Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑Ss. 62, 61, 56, 65 & 13(1)(aa)‑‑‑Assessment‑‑‑Addition‑‑‑Assessment without issuance of mandatory notice‑‑‑Validity‑‑‑Assessment had been finalized under S.62 of the Income Tax Ordinance, 1979 without issuance of a mandatory notice, be it tinder S.65 or 56 or 61 of the Income Tax Ordinance, 1979‑‑‑Even show‑cause notice under S.13 of the Income Tax Ordinance, 1979 with regard to addition was not issued‑‑ Notice could not have been issued without having assumed proper jurisdiction for the assessment of income‑‑‑First of all the reasons had to be recorded for issuance of notice under S.65 of the Income Tax Ordinance, 1979, then prior approval was to be taken from Inspecting Additional Commissioner and then jurisdiction was to be assumed by issuance of notice under S.65 of the Income Tax Ordinance, 1979‑‑‑None of the actions having taken place assessment was ab initio illegal and void and was cancelled by the appellate Tribunal and consequently penalty order stood cancelled.

1990 PTD (Trib.) 539; 1990 PTD 389; (1978) 113 ITR 22; 1999 PTD 3892; 1993 PTD 392; 1984 PTD 282; 1993 PTD 1172 and (1997) 39 Tax 30 rel.

M. Jawaid Zakaria for Appellant.

M. Umer Farooq, D.R. for Respondent.

Date of hearing: 20th April, 2001.

ORDER

SHAHID JAMAL (ACCOUNTANT MEMBER):‑‑‑The above appeals, preferred at the instance of the assessee, is directed against learned CIT(A)'s order dated 25‑3‑2000.

2. The facts giving rise to these appeals are rather interesting and need to be related at length. The appellant, it appears, was not an existing assessee of Income‑tax, but she had filed return of Wealth Tax to claim exemption in respect of House No.A‑40‑41, G. M. Barrage. Employer Cooperative Housing Society, Hyderabad, being self‑occupied. Her husband Mr. Nadeem Ahmed Samoon, however, was an Income‑tax Assessee being proprietor of Messrs New Meena Jewellers. From his income‑tax Wealth tax record it: was evident that he had given a cash gift of Rs.8,00,000 to his wife, appellant in this case, on 28‑6‑1995. From this the Income‑tax Officer, hastily inferred that the house shown to be owned and self‑occupied by her in her wealth tax returns was constructed out of this gifted amount, but it was rather unbelievable as the said gift was given on 28‑6‑1996 and the house stood constructed and completed on 30‑6‑1995. It was clear to the I.T.O. that the house could not have been constructed out of this gifted amount and hence the source of construction was not explainable. So, he addressed an enquiry to the husband of the appellant. It was explained by his Authorised Counsel vide explanation dated 16‑3‑1999 that appellant had received the constructed house from her brother and the inference or the suspicion that house was constructed within two days was incorrect. Since this contention raised on behalf of the appellant denied and contradicted the affidavit given by the husband, it led the I.T.O. to issue a show‑cause notice dated 18‑5‑1999 as under:‑‑‑

"It has been gathered from Income‑tax record of your husband Mr. Nadeem Ahmed Samoon that he has given you cash gift of Rs.8,00,000 on 28‑6‑1995, which amount has been invested by you in construction of house on Plot No.A‑40‑41, located at G.M. Barrage Employer Cooperative House Society, Hyderabad admeasuring 800 square Yards value of which has been declared at Rs.8,00,000. This house has been claimed by you as exempt on account of being self‑owned and occupied. In respect of a querry, your husband has submitted before this office through his authorised representative that the house under reference was given to you as gift in already constructed shape by your brother, Mr. Ghulam Abbas vide declaration of gift dated 3‑8‑1992. Nonetheless, the submission of your husband is bogus in view of the fact that vide affidavit dated 6‑6‑1994, issued in the name of Ghulam Abbas which transfers lease hold rights on said Plot No.A‑40-41, worth Rs.8,00,000 in aggregate arid cost of construction of Rs.20,000 is gift to you totalling in all to Rs.1,00,000 in lieu of dowery. This affidavit which is attested by the Advocate also renders explanation of your husband as totally void who has contended that house in question was given to you in full constructed position.

