsection (3) of section 156 if no order is made by the authority in whose notice mistake is brought before the expiration of the financial year next following the date on which it was so brought to its notice, the mistake shall be deemed to have been rectified and all the provisions of the Income Tax Ordinance shall have effect accordingly. lie has further conceded that the rectification application dated 29-12-1993 was required to be disposed of by 30-6-1995 where after it shall be deemed to have been automatically allowed and the application dated 29-12-1993 was not disposed of by 30-6-1995.

16. Mr. Tanauli has drawn our attention to the C.B.R. Circular No. 4 of 1979 in which important provisions contained in the Income Tax Ordinance, 1979 have been explained for the guidance of all concerned. The relevant instructions read as follows:---

"(52) - Rectification of mistakes (section 156):

The provisions of this section are same as those of the old section 35. There had been persistent complaints that mistakes brought to the notice of Income-tax Authorities were not rectified over long periods causing unnecessary hardship to the assessee. A provision has been made in subsection (3) that where no order is passed on any mistake brought to the notice of an income-tax authority by the end of the financial year next following the date on which it was brought to its notice, the mistake sought to be rectified shall be deemed to have been so rectified. For example if no order is. passed on an application made on 1-1-1979 by 30-6-1980 the mistake shall be deemed to have been rectified as on 1-7-1980 even if the application had no merit."

17. The upshot of the above discussion is that the learned D.R. is not able to point out any infirmity in the impugned direction of learned C.I.T.(A).

18. The appeal at the instance of department is preposterous and stands dismissed accordingly.

19. Before parting with this order we would like to observe that the filing of this appeal on behalf of the department clearly indicates that the departmental officers are bent upon defying the directions of C.B.R. and have no respect for the repeated observations by various Benches of this Tribunal, which is the final Court of appeal on facts. It has been repeatedly expressed that frivolous appeals should not be filed before the Tribunal so that unnecessary time is not wasted in disposal of frivolous appeals and the genuine appeals may be disposed of expeditiously. However, we have seer that frivolous appeals are being filed with same frequency. We have further seen in this order to our dismay and shock that in spite of clear instructions by the C.B.R. in Circular No.4 of 1979 providing guidance to the Assessing Officer has not passed order on rectification application during the period of limitation. It is further painful to find that not only the Assessing Officer but the supervisory officers from I.A.C. to Member (Income-tax), C.B.R. were unmoved in spite of repeated beseeching of assessee for the dispensation of justice. In the present case the law has been flouted blatantly and it appears without any fear of accountability and sense of responsibility. The tragedy and woe through, which the assessee had to pass can be realized by any person having even the minimum, sense of justice and fairplay. Surely, it must be a nightmare for the assessee as in the entire hierarchy of the Income tax Department nobody except the Regional Commissioner of Income Tax, Corporate Region, Karachi, was prepared to come to his help in getting an order of the rejection of rectification application so that remedy may be perused in the appellate forum. We understand that a genuine attempt as being made for reforming, restructuringand refining of the tax administration in Pakistan. However, until and unless an effective system of accountability is established, no fruitful purpose can be achieved. We expect that the learned Chairman, C.B.R. shall take this matter as a test case and after proper enquiry and due process of law shall take exemplary action against the concerned officers who not only caused worst kind of harassment to the assessee but also hoodwinked the financial managers of the country by creating such demand which was not sustainable in law at all. A copy of this order should be sent to the learned Chairman, C.B.R. We expect that necessary action shall be taken against the delinquent officers so that it should be an eye-opener of all concerned and' have a healthy effect in the efforts of establishing good governance in the tax administration.

C.M.A./556/Trib. Appeal dismissed.