VS, 2009 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 216 (2008)

Income Tax Ordinance (XLIX of 2001)---

----S.221(1A)---Income Tax Ordinance (XXXI of 1979), Ss. 107-AA & 80-D (1)---C.B.R. Circular 10 of 1960 dated 14-7-1960---Rectification of mistake---Assessments originally completed were rectified on the ground of allowing credit of tax deductions against the tax levied--Subsequently, assessee claimed tax credit under S. 107-AA of the Income Tax Ordinance, 1979 and requested for set off of the same against tax payable under S. 80-D of the Income Tax Ordinance, 1979---Rectification sought was granted by the Taxation Officer and consequently a further order was passed under S. 221 of the Income Tax Ordinance, 2001---Subsequent to passing such order, successor Taxation Officer, was of the view that assessee was illegally allowed set off and having an opinion different from his predecessor, invoked the provisions of S. 221 of the Income Tax Ordinance, 2001 and correct the stated illegality by passing a further order under S. 221 of the Income Tax Ordinance, 2001 reversing the allowed set off---Validity---Firstly, rectification had been made on the basis of change of opinion, secondly, the matter involved difference of interpretation, as in the opinion of predecessor the set off of tax credit was available against tax under S.80-D of the Income Tax Ordinance, 1979, while the successor had a different view; matter related to diversified interpretation of statutory provisions making the issue debatable and arguable and thirdly, First Appellate Authority having directed that set off of tax credit be allowed had hardly any room for the office of lower authorities to interfere with in view of the principle of merger---Action taken under S. 221 of the Income Tax Ordinance, 2001 was unjustified and unlawful and merited vacation---Basic action being illegal, whatsoever shall follow the same shall be unlawful and without jurisdiction---Question whether the tax credit was amenable to set off against tax under S.80-D of the Income Tax Ordinance, 1979 needed not to be discussed---Orders so passed were ordered to be vacated by the Appellate Tribunal being unlawful and without jurisdiction.

C.I.T. Companies-II, Karachi v. National Food Laboratories 1992 PTD 570; 2006 PTD 78; 1992 PTD 566 and 1992 PTD 932 rel.

Kasmir Edible Oil v. Federation 2005 PTD 1621; Federation v. Kashmir Edible Oil Ltd. 2006 SCMR 109; 2005 PTD 1316; C.I.T. v. Idrees Cloth House Lahore 2008 PTD 1420; Glaxo Laboratories's case 1992 PTD 566; 1992 PTD 932; Honda Shahrah-e-Faisal's case; Circular No.10 of 1960 and 1986 PTD 100 ref.

Shahbaz Butt for Appellant.

Dr. Muhammad Khan Awan, D.R., LTU, for Respondent.

ORDER

NASEER AHMAD (ACCOUNTANT MEMBER).---These two appeals at the stance of the assessee are directed against consolidated appellate order dated 20th November, 2007 passed by the Commissioner of Income Tax (Appeals) Zone-I, Lahore in respect ,of assessment years 2001-2002 and 2002-2003. Following grounds have been taken:--

Assessment year 2001-02:

(1) That the action taken by the Taxation Officer under the garb of section 221 of the Income Tax Ordinance, 2001 and subsequently confirmed by the learned First Appellate Authority is wholly without jurisdiction failing outside the scope of rectificatory provisions of law.

(2) That both the impugned orders are not tenable in the eyes of law, as the same are based not only on misconception of law, but also on wrong interpretation of statutory stipulation.

(3) That the learned First Appellate Authority has erred in holding that the provisions of sections 80-D and 8000 of the repealed Ordinance, are overlapping provisions, which operate independent of each other.

(4) That the Authorities below have erred in disallowing adjustment of tax credit under section 107AA against the tax payable under section 80D of the repealed Ordinance of 1979.

(5) That the learned First Appellate Authority was incorrect in holding that the matter in issue falls within the scope of section 221 of the Income Tax Ordinance. The matter purely relates to interpretation of statutory stipulations, therefore, cannot be exposed to limited scope of rectification on the basis of different interpretations and changed opinion.

(6) That the learned First Appellate Authority has failed to apply judicious and conscious mind on the submissions made at bar during the course of appellate proceedings.

(7) That both the Authorities below have erred in expanding the scope of main provisions under the wrong interpretation of explanation to section 80-D (1) of the repealed Ordinance.

(8) That the basic action taken by the Taxation Officer under the garb of section 221 was open to exception, as it was based on picking up imaginary loopholes in the existing order thereby reaching to a conclusion different from one expressed through the existing rectification order.

Assessment year 2002-03.

(1) That the action taken by the Taxation Officer under the garb of section 221 of the Income Tax Ordinance, 2001 and subsequently confirmed by the learned First Appellate Authority is wholly without jurisdiction falling outside the scope of rectificatory provisions of law.

