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

----S. 65---Additional assessment---Re-opening of case on the basis of interpretation of law by Courts---Validity---Assessing Officer had reopened the settled case of the assessee relying on the interpretation of law made by the High Court, held, was not justified.

Writ Petition No.8672 of 1999 distinguished.

PLD 1969 SC 322 rel.

(2000) 81 Tax 180 ref

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

----Ss. 65 & 80C/80CC/143B---Additional assessment---Re-opening of assessment of company on the basis of audit and inspection report-- Validity---Information on which the Department had relied for re opening assessee's case under S.65 of the Income Tax Ordinance, 1979 was available in the balance-sheet of the assessee---Assessee's balance sheet as well as-accounts Were audited ---Assessee company had genuine resources to explain the deposit made with its sister concern-- Information provided by Audit and Inspection Authorities-regarding the deposit of the assessee was hardly a good pretext on the basis of which assessments made under presumptive tax regime under Ss.80C/80CC/143B of the Income Tax Ordinance, 1979 could be reopened or such extreme action could be justified---Allegation regarding non -application of mind and mechanical action based on audit report was also partly true---Record showed that Assessing Officer himself was not satisfied that action under S.65 of the Income Tax Ordinance, 1979 could be taken on the basis of information provided by the audit and thus he had to raise four or five other points for getting approval from the Inspecting Additional Commissioner---Action under S.65 of the Income Tax Ordinance, 1979 was without any definite information in circumstances.

1992 PTD 1671; 1997 PTD 47 and 2000 PTD 2531 (Trib.) rel

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

----S. 65---Additional assessment---Approval of Senior Authority-- Exercise of power of approval by the author of the assessment order-- Validity---First Appellate Authority was justified to hold that prior approval of a Senior Authority had been made mandatory before initiating any action under S.65 of the Income Tax Ordinance, 1979 to put check on power of an Assessing Officer so as to examine the legality and necessity of all the contemplated actions---Provision of taking prior approval will naturally lose its sanctity when the same officer exercises these powers who was also the author of such assessment order-- Functions of Approving Authority which were considered as check on the arbitrary use of S.65 of the Income Tax Ordinance, 1979 by an Assessing Officer were being exercised by the same Inspecting Additional Commissioner who was the author of the original assessment order---Prior approval of Competent Authority was thus lacking in the case.  

2001 PTD 1467; 2001 PTD 2247; 2001 PTD, (Trib.) 2919 and 2001 PTD (Trib.) 3810 rel.

(d) Interpretation of statutes---

---- Interpretation placed on a statute by a Court would be applicable prospectively would not affect past and closed matters.  

2002 PTD 2904 rel.

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

----Ss. 65, 59-A, 80C, 80CC & 143-B---Additional assessment-- Statement under S.143-B of the Income Tax Ordinance, 1979 was filed-- Difference between book profits and imputable income---Re-opening of case under S.65 of the Income Tax Ordinance, 1979---Assessee contended that orders were pasted under S.80C/80CC/143B of the Income Tax Ordinance, 1979 and if order was deemed under S.59-A of the Income Tax Ordinance, 1979, even then the order deemed under S.59A. of the Income Tax Ordinance, 1979 under presumptive tax regime could not make any assessment of total income and such order could not be subjected to action under S.65 of the Income Tax Ordinance, 1979---Validity---Section 65 of the Income Tax Ordinance, 1979 caters for the requirement of normal 'tax regime where declared income was assessed/determined after filing of return under the presumptive tax regime---Under normal tax regime neither the return of income was required to be filed nor any income was assessed/determined--Even in S.80C(7) of the Income Tax Ordinance, 1979 wherein assessment order is deemed under S.59A of the Income Tax Ordinance, 1979, it was not provided that it shall be an assessment order in respect of total income but it was provided that in a case to which subsection (4) of S.80C of the Income Tax Ordinance, 1979 applied an order under S.59A of the Income Tax Ordinance, 1979 shall be deemed to have been made in respect of income referred to in subsection (1) of S.80C of the Income Tax Ordinance, 1979---Section 65 of the Income Tax Ordinance, 1979 could be attracted only when there was a prior order taxing the total income but not where order under S.59A of the Income Tax Ordinance, 1979 was deemed to have been made---Section 65 of the Income Tax Ordinance, 1979 had wrongly been invoked by the revenue in circumstances.  

Writ Petition No. 8672 of 1999 and Civil Petition No. 265-K and 362 of 2000 distinguished.

2002 PTD (Trib.) 337; Messrs Master Shahbaz Monnoo v. Commissioner of Income-tax C.T.R. No. 385 of 1991 and 2000 PTD 2193 (Trib.) ref.

1998 PTD 1 (Trib.) and 2000 PTD (Trib.) 2193 ref.

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

----S.80CC (4), First Sched: Part I, Para. FF & Part IV; Para. A, Cl. (2) & Eighth Sched.---Tax on income of certain exporters---Imputable income---Calculation---Rebated rate---Normal rate---First Appellate Authority found that assessee's imputable income would be worked back on the basis of rebated rate and not on normal rate which was applicable to a private limited company---Validity---For working of imputable income under S.80CC(4) of the Income Tax Ordinance, 1979, the factor of export rebate could not be ignored ---Assessee's imputable income would be worked back on the basis of rebated rate and not on the basis of normal rate---Assessee's imputable income exceeded the net profit declared by the company in its accounts and the question of taxing any excess of claimed net profit over imputable income under S.65 of the Income Tax Ordinance, 1979 did not arise.

Writ Petition No.8672 of 1999 distinguished.

I. T. As. Nos. 157/LB of 2000 and 781/LB of 1997 ref.

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

----Ss. 56 & 65---Notice for furnishing return of total income-- Additional assessment---Simultaneous proceedings under Ss. 56 & 65 of the Income Tax Ordinance, 1979---Validity---When proceedings were initiated and notices were issued under S.56 or 65 of the Income Tax Ordinance, 1979, the proceedings should have been taken to their logical end at the same time proceedings under both the sections could not be taken up---Revenue having issued notice under S.56 of the Income Tax Ordinance, 1979, it should have dropped proceedings by passing a written order or by making a written entry in the order sheet at least and assessee should have been intimated about the same---Dropping of proceedings should be witnessed by a documentary evidence---Revenue .in the present case had pursued simultaneously proceedings under Ss. 56 & 65 of the Income Tax Ordinance, 1979---Appeal of the Department was rejected by the Appellate Tribunal in circumstances.  

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

----S. 80CC ---Tax on income of certain exporters---Export rebate-- Assessment of difference between book profit and imputable income -- Validity---Assessee was entitled to the benefit of export rebate---If imputable income of the assessee was computed on the basis of rebate rate of tax, it exceeded net profits declared in the books of accounts and the question of any surplus or difference for the purposes of assessment did not arise.

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

----S.80CC---Tax on income of certain exporters---Export rebate---Usual profit---Assessment of difference between book profit and imputable income---Validity---Profits declared by the assessee in its books of accounts were usual profits and not unusual profits---Revenue had not doubted any reliable evidence that assessee had claimed unusual profits---Profits claimed by the assessee were protected being supported with audited books of accounts and balance-sheet ---Assessee could not be blamed to have converted his black money into white money under the disguise of total discharge of tax liability under S.80C(4) or S.80CC of the Income Tax Ordinance, 1979 in the circumstances---Surplus of book profits over imputable income could not be charged to tax in ordinary circumstances---Action of the Revenue, held, was unjustified in circumstances.

