I.T.As. Nos.4121/LB and 4125/LB of 2004, decided on 15th October, 2004. VS I.T.As. Nos.4121/LB and 4125/LB of 2004, decided on 15th October, 2004., 2005 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 720 (2004)

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

‑‑‑‑Ss. 12(12), 29(3)(b) & 66A‑‑‑C.B.R. Circular No. 14 of 1992, dated 4‑5‑1992‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Cost of acquisition, and consideration for transfer, how determined‑‑‑Value of shares‑‑‑No addition could be made in the income of the assessee on account of the alleged fair market value of the shares being higher than the' actual value of transaction as declared without first establishing that the declared value was "extremely low" as compared with the actual fair market value then getting the shares evaluated through an independent valuer appointed in terms of S.4 of the Income Tax Ordinance, 1979.

Central Insurance Company v. C.B.R. 1993 SCMR 1232; Commissioner of Income‑tax v. Muslim Commercial Bank Ltd. 2002 PTD 720 and I.T.A. No. 2138/LB of 2002 ref.

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

‑‑‑‑Ss.29(3)(b), 12(12) & 66A‑‑‑Income Tax Ordinance (XLIX of 2001), S.210‑‑‑C.B.R. Circular ‑ No.14 of 1992, dated 4‑5‑1992‑‑‑Cost of acquisition, and consideration for transfer, how determined‑‑‑Income deemed to accrue or arise in Pakistan‑‑‑Approval for determination of fair market value of shares‑‑‑Fair market value of shares was determined with the approval of Inspecting Additional Commissioner of Income Tax instead of Commissioner of Income Tax‑‑‑Validity‑‑‑Approval in terms of S.29 of the Income Tax Ordinance, 197 was given by the Additional Commissioner o Income Tax without any delegation of specific power under S.210 of the Income Tax Ordinance, 2001‑‑‑Fair market value of shares had been determined without mandatory approval by the Inspecting Additional Commissioner, which rendered the estimation without jurisdiction and unlawful‑‑‑Addition made under S.12(12) of the Income Tax Ordinance, 1979 by the Assessing Officer was deleted by the Appellate Tribunal.

(c) Income Tax Ordinance (XLIX of 2001)‑‑‑

‑‑‑‑Ss. 210, 239(1), 239(2), .2(13) & 2(65)-‑‑Delegation‑‑‑Under the Income Tax Ordinance, 2001, the power of Inspecting Additional Commissioner in terms of the Income Tax Ordinance, 1979 lies with the Commissioner of Income Tax who may specifically delegate this power to the Additional Commissioner under S.210 of the Income Tax Ordinance, 2001 or exercise the same himself.

Allied Motors Ltd. v. Commissioner of Income‑tax 2004 PTD 1173 rel.

Bashir Ahmad Shad, DR for Appellant.

Sajid Ijaz Hotiana for Respondent.

Date of hearing: 18th September, 2004.

JUDGMENT

TAUQIR AFZAL MALIK (JUDICIAL MEMBER). ‑‑‑These are two cross appeals, one by the assessee and the other by the Revenue against the order of CIT(A)‑II, Lahore, dated 31‑5‑2004. The assessee is a private limited company established to set up a power, plant. However, the appellant company could not commence its business operations due to adverse circumstances. The assessee has raised the following grounds of appeal;----

(i) That the order of the learned CIT(A) is bad in law and against the facts of the case on the grounds raised below.

(ii) That the learned CIT(A) has misdirected himself in not g the ground Nos. 4, 6, 8, 9, 10; 11 and 12 of the appeal.

(iii) That the learned CIT(A) was not justified in upholding the break up method for the valuation of shares.

The Revenue has raised the following grounds of appeal:‑‑

(i) That the order of the learned CIT(A) is bad in law and contrary to the facts of the case.

(ii) That the learned CIT(A) was, not justified to give relief on account of surplus on revaluation of assets amounting to Rs.20027787 as the method to arrive at fair market value has been endorsed by the learned ITAT.

