Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 66‑A & 17‑‑‑C.B.R. Letter No.17(1)/94, dated 28‑5‑1994‑‑ C.B.R. Letter C. No.1 (1)/DTP‑I‑94, dated 28-5‑1994‑‑‑C. B. R. Circular No. 15 of 1954‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Interest on securities‑‑ Mercantile Accounting System‑‑‑Interest income from Government Securities was assessed on receipt basis‑‑‑Inspecting Additional Commissioner by invoking provisions of S.66‑A of the Income Tax Ordinance, 1979 directed the Assessing Officer to assess the same on accrual basis as the assessee was maintaining accounts on Mercantile basis in spite of the fact that same interest income was taxed on receipt basis in the subsequent assessment year‑‑‑Validity‑‑‑Inspecting Additional Commissioner failed to establish any loss of revenue to the Department‑‑No change whatsoever had taken place in the method of accounting accepted by the Department over the year‑‑‑Method of accounting adopted by the assessee might be erroneous but for the attraction of S.66‑A of the Income Tax Ordinance, 1979, it would not only be an erroneous order but would be prejudicial to the interest of revenue as well‑‑‑Interest income which was ordered to be charged to tax on accrual basis was taxed on receipt basis in the subsequent assessment year and by not ordering for deletion of such amount in the subsequent year, Inspecting Additional Commissioner taxed the same amount twice‑ Practice of double taxation was deprecated‑‑‑Inspecting Additional Commissioner failed to view the matter in its total perspective and invoked S. 66‑A of the Income Tax Ordinance, 1979 and that too only for one year without realizing its impact in the subsequent year whereas the Department would suffer loss if method of accounting adopted by the assessee was discarded‑‑‑Order passed by the Inspecting Additional Commissioner was annulled, the assessment order was restored by the Appellate Tribunal as one of the basic ingredients that not only that order should be erroneous but it should be prejudicial to the interest of revenue, was altogether missing which was a. prerequisite for invoking S.66‑A of the Income Tax Ordinance, 1979.  

1994 SCMR 229 = 1994 PTD 174; Commissioner of Income -tax, Companies‑III, Karachi v. Krudd Sons Ltd. 1993 PTD (Trib.) 739; Glaxo Laboratories Ltd. v. IAC and others PLD 1992 SC 549 = 1992 PTD 932 and Seth Lalbhai Dalpatbhahi v. Commissioner of Income‑tax, Bombay North 22 ITR 13 (Bom.) rel.

Dr. Ikramul Haq for Appellant.

Mrs. Talat Altaf Khan, D.R. for Respondent.

Date of hearing: 18th July, 2002.

ORDER

SYED NADEEM SAQLAIN (JUDICIAL MEMBER).‑‑‑The captioned appeal for the assessment year 1996‑97 on behalf of the assessee/appellant has been directed against the impugned order, dated 16‑6‑2001 passed by the learned IAC by exercising his revisional jurisdiction conferred upon him under section 66‑A of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance). Objections have been raised through the grounds of appeal appended with the instant appeal which are as follows:‑‑

"(1) That the learned Inspecting Additional Commissioner of Income -tax has passed the order‑without giving adequate opportunity to your appellant by not providing of the relevant order sheet, despite of requests.

(2) That the learned Inspecting Additional Commissioner of Income -tax has tried to tax "Interest income on Securities" during the above year which has already been taxed during the subsequent year.

(3) That the learned Inspecting Additional Commissioner of Income Tax has merely relied upon the C.B.R. Letter C. No.17(1)97, dated 28‑5‑1994, without rebutting various .arguments put forward, on merit."

2. Briefly stated the facts of the case are that the assessee is a Public Limited Company deriving income from banking as scheduled commercial bank. Assessment in the present case was framed on 20‑6‑1997 at Rs.27,06,13,381 under section 62 of the Ordinance which was subsequently rectified under section 156 of the Ordinance vide D.C.R. No.6/191, dated 16‑1‑1998: The learned IAC found the assessment framed by the Assessing Officer to be erroneous insofar as prejudicial to the interest of revenue and accordingly a show‑cause notice was issued which is as follows:

"Interest income from

Government Securities.

Interest income from Government securities has been assessed on receipts basis instead of on accrual basis. Interest on Government Securities has been taxed on amount of Rs.58,30,00,114 (receipt during the period). As you, are maintaining accounts on mercantile basis so as per Note 3, 7 of your audited accounts, accounting recognition principle has been given as under:‑‑‑

"Recognition on accrual basis except for commission or letter of credit and guarantee which is taken to income account at the time of receipt."

