COMMISSIONER OF INCOME TAX, ZONE-B, KARACHI VS Messrs OLYMPIA POULTRY FARMS, 2006 PTD-KARACHI-HIGH-COURT-SINDH 1061 (2006)

Income Tax Ordinance (XXX1 of 1979)---

----S.55(1) & (2)---Income exempted from tax---Filing of nil return---Assessee was engaged in the business of poultry farming and filed income tax return showing nil income---Assessing officer issued notices under S.61 9of Income Tax Ordinance, 1979, and charged tax on interest income---Appeal against the order of assessing officer was dismissed---Appeal before Income Tax Appellate Tribunal was disposed of in the terms that a person deriving exempt income was not required to file the return of total income and if such return was filed it would not be a valid return and should not give jurisdiction to assessing officer to initiate assessment proceedings on the basis thereof---Validity---Income Tax Appellate Tribunal, while deciding the provisions contained in S.55 of Income Tax Ordinance, 1979, had committed an error in observing that under S.55 of Income Tax Ordinance, 1979, a person whose income exceeded the maximum amount which was not chargeable to tax was required to file his return in accordance with the provisions of S.55(2) of Income Tax Ordinance, 1979---Return of total income was. to be filed under S.55 (1) and not under S.55 (2) of Income Tax Ordinance, 1979---Exempt income merely enjoyed immunity from payment of tax and not the chargeability of tax---No provision in Income Tax Ordinance, 1979, existed which could make the payment of tax a condition precedent for filing of the return of total income---Only condition was that a person whose total income had exceeded the maximum amount which was not chargeable to tax under Income Tax Ordinance, 1979, was required to file the return---Exemption pre-supposed the liability and merely granted immunity from payment of tax---Income Tax Appellate Tribunal was not correct in holding that a person deriving exempt income was not required to file the return of total income and if such return was filed, it would not be a valid return and should not give jurisdiction to assessing officer to initiate assessment proceedings on the basis thereof---Question referred to High Court was answered in negative---Reference was dismissed accordingly.

CIT v. Ranchodas Karsondas (1959) 36 ITR 569 and Commissioner of Agricultural Income Tax v. Sultan Ali (1956) 30 ITR 439 ref.

Al-Samrez Enterprises v. The Federation of Pakistan 1986 SCMR 1917 fol.

Jawaid Farooqi for Applicant.

Nemo for Respondent.

Date of hearing: 14th September, 2005.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---The learned Income Tax Appellate Tribunal Karachi has referred the following question of law for our opinion.

"Whether in the facts and circumstances of this appeal the Income Tax Appellate Tribunal was legally justified in holding that Income Tax Officer had no valid returns before him to proceed under sections 61 and 62 of the Income Tax Ordinance, 1979 as the declared income was exempt from tax and should have taken resort to section 56 or 65 of the Income Tax Ordinance, 1979 whichever was applicable."

2. The relevant facts giving rise to the above question are that the respondent is registered firm deriving income from Poultry Farming business. In the assessment years 1980-81, 1981-82 and 1982-83 the respondent earned income at Rs.76,60,517 Rs.27,25,292 and 16, 89,188 respectively. The respondent filed return of total income for these three years showing nil income. The Assessing Officer, issued notices under section 61 of the Income Tax Ordinance (hereinafter referred to as the Ordinance). He charged tax on interest income in all the three assessment years. The first appeal was dismissed by the ASC. The respondent preferred second appeal before the Tribunal and it appears that the learned Tribunal formed a view on its own, with reference to an earlier decision of the Tribunal, that, the real issue has not been considered by the two forums below.

3. The learned Tribunal considered the provisions contained in sections 55,56,57 and 65 of the Ordinance, which read as follows:---

"(55). Return of total income:--(1) Every person

(a) Whose total income or the total income of any other person, in respect of which he is assessable under this Ordinance, for any income year (hereinafter referred to as the `said income year') exceeds the maximum amount which is not chargeable to tax under this Ordinance; or

(b) Who has been charged to tax for any of the four income years immediately preceding the said income year.

Shall furnish a return of his total income or the total income of such other person, as the case may be, for the said income year.

(2) The return of total income under subsection (1) shall be furnished.

