BEFORE MUHAMMAD AKHTAR NAZAR MIAN, ACCOUNTANT MEMBER AND SYED KABIRUL HASAN, JUDICIAL MEMBER VS BEFORE MUHAMMAD AKHTAR NAZAR MIAN, ACCOUNTANT MEMBER AND SYED KABIRUL HASAN, JUDICIAL MEMBER
2002 P T D (Trib.) 283
[Income-tax Appellate Tribunal Pakistan]
Before Muhammad Akhtar Nazar Mian, Accountant Member and Syed Kabirul Hasan, Judicial Member
I.T.As. Nos. 1486/KB to 1488/KB of 2000-2001, decided on 21/08/2001.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.66-A---Power of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Objection raised in Audit Report-- Proceedings based on material which was before Assessing Officer-- Legality---Notwithstanding the fact that the Audit Report had drawn attention towards the Assessing Officer's orders being erroneous and prejudicial to the interest of Revenue, yet the Inspecting Additional Commissioner while proceeding under S.66-A of the Income Tax Ordinance, 1979 examined only that record on which the Assessing Officer had based his assessment and therefore, no illegality was committed by the Inspecting Assistant Commissioner in circumstances.
Ganga Properties v. I.T.O. (1979) 118 ITR 447; J.P. Sarivastava & Sons v. CIT (1998) 111 ITR 326 and 1990 PTD (Trib.) 914 distinguished.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Erroneous order---Auditors' Report ---Revision---Validity- When order made by the Assessing Officer was "erroneous" and mere pointing such error by the Auditor would not mean that order "has become erroneous" on .he basis of such Report of the Auditor.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Power of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Jurisdiction---Examination of record-- Inspecting Assistant Commissioner had examined only those records which were before the Assessing Officer while framing the assessment Inspecting Assistant Commissioner had not gone beyond his jurisdiction.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Change of opinion---Order of the Inspecting Additional Commissioner could not be hit by the concept of change of opinion on the part of Assessing Officer as he, while exercising his supervisory jurisdiction could come to a different conclusion on the basis of same points of law and facts which were available to the Assessing Officer.
1986 PTD 408 rer.
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 156---Rectification of mistake---Change of opinion-- Inadmissibility---Once a finding had been given by the Assessing Officer regarding the nature of loss then notwithstanding as to whether the finding was correct or otherwise, the same Authority could not legally take different view under S.156 of the Income Tax Ordinance, 1979, otherwise it would be a case of change of opinion which was inadmissible under law.
(f) Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A & 156---Change of opinion---Initiation of proceedings under S.156 of the Income Tax Ordinance, 1979 by the Assessing Officer and subsequently under S.66-A by the Inspecting Additional Commissioner on the same point---Merger---For change of opinion on the same matter action could be taken only by the Inspecting Additional Commissioner if he found that the order passed by the Assessing Officer was erroneous insofar as it was prejudicial to the interest of Revenue---Supervisory Officer having taken up the revisionary proceedings, the action proposed by the Assessing Officer under S.156 of the Income Tax Ordinance, 1979 stood merged with the order of Inspecting Additional commissioner.
(g) Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A & 116---Inspecting Additional Commissioner's direction to Assessing- Officer to issue notice under 5.116 of the Income Tax Ordinance, 1979---Validity---Mere direction for issuing notice under S.116 of the Income Tax Ordinance, 1979 will not make Inspecting Assistant Commissioner's order invalid if the Assessing Officer's order was erroneous insofar as it was prejudicial to the interest of Revenue.
(h) Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A, 34, 36 & 37---Order prejudicial to the interest of Revenue-- Setting off of loss incorrectly---If it was found that the loss was incorrectly set off against the business income, order of the Assessing Officer having adversely affected the Assessing Officer was prejudicial to the interest of Revenue.
(i) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A---Change of opinion---Order recorded by the Inspecting Additional Commissioner under 5.66-A of the Income Tax Ordinance, 1979 would not be hit by the concept of "change of opinion" as he exercised supervisory jurisdiction and could give a different conclusion on the basis of same points of law and facts which were available with the Assessing Officer---Inspecting Additional Commissioner had jurisdiction to exercise his powers under S.66-A to appreciate the law and facts in the light of his own experience and legal knowledge and he may come to a different conclusion than that of the Assessing Officer.
