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

----Ss. 5(1)(c), 116(a) & 136---Appeal to High Court---Imposition of penalty by Additional Commissioner as Special Officer without obtaining statutory permission of Commissioner concerned---Such question neither raised before Tribunal nor ruled upon by it---Effect---Additional Commissioner ought to have obtained approval under S. I 16(a) of Income Tax Ordinance, 1979---Statutory permission to impose penalty was a jurisdictional fact, which could be raised at any time.

Sandal Engineering (Pvt.) Ltd. v. I.A.C. Income Wealth Tax (2001) 83 Tax 551 rel.

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

----S. 136---Appeal to High Court---Effect---Whole of the matter is thrown open on appeal, thus, objection with regard to limitation and jurisdiction could always be taken before the next forum.

(c) Contract Act (IX of 1872)---

----S. 17---Fraud---Connotation---Deception, which does not deceive, is not fraud, rather same is only an attempt.

(d) Fraud---

----Proof---Fraud cannot be presumed, rather same must be proved as a positive act.

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

----Ss. 111 & 119---"Concealment"---Connotation---"Fraud", "deception" and "concealment"--Distinction--Penalty and prosecution for concealment of income---Essential conditions stated.

Concealment is an active act, which operates both in mind as well as in action. It implies pre-existence of ability and opportunity to judge and decide. Besides other things, it is of paramount importance to know that the act employed to deceive is either half open or is totally concealed. A fraud cannot be presumed. It must be proved as a positive act. Generally speaking, in Income Tax proceedings, an act of concealment is perfected and completed, when in any assessment year on the basis of a wrong information supplied or an item of receipt liable to tax is successfully suppressed or income chargeable to tax is not disclosed to the revenue or an illegal deduction is successfully claimed as expenditure incurred. As a rule, a deception, which does no deceive, is not fraud. It is only an attempt. The provisions of section 111 of Income Tax Ordinance, 1979 are unique in the sense that these treated attempt and completed action of concealment alike. Therefore, both attempts as well as active act of concealment are punishable alike. In such situation; when an attempt and completed act of concealment are punishable alike, a penalty may not finally be imposed, unless the revenue is absolutely positive and can prove on record that an attempt was actually made to conceal income. An act of concealment is matured in the form of framing of an assessment, which is traced out in any subsequent year. It is liable to punishment as a completed action of concealment inasmuch as the assessee succeeded in reaping the fruits of the fraud by reducing or diminishing his liability towards revenue. A bona fide claim made may loosely be described as an attempt, but it is never completed action of fraud on the revenue. The introduction of provisions of subsection (2-A) in section 11 by Finance Act, 1988 was an attempt to soften the rigours of the provisions of subsection (1) of that section. The inserted provisions did not succeed in making a clear distinction between an honest claimant, a mere attempt or an actual act of concealment, because the three dividing lines between them are so thin and mostly relates to personal intention of a person or the condition of his mind. A real picture does not emerge till the act crosses the stage of attempt and matures into an active fraud.

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

----S. 111---Penalty for concealment of income, imposition of-- Existence of mens rea on assessee's part not established---Claimed expenses not proved to be a deliberate and wilful attempt on assessee's part to conceal income---Held; mere claim of an expense would not make assessee contumacious, unless proved on record to have persistently been cheating the revenue in previous years and was bent upon to go away with same in year under review---Imposition of penalty in such circumstances was, unjustified.

(g) Income-tax---

----Penalty, imposition of---Power to impose penalty, if discretionary, should not be exercised, unless defaulter was found contumacious-- Principles.

In fiscal statutes, a penalty should not be imposed only for the reason that it is legal to do so, particularly where the Statute vests a discretion in the Revenue Authority. In cases, where imposition of penalty is discretionary, the power so vested may not be exercised, unless the defaulter is found contumacious.

Commissioner of Income-tax v. Miss Aasia, Film Artiste, Lahore 2001 PTD 678 and Additional Commissioner of Income-tax v. Naravandas Ramkishan 1994 PTD 199 rel.

Messrs Abrar Hussain Naqvi and Zia Haider Rizvi for Appellant.

Muhammad Ilyas Khan for Respondents.

Date of hearing: 16th March, 2004.

JUDGMENT

NASIM SIKANDAR, J.--In this further appeal under section 136 of the late Income Tax Ordinance, 1979 following questions of law are stated to have arisen out of the impugned order of the respondent No.1, Income Tax Appellate Tribunal, Lahore Bench, dated 13-1-1999:

(i) Whether on the facts and in the circumstances of the case the ITAT was legally correct to ignore the facts that the Appellate Company had shown the Profit to the tune of Rs.26,14,25,801 and nothing-was concealed intentionally hence cannot be termed a wilful default.

(ii) Whether on the facts and in the circumstances of the case the ITAT was legally correct to treat the claim of Gratuity expense charged to the Computation Chart of income which has actually been made as a concealed income.

(iii) Whether on the fact and in the circumstances of the case the ITAT ignored all the material facts and differences between the concealment and inaccurate particulars and imposed the penalty.

