Messrs SHADMAN COTTON MILLS LTD. through Director VS COMMISSIONER OF INCOME TAX, COMPANIES-I, KARACHI and 2 others, 2006 PTD-KARACHI-HIGH-COURT-SINDH 2590 (2006)

Income Tax Ordinance (XXX1 of 1979)---

---Ss. 66-A & 156---Revision and rectification of assessment order---Scope---Where assessment order was made in conformity with prevailing view of law and consistent practice of department, but subsequently legal view was changed on account of interpretation of law by appellate or superior Court, then such wrong committed would not be treated mistake apparent on record, but would be an error of judgment rectifiable by recourse to revisional jurisdiction under S.66-A of Income Tax Ordinance, 1979--Rectification of such error of judgment by Assessing Officer himself under S.156 of Ordinance, 1979 would amount to review of order, which jurisdiction was not available to him under Income Tax Ordinance, 1979---Where prevailing view of law on account of appellate decision or interpretation by superior Courts was not applied/acted upon by Assessing Officer deliberately or on account of ignorance or as a result of inadvertence, then same would be a case of mistake apparent on record rectifiable by himself under S.156 Income Tax Ordinance, 1979---Principles.

Khalid Adamjee v. Commissioner of Income Tax (1983) 48 Tax 56 fol.

1992 PTD 570(S.C. Pak.); (1959) 36 ITR 350 (S.C.); (1961) 41 ITR 732 (S.C.); (1970) 78 ITR 26 (S.C.) and 1998 PTD 147 (H.C. Kar.) distinguished.

Rehan Hassan Naqvi and Ms. Lubna Pervaiz for Appellants.

Muhammad Fareed for Respondent.

Date of hearing: 10th August, 2006.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---This appeal is directed against the judgment, dated 24-5-1999 passed by the learned Income Tax Appellate Tribunal Karachi (hereinafter referred to as the Tribunal) in I.T.As. Nos. 879 and 880/KB of 1999 (Assessment years 1994-95 and 1995-96).

The appellant has proposed the following questions of law for our consideration:

(1) Whether the learned Income Tax Appellate Tribunal was right to hold that the original order passed by the Deputy Commissioner of Income Tax under section 62 of Income Tax Ordinance, 1979 allowing proration of all expenses including freight expenses had not recorded any finding on the issue and was not a conscious decision and therefore there arises no question of change of opinion and thus provision of section 156 of Income Tax Ordinance, 1979 could be invoked?

(2) Whether the learned Income Tax Appellate Tribunal was legally justified to say that the ratio of decisions 1992 PTD 570 (SC Pak) relied upon by the authorized representative of the appellant were not applicable to the facts of the case.

(3) Whether the learned Income Tax Appellate Tribunal could hold that the Deputy Commissioner of Income Tax has not altered the specific finding of his predecessor or resolved a disputed matter but rectified a mistake committed by his predecessor about which there cannot be two opinions for any valid reasons and therefore it is beyond the ambit of section 156 of the Income Tax Ordinance, 1979?

(4) Whether the learned Income Tax Appellate Tribunal through the M.A. (Rect) Nos. 421 and 422/KB of 1998-99 (Assessment years 1994-95 and 1995-96, dated 28-6-1999 has committed an error in law by resorting to cases of Indian jurisdiction reported as (1959) 36 ITR 350. (S.C.), (1961) 41 ITR 732 (S.C.) and (1970) 78 ITR 26 (S.C.) in the presence of our Hon'ble Supreme Court and High Court decisions reported as 1992 PTD 570 (S.C. Pak) and 1998 PTD 147 (H.C. Kar.) to affirm the action taken under section 156 of the Income Tax Ordinance, 1979 by the successor Assessing Officer?

A perusal of the above questions shows that the question No.4, does not arise out of the order, dated 24-5-1999. It emanates from the order, dated 28-6-1999 passed on rectification application submitted by the appellant before the learned Tribunal. Question No.4 therefore, does not require any consideration. So far, question Nos. 1, 2 and 3 are concerned they are directed to a single question of law pertaining to the legality of the order passed by the learned Tribunal, vacating the order of learned CIT(A) and restoring the order of the DCIT passed under section 156 of the Income Tax Ordinance, 1979. In these circumstances the following question of law requires our consideration:

Question of law

Whether in the facts and circumstances of the case the Tribunal was right in vacating the order of CIT(A) and up-holding/resorting the order of DCIT rectifying the assessment orders for the assessment years 1994-95 and 1995-96, under section 156 of the Income Tax Ordinance, 1979.

