I.T.A. No.2956/LB of 2001, decided on 27th August, 2002. VS I.T.A. No.2956/LB of 2001, decided on 27th August, 2002., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 279 (2002)

(a) Income Tax‑‑‑

----Association of persons ‑‑‑Individual‑‑‑Resources of‑‑‑Resources available to the individual members do not automatically become available to the Association of persons as the individual member are different entities in law.

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

‑‑‑Ss. 66‑A & 13(1)‑‑‑Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order ‑‑‑Revisional jurisdiction, exercise of‑‑‑Association of Persons‑‑‑Individual‑‑‑Difference between the opening capital account of the members of Association of Persons and opening cash balance of the members individual accounts ‑‑‑Addition‑‑Inspecting Additional Commissioner exercised his Revisional jurisdiction on the ground that Association of Persons had short declared an amount of Rs.72,33,855 being tae differential amount between the opening capital account of the member of Association of Persons and opening cash balance of the members' individual account as the same constituted money available with the individual members of the Association of Persons for use by the Association of Persons but not so declared in the capital accounts of the members of the Association of Persons and the said unexplained investment was actionable under S.13(1) of the Income Tax Ordinance, 1979 and the Assessing Officer having failed to take proper cognizance of the same, loss of revenue was patent and the assessment made rendered .erroneous‑‑‑Validity‑‑‑If the individual members were to increase their investment in the Association of Persons over and above what .was declared in their capital accounts in tae Association of Persons then they would be required to either augment heir capital contributions in the Association of Persons/or make an advance to Association of Persons by way of loan‑‑‑No augmentation had been made in the capital balances of the respective members in the Association of Persons and no advance had been trade by any of the members to the Association of Persons by way of loan‑‑Individual members of the Association of Persons had done nothing that could reasonably be interpreted as an unexplained investment made by them in the Association of Persons‑‑‑Analysis as made by the Inspecting Additional Commissioner in this regard was found to be faulty and the same could provide no justification for exercise of revisional jurisdiction under S.66‑A of the Income Tax Ordinance, 1979.

(2000) 82 Tax 20 (Trib.); 1987 PTD (Trib) 563; 1998 PTD 3319 and 1993 PTD 766 ref.

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

‑‑‑S. 66‑A‑‑‑Power of Inspecting Additional Commissioner to revise Deputy Commissioner's order‑‑‑Exercise of revisional jurisdiction under S.66‑A of the Income Tax Ordinance, 1979 on the direction of Zonal Commissioner of Income Tax‑‑‑Validity‑‑‑Exercise of revisional jurisdiction under S.66‑A of the Income Tax Ordinance, 1979 by the Inspecting Additional Commissioner was a very special statutory authority that must be exercised independently by the Inspecting Additional Commissioner without any advice or direction from any other authority, including the Zonal Commissioner of Income Tax‑‑‑Was patent that the Inspecting Additional Commissioner had reacted to the observations recorded by the Zonal Commissioner of Income Tax‑‑ Exercise of jurisdiction by the Inspecting Additional Commissioner under S.66‑A of the Income Tax Ordinance, 1979, was thus not shown beyond reasonable doubt to have indeed been exercised independently by the Inspecting Additional Commissioner as the law required that it must be exercised‑‑‑Order passed under S.66‑A of the Income Tax Ordinance, 1979 was not tenable in law and in the same was annulled by the Appellate Tribunal.

M. Sarwar Khawaja for Appellant.

Agha Hadayat Ullah Khan, D.R. for Respondent.

Date of hearing: 20th July, 2002.

ORDER

MUHAMMAD MUNIR QURESHI (ACCOUNTANT MEMBER).‑‑‑This appeal by an AOP is directed against exercise of revisionary jurisdiction by the IAC under section 66‑A of the Ordinance for the assessment year 1999‑2000.

2. It is the appellant's contention that the provisions of section 66‑A of the Income Tax Ordinance, 1979, have been unjustifiably invoked when the IAC statedly did not have 'definite information' before him on record conclusively establishing prejudice to revenue consequent to an erroneous assessment made by the DCIT.

3. According to the appellant, the assessment for 1999‑2000 made by the DCIT is consistent with statutory stipulation and incorporates an exhaustive appraisal of the sources of investment available to the AOP. It is contended that the assessment order has been passed after obtaining approval from the then (predecessor) IAC and it was not open to a `review' in the garb of `revision' by the successor IAC.

