(a) Income‑tax‑‑‑

‑‑‑‑Nature of land‑‑‑Whether agricultural or residential‑‑‑Piece of land purchased was part of a residential scheme and there was no claim of being agricultural activity done‑‑‑Claim of assessee that such piece of land was agricultural piece of land was rejected by the Appellate Tribunal in circumstances.  

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

‑‑‑‑S. 13(1)(d)‑‑‑Addition‑‑‑Valuation of property‑‑‑Collector's rate‑‑ Land having deep ditches‑‑‑Application of Collector's rate‑‑‑Validity‑‑ Assessee's contention that normal rate as per Collector's rates could not be applied as it was not a level piece of land and the department had accepted and allowed expenses against such development appeared to be correct, however, this did not automatically establish that the declared value was correct.

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

‑‑‑S. 13(1)(d)-‑‑Addition ‑‑‑Sale of lease hold right‑‑‑Valuation of property‑‑‑Application of Collector's rate‑‑‑Validity‑‑‑Contention of assessee with regard to valuation of the property that the same was only a sale of lease hold rights in the said piece of land which was held by the seller as a free hold land and the rates of Collector could not be applied was not approved by the Appellate Tribunal.

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

‑‑‑‑Ss. 12(12) & 13(1)(d)‑‑‑Deemed income‑‑‑Addition‑‑‑Land‑‑‑Stock in trade‑‑‑Interpretation of provisions of S.12(12) and S.13 of the Income Tax Ordinance, 1979‑‑‑Contention of the assessee that "provisions of S.12(12) of the Income Tax Ordinance, 1979 came in. way of department in evaluating the piece of land as stock‑in‑trade" was not approved by the Appellate Tribunal‑‑‑Section 12 of the Income Tax Ordinance, 1975 was a peculiar section and made certain transaction as part of income although there may or may ,not be any such income‑‑‑Purpose of S.12(12) of the Income Tax Ordinance, 1979 was to tax any benefit given to an employee or a Director of a company by way of concessional sale of its assets such as motor vehicles.

I.T.A. No.421/KB of 1991 ref.

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

‑‑‑‑S. 13(1)(d)‑‑‑Addition‑‑‑Land‑‑‑Enhancement of cost of sales in view of the enhancement of purchase consideration of land under S.13(1)(d) of the Income Tax Ordinance, 1979 would come into play if a gross profit rate is not applied by the Assessing Officer.

2003 PTD 1361 distinguished.

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

‑‑‑‑S. 65‑‑‑Additional assessment‑‑‑Issuance of notice under S.65 of the Income Tax Ordinance, 1979 for the assessment, year for which no return had been filed previously nor any assessment made‑‑‑Validity‑‑‑Action under S.65 of the Income Tax Ordinance, 1979 could not be initiated as the assessee had not filed any return for the income year pertaining to assessment year under consideration nor any assessment had been made for such assessment year prior to the issuance of notice under S.65 of the Income Tax Ordinance, 1979.

2002 PTD 998 and 2001 PTD 1998 rel.

PLD 2002 Kar. 60 and Muhammad Idrees v. Collector Custom 2001 SCMR 838 ref.

1998 PTD 1387 distinguished.

Muhammad Athar Saeed for Appellant.

Sartaj Yousuf D.R. for Respondent.

Date of hearing: 17th December, 2003.

ORDER

INAM ELLAHI SHEIKH (CHAIRMAN).‑‑‑This is the further appeal of an income‑tax assessee directed against an order, dated 12‑6‑2001 recorded by the learned CIT(A), Zone‑VI, Karachi.

2. The relevant facts in brief are that the assessee is an AOP and derives income from property development business. This is said to be a no account case. The assessee filed first return for the assessment year 1999‑2000 under Self‑Assessment Scheme (SAS) declaring the results for a period of fifteen months from 1‑4‑1998 to 30‑6‑1999. Such return was accepted under section 59(1) of the repealed Income Tax Ordinance, 1979 (hereinafter called the 1979 Ordinance). Such assessment was however cancelled by the IAC under section 66A of the 1979 Ordinance and such action was confirmed by the Tribunal against which reference application was filed. The assessee had purchased a piece of land from K.K. Builders (Pvt.) Ltd. which is an associated company of this AOP. This purchase was made in the period between April, 1998 to June, 1998. K.K. Builders (Pvt.) Ltd., hereinafter referred to as the "associated company", had purchased certain piece of land which was said to be agricultural land and sold a part of such land to the present assessee. The agreement to sell was made in April, 1998.