The relevant facts giving rise to the above question of law are that the appellant a Public Limited Company, engaged in the manufacturing and sale of yarn, filed its return of total income for the assessment years 1994-95 and 1995-96, which were completed under section 62 of the Income Tax Ordinance, 1979, on 25-2-1995 and 29-6-1996 respectively. The trading results were accepted and the expenses in the profit and loss account were computed on proration basis as per past practice. In the assessment year 1994-95 the Assessing Officer gave finding in this behalf as follows:

"Total export sales of the assessee amount to Rs.463,492,425 Export Sales subject to tax under section 80-CC amount to Rs.269,260,367 and other sales of Rs.194,232,357 the other sales are 41.90% of the total sales. All the expenses and gross profit to other sales is allocated at 41.90%."

Likewise in the Assessment year 1995-96, the Assessing Officer recorded finding as under:--

"Total sale of the assessee amount to Rs.850,474,798 Export sales subject to tax under section 80cc amount to Rs.247,385,307 and other sales of Taxable Unit Nos.1 and 2 Rs.303,084,928, the other sales are 47.17% of the total sales. All the expenses and gross profit to other sales is allocated at 47.17%."

However, on 2-6-1998 the Assessing Officer issued a common notice under section 156 of the Income Tax Ordinance, 1979. It is stated in the rectified assessment orders which are the subject-matter of this appeal, that on perusal of case record it was noted that freight and loading expenses (Export) were not accounted for in the assessment order under section 62 in the light of provisions of section 80-CC(2) of Income Tax Ordinance, 1979, as upheld by the appellate authority. For the sake of convenience the show-cause notice is reproduced below:

"Sub: Show-cause notice under section 156 I. Tax Ordinance, 1979 Asstt Years 1993-94, 1994-95 and 1995-96

Please refer to earlier case proceedings, your attention is invited to note No.23 of your accounts where in your claim of freight and loading (export) is as under:--

You would appreciate that above mentioned expenses exclusively pertain to your export sales and are not allowable in view of section 80CC(2) of Income Tax Ordinance, 1979, such treatment has been up-held by the CIT(A) VI vide Order No.161/A6, dated 30-4-1997 of NTN 0698094 and Orders Nos. 551 and 663 of 1997, dated 22-1-1997 of NTN 3350126, as also mentioned on page 5 of your assessment order under sections 62/80CC, dated 2-5-1998 for the assessment year 1997-98.

If such disallowances are made, the revised position of your income would be as under:

You are requested to explain with evidence, within three days of receipt of this letter/notice, as to why your Asstt. Order should not be so rectified under section 156 of Income Tax Ordinance, 1979."

The appellant filed explanation contending that the intended rectification was beyond the scope of section 156.

The Assessing Officer did not accept the contention and held that in the two assessment years under consideration the provisions of section 80CC(2) were not considered as regards the expenditure. As a result, the computation of income for the two assessment years were defective, inasmuch as, the freight expenses (Export) which were exclusively incurred for exports-sales, .were wrongly allowed as a deduction to the extent of local sales. The Assessing Officer held that the earlier treatments given by the Assessing Officers were defective as there was mistake apparent from the record and he consequently, made rectification whereby the expenses allowed were curtailed and taxable liability was enhanced.

Being aggrieved the appellant preferred first appeal before the learned CIT(A) contending that the Assessing Officer has acted beyond the jurisdiction vested in him under section 156 of the Income Tax Ordinance, 1979. The learned CIT(A) accepted the contention and held that the notice for the Assessment year 1994-95 was barred by time, while rectification made in the Assessment year 1995-96 was not sustainable in law. The learned CIT(A) held that it was not a mistake apparent on record and was an error of judgment which could be revised by IAC only under section 66-A of the Income Tax Ordinance, 1979. The learned CIT(A) held as follows:--

"The matter has been considered and I agree with the learned A.R's arguments against invocation of the provisions of section 156 in respect of the basis of allocation and proration of business expenses against the income assessable under section 8000 and normal law. Apart from the question as to whether such allocation was in accordance with the method prescribed by the Board through its various Circulars on the issue, or not, the important fact is that it was made by the DCIT's predecessor after due enquiry and exercise of discretion. Therefore, even if there was any mistake involved in it which was prejudicial to the interest of Revenue, it was only the concerned I.A.C. who was the legally empowered authority to take cognizance of the matter and initiate action under section 66A. The succeeding DCIT had no business to sit in judgment over his predecessor. In any case, no mistake `floating on the face of the record, having been pointed out. I find little justification for passage of the impugned orders in this case. This is without prejudice to the fact that the proceedings for Asst. year 1994-95 were ab initio void and illegitimate in view of the time limit for action under section 156 prescribed under section 156(4)."