Writ Petition No. 8672 of 1'799 rel.

1995 PTD 856; 1997 PTD (Trib.) 1143 and. 1999 PCTLR 639 ref.

Muhammad Zulfiqar Ali, D.R. and Sardar Ahmad Jamal Sukhera, L.A. for Appellant (in I.T.As. Nos. 2134/LB and 2135/LB of 2002).

Muhammad Iqbal Kh. for Respondent (in I.T.As. Nos. 2134/LB and 2135/LB of 2002.).

Muhammad Iqbal Kh. for Appellant (in I.T.A. No 2958/LB of 2002).

Muhammad Zulfiquar Ali, D.R. and Sardar Ahmad Jamal Sukhera, L.A. for Respondent (in I.T.A. No.2958/LB of 2002).

Date of hearing: 19th October, 2002.

ORDER

MUHAMMAD SHARIF CHAUDHRY (ACCOUNTANT (MEMBER).---Three appeals have been filed in the titled case: in the year 1995-96 appeal has been filed by Revenue alone against the appellate order, dated 22-4-2002 passed by Commissioner Income Tax Appeal Zone-I, Faisalabad, whereas in the year 1996-97 appeals have been filed by both the parties against appellate order passed by the same authority on the same date under section 132 of the Income Tax Ordinance. The Revenue feels aggrieved on the annulment of assessments by the Commissioner for both the years under consideration, whereas assessee feels aggrieved with the appellate order for the year 1996-97 only for the reason that some contentions of the assessee raised in the grounds of appeal have been rejected by the Commissioner without any justification.

2. Income Tax Department was represented by L.A., D.R. and Assessing Officer; while the assessee-company was represented by AR. They have been heard at length and the pleadings made by them and case law produced by them has been appraised. Available records have also been perused.

Facts of the Case:---

3. For the assessment year 1995-96, brief facts of the case are that the assessee is a private limited company which derives income as exporter of cloth. Being an exporter falling under the presumptive tax regime, the assessee filed statement under section 143B on 30-9-1995 declaring commercial exports of Rs.1,16,03,35,353 on which tax deduction was shown at Rs.9509941.92. Assessments were made by the IAC vide his order under section 80C/80CC/143B, dated 29-11-1995. Subsequently during the course of assessment of wealth tax cases of the directors of the company, the DCIT had a chance to examine the balance-sheet of the assessee-company. It transpired to him that a proposed dividend of Rs.45 lacs was shown as on 30-6-1995 whereas the directors of the company had declared dividend income of Rs.15 lacs each from the company in their returns of income. This fact led the Assessing Officer to conclude that the assessee-company had declared fictitious liability in the name of proposed dividend amounting to Rs.45 lacs. He, therefore, proceeded to issue show-cause notice under section 56 of the Income Tax Ordinance on 17-8-1999. Again a show- cause notice alongwith statutory notice under section 56 was issued on 15-3-2000. Later on a reminder notice under section 56 was issued on 8-6-2000 in which it was contended that from the perusal of audited accounts submitted by the assessee it was revealed that in appropriation account the adjustment has been made for an amount of Rs.76,10,413 under the head prior year adjustment. The explanation submitted by the petitioner for the previous years tax adjustment was not considered satisfactory. After a lapse of another 8 months a further letter, dated 6-2-2001 was issued by the Assessing Officer to the petitioner to substantiate its claim. A further show-cause notice was issued vide No.433, dated 28-2-2001 showing the intention of the Assessing Officer for reopening of already completed assessment on the ground that the assessee had taken wrong figure of imputable income of Rs.37337022 instead of Rs.19408042. The reply of the assessee was considered unsatisfactory. Thereafter the case was reopened under section 65 of the Income Tax Ordinance, 1979 with the prior approval of IAC.

The issuance of this notice was challenged in writ petition before the Hon'ble Lahore High Court, Lahore. The Hon'ble High Court after hearing the parties came to the conclusion that the nature of dispute between the parties falls within the domain of factual controversy. Therefore, the writ petition was dismissed in limine on 26-7-2001.

Assessment was finally completed by making addition under section 13(1)(aa) amounting to Rs.122048493 which comprised excess claim of credit of income amounting to Rs.16663238, fictitious credit amounting to Rs.100865255 and amount of fictitious liability of dividend at Rs.45 lacs. Notice under section 116 for levy of penalty under section 111 for concealment of income and for default of section 65 was also issued. Against this treatment of the Assessing Officer the assessee submitted appeal before the learned Commissioner Appeal Zone-I, Faisalabad. It was contended before the learned Commissioner that the DCIT had wrongly invoked the provisions of section 65 which were not applicable in the case of the assessee as the assessee was commercial exporter and was being assessed under presumptive tax regime of section 80C/80CC. It was further contended before the learned Commissioner that the Assessing Officer, had wrongly calculated imputable income of the assessee ignoring statutory export rebate and thus his action of reassessment under section 65 was not maintainable. It was also contended before the learned Commissioner that the orders passed under section 65 was not maintainable as the DCIT throughout assessment proceedings was changing his stand through one notice to another notice and thus making fishing enquiry which is clearly against the spirit of section 65. In the opinion of the assessee the assessment framed by the DCIT was also not maintainable under the law for lack of definite information which is mandatory condition under section 65. The assessee also contested additions made by the Assessing Officer under section 13(1)(aa) under various heads on the ground that no specific notice under section 13 had been issued and no proper approval of the IAC had been taken. All the contentions of the assessee were accepted by the learned Commissioner in his appellate order, dated 22-4-2002 relating to the year under consideration and, therefore, assessee's appeal was allowed and assessment was annulled. It is against this action of the learned Commissioner that now the Revenue is in appeal before us. In the grounds of appeal following contentions have been raised:--

"(1) That the learned CIT (Appeals) has erred in holding that proceedings in two different sections 56 & 65 were pursued simultaneously as proceedings under section 56 stood dropped after the objection of the assessee.

(2) That the learned CIT (Appeals) was wrong in observing that the action taken by the Assessing Officer was beyond his legal jurisdiction.

(3) That the learned. CIT (Appeals) was- not justified in annulling the assessment by holding that prior approval of the senior authority for initiating the proceedings under section 65 was not obtained.

(4) That the learned CIT (Appeals) was not justified to hold that imputable income of the assessee was to be worked out on the basis of Eighth Schedule to the Income Tax Ordinance, 1979.

(5) That the learned CIT (Appeals) has erred in annulling the assessment by holding that for action under section 65 determination of total income is necessary which was lacking in this case.

(6) That the learned CIT (Appeals) was not justified in not considering/discussing the arguments put forth by the Assessing Officer.

4. For the assessment year 1996-97, brief facts of the case are that the assessee-company filed statement under section 143B on 30-9-1996 declaring commercial exports of Rs.1630078031. The assessment was completed by the IAC Range VI, Faisalabad through a written order under section 80C/80CC/143B on 30-1-1997 and the declared version was accepted.