Principle of taxing the income from securities on accrual basis has been upheld by Superior Legal Forums in numerous cases.

On the strength of judgment of superior legal forum the DCIT has erred in accepting your contention."

3. In response to the show-cause notice issued to the assessee, the following reply was submitted by the learned A.R. on behalf of the appellant which is also reproduced as under:‑

"We understand that there is a change of mind on the part of Department. However, no action under section 66‑A is warranted as there is no loss of Revenue involved. The interest accrued for the assessment year 1995‑96 was offered to tax in the assessment year 1996‑97. The 'interest accrued' for the assessment year 1996‑97 was offered to tax in the assessment year 1997‑98. The 'interest income' for the assessment year 1998‑99 was offered to tax in the assessment year 1998‑99. The 'interest accrued for the assessment year 1998‑99 was offered to tax, in the assessment year 1999-2000. This way there is no income which has escaped assessment.

We understand that you are only suggesting a different method of arriving at the same Income, Tax Liability for each of the above four years. We do not have any objection to it.

You have referred to figures the year ended December 31, 1996 which does not correspond to the above assessment year. "

4. Feeling dissatisfied with the explanation tendered by the assessee/appellant, the learned IAC issued another show‑cause notice clarifying the position of the department for invoking section 66‑A in view of C.B.R's Circular No.17(1) of 1994, dated 28‑5‑1994 which reads as under:‑‑ .

"The matter regarding taxability of interest on Government securities and debentures on accrual v. Receipt basis has been carefully examined by the Central Board of Revenue: It is C.B.R.'s considered view that the income under section 17 should be assessed on accrual basis where assessees are maintaining account according to mercantile system:"

In response to second show‑cause notice issued by the department the learned A.R. submitted a detailed reply which is also reproduced as under:‑‑‑

"Without prejudice to the above we once again wish to remind you that this 'interest receivable' has also been taxed in the following assessment year and therefore, this will be an exercise in futility to enhance the income of this year and reduce the income of the following year."

Subsequently, another elaborate reply was filed by the learned A.R. which is also reproduced as under:‑‑‑

"As far as section 8 is concerned, 'interest on securities' only becomes `income' when it is actually received and not when it is due or capable of being received by the assessee."

Being in respectfully agreement with the aforementioned judgments of the superior Courts, the Central Board of Revenue issued Circular No.15 of 1954 (Copy enclosed). In this circular the C.B.R, while instructing adherence to judicial interpretation of the word "receivable" as propounded in the aforesaid reported cases, also observed as under:‑‑‑

"A view has sometimes been taken that if the assessee maintains his accounts on the mercantile system. `Interest on Securities' is liable to tax when it becomes due. 'This view is incorrect.

Since the provisions of section 17 of the Income Tax Ordinance, 1979 are identical to those of section 8 of the repealed Act and no other circular containing any contrary explanation/instruction has till to date been issued by the C.B.R., the instructions contained in Circular No.15 of 1954 very much hold the field and the same are valid and binding on the department".

6. However, the IAC was still not convinced with the replies/explanations offered by the assessee, proceeded to invoke section 66‑A of the Ordinance and while considering the assessment framed by the Assessing Officer to be erroneous insofar as prejudicial to the interest of revenue, modified the same with the direction that interest income will be taxed on accrual basis. Hence the instant appeal by the appellant.