1990 PTD (Trib.) 914 and 1986 PTD 408 rel.
(j) Income Tax Ordinance (XXXI of 1979)---
----S.27---Capital gain---Stock in trade---Income from--Head of income- Words "held by an assessee" as used in the context of capital assets means the property in possession of an assessee and naturally when the property was stock in trade, it was not necessarily to be retained-- Person dealing on his own in stocks and shares, such stock in trade was a capital asset and once the asset was held to be a capital asset the income on its transfer had to be computed as income under the head "Capital Gain" under S.27 of the Income Tax Ordinance, 1979.
The Chamber's Dictionary rel.
(k) Income Tax Ordinance (XXXI of 1979)---
----Ss. 34, 37, 9, 2(12)(24)(44) & Second Sched., Part I, CI. (116)-- C.B.R. Circular No. 2-IT of 1972, dated 1-7-1972---Set off of loss---Loss from dealing in stocks and shares---Capital loss---Loss from dealing in stocks and shares was computable under the head "Capital Gain", as it was not liable to be set off against income, under any of the other heads as provided in S. 34 of the Income Tax Ordinance, 1979 and was liable to be carried forward in the light of provisions of S.37 of the Income Tax Ordinance, 1979.
CIT v. Bagla Brothers (1972) 84 ITR 20; Kershandas v. CIT (1969) 71 ITR 256; New Era Agencies Private Ltd. v. CIT (1968) 68 ITR 585; CIT v. Dalmia Jain & Company Ltd. (1972) 83 ITR 438 and CIT v. Ashoka Marketing Company 1972 ITR 439 distinguished.
(l) Income Tax Ordinance (XXXI of 1979)---
----S. 66-A & 59(1)(3)---Power of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Self-assessment---Failure of the Assessing Officer in resorting to S.59(3) of the Income Tax Ordinance, 1979 made his order erroneous and prejudicial to the interest of Revenue and was liable to be revised under S.66-A of the Income Tax Ordinance, 1979.
1991 PTD 217 distinguished.
(m) Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A & 116---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Penalty proceedings---Inspecting Additional Commissioner modifying and not cancelling the order of the Assessing Officer for de novo proceedings---Validity---Initiation of penalty was beyond the scope of S.66-A of the Income Tax Ordinance, 1979 because while proceedings under S.66-A the Inspecting Additional Commissioner could either enhance or modify the assessment or cancel .the assessment with the direction to make fresh assessment---When all the facts had already been brought on record by the tax payer and nothing had been concealed, then there was no occasion to initiate penalty proceedings for concealment.
(1985) 156 ITR 603; (1983) 142 ITR 606 and (1982) 133 ITR 7 rel.
(n) Income Tax Ordinance (XXXI of 1979)---
----Ss. 66-A, 62, 59(1), 34, 36, 37, 116, 156 & Second Sched., C1. (116)---Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order---Assessment---Self-assessment---Set off of loss---Capital loss was set off against other income---Revision of such order by the Inspecting Additional Commissioner and penalty proceedings---Validity---Inspecting Additional Commissioner was justified in proceeding under S.66-A of the Income Tax Ordinance, 1979 because orders passed under Ss. 62 & 59(t) of the Income Tax Ordinance, 1979 were erroneous insofar as these were prejudicial to the interest of Revenue as the profit or loss from dealing in shares and stocks even if temporarily retained was to be computed under the head "Capital Gains"---Such loss was not computable under S.34 of the Income Tax Ordinance, 1979 but had to be carried forward in accordance with the provisions of S.37 of the Income Tax Ordinance, 1979, notwithstanding the exemption as far as it might be available under C1. (I 16) of Part I of the Second Schedule to the Income Tax Ordinance, 1979---Directions of the Inspecting Additional Commissioner to the Assessing Officer for initiating penalty proceedings were omitted and the order under S.66-A of the Income Tax Ordinance, 1979 as such was maintained by the Tribunal in circumstances.
I.T.A. No. 2328/KB of 1992-93 ref.
Muhammad Nasim for Appellant.
Javed Iqbal Rana, I.A.C. for Respondent.
Date of hearing: 16th August, 2001.
ORDER
MUHAMMAD AKHTAR NAZAR MIAN (ACCOUNTANT MEMBER). ---These three appeals are against order of the IAC of Income Tax passed by him on 31-5-2001 under section 66-A of the Income Tax Ordinance, 1979.