(a) in the case of a company, on or ,before the first day of August next following the income year or within fifteen days of the expiry of six months from the end of the income year, whichever is later; and

(b) in every other case:

(i) Where the income year ends at any time between the first day of July and the thirty-first day of December (both days inclusive), on or before the fist day of August next following; and

(ii) in other cases on or before the . first day of October next following.

(3) The Income Tax Officer may, on sufficient cause being shown, extend the date for the delivery of the return so, however, that no extension of time for a period or periods amounting in all to more than fifteen days from the date specified in subsection (2) shall be allowed except with the approval of the Inspecting Assistant Commissioner.

(56) Notice for furnishing return of total income:--

The Income Tax Officer may, at any time by notice in writing, require any person who, in his opinion, is chargeable to tax for any income year to furnish a return of total income for such year within thirty days from the date of service of such notice or such longer or shorter period as may be specified in such notice or as the Income Tax Officer may allow.

(57) Revised return of total income: If any person has not furnish a return of total income as required by, or under, any provision of this Ordinance (hereinafter in this section referred to as `return'), or having furnished a return, discovers any omission or wrong statement therein, he may, without prejudice to any liability incurred by him under any provision of this Ordinance or the repealed Act, furnish a return or a revised return, as the case may be, at any time before the assessment is made.

(65) Additional assessment: (1) If, in any year, for any reason,

(a) any income chargeable to tax under this Ordinance has escaped assessment; or

(b) the total income of assessee has been under assessed or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance; or

(c) the total income of an assessee or the tax payable by him has been assessed or determined under subsection (1) of section 59 and no order of assessment has subsequently been made under this section or any other provision of this Ordinance, the Income Tax Officer may, at any time, subject to the provisions of subsections (2), (3) and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far as may be, apply accordingly:

Provided that the tax shall be charged at the rate or rates applicable to the assessment year for which the assessment is made.

(2) No, proceedings under subsection (1) shall be initiated unless definite information has come into the possession of the Income Tax Officer and he has obtained the previous approval of the Inspecting Assistant Commissioner of Income Tax in writing to do so.

Explanation.---As used in this subsection, "definite information" included information in respect of sales and purchases, made by the assessee, of any goods, and any information regarding acquisition, possession or transfer, by the assessee, of any money, asset or valuable article, or any investment made or expenditure incurred by him.

(3) Notice under subsection (1), in respect of any income year, may be issued within ten years from the end of the assessment year, in which the total income of the said income year was first assessable:

Provided that, where the said notice is issued on or after the first day of July, 1987, this subsection shall have effect as it for the words "ten years" the word "five years" were 'substituted.

(3A) Where a notice under subsection (1) is issued on or after the first day of July, 1982, no order under the subsection shall be made after the expiration of one year from the end of the financial year in which such notice was served.

(4) Nothing contained in subsection (2) shall apply to any such case or class of cases to which clause (c) of subsection (1) applies as may specified by the Central Board of Revenue."

4. The learned Tribunal observed that, from perusal of sub-section (1) (a) of section 55, it appears that a person whose income exceeds the maximum amount which is not chargeable to tax under the Ordinance is required to file his return in accordance with the provisions of subsection (2) of section 55. It was further observed that if a person is required to file his return of income but fails to do so and in the opinion of the Income Tax Officer the income of such person is chargeable to tax or such income has escaped the assessment the Income Tax Officer may require such person to file return under section 56 or 65 of the Ordinance as the case may be. It was further observed that from the perusal of provisions in this behalf, in sections 55, 56 and 65 it emerges that an assessee is not required to file his return voluntarily if his income is not chargeable to tax provided he has not been charged to tax for any of the four years immediately preceding the income year in dispute. It was further observed that the I.T.O., has jurisdiction to issue notices under sections 61 and 62 when a return as required by law is filed by a person.

5. It was also observed that there was no judgment by any superior Court dealing with the issue, whether an Assessing Officer has jurisdiction to frame assessment in such cases where the declare income is wholly exempted under the any of the clause of second Schedule to the Income Tax Ordinance, 1979. It was stated that the Supreme Court of India has adverted to this issue in the case of CIT v. Ranchodas Karsondas (1959) 36 ITR 569. The observation of (Hidayutallah, J) was as follows:--

"In the arguments before us, our attention was drawn to a (leavage of opinion between the Bombay High Court on the one hand and the Calcutta High Court on the other hand. While the Bombay High Court seems to be of the view that the `voluntary' return showing a non-taxable income is still a good return for all purposes under the Act. The Calcutta High Court is of the view that what section 22(1) of the Act requires is a return of taxable income and not a return of income which shows a loss or is below the taxable limit."