4. The IAC's intervention under section 66‑A is assailed by the appellant as wholly arbitrary, misconceived in law and without proper objective basis. It is the appellant's contention that the sources of investment were subjected to indepth probe by the DCIT and after proper explanations rendered the declared investment was accepted. Such investment includes Rs.10,90,000 for purchase of land measuring 38 Kanals and 14 Marlas at Tehsil Ferozewala and construction thereon for an amount of Rs.20,75,130 on 3906 sq. ft. built up area at a per sq. ft. cost of Rs.561. Plant and machinery purchased during the year includes induction furnace, C.C. Plant, Gas oven, Flow meter, Fiber mold. Measuring machine, AOD converting lining, Shapering machine etc. etc. for an amount of Rs.20,473,212. The total investment aggregates some Rs.2,95,50,000 and the same has statedly been contrived exclusively against foreign remittances.

5. According to the IAC, the Assessing Officer has erred in failing to recognize alleged discrepancy between the opening capital accounts as on 1‑7‑1998 of the members of the AOP cited in the balance sheet of the AOP as on 30‑6‑1999 at Rs.23,50,000 as against opening cash balance of the members individual accounts aggregating Rs.95,83,855 as per reconciliation statement filed before the DCIT at assessment stage. It is thus the IAC's contention that the AOP had "short declared" an amount of Rs.72,33,855 .being the differential amount between the balances referred to Supra and such amount statedly remains unexplained in the hands of the AOP as the same constitutes moneys available with the individual members of the AOP for use by the AOP but not so declared in the capital accounts of the members as at 1‑7‑1998 cited in the balance sheet of the AOP as on 30‑6‑1999. In the opinion of the IAC, the said unexplained investment was actionable under section 13(1) of the Ordinance and the Assessing Officer having failed to take proper cognizance of the same, loss of revenue was patent and the assessment made rendered erroneous.

6. Additionally, the IAC is of the opinion that the DCIT has failed to appraise cost of construction of building/factory premises properly and here too there is an alleged lapse under section 13(1). The IAC is also of the opinion that the DCIT has failed to appraise closing stock of raw- material properly insofar as raw‑material has been shown to have been purchased at 10,520 per ton whereas the closing stock has been valued at Rs.13,000 per ton which has not been probed by the Assessing Officer and no consequential addition made.

7. The appellant does not deny formal confrontation by the IAC with regard to the alleged lapses referred to Supra. However, it has been emphasized by the appellant that multiple show‑cause notices have been issued by the IAC and confrontation made in a confused and haphazard manner leading to the inescapable conclusion that the IAC was pre determined to invoke the provisions of section 66‑A, one way or the other.

8. According to the appellant, the cash resources available with the individual members can be freely, put to use by the AOP without any let or hindrance and there is no bar in law that need be overcome before this can be done. It is further the appellant's contention that the individual members had more than adequate cash resource, available to them as on 1‑7‑1998 and this is allegedly borne out from their individual wealth tax assessments. It is contended that such resources have been contrived against foreign remittances received by the members and these are consequently statutorily exempt from levy of Income Tax under the Second Schedule to the Ordinance.

9. The very assumption of jurisdiction by the IAC under section 66‑A is contested by the appellant on the ground that the DCIT's order under section 62 having allegedly been passed after obtaining prior approval from the then IAC could not be subjected to exercise of revisionary jurisdiction under section 66‑A by the successor IAC. It is also the appellant's contention that the IAC has not recorded an unequivocal finding to the effect that the order of the DCIT was erroneous and prejudicial to the interests of revenue.

10. Appellant further argues that the IAC has taken action under section 66‑A on the basis of `presumption and surmises' and the alleged absence of any `definite information' showing prejudice to revenue relatable to erroneous/defective appraisal of investment by the DCIT in the order passed under section 62.

11. In the matter pertaining to construction of premises, it is the appellant's contention that cost of construction declared at Rs.561 per sq.ft, is actually in excess of the cost confronted to the appellant through show‑cause notice issued on the matter.

12. Case‑law has been cited by the appellant as under:‑

(2000) 82 Tax 20 (Trib.); 1987 PTD (Trib) 563; 1998 PTD 3319 and 1993 PTD 766.

13. The D.R. has contested the submissions made by the appellant. According to the D.R the discrepancy between cash available to the individual members in their hands and that declared in their respective capital accounts as on 1‑7‑1998 appearing in the balance sheet of the AOP as on 30‑6‑1999 is patent and such discrepancy is "proof positive" that the actual cash resources available with the members have not been explained as to source before the DCIT at assessment stage and the IAC is fully justified in his conclusion that the "short declaration" of cash actually held by members was actionable under section 13(1) of the Ordinance. The D.R. strongly contests the appellant's contention that the assessment made by the DCIT under section 62 had been formally approved by the then IAC. It is pointed out that no approval letter at all had been issued by the then IAC and routine guidance given to the DCIT at assessment stage did not amount to formal approval under the Ordinance and the order under section 62 hence remained an order passed by the DCIT. It is emphasized that discussion of the case by the DCIT with the IAC cannot be interpreted to mean formal approval of the assessment order by the IAC.