After completion of assessment, an information was received by the Assessing Officer from the office of the Additional Director, Audit and Inspection to the effect that an amount of Rs.80700000 had been deposited by the assessee company with Messrs Be Be Jan Protean Farms Ltd., as share money but the said company had hot issued shares Thus the nature of deposit was considered as a loan by and it was observed that the assessee did not have sufficient sources to extend such a huge loan. So the Assessing Officer proceeded to issue show-cause notice to the assessee under section 65 for reopening the already completed assessment. After prolonged correspondence the case was ultimately reopened under section 65 on 16-5-2000 by ticking clause (b) of notice under section 65 i.e. "under assessed" with the prior approval of the same IAC (who had completed assessment under section 80C/80CC/143B) vide his letter, dated 12-5-2000. Assessment was finally completed by the DCIT on 12-12-2001 under sections 65/62/80CC of the Income Tax Ordinance by making two additions separately under section 13(1)(aa) amounting to Rs.23318642 on account of excess claim of credit of income and Rs.327496857 on account of fictitious creditors. Thus total addition was made under the said provisions of law at Rs. 350815499. Against this assessment the assessee filed appeal before the Commissioner Appeal Zone-I, Faisalabad. It was contended before the Commissioner inter alia that the DCIT had no jurisdiction to invoke the provisions of section 65 in appellant's case as the case was covered under presumptive tax regime of section 80CC on the basis of statement filed under section 143B. It was also contended that action under section 65 was illegal as the Assessing Officer had simply acted on information of Audit and Inspection Organization without applying his own mind. It was further contended that the provisions of section 65 had wrongly been applied on the basis of wrong calculation of imputable income ignoring the statutory export rebate. Order passed by the DCIT was also challenged on the basis of lack of definite information. According to the assessee, additions made under section 13(1)(aa) by the DCIT were also against the spirit of law as no specific notice under section 13 had been issued and no prior approval of the IAC had been taken. Some contentions in the additional grounds of appeal were also raised. The learned Commissioner in his appellate order referred to above accepted most of the contentions raised by the assessee, allowed the appeal and annulled the assessment. It is against this action of the learned Commissioner that both the parties have come up in appeal before us.

5. The Revenue has filed appeal raising the following contentions in the grounds of appeal:--

"(1) That the learned CIT (Appeals) was not justified in annulling the assessment despite rejecting the assessee's ground that proceedings, were initiated at the directions of Additional Director, Audit and Inspection.

(2) That the learned CIT (Appeals) had erred in annulling the assessment by holding that calculation of imputable, income was rightly made as the case was not reopened on the basis of work-' back of imputable income.

(3) That the learned-CIT (Appeals) was not justified in observing that the action taken by the Assessing Officer was beyond his legal jurisdiction.

(4) That the learned CIT (Appeals) has erred in annulling the assessment by holding that prior approval of the senior authority for initiating the proceedings under section 65 was not obtained.

(5) That the learned CIT (Appeals) was not justified to hold that imputable income of the assessee was to be worked out on the basis of Eighth Schedule to the Income Tax Ordinance, 1979.

(6) That the learned CIT (Appeals) was not justified in annulling the assessment by holding that for action under section 65 determination of total income is necessary which was lacking in this case.

(7) That the learned CIT (Appeals) was not justified in not considering/discussing the arguments put forth by the Assessing Officer. "

6. The assessee has filed appeals on the following grounds:--

"(1) That the assessment framed under section 65/62/80CC is not maintainable under law for lack of definite information in possession of Assessing Officer which is mandatory condition under section 65. The Commissioner of Income Tax (Appeals) has wrongly confirmed the order of the Assessing Officer on this score.

(2) That the order passed under section 65/62/80CC is also not maintainable as admittedly, the Assessing Officer had failed to obtain prior approval before issuance of show-cause notices under section 65."

Discussion of Issues and Decision:--

7. Since the grounds of appeals filed by both, the parties are identical, all the three appeals are taken up for decision simultaneously. Contentions raised by the Revenue as well as by assessee in their grounds of appeal against the impugned appellate orders of the learned Commissioner would be taken up one by one and discussed and decided in consolidated manner as under:--

8. Issue of Legal Jurisdiction.--This issue has been raised by Revenue in Ground No.5 in the year 1995-96 and in Ground No.4 in the year 1996-97. It has been contended that the learned Commissioner was wrong in observing that the action of the Assessing Officer was beyond his legal jurisdiction.

From the perusal of the impugned appellate orders it transpires that the assessment orders passed by the DCIT have been held to be without legal jurisdiction by the learned Commissioner on the basis of three points, namely: that there was no assessment order in site which could be reopened under section 65; that prior approval in writing of the competent authority was not taken for reopening the case, and the Assessing Officer had no definite information in his possession to reopen the case. Since both the parties have taken up specific grounds of appeal on these points, the same would be discussed and decided at proper place in this consolidated order in the subsequent paras.

9. Issues of definite information.---(i) As stated above, in the assessment year 1995-96, only the department is in appeal. Although no specific ground has been raised by the Department on the issue of definite information in this year, yet the representatives of the Department during their pleadings at the bar, have raised and strongly contested this issue. It has been contended that the DCIT had definite information in his possession in the form of income disclosed by the assessee in its own accounts which exceeded its imputable income under presumptive tax regime and, therefore, action of DCIT under section 65 was justified but it has wrongly been annulled by the CIT(Appeals).

The impugned appellate order shows that the learned Commissioner has accepted assessee's contention that the Department had no definite information on the basis of which it could reopen his case. After considering references to the rich case-law made by both the parties on the issue of definite information in terms of section 65 of the Income Tax Ordinance, the learned Commissioner observed that the disclosed income in the balance-sheet as submitted by the assessee itself was strictly according to law. According to him the case was reopened on the basis of wrong worked out imputable income. In the opinion of the learned Commissioner the appellant was entitled to export rebate and hence imputable income was to be worked on rebate rates instead of normal rates. In that way the imputable income of the assessee was more than the net profit declared in the accounts and hence the Department had no definite information and case was wrongly opened.

7. The learned legal Advisor of Income Tax Department has argued that the assessee itself declared income in the balance-sheet which was more than its attributable income and hence this was a definite information which could lead to reopen the case. In support of his view he AR has quoted judgment of the Lahore High Court in Writ Petition No. 8672 of 1999, dated 14-6-2000. On the other hand the AR of the assessee has referred to the meaning of definite information as contained in explanation to subsection 2 of section 65 of the Income Tax Ordinance find has also quoted as lot of case-law to contend that the type of definite information which has been explained by the legislature and which has been defined by the superior Courts was lacking in the instant case. Let is see the assessment order of the ITO about definite information on the basis of which the Assessing Officer has reopened the case. For the assessment year 195-96 the Assessing Officer issued show-cause notice under section 65 vide his officers letter No.433, dated 28-2-2001, the relevant part of which is reproduced below:--

"The perusal of your balance-sheet as on 30-6-1995 has revealed that profit of Rs.373,37,022 was credited to the same whereas your deduction of tax on export under section 50(5A) amounted only to Rs.9509,941. Your imputable income on the basis of tax deduction works out to Rs.194,08,042. Since you have declared net profit at Rs.373,37,022,therefore, the excess is liable to be assessed in your hands in view of the provisions of section 80CC(4) of the Income Tax Ordinance, 1979. Please explain as to why the intended action may not be taken by reopening your assessment under section 65 in view of the judgment of High Court delivered in case of Writ Petition No.8672 of 1999, dated 14-6-2000. Your explanation in this regard should reach this office by 9-3-2001 positively."

