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

‑‑‑‑S.68(4)‑‑‑Registration of firm‑‑‑Refusal of registration‑‑‑Order under S.68(4) of the Income Tax Ordinance, 1979 was not merely for granting of registration but under the same provision of law the Assessing Officer was also entitled to refuse the registration of a firm if he was satisfied that a genuine firm as shown in the instrument of partnership was not in existence in the relevant income year, and that it had not fulfilled the requirements as laid down in subsections (2) & (3) of S.68 of the Income Tax Ordinance, 1979.

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

‑‑‑‑S.68‑‑‑Registration of firm‑‑‑Application for registration‑‑‑In order to qualify for being a registered firm an application had to be made by the firm and the department cannot on its own grant the registration to a. firm.

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

‑‑‑‑Ss. 68 & 69‑‑‑Registration of firm‑‑‑Department, till the assessment year 1985‑86, could treat an unregistered firm (i.e. a firm which had not even applied for registration) as registered firm for the purpose of levy of tax as laid down in sub‑clause (ii) of cl. (b) of subsection (1) of S.69 of the Income Tax Ordinance, 1979 but due to insertion of proviso to S.69 this power had been taken away from the Department‑‑‑Natural corollary of such change in law by the Legislature was that the assessee was entitled to claim status of an unregistered firm for the purposes of levy of tax at concessional rates.

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

‑‑‑; S.68‑‑‑Registration of firm‑‑‑Claim of status as an "Association of Persons" from "registered firm" ‑‑‑Validity‑‑‑Assessee was legally well within its right to claim the status of an "Association of Persons" irrespective of the fact whether the firm had' been dissolved or was intact as the claim of registration under S.68 of the Income Tax Ordinance, 1979 was the privilege for which the assessee could apply after fulfilling the requirements enumerated thereunder.

(e) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.68(4) & (5)‑‑‑Registration of firm‑‑‑Status‑‑‑Change of‑‑‑Provision of S.68(4) of the Income Tax Ordinance, 1979 to treat a .firm as "registered" in all subsequent assessment years, if once registered, was only mandatory on `the Department and not on the assessee ‑‑‑ Provisions of S.68(5) of the Income Tax Ordinance, 1979 for cancellation of registration of firm were also binding on the Department ‑‑‑Assessee had the privilege and prerogative to be taxed at a concessional, rate if the law had been so amended.

(f) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.68‑‑‑Registration of firm‑‑‑Status‑‑‑"Registered firm" ‑‑‑Change of status ‑‑‑Validity‑‑‑Assessee can change its status from a "registered firm" to that of an "unregistered firm" or "Association of Persons" or "individual" for the purpose of availing concessional rate of tax.

(g) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.59‑‑‑C.B.R. Circular No: 5 of 1997, dated 12‑7‑1997‑‑‑C. B. R. Circular No. 12 of 1997, dated 17‑9‑1997‑‑‑Self‑assessment‑‑ Assessment year 1997‑98‑‑‑Immunity, from special audit‑‑‑Tax paid was more than 25% as compared with the last year's tax‑‑‑Income was less than the income previously declared‑‑‑Change of status from "registered firm" to "Association of Persons" ‑‑‑Assessing Officer refused to accept the assessee's return under Self‑Assessment Scheme for the reason that comparison of income and tax paid thereon was not possible owing to change in status of the firm‑‑‑Validity‑‑‑While setting apart the assessee's return out of the parameters laid down for special audit, the Assessing Officer had mistakenly involved himself in making comparison of the income‑returned as well as the status claimed by the assessee with those of the immediately preceding assessment year‑‑‑Making comparison on such basis amounted to denial of benefits of Self‑Assessment Scheme to the assessee‑‑‑Case of. the Department was not that the assessee had paid less tax in the year which was required to be paid in order to avail amnesty from special audit‑‑‑First Appellate Authority rightly ordered for acceptance of the returned income under the Self‑Assessment Scheme as, the case was not hit by any disqualification enumerated in the Scheme‑‑‑Departmental appeal was dismissed by the Tribunal.

CIT v: Khatija Begum 1965 PTD 540 and PLD 1961 SC 119 ref.

Muhammad Aslam; D.R. for Appellant Nemo for, Respondent.

