KENHILL LTD., KARACHI VS I.T.O., CO. CIR. A-3, KARACHI, 2000 PTD-KARACHI-HIGH-COURT-SINDH 1320 (1998)

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

----Ss.13(1) & 136---Addition---Reference---Encashment of cheque-- Payment was made by assessee after withdrawal of cash from Bank through bearer cheque---Cheque carried name of another party, not the party to whom payment was made---Assessing Officer made addition of such amount on the ground that payment made was from undisclosed source and not that of amount encashed from Bank as the cheque was not in the name of the party to whom the payment was made but in the name of another party ---Assessee Company explained that amount was received through bearer cheque from his Accounts Department and handed over to the accountant for payment to said party and denied the identity of the party in whose name bearer cheque was issued---Payment to the party in whose name barer cheque was issued was not verified from -the facts and material available on record nor the person was identified who received the payment from the Bank ---Effect-- Assessee having established that amount was credited in its account books and thereafter debited in favour of the party to whom payment was made and it was the same amount which was received from encashment of the cheque in dispute---Amount received, therefore, was not from an undisclosed source and there was no justification for adding the same to the income of the assessee---Actions of the Authorities were declared contrary to law and could not be sustained---Addition made was deleted in circumstances.

Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, Bihar and Orissa (1959) 37 ITR 288 and Industrial Management Ltd., Karachi v. Commissioner of Income-tax, Karachi PLD 1978 Kar. 673 ref.

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

----S.135(1)---Disposal of appeal by Appellate Tribunal---Powers of enquiry by Tribunal---Appellate Tribunal if not satisfied with the enquiry allegedly conducted by the Assessing Officer could cause further enquiry to be made by the Assessing Officer, but could not itself proceed to hold such an enquiry.

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

----S.136---Reference---Scope---Evidence of record---Misreading and misconstruction of evidence on record---Powers of High Court---Findings of facts, which had been arrived at on the basis of evidence on record and not suffering from misreading and misconstruing the evidence on record were protected from being disturbed by the High Court under S.136 of the Income Tax Ordinance, 1979---Finding of facts, which was based on irrelevant and extraneous material or consideration or on conjectures and surmises, was, however, not protected from scrutiny and could be disturbed or set aside by the High Court in exercise of its powers under S.136 of the Income Tax Ordinance, 1979:

Harmones Laboratories v. Commissioner of Income-tax 1988 PTD 84; Commissioner of Income-tax v. Saeeda Nasreen 1994 PTD 949 and Lal Chand Bhagat v. Commissioner of Income-tax (1959) 37 ITR 288 rel.

Sirajul Haque for Petitioner.

Shaikh Haider for Respondent.

JUDGMENT

SAIYED SAEED ASHHAD, J.---The Income Tax Tribunal vide order dated 23-9-1990 in R. A. No. 190/KB of 1989-90 has, at the instance of appellant/assessee, referred four questions of law to this Court for seeking its opinion. The questions of law are as under:

(i) Whether, on the facts and in the circumstances of the case, the learned Tribunal has not misdirected itself in law in holding that the addition was correctly made under section 13(1)(d) of the Income Tax Ordinance?

(ii) Whether, on the facts and in the circumstances of the case, the learned Tribunal has not misdirected itself in law in holding that the action of the I.T.O. in not specifying the clause of section 1.3(1) is protected by the provision of section 155?

(iii) Whether, on the facts and in the circumstance of the case, the learned Tribunal has not misdirected itself in law in relying on extraneous considerations like banking practice for justifying the addition of Rs.7,50,000 as income from undisclosed sources?

(iv) Whether, on the facts and in the circumstances of the case, there was any evidence or justification for confirming the addition of Rs.7,50,000 as income from undisclosed sources when the primary evidence of the books of account showed that the money was withdrawn from the bank through a bearer cheque?

