Messrs CITIBANK N.A. through Resident Vice-President VS COMMISSIONER OF INCOME TAX, 2007 PTD-KARACHI-HIGH-COURT-SINDH 1560 (2007)

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

---S. 65---Definite information---Re-opening of assessment on basis of acquiring belated knowledge of judgment of superior Courts---Income Tax Officer was in possession of definite information' for re-opening of assessment.

Messrs Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others 1993 PTD 766 fol.

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

---S. 65(2)---'Definite information', availability of---Determining factors stated.

The following principles would apply to determine the availability of definite information:---

(1)where the information is true and correct state of the law derived from relevant judicial decisions;

(2)where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income Tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;

(3)where the information is derived from an external source would include discovery of new and important matters or knowledge of fresh facts, which were not present at the time of the original assessment;

(4)where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law.

If these conditions were satisfied, then the Income Tax Officer would have complete jurisdiction to re-open the original assessment. It is obvious that where the Income Tax Officer gets no subsequent information, but merely proceeds to re-open the original assessment without any fresh facts or materials or without any enquiry into the materials, which form part of the original assessment, then section 65(2), Income Tax Ordinance, 1979 would have no application.

Once all the facts have been fully disclosed by the assessee and considered by the Income Tax Authorities and the assessment has been consciously completed and no new fact has been discovered, then there can be no scope for interference with these concluded transaction under the provisions of section 65 of the Income Tax Ordinance, 1979 on the ground that the income chargeable to tax under the Ordinance has escaped assessment or has been under-assessed etc., in the meaning of clause (a) or (b) of subsection (1) of section 65 of the Ordinance.

Edulji Dinshaw Limited v. Income Tax Officer 1990 PTD 155; Gemini Leather Stores v. The Income Tax Officer, B. Ward Agra and others AIR 1975 SC 1268; Kalyanji Mavji and Co. v. Commissioner of Income Tax, West Bengal II, Income Tax Reports Vol.102 1976 286; (1968) 67 ITR 11, 15, 16 (SC) and (1959) 35 ITR 1 (SC) fol.

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

----S. 65---Re-opening of assessment finalized after consciously considering facts disclosed by assessee and available on record---Scope---Unless new facts had come into possession of Income Tax Officer subsequent to passing of original order, he could not take action under S.65 of Income Tax Ordinance, 1979 even by making further enquiry, research and investigation into the facts or on reappraisal of facts, which were already available on record---When original order was passed unconsciously or without considering the facts on record, then action might be taken under S.65 of Income Tax Ordinance, 1979---Principle.

Edulji Dinshaw Limited v. Income Tax Officer 1990 PTD 155; Gemini Leather Stores v. he Income Tax Officer, B. Ward Agra and others AIR 1975 SC 1268; Commissioner of Income Tax, Bombay City-I v. Bhagwandas K. Bros. Income Tax Reports Vol. 91 1973 256; Messrs National Beverages (Pvt.) Ltd. v. Federation of Pakistan and others 2001 PTD 633; Messrs Pakistan Tobacco Co. Ltd. v. Government of Pakistan and 3 others 1993 SCMR 493; Kalyanji Mavji and Co. v. Commissioner of Income Tax, West Bengal II, Income Tax Reports Vol. 102 1976 286 and Commissioner of Income Tax, Lahore Zone (West Pakistan), Lahore v. Dr. Khurshid Alam Malik, Sheikhupura 1988 PTD 771 ref.

Abdul Ghaffar for Applicant.

Aqeel Ahmed Abbasi for Respondent.

ORDER

MUHAMMAD ATHAR SAEED, J.---These Income Tax Reference Applications have been filed under section 136(2) of the Income Tax Ordinance, 1972, seeking the opinion of this Court on the following common question said to have arisen from the order dated 2-2-1989 of the Income Tax Appellate Tribunal in I.T.As. Nos.1066/KB/1984-85 and 1067/KB/1984-85:---

Whether on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal was justified in holding that the action of the learned Income Tax Officer regarding reopening of assessment under section 65 of the Income Tax Ordinance, 1979 was lawful?