Arguments heard. Record perused.

The brief facts of the case are that the assessment in the case of the appellant was originally completed on 28‑9‑2000 when net income of the appellant was assessed as nil. Later on, the concerned JAC, from examination of the record discovered that appellant had purchased 3,400,000 shares of Messrs Escorts Pakistan Limited (EPL) at the face value of Rs.10 per share. He noted that the fair market value of the said shares on the date when these changed hands, was more than their face value. After examining the balance sheet of Messrs EPL he concluded that break up value of a share having the face value of Rs.10 was actually Rs. 16.32 which was arrived at by clubbing together the paid up capital (Rs.40,000,000), un-appropriated profit (Rs.5,262,463) and surplus on revaluation of fixed assets (Rs 20,027,787) and dividing the sum total of Rs.65,290,250 by the number of shares i.e. 4,000,000. The difference between the two values was, according to the JAC, chargeable to tax in terms of, section 12(12) .of the now repealed Income Tax Ordinance, 1979 (the repealed Ordinance) The appellant was properly confronted on the issue, however, the submission of the appellant assessee were not totally accepted an the concerned IAC cancelled the assessment with the specific observafi6n that in this case further inquire was needed to arrive at the correct fair market value of the asset particularly with reference to subsection (3) of section 29 of the repealed The appellant/assessee filed an appeal against the order under section 66A before the learned Income Tax Appellate Tribunal, Lahore Bench, Lahore (ITAT) vide ITA No. 2138/LB/2002, which was dismissed vide Tribunal's judgment (Assessment year 1999‑2000), dated 22‑7‑2003. After dismissal of the appeal the concerned Assessing Officer initiated the reassessment proceedings; and after issuing a notice under section 62 and obtaining the reply of the assessee passed the assessment order by adopting the per share fair market price at 8.16.32 per share in terms of clause (b) 'of subsection (3) of section 29. The appellant/ assessee assailed this order before the CIT(A) on the following grounds:‑‑ .

(1) That the impugned assessment order .is bad in law and against the facts of the case.

(2) That the impugned assessment order is replete with contradictions arid misstatements.

(3) That the impugned assessment order reflects incorrect appreciation of facts and misapplication of law.

(4) That the impugned assessment order has been passed in violation of the directions issued by the learned Inspecting Additional Commissioner, Range‑II, Companies Zone‑II, Lahore in his order passed under section 66A of the repealed Income Tax Ordinance, 1979.

(5) That the impugned assessment order has been passed in a mechanical fashion and without any application of mind.

(6) That the learned Assessing Officer has failed to consider the reply of the appellant, dated 30‑8‑2003 furnished in reply to the notice under section 62 of the repealed Income Tax Ordinance, 1979.

(7) That the learned Assessing Officer has failed to disclose the alleged "efforts" made by him to determine the fair market value of shares under section 29(3)(a).

(8) That the determination of the value of shares of Messrs Escorts Pakistan Limited at Rs.16.32 per share is without any basis.

(9) That while determining the value of shares at Rs.16.32 per share the learned Assessing Officer has failed to give effect to the Circular No. 14 of 1992.

(10) That the learned Additional Commissioner Range‑II, Companies Zone‑II was not competent to grant approval to the Assessing Officer in terms of section 29(3)(b) of the repealed Income Tax Ordinance, 1979.

(11) That notwithstanding the ground No. 10, the approval has been granted without considering the letter and spirit of section 29(3)(b) of the repealed Income Tax Ordinance, 1979.

(12) That the Assessing Officer was not justified to make the addition under section 12(12) read with section 29(3) of the repealed Ordinance after accepting the reply of the appellant/assessee in response to the notice under section 62. (This was filed as an additional ground).

