COMMISSIONER OF INCOME TAX VS HABIB BANK LTD.
2007 P T D 901
[Karachi High Court]
Before Anwar Zaheer Jamali and Muhammad Athar Saeed, JJ
COMMISSIONER OF INCOME TAX
Versus
HABIB BANK LTD.
I.T.Cs. Nos.l73 to 182 of 1993, decided on 21/12/2006.
(a) Income-tax---
----Penalty provisions under Income Tax Law are quasi-criminal in nature.
(b) Income Tax Ordinance (XXXI of 1979)---
----S.111---Penalty for concealment of income, levy of---Essential condition---Nature of penal provisions of Income Tax Ordinance, 1979 being quasi-criminal, existence of mens rea was mandatory condition for levying such penalty---Department must establish mens rea before levying such penalty.
Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad (1994) 69 Tax 38 and Gharibwal Cement Limited through General Manager v. Income Tax Appellate Tribunal of Pakistan, Lahore and 2 others 2005 PTD 1 ref.
D.G. Khan Cement Company Ltd. v. Federation of Pakistan and others 2004 PTD 1179; Commissioner of Income Tax, West Bengal I, and another v. Anwar Ali (1970) 76 ITR; Commissioner of Income Tax, Andhra Pradesh v. C.V.C. Mining Company, Gudur (1976) 102 ITR 830; Commissioner of Income Tax v. Hari Ram Sri Rain (1988) 57'Tax 51; Muhammad Muslim v. Commissioner of Income Tax Karachi (1980) 42 Tax 129; Commissioner of Income Tax, Lahore Zone, Lahore v. Kamran Steel Re-Rolling Mills (1989) 60 Tax 13 and Commissioner of Income Tax (Rawalpindi Zone), Rawalpindi v. Ch. Fazal Din and Sons, Sialkot (1974) 29 Tax 1 10 rel.
2000 PTD (Trib.) 1649 overruled.
(c) Income Tax Act (XXXI of 1979)---
----Ss. 135, 136 & 137---Order of Appellate Tribunal could not overrule judgments or Supreme Court and High Court.
Jawaid Farooqui for Applicant.
Iqbal Salman Pasha for Respondent.
ORDER
MUHAMAMD ATHER SAEED, J.---These Income Tax Reference applications under section 136(2) of the Income Tax Ordinance, 1979 have been preferred against the combined order of the Income Tax Appellate Tribunal, dated 15-5-1993 whereby the Tribunal had refused to refer the understated questions to this Court for its opinion.
2. The Commissioner Income Tax seeks the opinion of this Court on the following common proposed question:--
"(i) Whether on the basis of facts and in the circumstances of the case, the learned ITAT was justified in cancelling the penalty order when the material and circumstantial evidence available on record as appreciated by the learned ITAT justified the levy of penalty under section 111?
(ii) Whether on the basis of facts and in the circumstances of the case, learned ITAT, after having appreciated the facts and circumstantial evidence was justified in holding that onus to establish mens rea was not discharged by the department for the levy of penalty?"
3. During the arguments at Katcha Peshi stage, on 25-5-2006 with the consent of the learned counsel following further question was also framed for the opinion of this Court:---
"Whether learned Income Tax Appellate Tribunal fell in error by holding that under section 111 of the Income Tax Ordinance, 1979 (Repealed), it was necessary to establish mens rea/guilty mind of the assessee before imposition of penalty could be considered for concealment of income."
4. Brief facts of the case are that the respondent a public limited company carrying no business of banking had claimed rebate under clause A(1)(v) of Part-II of 1st Schedule to Income Tax Act, 1922 read with relevant clause of the Income Tax Ordinance, 1979 on account of foreign income brought into Pakistan for the assessment years 1975-76 to 1984-85, which was allowed by the Income Tax Officers. However, later on it transpired that the respondent had actually brought the foreign income in Pakistan which was much less than the foreign remittances declared by respondent for the purpose of claiming rebate. On receipt of this information the assessments for all the above assessment years were reopened under section 65 and the rebate was allowed only on the basis of the actual remittance info Pakistan. The position of the excess rebate claimed by and allowed to the applicant can be gauged from the chart given below:--
| Asstt. | Foreign | Rebate | Actual | Actual | Loss of |
| Year | remittances declared | allowed by the Deptt. | remittances brought into | Rebate admissible | Revenue |
| | And | | Pakistan as | | |
| | accepted as | | per | | |
| | per asstt. | | information | | |
| | Order | | gathered | | |
| 1975-76 | 339,66,789 | 5095018 | 1952744 | 292912 | 4766106 |
| 1977-77 | 376 | 5849845 | 8047256 | 1207088 | 4442557 |
| 1977-78 | 634,76,021 | 9520953 | 10000000 | 1500000 | 9020953 |
| 1978-79 | 507,43,394 | 7611503 | 20000000 | 3000000 | 4611508 |
| 1979-80 | 600,00,000 | 9000000 | 10000000 | 1500000 | 7500000 |
| 1980-81 | 500,00,000 | 7500000 | 10000000 | 1500000 | 6000000 |
| 1981-82 | 500,00,000 | 7500000 | 11410000 | 1711500 | 5788500 |
| 1982-83 | 500,00,000 | 7500000 | -- | -- | 7500000 |
| 1983-84 | 500,00,000 | 7500000 | -- | -- | 7500000 |
| 1984-85 | 500,00,000 | 7500000 | -- | -- | 7500000 |
| Total Loss of Revenue | 63629624 |
5. The Income Tax Officer after completing the reassessment issued notices under section 116 to initiate penalty proceedings and after rejecting the explanation of the respondent levied penalty at the rate of 2.5 times of' the excess rebate allowed for all these years. Being aggrieved by the above orders the respondent filed appeals before the CIT (Appeals), who dismissed the appeals under section 65/62 and set aside the orders framed under section 111 for the years.