2. Brief facts of the case are that for the assessment years 1977-78 and '1978-79 the applicant had filed return of income claiming the profit on sale of government securities as exempt as according to the applicant it was capital gain and, therefore, exempt under the provisions of the Second Schedule to the Income Tax Ordinance, 1979. The Assessing Officer, while finalizing the assessment, allegedly did not consider this issue and finalized the assessment without considering the exemption on the gain of sale of securities. Later on, the successor of the Assessing Officer after noting that the gain on sale of government securities has escaped assessment to tax due to oversight inadvertence and mistake of his predecessor and after allegedly making necessary enquiry and research into the facts and law and investigation of the material placed on record, he claimed that it was found that such profit on sale of securities was liable to tax as it did not fall within the ambit of exemption provided to capital gains and relying on the judgment of the Supreme Court of India in the case of Kalyanji Mavji and Co. v. Commissioner of Income Tax, West Bengal II. (1976) 102 ITR 287 (SC) he reopened the assessment proceedings under section 65 of the Income Tax Ordinance, 1979 and after rejecting the applicants explanation he finalized the assessment by making additions of Rs.54,74,363 and Rs.50,61,264 to the income for the assessment years 1977-78 and 1978-79 respectively. Being aggrieved by the above order the applicant filed appeals before the CIT (Appeals), who vide his common judgment for both the assessment years dated 19th September 1984 in I.T.As. Nos.363 and 364 of 1982-83 accepted the appeals and cancelled the orders passed by the Income Tax Officer allegedly for the reason that the assessments were reopened on mere change of opinion.

3. Being aggrieved by the order of the Commissioner of Income Tax (Appeals), the present respondent filed appeal against the order before the Income Tax Appellate Tribunal, who vide their order referred to above, accepted the appeal, vacated the order of the CIT (Appeals) and restored the orders of the Income Tax Officer. The applicant then filed applications under section 136(1) of the Income Tax Ordinance, 1979 requiring the Income Tax Appellate Tribunal to refer the above stated question of law for the opinion of this Court. The Tribunal vide their order dated 6-2-1990 in R.As. Nos.2 and 3/HQ 1188-89 refused to refer the question of law as according to them the question proposed by the applicant did not need any reference to the High Court. Hence these reference applications.

4. We have heard Mr. Abdul Ghaffar Khan learned counsel for the applicant and Mr. Aqeel Ahmed Abbasi learned counsel for the respondent.

5. The main contention of the learned counsel for the applicant was that there was no definite information in possession of the Income Tax Officer to reopen the assessments under section 65 of the Income Tax Ordinance and the same has been reopened on a mere change of opinion. He argued that it is a settled law that facts already on record do not constitute definite information and the assessments cannot be reopened on mere change of opinion. The learned counsel further submitted that it is a mandatory condition for reopening of assessment that there should be some definite information in the possession of the Income Tax Officer on the basis of which it becomes evident that income has escaped assessment and this definite information should come into the possession of the Income Tax Officer subsequent to the passing of the assessment order. In support of his contention he relied on the following judgments of the Honourable Supreme Court, the Honourable Supreme Court of India and this Court and other Honourable High Courts of Pakistan and India:---

(1)Edulji Dinshaw Limited v. Income Tax Officer (1990 PTD 155);

(2)Gemini Leather Stores v. The Income Tax Officer, B. Ward Agra and others (AIR

1975 SC 1268) and

(3)Commissioner of Income Tax, Bombay City-I v. Bhagwandas K. Bros. (Income Tax Reports [Vol. 91 1973] 256)

6. Mr. Aqeel Ahmed Abbasi learned counsel for respondents while narrating the facts of the case stated that the Income Tax Officer had inadvertently failed to consider whether the gain on securities fell within the head capital gains and was exempt from tax or was to be assessed as income from business and profession and taxed accordingly. In this connection he placed on record original assessment orders passed under section 23(3) of the Income Tax Act, 1922 to point out that the Income Tax Officer had consciously deducted the profit on sale of securities from the net profit for separate consideration but at the end of computation he failed to reconsider the profit and loss on securities and had missed the same inadvertently. He argued that the plea of change of opinion could not be taken by the applicant for reopening of the assessment because while passing the original order the Income Tax Officer had not consciously considered the exemption or otherwise of the profit on the sale of the securities and had in advertently missed it. He therefore, argued that since the Income Tax Officer while framing original order had not expressed his opinion on this point, therefore, reopening of the case on this point by the succeeding Income Tax Officer cannot be considered to be on the basis of a change of opinion. The learned counsel submitted that the definite information carne into the possession of the Income Tax Officer subsequent to the passing of the assessment order when he acquired the knowledge that the superior Courts had treated the gain on sale of securities as a business income and, therefore, it was liable to tax. On the basis of these submissions the learned counsel submitted that all the mandatory requirements for taking action under section 65 had been fulfilled by the Income Tax Officer and the case was legally and lawfully reopened and Tribunal had rightly restored the order of the Income Tax Office. In support of his above contentions, the learned counsel relied on the following judgments:--

(1)Messrs National Beverages (Pvt.) Ltd. v. Federation of Pakistan and others 2001 PTD 633;

(2)Messrs Pakistan Tobacco Co. Ltd. v. Government of Pakistan and 3 others (1993 SCMR 493);

(3)Kalyanji Mavji and Co. v. Commissioner of Income Tax, West Bengal II, (Income Tax Reports (Vol. 102 1976) 286) and

(4)Commissioner of Income Tax, Lahore Zone (West Pakistan), Lahore v. Dr. Khurshid Alam Malik, Sheikhupura 1988 PTD 771.