The learned CIT(A) accepted the appeal of the appellant/assessee only to the extent that the Assessing Officer, while working out the fair market value of the shares, was not competent to take into consideration the surplus on revaluation of assets amounting to Rs.20,027,787 and as such reduced the value per. share from Rs.16.32 to Rs.11.32. .Both the assessee as well as the Revenue felt aggrieved of the order of the learned CIT(A) and thus are in their respective appeals before us. Both the appeals are disposed of as under:

The main grievance of the assessee is the ground Nos. 4, 6, 8, 9, 10, 11 and 12 of its appeal have not been adjudicated by the learned CIT(A). TireAR of the assessee contested the treatment meted out to him. The main thrust of the learned counsel was on the non‑adjudication of ground Nos. 9 and 10 of its appeal, which were as under:

"That while determining the value of shares at Rs.16.32 per share the learned Assessing Officer has failed to give effect to the Circular No. 14 of 1992.

That the learned Additional Commissioner Range‑II, Companies Zone‑II was not competent to grant approval to the Assessing Officer in terms of section 29(3)(b) of the repealed Income Tax Ordinance, 1979."

While arguing the ground No.9 above the learned counsel has submitted that when it comes to finding the fair market value of stocks and shares for the purpose of section 12(12) the Assessing Officer has not jurisdiction to make the assessment of fair market value of shares in case of dispute between the assessee and the Department. He further elaborated that when the, phrase "or stock and shares" was omitted from section 12(12) through Finance Act, 1992 there was a commotion among the business community and they apprehended wanton and arbitrary exercise of jurisdiction under this provision of law on the part of Assessing Officers. To allay the ‑fears of the taxpayer the Central Board of Revenue explained the parameters of exercise of jurisdiction under this provision vide Circular No.14 of 1992, dated 4‑5‑1992. The extract of relevant portion of the said Circular is reproduced below:‑‑

"Subsection (12) of section 12 has been amended to the effect that stocks and shares have also been brought at par with other assets in the context of determination of their transfer value on the basis of fair market price. Now, if shares and stocks are found to have been transferred at less than the fair market price, the difference will be treated as deemed income in the hands of the purchaser. In the case of companies quoted on the stock exchange, price of share in any sale through a stock exchange would be accepted. However, 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 makes it obligatory on the Department that if it wants to dispute the declared value of shares in case of an unquoted company it has first to prove that the declared value of shares is "extremely low" and then it has to appoint a valuer under section 4 of the Income Tax Ordinance, 1979 to determine the "fair market value" ‑of the disputed shares. Of course, after the receipt of the report of valuer both the assessee as well as the Department can dispute the same on legal as well as factual grounds. The above Circular 14 of 1992, dated 4‑5‑1992 is squarely applicable in this case as being beneficial to the assessee and also not in conflict with any of the statutory provisions. In support of his contention that the Circular was binding on the Assessing Officer the learned counsel has first referred to the judgment of the Hon'ble Supreme Court of Pakistan in the case of Central Insurance Company v. C.B.R. reported as 1993 SCMR 1232. While examining the authority of the Central Board of Revenue in interpreting any law and provision of section 8 of the late Income Tax Ordinance, 1979 the apex Court was pleased to observe:‑‑‑

"It is evident from the above provisions that though the Central Board of Revenue has administrative control over the functionaries discharging their functions under the Ordinance, but it does not figure in the hierarchy of the forums provided for adjudication of the assessee's liability as to the tax. In this view of the matter, any interpretation placed by the Central Board of Revenue on statutory provisions cannot be treated as a pronouncement by forum competent to adjudicate upon such a question judicially or quasi‑judicially. We may point out that the Central Board of Revenue cannot issue any administrative direction of the nature, which may interfere with the judicial or quasi‑judicial functions entrusted to the various functionaries under statute. The instructions and directions of the Central Board of Revenue are binding on the functionaries discharging their functions under the Ordinance in view of section 8 so long as they are confined to administrative matters. The interpretation of any, provisions of the Ordinance can be rendered by the hierarchy of the forums provided for under the above provisions of the Ordinance, namely, the Income‑tax Officer, Appellate Assistant Commissioner, Appellate Tribunal, the High Court and this Court, and not by the Central Board of Revenue. In this view of the matter; the interpretation placed by the Central Board of Revenue on the relevant provisions of the Ordinance in the Circular, can be treated as administrative interpretation and not judicial interpretation."