The brief facts giving rise to this income-tax case are that the applicant is a private limited company and is engaged in running the business under the name and style of M/s. Kenhill on the ground floor of Panorama Center, Karachi. In framing the assessment for the assessment year 1986-87 the Income-tax Officer noted a credit entry of Rs.7,50,000 on 15-8-1985 in the cash book as cash withdrawn from the bank. On the same date a debit entry of Rs.7,50,000 was shown as payment made to M/s. Panorama Enterprises (Private) Limited. The applicant was required to explain the entry and the case of the applicant before the Income-tax Officer was that they had to make payment of Rs.1,60,00,000 to M/s. Panorama Enterprises (Private) Limited for acquiring space for their departmental store and the entire payment of the aforesaid amount was made by cheques including the payment of Rs.7,50,000. The bank statement of the assessee was obtained which showed that cheque dated 15-8-1985 was issued in favour of M/s. Rasheed Brothers and was encashed on their behalf. The applicants were directed to verify the said Rasheed Brothers but the applicant stated that they did not know the said Rasheed Brothers. The Income-tax Officer held that the payment of Rs.7;50,000 made to Panorama Enterprises (Private) Limited was not made from the amount of the cheque in dispute but was paid from income from undisclosed sources. The applicant was called upon to explain as to why the amount of Rs.7,50,000 should not be added under section 13(1) of the Income Tax Ordinance, 1979 (hereinafter referred to as "the Ordinance"). The applicant could not furnish a satisfactory explanation and the Income Tax Officer added the sum of Rs.7,50,000 to the total income - of the applicant. In appeal before Commissioner of Income Tax (Appeals) the applicant objected to the aforesaid addition on the ground that the income Tax Officer did not mention the relevant clause of subsection (1) of section 13 of the Ordinance, under which tile addition was made. It was further submitted that the source of this amount was established as it was withdrawn from the bank through cheque ire dispute. The Commissioner of Income Tax (Appeals) did not accept the interaction advanced on behalf of the applicant and held the addition to, be under section 13(1)(a) of the Ordinance. The applicant feeling dissatisfied with the finding of the Commissioner of Income Tax (Appeals) filed second appeal before the Appellate Tribunal, wherein the finding of the Commissioner of Income Tax (Appeals) making the addition under section 13(1)(a) of the Ordinance was challenged on the ground that the Income Tax Officer had riot discovered a cash credit entry so as to apply the provisions of section 13(1)(a) and further that the addition under any other clause of section 13 of the Ordinance would not be valid and sustainable in law as two approvals required in view of the second proviso to section 13(1) of the Ordinance and section 13(2) of the Ordinance, as they existed prior to the amendment made by the Finance Act, 1992 had not been obtained. However, the Appellate Tribunal did not accept the contention advanced on behalf of the applicant and held that addition. would be deemed to have-been made under section 13(1)(d) of the Ordinance, for which the approval was taken by the Income Tax Officer and further that two approvals were not required in the circumstances of the case. The Appellate Tribunal also did not accept the explanation advanced by the accounts Department of the applicant of encashment and handing aver the amount of Rs.7,50,000 to the Accountant of the applicant, who recorded the same in the book of accounts and the payment was made, to M/s. Panorama Enterprises (Private) Limited on the same date. The Tribunal came to the conclusion that the applicant failed to prove that the amount of cheque in dispute was received by somebody on behalf of the applicant and held that the same was encashed by Rasheed Brothers, who could not be produced by the applicant to establish the contention of the applicant that the amount of cheque in dispute after encashment was handed over to their Accountant. The Appellate Tribunal confirmed the findings of the Income Tax Officer and CIT (Appeals).

The applicant not being satisfied with the' above finding of the Appellate Tribunal submitted a Reference Application framing the aforestated questions of law, praying therein that the same be referred to this Court for seeking its opinion. The Tribunal by its order dated 23-9-1990 referred the aforesaid question to this Court for seeking its opinion.

We have heard the arguments of M/s. Sirajul Haque, Advocate and Mr. Shaikh Haider, Advocate, the learned counsel for the applicant/assessee and the respondent/Department respectively. We have also perused the material on record as well as relevant provisions of Income Tax law and the case law relied upon by Mr. Sirajul Haque Memon.

