I.T.As. Nos.5441/LB, 5862/LB, 5861/LB of 2002, decided on 31st August, 2006. VS I.T.As. Nos.5441/LB, 5862/LB, 5861/LB of 2002, decided on 31st August, 2006., 2007 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 651 (2006)

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

----Ss. 65 & 59(A)--- Additional assessment---Re-opening of assessment on the basis of under valuation of cost of construction of the house---Assessee contended that Taxation Officer could not reopen the case unless some new material was discovered; and declared cost of construction being reasonable, Taxation Officer could not reopen the case on the change of opinion---Validity---Only basis of reopening the assessment was under valuation of the cost of construction of house and it was not justifiable, as under S.65 of the Income Tax Ordinance, 1979, the additional assessment could be made if any income had been under-assessed or assessed at too low a rate and under S.65(2) of the Income Tax Ordinance, 1979, no proceedings should be initiated unless definite information had come in possession of the Assessing Officer---Assessee through evidence had explained the sources of income and there was no justification to reject the version of the assessee without bringing on record definite information that income had been under-assessed---Order of First Appellate Authority was vacated and additional assessment made by the Taxation Officer was cancelled by the Appellate Tribunal.

1993 PTD 1108 rel.

2002 PTD 912; 2002 PTD (Trib.) 1949; 2002 PTD (Trib.) 129; 1976 33 Tax (285); I.T.A. No.1799/LB of 2001; I.T.A. No.4401/LB of 2002 and 2005 PTD 1795 ref.

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

----S.65---Additional assessment---Definite information---Case was reopened on the basis of information given by assessee himself in returns, which in no way could be said to he `definite information' regarding escaped assessment.

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

--Ss. 13(1)(aa) & I48---Addition---Gift---Rejection of gift on the ground that date of gift and evidence of payments had not been produced and since there was no blood relationship with the assessee, the gift could not be made---Assessee contended that First Appellate Authority was-not justified to set aside the addition made under S.13(1)(aa) of the Income Tax Ordinance, 1979 for re-consideration, as the girt transaction was fully verifiable and authentic in the eyes of law and addition was liable to be deleted---Validity---Donors had sworn affidavits and had appeared before the Taxation Officer and had been examined under 5.148 of the Income Tax Ordinance, 1979 and admittedly they were existing taxpayers---Rejection of version of assessee on flimsy grounds was not justified---For gifts, there was no requirement under the law that gift could be made to the blood relationship only---Donors were men of means and had shown gifts in their respective income tax assessments and there was no valid reason to reject the gifts, as oral gift was as valid as written gift under the Islamic Law and "offer", "acceptance" and "possession" were the only three conditions under the law for performance of gift, which had been fulfilled---Addition was deleted by the Appellate Tribunal in the circumstances.

(d) Income Tax Ordinance (XXX1 of 1979)---

----Ss. 59(4) & 65---Self-assessment---Limitation---Return was filed under Self-Assessment Scheme and no order having been passed before 30-6-1999 as provided under S.59(4) of the Income Tax Ordinance, 1979, order if any later on passed on 1st January, 2000 was nullity in law and superstructure built thereon fell down for want of jurisdiction.

2002 PTD 912 (Trib.) rel.

Khurshid Ahmed for Appellant (in I.T.A. No.5441/LB of 2002).

Nemo for Respondent (in I.T.A. No.5441/LB of 2002).

Nemo for Appellant (in I.T.As. Nos.5862/LB and 5861/LB of 2002).

Khurshid Ahmed for Respondent (in I.T.As. Nos.5862/LB and 5861/LB of 2002).

ORDER

Out of these three appeals, two are the cross appeals for the assessment year 1998-99, while the third appeal for the assessment year 1995-96 has been filed by the Department against the consolidated impugned order of the learned CIT(A), dated 13-9-2002 for the two assessment years i.e. 1995-96 and 1998-99.

The Department in its appeal for the assessment year 1995-96 has objected the canceling of the additional assessment made under section 65 of the repealed Income Tax Ordinance, 1979. While for the assessment year 1998-99, the Department has assailed the impugned order on the following grounds:--

(2) That the learned CIT(Appeals) was not justified in setting aside the very basis for calculating production of six pairs of shoes in terms of per unit consumption of electricity.