2. The learned A.R., the learned D.R, and the author of the order have been heard. The order and the write-up given by the learned A.R have been perused and considered.
3. The facts of the case as stated by the learned A.R. on the basis of his examination of the record of the DCIT and un-controverted by the departmental representatives are that:---
(i)The appellant is a private limited company having following two objects amongst others as per Memorandum of Association:---
(a)To act as Member of the Stock Exchange and to carry on the business of the broker in stocks and share.
(b)To buy and sell, hold or otherwise invest in securities as defined in Securities and Exchange Ordinance, 1969.
For this activity the assessee puts in its own capital/funds in the purchase and sale of shares. The assessee-company purchases and sells shares on day-to-day basis as its trading activity.
(ii)The returns were filed for the assessment years 1997-98, 1998-99 and 1999-2000 alongwith copies of the final accounts and the computation sheets which inter-alia showed adjustment pertaining to capital loss on investment of Rs. 2,018,550 Rs. 1,868,750 and Rs. 2,375,605 in the respective assessment years 1997-98, 1998-99 and 1999-2000. In the computation charts this capital loss on investment was adjusted against gross operating revenues.
(iii) The Assessing Officer examined the accounts of the assessee for the years 1997-98 and 1998-99 after issuing notices under section 61 of the Income Tax Ordinance, 1979. After having obtained proper details and explanations the' two assessment orders for 1997-98 and 1998-99 were framed under section 62 of the Income Tax Ordinance, 1979. This was after proper scrutiny and investigation by the Assessing Officer and he agreed with the assessee that the losses on sale of shares were revenue losses (and not capital losses) and liable to be set-off against income under their heads.
(iv)Return for the assessment year 1999-2000 was filed under the Universal Self Assessment Scheme-issued by the Central Board of Revenue and the DCIT vide his order, dated 28-1-2000 under section 59(1) accepted the return under the Scheme.
After the assessments had been completed, records were examined by the Audit Wing of the Income Tax Department who reported loss of revenue of Rs. 2,649,033 due, to adjustment of speculation loss/capital loss in these years.The break up of the losses reported was as under:---
| 1997-98 | 1998-99 | 1999-2000 |
| Rs. 822,962 | Rs. 835,062 | Rs. 1,021,509 |
The auditor desired that "the matter may please be looked and corrective action as per law be taken under intimation to audit".
(vi) The DCIT served a notice under section 156 for all these years on 27-11-2000 showing his intention to rectify his orders for the years 1997-98 through 1999-2000 in view of the provisions of section 36 (Speculation Losses). This notice was responded to by the learned. A.R. on 9-12-2000 arguing inter alia that the position shown as a capital loss was a misnomer and a mistake of description since it was loss on purchases and sale of shares and there was no element of being speculation loss therein. These losses in the respective years were borne out as speculative loses neither from the accounts nor from proceedings nor from assessment orders passed.
(vii) The records as inspected by the learned A.R. are stated to show that on 12-3-2001, the DCIT discussed the matter with CIT alongwith IAC and it was decided to keep the proceedings under section 156 pending.
(viii) The IAC issued notice under section 66-A on 22-3-2001 in these circumstances saying that the orders passed by the DCIT for the assessment years 1997-98, 1998-99 and 1999-2000 were erroneous in so far as these were prejudicial to the interest of revenue as the capital loss which was allowable only against capital gains had incorrectly been set-off against business income.
(ix)The IAC after considering the response of the learned A.R. to his notice passed order under section 66-A on 31-5-2001 modifying the order of the DCIT for the assessment years 1997-98 through 1999-2000 by adding to already assessed income the capital loss on investment previously allowed by the DCIT in his orders.He also directed the DCIT to issue notice under section 116 of the Income Tax Ordinance, 1979 for penalty for concealing the particulars of income.
4. The orders of the I.A.C. are assailed as being without justification and incorrect on merits also.
5. It is argued that the I.A.C. could proceed to examine the record of the case as it existed on the dates the assessments were made whereas according to the learned A.R. all these proceedings were initiated consequent upon audit report and therefore, were not found from the record as existed before the Assessing Officer at the time of framing the assessments. In this connection he has referred to the following case law:---
(1) Ganga Properties v. ITO (1979) 118 ITR 447 (Calcutta)
(2) J. P. Sarivastava & Sons v. CIT (1998) 111 ITR 326 Allahabad.