14. The D.R. has further contested the appellant's contention that the IAC has invoked revisionary jurisdiction under section 66‑A on the basis of mere presumption and surmises. It is pointed out that the discrepancy between the resources available to the individual members as on 1‑7‑1998 and that declared in their capital accounts in the balance sheet of the AOP as on 30‑6‑1999 was a very real difference and there was no question of any presumption here.

15. The D.R. has also argued that revisionary jurisdiction under section 66‑A can be invoked by the IAC when there is reasonable cause to hold that an, assessment is erroneous insofar as it is prejudicial to the interests of revenue and it is not mandatory that the information available in this regard be 100% definite. It is pointed out that "definite information" referred to by the appellant was indeed necessary to invoke the provisions of section 65 but in the case presently before the Tribunal, it is argued by the D.R. that there was enough material on record at the relevant time for the IAC to invoke the provisions of section 66‑A notwithstanding the fact that the provisions of section 65 may not be invokable given this kind of information.

16. As for alleged repetitive issuance of show‑cause notices by the IAC, the D.R. argues that the IAC can issue multiple show‑cause notices so long as different matters are raised in each separate show‑cause notice and there was nothing in the law that mandated issuance of single show -cause notice only.

17. The D.R. emphasis that resources available with the individual members do not become available to the AOP automatically. It is argued that the resources available with the individual members are required to be formally made available to the AOP either through an increase in the capital account of the individual members in the AOP or through loan amount advanced by them to the AOP. It is pointed out that in the present case there was no change in the capital contribution of the members in the AOP and no loan amount had been advanced by them to the AOP and it could, therefore, be not said, as, he has been argued by isle AR, that the total moneys available to the individual members as on 1-7‑1998 were automatically available for use by the AOP in their totality in the period relevant to assessment year 1999‑2000 (i.e. 1‑7‑1998 to 30‑6‑1999;

18. We have heard both sides and have examined the available record. We have also perused the case‑law cited before us and our findings are recorded as under:‑‑‑

(i) The exercise of revisionary jurisdiction under section 66‑A has clearly been provoked by the fact that in the opinion of the IAC, the DCIT's appraisal of quantum of investment and sources thereof declared by the AOP as on 1‑7‑1998 was erroneous insofar as the said investment had been "short, declared" to the tune of Rs.72,33,855 being the difference between moneys actually available with the members in their individual hands as cited in the reconciliation statement filed by them before the DCIT and the amounts declared on 1‑7‑1998 in their respective opening capital account balances in the balance sheet of the AOP as at 30‑6‑1999. In our judgment, the IAC is clearly misconceived in his view that the aggregate of the total moneys available in the individual hands of the members i.e. Rs.95,83,855 as on 1‑7‑1998 must also be so cited in the partners opening capital account in the balance sheet of the AOP as at 30‑6‑1999. We see no reason why the individual members cannot withhold a part of their total cash availability and retain the same in their personal hands as has happened in the present case when the individual members are shown to have made a opening capital account contribution as on 1‑7‑1998 on Rs.23,50,000 in the balance sheet of the AOP as on 30‑6‑1991) when the aggregate amount of moneys available with the members as on 1‑7‑1998 is Rs.95,83,855. There is nothing in the law that compels the individual members to declare the total amount available with them in their respective opening capital accounts in the AOP if they choose to retain part' of the total cash availability with them. Thus the individual members having duly declared aggregate amount of Rs.23,50,000 as their opening capital account balance as on 1‑7‑1998 in the balance sheet of the AOP as at 30‑6-1999 and having admittedly rendered explanation for the same before the DCIT at assessment stage, there is nothing here that can be assailed as being detrimental to the interest of revenue. The fact of the matter is that the individual members have declared a certain amount as their opening capital balances in the AOP and have duly explained the same before the DCIT.