7. Both the parties have been heard and relevant orders perused. The learned A.R. has vehemently argued the case and contended that the learned IAC had wrongly invoked section 66‑A of the Ordinance for the reason that not only the order should be erroneous but it should be prejudicial to the interest of revenue as well. He emphasised that both of the ingredients must be present in order to exercise revisional jurisdiction under section 66‑A of the Ordinance. He further said that there is no finding as to the loss of revenue caused to the department for the reason that income chargeable under section 17 of the Ordinance was accepted on receipt basis. It was further argued by the learned A.R. that learned IAC did not discharge the onus that regular applied method of accounting did not yield the correct profit. While continuing his arguments, the learned A.R. submitted that the learned IAC wrongly placed reliance on C.B.R. Letter No.17(1)/DTP‑1‑94, dated 28‑5‑1994 to establish error of law leading to the loss of revenue. He commented that even otherwise Letters/Circulars/Notifications issued by the C.B.R. are not binding on the officers of foe department while acting an their judicial capacity but may have binding force only for executive purposes. The learned A.R. further averred at the bar that in the assessment year 1993‑94 which is first year of business, the assessee declared income under section 17 on receipt basis and the same was accepted by the department. Since then the same regular method of accounting as adopted by the assessee has been accepted by the department, and the acceptance of this method did not constitute any error of law, had it been so the learned IAC should have established it in the revisional order passed under section 66‑A of the Ordinance but it is conspicuously missing. The learned A.R. while arguing the case further elaborated that the learned IAC while passing the impugned order ignored the vital fact that the same interest income which he ordered to charge tax on accrual basis was subsequently taxed on receipt basis in the assessment year 1997‑98, and he did not order to delete the said amount in the subsequent assessment year, thus the amount stand taxed twice which has never been approved by the higher judicial authorities. In this regard he further submitted that in the present case there is a chain of taxation of income under section 17 on receipt basis and if one loop of the chain is to be disturbed then the entire chain has to be re‑arranged. The basis for the assessment year 1993‑94 has become a past and closed transaction and since that year cannot be disturbed under section 66‑A the subsequent year also cannot be tampered with as regular method of accounting employed by the assessee could not be discarded on mere flimsy ground as held by the Supreme Court in case reported as 1994 SCMR 229 = 1994 PTD 174. He drew our attention to a chart drawn by him and placed it on the case file which is as under:‑‑‑

8. He commented that it is very much evident from the above produced chart that since 1999‑2000 the income under section 17 of the Ordinance on receipt basis is more than what is chargeable on accrual basis. Thus action under section 66‑A of the Ordinance is misconceived as the learned IAC has failed to view the matter in its total perspective and invoked section 66‑A just for one year without realizing and computing its impact in the subsequent assessment years where the department will suffer losses if regular method of accounting is discarded. While summing up his arguments the learned A.R. pleaded at the bar that it is proved beyond any doubt that neither any loss is caused to the department nor the‑same is established by the learned IAC.

9. Conversely, the learned D.R. while opposing the contentions raised by the learned A.R. made a feeble attempt to persuade the Court that section 66‑A has rightly been invoked by the learned IAC, She reiterated almost all the arguments relied upon by the learned IAC while applying section 66‑A of the Ordinance.

10. We have heard the learned counsel for both the parties and have gone through the relevant order alongwith the case‑law cited by the learned A.R. in support of his contentions. The first case relied upon by the learned A.R. to substantiate his contentions was reported as 1993 PTD (Trib.) 739 in re: Commissioner of Income Tax, Companies‑III, Karachi v. Krudd Sons Ltd. wherein it was held:‑‑‑

"It is the duty of the Income Tax Officer to determine whether the assessee has adopted method of accounting from which income, profits and gains can properly be deduced: In this case the Assessing Officer did not proceed in the indicated manner although from the accounts laid down on its examination true income and profit could be deduced. This judgment is of no help to the appellant. There can be no cavil that a regular method of accounting in the past cannot be accepted as a matter of routine without examining it and if the Assessing Authority comes to the conclusion that it is defective and true income, profit and gain cannot be deducted from it then on the principle, stated above it cyan be rejected. In the present case the reasons given for rejecting the accounts are not proper, sufficient and valid."

11. Perusal of the above mentioned paragraph of supra judgment clearly shows that if income, profit and gain are properly deducted from the method of accounting adopted by the assessee and reasons given for rejecting the account are not, sufficient and valid then the same cannot be discarded without, assigning any cogent reason.

12. The next judgment relied upon by the learned A.R. is‑reported as PLD 1992 SC 549 = 1992 PTD 932 in Re: Glaxo Laboratories Ltd. v. IAC and others. The august Supreme Court of Pakistan settled the ratio with regard to the powers of the IAC and laid down the guidelines in order to invoke section 66‑A of the Ordinance with the following observations:‑‑

"It may be clarified that subsection (1‑A) was inserted by Finance Act, 1991 after the impugned notice under section 66‑A had been issued by the JAC. Subsection (1) .of section 66‑A authorises Inspecting Assistant Commissioner to issue a notice for reopening the case if he considers that any order passed by the Income Tax Officer is erroneous causing prejudice to the interest of revenue. A mere erroneous order of the Income Tax Ordinance without causing any prejudice to the interest of the revenue will not authorise Inspecting Assistant Commissioner to exercise power under section 66‑A. These two ingredients must be satisfied before invoking it."