3. Subsequent to the cancellation of the assessment by the IAC, the Assessing Officer invoked the provisions of section 65 of the 1979 Ordinance requiring the assessee to file a return for the assessment year, 1998‑99 and the assessee filed a return declaring nil income alongwith the statement of accounts. The Assessing Officer confronted the assessee with the proposal that Plot` No. 118/9II and III, Bolck 18, Gulistan‑e‑Jauhar, Karachi, measuring 13490 Sq. Yds had not been declared at the correct value and he proposed to adopt the value of such plot at Rs. 33,590.100 (at Rs. 2,490 per Sq. Yd) as against the declared value as per lease agreement of Rs. 10,117,500. It was proposed to make an addition of Rs. 23,472,600 under section 13(1)(d) of the 1979 Ordinance. The wealth statement of the partners of the AOP and other details were also summoned. A credit in the bank account of, Rs. 1,000,000 was also doubted which had been explained as advance against sale. In response, the assesssee elaborated that the KDA and Board of Revenue had allotted various plots to various parties in Gulistan‑e‑Jauhar on 99 years lease at Rs.400 per Sq. Yd. Also some registered deeds were enclosed showing the value of land between Rs. 305 to Rs. 880 per Sq. Yd. It was also disputed by the assessee that the collectors rate could not be applied to ascertain the valuation of this plot since this was a lease‑hold property. The Assessing Officer did not accept such contentions. He therefore, proceeded to make the assessment in the following manner:‑‑

Other Add backs out of P&L Accounts

The learned CIT(A) upheld the action of the Assessing Officer under section 65 of the, 1979 Ordinance and also confirmed the treatment of land as commercial instead of agricultural. The contention of the assessee that this was the stock‑in‑trade of the assessee and could not be valued by the Assessing Officer was rejected. The assessee's contention with regard to certain extraordinary, expenses such as payment to encroachers and ditch filling expenses leading to non‑applicability of standard DC rates was also rejected. The assessee's plea that it was not the registered owner of the property was also rejected. The add backs in the P&L expenses were confirmed.

4. Before us, the assessee has challenged the orders of the departmental officials mainly on the grounds that the provisions of section 65 were not applicable; the declared GP rate could not be rejected, the declared value of property could not be rejected nor the addition under section 13(1)(d) of the 1979, Ordinance could be made; the addition under section 13(1)(d) of the, 1979 Ordinance had been made without fulfilling the legal requirements. The assessee has also taken the plea that the plot is an agricultural plot and the valuation has not been made properly. In the end, the, assessee has also challenged the various additions in the P&L expenses under the heads; publicity expenses, entertainment, telephone, conveyance, printing and stationery advertisement and publicity and miscellaneous Commission expenses.

5. The learned counsel of the assessee has strongly attacked the orders of the departmental officials, firstly, on the question of invocation of section 65 of the 1979 Ordinance. The plea of the learned counsel of the assessee before us is that since there was no assessment order in field for this assessment year, the provisions of section 65 could not be invoked and the same was required to be held as invalid. The learned counsel has relied on the following two decisions to support his contention:‑‑

(1) 2002 PTD 998 and (2) 2001 PTIS 1998

The learned counsel of the assessee also drew our attention to the contents of section 65 of the 1979 Ordinance, specifically referring to the heading of the section which mentions the additional assessment, and submitted that additional assessment could only be made when there is an assessment already in existence. On the issue of the applicability of section 65, the learned counsel of the assessee also relied on another two decisions, viz. PLD 2002 Kar. 60, Muhammad Idrees v. Collector Customs, and 2001 SCMR 838. The learned counsel of the assessee also referred to an order of the Tribunal reported as 1998 PTD 1387 but the same was not found to be relevant to the facts of this case.

6. The learned counsel of the assessee then attacked the orders of the departmental officials on the plea that the assessee in the present case is a property developer and the land in his hands as such represents stock‑in‑trade and that the Assessing Officer was debarred from valuing such asset in view of the provisions of subsection (12) of section 12 of the 1979 Ordinance. The learned counsel referred to a decision of a Tribunal recorded in I.T.A. No. 421/KB of 1991, dated 24‑3‑1992.