(3) That the learned CIT(Appeals) was not justified in reducing construction rate from Rs.750 to Rs.475 per sq.ft.

(4) That the learned CIT(Appeals) was not justified in setting aside the issue of alleged receipt of gift.

(5) That the learned CIT(Appeals) was not justified in deleting the addition of Rs.125,000 made under the head furniture fixture/air conditioner.

(6) That the learned CIT(Appeals) was not justified in setting aside the issue of allowance of expenses of Rs.487,000.

The assessee in the cross-appeal has objected against the impugned order on the following grounds:---

(2) That the assessment for the year under consideration is barred by time. Therefore, the action to reopen the case is illegal.

(3) That the learned first appellate authority was not justified to uphold the action under section 65 of the Income Tax Ordinance, 1979 without any cogent reasons.

(4) That the reopening under section 65 of the Income Tax Ordinance, 1979 is illegal, unjust and without any definite information.

(5) That the learned first appellate authority was not justified to set aside the case on the matter of sales. The sales were estimated without any logic and basis. The sales declared by the appellant being reasonable may please be accepted.

(6) That the relief allowed by the first appellate authority in the construction of house from Rs.750 per sq.ft. is still inadequate. The construction rate was estimated without any basis. The assessee has declared the cost of construction very reasonable, therefore, the declared cost of construction may please be accepted.

(7) That the learned first appellate authority was not justified to set aside the addition made under section 13(1)(aa) of the Income Tax Ordinance, 1979 as the gifts received by the appellant from different persons are fully verifiable.

(8) That all the donors are existing assessees and were examined by the Assessing Officer by issuing a notice under section 148 of the Income Tax Ordinance, 1979. Therefore, the addition made under section 13(1)(aa) is illegal and is liable to be deleted.

(9) That the expenses are not allowed proportionately.

We have heard the learned representative of the assessee and have perused the impugned order of the learned CIT(A), the assessment orders for both the years, the case-law reported by the learned counsel, the affidavits, statements recorded under section 148 and other relevant documents, produced before us by the learned representative of the assessee.

1995-96

Regarding the appeal filed by the Department for the assessment year 1995-96, we have found that the learned CIT(A) after discussing the matter in detail and considering the case-law referred by the assessee regarding requirement of definite information that income has escaped or under-assessed reported as 1993 PTD 1108 (S.C. Pakistan) has finally held that:

"So far as the issue of limitation in this is concerned, I do not agree with the AR that this is a close matter. This issue could arise only if this case had been set apart for normal law assessment. In this case, however, the assessment has first been framed under section 59(1) and then later on reopened under section 65 for additional assessment.

As regards the estimation of income, I agree with the AR that in view of rule 207-A and the reported decision cited by AR, the reopening on the basis of purchase of plot is concerned, the AR has fully made out a case for relief on this score, On this score, the reopening cannot be held to be illegal. Hence, it is not maintainable. The present assessment is therefore ordered to be cancelled and the original assessment order is directed to be revived".

After considering the above observations of the learned CIT(A), we find no warrant for interference in the impugned order, as he has rightly cancelled the additional assessment and has directed to revive the original assessment.

The appeal filed by the Department for the assessment year 1995-96 is, therefore, dismissed.

1998-99

Regarding the assessment year 1998-99, the learned counsel for the assessee has contested against the additional assessment on legal as well as factual grounds. He has contended that section 59(4) of the repealed Income Tax Ordinance, 1979 requires that the order under section 59 is to be passed before June, 30 of the Financial Year next following the income year. Thus the order passed on January 1, 2000 (instead of 30-6-1999) is void order and subsequent orders under section 65 of the repealed Income Tax Ordinance, 1979 based on that order are also void. Reliance has been placed on a reported judgment, 2002 PTD 912. According to the learned counsel, the proceedings initiated under section 65 of the repealed Income Tax Ordinance, 1979 are illegal and unlawful in the absence of any order passed in writing. How it can be considered that the order passed therein is erroneous so far as prejudicial to the interest of Revenue. Since in the present case, no formal order has been passed except availability of the mere demand notice under section 59(A) of the repealed Income Tax Ordinance, 1979, dated January I, 2000, which is in fact also a void order, cannot be taken to be an assessment order in writing. Thus the order passed under section 65 of the repealed Income Tax Ordinance, 1979 is not sustainable in law. To support his plea, reliance has been placed on the case-law cited:-