7. We have considered the question referred to in the light of the arguments of the learned counsel and carefully perused the records of the case including the impugned judgment and the judgments relied on by the learned counsel for the parties.

8. A perusal of the original assessment order furnished by the learned counsel for the respondent reveals that on page 5, while computing the assessed income, the Income Tax Officer had subtracted profit on sale of securities and dividend income from the profit as per profit and loss account under the heading "less for separate consideration". However, at the end of the computation although he has considered the dividend income and levied tax on dividend income at fifteen per cent, he has not discussed the gain on sale of securities and has not added it back to the total income. It is on this basis that the learned counsel for the respondent submits that the Income Tax Officer has not considered the taxability or otherwise of the gain on sale of securities and has inadvertently missed adding it to the taxable income and, therefore, the non-inclusion of income was not due to the formation of opinion by the Income Tax Officer that the income was not taxable but it was not included due to inadvertence and mistake of the Income Tax Officer, which can be corrected by reopening the assessment under section 65. On the face of its, this argument of the learned counsel seems very attractive, but when we look at the computation in detail, it emerges that the following points require consideration:---

(i) All the additions made by the Income Tax Officer have been discussed in the body of the order, except the point of profit and loss on sale of securities.

(ii) There is justification for deducting the dividend income from the net profit and loss account for separate consideration because dividend income of a bank is taxable at a reduced rates of fifteen per cent and not at corporate rates applicable on the other income of the applicant.

(iii) If the intention of the Income Tax Officer was to treat gain on sale of securities as taxable income then there was no need to deduct it from the net profit as per profit and loss account for separate consideration because if this gain is taxable as business income then the entire gain will be included in the taxable income and no purpose will be served by first deducting it from and then adding it back to the total income.

9. On the basis of the above points, we are of the opinion that the inadvertent mistake to which the learned counsel for respondent was referring, is not that the Income Tax Officer had not considered this gain at the end of the computation but that it was shown to have been deducted from the net profit as per profit and loss account for separate consideration. We are, therefore, afraid that we cannot accept the arguments of the learned counsel for the respondent that the Income Tax Officer had not allowed exemption on the gain of sale of securities consciously but it was excluded from the income due to inadvertent mistake of the Income Tax Officer.

10. In the light of the above analysis of the factual position, we will examine whether there was any material on the basis of which the Income Tax Officer could reopen the assessment under section 65 of the Income Tax Ordinance to make the addition of the gain on the sale of securities. The Income Tax Appellate Tribunal in the impugned order is of the view that the reopening of the assessment under section 65 was not the result of a change of the opinion of the Income Tax Officer, but had resulted from correct interpretation of law by superior Courts. Perusal of the assessment order passed by the Income Tax Officer reveals that he has not brought anything on record to indicate that he had reopened the case by acquiring belated knowledge of any judgment of the Tribunal or any other superior Courts which dealt with the taxability or otherwise of gain on sale of securities by a banking company and held that this gain on sale of securities is a revenue income and, therefore, taxable. If the Income Tax Officer had brought such a judgment on record, we may have in the light of the judgment of the Honourable Supreme Court in the case of Messrs Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others (1993 PTD 766) held that there was definite information in possession of the Income Tax Officer for reopening the assessment.

11. We have also examined the judgment of the Lahore High Court in the case of CIT v. Dr. Khurshid Alain Malik (1973) 28 Tax 164 on which the Tribunal has relied in its impugned judgment. A perusal of the judgment reveals that even in that case the Honourable Lahore High Court had declared the reassessment proceedings legal and valid because despite the fact that the Income Tax Officer was cognizant of the fact of construction of building while making original assessment but the definite information was that in the original assessment quantum of investment was not disclosed by the assessee.

12. We have carefully perused the judgment of the Supreme Court of India in the case of Kalayanji Mavji and Co. (supra). In this case the Supreme Court of India laid down the following principles which according to them would apply to determine the applicability of section 34(1)(b) of the Income Tax Act, 1922, which is para materia to subsection (2) of section 65 of the Income Tax Ordinance, 1979 so far as the availability of definite information is concerned:-

(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions;

(1) (1968) 67 ITR 11, 15, 16 (SC);

(2) (1959) 35 ITR 1 (SC).

(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income Tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority;

(3) where the information is derived from an external source would include discovery of new and important matters or knowledge of fresh. facts, which were not present at the time of the original assessment;

(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law.

If these conditions are satisfied, then the Income Tax Officer would have complete jurisdiction to re-open the original assessment. It is obvious that where the Income Tax officer gets no subsequent information, but merely proceeds to re-open the original assessment without any fresh facts or materials or without any enquiry into the materials, which form part of the original assessment, section 34(1)(b) would have no application.