(3) 1990 PTD (Trib.) 914.
6. Our finding on the issue is that notwithstanding the fact that pointation was made by the Audit Report towards the DCIT's ordersbeing erroneous and prejudicial to the interest of revenue, yet the IAC while proceeding under section 66-A examined only that record on which the Assessing Officer had based his assessments and therefore, no illegality was committed by the IAC. The cases cited by the learned A.R. are distinguishable from the facts of this case. In Ganga Properties v. ITO, the ITO had accepted consideration of sale declared by the petitioner subject to report of Valuation Officer. The subsequent report of the Valuation Officer depicted higher valuation and the revision proceedings by the Commissioner were started on the basis of valuation officer's report. It was held that the revision by the Commissioner could be if the order "is erroneous" and not "has become subsequently erroneous". In the instant case the order was erroneous (as we will discuss later) when made by the DCIT and mere pointation by the audit does not mean that the order "has become erroneous" on the basis of this report of the audit. In the case cited as (1978) 111. ITR 326 as referred to in the case cited as (1990) PTD (Trib.) 914 it has been held that while exercising the powers under section 66-A the IAC cannot rely upon material which was not available before the Income Tax Officer. Here in the case under appeal the AC has not made use of any material which was not before the DCIT while framing the assessments for the respective years:
7. The net result of the above discussion is that since the IAC had examined only those records which were before the DCIT while framing the assessments, the contention of the learned A.R. that the JAC had gone beyond his jurisdiction is not correct.
8. The learned A.R. then argues that the proceedings based on or in compliance of audit report and therefore, these lack authority and jurisdiction. We have already held that the audit report is just a pointation towards the fact that speculation loss/capital loss was allowed against the revenue. The IAC after applying his independent mind came to the conclusion that it was capital loss under section 37 which had incorrectly been allowed by the DCIT as business loss. The proceedings are result of independent application of mind by the IAC to the facts as were available to the DCIT while making assessments of the respective years.It may be observed that the order of the IAC under section 66-A is not hit by the concept of change of opinion with the DCIT as he exercises his supervisory jurisdiction and can come to a different I conclusion on the basis of same points of law and facts which are available to the Assessing Officer (1986 PTD 408).
9. The next argument of the learned A.R. is that since the Assessing Officer had already taken up the matter under section 156 of the Income Tax Ordinance which had not attained finality the IAC was debarred from proceedings under section 66-A of the Ordinance. We have examined the facts of the case and found that the DCIT had issued notice under section 156 showing his intention of treating, loss as speculation loss liable to be dealt with under section 36 of the Income Tax Ordinance. The fact of the matter is that as has been rightly pointed out by the A.R. in reply to the notice under section 156 there was no material on record to hold that the loss claimed was speculation loss. Moreover, once a finding has been given by the Assessing Officer regarding the nature of this loss, then notwithstanding as to whether the finding is correct or otherwise, the same authority (DCIT) could not legally take different view under section 156, otherwise this would have E been a case of change in opinion which is inadmissible under the law. It is to these circumstances that the IAC and CIT(A) with their experience guided the Assessing Officer not to proceed under section 156 in the circumstances of the case. For change of opinion about the same matter action could be taken only by the IAC if he found that the order passed by the DCIT is erroneous insofar as it was prejudicial to the-interest of revenue. Now that a supervisory officer has taken up the revisionary proceedings the actions proposed by the subordinate officer stand merged with the order of the IAC.
10. Then the learned A.R. argues that in the order under section 66-A, IAC has directed for issuing notices for the purpose of imposition of penalty of concealment. According to him the detection of concealment and imposition of penalty is not spelt out under section 66-A and therefore, the jurisdiction exercised by IAC was not proper. On scrutiny of the order of the IAC we have found that he has directed the DCIT to issue notice under section 116 for concealment of income. On f this issue we will dilate upon in the later part of the order but let us say that mere direction of issuing notice under section 116 (which is not the G final order of penalty) will not make IAC's order invalid. If the DCIT's order is erroneous so far it is prejudicial to the interest of revenue, then it will have to be evaluated on its own merits.