"We are unable (and we say this with due respect) to accept the view adumbrated in the Calcutta cases. The contrary view is expressed by the Bombay High Court in the earlier case of Harakhand Makanji and Co. v. CIT, and in the judgment under appeal. That view was accepted by the Madras High Court in P.S. Ramaiyar v. CIT and also in our opinion is the sounder view of the two."

"No doubt, under that circumstances only those persons are required to make return, whose income is above taxable limit, but a person may legitimately consider himself entitled to certain deductions and allowances and yet file a return to be on the safe side. He may show his income and the deductions and allowances he claims. But it may be that on a correct process, his income may be found to be above the exempted limit."

6. After citing the observations from above judgment of the Indian Supreme Court, the learned Tribunal observed that, the issue before the Tribunal was regarding the return of that income which is basically exempted under Second Schedule of the Income Tax Ordinance and cannot be subjected to tax even if it is found exceeding the maximum amount which is not chargeable to income-tax. It was further observed that the precise question would be whether a return of such income would be a return in the eye of law. It was then observed that with greatest respect to the view held by Indian Supreme Court in the case of Ranchodas (supra) and while agreeing that a voluntary return showing a non-taxable income with wrong computation is a good return for all purposes and the Income Tax Officer has the power to levy tax on `correct processing of the return' but still there was force in the view held by Calcutta High Court in the case of Commissioner of Agricultural Income Tax v. Sultan Ali, (1956) 30 ITR 439, wherein it was held that, where the income of an assessee is basically exempted, the I.TO. cannot, in any case, charge any tax on it and if an assessee files such type of return, it cannot be, called a `return' in the eye of law.

7. The learned Tribunal reiterated its views held in earlier orders that unless the I.T.O. is able to subject the exempt income to tax, he would not have jurisdiction to frame assessment regarding it under section 62 of the Income Tax Ordinance. It was held that the law requires an exempt income to be declared in the return but it does not empower the ITO to examine and compute such income or determine admissibility or inadmissibility of expenses or other deductions. Its main purpose appears to be collatoral, i.e., to bring on record such income for purposes of determination of wealth or to charge tax on income, which is generated by it. The learned Tribunal further reiterated its view in an earlier order that if an assessee files return of income showing taxable and exempt income both, the ITO has jurisdiction not only to call for the relevant evidence which proves that it was exempt but also to examine it. This jurisdiction was contingent on the condition that some of the income was chargeable to tax. It was further held that in such case the ITO shall have the jurisdiction to call upon the assessee to show that the exempt income was actually so because of having a valid return before him. The learned Tribunal held that in these cases the ITO had no valid returns before him to proceed with under section 61 or 62 of the Ordinance for the simple reason that the declared income of the assessee was exempt and even if it exceeded the maximum amount which was not chargeable to tax during the relevant assessment year the return was not required to be filed.

8. It appears that the learned Tribunal was conscious of the fact that there may be cases of concealment and suppression of the correct particulars of income chargeable to tax and therefore, proceeded to examine the question as to what was to be done if an assessee has not deliberately declared its taxable income. The learned Tribunal held that in such situation whether assessee declares in the return only that income which is wholly exempt from the tax and does not declare the income chargeable to tax then the Assessing Officer has to make resort to section 56 or 65 of the Income Tax Ordinance as the case may be.

9. We have heard Mr. Jawaid Farooqi, learned counsel for the Department. He has submitted that the issue under consideration subsequently came for consideration before a Full Bench of the Income Tax Appellate Tribunal, comprising one of us (Muhammad Mujeebullah Siddiqui) in the capacity of Chairman of the Tribunal. Mr. S.M. Sibtain, Accountant Member and Mr. Nasim Sikandar, Judicial Member (as his lordship of Lahore High Court then was). In the Full Bench judgment of the Tribunal, it was found that the controversy arose on account of C.B.R. Circular No.21 C. No.13(19) IT-I/1980, dated October 24th 1988 which reads as follows:

"References have been received in the Board seeking clarification regarding the requirements of filing of returns, determination of taxability of income and income itself in case where exemption from income-tax is available under the Second Schedule to the Income Tax Ordinance, 1979.