Thereafter the learned counsel referred to the judgment of the Hon'ble Karachi High Court in the case of Commissioner of Income Tax v. Muslim Commercial Bank Ltd. reported as 2002 PTD 720: After referring to the above judgment of the Hon'ble apex Court It was concluded that:

"Respectfully following the dictum laid down by the Hon'ble Supreme Court, in 1993 SCMR 1232 the considered opinion that the beneficial view taken by the C.B.R. which is not patently violative of any statutory enactment but is merely aimed at mitigating the rigours of law or implementing the law keeping in view, the pragmatic considerations, requires all respect and is binding on the functionaries employed in the execution of Ordinance, including the Assessing Officer while involved in the assessment proceedings. The C.B.R. is the apex administrative authority in the tax administration of the Federation, and thus, occupies very important position. The C.B.R. by virtue of the position occupied by it and the duties assigned to it, is not only supposed to implement and execute the revenue laws of the Federation and to supervise the tax administration but is further supposed to oversee and watch that the law is justly and property applied and implemented. In performance of this justification the C. B. R. is empowered .to issue clarification, circulars and guidelines containing orders, instructions and directions, which are of binding nature. In order to maintain better discipline the subordinate administrative officers should not venture to circumvent or flout the instructions/directions of the C.B.R."

Elaborating further his arguments on this point, the learned counsel has ‑submitted that the above arguments were duly taken by the assessee before the Assessing Officer, during the assessment proceedings. The learned counsel has provided us copies of his reply, dated 30‑8‑2003 filed in response to the notice under section 62 of tile repealed Ordinance. On pages 17 to 21 of the reply identical arguments were raised, however, the Assessing Officer did not bother to take stock of the same. He rejected this contention of the assessee by stating on page 9 of the impugned assessment order that "the learned ITAT in it judgment in I.T.A. No. 2138/LB of 2001 has decided this issue (along with other issues) against the assessee", however, a collective reading of the judgments of this Tribunal, in I.T.A.' No. 2138/LB of 2002 and R.A. No.582/LB of 2003 shows that the actual finding is exactly opposite of it i.e. that while disposing off the question of law proposed by the assessee on this issue this Tribunal categorically stated that it had never stated that the benefit of the Circular No. 14 of 1992 was not available to the assessee rather it had only held that while determining the jurisdiction of the Inspecting Additional Commissioner under section 66A the Circular was not relevant. Therefore, we are of the considered view that the appellant/ assesssee was fully entitled to the benefit of the Circular No. 14 of 1992; and that no addition could be made in the income of the assessee on account of the alleged fair market value of the shares being higher than the actual value of transaction as declared without first establishing that the declared value was "extremely low" as compared with the actual fair market value and then getting the shares evaluated through an independent valuer appointed in terms of section 4 of the repealed Income Tax Ordinance, 1979.