6. Being aggrieved by the order of the CIT (Appeals) the respondent filed appeals before the Income Tax Appellate Tribunal Karachi, who vide its common order, dated 9-9-1992 for all the years in respect of orders under section 62 and section 111 dismissed all the appeals against the orders under sections 62/65, but allowed the appeals against the orders under section 111 and cancelled all the penalties and modified the orders of learned CIT(Appeals) to that extent. There is no record about the filing of reference applications by the respondent under section 136(1) against the dismissal of their appeals under section 62, but the department had filed reference applications against the modification of the orders of the CIT(Appeals) in appeals under section 111, which were dismissed by the Tribunal vide its order, dated 16-5-1993. Hence these reference applications.
6A. We have heard Mr. Jawaid Farooqui learned counsel for the applicant and Mr. Iqbal Salman learned counsel for the respondent.
7. The main contention of Mr. Jawaid Farooqi learned counsel for applicant is that the respondent had deliberately claimed excess rebate by wrongly overstating the foreign income which was brought by them to Pakistan continuously for ten years. He said that at the time of original assessments the respondent had not declared all the facts correctly and this fact has been conceded by the learned counsel of the respondent, who while arguing the appeal before the Tribunal had conceded that the full facts were not disclosed by the respondents and this concession is recorded in the order of the Tribunal. He further submitted that it was one of the reasons that the Tribunal had dismissed the appeals under section 62. He submitted that the arguments of the respondent's counsel before the Tribunal that the respondent in good faith had inferred that once the State Bank of Pakistan had allowed them permission to retain part of the profit earned aboard there to meet the liabilities incurred by the bank in that country, therefore, fictionally speaking the entire income was deemed to have been brought into Pakistan and, therefore, rebate was claimed on this basis, is an afterthought because this ground was not raised before the Commissioner of Income Tax (Appeals) which is apparent on a perusal of the order of CIT (Appeals). He said even otherwise the respondent being a leading bank of Pakistan and being assisted by a battery of chartered accountants and tax advisors it cannot be assumed that they were not advised of the correct interpretation of law. He further argued that from a plain reading of the statute sanctioning the rebate there can be only one interpretation and, therefore, the Tribunal was not justified in accepting their contention that there was no mens rea involved and they had overstated the remittance and claimed excess rebate by entertaining bona fide view that they are entitled to rebate on the income which was retained abroad under the permission of the State Bank of Pakistan. He said that the mala fide intention of the respondent can be gauged from the fact that while claiming the rebate during the original assessment proceedings they had not disclosed this basis and no computation was filed showing the actual remittance, the so-called fictional remittance and the total remittance on which the rebate was claimed.
8. On the basis of the above arguments, he submitted that there was no material before the Tribunal to modify the order of the CIT (Appeals) and prayed that the questions proposed may be answered in favour of the applicant. In support of his contentions he relied on the following judgments:--
(1) Syed Akhtar Ali v. Commissioner of Income Tax, Hyderabad (1994) 69 Tax 38 (H.C. Kar.)
(2) Gharibwal Cement Limited through General Manager v. Income Tax Appellate Tribunal, of Pakistan, Lahore and 2 others (2005 PTD 1)
(3) 2000 PTD (Trib.) 1649.
9. The learned counsel conceded that the third judgment relied on by him was a judgment of the Tribunal which normally is not relied on in cases before this Court, but he has relied on this case to show that the then learned Chairman of the Income Tax Appellate Tribunal, who had authored the impugned judgment, has in the case relied upon held that the penalties levied under the Income Tax Act are civil liabilities.