Being aggrieved with the above order, the respondent/Department filed appeal before the learned Income Tax Appellate Tribunal, who vacated the order passed by the learned CIT(A) and restored the order of DCIT rectifying the original assessment order. The learned Tribunal further held that the notice for the Assessment year 1994-95 was within period of limitation. The finding of the learned Tribunal on the point of limitation has not been assailed in this appeal and therefore, the finding in that behalf requires no consideration.

It was contended on behalf of Department before the learned CIT(A) that the mistake rectified was apparent from record and floating at surface. After the introduction of Presumptive Tax Regime income assessable under section 62 was separately calculated and expenses pertaining to the income/receipts covered by the Presumptive Tax Regime has to be deducted from the total income for the purpose of determining the total income under section 62 and expenses were not to be allowed on proration basis. The expenses incurred for earning the presumptive income were not admissible and were to be excluded. The allowing of expenses on proration basis was therefore defective and rightly corrected by DCIT which did not amount to change of opinion.

The order of the learned CIT(A) was supported by the learned counsel for the assessee.

The learned Tribunal agreed with the contention of departmental representative and held that the DCIT had not altered the specific finding of his predecessor and had not resolved a disputed matter. He has only rectified a mistake committed by his predecessor about which there could not be two opinion for any valid reason. The learned members of the Tribunal observed that the income assessable under section 62 and Presumptive Tax Regime are separate blocks of income and has to be calculated separately. It was further observed that all expenses pertaining to the Presumptive Tax Regime were not to be considered against other income. The learned Tribunal came to the conclusion that, "The DCIT framing the original assessment as is apparent from the order inadvertently prorated freight expenses incurred on exports and in the process allowed a part thereof against income assessable under section 62. He did not record proper reason for his doing so, which could be taken to be a conscious decision falling beyond the ambit of section 156 to be altered. We therefore, vacate the orders of CIT(A) and restore that of the DCIT."

We have heard learned Advocates for the parties.

Messrs Rehan Hassan Naqvi and Lubna Pervaiz, learned counsel for the appellant have contended that on account of instructions issued by the C.B.R., after introduction of Presumptive Tax Regime, the expenses in respect of an assessee earning income covered under the Normal Tax Regime as well as under Presumptive Tax Regime were being allowed on proration basis. This was the consistent practice which is evident from the fact that in case of appellant also similar treatment was given in the Assessment years 1993-94, 1994-95 and 1995-96. Subsequently the issue came for consideration before Income Tax Appellate Tribunal, and the correct legal position was propounded by the Tribunal, whereby it was held that after the introduction of Presumptive Tax Regime the income earned under Normal Tax Regime and Presumptive Tax Regime are to be considered as separate block of income and expenses are not to be allowed on proration basis. Neither the Department nor assessment assailed the legal position explained by the Tribunal and thereafter the assessments were made in the light of law expounded by the Tribunal and the earlier assessment orders were revised by the IACs under section 66-A of the Income Tax Ordinance, 1979. The assessment orders pertaining to the appellant were the only exception, where instead of revising the orders under section 66-A by the IAC, resort was made by the Assessing Officer to rectification under section 156 of the Income Tax Ordinance, 1979. Mr. Rehan Hassan Naqvi, has submitted that the learned Tribunal while deciding the appeal has made unnecessary observation about the merits of the case which was not the point for consideration. Mr. Naqvi, has vehemently argued that the point for consideration was whether the wrong committed could be rectified by the Assessing Officer himself by resort to section 156 of the Income Tax Ordinance, 1979 or loss to the Revenue could be retrieved by recourse to section 66-A of the Income Tax Ordinance, 1979, by the IAC holding the assessment orders to be erroneous in law and prejudicial to the interest of Revenue. According to him the learned Tribunal instead of giving finding on the merits, on which, there was no dispute, ought to have given finding on the point of jurisdiction. Mr. Rehan Hassan Naqvi, has submitted that even if an order is correct on merits but is passed by an authority which has no jurisdiction, it would be nullity in law, and this point was missed by the learned Tribunal. Mr. Rehan Hassan Naqvi, has maintained that the two assessment orders under appeal as well as, assessment order for the Assessment year, 1993-94 which was not rectified as the period of limitation provided in law for rectification had expired, were not made out of inadvertence or on account of mistake but were passed in compliance with the directions given by the C.B.R. and after conscious application of mind. He has argued that the orders made deliberately cannot be termed as mistake but such orders are to be treated as a result of error of judgment. In such situation the orders can be modified either by review or revision. Since there is no provision in the Income Tax Ordinance, 1979 conferring power of review, therefore, the order could be corrected under section 66-A only, by the IAC, in exercise of revisional jurisdiction.