2002 PTD (Trib.) 1949, 1987 PTD (Trib.) 129, 1976 33 Tax (285), I.T.A. No.1799/LB of 2001 and I.T.A. No.4401/LB of 2002.

He has contended that the only basis of issuing notice under section 65 of the repealed Income Tax Ordinance, 1979 was under-valuation of the cost of construction of the house. The assessment having been made under section 59(A) of the repealed Income Tax Ordinance, 1979 on the basis of the return, the Taxation Officer could not reopen the case under section 65 of the repealed Income Tax Ordinance, 1979 unless some new material was discovered. The declared cost of construction being reasonable, he could not reopen the case on the change of opinion. He has contended that even otherwise, the power under section 65 of the repealed Income Tax Ordinance, 1979 cannot be exercised by the Taxation Officer unless there is definite information that the income has escaped or under-assessed. The Hon'ble Supreme Court of Pakistan in the case reported as 1993 PTD 1108 in the identical situation observed as under:

"The expression "definite information", and similar other expression used in the above-mentioned provisions or other related provisions certainly meant much more than mere material so as to cause a reasonable belief. Unless there is definite direct information and there is no further need to put the said definite information to trial by putting in further supporting material the process of self-assessment could not be reopened".

According to the learned counsel in the above referred cases, like in the case of the assessee, the ITO had issued notice for reopening the assessment framed under section 59 of the repealed Income Tax Ordinance, 1979 on the ground that the purchase price declared by the assessee for a plot of land was on the lower side, but at page-112 of the above said judgment, the Hon'ble Supreme Court further observed as under:

"In this case in order to establish through so-called "definite information" the department had to rely upon further reasoning in order to clothe their information with credibility what to talk to definiteness. They had to make inquiry in regular trial in which all the persons who purchased the other plot (or majority of those who sold or purchased the other plots) might have been examined in order to know under that conditions they paid prices which were higher than the price mentioned by the respondent in this case. And in any case the seller of the plots in this case had to be examined in order to ascertain whether the price mentioned by the respondent, was not genuinely paid. It partakes of some procedural aspects of the disputes in pre-emption and other land cases where the price of the said land is in dispute. There is plethora of law on this aspect of pricing of land. Keeping all this in view we agree with the learned Judges of the High Court that definite information in the context of the law under discussion could not mean mere difference of opinion or further reasoning or other exercise of logic or even drawing of conclusions. Accordingly, the judgment of the High Court is unassailable in so far as the findings of fact are concerned".

The learned counsel in this regard has also referred the judgment of the Hon'ble Lahore High Court reported as 2005 PTD 1795, wherein it has been observed as under:--

"After careful perusal of the order impugned, we are of the view that the Tribunal rightly held that initiation of action in terms of section 65 of the Ordinance was not competent as it was undertaken without availability of definite information, as contemplated under the aforesaid provision of law. On merit it was held that the Assessing Officer had failed to bring home any acceptable justification, reason or basis to enhance the price evidenced by the registered sale-deed".

On the facts of the case, the learned counsel has contended that the Taxation Officer has completely ignored the facts while estimating the sales that there is no basis for making out production of 6-pairs of shoes per unit of electricity. That arbitrary loss of electricity of' 10% is imaginary. The history of the assessee has been ignored. According to the learned counsel in the earlier assessment years, the machinery remained the same and the capacity of the machinery manufacturing shoes also remained the same. In the absence of any evidence brought on record that the assessee had increased the capacity of production, no addition could be made on the ground of higher production. He has argued that the sale rate per pair of shoes adopted at Rs.10 per pair is arbitrary. The Taxation Officer has ignored the fact, which is in the common knowledge of everyone, that there is a frequent electricity breakdown and each time when there is a breakdown of electricity, the boiler or heating machinery cools down and it takes quite some time to restore it to its original temperature. Thus more the frequency of electricity failures more the loss of electricity. Similarly, when there is a breakdown of electricity, the shoes in the process are damaged because of the cooling of the machinery. This fact has also not been taken into consideration. He has contended that the learned first appellate authority the learned CIT(A) was not justified to set aside the matter regarding estimation, of sales for fresh consideration. He has contended that the Taxation Officer has not pointed out any objection regarding sales in his show-cause notice or his intention to reopen the case on the basis of sales declared. According to the learned counsel, the sales declared by the assessee, being quite reasonable are, therefore, liable to be accepted.