7. The learned counsel of the assessee further attacked the orders of the departmental officials in respect of nature of the land. It was submitted that the Assessing Officer had wrongly concluded that the property was of commercial nature whereas as per record this was an agricultural property. It was elaborated by the learned counsel that the assessee in the present case had purchased lease-hold rights of this property from its associated company who had been allotted such land earlier in exchange for land acquired by the defence authorities. It was submitted that this land had 30 ft. deep ditches and could not be treated as a normal commercial land as done by the Assessing Officer. It was also pointed out that the assessee had to incur heavy expenditure in getting the land vacated from encroachers which has been accepted by the Revenue in the assessment year 1999‑2000.

8. The learned counsel of the assessee further submitted that the provisions of section 13(1)(d) of the 1979 Ordinance could not be invoked unless it was proved that the assessee had spent more money than had been shown or declared by it. The learned counsel referred to a decision of the Tribunal reported as 2003 PTD 1361 to support this contention.

9. On the issue of rejection of the declared version of the trading accounts, the learned counsel of the assessee strongly attached such rejection as well with the submission that the receipts had already been accepted by the department. Also it was argued that if the addition under section 13(1)(d) was found to be validly made, then the cost of land would automatically increase and thus there would be not net results of this assessee.

10. The learned DR has appeared without any record and supports the orders of the departmental officials for the reasons recorded therein.

11. We have considered the submissions of both the parties. We have already reproduced above the assessment made by the Assessing Officer which shows the careless manner in which it has been made. No basis or legal provisions have been cited while allowing 1/3rd publicity expenses in the year under consideration and the rest to be allowed in the subsequent years. No specific defects have been pointed out. On the other hand, we do not agree with the contention of the assessee that the land in question was agricultural land. There are several questions which could be raised about this transaction of lease. The lease agreement has been made on 20‑4‑1998 between Mr. Manzoor Ahmed and his wife as lessors and Kay Kay Developers through its partner Mst. Shagufta Kanwal and in this lease agreement, the lessor says that they are seized and possessed as absolute owners of a certain piece of land including the part being leased out. On the other hand, a copy of the deed of the same land has been filed which is, dated 23‑6‑1998. According to such deed of sale, Mr. Manzoor Ahmed and his wife Zubeda Ahmed have sold the same piece of land to Kay Kay Builders (Pvt.) Ltd. in pursuance of some agreements of sale, dated 5‑10‑1991 and 25‑1‑1992 and in that deed of sale again the vendors say that they are absolute, legal and beneficial owner of the same property. It is also an admitted fact that this piece of land is now part of Gulistan‑e‑Jauhar, and has been so, for a long time. There is no claim of any agricultural activity being done there. Hence the claim of the assessee that this was an agricultural piece of land does not carry any weight and is rejected.

12. The next contention of the assessee is that the normal rate as per Collector's rates could not be applied as it is not a level piece of land and the department has accepted and allowed expenses against such development. This contention of the assessee appears to be correct. However this does not automatically establish that the declared value is correct. The next contention with regard to the valuation of the property is that this is only a sale of lease‑hold rights in the said piece of land which is held by Kay Kay Builders (Pvt.) Ltd., as a free hold land and thus the rates of the Collector could not be applied. Again this contention is found to be quite forceful. The next contention of the learned counsel of the assessee before us is that the addition under section 13(1)(d) of the 1979 Ordinance could not be made unless it was established that the assessee had spent more money than what he shown to have been invested in any asset and he has relied upon a case reported as 2003 PTD (Trib.) 1361 to support this contention. The learned counsel further submitted that the addition under section 13(1)(d) of the 1979 Ordinance could not' be made on two further counts. Firstly, that any addition on account of the cost of land is bound to be allowed as the enhancement of cost of sales and, secondly, the land being the stock‑in‑trade of the assessee/AOP could not be valued as per subsection (12) of section 12 of the 1979 Ordinance which reads as follows:‑‑

"Where any assets not being stock‑in‑trade are purchased by an assessee from any company and the Deputy Commissioner has reason to believe that the price paid by the assessee is less than the fair market value thereof, the difference between the price so paid and the fair market value shall, be deemed to be income of the assessee chargeable to tax under this Ordinance.