From the above extract of show-cause notice issued by the Assessing Officer it is abundantly clear that the excess of net income declared in accounts over imputable income has been used on the basis of judgment of Lahore High Court delivered in case of Writ Petition No.8672 of 1999, dated 14-6-2000 as definite information. It has been held by the honourable Supreme Court of Pakistan in its judgment reported as (PLD 1969 SC 322) that an interpretation placed on a statute by a Court would be applicable prospectively in future cases and such, interpretation would not effect past and. closed matters. The ratio of this judgment has been recently applied by Justice Jawad S. Khawaja in a decision announced in Writ Petition No.235 of 2002 on 11-2-2002 wherein a wealth tax case reopened by the IAC under section 17B of the Wealth Tax Act on the basis of Full Bench judgment of that ITAT reported as (2000) 81 Tax 180 was annulled. In the instant case the assessing Officer has reopened the settled case of the assessee for the year 1995-96 relying on the interpretation of law made by the honourable Lahore High Court in Writ Petition No.8672 of 1999, dated 14-6-2000 which is not justified. We also endorse the view of the learned Commissioner that judgment of L.H.C. in writ petition, dated 14-6-2000 is not relevant because the facility of export rebate is available to the respondent whereas in the case adjudged by L.H.C. this was not available. Hence the decision of the learned Commissioner is maintained and the contention taken by the Revenue is dismissed in the assessment year 1995-96.

(ii) In the year 1996-97, the issue of definite information has been raised by Revenue specifically and directly in its Ground No. 2 and Ground No.3. The assessee has also raised this issue in this year in its Ground No. 1. The contentions raised by both the parties on the issue of definite information in their respective appeals are discussed and decided as under:

From the perusal of the impugned appellate order it transpires that the issue of definite information in the

year 1996-97 has been rather confused and misconceived by the learned Commissioner. The DCIT had reopened the case of the assessee under section 65 on the information received in audit report. But the learned Commissioner has not only treated the audit report as definite information but has also wrongly treated income declared in the balance sheet vis-a-vis imputable income as definite information. In his impugned appellate order for the year under consideration at page-5 the learned Commissioner has rejected assessee's appeal regarding audit report and has accepted view-point of the Department, whereas at page-10 and 11 of the order he has treated income in the balance-sheet vis-i-vis attributable income as definite information and has accepted assessee's appeal. Hence there is inconsistency in his impugned order on the issue of definite information.

(a) It has been contended by Revenue in its Ground No.3 in the year 1996-97 that the learned CIT erred in annulling the assessment by holding that calculation of imputable income was rightly made whereas the assessment had trot been reopened on his issue but it had been reopened on the basis of audit report. This contention of Revenue, as discussed above, is undoubtedly correct and justified. Therefore, it would be in the fitness of things if the remarks and observations of the CIT as recorded on page 10 and 11 on the issue of treating the point attributable income as definite information, being incorrect and unsustainable, are deleted. But this would not mean that the view point of CIT on the issue of method of working out of imputable income and admissibility of export rebate is also deleted, because this point is a subject-matter of another ground of appeal raised by Revenue and would be discussed at proper place.

(b) As stated above, the DCIT reopened assessee's case for the year 1996-97 under section 65 on the basis of audit report. The DCIT had received information from Audit and Inspection Organization regarding an amount of Rs.807,00,000 which the assessee had deposited with Messrs Be Be Jan Proteen (Pvt.) Ltd. Hence he reopened the assessment with prior approval of IAC under section 65. The action of the Assessing Officer was challenged by the assessee before the Commissioner and it was contended that the information received by the Assessing Officer was not a definite information and his action was merely based on a flimsy information. It was also contended before the Commissioner that the Assessing Officer had mechanically acted upon the information provided by audit and had not applied his own, mind. The Commissioner however, rejected assessee's plea and confirmed the order of the Assessing Officer on this point with the observation that the Assessing Officer did not issue notice under section 65 merely on the receipt of the information but had entered into protracted correspondence with the assessee to come to the conclusion that information provided by the audit and inspection department was correct. It is against this action of the Commissioner that both the parties have come up in appeals before us.

It has been contended by Revenue in, its Ground No.2 that the Commissioner was not justified in annulling the assessment deposit rejecting the assessee's ground that proceedings were initiated at the directions of Additional Director Audit and Inspection. We have considered this grievance of Revenue in the light of the facts available on record and have not been able to find any reason or direction in the same. The point of definite information based on audit report has been decided by the learned Commissioner in favour of Revenue and, therefore, Revenue has got no cause of grievance. The demand of Revenue that the CIT should not have annulled the assessment is not understandable. The learned CIT has not annulled the assessment made by the DCIT on the issue of audit based information but on many other issues such as lack of approval from competent authority, wrong application of section 65 to presumptive tax regime, wrong working of imputable income ignoring export rebate, etc. Hence the demand of Revenue is rather preposterous and, therefore, the contention raised in this regard is dismissed.

The real grievance against treatment of audit report as definite information by CIT is that of the assessee. It has been contended by the assessee that the CIT had no justification to reject assessee's appeal regarding audit based information of the Department which has been made excuse for reopening the assessment. According to the AR of the assessee, the assessee-company itself had shown deposit of Rs.807,00,000 made with Messrs Be Be Jan Protein Pvt. Ltd. in its balance-sheet and hence there is no question of information or definite information by the department. The AR has submitted that the company is a private limited company which is maintaining its books of accounts meticulously. Books of accounts are audited by the competent auditors and balance-sheet alongwith trading profit and loss account is prepared and audited. All the inform4tion about assessee's deposit with sister concern in available in assessee's accounts. The amount of deposit has been shown on the asset side and it has been balanced on the liability side by the source like income, capital, creditors, etc. There is nothing wrong which could cause the department to take an extreme action like that of reopening the assessment under section 65 on this small issue. The AR has also alleged that the DCIT has not applied his mind but has mechanically acted upon the information provided by Audit and Inspection Authorities. In support of this contention of the AR has relied upon the following case-law:

1992 PTD 1671 (SC Pak.)

1997 PTD 47.

2000 PTD 2531 (Trib.).

The AR has further contended that the Assessing Officer confronted the assessee in his show-cause notice No. 430, dated 24-2-2001 for reopening the case under section 65 only with a single point i.e. information received from audit, whereas in his Letter No.2000-2001/Company/6/Faisalabad/691, dated 30-4-2001 addressed to the IAC for getting his approval he mentioned 4/5 points raising the issues like imputable income, creditors, etc. to convince the IAC.

On the other hand the learned LA and DR have argued that the learned Commissioner has rightly rejected assessee's appeal on the point of definite information because the Assessing Officer was not found by him to have acted mechanically without application of mind.

