I.T.A. No.2138/LB of 2002, decided on 22nd July, 2003. VS I.T.A. No.2138/LB of 2002, decided on 22nd July, 2003.
2003 P T D (Trib.) 2767
[Income‑tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Judicial Member and Imtiaz Anjum, Accountant Member
I.T.A. No.2138/LB of 2002, decided on 22/07/2003.
(a) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 66‑A‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Order which was perfectly legal should not be disturbed under the provision of S.66‑A of the Income Tax Ordinance, 1979.
(b) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 66‑A‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy, Commissioner's order‑‑‑Provision of S.66‑A of the Income Tax Ordinance, 1979 should only be invoked where the error is floating on the surface of the order and does and need any further argument, inquiry or details for establishing the same.
(c) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 66‑A‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Complete assessment would have a sanctity and should not be cancelled on the basis of fishy inquiries and unnecessary investigations.
(d) Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑Ss. 66‑A & 12(12)‑‑‑C.B.R. Circular No.14 of 1992‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Addition‑‑‑Valuation of shares‑‑‑Break‑up value‑‑‑Fair market value‑‑‑Inspecting Additional Commissioner cancelled the assessment framed under S.62 of the Income Tax Ordinance, 1979 on the ground that purchase price of the shares was accepted without ascertaining the fair market value which was higher than the cost price worked out on the basis of break‑up value‑‑‑Whether .difference in cost and actual value attracted the provision of S.12(12) of the Income Tax Ordinance, 1979‑‑ Re‑valuation was for the purpose of determination of sale value of the shares for a sale transaction‑‑‑No one would sell its belongings at a lesser price than it could fetch in open market‑‑‑No moral or legal restriction existed on a person to sell his belongings at a lesser rate but ordinarily this was not done anywhere in the world except under special circumstances‑‑‑Provision of S.12(12) of the Income Tax Ordinance, 1979 provided of a situation in which if a person had purchased certain assets at less than the fair market value, the Assessing Officer was legally required to reject the same‑‑‑Order of Assessing Officer was erroneous as well as prejudicial to the interest of Revenue in circumstance‑‑‑Appeal of the assessee was rejected by the Appellate Tribunal.
CIT v. T. Narayana Pai 163 ITR 129; 98 ITR 422; 1991 PTD (Trib.) 321; Venkatakrishna Rice Co. v. CIT (1987) 13 ITR 129; 1999 PTD (Trib.) 3229; 1997 PTD (Trib.) 902; 1999 PTD 2851; Commissioner of Wealth Tax, Assam v. Mahadeo Jalan and others (1972) 86 ITR 621 (SC); Commissioner of Income‑tax, West Bengal v. Swadeshi Mining & Manufacturing Co. Ltd. 116 ITR 259; Grindlays Bank Ltd. v. Commissioner of Income‑tax 116 ITR 799; 2002 PTD (Trio.) 2014 and 2002 PTD 720 ref.
Sajid Ejaz for Appellant.
Muhammad Asif, D.R. for Respondent
Date of hearing: 24th October, 2002.
ORDER
KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑‑ The petitioner in this case is the assessee.
The assessee a Private Limited Company, was established to set, up a power plant. However, no business was commenced during this year.
Return of Income was filed under section 55 of the Income Tax Ordinance, 1979 and the assessment was framed under section 62 of the Ordinance. During the period relevant to this assessment year the assessee was found having purchased 3.4 (Million) sharesof Messrs Escorts Pakistan. Limited at the face value of Rs.10 per share.
As the assessee had made a huge investment of Rs.34 (Million) in the purchase of shares the learned Assessing Officer made a probe of this issue while framing the assessment. However, the cost of purchase was accepted as declared.
A show‑cause notice under section 66‑A was issued by the IAC on the premises that "The DCIT has erroneously accepted the purchase price of asset in the shape of shares of Messrs Escorts Pakistan Limited without ascertaining the fair market value of the shares. It was stated that the fair market value per share of Messrs Escorts Pakistan was Rs. 16.32 worked out on the basis of break‑up value of its shares. The difference in cost and actual value attracted the provisions of section 12(12) of the Income Tax Ordinance, 1979, which amounted to Rs.214,88,000.