Date of hearing: 12th April, 2001

ORDER

RASHEED AHMED SHEIKH (JUDICIAL MEMBER).‑‑1: This appeal at the behest of the, Revenue is directed against order, dated 26‑5‑1999 passed by CIT(A) Zone‑IV, Lahore in respect of assessment year 1997‑98.. ,

2. The precise question which is involved in this appeal related to whether the assessee can opt its status from a "registered firm" to that of "an unregistered firm" or "AOP" or "individual" for the purpose of availing concession rates of tax?

3. Facts in short are that for the assessment year 1997‑9b the assessee‑respondent filed its tax return declaring total net income of Rs.1,49,545 under the Simplified Self‑Assessment Scheme (S.S.A.S.) by claiming status of an "AOP" whereas he was being assessed to tax as a "Registered Firm" in the preceding assessment year. It was thus observed by the Assessing Officer that since the respondent had failed to intimate any change in the constitution of the firm nor he furnished any dissolution deed or a certificate issued by the Registrar of Firm, regarding dissolution of the firm, therefore, in the absence of these documents status of an "AOP" cannot be assigned to tile assesses: However, the return filed under the SSAS, whereby immunity from total audit had been claimed, was not accepted by the Assessing Officer being the income returned in the year under appeal was less than the income previously declared by the assessee in the status of a "R.F." which was at Rs.164,240. After completing usual formalities ex parte assessment was formulated by the Assessing Officer at net income of Rs.514,000 by resort to section 63 of the Income Tax Ordinance, 1979. It is worthwhile to mention that despite recording the above observations status of an "AOP" in lieu of a "Registered Firm" was assigned to the assessee by the Assessing Officer.

4. Before the First Appellate Authority the' assessee's main' contention was that since the tax paid for the year under appeal was more than 25% of the tax payable in the last year, therefore, the return was immune from special audit and as such was erroneously excluded out of the purview of the SSAS. To substantiate the contention, a chart showing tax payable for the year under appeal viz. the preceding assessment year was also furnished. After weighing pros and cons of the case, it was held by the' learned Appeal Commissioner' that even if a copy of the dissolution deed was not filed, the return could not be excluded out of the ambit of the said scheme if otherwise qualified. Further held that the return of the assessee was qualified to be, processed under immunity clause of the SSAS and the Assessing Officer was not justified to refuse the claim of status of an "AOP" for lack of submission of copy of the dissolution deed. Accordingly, the learned Appeal Commissioner directed the Assessing Officer to accept the returned income of the assessee under the immunity clause of the said Scheme.

5. Arguing on behalf of the department the learned D.R. vehemently contended that since, the respondent was a registered firm in the previous assessment year and by virtue of ratio of provisions of subsection (4) of section 68 of the Income Tax Ordinance, 1979 automatic renewal of registration of the firm was being granted by the Assessing Officer, till assessment year 1996‑97, the respondent could not get out of the mischief of this provision. He explained‑ that the word "shall" used in subsection (4) of section 68 denotes command of the legislature for all the persons employed for implementation of the Ordinance and as such the ITO had no other alternative but to assign status of a registered firm unless a change in the constitution of the firm was proved by the respondent. As change in the constitution of the firm could not be proved by the respondent, status of an AOP claimed in the return could not be allowed. It was further explained that the Income Tax Ordinance does not provide any choice to the respondent to change the status already granted to a registered firm at any time whenever it suits to him.

6. Also contended that claiming of status of an AOP was simply a device to reduce incidence of taxation because the rate of tax for the year under appeal was more favourable to an AOP or unregistered firm viz. a registered firm. Since the law did not permit for automatically change in the‑constitution of the firm, the devoice to pay lower amount of tax cannot be allowed to succeed. He also pleaded that claiming status of an AOP in the return can only be termed as misnomer and legal misrepresentation as according to definition of the registered firm, status of an AOP or an unregistered firm can be claimed and assigned only in a case when there is not a registered firm in existence:

7. The learned D.R. also pointed out that a certain procedure has been laid down under the law to incur a change in the registered firm. He stated that registration of a firm under the Partnership Act is one of the pre‑condition for claiming registration under section 68 of the Income Tax Ordinance, 1979 and since the Partnership Act lays down a complete procedure for dissolution of the firm, it cannot be dissolved unless the formalities as laid down in Chapter‑IV (Sections 39 to 55) of the Partnership Act are fulfilled. He asserted that having not dissolved the firm, the respondent was not entitled to claim status of "unregistered firm" or an AOP. Continuing further the learned D.R. argued that since no order under section 68(5) of the Income 'Talc Ordinance, 1979 has been made, the status of a registered firm would continue to subsist even during the year under appeal. Thus, the respondent acquires automatic renewal of registration of the firm. In the end he prayed that the findings recorded by the learned Appeal Commissioner may be vacated and that of the Assessing Officer modified by directing him to assign status of a "Registered Firm" to the respondent and not that of an "AOP". Also prayed that in this background the order of the Assessing Officer regarding exclusion of the assessee's return out of the ambit of the Simplified Self‑Assessment Scheme may be held to be justified being the return did not fall within the immunity clause of the‑Scheme if the status of R.F. is assigned to the assessee.