11. It is submitted by the learned A.R. that the notice, dated 22-3-2001 does not demonstrate any loss of revenue and is thus beyond the scope of section 66-A. We are afraid we cannot subscribe to this submission because if it is held that the loss was incorrectly set off against the business income, then obviously the order of the Assessing Officer has adversely affected the revenue and it is prejudicial to the interest of revenue.
12. The learned A.R. then argues that powers under section 66-A are not for reviewing the decision, there cannot be wanton exercise of powers and that with the assessment orders having been made vested rights are created which cannot be lightly taken away. In the circumstances of the case we hold that this is a case where the IAC has exercised his jurisdiction to revise DCIT's order and in no way this is wanton exercise of power. We are fortified in this view by the decision reported as 1990 PTD (Trib.) 914 where by referring to an earlier decision reported as 1986 PTD 408 it has been held that the order recorded by the IAC under section 66-A would not be hit by the concept of change of opinion as he exercises his supervisory jurisdiction and can I give a different conclusion on the basis of same points of law and facts which were available with the Assessing Officer and that the IAC has jurisdiction to exercise his powers under section 66-A to appreciate the law and facts in the light of his own experience and legal knowledge and he may come to a different conclusion than that of the Assessing Officer.
13. Next the learned A.R. has come to the transaction itself to contend that loss from this transaction was a business loss liable to be set-off against the business income. According to the learned A.R. dealing in shares and stocks is a regular business activity of the appellant and is therefore, liable to be assessed as income from business. According to him the shares were never held for more than a year and therefore, the gain, if any, in such dealing was to be included in the total income of the appellant as per clause (4) of Part-IV of 1st Schedule. According to him the shares and stocks were merchandize/goods in which the assessee was dealing and therefore, any loss on purchase and sale of merchandize was incapable of being treated as capital loss and excluded from total income. In this connection he has relied upon the following Indian case law:---
(1) CIT v. Bagla Brothers (1972) 84 ITR 20 (Allahabad); (2) Kershandas v. CiT (1969) 71 ITR 256; (3) New Era Agencies Private Ltd. v. CIT 1968 68 ITR 585 (SC of India); (4) CIT v. Dalmia Jain & Company Ltd. 1972 83 ITR 438 (SC of India) and (5) CIT v. Ashoka Marketing Company 1972 ITR 439 (SC of India).
14. He has also dwelt upon the provisions of section 2(12), C.B.R. Circular No.2. IT of 1972, dated 1-7-1972 read with section 37 of the Income Tax Ordinance, 1979 and also the provisions of section 9, section 34, section 2(24) and section 2(44) to contend that:---
(i)in the first place the loss was a business loss and should have been treated as such, and.
(ii)even if this was a capital loss this should have been set-off under section 34 when provisions of section 37 had become ineffective due to exemption granted to capital gains under clause (116) of Part-I of Second Schedule to the Income Tax Ordinance 1979. For the sake of clear understanding of legal position it would be beneficial to reproduce the provisions of law as referred to by the learned A.R. and are relevant to the issue in dispute.
Section 2(12):
(12) "capital asset" means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include:---
(i)any stocks-in-trade (not being stocks and shares), consumable stores or raw materials held for the purpose of his business or profession;
(ii)personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him; and
(iii) any land from which the income derived by the assessee is agricultural income;
Section 2(24):
(24) "income" includes---
(a)any income, profits or gains, from whatever source derived, chargeable to tax under any provision of this Ordinance under any head specified in section 15;
(b)any loss of such income, profits or gains;
Section 2(44):
(44) "total income" means the total amount of income referred to in section 11 computed in the manner laid down in this Ordinance; and includes any income which, under any provision of this Ordinance, is to be included in the total income of an assessee;
Section 9(1):
9. Charge of Income-tax. ---(I) Subject to the- provisions of this Ordinance, there shall be charged, levied and paid for each assessment year commencing on or after the first day of July, 1979, income tax in reject of the total income of the income year or years, as the case may be, of eves person at the rate or rates specified in the First Schedule.
..
.
Section 27(1):
(27) Capital gains.----(1) Any profits or gains arising from the transfer of a capital asset shall be chargeable under the head "Capital gains" and shall be deemed to be income of the income year in which the transfer took place..
Section 28.
(28) Computation of capital gains.---(1) In computing the income under the head "Capital gains", the cost of acquisition of the capital asset and , any expenditure incurred wholly and exclusively in connection with the transfer thereof shall be deducted.
Section 34.