(iv) Whether on the facts and in the circumstances of the case the ITAT was legally correct to reduce the penalty to 125% and remanding back the matter to the Assessing Officer for recalculation of the amount of penalty:

3. The assessee is a Public Limited Company and is engaged in production of Cement. For the assessment year, 1993-94 as against declared Income of Rs.26,14,25,807 an assessment was framed under section 62 of the late Ordinance on 31-3-1996 at total income of Rs.32,95,91,102.

3. After framing of the assessment the Assessing Officer observed that the computation chart filed with the return revealed that gratuity debited to P&L Account on accrual basis amounting to Rs.29,19,572 was added to the net profit and gratuity paid to the employees amounting to Rs.2,11,68,461 was deducted from the net profit. That treatment and disclosure in the accounts was taken as concealment and furnishing inaccurate particulars of income in terms of section 111(1) and 111(2)(b) of the late Ordinance. The reply submitted to the show-cause notice was rejected inter alia for the following reasons:--

"It is factually incorrect that a simple matter of admissibility or non-admissibility has been termed as concealment of income. The facts on the ground are that assessee has claimed an expense of Rs.2,11,68,461 which includes an amount of Rs.1,55,57,884 received by the assessee company, from gratuity fund trust for payments and it was paid by the assessee to the employees out of funds transferred from gratuity fund trust which represented accumulated balance of payments by the assessee to gratuity fund trust from assessment years, 1982-83 to 1992-93 which has already been allowed as expense by the department plus interest earned by gratuity fund trust on the investment of its funds. It is crystal clear from the above facts that assessee wilfully and deliberately claimed the expense of Rs.1,55,57,884 in the computation chart to reduce the profit and eventually to reduce the tax liability. As far as the submission of figures by the company itself is concerned it is submitted that the company submitted the said figures on 19-2-1996 which was after the department had confronted it vide notice under section 62 bearing Nos. 312, dated 27-1-1996 and No. 428, dated 13-2-1996. The above fact proves that department has detected the concealment before submission of the said figures by the assessee."

4. Thereafter the Assessing Officer proceeded to hold that the assessee had been guilty of deliberate, wilful and intentional concealment of income and accordingly imposed a penalty of Rs.1,63,35,778. The Commissioner of Income Tax/Wealth Tax (Appeals) Zone-I Lahore on 26-3-1998 refused to interfere with the penalty so imposed by the Assessing Officer.

5. On further appeal learned Tribunal by way of the impugned order maintained the imposition of penalty of the aforesaid reasons which weighed earlier with the Assessing Officer as well as the First Appellate Authority though its quantum was reduced to 125% as against the imposed rate of 250% of the tax sought to be evaded. The learned members of the Tribunal while addressing to the issue as if the assessee had wilfully furnished inaccurate particulars observed that they had already rejected the contention with regard to the claim of the said expense while hearing the appeal filed by the assessee against the assessment framed under section 62 of the late Ordinance. It was further observed that the case of the assessee was that of a claim of expense which had not been incurred and that the computation chart attached with the return claiming the said expense was not supported by any legal or factual basis. However, as noted above, the alternate plea of the petitioner for reduction was found tenable and, therefore, the aforesaid relief was allowed.

6. Heard the learned counsel for the parties. For the appellant it is inter alia contended that on privatization of the project the assessee continued with the same books of accounts in which the gratuity fund was being charged on accrual basis. Therefore, there was no deliberate attempt on the part of the appellant to conceal income, that the expenses having clearly been mentioned in the computation chart there was no mens rea as the assessee had followed the pattern of accounts arid procedure adopted by the Company in the previous years, and that mere claiming a wrong expense does not amount to concealment as envisaged in subsection (2-A) of section 111 of the late Income Tax Ordinance, 1979. Learned counsel also contends that the impugned order recorded by an Addl. Commissioner though acting as a Special Officer was illegal in view of the provisions of section 5(1)(c) of the late Ordinance inasmuch as he was required to obtain permission to impose penalty from the concerned Commissioner and not from another IAC as was done in this case.

7. Learned counsel for the Revenue on the other hand supports the impugned order. It is started that a Public Limited Company listed on the stock exchange and having the services of Chartered Accountants cannot be believed to have claimed an expense on account of inadvertence which was clearly against the basic principles of accounting. Also refers to the confirmation of that disallowance by the Tribunal is case of the assessment framed under section 62 of the Ordinance. In his view the assessee company took a chance and on being confronted an attempt was made to be persistent in the wrong claim. That fact alone, according to him is sufficient to establish mens rea against the petitioner. Lastly, states that the objection of lack of approval from the Commissioner as against IAC is not available to the petitioner at this stage inasmuch this issue was neither raised before the Tribunal nor it was ruled upon by them. Therefore, according to him that question cannot be said to have arisen out of the order of the Tribunal.