We, have considered the view-point of both the parties and have appraised the case-law produced by the AR of the assessee. The contention of the assessee is correct that the so called information on which the department has relied for reopening assessee's case under section 65 is available in the balance-sheet of the assessee. Company's balance-sheet as well as accounts are audited. The asses see company had genuine resources to explain the deposit of Rs.807,00,000 made with its sister concern. So the information provided by audit and inspection authorities regarding this deposit of the assessee has hardly a good pretext on the basis of which assessments made under presumptive tax regime under section 80C/80CC/143B could be reopened and this extreme action could be justified. The allegation regarding non application of mind by the DCIT and regarding his mechanical action based on audit report is also partly true. From the record it appears that the Assessing Officer himself was not satisfied that action under section 65 can be taken on the basis of information provided by the audit and, therefore, he had to raise 4/5 other points in his letter addressed to his IAC for getting his approval. In view of this situation we do not feet any hesitation to arrive at the decision that the action under section 65 in this year has been taken by Revenue without any definite information. Therefore, the impugned appellate order on the issue of definite information relating to audit report is vacated and the assessment order on this issue is annulled.

10. Issue of Approval of Competent Authority:--This issue has been raised by the both the parties-by Revenue in both the years and by assessee in the year 1996-97. Appeals of Revenue on this issue are first taken up and appeal of assessee would be taken up afterwards.

(i) This issue has been raised by Revenue in its Ground No.6 in the year 1995-96 and in its ground No.5 in the year 1996-97. It has been contended by the, Revenue that the learned Commissioner was not justified in annulling the assessments by holding that prior approval of the senior authority for initiating the proceedings under section 65 was not obtained.

From the perusal of the impugned appellate orders it comes to light that the CIT has decided this point against Revenue at page No. 13/14 in the assessment year 1995-96 and at page No. 9/10 in the assessment year 1996-97. It was contended by the AR of the assessee before the learned Commissioner that the IAC had framed original assessments and approval for reopening of the said completed original assessments was also granted by the IAC who happened to be the same person. It was pleaded that in fact approval should be granted by the Commissioner acting as IAC and that this was fatal mistake not curable under the law. In support of this contention the AR produced a lot of case-law before the First Appellate Authority. After appraising the law the learned Commissioner came to the conclusion that the approval obtained by the Assessing Officer from the same IAC who had completed the assessment was illegal and void. The following observations were made by the learned Commissioner on this issue:--

"It is to be appreciated the prior approval of the senior authority has been made mandatory before initiation of any action under section 65 to put a check on powers- of an Assessing Officer and to examine the legality and necessity of the contemplated action. This provision of taking prior approval will lose its sanctity when a person equal in rank exercises these powers particularly when unfortunately the author of the order and its reviewer is one and the same person. Thus legally speaking in view of the case-law on the subject and above reasoning whole action under section 65 becomes illegal being bad in law and not maintainable."

It has been submitted by the learned DR that assessment orders were made and signed by the IAC in his capacity as an Assessing Officer, whereas the approval to reopen the case was granted by him in the capacity of supervisory officer. Both these acts of this officer did not suffer from any illegality. The approval of the Commissioner was necessary if the IAC was going to issue the notice under section 65 but in the instant case since the DCIT was going to reopen the assessment under section 65 he was legally required to obtain prior approval of IAC. Reliance has been made by the learned DR on section 5(1)(c) of the Income Tax Ordinance, 1979 which has been read out before us. According to the legal advisor, if the IAC is Assessing Officer he would get statutory approval from the Commissioner but if the DCIT is Assessing Officer then he would get statutory approval from the IAC for his action wherever required under the Income tax Ordinance, 1979.

The AR of the assessee, on the other hand, holds that in the instant case since the original assessment orders were made by the IAC the approval for reopening such assessments was required to have been obtained by the Commissioner although the DCIT was reopening the assessments. In support of his contention, the AR has relied upon the following case law:--

(a) 2001 PTD 1467.

(b) 2001 PTD 2247.

(c) 2001 PTD (Trib.) 2919.

(d) 2001 PTD (Trib.) 3810.

In the case reported at Serial No.(a) above the honourable Lahore High Court announcing the general principles of law, has held that an order recorded by an IAC being authorized under section 5(1)(c) of the Income Tax Ordinance continues to remain that of an IAC though acting as an Assessing Officer. It has been further observed that:--

"The use of word for the purposes of any proceedings in respect of such cases or person' in section 5(1)(c) of the Income Tax Ordinance, 1979 does not in any manner mean or include only the proceedings as long as they continued. The proceedings so contemplated include not only a pending assessment order but also a completed assessment order. Therefore, the reference to Deputy Commissioner and the Inspecting Additional Commissioner shall remain a reference to Inspecting Additional Commissioner and the Commissioner."

The I.T.A.T. in its judgment cited at serial No.(d) above has held that if the IAC is involved in the case at assessment stage, he becomes functus officio to invoke section 65 or 66A.

We have appraised the arguments of both the parties and have consulted the relevant case-law. In our opinion the assessment orders of the DCIT passed under section 65 suffer froth the incurable defect of having been made without proper approval of competent authority as envisaged by subsection 2 of this section. The learned Commissioner is justified to hold that prior approval of a senior authority has been made mandatory before initiating any action under section 65 to put check on powers of an Assessing Officer so as to examine the legality anti necessity of all the contemplated action. This provision of taken prior approval will naturally lose its sanctity when the same officer exercises these powers who is also the author of such assessments orders. In the instant case the functions of approving authority which are considered as check on arbitrary use of section 65 by an Assessing Officer are being exercised by the same IAC who was unfortunately the author of the original assessment orders. In view of these facts and circumstances we feel no hesitation to agree with the learned Commissioner that the prior approval of the competent authority is lacking in the present case. Hence the impugned appellate order is maintained and contention raised by Revenue is dismissed in both the appeals.

(ii) In the year 1996-97 the assessee has also submitted appeal on the issue of approval of competent authority although this issue has been decided by the CIT in his favour and assessment order of DCIT has been annulled. It has been contended in Ground No.2 of appeal that the order passed by the Assessing Officer under section 65 is not maintainable as the Assessing Officer had failed to obtain prior approval of competent authority before issuance of preliminary show-cause notice under section 65. According to the learned AR, Assessing Officer is required to take approval of competent authority not only before issuing formal notice under section 65 reopening the assessment but is also required to get approval for issuing preliminary show-cause notice under section 65. In support of this contention the AR has relied on an order of Federal Tax Ombudsman reported as (2002) 86 Tax 182 (FTO Pak). He has submitted that in compliance with this order the C.B.R. has also issued circular instructions to the Assessing Officers to get prior-approval of competent authority before issuance of show-cause notices under section 65.

We have considered the contentions of the assessee on the point under consideration. The Assessing Officer had issued show-cause notices to the assessee and had completed proceedings in the case under consideration much earlier to the said order of the FTO and circular instructions of C.B.R. Hence the interpretation of law by the FTO and the circular instructions issued by the C.B.R. cannot be retrospectively applied to the actions already taken. We have already quoted a judgment of the honourable Supreme Court of Pakistan (PLD 1969 SC 322), that an interpretation placed on statute by a Court would be applicable prospectively in future cases and such interpretation would not effect past and closed matters. Hence assessee's contention on the issue of prior approval of preliminary show-cause notice under section 65 is dismissed.