Regarding the addition of Rs.40,00,000, the learned counsel has submitted that before the Taxation Officer, the assessee had produced affidavits of the donors, who were called by the Taxation Officer under section 148 of the repealed Income Tax Ordinance, 1979 and their statements were recorded on oath, who admitted, to have advanced the gifts. All of them are existing assessees, who had shown their gifts in their income tax cases. In spite of it, the Taxation Officer has rejected the gifts on flimsy grounds that the. date of. gift and evidence of payments B has not been produced, and since there is no blood relationship with the assessee, therefore, the gift could not be made. He has contended that none of these grounds as mentioned in the assessment order by the Taxation Officer is valid in law, as when the donors are men of means and have shown gifts in their income tax assessments, the Taxation Officer has no valid reason to reject the gifts. According to the learned counsel, it is common knowledge that at the time of construction of house, generally the people are short of funds and do take certain amounts from the friends and the Taxation Officer was completely oblivious of this common practice in our country. Even otherwise, according to the learned counsel, oral gift is as valid as written gift under the Islamic Law. He has argued that observations that the date of gift or the telephone number of the assessee is not remembered by the donors, have hardly any relevance, as the fact remains that the assessee has shown that he had received the gifts, donors have also admitted that they had gifted the amounts and it is shown in their income tax cases. He has contended that the Taxation Officer should not reject the transaction of gift, and the learned CIT(A) was not justified to set aside the addition made under section 13(1)(aa) of the repealed Income Tax Ordinance, 1979 for re-consideration, as the gift transaction is fully verifiable C and authentic in the eyes of law, therefore, the addition made under section 13(1)(aa) of the repealed Income Tax Ordinance, 1979 amounting to Rs.40,00,000 is liable to be deleted.

Regarding the addition of Rs.33,60,000 he has contended that the addition on account of cost of construction is extremely excessive as against cost of construction declared at Rs.45,00,000, the Taxation Officer adopted cost of construction at Rs.78,60,000, which works out to Rs.750 per sq. ft. The Taxation Officer has relied upon Inspector's Report, based on his inspection made on May 23, 2001. According to the learned counsel. it would be interesting to note that even in the year, 2000 (one year before the Inspector's Report), the Taxation Officer had indicated his mind to adopt value of cost of construction at Rs.750 per sq. ft. and the Inspector made the same report after one year i.e. on May 23, 2001, which shows that the Inspector's report was made on the direction of the Taxation Officer. Even otherwise, the cost of construction of Rs.45,00,000 in the assessment year 1998-99, which correspond the period July 1, 1997 to June 30, 1998 was certainly reasonable and in no case can be considered - to be "too low" as envisaged under section 13(2) of the repealed Ordinance. He has in this respect pointed out that construction during the year under appeal was not completed, as it is evident from the Inspector's report, dated May 23, 2001. He has submitted that the relief allowed by the learned CIT(A) in cost of construction is still inadequate. The cost declared is very reasonable according to the nature of construction, therefore, the declared cost of construction may please be accepted and the addition made under section 13(1)(d) of the repealed Income Tax Ordinance, 1979 amounting to Rs.33,60,000 may please be deleted.