(34) Set off losses.---Where an assessee sustains a loss (not being a loss to which section 36 or section 37 applies) in any assessment year under any head of income specified in section 15, he shall 1 [subject to clause (b) of subsection (1) of section 23*] be entitled to have the amount of the loss set-off against his income (other than income to which subsection (7) or (9) of section 12 applies), if any, under any other head assessable for that assessment year.
Section 37:
(37) Capital losses.---Where an assessee sustains a loss in any assessment year under the head "Capital gains", such loss shall be carried forward to the following assessment year and set-off against the capital gains chargeable for that assessment year under the said head and if it cannot be set-off in this manner, the amount of loss not so set off shall be carried forward to the following assessment year, and so on, but no loss shall be carried forward for more than six assessment years immediately succeeding the assessment year for which the loss was first computed:
Provided that where the loss sustained by any assessee in any income year does not exceed five thousand rupees, it shall not be carried forward and, where it exceeds five thousand rupees, only so much of such loss shall be carried forward as exceeds five thousand rupees:
Provided further that as respects the assessments for the years beginning on the first day of July, 1975 and ending on the thirtieth day of June, 1984, this section shall have effect as if the assessment year beginning on the first day of July, 1984 were the next following assessment year to any assessment year ending at any time between the thirtieth day of June, 1975, and the thirtieth day of June, 1983 and the first proviso were omitted:
Provided further that as respect the assessments, in respect of loss arising from sale of shares of a public company (as defined in the First Schedule), for the years beginning on the first day of July, 1984, and ending on the thirtieth day of June, 1989, this section shall have effect as if the assessment year beginning on the first day of July, 1989, were the next following assessment year to any assessment year ending at any time between the thirtieth day of June, 1984, and the thirtieth day of June, 1988, and the first proviso were omitted.
Clause (116). Part-I of Second Schedule to the Income Tax Ordinance 1979.
(116) Any income chargeable under the head "capital gains" being income from the sale of modaraba certificates or any instrument of redeemable capital as defined in the Companies Ordinance, 1984 (XLVII of 1984), listed on any stock exchange in Pakistan or shares of a public company (as defined in the First Schedule) and the Pakistan Telecommunications Corporation vouchers issued by the Government of Pakistan derived by an assessee in respect of any assessment year ending on or before the thirtieth day of June, 2005.
15. The relevant provisions of law have been quoted above. Section 9 provides that income tax is to be charged in respect of total income of every person and as per section 2(44), total income means the total amount of income referred to in section 11. Income as per section 2(24) includes income profits and gains from whatever source derived chargeable to tax under any head specified in section 15 and it includes any loss of such income and gains. Section 15 gives heads of accounts under which the income is to be computed and one of the heads of accounts is Capital Gains. Income under the head Capital Gains pertains to loss/income, profits or gains arising from transfer of capital asset. Capital asset has been defined under section 2(12) to mean property of any kind held by an assessee whether or not connected with his business or profession but does not include any stock in trade not being stocks in shares. This means that stocks and shares are ca vital assets even if these are held in business as stock in trade. Here the learned A.R. stressed that the word "held" by an assessee means that the capital asset is held for some reasonable period for the purpose of appreciation or depreciation in its value and only then can be treated as capital asset liable to be- tackled under the head income from Capital Gains.
16. The word "hold" has not been defined in the Income Tax Ordinance and will have to be taken on its ordinary dictionary meanings. The Chambers Dictionary gives following meaning of the ward "hold", among others:--
To keep; to have; to grasp; to have in one's possession; to pass on a title to; to confine; to restrain; to detain, to retain; to reserve, to continue; to persist in; to celebrate; to observe; to conduct; to carry on, amongst others.
So the words "held by an assessee" as used in the context of capital assets means the property in possession of an assessee and naturally when the property is stocks in trade, it is not necessarily to be retained as claimed by the learned A.R. It is thus clear that even in the J hands of a person dealing on his own in stocks and shares, such stock in trade is a capital asset and once the asset is held to be a capital asset the income on its transfer has to be computed as income under the head Capital Gains i.e. section 27 of the Income Tax Ordinance, 1979.