13. Lastly, the learned 'A.R. sought strength from the Indian jurisdiction reported as 22 ITR 13 (Bombay High Court) in the case of Seth Lalbhai Dalpatbhai v. Commissioner of Income‑tax, Bombay North. In the supra judgment section 8 of the Repealed Act, 1922 which is almost identical to section 17 of the Income Tax Ordinance, 1979 was the subject‑matter of discussion; the instant case is very much relevant especially in view of the fact that in the above‑cited judgment the Honourable Bombay High Court was seized of the matter to determine the meaning of word "receivable". The facts of the supra cited case are that interest on security was payable on the 15th April and 15th October, every year. These securities were lodged with the Imperial Bank of India. 15th October, 1944 was holiday, 16th October was a working day and 17th and 18th October were again Diwali holidays. The Imperial Bank collected the interest in respect of this half year on the 21st October, 1944 and credited it to the assessee's account in the bank pass book on the same date. The assessee, however, passed the corresponding entry in his books of account on 25th October, 1944. This half yearly income falling due for payment on 15th October, 1944, had been treated by the Department as income of the assessment year 1945‑46. The assessee contended that this should be included in the assessment year 1946‑47. In this regard the assessee had relied upon section 8 of the Repealed Income‑tax Act, 1922 which' dealt with the assessability of income under the head "Interest on securities" which reads as under:‑‑

"The tax shall be payable by an assessee under the head `interest on securities' in respect of the interest receivable by him on any security of the Central Government or Provincial Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company."

14. It was the contention of the assessee that word "receivable" in this connection means "received' and as the interest was credited by the bank to the assessee's account on 21st October, 1944, it should be treated as the income of the year in which this date falls, i.e. assessment year 1946‑47. The Tribunal held that the interest was receivable by the assessee on the 16th October, which was a working day, and, therefore, it was the income of the year in which this date falls, i.e. the accounting year relevant to the assessment year 1945‑46. The Tribunal did not agree with the assessee that "receivable" means "received". On a reference application forwarded to the High Court for the determination of the same, it was held:

"Undoubtedly, the language used by the Legislature is 'receivable' and not 'received' and we are asked to draw the necessary inference that the Legislature was attempting to tax interest or securities not when it was received, but when it was capable of being received. But when one looks a little more closely into the scheme of the Act, it is clear that 'receivable' in this case does not mean 'capable of being received'.

15. We have given our anxious consideration to the arguments addressed by the counsel for the respective parties and the case‑law cited at the bar, in the light of above discussion we are of the considered opinion that the learned IAC was not justified in invoking section 66‑A of the Ordinance. Bate perusal of the impugned order shows that the learned IAC has failed to establish any loss of revenue to the department Admittedly; there has been no change whatsoever in the method of accounting accepted by the department over the year. Though the method, of accounting adopted by the assessee might be erroneous but for the attraction of section 66‑A of the Ordinance, it should not only be an erroneous order but simultaneously it should be prejudicial to the interest of revenue as well. Assessee's stance stands substantiated by the judgment of the Supreme Court reported as PLD 1992 SC 549 = 1992 PTD 932. Even otherwise arguments of the assessee that interest income which the learned IAC ordered to be charged to tax on accrual basis was taxed on receipt basis cannot be brushed aside because by not ordering for deletion of said amount in the subsequent year the learned IAC has tried to tax the same amount twice. We have no hesitation in observing that practice of double taxation has never been approved by the Courts. Another argument pressed by the learned A.R. was also worth‑giving weight, and that was amply proved by the learned A.R. through a chart reproduced above that since 1999‑2000 income under section 17 of the Ordinance on receipt basis is more than chargeable on accrual basis. We, feel ourselves persuaded with the arguments advanced by the learned A.R. that the IAC has failed to view the matter in its total perspective and involved section 66‑A of the Ordinance and that too only for one year without realizing in impact in the subsequent year where the department would suffer loss if method of accounting adopted by the assessee is discarded.

16. For the foregoing reasons, we annul the impugned order passed by the learned IAC and restore the assessment order since as per judgment of the Supreme Court one of the basic ingredients that not only that order should be erroneous but it should be prejudicial to the interest of revenue was altogether missing which is a prerequisite for invoking section 66‑A of the Ordinance.

17. Resultantly appeal of the assessee succeeds.

C.M.A./632/Tax(Trib.)Appeal succeeded.