13. With regard to the contention that the provisions of sub-section (12) of section 12 of the 1979 Ordinance come in the way of department in evaluating the piece of land as stock‑in‑trade, we are not impressed by such argument. Section 12 is a peculiar section and makes certain transactions as part of income although there may or may not be any such income. For instance, under the provisions of subsection (9A) of section 12 of the 1979 Ordinance if the assessee fails to pay certain amounts of dividends, the shortfall would be treated as income of the assessee and subjected to tax again although the same income had already been taxed before, the declaration of any dividend. Similarly, in subsection (7) of section 12 of the 1979 Ordinance, there was a provision, which has now been repealed, to deem that the assessee had earned interest income at a certain percentage of the loan if no interest had been charged or the interest had been charged at a lower rate than specified rate. On the other hand, section 13 deals with unexplained investments and is based on the presumption that the assessee had made investments from same concealed income unless the assessee can explain properly the source of such investment. Hence, in our view, these are two independent provisions. Even otherwise, we feel that the purpose of subsection (12) of, section 12 of the 1979 Ordinance is to tax any benefit given to an employee or a director of a Company by way of concessional sale of its assets such as motor vehicles. The contention with regard to enhancement of cyst sales in view of the enhancement of purchase consideration of land under section 13(1)(d) of the 1979 Ordinance would come into play if a GP rate is not applied by the Assessing Officer. We have also considered the decision of the Tribunal reported as 2003 PTD (Trib.) 1361 and we find that in that case the issue of additional under section 13(1)(d) had been set aside. The assessee has also agitated the reduction of declared GP rate. However, we do not find any specific findings of the departmental officials on this issue nor has the assessee provided as with the details of the declared GP rate. We also find that the Assessing Officer has not rejected the declared GP rate but has made certain additions in the trading account. The learned counsel over has also not elaborated as to which legal formalities have been Ordinance while making the addition under section 13(1)(d) of the 1979 Ordinance.

14. Now we take up the major issue on which the assessee has agitated the departmental orders i.e. the proceedings under section 65 of the 1979 Ordinance. As already said above, the assessee had filed the first return for the assessment year 1999‑2000 under the Self‑Assessment Scheme declaring results for a period of 15 months from 1‑4‑1998 to 30‑6‑1999 and the self‑assessment order was cancelled by the IAC. Subsequently, the Assessing officer issued a notice under section 65 of the 1979 Ordinance on 24‑4‑2000 as recorded in the impugned assessment order for the reason that the assessee had made huge investment in the purchase of land. The first and the foremost issue before us is that the assessee had not filed any return for the assessment year 1998‑99 prior to the issuance of notice under section 65 of the 1979 Ordinance and that there was only a period of three months from April, 1998 to June, 1998 for which the results were included in the return for the assessment year 1999‑2000. The question is whether the Assessing Officer could issue a notice under section 65 of the Ordinance for the assessment year 1998‑99 for which no return had been filed previously nor any assessment made. The assessment made for the assessment' year 1999‑2000 under the Self‑Assessment Scheme had been cancelled by the IAC. The learned counsel of the assessee has relied on a decision of the Hon'ble Lahore High Court reported as 2001 PTD 1998 and following the same, another judgment of the 'same August Court reported as 2002 PTD 998. In the judgment reported as 2001 PTD 1998 (Muhammad Siddiq v. Commissioner of Income Tax, Zone‑A, Lahore), the Hon'ble Judges of the High Court have held in para. 18 as follows:‑‑

"18. Accordingly it is held that a notice under section 65* of the Ordinance can be issued for the current as well as for any previous assessment year after the enforcement of the Income Tax Ordinance, 1979. Also that, in cases where an assessee had failed to file return of his total income in the current as well as in the previous years the issuance of notice under section 65 of the Income Tax Ordinance, 1979 is not required. Further that the provisions of section 65 of the Ordinance are applicable only in respect of assessments already framed or deemed to have been framed."

(*appears to have wrongly been typed as 65 instead of 56).

This case was also followed in the subsequent judgment in Messrs Abdur Rehman alias Boota, Lahore, v. Commissioner of Income Tax, Lahore, reported as 2002 PTD 998 supra. In this case, the following question referred to the Hon'ble High Court by the Tribunal was answered in the negative.

"Whether on the facts and in the circumstances of the case, the proceedings for earlier years could be initiated under section 65 when the return for 1986‑87 was filed as `new Tax Payer' claiming `Immunity from Total Audit'."

These two judgments of the Hon'ble Lahore High Court clearly support the contention of the assessee that the action under section 65 of the 1979 Ordinance could not be initiated in the present case as the assessee had not filed any return for the income year pertaining to the assessment year under consideration nor any assessment had been made for such assessment year prior to the issuance of notice under section 65 of the 1979 Ordinance. Hence we accept this appeal of the assessee on this ground and we annul the proceedings under consideration. The appeal succeeds accordingly.

C.M.A./60/Tax(Trib.) Appeal accepted.