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

----Ss. & 116---Penalty---Concealment of income by assessee-- Department's duty to observe mandatory obligations in conducting such proceedings---Principles.

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

----Ss.111 & 116---Penalty---Concealment of income---Agreed assess ment ---Penalty without prior approval of Inspecting Additional Commissioner and notice---Validity---Penalty order revealed. that penalties had been imposed by the Assessing Officer in a slipshod manner i.e. without obtaining prior approval from the Inspecting Additional Commissioner and penalty orders available on record were not signed by the Assessing Officer---Such orders could not be held to be legally made---Inspecting Additional Commissioner was deprived of his jurisdiction and as such the penalty order could not be considered-to have been passed with the sanction of law and the same was cancelled by the Tribunal.

1981 PTD (Trib.) 15 ref.;

Irfan Aslam for Appellant.

Javed-ur-Rehman, D.R. for Respondent.

Date of hearing: 13th June, 2001.

ORDER

1. Vide this single order I proceed to adjudge these six appeals; three each filed by the assessee and the department. The assessee has assailed the First Appellate Authority's order, dated 20-6-1995 whereby the AAC had set aside the penalty order in the first round of appeal being not validly made. Coming to the departmental appeals, the ACIT has objected to the order rendered by the CIT(A), dated 14-1-1997, in the second round of appeal before the First Appellate Authority. In this order the Appeal Commissioner has cancelled the penalty order. Ali these appeals relate to assessment years 1985-86 to 1987-88.

2. Both the learned representatives appearing at the bar have been heard at great length.

3. The precise question involved in this case is whether the penalty under section 111 of the Income Tax Ordinance can be levied without prior approval of the IAC where the assessee had offered to be assessed at net income as well as imposition of 100% penalty on the concealed portion of his Income. Facts leading for disposal of this very question are that the assessee enjoys share income from a registered firm namely, Aziz Brothers Anarkah, Lahore. The assessments originally formulated under section 59(1) and under section 62 of the income Tax Ordinance, 1979 were subsequently reopened by the Assessing Officer by issuing notices under section 65 of the Income Tax Ordinance, 1979. The reason advanced was that the assessee had failed to disclose his bank Account bearing No.762-7 Habib Bank Ltd. Bano Bazar, Lahore. Resultantly, reassessments were completed on agreed basis at net income of Rs.195,010, Rs.70,000 and Rs.221,628 respectively. Thereafter, penalty under section 111 of the Income Tax Ordinance, 1979 was also imposed amounting to Rs.73,450, Rs.816 and Rs.800 respectively on the concealed portion of the assessee's income. When this treatment was assailed before the First Appellate Authority who set aside the penalty order on two grounds. Firstly, that statutory notices may be issued before imposing penalty as was required under section 116 of the Income Tax Ordinance, 1979 and secondly the Assessing Officer was directed to obtain prior approval for imposing penalty under section 111 of the Income Tax Ordinance, 1979 as well While passing the penalty order for the 2nd time the Assessing Officer repeated the figures of penalty earlier imposed under section 111 of the Income- Tax Ordinance. 1979 in the first round of the order by holding that the assessee had also. agreed to be penalized at 100% of the amount of tax sought to be evaded.

4. On second round of appeal, the Appeal Commissioner cancelled the impugned order being that was illegally made and was also void.

5. The learned counsel for the assessee has strongly objected to setting aside the penalty order by the learned AAC. He contended that when the learned AAC had come to the conclusion that the penalty under section 111 of the Income Tax Ordinance was not legally imposed, he should have deleted the charge of penalties. According to him this is tantamount to giving a fresh leverage in the hands of the Assessing Officer to make good his deficiencies in the proceedings already declared not to be legal. He reiterated the contentions as were raised before the AAC by stating that the assessee had only agreed to pay principal amount of income tax and no other liability was admitted by him. He stressed that as to why the assessee should accept charge of penalty when all the guilts, misgivings and other liabilities had been merged in the agreed assessment. Also asserted that over and above the agreed amount of income and the tax payable was never intimated or confronted to the assessee. Further added that the penalty proceedings are 'criminal in nature, therefore, the assessee cannot be punished/penalized without fulfilment of the legal requirements set-forth in the law for this purpose. He also pleaded the confession on the part of the assessee is not a sufficient evidence to prove concealment of income. Thus, non -observance of legal requirements of law renders the proceedings invalid and the person cannot be punished.

6. Learned D.R. on the other hand-contended that the Assessing Officer was fully justified in imposing penalty under section 111 of the Income Tax Ordinance, 1979 for the reason that there existed concealment of income and he had confessed for imposition of penalty to the extent of 100 % of the tax sought to be evaded. In this background the department has fully discharged its duties while imposing penalty under section 111 of the Income Tax Ordinance. Further argued that mere non -obtaining of approval by the IAC for imposition of penalty does not render the penalty order to be illegal. This may be termed as a technical mishap on the part of the Assessing Officer which can be cured by setting aside the penalty order. Thus the learned AAC did no wrong in setting aside the penalty order on account of technical deficiencies.