Mr. Sirajul Haque Memon, the learned counsel for the applicant/assessee raised the following arguments before us. Firstly, he submitted that the Appellate Tribunal erred in upholding the findings of the Income Tax Officer and the Commissioner of Income Tax (Appeals) that the amount of Rs.7,50,000 recorded in the books of accounts of the assessee as both credit and debit entries in favour of the applicant and M/s. Panorama Enterprises (Private) Limited respectively was not the amount received from encashment of the bearer cheque dated 15-8-1985 issued in favour of Rasheed Brothers and that it was received by the applicant/assessee from an undisclosed source. Secondly, he submitted that the Tribunal also erred in arriving at the finding that the addition of Rs. 7,50,000 to the income of the applicant/assessee would be deemed to have been made under section 13(1)(d) of the Ordinance and that since the amount has already ascertained therefore, two approvals for adding the said ascertained amount were not required. Mr. Sirajul Haque Memon further submitted that the Tribunal's finding that the amount of bearer cheque No.670707 dated 15-8-1985 was drawn and taken away by M/s. Rasheed Brothers and that it was not handed over to the accounts Department of the applicant/assessee for being credited in the account books for payment thereof to M/s. Pahorama Enterprises (Private) Limited was not based on material available on the record but was based on conjectures, surmises and suspicion. He further submitted that a finding of fact based on misreading and over looking material on record or on extraneous material, surmises and suppositions could not be said to be a valid and proper finding and' would be attacked before this Court in exercise of its power under section 136 of the Ordinance, as such a finding becomes a question of law and an assessment made on the basis of such conjectures, suspicious and presumptions would not be deemed to be legal and proper assessment and could not be sustained. In support of the above contention he placed reliance on the cases of (1) Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax, Bihar and Orissa (1959) 37 ITR 288 and (2) Industrial Management Ltd., Karachi v. Commissioner of Income Tax, Karachi PLD 1978 Kar. 673.

With regard to the withdrawal of the amount of Rs.7,50,000 of the cheque in dispute, he submitted that though a photostat copy of the cheque in dispute was summoned from the concerned Bank by the Appellate Tribunal, yet the Appellate Tribunal could not come to a definite finding regarding the identity of the person who, according to it, had encashed the cheque on behalf of Rasheed Brothers and submitted that in the circumstances, the explanation advanced by the applicant/assessee that notwithstanding the fact that cheque was issued in favour of Rasheed Brothers it was encashed by an employee of the accounts Department of the applicant/assessee, who handed over the amount 'of Rs.7,50,000 to their Accountant, who in turn made a credit entry in account books in favour of the applicant/assessee and thereafter made a debit entry in the account book crediting the amount in favour of M/s. panorama Enterprises (Private) Limited ought to have been accepted. With regard to the objection that aforesaid addition could not have been made either under clauses (a) or (d) of section 13(1) of the Ordinance, he submitted that the Income Tax Officer while scrutinizing the book of the applicant/assessee had discovered a debit entry whereby a sum of Rs.7,50,000 was credited in favour of M/s. Panorama Enterprises (Private) Limited and he made addition of this amount- under section 13(1) with the prior approval of the Inspecting Assistant Commissioner of Income Tax without specifying the clause of section 13(1) of the Ordinance, which clearly led to an inference that the Income Tax Officer himself was not certain whether the aforesaid amount of Rs.7,50,000 could legally be added under section 13(1) of the Ordinance. He further submitted that his uncertainty was further confounded by the Commissioner of Income Tax (Appeals) in treating the addition under section 13(1)(a) while the Appellate Tribunal held the same to be under section 13(1)(d) of the Ordinance.