On the remaining issues which are being discussed and decided in the subsequent paras, only the department is in appeal in both the years and not the assessee.

11. Issue of Existence of Assessment Order:--The contention regarding this issue has been raised by Revenue in Ground No. 8 in the year 1995-96 and in Ground No.7 in the year 1996-97. It has been contended that the learned Commissioner (Appeals) has erred in annulling the assessment by holding that for action under section 65, determination of total income is necessary which was lacking in this case.

This issue has been dealt with by the learned Commissioner at page 9 of his appellate order for year 1995-96 and at page 6 of his order in the year 1996-97. After making a lengthy discussion and after appraising written arguments and case law produced by both the parties the learned Commissioner has held that provisions of section 65 can only be attracted when there is a prior order at site determining the total income of an assessee. Relying upon judgments of the ITAT reported as (1998) PTD 121, (2000) 82 Tax 59 and (2000) 82 Tax 1, he has reached the conclusion that there is no order at site determining the total income of the assessee which could be reopened under section 65 of the Income Tax Ordinance. In respect of income covered under section 80C, neither there is any concept of total income nor it is assessable under the Income Tax Ordinance. Under section 80C of the Income Tax Ordinance there is a concept of deemed income which is subjected to tax without going through the process of assessment by any Assessing Officer and without determining the total income. Since there was no order in existence which could be reopened under section 65, the learned Commissioner has annulled the assessments made by the DCIT under section 65 in both the years. In brief, according to the CIT, section 65 cannot, be applied in the domain of presumptive tax regime.

The issue under consideration has been hotly debated before us by both the parties to the present proceedings. It has been contended on behalf of Revenue that section 80CC(6) states that an order under section 59A shall be deemed to have been made in respect of income referred to under subsection (1). The learned D.R. has referred to section 65(1)(c) and argues that this section also takes cognizance of income assessed or deemed to have been assessed under section 59A for the purpose of action under section 65. It has been submitted that total income means the income of a person from all sources. In the case of persons whose income is covered under the presumptive tax regime, the total income means the imputable income which is to be worked out as per procedure laid down under section 80C and 80CC. According to the learned LA. The action under section 65 in the case of a person having only the presumptive income has been confirmed by the honourable ITAT vide its order, dated 20-2-1998 in I.T.A. No.7492/LB of 1996. Reliance has also been placed by the learned LA on judgment of the Supreme Court of Pakistan in Messrs Elahi Cotton Mills Ltd. and others v. Federation of Pakistan and judgment of the Lahore High Court in Writ Petition No.8672 of 1999, dated 14-6-2000.

The AR of the assessee has also dilated on this issue in detail. It has been submitted by him that no order under section 59A has been passed in this case and the orders in both the years were passed under section 80C/80CC/143B. Even if order is deemed under section 59A, even then the order deemed under section 59A under presumptive tax regime does not make any assessment of total income and hence such order cannot be subjected to action under section 65. According to AR, statement furnished under section 143B could not be equated with the return of total income which is filed under normal law. In support of his contentions on this issue, the AR has quoted following case-law:--

(a) 2002 PTD (Trib.) 337

(b) CTR No.385 of 1991 case of Messrs Shahbaz Monnoo v. Commissioner of Income-tax wherein it was held by Lahore High Court that case can be reopened under section 65 only when there is an order at site.

(c) 2000 PTD (Trib.) 2193.

(d) 1998 PTD (Trib.) 1.

(e) 2000 PTD (Trib.) 2193.

Civil Petition No.265-K and 362-K of 2000 decided by Supreme Court of Pakistan on 3-5-2001.

We have considered the arguments of both the parties and have appraised the case-law produced by them. The judgment of the honourable Supreme Court in Messrs Elahi Cotton v. Federation of Pakistan is not relevant, as it lays down basic principles regarding presumptive tax regime under section 80C but has not examined question of application of section 65 to income deemed under section 80C/80CC.

Similarly judgment of the honourable Lahore High Court delivered in Writ Petition No.8672 of 1999, dated 14-6-2000 (which is relied upon by Revenue) is not relevant as the facts of the case involved in this judgment are different from those of the case under consideration. In the case involved in the judgment neither the assessment under section 65 was made nor any difference between book profits and imputable income was charged to tax. Merely a notice under section 65 was issued for reopening of the case with the intention to assess the difference. A writ petition was filed before the Lahore High Court against this notice and it was contended that no notice under section 65 could be issued because it can only be issued to an `assessee" but the petitioner was not an "assessee". The Court held that petitioner's assessment was deemed to 'have been made under section 59A by the operation of section 80C(6) and, therefore, petitioner was an assessee. In the case before us the question is whether there is an assessment order in existence determining total income of the assessee which could be reopened under section 65. This question of assessment order in existence and determination of total income in that assessment order which could be reopened under section 65, was neither raised nor decided in the judgment of the writ petition. Moreover in the case involved in the judgment, the question of export rebate never came up but in the instant case it is also one of the major contentions of the assessee. If this factor is taken into consideration the judgment of the writ petition becomes all the more inapplicable. The judgment of the Supreme Court relied upon by the AR of the assessee which has been cited at (f) above is also not applicable. In that judgment the issue related to recovery of shortfall in the tax deducted under section 50(4) and during the course of this judgment the honourable apex Court held that section 65 or section 66A cannot be applied to recover such tax.

The issue of application of section 65 in the case covered under presumptive tax regime has been directly taken up and decided by the Income Tax Appellate Tribunal in many of its judgments. The learned Commissioner in his impugned appellate orders has reproduced the relevant extracts of these judgments and has elaborately discussed the same. Briefly speaking, it has been held by the ITAT that section 65 caters for the requirement of normal tax regime where decided income is assessed/determined after filing of return. Under the presumptive tax regime neither the return of income is required to be filed nor any income is assessed/determined. It has been further held that even in subsection (7) of section 80C wherein assessment order is deemed under section 59A, it is not provided that it shall be an assessment order in respect of total income but it is provided that in a case to which subsection (4) applies an order under section 59A shall be deemed to have been made in respect of income, referred to in subsection (1).

According to the 1TAT, section 65 can be attracted only when there is a prior order at site taxing the total income but not where order under section 59A is deemed to have been made. We agree with the observations and the conclusions made by the ITAT in its various judgments on this issue particularly its judgments referred by the AR and cited at Serial No.(d) & (e) above.

In view of the foregoing discussion, we do not feel any hesitation to agree with the learned Commissioner that section 65 has wrongly been invoked by Revenue .in the case of the assessee. Hence contentions raised by Revenue on this issue are dismissed and the impugned appellate order is maintained in both the years.

12. Issue of Working of Imputable income:--Contentions regarding this issue have been raised by Revenue in the assessment year 1995-96 vide Ground No.7 and in assessment years 1996-97 vide Ground No.6. It has been contended that the learned Commissioner was not justified to hold that imputable income of the assessee was to be worked out on the basis of 8th Schedule of the Income Tax Ordinance, 1979.