8. Having heard the learned counsel for the parties as far the objection against lack of approval is concerned, we will readily agree that the required approval under section 116(a) ought to have been obtained from the concerned Commissioner of Income Tax as the IAC as special officer made the penalty order. The provisions of section 5(1)(c) are very clear in that regard. The reliance of the learned counsel for the petitioner on a judgment of this Court in re: Sandal Engineering (Pvt.) Ltd. v. I.A.C. Income Wealth Tax 2001 PTD 1467 is, therefore, pertinent and relevant. Since the statutory permission to impose penalty is a jurisdictional fact it can very well be raised at any time. It is correct that in a number of decisions we have held that the appellate jurisdiction of this Court under section 136 of the late Income Tax Ordinance was equivalent to the one of referable jurisdiction under the repealed section 136, yet the fact remains that on appeal whole of the matter is thrown open and the objections with regard to the limitation and jurisdiction can always be taken before the next forum.

9. A concealment is an active act which operates both in mind as well as in action. It implies pre-existence of an ability and opportunity to judge and decide. Besides other things it is of paramount importance to note that the act employed to deceive is either half open, or is totally concealed. A fraud cannot be presumed. It must be proved as a positive act. Generally speaking, in Income Tax proceedings an act of concealment is perfected and completed when in any assessment year on the basis of a wrong information supplied or an item of receipt liable to tax is successfully suppressed or income chargeable to tax is not disclosed to the Revenue or an illegal deduction is successfully claimed as expenditure incurred. As a rule, a deception which does not deceive is not fraud. It is only an attempt. The provisions of section 111 of the late Income Tax Ordinance were unique in the sense that these treated attempt and completed- action of concealment alike. Therefore, both attempt as well as active act of concealment were punishable alike. In such situation, when an attempt and completed act of concealment are punishable alike a penalty may not finally be imposed unless the Revenue is absolutely positive and can prove on record that an attempt was actually made to conceal income.

10. An act of concealment is matured in the form of framing of an assessment which is traced out in any subsequent year. It is liable to punishment as a completed action of concealment inasmuch as the assessee succeeded in reaping the fruits of the fraud by reducing or diminishing his liability towards Revenue. In case of current assessment, however any act of the kind as we have before us in this case, can at best be an attempt. Although, as noted earlier, both attempt as well as the complete act are punished alike, a bona fide claim made may loosely be described as an attempt but it is never completed action of fraud on the Revenue. The introduction of provisions of subsection (2-A) in section 111 by Finance Act, 1988 was an attempt to soften the rigours of the provisions of subsection (1) of that section. The newly inserted provisions did try to distinguish between an honest claim and an attempt to defraud. However, it only ended up with providing for the exception that "unless it is proved that the assessee deliberately, claimed exemption from fax in respect of the aforesaid item of receipt or claimed deduction in respect of such expenditure not actually incurred by him." These provisions, without any doubt were already an implied part of the provisions of subsection (1). The inserted provisions, however apparently did not succeed in making a clear distinction between an honest claimant, a mere attempt or, an actual act of concealment because 'the three dividing lines between them were so thin and mostly related to the personal intention of a: person or the condition of his mind. A real picture does not emerge till the act crosses the stage of attempt and matures into an active fraud. Unfortunately a strong suspicion on the part of the assessee to deceive the Revenue invariably exists in the mind of every tax collector in our system. At times he conceives those kinds of frauds and deceptions which may never have even crossed the imagination of the assessee.

11. As far the merits of the case are concerned, again we will hold that imposition of penalty and its maintenance by CIT (Appeals) as well as the Tribunal was unjustified for the following reasons:--

firstly,the Revenue never succeeded in establishing the existence of mens rea in this case. Admittedly the impugned expense was claimed in bold words and the assessee attempted to support the same from the books, of accounts which were being maintained during the period of the project was with the Federal Government.

The basis on which the Assessing Officer rejected the explanation in response to the show-cause notice, as reproduced above are not open to exception as far the principles of accounting are concerned. However the fact remains that before imposition of penalty, the Assessing Officer must have brought home that the claim of expense was a deliberate and wilful attempt on the part of the assessee to conceal the income. That having not been done the imposition was unjustified;

secondly, it is by now well-settled that in fiscal matters a penalty should not be imposed only for the reason that it is legal to do so. Particularly where the statute vest a discretion in the Revenue Authority;

thirdly, it is also established that in cases where imposition of penalty is discretionary, the power so vested may not be exercised unless the defaulter is found contumacious.

In the case in hand in our opinion though the claimed expense was unjustified in view of the basic principles of accounting, yet mere claim of an expense did not make the assessee contumacious unless it was born out from the record that the assessee had persistently been cheating the Revenue in the previous years and was also bent upon to go away with it in the year under review.

12. The aforesaid principles with regard to the imposition of penalty were recently considered and discussed by this Court in a judgment re: Commissioner of Income Tax v. Miss Aasia Film Artiste, Lahore 2001 PTD 678. While doing so we had benefited from the opinion expressed by their Lordships of the Andhra Pradesh High Court in re: Additional Commissioner of Income Tax v. Naravandas Ramkishan 1994 PTD 199.

13. In view of what has been stated above, our answer to question No.3 is in the positive while questions Nos. 1, 2 and 4 do not need to be answered in the given facts. As a result of our answer to question No.3 the imposition of penalty in the given facts of the case is disapproved.

14 Disposed of.

S.A.K./G-76/LQuestions answered accordingly.