After considering the arguments of the learned counsel for the assessee, the perusal of impugned order, the assessment order, the referred case law and other relevant facts of the case, we have found that the assessee in this case is an individual and derives income from the manufacturing of Plastic Chappals. In the assessment year under appeal, the assessee declared income at Rs.2,13,000 under the Self-Assessment Scheme, which was assessed under section 59(A) of the repealed Income Tax Ordinance, 1979 vide order, dated January 2000. Later on, as per assessment order, the perusal of wealth tax record revealed that the assessee has constructed a house, the value of which was declared at Rs.65,00,000. The value of the plot was declared at Rs.20,00,000, cost of construction in the assessment year 1998-99 was Rs.45,00,000, which works out to Rs. 430 per sq. ft. and the covered area of the house was 10480 sq. ft. The Taxation Officer issued a show-cause notice on January 4, 2000 on three grounds for reopening the case under section 65 of the repealed Income Tax Ordinance, 1979:

(i) That the cost of construction declared by the assessee was low.

(ii) That the receipt of gift of Rs.40,00,000 could not be accepted for the reasons that the affidavits of the donors reflected that they were not blood relations and the consideration for gift had been stated only friendly relationship.

(iii) That the assessee had purchased Pajero Car for Rs.7,00,000 and invoice of registration book is not available on record. The petitioner was also asked to produce the statement of account, wherein foreign remittance of Rs.10,87,212 were credited.

The above show-cause notice was duly replied and it was explained that the cost of construction declared by the assessee at Rs.45,00,000 was not on the lower side and the investment/expenditure on the construction of the house was not "too low". The Taxation Officer after correspondence, finally assessed the income and made the following additions:

Trading addition of Rs.29,66,816 was made on the formula of production of 6-pairs of shoes per unit of electricity and sale rate per pair of shoe was adopted at Rs.12 per pair. After allowing 10% wastage of electricity, the Taxation Officer worked out sales at Rs.1,46,67,264 and after applying GP rate of 25%, GP was worked out at Rs.36,66,618. After deduction of declared GP of Rs.7,00,000, addition of Rs.29,66,816 was made in the trading account.

The income has been computed as under:--

(1) Trading balance for addition??????????????????????????????????????????????? Rs. 29,66,816

(2) Add net income declared???????????????????????????????????????????????????? Rs. 2,13,000

(3) Unexplained investment (Gift received)??????????????????????????????? Rs.40,00,000

Addition under section 13(1)(aa)

(4) Unexplained investment (3-Air???????????????????????????????????????????? Rs.3,360,000

Conditioners) Addition under section

13(1)(aa)

(5) Unexplained investment (Construction of????????????????????????????? Rs.33,60,000

House) Addition under section 13(1)(d)

Net Income????????????????????????????????????????????????????????????????????????????? Rs.1,06,64,816

Less

Trading set off against additions made

due to unexplained Investment (s) up to

full extent vis-a-vis trading addition??????????????????????????????????????????? Rs.29,66,816

Net Income Assessed?????????????????????????????????????????????????????????????? Rs.76,98,000

The learned CIT(A) has upheld the reopening' of assessment, deleted the addition of Rs.1,25,000 regarding cost of construction, reduced the rate of construction to Rs.475 per sq.ft and has set aside the assessment on all other issues.

On behalf of the assessee, placing reliance on the decision of this Tribunal reported as 2002 PTD (Trib.) 912, it has been contended that as in this case, there was no original order in writing but the assessment was made vide IT-30, dated January 1, 2000, which should have been made before 30-6-1999 as provided under section 59(4) of the repealed Income Tax Ordinance, 1979 as held by this Tribunal in the above referred judgment, the relevant para. of which is reproduced hereunder:--