17. While computing the income under section 27, the cost of acquisition of the capital asset and any expenditure incurred wholly and exclusively in connection with the transfer thereof are deductable. Such a deduction may result in income or loss. In case the end result is loss then this loss is not to be set-off under section 34 against any other income of the assessee for the assessment year but the loss is to be carried forward to the following assessment year and to be set-off only against the Capital Gains computed for that assessment year under the said head and may be carried forward to the following assessment years and so on, but no loss is to be carried forward for more than 6 assessment years, immediately succeeding the assessment year in which the loss is first computed. This is so in peculiar circumstances of the loss under the head Capital Gains. All other losses except speculation are liable to be set-off against income of the same year under other heads of income but the speculation losses and capital loss (loss under the head capital gains) is out of the purview of section 34 of the Income Tax Ordinance, 1979.
18. In view of the above discussion it is held that in the case of the assessee the loss from dealings on own account in stocks and shares is computable under the head Capital Gains, it is not liable to be set-off against income under any of the other heads as provided in section 34 and is liable to be carried forward in the light of provisions of section 37 of the Income Tax Ordinance 1979.
19. Before proceeding further we would like to say that in all the cases cited by the learned A.R. quoted in para-12 supra the assessees were dealing in stock and shares and the business loss incurred by them was considered allowable. As quoted above in the Pakistani jurisdiction, the stock in trade of stocks and shares has specifically been included in the definition of "capital assets" and therefore, the cases quoted by the learned A.R. are not only distinguishable but also of no help to the learned A.R. in Pakistani context.
20. It has further been argued by the learned A.R. that under clause (116) of Part-I of the Second Schedule to the Income Tax Ordinance, 1979, the Capital Gains have been exempted from tax and therefore, section 37 has practically become inoperative. We cannot subscribe to this view of the learned A.R. because we feel that all the capital gains have not been exempted from tax. It is only the income chargeable under the head capital gains (which naturally includes the loss as well) which arises from sale of Modaraba Certificates or an instrument of redeemable capital listed on stock exchange in Pakistan or the shares of a public company or PTC vouchers issued by the Government of Pakistan which is exempted from tax in respect of any assessment year ending on or before 30th day of June, 2005. All other capital gains are still liable to tax and to be processed in accordance with the provisions of law explained above. Section 37 has not thus been rendered unworkable in view of clause (.116) of the Second Schedule to the Income Tax Ordinance, 1979.
21. The learned A.R. has stressed that if capital loss as in this case cannot be set-off against the income under other heads and is to be carried forward as such then absurd situation may arise where a loss actually incurred is completely lost contrary to the claim of the Income Tax Ordinance, 1979. It has to be appreciated that similar situation may arise in case of business lots which is carried forward and is allowable against income of the same business for specified period. Even there a situation may arise where the business loss actually incurred may not be allowable under the Income Tax Ordinance, 1979. Similarly loss under other heads of account, except the business loss, if not adjusted against income under other heads of the same income years, it cannot even be carried forward and is lost for ever. There is thus no force in this argument of the learned A.R.
22. In respect of assessment year 1999-2000 the learned A.R. has argued that the assessment had been made by the DCIT under section 59(1) of the Income Tax Ordinance, 1979 accepting the return under the Universal Self Assessment Scheme. In doing so the Assessing Officer had carried out policy order of the C.B.R. and had not passed any conscious order of his own. In this view of the matter and in the light of decision reported as 1991 PTD 217 (H.C. of Sindh) no action under section 66-A is exigible. We are afraid as we cannot subscribe to the view given by the learned A.R. Section 59(3) makes it obligatory on the Assessing Officer that in assessing the total income and, determining the tax payable under subsection (1), he may make such adjustments as may be necessary including any adjustment under section 37 alongwith others as provided in the statute. Failure of the Assessing Officer in resorting to subsection (3) of section 59 makes his order erroneous and L prejudicial to the interest of Revenue. The order was therefore, liable to be revised under section 66-A by the IAC. The facts in the case reported as (1991) PTD 217 were distinguishable. In that case assessment had been made under section 59(1) of the Income Tax Ordinance, 1979 which was re-opened under section 65 alleging that the income had been under assessed. It was contended before the Hon'ble Karachi High Court, as it then was, that the show cause notice under section 65 was based on change of opinion. It was held that the original assessment having been made under Self Assessment Scheme, in fact no opinion had been shown by the Assessing Officer and therefore, when there was no opinion shown there was no question of change in opinion. The notice under section 65 was held valid.