On the other hand, Mr. Muhammad Farid, learned counsel for the Department has supported the finding of the learned Tribunal. He has urged that admittedly the assessment orders were not in consonance with the law and according to him the earlier findings in the original assessment orders were neither deliberate nor result of conscious application of mind and therefore they fell within the ambit of "mistake", envisaged under section 156 of the Income Tax Ordinance, 1979. He submitted that the Assessing Officer is empowered to correct all the mistakes of law and facts. According to him, any incorrect order whether suffering from mistake or being erroneous can be corrected by Assessing Officer by way of rectification, meaning thereby, that even if an order is erroneous and prejudicial to the interest of Revenue it can be rectified by the Assessing Officer himself under section 156 of the Income Tax Ordinance, 1979.

Both the learned Advocates have placed reliance on various judgments from Pakistan and Indian jurisdiction in support of their respective contentions.

We have carefully considered the material on record and the contentions raised by the learned Advocates for the parties. We have carefully gone through the ratio of judgments on which the learned Advocates have placed reliance. However, with due deference to the learned Advocates, we are of the opinion that none of the judgments referred to by the learned Advocates require consideration, as the facts and circumstances of the present case and the issue of law, is covered by an earlier judgment of this Court in the case of Khalid Adamjee v. Commissioner of Income Tax, (1983) 48 Tax 56, on which we were able to lay hand on our own.

In the above cited case, following questions of law were referred to this Court:--

(1) Whether in the facts and circumstances of the case the Tribunal was right in upholding the refusal by the Income-tax Officer to rectify the assessment for assessment year 1967-68 under section 35 of the Income Tax Act, 1922?

(2) Whether in the facts and circumstances of the case the dividend income derived by the applicant from tax exempt income of a Company could lawfully be subjected to income-tax?

The admitted facts were that the assessee filed their return of income under the Income Tax Act, 1922, showing therein the dividends received by them from Companies which enjoyed tax holiday under section 15-BB of the Income Tax Act, 1922. No exemption was claimed by the assessees although they were entitled for it. Consequently the Assessing Officer subjected the exempt income to tax. As in the present case, the assessees came to know of the correct legal position from a decision of the Full Bench of Income Tax Appellate Tribunal. The assessees, therefore, submitted rectification applications under section 35 of the Income Tax Act, 1922 (which is analogous to section 156 of the Income Tax Ordinance, 1979) and prayed for exclusion of dividend income from the taxable income. The Income Tax Ordinance rejected the application. The appeals preferred before the Appellate Assistant Commissioner and Tribunal were dso dismissed. The questions cited above were therefore, referred to the High Court, on reference application.

The learned Judges of the Division Bench of this Court observed that the question of exemption from income tax in respect of dividend income received from the Companies enjoying tax holiday was decided by the Lahore High Court and Sindh High Court in favour of assessees. In the light of above legal position that the dividend income was exempted from payment of income tax, the question was examined whether the Tribunal was justified in holding that the assessees failed to make out a case for correction/rectification, under section 35 of the Income Tax Act, 1922.

It was contended on behalf of the assessees before this Court, that once it was decided by the two High Courts that the income was exempt, any finding to the contrary by the ITO amounted to error on record of the assessment and could be corrected by the ITO under section 35 of the Income Tax Act, 1922.

On behalf of Department it was contended that merely because the High Court and Supreme Court have subsequently taken a different view of law in some other cases, is no ground to reopen cases under section 35 of the Act, which were transactions past and closed and were disposed of finally in accordance with the view of law prevailing at that time. It was held by the learned Division Bench of this Court that section 35 of the Income Tax Act, was not analogous to the power conferred on Civil Court under Order XLVII Rule 1, C.P.C. It was held that the power conferred on ITO under section 35 of Income Tax Act to rectify an error or mistake in the assessment or refund order is much wider in scope than the power available to a Civil Court under Order XLVII, Rule 1, C.P.C., while reviewing a judgment or order. It was also held that, therefore, the ITO while rectifying a mistake or error in the assessment or refund order under section 35 of the Income Tax Act need not confine himself to the consideration of only those errors which are apparent on the face of the order but could also refer to the record of the proceedings of the assessment or the refund order as the case may be, to discover the error which is noticed by him or which is pointed out to him by the assessee. After referring several judgments from the Indian jurisdiction, it was held that while rectifying a mistake or error in the assessment order