8. Since, none prosecuted on behalf of the assessee‑respondent despite proper intimation made to him, therefore, we adopt the same arguments as were advanced by him before the learned Appeal Commissioner and dispose of the present appeal by resort to rule 20(2) of the ITAT Rules, 1981.

9. We have given anxious thought to the averment advanced by the learned D.R. appearing at the bar and perused the relevant provisions of the law as well. Before dilating upon the issue in hand, we would like to reproduce the relevant sections of the Income Tax Ordinance around which the whole controversy resolves.

Registration of firms‑‑‑Section 68

(1) An application may be made to the Deputy Commissioner on behalf of a firm for registration of the firm for the purposes of this Ordinance.

(2) No application shall be made under subsection (1) unless, before the end of the income year relevant to the year for which assessment is to be made;

(a) the firm had been constituted by an instrument of partnership;

(b) the said instrument specifies, among other things, the shares of the partners; and

(c) the said firm had been registered under the Partnership Act, 1932 (IX of 1932), or an application for registration under the said Act had been made.

(3) An application under subsection (1) shall be in such` form, be accompanied by such documents, be verified in such manner and be made on or before such date as may .be prescribed.

(4) Where the Deputy Commissioner, after making such enquiry or requiring the firm to furnish such particulars, documents or evidences as he may think fit, is satisfied that the requirements of subsections (2)(3) have been fulfilled and that there is, or was genuine firm in existence in the relevant income year constituted as shown in the instrument of partnership; he may, by an order in writing made within three months of the date on which the return of total income was filed under section 55 of six months; of the end of the income year, whichever is the earlier, register the firm for the purposes of subsection (5), such firm shall be treated as registered firm for the income year for which it is first, registered and for all subsequent income years for so long as there is no change in the constitution of the firm; and if he is, not so satisfied, he may by an order in writing made within the‑aforesaid period, refuse to register the firm;

Provided that, where no such order is made within the afore said period, the firm shall be treated as a registered firm and all the provisions of this Ordinance shall, so far as may be, apply as they apply in the case of firm registered under this subsection.

(5) If, at any time after a firm has been registered or treated as a registered firm under subsection (4) for any income year, the Deputy Commissioner has reason to believe that;

(a) there was no genuine firm in the existence in such income year constituted as shown in the instrument of .partnership; or

(b) the requirements of subsections (2) and (3) had not been fulfilled in respect of the said income year,

he may cancel the registration after giving a reasonable opportunity to the firm of being heard. For facility of reference relevant provisions of section 69 of the Income Tax Ordinance, 1979 are also being reproduced hereunder;

Assessment of firms and partners‑‑‑Section 69

For facility of reference, relevant provisions of this section are also being reproduced hereunder:‑‑‑

(1) Notwithstanding anything contained in this Ordinance, where the assessee is a firm and the total income of the firm has been determined or assessed under sections 59, 59‑A, 60, 62, 63 and 65 as the case may be;

(a)------------------------------------------------------------------------------

(b) In the case of an unregistered firm, the Deputy Commissioner;

(i) May determine the tax payable by the firm on the basis of the total income of the firm; or

(ii) May proceed in the manner laid down in clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of tax (including the tax payable under sub‑clause (1) of that clause (would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm:

Provided that this sub‑clause shall not apply in respect of any assessment year commencing on or after the first day of July, 1986.

10. Bare reading of section 68 clearly envisages that the provisions of this section are machinery in character and as such the construction 'favourable to the taxpayer should be adopted as is held by the august Supreme Court of Pakistan in the ruling cited as CIT v. Khatija Begum 1965 PTD 540. In another case the apex Court of Pakistan in a case reported as 1961 PTD SC 119 has observed that the machinery section should be construed liberally and where two interpretations are possible, the one favourable to the subject shall be adopted.