23. Next, it has been argued by the learned A.R. that the order of the learned IAC directing the Assessing Officer to impose penalty for concealment completely lacks in jurisdiction and propriety because no such powers were spelt out from the language implied in section 66-A. The assessment and penalty are two different sets of proceedings and where as the assessment proceedings are civil in nature those of penalty are a quasi criminal proceedings. Again it is said that the penalty is to be imposed under section 111 where the DCIT is empowered to impose penalty and not the IAC and that there is no jurisdiction in the entire body of the order under section 66-A for imposition of penalty. Reliance has been placed on the following case law.
(1985) 156 ITR 603; (1983) 142 ITR 606 and (1982) 133 ITR 7.
24. The cases cited by the learned A.R. are identical in fact to the case under appeal before us. The author of the order explained that since he was modifying the order and not cancelling the order of the ITO for de novo proceedings, he had to take its cognizance. We feel that initiation of penalty is beyond the scope of section 66-A because while proceeding under section 66-A in respect of an assessment, the IAC could either enhance or modify the assessment or cancel the assessment with the direction to make fresh assessment. Also in the circumstances of this case when all the facts had already been brought on record by the tax payer and nothing had been concealed so far as the quantum of loss is concerned and the question before the DCIT or the IAC is regarding applicability of section 34 and section 35 or section 37, there was no occasion to initiate penalty proceedings for concealment.
25. The learned A.R has stated that reliance of the IAC was not proper on appeal decided by the I.T.A.T. vide I.T.A. No. 2328/KB of 1992-93, dated 16-8-2000 in the case of Standard Chartered Bank Ltd. This argument of the learned A.R. is not acceptable because in similar circumstances the I.T.A.T. in the ITA No. 2328/KB of 1992-93 had given the following finding:---
"Assessee bank's next grievance is regarding the Assessing Officer treating loss on sale of NTN Units as capital loss and adjusting the same against the capital gain on PICIC shares claimed to be exempt under clause (116) of Part-I of the Second Schedule to Income Tax Ordinance, 1979 instead of carrying forward the same and for adjustment against future taxable capital gains. Mr. Saqib assailed the treatment meted out by the Assessing Officer and confirmed by CIT(A). He informed that NIT Units were dealt in frequently and hence the loss was Revenue in nature and adjustable against Revenue profits of the year. PICIC shares had been held for a long time he claimed. He, however, could not make out any good case for what was urged before us. The Assessing Officer has discussed the whole matter in detail on pages 8 to 9 of his order and CIT(A) thoroughly considered the whole matter before confirming the treatment meted out. In short NIT Units are capital assets even if temporarily held as per the specific provisions of section 2(12) of Income Tax Ordinance. 1979 and hence profit/loss on dealings in the same would always be capital profit or loss."
26. The learned A.R. has in his writ-up referred to the principles of law as enunciated by the Hon'ble Supreme Court of Pakistan in para-13 of its order in the famous case of Ellahi Cotton Mills. We are of the view that the interpretation of law as given above does not in any way infringe upon the principles as laid down by their lordships of the Hon'ble Supreme Court of Pakistan in the quoted case.
27. For the reasons given above we maintain that IAC was justified in proceeding under section 66-A because in the circumstances of the case all the three orders passed by the DCIT under section 62 for the assessment years 1997-98, 1998-99 and under section 59(1) for the assessment year 1999-2000 were erroneous insofar as these were prejudicial to the interest of Revenue. The I.A.C. was also right in holding that profit or loss from dealing in shares and stocks even if temporarily retained is to be computed under the head Capital Gains as per specific provisions of section 2(12) of the Income Tax Ordinance, 1979 and is includable in total income. The charging of tax thereon will depend upon the provision of clause (4) of Para-A of Part-IV of the First Schedule and clause (116) of the Part-I of the Second Schedule to the Income Tax Ordinance, 1979, as far as these are applicable in the circumstances. In case of loss under the head, section 34 is not applicable, such loss has to be carried forward in accordance with the provisions of section 37, notwithstanding the exemption as far as it may be available under the circumstances under clause (116) of Part-I of the Second Schedule to the Income Tax Ordinance.
28. Consequently the appeals succeed only to the extent that the direction of the IAC to the DCIT for initiating penalty proceedings are omitted, otherwise the orders under section 66A as such are maintained.
C. M. A. /M. A. K./149/Tax (Trib).Order accordingly.