From the perusal of the impugned appellate orders of the learned Commissioner it comes to light that the learned Commissioner has accepted assessee's view on the issue of export rebate and has held that assessee's imputable income would be worked back on the basis of rebated rate of 23% and not on normal rate of 46% which is applicable to a private limited company.

It has been submitted by the DR that the working of imputable income by the Assessing Officer on the basis of normal rates is in accordance with the ITAT decision. It has been submitted by the Assessing Officer during the appeal proceedings that in the ITAT order referred to by the assessee and relied upon by the CIT(Appeals), the department could not provide any basis for working of imputable income. Since the conditions in the instant case are different so the ITAT order relied upon by the Commissioner is not relevant. According to the representatives of the Department, section 80CC(4) is a non-obstante which has overriding effect over all the provisions of Income Tax 6rdinance, 1979. The method of working of imputable income in the case of exporter is provided in section 80CC(4) and no other method is applicable. It has been further submitted that the concept of export rebate was applicable for the year prior to the introduction of presumptive tax regime and after the insertion of section 80CC, the 8th Schedule lost its vitality. The intention of the legislature to provide relief to the specific categories of exporters was covered by fixing separate fates of tax deduction. The rates were provided in para-FF of Part-I of First Schedule which are applicable. In the view of the Revenue, export rebate is no more available to the taxpayer after the introduction of presumptive tax regime. Reliance has also been placed by Revenue on the judgment of the Lahore High Court in writ petition, dated 14-6-2000.

On the other hand the AR of the assessee has submitted that provisions regarding export rebate continued to exist on the statute book in the clause (2) of Para-A of Part-4 of the First Schedule and in 8th Schedule upto the year 1997 when the same were modified/dropped by Finance Act 1997. So according to the AR export-rebate was kept in view when lower rates of deduction were introduced which means that for the purpose of working out imputable income the factor of export -rebate cannot be ignored. The AR has relied on judgment of the ITAT, dated 23-12-2000 for the assessment year 1995-96 in I.T.A. No. 157/LB of 2000 and 781/LB of 1997. For working of the export-rebate the AR has quoted "Complete Income Tax law written by S.A. Salam Volume-I" and "Practical Hand Book of Income Tax written by Dr. Ikram-ul-Haq."

We have considered the view-point of both the parties. Before substitution by Finance Act of 1997, Para. CCCC of Part I of the First Schedule to the Income Tax Ordinance read as under:--

The assessee-company was entitled to export-rebate at the rate of 50% of its tax payable. In our opinion the facility of export-rebate is available to the taxpayers uptill the time when the said para of the 1st Schedule and provisions of 8th Schedule were not modified/dropped. It is in the year 1997 that the provisions of 8th Schedule were modified in respect of availability of export-rebate. The years of the assessee under consideration are assessment years 1995-96 and 1996-97 and so the assessee was entitled to export-rebate. Therefore, for the working of imputable income under section 80CC(4), the factor of export-rebate cannot be ignored. Hence assessee's imputable income would be worked back on the basis of 23% rebated rate and not on the basis of 46% normal rate. In this way assessee's imputable income exceeds the net profit declared by the company in its accounts and hence the question of taxing any excess of claimed net profit over imputable income under section 65 does not arise. Reliance of Revenue on L.H.C. judgment in writ petition, dated 14-6-2000 is misplaced as the case before the honourable Lahore High Court related to assessment year 1998-99 when the provisions of law in the First Schedule and 8th Schedule had been modified and export-rebate was no longer available. Therefore, appellate order of the learned Commissioner on this point is maintained and contentions raised by Revenue are dismissed.

13. Issue of simultaneous proceedings under sections 56 and 65:--- This issue relates to only assessment year 1995-96 and has been agitated by the Revenue in its Ground No.4 in this year. It has been contended that the Commissioner (Appeals) has erred in holding that proceedings in two, different sections 56 and 65 were perused simultaneously, when the fact is that proceedings under section 56 stood dropped after the objection of the assessee. In support of this, the learned LA has submitted that the fact of dropping of proceedings is evident from the letter of the AR of the assessee, dated 4-12-2001 filed in response to notice under section 65. The extract of this letter is as follows:---

"The notice is without jurisdiction being mala fide and has been issued to harass the assessee. The assessee is being persistently harassed ever since assessment year 1992-93 and onward. All such notices and proceedings under section 56 have ultimately been dropped."

On the other hand the AR has produced Letter No.383, dated 6-2-2001 issued by ITO to support his contention that proceedings under section 56 were not dropped.

Thus, the Revenue has sought to explain the dropping of proceedings under section 56 on the admission of assessee and has attacked the findings of the learned Commissioner on this basis as misconceived. It has also been submitted that this issue was neither raised during assessment proceedings nor it was raised in the original grounds of appeal. However, the assessee's AR was allowed to take this ground at the later stage during the appeal proceedings.

We have considered the view-point of both the parties and have gone through the impugned appellate order of the learned Commissioner. The explanation tendered on behalf of Revenue that the assessee itself had admitted the dropping of proceedings under section 56 is just ridiculous rather is very ridiculous. It has been held in a plethora of judgments of superior judiciary that when proceedings are initiated and notices are issued under section 56 or 65, the proceedings should be taken to their logical end. At the same time proceedings under both the sections cannot be taken up. Since the Revenue had issued notice under section 56, it should have dropped proceedings by passing a written order or by making a written entry in the order sheet at least and assessee should have been intimated about the same. But no such order appears to have been passed what to speak of intimating the assessee. The dropping .of proceeding should be witnessed by a documentary evidence which has not been produced even before us. The admission of the AR of the assessee, if such is assumed for the sake of argument appears to be in, the nature of presumption. If a notice under section 56 is issued and after some time another notice under section 65 is issued the prudent man would reasonably presume that the Assessing Officer being a responsible functionary of the Federal Government of Pakistan would have dropped proceedings initiated under section 56 before issuing a notice under section 65. Such admission of the AR of the assessee cannot be, and should not be, produced as evidence of an order regarding dropping of proceedings which has not actually been passed. In this situation it would be in the fitness of things if we agree with the learned Commissioner that Revenue has pursued simultaneously proceedings under sections 56 and 65. Hence the order of the learned Commissioner on this point is maintained and appeal having no merit is rejected.

14. Issue of Non-Consideration of Arguments of the Assessing Officer.--Contention regarding this issue has been raised in both the years by Revenue. It has been contended that the Commissioner (Appeals) was not justified in not considering/discussing the arguments put-forth by the Assessing Officer. This contention of Revenue is obviously false. If we go through the impugned appellate orders we come to know that the Commissioner has provided reasonable opportunity of being heard to both the parties. Written arguments submitted by the A.R. of the assessee were handed over to the Assessing Officer by the Commissioner and his comments were invited. Comments, and arguments submitted by the Assessing Officer were not only considered but also the view-point of the Department put-forth in these comments was properly discussed. The allegation levelled by the Department is not correct and so the same is dismissed.