(ii) While the JAC is correct in his view that the 'resources available to the individual members do not automatically become available to the AOP and has rightly pointed out that the AOP and the individual members are different entities in law, however, we fail to see any transfer of "unexplained resources" by the members to the AOP as on 1‑7‑1998. As pointed out above, the individual members have shown an investment of Rs. 23,50,000 in their opening capital accounts in the AOP as on 1‑7‑1998 when they were actually in possession of an aggregate amount of Rs.95,83,855 on that date. There is nothing on record to show that the actual balance amount in their respective capital accounts as on 1‑7‑1998 is higher than Rs.23,50,000 in the aggregate. The differential amount of Rs.72,33,855 referred to by the IAC is the amount available with the individual members admittedly in excess of the amounts cited in their respective capital accounts. There is nothing on record to show that any amount out of this Rs.72,33,855 has actually been transferred to the AOP as on 1‑7‑1998 and not so declared in the partners capital accounts. It would have been an entirely different matter if the IAC had been able to establish that the individual members had declared an amount of Rs.23,50,000 in their respective opening capital balances in the AOP but had actually disbursed a higher amount or had declared an aggregate amount of Rs.23,50,000 when the total moneys available to them was less than Rs.23,50,000. It is not enough to say that whatever moneys are available with the individual members are automatically freely available for use in the AOP. Needless to say, if the individual members are to increase their investment in the AOPI over and above that declared in their capital accounts in the AOPI then they would be required to either augment their capital, contributions in the AOP/or make an advance to AOP by way of loan. In the case presently before us there is no f augmentation in the capital balances of the respective members in the AOP as on 1‑7‑1998 and no advance has been made by any of the members to the AOP by way of loan. In short, individual members of the AOP have done nothing that can reasonably be interpreted as an unexplained investment made by them in the AOP the analysis as made by the IAC in this regard is thus found to be faulty and the same can provide no justification for invocation of revisionary jurisdiction under section 66‑A. It is pertinent to note here that it is the appellants assertion that the "entire moneys" in the hands of the individual members have been contrived against foreign remittances received by them to date that admittedly enjoys statutory exemption from levy of income tax under the Second Schedule to the Ordinance. The total investment by the members in the AOP uptil 30‑6‑1999 aggregates Rs.27,446,236. The IAC has not contested the inflow of foreign remittances. Indeed he has kept silent on the issue of remittances except to say that the wealth tax returns showing the individual members net wealth as on 30‑6‑1998 and 30‑6‑1999 did not specify the exact from that the foreign remittances assume i.e. whether in dollar or pound sterling denomination etc. In our view, the cash reconciliation statement filed by the individual members satisfactorily establish the availability of moneys in their individual hands as on 1‑7‑1.998 and 30‑6‑1999 and no defects at all in these statements, have been identified by the IAC in the order passed by him under section 66‑A. As to the exact denomination (i.e. dollar/pound sterling etc.) of the remittances, as the foreign remittances `per se' have not been challenged by the IAC their `form' is not really germane to the issues raised by him.

(iii) Our examination of the assessment record and the record of the IAC under section 66‑A requisitioned by us shows that the action taken by the IAC under section 66‑A is a sequel to the directions given by the then. Commissioner of Income Tax, Zone‑C, Lahore, vide his Letter No.191/PA, dated 1‑11‑2000 who after inspection of the DCIT's assessment order had evidently taken Umbrage at his handling of the case and he had made an endorsement to the IAC, Range‑II, Lahore, "for taking appropriate measures to set right the things" (SIC). It appears to us that the IAC's invocation of revisionary jurisdiction under section 66‑A is a sequel to this letter to him from the Commissioner of Income Tax, Zone‑C, Lahore and it is fair to conclude that the IAC may not have acted, on his own in this manner but he felt compelled to do so after receipt of the Zonal CIT's above cited letter. Although this objection has not been raised by the appellant before us, however, we cannot but take cognizance of the factual position after having examined the relevant record of the IAC where the fits stare us in the face and we cannot indeed must not close our eyes to the same.

In our judgment, exercise of revisionary jurisdiction under sec‑ ion 66‑A by the IAC is a very special statutory authority that dust be exercised independently by the IAC without any advice or direction from any other authority, including the Zonal CIT. In the resent case, it is patent that the IAC has reacted to the observations recorded by the Zonal CIT in his cited letter endorsed to him. The exercise of jurisdiction by the IAC under section 66‑A is thus not shown beyond reasonable doubt to have indeed been exercised independently by the IAC, as the law requires that it must be exercised.

19. Looking at the matter in the totality, we are of the view that the order passed under section 66‑A is not tenable in law for the reasons recorded (supra). The said order under section 66‑A is, therefore, hereby annulled.

Resultantly, the appeal succeeds.

C.M.A/503/Tax(Trib.) Appeal succeeded.