"(4) It has strenuously been contended by the learned A.R. (s) that since the return of income was filed under the SAS, therefore, the order originally made on 20-6-1996 was clearly barred by limitation in accordance with the time period stipulated in section 59(4) of the Income Tax Ordinance, 1979. According to them original assessment order should have been made under section 59(1) instead of under section 59A and that too till 30th of June of the financial year next following the income year in respect of which return of total income has been furnished under section 55 of the Income Tax Ordinance, 1979. As the order made under section 59A is nullity in law, the superstructure built thereon under sections 62/65 of the Income Tax Ordinance, 1979 should automatically fall down for want of jurisdiction. Strength in this regard was acquired from reported decision of the higher appellate forums including the Income Tax Appellate Tribunal, such as PLD 1963(SC) 322, 1993 PTD 332 and 1993 PTD (Trib.) 1421. This contention of the learned counsel for the assessee is well-merited. Section 59 of the Income Tax Ordinance, 1979, deals with the returns of income which are furnished under the Self-Assessment Scheme (SAS). Subsection (1) of this section envisages that where a return of total income for any income year is furnished by the assessee under section 55 of the Income Tax ordinance, 1979 and qualifies for acceptance in accordance with the provisions of a Scheme of Self-Assessment made by the C.B.R. for that year or under any instructions or order passed thereunder, the Deputy Commissioner of Income Tax shall assess, by an order in writing the total income of the assessee on the basis of such return and determine the tax payable on the basis of such assess?ment. The legislature has also put fetters on the jurisdiction of the Assessing Officer to complete the assessment within the specified limit of time, as is laid down in subsection (4) of section 59 of the Income Tax Ordinance, 1979, where the return of income qualifies to be accepted under the SAS. This subsection in unequivocal language has told over that no order under subsection (1) shall be made in any case after the 30th of June of the financial year next following the income year in respect of which return of total income has been furnished under section 55 of the Income Tax Ordinance. A proviso to subsection (4) of section 59 of the Income Tax Ordinance, 1979, has also been added which mentions that in case no order is passed by such date it shall be treated that the order under subsection (4) of section 59 of the Income Tax Ordinance is couched in negative language nevertheless it is well accepted principle of interpretation that it is mandatory on the part of the authority to pass order in such limit of time. Corollary of non-passing the order in terms of section 59(4) would be that no order could be made subsequently to the said period of limitation. This would result into acquiring a vested right of escaping assessment which cannot be taken away. So, if any order is passed subsequently to lapse of period of limitation that would be a void order and such would be non-existent in the eye of law and any building is erected on such order that must crumble down".

After considering the decision of this Tribunal referred above we have found the facts of the present case are at all fours. In the instant case also, the return was filed under SAS and no order being passed before 30-6-1999 as provided under section 59(4), therefore, the order if any later on passed on 1st January, 2000 is nullity in law and superstructure built fall down for want of jurisdiction.

Even otherwise, the only basis of reopening the assessment in this case is the undervaluation of the cost of construction of the house. We are of the view that it is not the justifiable cause, as under section 65 of the repealed Income Tax Ordinance, 1979, the additional assessment can be made by the DCIT if any income has been underassessed or assessed at too and under subsection (2) of section 65, no proceedings should be initiated unless definite information has come in possession of the DCIT. We have found that in this case, there is no definite information in the possession of the DCIT that income has escaped or underassessed. The Taxation Officer has reopened the case on the basis of information given by the assessee himself in his returns, which in no F way in the present case can be said to be definite information regarding escaped assessment. The Hon'ble Supreme Court of Pakistan has held in the case reported as 1993 PTD 1108 that "definite information" certainly mean much more than mere material so as to cause a reasonable belief or even such evidence which might lead to a "definite belief". But in this case, the assessee through evidence has explained the sources of income and there was no justification to reject the version of the assessee without bringing on record definite information that income has been under-assessed. Regarding the gifted money, the donors have sworn affidavits and have appeared before the Taxation Officer and have been examined under section 148 of the repealed Income Tax Ordinance, 1979 and admittedly they are existing taxpayers. We, therefore, find no justification to reject the version of the assessee on the flimsy grounds. For the gifts, there is no requirement under the law that gift can be made h to the blood relationship only. In this case, donors are men of means and have shown gifts in their respective income tax assessments and there was no valid reason to reject the gifts, as oral gift is as valid as written gift under the Islamic Law and "offer", acceptance" and "possession" are the only three conditions under the law for the performance of gift, which has been fulfilled in the present case.

In view of this legal as well as factual position, we find no justification for additional assessment in this case. The impugned order I of the learned CIT(A) is, therefore, vacated and additional assessment made by the Taxation Officer is cancelled.

The appeal filed by the assessee is allowed. Consequently, the cross-appeal filed by the Department is dismissed.

Both the appeals filed by the Department for the assessment years 1995-96 and 1998-99 are dismissed, while the cross-appeal filed by the assessee for the assessment year 1998-99 is allowed for the reasons discussed supra.

C.M.A./229/Tax (Trib.)??????????????????????????????????????????????????????????????????????? Appeal accepted.