15. Issue of Assessment of difference between book profit and imputable income.---This issue is very .important but surprisingly no contention regarding this issue has been raised in the grounds of appeal in any year However, it has been decided against Revenue by the learned Commissioner and it also came up during the assessment proceedings before the DCIT. During proceedings before us the Revenue has contended that difference between net profit declared in the books of accounts and imputable income worked out under section 80CC can be charged to tax and has rightly been so charged by, the DCIT in the instant case. The main reliance of the Revenue in support of this contention is on the famous judgment of the honourable Supreme Court of Pakistan in Elahi Cotton Mills Ltd. and others v. Federation of Pakistan reported as (1997) 76 Tax (SCP) and Lahore High Court judgment in Writ Petition No.8672 of 1999, dated 14-6-2000.

On the other hand the view-point of the assessee as expressed through his AR is that such surplus or difference cannot be charged to tax. The AR of the assessee also relies on Supreme. Court judgment referred to above. Besides this, the AR quotes judgment of Karachi High Court reported as (1995) 71 Tax 227 (H.C. Karachi), judgment of the ITAT reported as 1997 PTD 1143 (Trib.) and judgment of the ITAT cited as 1999 PCTLR 639.

We have considered the view-point of both the parties. It has already been decided that the assessee is entitled to the benefit of export -rebate. If imputable income of the assessee is computed on the basis of rebated rate of tax, it exceeds net profits declared in the books of accounts and, therefore, the question of any surplus or difference for the purpose of assessment does not, arise. So the issue of assessment of surplus in the hands of the assessee becomes rather irrelevant. However, we would like to express our view-point briefly on this issue, at least for the sake of academic interest, as under:--

The cases quoted by the AR of the assessee are relevant wherein it has been held that difference between book profit and imputable income cannot be charged to tax. The case relied upon by Revenue i.e. the judgment of the honourable Lahore High Court in Writ Petition No.8672 of 1999, dated 14-6-2000 is not relevant. In the case involved in this judgment neither the Revenue has completed assessment under section 65 imposing tax on difference between book profits and imputable income nor such issue was raised before the honourable Court nor it was decided in the writ. According to the facts of that case, the Income Tax Department issued notice under section 65 to an exporter with the intention of charging to tax the surplus income claimed by him in accounts over and above the imputable income. The exporter filed writ petition before Lahore High Court challenging the issue of notice under section 65. During the proceeding, the counsel of the Department held out an assurance that if the petitioner is able to show that the income declared in the balance sheet was actually earned on account of the export sales the petitioner will not be burdened with any tax liability. The Court observed that this assurance should eliminate the apprehension, which the petitioner may have and thereafter it dismissed the petition. In this situation this case quoted by Revenue in this favour cannot be applied to the present case which is entirely different.

However, the authority on the interpretation of law as contained in sections 80C and 80CC relating to presumptive tax regime so far remains the land-mark judgment of the honourable Supreme Court of Pakistan in the case of Elahi Cotton Mills Ltd. cited as (1997) 76 Tax (SCP). The relevant extract of the judgment is reproduced as under:---

"We may observe that the object of section 80C seems to be to eliminate the hassle of filing of returns by an assessee and going through the normal procedure culminating in framing of an assessment order and to eliminate the involvement, to the minimum extent, of the Income Tax Department. To achieve the above objection, above subsection (4) was enacted. In our view, subsection (5) of section 80C cannot be used by the Income Tax Department for defeating the above objective of the legislation, and therefore, report cannot be made of subsection (5) of the above section as a matter of course. It is to be invoked sparingly in exceptional circumstances. If an assessee makes profit more than what is subject to tax under section (1) of section 80C, the Revenue has no power to charge tax on the additional income so long as the above additional income is earned by him on account of the transactions, which have been subject to tax under subsection (1) of section 80C ."

"However, if the assessee claims that he has made, unusual profit; for example he has earned Rs.100,000 instead of Rs.5000 which would have been the normal profit, the protection of above subsection (4) of section 80C will still be available to him if he can on the basis of reliable 'evidence prove the above fact to the satisfaction of the forums provided under the Ordinance. But if he fails to discharge above burden of proof, in that event subsection (5) can be invoked. The assessee in disguise of total discharge of his liability under subsection (4) of section 80C cannot convert black money into white money by showing the black money as a profit earned, though factually it is not so.

The principles laid down by the honourable apex Court in this judgment are as under:-

(i) Subsection 5 of section 80C should not be resorted, to by the Income Tax Department as a matter of course to defeat the purpose of legislature as intended in enacting subsection (4). Subsection (5) would be invoked sparingly in exceptional circumstances.

(ii) If an assessee makes profit more than what is subject to tax under subsection (1) of section 80C, the Revenue has no power to charge tax on the additional income so long as the above additional income is earned by him on account of the transactions which have been subjected to tax under subsection (1).

(iii) If the assessee claims that he has made unusual profits, the protection of above subsection (4) will still be available to him if he can on the basis of reliable evidence prove such unusual profits.

(iv) But if the assessee fails to discharge burden of proving the unusual profits with reliable evidence, in that subsection (5) can be invoked because the assessee in disguise of total discharge of its liability under subsection (4) cannot be allowed to convert black money into white money.

In the instant case the profits declared by the assessee an its books of accounts are usual profits and not unusual profits. Even the Revenue 'has not, doubted with any reliable evidence that assessee has claimed unusual profits. But suppose the assessee has claimed unusual profits in the instant case, even then the profits claimed by the assessee are protected being supported with audited books of accounts and balance sheet. In no way, the assessee can be blamed to have converted his black money into white money under the disguise of total discharge of tax liability under subsection 4 of the section 80C or relevant provision of section 80CC. Hence the judgment of the Supreme Court cannot be invoked by Revenue in assessee's case.

Thus according to the principles laid down by the honourable Supreme Court of Pakistan in its land mark judgment sanctity is attached to the presumptive tax regime of section 80C/80CC. Common perception which prevailed among the legal community and tax payers as well as in Income Tax Department was that excess of net profit declared in accounts over and above imputable income could not be charged to tax as a matter of course in ordinary circumstances. And this widely held perception was strengthened by the historic judgment of the learned Supreme Court of Pakistan which has been referred to above.

However, an attempt was made by the legislature by introducing section (5A) in section 80C by Finance Act of 1999 to recover difference between tax on book profits and tax on imputable income under section 54. Subsection (5A) reads as under:--

"(5A) Where an assessee derives income from any source which is subject to tax in accordance with the provisions of this section, and the tax liability is less than the tax payable on such income had it not been chargeable to tax under this section, the difference in tax shall be payable in accordance with section 54 alongwith the return of income, provisions of subsection (4) notwithstanding. "

But this provision of law was resented by the taxpayers and so the same was withdrawn in the next year by Finance Ordinance of 2000.

In view of the foregoing, we feel no hesitation to hold that surplus of book profits over imputable income cannot be charged to tax in ordinary circumstances. In the case of the assessee, action of Revenue is absolutely unjustified. Therefore, no interference in the impugned appellate orders is made an contentions of Revenue are rejected on this issue.

Conclusion:--

16. Consequently appeal filed by Revenue in the year 1995-96 totally failed and, therefore, impugned appellate order annulling the assessment of the DCIT is maintained. In the assessment year 1996-97, the appellate order has been modified on the issue of definite information and contentions raised by the parties have been accepted. On all other issues the said order is confirmed and appeals of both the parties are dismissed.

C.M.A./790/Tax (Trib.) Order accordingly.