Reply to this show‑cause notice was considered as unsatisfactory and order of the ITO was cancelled.
Before us the A.R. has argued that case challenging the jurisdiction under section 66A. He said it cannot be assumed against an order of the Assessing Officer, which is perfectly legal. Reference is made to the judgments of Madras High Court in the case of Venkatakrishna Rice Co. v. CIT and Karnataka High Court in the case of CIT v. T. Narayana Pai reported as 163 ITR 129 and 98 ITR 422 respectively. Reference is also made to the judgment of the learned ITAT In the case reported as 1991 PTD (Trib.) 321. He argued that for assumption of jurisdiction under section 66‑A the order of the DCIT must be erroneous in so for as it is prejudicial to the interest of Revenue. This provision of law since it vacates a completed assessment must not be construed in a petty fogging manner but must be given a dignified construction. There must be some grievous error in the order passed by the Assessing Officer, which sets a bad trend or pattern for similar assessments. Reference is again made to the judgment of Honourable Madras High Court in the case of Venkatakrishna Rice Co. v. CIT (1987) 13 ITR 129 (Mad.).
With the completion of assessment a vested right is created in favour of assessee and concept of finality of assessment comes into operation. He said the assessee cannot be lightly deprived of his vested right under the law until and unless the conditions prescribed by law in that behalf are strictly fulfilled. Reliance is placed on the judgment of learned ITAT in the case reported as 1999 PTD (Trib.) 3229. In a situation like in this case the Assessing Officer was not required to compulsorily conduct an investigation if, on a general perusal of facts and legal provisions he was satisfied that the declared purchase price was reasonable and fair. The IAC, the A.R. remarked, cannot poke his nose in assessments framed by DCIT on the basis of conjectures, surmises and far‑fetched analogies. Such a practice is highly deprecated by the higher Courts in the strongest terms.
He added that the IAC has no authority to substitute his own discretion and, his own way of appreciating the facts for arriving at preconceived desired results which are contrary to the facts found by the DCIT and conclusions drawn thereon. Reference is made to the judgment of the learned ITAT reported as 1997 PTD (Trib.) 902.
He said that the mala fide proceedings in this case are nothing more than a case of further inquiry which is not permissible under the law. As the honourable judicial forums have deprecated this practice of the Department, (reference is made to 1999 PTD 2851).
The learned A.R. says that fair market value of shares of Messrs Escorts Pakistan Limited has been calculated by the learned respondent with reference to the break‑up value of shares of the Company. The application of break‑up value method to determine fair market value of shares of such companies which are going concerns like. Escorts Pakistan Limited is totally inappropriate and illegal. The value of shares of such companies as are not quoted on Stock Exchanges is to be determined on the basis of the dividend or earning method or yield method. The method of break‑up value is to be applied only in very rare and exceptional circumstances and one such exception is when a company is going into liquidation. Reference was made to the judgment of the Supreme Court of India in the case of Commissioner of Wealth Tax Assam v. Mahadeo Jalan and others reported as (1972) 86 ITR 621 (SC).
Further referring the judgment of the Calcutta High Court reported as Commissioner of Income Tax, West Bengal v. Swadeshi Mining & Manufacturing Co. Ltd., reported as 116 ITR 259, he said that the judgment fully supported the case of the appellant on factual as well as legal grounds. The assessee sold a lot of 7,500 shares at the rate of Rs.9.50 per share, the face value thereof being Rs.10 per share. In the Assessment year 1958‑59 the ITO held that the shares had been sold at an unusually low price and also that the vendee was associated with the assessee; therefore, he proceeded to ascertain the break‑up value of shares which worked out to Rs.23,85 per share. The surplus was sought to be assessed as capital gain.
On appeal the learned Tribunal held that the break up value of the shares did not indicate their market value. The Honourable High Court upheld the decision of the learned Tribunal and held that it was only in very exceptional cases that the shares of a company would be valued by the break‑up method and the fact that the purchaser and vendor were associated with each other in business was not reasonable enough to bring the transaction within such special circumstances.