Above situation clearly point towards the fact that your out of undisclosed sources has been able to construct this house shown by you as exempt and were in possession of cash amounting to Rs.800,000 as on 28‑6‑1995, supposedly and apparently not declared by you in your wealth tax return. It is, therefore, intention of this officer to assessee his cash gift of Rs.800,000 in your hand and stock off of this mala fide situation by way of recourse to penal provisions of the statute. This shall be done so far as your wealth tax 1 for assessment years 1995‑96 is concerned.

In wealth tax return filed for assessment year 1995‑96 under the column of other expenses, you have claimed yourself to be separate assessee. Please clarity your position in this regard so that addition of Rs.8,00,000 as contended for wealth tax purpose is also taken stock of so far income tax proceedings are concerned.

Parawise compliance to above is advised to be made by 26‑5‑1999. No adjournment application shall be entertained which may please be noted.

3. Vide above notice ITO showed his intention to tax Rs.8,00,000 as undisclosed income. In response to the above notice it was further explained by counsel of the assessee that partly constructed house was given by the brother of the appellant and its value was Rs.1,00.000 and thereafter the cash gifted by husband was utilized on renovation/re construction, till its value became Rs.8,00,000 as on 30‑6‑1995. It was further alleged that there was a family settlement that the amount of Rs.8,00,000, being the current value of the said property, was squared off by terms of the settlement, details of which were admittedly neither known or disclosed to the Assessing Officer. This led the ITO to believe that explanations rendered at various dates and stages of the proceedings were self‑contradictory, the assessee was unable to explain the source of investment to the said property, and therefore, an amount of Rs.7,00,000 which remained unexplained was to be taxed under section 13 of the Income Tax Ordinance. He, therefore, obtained prior approval of LA.C., Range‑1, Hyderabad for the said addition and accordingly held Rs.7,00,000 to be deemed income under section 13(1)(aa) of the Income Tax Ordinance. He charged tax of Rs.2,15,600 and also an equivalent sum as penalty under section 111 of the Income Tax Ordinance, 1979. Aggrieved by the assessment and the penalty order, appellant preferred appeal before learned CIT(A), Hyderabad, who set aside the assessment order with following observation:‑‑‑

"After going through the submissions trade by the A.R. and the Income Tax Officer and after carefully perusing the case records I have come to the conclusion that although finalization of assessment in question was within the competence of Income Tax Ordinance, Circle‑V, Hyderabad on the basis of territorial jurisdiction, the Assessing Officer clearly erred in not confronting the assessee with the proposed addition under section 13(1)(aa) of Income Tax Ordinance, 1979 thereby making justice a causality. I, therefore, set aside the assessment order finalized tinder section 62 for de novo proceeding after giving due opportunity of being heard to the appellant."

4. The appellant has now come up in appeal before us against the two set aside orders.

5. Heard Mr. Muhammad Jawed Zakaria, Advocate, for the appellant and Umer Farooq, for the Department.

6. Authorised Representative of the appellant Mr. Jawed Zakaria, Advocate, submitted that the order passed by the ITO was ab initio illegal and void as ITO had not assumed jurisdiction to proceed in the matter. He submitted that he had not issued any notice under section 65 or 56 or 61 and yet had finalised the assessment under section 62 of the Income Tax Ordinance, Sine the proceedings were without jurisdiction, the assessment order needed to be annulled and not set aside. In support of this contention he has cited several case‑laws. The first case relied by him is 1990 PTD (Trib.) 539 in which following ratio was held:‑‑

"It is well‑settled principle that if the very foundation of an action is illegal or without jurisdiction the whole superstructure built upon it cannot validly legally stand."