Mr. Shaikh Haider, on the other hand, submitted that the Income Tax Officer had sought prior approval of the Inspecting Assistant Commissioner for making the addition under section 13(1)(d) of the Ordinance, but by inadvertence the Inspecting Assistant Commissioner recorded approval under section 13(1) without specifying the relevant clause. He further submitted that this was a mere omission and the Appellate Tribunal rightly came to the conclusion that the said addition could be made under section 13(1)(d) of the Ordinance and, therefore, supplied the omission and in so acting the Appellate Tribunal could not be said to have committed any illegality or irregularity. With regard to the encashment of the cheque and withdrawal of the amount of Rs.7,50,000, he submitted that it was for the applicant/assessee to establish that the amount received from encashment of the cheque in dispute was brought and handed over to the Accountant of the applicant/assessee who had credited the amount in the account book and thereafter debited the same by means of a credit voucher in favour of M/s. Panorama Enterprises (Private) Limited. Mr. Shaikh Haider drew our attention to the past, practice of the applicant/assessee of issuing cheques in

the name of M/s. Panorama Enterprises (Private) Limited for making payment towards the amount of Rs.1,60,00,000 and this was the only instance when .the cheque was not issued in the name of M/s. Panorama Enterprises (Private) Limited, but in the name of Rasheed Brothers, which deviation from the established practice was sufficient to infer that the cheque in dispute was not issued for the payment of the amount of Rs.7,50,000 to M/s. Panorama Enterprises (Private) Limited, but to somebody else and that the credit entry of Rs.7,50,000 in the account book was from an undisclosed sources notwithstanding encashment of the cheque on the same day.

The contention advanced by Mr. Sirajul Haque on behalf of the applicant/assessee merits consideration. According to the explanation submitted by the applicant/assessee before the Income Tax Officer the cheque in dispute was encashed by an employee from the accounts Department of the applicant/assessee and the cash was handed over to the Accountant of the applicant/assessee who credited it in the account book in favour of the applicant and then made a debit entry in respect of the same showing the payment thereof in favour of M/s. Panorama Enterprises (Private) Limited. The Appellate Tribunal in its order had observed that a copy of the cheque in dispute was summoned and it was found that it was encashed in favour of M/s. Rasheed Brothers but the name of person, who allegedly got it encashed on behalf of Rasheed Brothers, could not be ascertained. It is not understandable as to how Rasheed Brothers, which could be either a sole proprietary concern or a partnership, could have encashed the cheque and it would have been encashed by somebody on behalf of M/s. Rasheed Brothers. The facts that the applicant/assessee showed their ignorance as to who M/s. Rasheed Brothers were, the observations of the Appellate Tribunal that it was not understandable as to how a bearer cheque would have been handed over to a stranger for encashment from the bank, and the failure of the Appellate Tribunal to note as to who had signed the cheque while receiving the amount of the cheque were sufficient to accept the explanation advanced on behalf of the applicant/assessee that the cheque in dispute was in fact encashed by an employee of accounts Department of the applicant/assessee who brought the cash of Rs.7,50,000 from the bank and handed over the same to the Accountant of the applicant/assessee, who in turn first made a credit entry in the account book and then made a debit entry showing the payment thereof to M/s. Panorama Enterprises (Private) Ltd. The finding of the Appellate Tribunal that the amount of the cheque was encashed by Rasheed Brothers is based on presumption and surmises merely on the basis that the cheque was issued in the name of M/s. Rasheed Brothers, over looking the fact that it was a bearer cheque and could have been presented by the holder thereof for encashment. The finding that the cheque was encashed by Rasheed Brothers is also not logical as it could have been encashed by any person on behalf of Rasheed Brother, who as of necessity was required to put his signature on the cheque before receiving the cash amount of the cheque. In the circumstances the Appellate Tribunal ought to have got established the identity of the person who signed the cheque in dispute and received the payment of the cheque to submit to its view that the payment was received by Rasheed Brothers. In the absence of such a finding the explanation advanced by the applicant/assessee had to be accepted. Apart from the above observations it may also be pointed out that the action of the Appellate Tribunal in allowing the photostat copy of the cheque in question to be produced before it in the absence of its production before the Assessing Officer and holding of an inquiry relating to the identity of the person who had received the payment of the amount of the cheque in dispute, was in contravention of section 135(1) of the Ordinance. The Appellate Tribunal, if, was not satisfied with the inquiry allegedly conducted by the Income Tax Officer should have caused further inquiry to be made by the Income Tax Officer but could not itself proceed to hold such an inquire. The Appellate Tribunal, thus, committed an illegality by holding an inquiry for verification of disputed fact and relying on extraneous consideration. We are, therefore, unable to accept the finding of the Appellate Tribunal that the amount of Rs.7,50,000 credited in the account book of the applicant/assessee on I5-5-1986 did not reflect the amount received from encashment of the cheque in dispute and represented income from an undisclosed source. The Appellate Tribunal in arriving at the finding acted on surmises, suspicion and conjectures and acted without any evidence or upon a view of the facts which could not reasonably be entertained. Mr. Shaikh Haider contended that a finding of fact arrived by the Appellate Tribunal can neither be considered nor disturbed by this Court in exercise of its powers under section 136 of the Ordinance. In support of this contention 15 relied or the case of (i) Harmones Laboratories v. Commissioner of Income-tar, reported in 1988 LTD 84 and (ii) Commissioner of Income Tax v. Saeeda Nasreen, reported in 1994 PTD 949. In both the afore-cited cases, it has been held that a finding of fact recorded by the Appellate Tribunal is binding in proceedings under section 136 of the Ordinance and this Court cannot go behind the facts found by the Appellate Tribunal. However, the pronouncements made in the two cited cases have no application to the case in hand. Only those findings of facts, which have been arrived at on the basis of the evidence on record and not based on misreading and misconstruing the evidence on record are protected from being disturbed. A finding of fact, which is based on irrelevant and extraneous material or considerations or on" conjectures and surmises, as has been done in this case, is not protected from scrutiny and can be disturbed or set aside by this Court in exercise of its powers tinder section 136 of the Ordinance. This proposition also finding support from the observations made in the aforesaid cases of (i) Hormones Laboratories v. Commissioner of Income Tax 1988 PTD 84. (ii) Commissioner of Income Tax v. Saeeda Nasreen (19941 PTD 949, and in the case of Lal Chand Bhagat v. Commissioner of Income Tax (1959) 37 ITR 288.