11. Reverting to section 68 of the Income Tax Ordinance, 1979, it is observed that an order under subsection (4) of section 68 is not merely for granting of registration but under the same provision of law the ITO is also entitled to refuse the registration of a firm if he is satisfied that a gnuine firm as shown in the instrument of Partnership was not in existence in the relevant income year and that it had not fulfilled the requirements as laid down in subsections (2) and (3) of section 68 of the Income Tax Ordinance, 1979. It is also evident that in order to qualify for being a registered firm an application has to be made by the firm and the Department cannot on its own grant the registration to a firm. However, till assessment year 1985‑86, the Department could treat ate unregistered firm (i.e. a firm which does not even apply for registration) as registered firm for the purpose of levy of tax as laid down in sub- clause (ii) of clause (b) of subsection (1) of section 69 but due to insertion of proviso to this section, this power has been taken away from the Department. Now, natural corollary of this withdrawal of process by the legislature is that the appellant is entitled to claim status of and unregistered firm for the purposes of levy of tax at concessional rates. We also cannot digest how could the ITO pass an order tinder section 68 (4) of the Income Tax Ordinance without satisfying himself that the requirements of subsections (2) and (3) of section 68 of the Income Tax Ordinance, 1979 had been fulfilled as there was no application made by the appellant as required under subsection (1) of section 68 of the Income Tax Ordinance, 1979.

12. Having taken regard to the foregoing discussion, we find the observation of the ITO that, the applicant could not be allowed to avail facility of concessional rates of tax by claiming status of an "A.O.P." is misconceived especially in view of the amended provision of sub‑clause (ii) of clause (b) of subsection (1) of section 69 of the Income Tax Ordinance. Prior to introduction of the amendment in this section, the Department had a right to treat even an "unregistered firm" as "registered firm" for determination of tax payable by it if the same was beneficial to the Revenue. Since, applicability of this provision has been withdrawn from the assessment year 1986‑87 onwards; the clear intention of the legislature is to allow the assessee to avail facility of concessional rate of tax by claiming status of alt "unregistered firm".

13. Although for the purpose of determining tax payable by a firm, section 69 of the Income Tax Ordinance. 1979 had entrusted the powers to the DCIT to treat an "unregistered firm" 'to be a "Registered Firm" nevertheless the fact remains that rates of tax in case of U.R.F., A.O.P. and individual are the same. So, in order to avail concessional rates of tax it is immaterial whether the assessee had claimed the status as "U.R.F:." or "A.O.P", or "individual" in the relevant assessment year viz. previously claimed as "R.F". Acquiring strength from the amendment introduced in section 69 of the Income Tax Ordinance, 1979, we feel convinced that the respondent was legally well within its right to claim the status of an"AOP" irrespective of the fact whether the firm had been dissolved or intact as the claim of registration under section 68 of the Income Tax Ordinance is the privilege for which the assessee cap, apply after fulfilling the requirements so enumerated thereunder. It is so because if in a case, firm is legally constituted, as envisaged under the: Partnership Act, but does not intend to have itself registered under section 68, it has the vested right to do so. It is pertinent to mention that Provisions of subsection (4) of section 68 to treat a firm as "Registered" in all subsequent assessment years, if once registered, was only mandatory on the Department and not on the appellant. Similarly, observance of provisions of subsection (5.) of section 68 for cancellation of registration of firm already granted is also binding only on the Department. Hence, this is the assessee's privilege and prerogative to be taxed at a concessional rate if the law has been so amended.

14. In the given scenario, we are persuaded to hold that the Assessing Officer has acted in flagrant violation of law in observing that status of an "A.O.P. has illegally been claimed by the respondent instead of a "Registered Firm". His observations to ‑this extent are not sustainable and having no legal effect. It would not be out of place to mention that despite making a lot of discussion in the assessment order regarding claiming incorrect status by the assessee, status of an "A.O.P." has personally been assigned by the Assessing Officer rather than assigning a "Registered Firm". This act of the Assessing Officer suo Motu nullifies the effect of findings recorded by him in the assessment order. So, our answer to the question posed (supra) is that the assessee can change its status from a "registered firm" to that of an "un‑ I registered firm" or "association of persons" or "individual" for the purpose of availing concessional rate of tax.