10. Mr. Iqbal Salman Pasha learned counsel for the respondent supported the order of the Tribunal and stated that the Tribunal has rightly arrived at the conclusion that the respondent entertained a bona fide view on the basis of interpretation of the rebate granting provision and had no guilty intent. He said that the respondent-bank was fully owned by the Government of Pakistan and if the officers of the bank committed an act which had resulted in reduction of tax liability of the respondent bank, no personal benefit accrued to them and no guilty intent or mens rea can, therefore, be attributed to them or to the Government of Pakistan. He said that there is plethora of case-laws on the subject that the penalty imposing statute is quasi-criminal in nature and mens rea has to be proved before taking any penalty action. He without prejudice to his argument that the excess rebate was claimed on an interpretation of the rebate granting provision which the respondent in good faith considered to be correct, said that the onus was on the Income Tax Officer to establish the mens rea or the guilty intent and this onus has not been discharged by the Income Tax Officer. He further submitted that the CIT(Appeals), after analyzing the factual and legal position of the penalty order had given a clear cut finding that the penalty order was not sustainable, but instead of cancelling it had only set aside the penalty order and this finding of the CIT(Appeals) was not challenged by the applicant before the Tribunal as they had not filed any appeal against this order before the Tribunal and, therefore, they cannot be allowed to challenge it now. Defending the order passed by the Tribunal, rejecting the reference application for referring the proposed questions to this Court the learned counsel submitted that the Tribunal was correct in holding that the point in issue is so well-settled that there was no need for the Tribunal to refer the issue to this Court. The learned counsel also referred to the definition of mens rea in Law Lexicon page 1481.
11. In support of his contentions the learned counsel relied on the following case-laws:
(1) D.G. Khan Cement Company Ltd. v. Federation of Pakistan and others (2004 PTD 1179).
(2) Commissioner of Income Tax, West Bengal I, and another v. Anwar Ali (1970) 76 ITR (SC India).
(3) Commissioner of Income Tax, Andhra Pradesh v. C.V.C. Mining Company, Gudur (1976) 102 ITR 830.
(4) Commissioner of Income Tax v. Hari Ram Sri Ram (1988) 57 Tax 51 (H.C. Ind.)
(5) Muhammad Muslim v. Commissioner of Income Tax Karachi (1980) 42 Tax 129 (H.C. Kar.))
(6) Commissioner of Income Tax, Lahore Zone, Lahore v. Kamran Steel Re-Rolling Mills (1989) 60 Tax 13 (H.C. Lah).
(7) Commissioner of Income Tax (Rawalpindi Zone), Rawalpindi v. Ch. Fatal Din and Sons, Sialkot (1974) 29 Tax 110.
12. We have examined these reference applications in the light of the arguments of the learned counsel, the judgments relied on by them and have perused the impugned judgment, the Tribunal CIT (Appeals), the orders under section 111 passed by the Income Tax Officer and the records of the case.
13. There can be no cavil to the arguments of the learned counsel for the respondent that the penal provisions under the Income Tax Act are quasi-criminal in nature and mandatory condition required for the levy of penalty under section 111 is the existence of mens rea and, therefore, it is necessary for the department to establish mens rea before levying penalty under section 111. There is a plethora of judgments of the superior Courts of India and Pakistan from the very inception of Income Tax Act, 1921, on this point. The judgments relied on by he learned counsel for the respondents also supported this proposition. The reliance of the learned counsel for the applicant on the judgment of the Tribunal authored by the then Chairman or the Income Tax Appellate Tribunal in which the learned Chairman has held that the penalties levied under the Income Tax Ordinance are in nature of civil liabilities, is ill founded as the order of the Tribunal cannot overrule the judgments of the apex Court and this Court. Therefore, we have no hesitation in answering the question framed by this Court with the consent of the parties on 5-5-2006, in negative.
14. Before discussing the other merits of the case, it will he relevant to reproduce section 111 of the Income Tax Ordinance, 1979 and the clause (vi) of Para A of Part-II of the Second Schedule by which this rebate was allowed which read thus.
Section 111. Penalty for concealment of income, etc.---(1) Where, in the course of any proceedings under this Ordinance, the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal is satisfied that any person has, either in the said proceedings or in any earlier proceedings relating to an assessment in respect of the same income year, concealed his income or furnished inaccurate particulars of such income, he or it may impose upon such person a penalty not exceeding two and a half times but in no case less than the amount of tax which (the said person sought to evade by concealment of his income or furnishing of inaccurate particulars of such income, as aforesaid).
(2) For the purposes of subsection (1) and section 119, concealment of income or the furnishing of inaccurate particulars of income shall include---
(a) the suppression of any item of receipt liable to tax in whole or in part,
(b) claiming any deduction for, or showing, any expenditure not actually incurred, (and)
(c) any act referred to in clauses (aa), (b), (c), (d) and (e) of subsection (1) of section 13.