or of refund, the Income Tax Officer need not confine himself only to the errors which are pointed out in the order but such errors as are pointed out from the proceeding and record of assessment or refund order as the case may be, may also be taken into consideration for correcting or rectifying the assessment or the refund order. It was further held that an error in the assessment resulting from failure to apply indisputable state of law could be corrected by the ITO under section 35 of the Act, provided the mistake or error is apparent from the record of assessment proceedings. It was also held that if ITO failed to give effect to a provision of law as interpreted by the High Court or the Supreme Court at the, time of making of assessment or refund order and such mistake is discoverable from the record and proceeding of assessment or refund order, then such errors could also be corrected by the ITO under section 35 of the Act. It was further held that the above proposition was not applicable to the cases under consideration, as the correction sought by the applicants in these cases in their assessment order was not ascertainable from the proceedings and record of the cases. It was observed that in order to make rectification the ITO had to make further inquiry which could not be done and therefore, the correction sought was not in respect of mistake falling within the scope of section 35 of the Act. In this case it was held that the dividend income derived by the applicants enjoys exemption from payment of Income tax and similarly it was held that it was not a case of rectification. The ratio of above judgment, is two fold, first, that if any inquiry is to be made for the purpose of rectification it does not fall within the purview of section 35 of the Income Tax Act, 1922 which provision was analogous to section 156 of the Income Tax Ordinance, 1979. Secondly, if an assessment order was made in accordance with the view of law prevailing at the time of making the assessment and subsequently the law is interpreted by the Appellate or superior Court taking a contrary view, then it is not a case for rectification of mistake envisaged under section 35 of the Income Tax Act, 1922, which is identical to section 156 of the Income Tax Ordinance, 1979.

Respectfully following the ratio of the above judgments which is binding on us, it is held that if an assessment order is made in conformity with the prevailing view in respect of legal position and subsequently the legal view is changed on account of interpretation of law by the appellate or superior Court, then it cannot be said that it is a case of mistake apparent on record envisaged under section 156 of the Income Tax Ordinance, for the reason that it would not be an assessment order resulting from failure to apply the indisputable state of law. However, if the prevailing view of law on account of appellate decision or interpretation by the superior Courts was not applied/acted upon by the Assessing Officer deliberately or on account of ignorance or as a result of inadvertence, it would be a case of mistake apparent on record which can be corrected by the Assessing Officer under section 156 of the Income Tax Ordinance, 1979. In the first situation, the wrong committed would not be treated mistake apparent on record but an error of judgment which could be rectified in exercise of revisional jurisdiction vested under section 66-A of the Income Tax Ordinance, 1979, and in the case of second situation, it would be a mistake apparent on record amenable to correction by the Assessing Officer himself under section 156 of the Income Tax Ordinance, 1979. If the wrong committed in the first situation is rectified by the Assessing Officer himself it would amount to review of the order which jurisdiction is not available in the Assessing Officer under the Income Tax Ordinance, 1979.

For the foregoing reasons, it is held that in the present case the original assessments were made consciously and deliberately, in accordance with the consistent practice of the Department in consonance with the view prevailing at the relevant time, and thus, it was not mistake apparent from record. The prevailing view at the time of making original assessment orders was found erroneous by the Income Tax Appellate Tribunal subsequently, in other cases and thus, the view taken in the assessment orders were error of judgment which could be corrected by recourse to the revisional jurisdiction under section 66-A of the Income Tax Ordinance, 1979. Consequently, we are of the considered view that the ITO was not justified in rectifying the original assessment orders under section156 of the Income Tax Ordinance, 1979 and the learned CIT(A) rightly cancelled the rectified orders. The learned Tribunal committed error in vacating the order of CIT(A) and restoring the order of rectification made by the Assessing Officer which was not sustainable in law. The result is that the orders passed by the DCIT and learned Tribunal are liable to be vacated which are not sustainable in law. The order passed by the learned CIT(A) is in accordance with the law which requires to be restored. Resultantly the rectified assessment orders are cancelled and the original assessment orders are restored.

Consequent to the above finding, the question of law formulated by us is answered in negative.

A copy of this judgment be sent to the Income Tax Appellate Tribunal under the seal of this. Court and signature of the Registrar to pass such order as are necessary to dispose of the case.

S.A.K./S-58/KQuestion answered.