15. Now coming to the other question as to whether the. assessee's return was hit by mischief of any para. of the relevant SSAS in the given circumstances. Perusal, of the Scheme reveals that originally no amnesty to the taxpayers was granted in the said Scheme whereby they could claim immunity from special audit. Subsequently, the C.B.R. through a clarificatory Circular bearing No.12 of 1997 (Income Tax) Islmabad, the 17th September, 1997 introduced an immunity clause thereunder para, 2 of the said Circular provides that all the taxpayers who intend to avail benefits of the SSAS will be immune from special audit if they pay 25 % more tax in the assessment year 1997‑98 viz. the tax payable in the last year. However, out of the cases not qualifying for the immunity, 5% to 10% cases will be selected for special audit. Meaning thereby rest of the cases, otherwise not eligible, shall be processed under the Self Assessment Scheme. In addition to, facility of amnesty from special audit was also extended to the persons who have already filed their returns for the assessment year 1997‑98 prior to issuance 'of the said Circular by the C.B.R. so that they could revise their returns by 30^th September, 1997 in order to avail the benefits of the immunity clause introduced by the C.B.R. in the said Circular.

16. Coming to the facts of the present‑ case, the return was filed by the assessee in the status of an "AOP" under the SSAS: In order to claim immunity from "special audit", a revised return was submitted declaring net income of Rs.149,545 and tax worked-out thereon at Rs.17,500 had duly been paid. While the net income in the immediately preceding assessment year 1996‑97 was returned at Rs.164,240 and tax payable thereon was at Rs.13,900 but in the status of a "Registered Firm". Admittedly' the tax paid by the assessee in the year under appeal was more than 25 % when compared with the last year's tax which was the pre‑condition for entitlement to fall out of the ambit of the "special audit". Since, the income returned for the year under appeal was less than the income previously declared, the Assessing Officer refused to accept the assessee's return under the Scheme for the reason that comparison of income and tax paid thereon was not possible owing to change in status of the firm in the year under appeal viz. the preceding assessment year. Accordingly net income was computed by the Assessing Officer at Rs.514,000 by assigning status of an "AOP" to the assessee. At the first appellate stage, the Appeal Commissioner directed to accept the return under the SSAS as the appellant's case qualified to be accepted under the immunity clause of the Scheme.

17. Upon having considered the learned D.R's. contentions and the facts available on file, we feel convinced that the assessee's return of income has erroneously been excluded out of the ambit of the immunity clause of the Self‑Assessment Scheme. In fact the Assessing Officer has processed the assessee's case in "special audit" without appreciating the relevant provisions of SSAS in its proper perspective. C.B.R. in para. 2 Circular No.5 of 1997 (Income Tax) Islamabad, July 12, .1997 had certainly qualifications for acceptance of the returns to be accepted under the Scheme. Out of which sub‑para. (b) the said para clearly spells out that all the returns shall qualify for acceptance in the Scheme if the tax paid .by an existing assessee on the basis of income declared for assessment year 1997‑98 is higher than the tax payable for the assessment year 1996‑97 on the basis of assessment or the returned income whichever is higher. In order to claim, immunity from "special audit" Circular No. 12 of 1997 (Income Tax) Islamabad the 17th September, 1997 shall have to be taken into account which envisages that persons who availed Broad Based Self‑Assessment Scheme (BBSAS) in the preceding assessment year will be immune from "special audit" if they pay 25 % more tax than the last year's tax. Glancing through both these circulars we find that main thrust of these circulars is that the condition precedent for making comparison to fall out of the purview of the special audit is two‑fold. Firstly that the case for the‑preceding assessment year should have been processed under the Broad Based Self -Assessment Scheme and secondly tax paid 'for the year under appeal should be 25 % more than the last year's tax. Perusal of the facts reveals that while setting apart the assessee's return out of the parameter laid down for special audit, the Assessing Officer .has mistakenly involved himself in making comparison of the income returned as well as the status claim by the assessee in the year under appeal with those of the immediately preceding assessment year. Making comparison on such basis amounts of benefits of the SSAS to the assessee. In fact this is not the case of the 'Department that the assessee has paid less tax in the year under appeal, which was required to be paid in order to avail amnesty from special audit of the case, and he had not cut the fruit of Broad Base Self‑Assessment Scheme in the preceding assessment year. In this back ground we have no other alternative except to hold that the CIT(A) has rightly ordered for acceptance of the returned income under the SSAS being the case did not hit by any disqualification enumerated in the said scheme.

18. Consequently, the Departmental appeal fails and we dismiss being bereft of any merits.

C. M. A. /M. A. K./179/Tax(Trib.)Appeal dismissed.