(2A) Notwithstanding anything contained in subsection (1) or subsection (2), where any item of receipt declared by the assessee is claimed by him as exempt from tax, or where any deduction in respect of any expenditure is claimed by him, mere disallowance of such claim shall not constitute concealment of income or the furnishing of inaccurate particulars of income, unless it is proved that the assessee deliberately claimed exemption from tax in respect of the aforesaid item of receipt or claimed deduction in respect of such expenditure not actually incurred by him.
(3) An appellate Assistant Commissioner or the Appellate Tribunal, on making an order under subsection (1), shall forthwith send a copy thereof to the Income-tax Officer and thereupon all the provisions of this Ordinance relating to the recovery of penalty shall apply as if such order were made by the Income-tax Officer.
Clause (vi) of para of
Part-II of the Second Schedule:
Provided that in the case of a domestic company, rebate shall be allowed as follows:--
(i) -----------------------------------------------------
(ii) -----------------------------------------------------
(iii) -----------------------------------------------------
(iv) -----------------------------------------------------
(v) -----------------------------------------------------
(vi) a rebate of 15 per cent to such company on so much of the income, profits and gains accruing or arising outside Pakistan to which clause (2) of paragraph A of Part-IV does not apply as are brought by it into Pakistan.
15. The learned counsel for the respondent has submitted that besides his other arguments his case falls under subsection 2(A) of section 111 wherein the mere disallowance of any claim shall not constitute concealment of income or the furnishing of inaccurate particulars of income, unless it is proved that the assessee deliberately claimed exemption. However, the learned counsel for the applicant pointed out that subsection 2(A) was introduced vide Finance Act, 1988 whereas penalty was levied for the assessment years 1975-76 to 1984-85 and this subsection will not have retrospective effect. The learned counsel for the respondent rebutted this arguments by submitting that the impugned order under section 111 was passed on 28-2-1991 when subsection 2(A) was on the statute book and being a beneficial amendment it would apply to all pending proceedings. Since the above controversy is not directly relevant to the subject matter of this case, resolving it would be academic in nature only and, therefore, we refrain from commenting on these arguments.
16. The Tribunal has allowed this appeal with the following remarks:
"On consideration of entire facts and material obtaining on record it is held that the appellant entertained a bona tide view though not sustainable in fact, but in the facts and circumstances of the case the imposition of penalty is not justified and consequently all the penalty orders stand cancelled. The order of learned CIT(Appeals) is varied accordingly.
The appeals arc allowed as above."
17. On an examination of the record of the case and the perusal of the impugned order of the CIT Appeals and the Income Tax Officer and after analyzing the conduct of the respondent, we are of the view that the finding of the Tribunal that the respondent entertained a bona fide view, though not substantiated by fact, is not prima facie apparent and, therefore, it is our view that this finding is not based on correct appreciation of the facts of the case and since it is on the basis of this finding that the Tribunal has modified the order of the CIT Appeals and has cancelled the penalty orders we are of the view that this action of the Tribunal is not sustainable.
18. On perusal of the order of the CIT Appeals we find that besides other reasons one of the reasons prevailing with the Commissioner of Income Tax (Appeals) was that the respondent had not been provided a reasonable opportunity for hearing in submitted their point of view when the order was passed in February, 1991. He also referred to the C.B.R. Circular No.100/1997 where C.B.R. had directed the assessment officer to finalize the penalty proceedings in reasonable time and held that the inordinate delay was not sustainable in law. These were also the basis for setting aside the penalty orders.
19. In view of the above discussion we would reframe an additional question as under:
Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in modifying the order of the CIT Appeals?
20. We would answer this question in negative. We would also like to observe that since the effect of the above answer is that the order of the Income Tax Appellate Tribunal is set aside and the order of the CIT Appeals is restored and the penalty order will have to be reframed by the Income Tax Officer after giving the respondent an opportunity of being heard, our reply to the proposed questions referred to us by the applicant may prejudice the case of the parties we would, therefore, refrain from expressing our opinion on the proposed questions.
21. Before parting with this order we would also like to observe that the Income Tax Officer while framing the penalty orders will not consider the discussion in this order or the orders of the Tribunal and the CIT but finalize the order independently in accordance with law. We would, however, like to observe and this observation should be considered by the ITO that even if he reaches the conclusion that the penalties are leviable, these cases are not the cases in which maximum penalty provided should be levied.
22. These income tax Reference Applications are disposed of in the above manner.
23. A copy of this order under the seal and signature of the Registrar of this Court may be sent to the Registrar, Income Tax Appellate Tribunal for passing of order in consonance with this judgment.
S. A.K/C-1/KReference answered.