13. When we examine the present reference applications on the anvil of these principles and tests we reach the following conclusions:---

(a) The Income Tax Officer has not referred to any relevant judicial decision on the basis of which, according him, the correct state of the law was declared. Even otherwise; we have come across conflicting decisions of the Superior Courts on the point of taxability or otherwise of gain on sale of securities by banking companies.

(b) We have already concluded that the income liable to tax had not escaped assessment due to oversight, inadvertence or mistake committed by Income Tax Officer, but he had consciously deducted the subject income from the total income liable to tax.

(c) No mention is made of any information derived by the Income Tax Officer, which was not present at the time of original assessment.

(d) Although the Income Tax Officer in his assessment order has asserted that he had conducted necessary enquiry and research into facts and law and investigation of the material on record, but he has only pointed out that this exercise was completed for the assessment year 1980-81 and no mention of this enquiry and research has been made in the assessment order for the assessment year in question.

14. We are, therefore, of the opinion that in the present case there was no definite information in the possession of the Income Tax Officer to reopen the assessment on the basis of the tests prescribed by the Indian Supreme Court in the judgment relied on by the Income Tax Officer for re-opening the assessment. Even otherwise, the test No.4 prescribed in the case of Kalyanji Mavji and Co. (Supra), has not been appreciated by the Supreme Court of Pakistan and in the case of Edulji Dinshaw Limited v. Income Tax Officer (1990 PTD 155) on which reliance has been placed by the learned counsel for the applicant, the Honourable Apex Court has held as under:--

"Once all the facts have been fully disclosed by the assessee and considered by the Income Tax Authorities and the assessment has been consciously completed, and no new fact has been c discovered, there can be no scope for interference with these concluded transaction under the provisions of section 65 of the Income Tax Ordinance on the ground that the income chargeable to tax under the Ordinance has escaped assessment or has been under-assessed etc., in the meaning of clause (a) or (b) of subsection (I) of section 65 of the Ordinance."

15. Even the Supreme Court of India in the case of Gemini Leather Stores v. Income Tax Officer, B-Ward, Agra quoted (supra), has held that where the assessee had deposed fully and truly all material of facts, the Income Tax Officer could not take action by reopening the case to remedy the error resulting from his own oversight. The judgment of the Supreme Court of India has been summed up in the following extract:-

"The law laid down in Calcutta Discount Co. S. case has been restated in several subsequent decisions of this Court; Commissioner of Income Tax v. Hemchandra Kar. (1970) 77 ITR 1 (SC), Commissioner of Income Tax v. Bhanji Lavji (1971) 79 ITR 582 (SC) and Commissioner of Income Tax v. Burlop Dealers Ltd. (1971) 79 ITR 609 (SC) to name only a few. In the case before us the assessee did not disclose the transactions evidenced by the drafts which the Income Tax Officer discovered. After this discovery the Income Tax Officer had in his possession all the primary facts, and it was for him to make necessary enquiries and draw proper inference as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year. This is the Income Tax Officer did not do. It was plainly a case of oversight, and it cannot be said that the income chargeable to tax for the relevant assessment year had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts. The Income Tax Officer had all the material facts before him when he made the original assessment. He cannot now take recourse to section 147(a) to remedy the error resulting from his own oversight."

16. It is nobody's case that the applicant had not revealed the facts relating to the transaction on which the gain on securities had been earned by him and the Income Tax Officer by deliberately deducting the gain on sale of securities from the net profit in profit and loss account in the computation of income has indicated that he has considered the taxability of this amount in the light of the facts disclosed by the assessee, therefore, if the ratio decendi in the above judgments is followed, the Income Tax Officer cannot take action under section 65 even by making further enquiry, research and investigation into the facts which are already available on record.

17. A perusal of the other judgments relied on by both the learned counsel show that once an assessment is finalized after consciously considering the facts on record then action cannot be taken under section 65 on the reappraisal of the same facts unless new facts have come into the possession of the Income 'Tax Officer subsequent to the passing of' the assessment order. At the same time, there can be no cavil to the arguments of the learned counsel for the respondent that if the original order was passed either under self assessment scheme unconsciously or without considering the facts on record then action may be taken under section 65. Since we have held that the Income Tax Officer has consciously not added the gain on sale of securities to the taxable income and there was no mistake or inadvertent error on his part in not making this addition, therefore, the order of the Tribunal based on misreading of the factual position of the case, cannot be sustained.

18. In view of the above discussion, we would answer the proposed questions in negative. As a consequence thereof these Income Tax Reference Application are allowed.

20(sic). A copy of this order under the signature of the Registrar and seal of this Court be remitted to the Income Tax Appellate Tribunal for passing of order in conformity with this judgment.

S.A.K./C-9/KAnswer in negative.