The learned AR of the assessee further that the alleged fair market value of the shares has been determined with the approval of the Additional Commissioner Range‑II, Companies Zone‑II, Lahore who was not competent to grant this approval. The actual authority who had the jurisdiction to grant this approval was the Commissioner of Income Tart B Companies Zone‑II, Lahore, therefore, the determination of the fair market value has been done without the mandatory statutory approval of the concerned authority and as such the same is illegal and that since the .valuation has been made without the statutory approval of the concerned, authority no addition could be made under section 12(12) of the Ordinance. Elaborating this issue further the learned counsel for the appellant/assessee further submitted that under the repealed Ordinance the power of assessment and approval for various additions was statutory vested in designated Income Tax Authorities. For example the power of assessment was vested in the Deputy Commissioner of Income Tax, the power of cancellation for amendment of assessment and approval for various additions was statutory vested in designated Income Tax Authorities. For example the power of assessment was vested in the Deputy Commissioner of Income Tax; the power of cancellation or amendment of assessment under section 66A was vested in the Inspecting Additional Commissioner (IAC); and 'the power of approval of estimation of income and determination of fair market value etc. for the purposes of sections 13 and 29 (to give a few examples) was also vested in the IAC. However, with the promulgation of the Income Tax Ordinance, 2001 w.e.f 1‑7‑2002 all the powers of assessment of income as well as various statutory approvals have been vested in the Zonal Commissioner of Income Tax who may now either himself exercise the power or delegate the same to any of his subordinate authority under section 210 of the new Ordinance. Thereafter the learned counsel for the assessee referred to subsections (1) and (2) of section 239 of the new Ordinance. Subsection (1) says that subject to subsection (2) the assessment in respect of any income year ending on or before the 30th day of June, 2002, the provisions of the repealed Ordinance would apply so far‑ as computation of total income and tax payable thereon is concerned as if the new Ordinance had not come into force; whereas the subsection (2) says that the assessment referred to in subsection (1) shall be made by an income‑tax authority which is competent under the new Ordinance to make an assessment in respect of a tax year eliding on any date after the 30th day of June, 2002. Thus a cumulative reading of the two subsections makes it crystal clear that assessments in respect of assessment years ending on any date on or before 30th June., 2002 shall be made by an income‑tax authority which is competent to make assessment in respect of a tax year ending on any date after the 30th of June, 2002 but in accordance with the law applicable to the assessment years ending on any date on or before the 30th of June, 2002.

The concerned assessment year in the case of the appellant is the assessment year, 1999‑2000 i.e. it is an assessment year ending before the 30th day of June, 2002; and the assessment has been made after the 30th of June, 2002.i.e. the assessment was to be made by an income‑tax authority which was competent to make assessment with respect to a tax year ending after the 30th day of, June, 2002; thus in this case both the subsections (1) and (2) of section 239 are applicable. Thus insofar as the provisions of assessment are concerned, the same have been rightly applied in terms of subsection (1); however, the provision of subsection (2) has not been followed insofar as the approval for estimation of fair market value in terms of section 29 which was a part of the process of assessment has not been given by the competent authority which was the Commissioner of Income‑tax. In support of this contention the learned counsel has relied heavily on the judgment of the Hon'ble Karachi High Court in the case of Allied Motors Ltd. v. Commissioner of Income Tax reported as 2004 PTD 1173 wherein after exhaustively referring to and discussing clauses (13) and (65) of section 2, section 210 and subsections (1) and (2) of section 239 of the new Ordinance the Hon'ble Court has categorically held that under the new dispensation the power of IAC in terms of the repealed Ordinance lies with the Commissioner of Income Tax who may specifically delegate this power to the Additional Commissioner under section 210 or exercises the same himself.

It is an admitted position in this case that the approval in terms of section 29 of the repealed Ordinance was given by the Additional Commissioner of Income Tax Range‑II, Companies. Zone‑II, Lahore without any delegation of this specific power under section 210.

In view of the above discussion and argument put forth by the learned counsel and case‑laws cited supra, we have no hesitation in holding that the fair market value of the shares has been determined without the mandatory approval by the Inspecting Additional Commissioner, which renders the estimation without jurisdiction and unlawful. Accordingly, the addition under section 12(12) made by the Assessing Officer is hereby deleted.

The Department .contention with reference to the revaluation of assets has already been adjudicated in the course of the decision of the assessee appeal and hence the issue has already been dealt with. Consequently the department's appeal in the case is hereby rejected.

As the appeal has been decided on the legal grounds therefore technical grounds need not to be discussed. Resultantly, the appeal filed by the assessee succeeds and that of the Department is hereby rejected

C.M.A./327/Tax (Trib.)Appeal accepted.