7. I have given anxious thought to the rival arguments and it is noted that Chapter-II -of the Income Tax Ordinance, 1979 deals with the cases which are subjected to charge of penalty. Section 111 of this Chapter envisages that penalty shall be levied by the Deputy Commissioner of Income Tax in the cases where any person has sough evasion of tax by way of concealment of his income or furnishing inaccurate particulars of such income. For this purpose the statute has laid down certain procedure in section 116 of the said Chapter which is the pivotal point for adjudication of the issue in hand. For facility of reference I would like to re-produce that section hereunder:---

Section 116

Imposition of penalty after notice of hearing etc.---No. penalty under this Chapter shall be imposed on any person.

(a) by a (Deputy Commissioner) except with the prior approval in writing of the Inspecting (Additional Commissioner) and

(b) unless such person has been given a reasonable opportunity of being heard,

and the imposition of such penalty shall be without prejudice to any other liability incurred by such person under this Ordinance; the repealed Act or any other law for the time being in force.

Provided that where a notice for hearing is given on or after the first day of July, 1990, no order of penalty shall be passed after the expiration of two years from, the end of the financial year in which such notice was served.

This section has actually stipulated two conditionalities prior to imposition of penalty against a person where guilt has been established in case of such person. First condition is that such person shall not be condemned unheard. The logic behind this exercise is that the guilty person may adduce rebuttal against the charges framed against such person because penalty proceedings are criminal in nature as has been held by the higher appellate forum in quite a number of cases. Second condition is that no penalty shall be imposed unless prior approval of the IAC in writing has been obtained by the Assessing Officer. Purpose of involvement of the IAC for granting approval is that his consent while imposing penalty should be obtained so that he could look into the facts of the case in order to ascertain whether standard of evidence regarding concealment of income or furnishing inaccurate particulars of such income is available on record or that has been mitigated unilaterally.

8. Coming to the question as to whether fulfilment of statutory requirements are obligatory where the assessee has agreed to be penalized in case of concealment of income. Allegedly even if an agreement to be penalized is there, still then the department cannot absolve of its statutory responsibility to observe the mandatory obligations as are provided in section 116 of the Income Tax Ordinance, 1979 because standard of evidence required to be adduced in penalty proceedings is the same as in the criminal proceedings. This view has been enunciated in a case reported as (1980) 42 Tax 37 (Trib.) whereby it has been held that confession on the part of the assessee is not a sufficient evidence to prove the concealment. I cannot endorse this view that penalty under section 111 of the Income Tax Ordinance, 1979 can be levied summarily without adherence to the mandatory obligations which are laid down in law irrespective of the fact whether or not the person has confessed charge of penalty in consequence of an agreement to do mso. This is never the intention of the legislature that the assessee should be punished or penalized without fulfilment of the statutory requirements set-forth in any provisions of law. Even a slight lacuna which might cause a shadow of doubt that the assessee in the criminal proceedings initiated against him under section 111 of the Income Tax Ordinance has been deprived of his legitimate right, thus non-observance thereof renders the proceedings invalid and the person may not be punished. Since, the law has provided a mandatory provision to afford an opportunity of rebuttal to the assessee and also to obtain prior approval from the IAC before charging penalty, those formalities or the procedure cannot be culminated even if the assessee has offered to be penalized.

9. In no way such requirements of law can be termed as a technical mishap on the part of the Assessing Officer, which can be cured by setting aside the penalty order. It is a settled principal that the mandatory requirements of law are sine qua non meaning thereby that those have to be rigidly followed and as such cannot brushed aside whimsically. In view of foregoing discussion I have no ambiguity in my mind that prior to charge of penalty under section 111 of the Income Tax Ordinance, the two conditionalties as are provided in section 116 of the Income Tax Ordinance, 1979, are to be adhered as to whether the assessee has confessed to be levied of 100% amount of penalty on his concealed portion of income or not. Hence, non-compliance thereof would render the penalty order to be not sustainable in law and is liable to be struck down.

10. Coming to the .facts of the case, perusal of the impugned order reveals that penalties have been imposed by the Assessing Officer in a slip shod manner i.e. without obtaining prior approval from the IAC to do so, coupled with it, the penalty orders available on record are not signed by the ACIT, such orders cannot be held to be legally made. In this view of the matter am of the firm view that the IAC was deprived of his jurisdiction and as such the penalty orders cannot be considered to have been passed with the sanction of law and those stand cancelled.

11. Since I have disposed off the assessee's appeals preferred before the Tribunal in the first round of appeal whereby the AAC has set aside the penalty order, therefore, the penalty order made in consequence thereof, which has also been agitated by the department in appeal before the Tribunal is fixed for hearing today, shall dash to the ground. It is so because the penalty order made by the ACIT in the second round of proceedings is the outcome of the first order which has been declared to be made without any lawful jurisdiction.

12. Resultantly, the three appeals filed by the assessee succeed while those of the department fail and are dismissed as such.

C.M.A./M.A.K./212/Tax (Trib.) Order accordingly.