Reference is further made to another judgment of the Honourable High Court of Calcutta in the case reported as Grindlays Bank Ltd. v. Commissioner of Income Tax reported as 116 ITR 799. It was held, "in the case of a company which is a going concern and whose shares are not quoted on the Stock Exchange, the profits which the company has been making or, in other words, the profit‑earning capacity of the company would ordinarily determine the value of its shares. The break‑up value will not be appropriate for valuation of shares 'of such a company.
Notwithstanding the above contention that the application of break‑up value method is inappropriate in this case even the working of break up value is illegal and faulty. While calculating the break‑up value of shares of the appellant the learned respondent has taken into account surplus on revaluation of fixed assets reserves of Rs.20,027,787. It is submitted that it is a notional reserve, which is never credited to the P&L account and is taken to the Balance‑Sheet directly and is capitalized; therefore, it is to be ignored while calculating the break‑up, value of shares. Reference is made to the judgment of the learned ITAT reported as 2002 PTD (Trib.) 2014.
As a counter argument he said that if the re‑valuation of fixed assets reserve is excluded then the break‑up value per share comes only to Rs.11.32 per share which exceeds the face value by just Rs.11.32 per share. When section 12(12) was amended through the Finance Act, 1992 and stocks and shares were brought at par with other assets in the context of determination of their transfer value on the basis of fair market value a section of taxpayers expressed their grave apprehensions over the arbitrary valuation of shares by the Department of such companies which were not quoted on the Stock Exchange. In order to allay the fears of the taxpayers the C.B.R. issued Circular 14 of 1992 which stated: "In the case of shares of companies not quoted on the Stock Exchange, where the transfer price is found to be extremely low, the valuation will be made on the basis of the report of the valuer appointed under section 4 of the Ordinance. Arbitrary exercise of discretion in this regard will be checked through administrative control. "
This Circular, the A.R. argued makes it abundantly clear that discretion in valuation of shares for the purpose of section 12(12) will be exercised only where the valuer declared is extremely low. The value per share at Rs.11.32 against the declared value of Rs.10 per share is not extremely low.
Even when viewed in the light of this Circular alone the impugned order under section 66A is illegal and issued in violation of the Instructions of the C.B.R., which being beneficial to the assessee, were binding on the learned respondent. So far as the binding nature of the Instructions is concerned reference is made to a recent judgment of the Honourable Sindh High Court in the case reported as 2002 PTD 720. It has been held that the beneficial view taken by the Central Board of Revenue which is not patently violative of any statutory enactment but is merely aimed at mitigating the rigours of law is binding on the functionaries employed in the execution of the Income Tax Ordinance. In this case the Honourable Court also interpreted the judgment of the Honourable Supreme, Court of Pakistan in the case of Central Insurance Company v. C.B.R. which is fully supportive of this contention of the appellant.
The A.R. thus prayed that the impugned order under section 66‑A may graciously be set aside the that of the Deputy Commissioner may be restored.
The DR started his argument by saying that the assessee admission that the cost of shares was Rs.11.32 per share alone is enough to hold that the value of the shares was not Rs.10. He said that it may be family arrangement, however, the value of the shares of the company being governed by section 12(12) the Assessing Officer was under a legal obligation to assess the same accordingly. The argument that the break up value method is not applicable and that the surplus of revaluation of fixed assets cannot be added for calculating the break up even if found correct the results still would be that the value will be Rs.11.32. Keeping section 12(12) in view and this admitted value of the assessee there is no way for the assessee to escape from the fact that the case was erroneous as well as prejudicial to the interest of Revenue. He said that the case‑laws referred by learned AR are just. hypothetically and are not applicable on the facts of this case. In the present case the Assessing Officer while making original assessment ignored that the fair market value was much more than what the assessee held shown. He has tried to cover the case in the definition of break‑up value and has further tried to complex the situation by discussing the methods in the manner that the reserve of re‑valuation of assets cannot be added for such determination. The language of section 12(12) does not leave anything open as the words used therein are "fair market value".