We have come to the conclusion that the applicant/assessee has been able to establish that the amount of Rs.7,50,000 credited in the accounts book of the applicant and thereafter debited in favour of M/s. Panorama Enterprises (Private) Limited was the amount received from encashment of the cheque in dispute. It was not an amount received from an undisclosed source and there was no justification for adding the wine to the income of the applicant/assesses in the relevant assessment year. The action of the Income Tax Officer in adding the same to the income of the applicant/assessee and findings of the Commissioner of Income-tax (Appeals) and Appellate Tribunal upholding the said action of the Income Tax Officer were absolutely contrary to the law and cannot be sustained.

In view of our finding that there was no justification for adding the amount of Rs.7,50,000 to the income of the applicant, the questions as to which of the clauses of section 13(1). of the Ordinance would be applicable and that whether obtaining of two prior approvals were necessary are irrelevant and redundant as discussion and pronouncement thereon would be merely academic without being of any assistance to or affecting the rights and liabilities or any of the aforesaid parties. In such a situation this Court would normally refrain from answering the questions. If any authority, is required in support hereof, the same can be found in the case of Commissioner of Income Tax, Karachi v. M/s. Hassan Associates (Private) Limited.

Upon the above discussion, we are satisfied that this reference merits consideration and is to be accepted. Accordingly, we allow the Income Tax Reference and set aside the impugned order of the Appellate Tribunal dated 19-11-1998. Question No.3 is answered in the affirmative, question No.4 is answered in the negative, while we refuse to answer questions Nos. l and 2. The addition of Rs.7,50,000 is deleted.

C.M.A./M.A.K./K-1/K Order accordingly.