7. The next case, relied upon is 1990 PTD 389 in which following ratio was held:

"Where any action is challenged as without jurisdiction and if it is so declared then all orders and proceedings taken on the basis of such illegal action shall also be vitiated."

8. The next case cited by him is (1978) 113 ITR 22. The facts of this case briefly are that the assessment for the assessment year 1960‑61 was finalised. Thereafter, during the assessment proceeding of assessment year 1961‑62 ITO noticed that the assessee had sold gold worth Rs.19,421 and the fund for the acquisition of gold represented, suppressed income of the assessee. After a show‑cause notice proceedings of re‑assessment were initiated vide notice under section 147 of the Indian Income. Tax Act, 1961. The assessee raised objections about the validity of the said notice. The order, of re‑assessment, however, was passed by the ITO rejecting the assessee's contention. In appeal before the, Appellate Assistant Commissioner, the assess did not raise the contention about the validity of notice issued under section 147. The A.A.C. decided the appeal on merit and dismissed the appeal. The assessee preferred appeal before the Tribunal where also the issue of validity of notice under section 147 was neither raised, nor debated nor deliberated. The Tribunal, however, set aside the case with direction to cross‑examine the witness, as per directions of the Tribunal the witness was examined, the ITO once again rejected the assessee's contention and re‑framed the assessment. In the second round of appeals, the assessee raised the issue of validity of notice under section 147. The A.A.C. this time found that there was no basis before the ITO to assume jurisdiction under section 147. He therefore, held that the original assessment was reopened on change of opinion, which could not be sustained, and he, therefore, annulled the order. The Department went in appeal before the Tribunal raising the question that assessee had given up the contention regarding validity of notice during the original appeal proceedings, which has attained finality and could not be raised now. The Tribunal held that the assessee having given up the issue previously was not prejudiced and the issue of validity could not be agitated. The appeal was allowed to the Department by the Tribunal. The assessee preferred reference to High Court on the following question of law:‑‑‑

"Whether, on the facts and in the circumstances of the case the Tribunal was right in holding that once the Tribunal passed an order the matter became final with regard to the point which was settled by the Appellate Assistant Commissioner and was not agitated before the Tribunal unless it was taken up to the High Court?"

9. The High Court of Gujarat in its judgment, dated 3‑8‑1977 held that as jurisdictional provision which was mandatory and enacted in public interest could never be waived and the want of jurisdiction was discovered by the A.A.C., therefore, was no question of waiver by the assessee. No question of finality of the remained order of the Tribunal could arise because the mandatory conditions for founding jurisdiction for initiating re‑assessment proceedings had not been fulfilled. The order of re‑assessment was, therefore, not maintainable. On the ratio of above decision Mr. Jawaid Zakaria argued that the entire superstructure built by the ITO was bound to be demolished as the mandatory requirement of assumption of jurisdiction vide issuance of notice under section 65, was not fulfilled. In this respect, he further cited other cases such as 1999 PTD (Trib,) 3892, 1993 PTD 392; 1984 PTD 282, 1993 PTD 1172 and (1997) 39 Tax 30. In all these judgments it has been held that where mandatory provisions are not complied, tine assessment order was bound to be cancelled rather than set aside.

10. We have heard Mr. Jawed Zakaria at length and also gone through the case‑laws cited at the Bar. It indeed looks very strange to us that assessment has been finalised under section 62 without issuance of al single mandatory notice, be it under section 65 or 56 or 61. Even a show‑cause notice under section 13. With regard to addition of Rs.7,00,000 was not issued, and indeed such a notice could not have been issued without having assumed proper jurisdiction for the assessment of income. First of all the reasons had to be recorded for issuance of notice under section 65, then prior approval was to be taken from I.A.C., and then jurisdiction was to be assumed by issuance of notice under section 65. None of this was done. The assessment is, therefore, ab initio illegal and void and is hereby cancelled. Consequently, the penalty order passed by the ITO also stands cancelled.

C.M.A./612/Tax (Trib.) Order accordingly.