It is clarified that a person enjoying income exclusively from sources exempt from taxation under the Income Tax Ordinance are not obliged to file a return of income. For example, a person deriving income solely from agriculture, dividend income from listed companies, etc. is not required to file the return of income. Lastly, if such a person files the return declaring exempt income, such return cannot be considered as a return of total income. Hence, no proceedings under the law can be initiated in respect of such return. The income-tax authority, receiving such a return may inform the person furnishing the return that the said return, being invalid, has been filed. However, where such return declares an income which, ex facie, cannot be reasonably attributed to the exempt source declared, it is obviously a case where taxable income (from business etc.) is being declared as exempt income. In such a case, it is the duty of the assessing authority to pass an order determining a reasonable proportion of the declared income to the exempt source and taxing the remaining portion under section 13.

Further, Part-II of IT-11, requires declaration of exempt income. This provision has been specifically made in the form of return to ensure that an assessee having income both form non-exempt and exempt sources discloses the income from both such sources. In such cases, the income-tax authority can determine whether or not the exemption claimed is in adcordanee with law and if so the income declared is reasonable considering the facts of the case. In case, the income declared from exempt source is unreasonably high, the excess can be attributed to income from undisclosed sources taxable under section 13.

The Income Tax Ordinance also provides for exemption of certain income contingent upon fulfilment of certain conditions. For example, claims of exemption under clauses (93) to (108) and (113) to (128) of Part I of the Second Schedule to the Income Tax Ordinance, 1979, are of the type where the issue is to be decided on yearly basis. In such cases, returns are to be called for under section 56 if not filed voluntarily, and examined with reference to the conditions required to be fulfilled. An order must be passed in such cases. Where the assessing authority is of the opinion that the income declared is in excess of what can be reasonably attributed to such exempt source, the excess should be taxed under section 13 of the Income Tax Ordinance, 1979."

10. The Full Bench of the I.T.A.I. framed a question for consideration, whether an income exempt from tax under Second Schedule to the Income Tax Ordinance, was excluded from the concept of total income as defined under subsection (44) of section 2 of the Ordinance. The Full Bench of the Tribunal then referred to the conflicting decisions of various Benches of the Tribunal. The Full Bench of the Tribunal while dealing with the concept of exemption referred to the decision of Hon'ble Supreme Court of Pakistan in Al-Samrez Enterprises v. The Federation of Pakistan, 1986 SCMR 1917, wherein Zafar Hussain Mirza, J, after referring to a passage defining the nature and purpose of exemption in the Corpus Juris Secundum, observed as follows:--

"From the above it would be seen that the concept of exemption presupposes a liability and is a grant or immunity from the payment of duty which would otherwise be attracted in respect of the goods. It has accordingly been held that `non-taxability' and `exemption' are different concepts, the first connotes that the subject was never in the tax net while the letter connotes that it was, but has been permitted to `escape'."

11. After referring to the provisions contained in subsections (24) and (44) of section 2 of the Ordinance, as well as section 14 of the Ordinance, the Full Bench of the Tribunal held that incomes enumerated in Part I of the Second Schedule to the Income Tax Ordinance, 1979, being incomes as defined under subsection (24) of Section 2 are part of the total income as defined under subsection (44) of section 2 liable to charge of tax under sections 9 and 10 of the Income Tax Ordinance. However, since the charge under section 9 as well as under section 10 is subject to the provisions of the Ordinance and since clause (a) of subsection (1) of section 14 and the clauses of Part-I of the Second Schedule provide that incomes enumerated therein shall be exempt from tax, the Assessing Officer, after computing any Or all of such incomes, accruing to an assessee, as his total income, shall allow such incomes, profits and gains to escape tax. It was further held by the Full Bench of the Tribunal that `non-taxability' and `exemption' are different concepts.

12. Reference was made to section 49 of the Ordinance as well in which it is contained that save as otherwise provided in the Ordinance, any allowance admissible or any sum exempt from tax under any provision contained in this Ordinance shall be included in the total income, but may be deducted from such income for the purposes of computing the tax payable by an assessee.