He further added that fair market value in the case of shares can be its break‑up and for determination of the same the cases referred by AR are of no help. He is referring the cases in which the break‑up has been determined during the running of said companies. However, in the case of a sale transaction said methods are not applicable. The break up value of a share and consequently fair market value can only be determined by reducing total liabilities from the assets. The resultant net assets shall determine the value and the same is fair market value of the shares. In any case he repeated that so far as order of the IAC is concerned the assessee having accepted that the fair market value was Rs.11.32 the order of the Assessing Officer who accepted the value as Rs.10 per share was erroneous as well as prejudicial to the interest of Revenue.
The argument of learned AR with regard to the words "extremely low" he said has nothing to do with section 66A. It only speaks of the status of the order. If the same is erroneous and prejudicial to the interest of Revenue the same comes into full force. The percentage of prejudice to Revenue is not relevant.
The arguments of the two sides have been heard in detail. We have full respect of the arguments of the two sides. Learned AR has brought on record a long list of case‑laws which we have mentioned in our discussion above. We agree that an order which is perfectly legal should not be disturbed. Furthermore that this provision should only be invoked where the error is floating from the surface of the order and does not need any further argument, inquiry or details for establishing the same. Moreover, a completed assessment does have sanctity and should not be cancelled on the basis, of fishy inquiries and unnecessary investigations. The case‑law, therefore, obviously highlights all these important acts and there is no question of not appreciating the same while dealing with such issues. We have to see such decision in the light of the facts of the case under discussion. For example learned AR claims that the judgments reported as 116 ITR 259 in the case of CIT, West Bengal‑II v. Swadesh Mining & Manufacturing Co. Ltd. is fully applicable on the facts of this case. The finding therein was that in very exceptional cases the shares of a company would be valued through the break up‑method. Unfortunately those exceptional circumstances exist in this case. The assessee itself while giving reply to IAC though as a counter argument claimed that the value of the shares at best could be Rs.11.32. Moreover, the provision of law speaks of fair market value which also is conspicuous and clear in its meanings. The concept of too low does not apply in the case of exercise of jurisdiction under section 66A. It is the error found in the order which ignites the revision jurisdiction and if said error causes prejudice to the interest of Revenue the effort of IAC completes. In the present case the Assessing Officer had failed to notice that the fair market value of shares was not correct ignorance of this provision of law while making assessment obviously was error and the fact that the value of the share is more than Rs.10 per share has caused prejudice to the interest of Revenue. The argument that the ass9ssee was in a position to correlate this addition with some source is also of no help with regard to invocation of jurisdiction under section 55A. Since this argument was not there at the time of original assessment and nor the same has been correlated before the IAC so as to create the impression that no prejudice to the interest of Revenue has been caused, we ignore the same. In any case if the assessee is in a position to explain its source he cannot be denied of this right even after cancellation of the order but we have to decide on the basis of the facts obtaining on the date of cancellation of the order. We have not even an iota of doubt that the error existed in this case on the date of inspection of file and the value of the share admittedly being higher than Rs.10 the prejudice to the interest of Revenue is equally visible. The question that re‑valuation of the assets is not relevant for determination of the value of shares also fails in the present circumstances. In this case the re valuation is for the purpose of determination of sale value of the shares for a sale transaction. Obviously no one would sell its belongings at a lesser price than it can fetch in open market. It is true that there is no moral or legal restriction on a person to sell his belongings at a lesser D rate but, however, ordinarily this is not done any where in the world except under special circumstances. This discussion, however, becomes irrelevant in the presence of the provisions of section 12(12). It speaks of a situation in which if a person has purchased certain assets less than the fair market value the ITO is legally required to reject the same. The test, however, is that he should have reason to believe which obviously requires proof and the same is fully available in this case. The above discussion obviously leads to the conclusion that the order of the ITO was erroneous as well as prejudicial to the interest of Revenue. As a result the assessee appeal is rejected and the same is accordingly disposed.
C.M.A./865/Tax(Trib.)Appeal rejected.