13. Mr. Jawaid Farooqi has submitted that the above Full Bench decision of the Tribunal fully clinches the issue. He has forcefully argued that in the impugned order, the subject matter of this reference, the Tribunal failed to note the distinction between the concepts of 'non-taxability' and `exemption', and therefore, fell in error in holding that an assessee enjoying exempt income is not required. to file the return of income and if any such return is filed it would not be valid in law and that on the basis of such invalid return the Assessing Officer shall have no jurisdiction to initiate assessment proceedings.

14. We have carefully considered the view taken by the learned Tribunal in the order giving rise to the question referred for our opinion, the findings of the Full Bench of the Tribunal relied upon by Mr. Jawaid Farooqi and the provisions contained in section 55 of the Ordinance.

15. We are persuaded to agree with the contention of Mr. Jawaid Farooqi, and fully agree with the findings contained in the Full Bench order of the Tribunal relied upon by him. A perusal of the impugned judgment shows that the learned Tribunal while deciding the provisions contained in section 55 of the Ordinance, has committed a serious error A in observing that under section 55 a person whose income exceeds the maximum amount which is not chargeable to tax under the Ordinance is required to file his return in accordance with the provisions of sub-section (2) of section 55. A perusal of section 55 shows that the return of total income is actually to be filed under subsection (1) of section 55 and A not under subsection (2) of section 55. Subsection (2) of section 55 merely contains that the return of total income under subsection (1) shall be furnished in the case of a company, on or before the first day of August next following the income year or within 15 days of the expiry of six months from the end of the income year, whichever is later and in every other case, where the income year ends at any time between the first day of July and thirty first day of December on or before the first day of August next following and in other cases on or before the first day of October next following. Thus, subsection (2) of section 55 merely prescribes the dates of filing the return of total income. A bare perusal of subsection (2).shows that according to it return of total income shall be furnished under subsection (1). It is specifically provided in sub-section (1) clause (a) of section 55 that the return into be filed in respect of total income exceeding the exempt amount which is not chargeable to tax under this Ordinance. When this provision is read with section 49 it leaves no room for any doubt that an income exempt from the tax under any provision of the Ordinance is to be included in the total income. A perusal of section 14 of the Income Tax shows that, income or classes of incomes, or persons or classes of persons, enumerated therein, shall be' exempt from tax, subject to the conditions and to the extent specified therein; or shall be liable to tax at such rate which are less than the rate specified in the first schedule, as are specified therein; or allow a reduction in tax liability, subject to the conditions and to the extent specified therein; or exempt from the operation of the provisions of the Ordinance, subject to the conditions and to the extent specified therein. The assessment years under the consideration are 1980-81 to 1982-83 and a proviso was added to section 14 of the Ordinance by Finance Act, 1988, which is in the nature of clarification. It provides that where any income which is exempt from tax under any provision of the Second Schedule, such income, as may be specified in the said schedule and subject to such conditions as may be specified therein, shall be included in the total income, so however, that the tax shall not be payable in respect of such income. Even if this provision is excluded from consideration, which in our humble opinion was not necessary to be inserted in the Ordinance on account of the provisions contained in section 49, which has already been referred to earlier, the exempt income mere enjoys immunity from payment of tax, and not the chargeability of taxability. There is no provision in the Ordinance, which makes the payment of tax, a condition precedent for filing of the return of total income. The only condition is that a person whose total income exceeds the maximum amount which is not chargeable to tax under this Ordinance is required to file the return. The Hon'ble Supreme Court has already held in Al-Samrez case (supra) that exemption pre-supposes the liability and merely grants immunity from payment of tax. Respectfully following the dictum laid down by the Hon'ble Supreme Court, we are of the opinion that the Tribunal was not correct in holding that a person deriving exempt income is not required to file the return of total income, and if such return is filed it would not be a valid return and shall not given jurisdiction to the Assessing Officer to initiate assessment proceedings on the basis thereof.

16. For the foregoing reasons, the questions referred to us is answered in negative.

17. A copy of this judgment under the signature and seal of the Registrar of this Court be sent to the ITAT,. who shall pass the order as is necessary to dispose of this case conformably to this judgment.

M.H./C-6/K???????????????????????????????????????????????????????????????????????????????????????? Reference dismissed.