(2) That both the impugned orders are not tanable in the eyes of law, as the same are based not only on misconception of law, but also on wrong interpretation of statutory stipulation.

(3) That the orders passed by the Taxation Officer, tantamount to an assault on the orders passed by a Superior Authority. Hence absolutely contrary to the principle of merger and, therefore, wholly without lawful jurisdiction.

(4) That the learned First Appellate Authority has erred in holding that the provisions of sections 80-D and 8000 of the repealed Ordinance, are overlapping provisions, which operate independent of each other.

(5) That the authorities below have erred in disallowing adjustment of tax credit under section 107/AA against the tax payable under section 80D of the repealed Ordinance 1979.

(6) That the learned First Appellate Authority was incorrect in holding that the matter in issue falls within the scope of section 221 of the Income Tax Ordinance. The matter purely relates to interpretation of statutory stipulations, therefore, cannot be exposed to limited scope of rectification on the basis of different interpretations and changed opinion.

(7) That the learned First Appellate Authority has failed to apply judicious and conscious mind on the submissions made at bar during the course of appellate proceedings.

(8) That both the Authorities below have erred in expanding the scope of main provisions under the wrong interpretation of explanation to section 80-D (1) of the repealed Ordinance.

(9) That the basic action taken by the Taxation Officer under the garb of section 221 was open to exception, as it was based on picking up imaginary loopholes in the existing order thereby reaching to a conclusion different from one expressed through the existing rectification order.

2. Out of the foregoing grievances of the appellant a precise question "as to whether the Taxation Officer has lawfully rectified both the orders in exercise of power under section 221 (1) of the Income Tax Ordinance, 2001" (hereinafter referred to as "The Ordinance") has arisen for the Tribunal's consideration.

3. Relevant facts for the disposal of these appeals are as follows:--

Assessment year 2001-2002:

4. The assessee-appellant a Private Limited Company is engaged in the manufacturing and sale of tyres and allied rubber products. Original assessment in this year was completed on 26th June, 2002, under section 62 of the Income Tax Ordinance, 1979 (hereinafter referred to as ("The Repealed Ordinance"). Since the tax on assessed income was less than one half per cent of the declared turnover, therefore, minimum tax under section 80-D (1) of the Repealed LT. Ordinance was charged at Rs.1,165,102. The assessed income was impugned before the first and second appellate forums. This Tribunal vide its order dated 9th April, 2006 passed in I.T.A. No.878/LB/2004 remanded the case back to the assessing officer. It is also worth mentioning that during the pendency of appeal before C.I.T.(A) in the first round of litigation, the original assessment order dated 26th June, 2002 was subsequently rectified under section 221 of the Income Tax Ordinance, 2001 through an order dated 17th June, 2004, to the extent of allowance of credit of tax deducted during the year. Consequent upon receipt of order dated 17th June, 2004, the assessee/appellant moved an application under section 221 of the Ordinance seeking rectification on the ground that export rebate was not allowed, while the determined tax credit under section 107-AA of the Repealed Ordinance was not allowed set off against tax determined under section 80-D of the above said Ordinance. The Taxation Officer, agreeing with the submissions of the appellant rectified the order dated 17th June, 2004 through and order dated 24th August, 2004, whereby export rebate was allowed and tax credit under section 107-AA as determined at Rs.1,049,937 was set off against minimum tax payable under section 80-D of the Repealed Ordinance.

5. Subsequently the successor Taxation Officer initiated proceedings under section 221 and the assessee was issued show-cause notice as to why the order dated 24th August, 2004 may not be rectified under section 221 of the new Ordinance as it was in view of the successor officer that in accordance with the interpretation of section 80-D (1) of the late Ordinance, set off of tax credit under section 107-AA of the aforesaid Ordinance is not correct and is not permissible. The taxpayer agitated the intended action being illegal and without jurisdiction and beyond the scope of the statutory stipulations as contained in section 221 of the Ordinance, 2001. The submissions so made, did not convince favour of the Taxation Officer and the earlier rectification order was further rectified through impugned order dated 30th June, 2007, whereby the set off of tax credit under section 107-AA, already allowed by the predecessor Taxation Officer, against tax payable under section 80-D was declined. The treatment meted out through order dated 30th June, 2007 was agitated before C.I.T. (A), who vide impugned consolidated order dated 20th November, 2007, dismissed the appeal.

Assessment year 2002-2003:

6. Original assessment was completed on 28th June, 2003. The original order was rectified through an order passed under section 221 of the Ordinance, whereby credit of tax deducted, collected or paid was allowed against tax payable for the said year. Subsequently, the assessee moved for rectification claiming set off of tax credit of Rs.1,312,669 determined under section 107-AA of the Repealed Ordinance, against the tax payable under section 80-D thereof. The said issue was also raised in appeal before C.I.T.(A), who vide an order dated 28th June, 2005 directed the Taxation Officer to allow the set off of tax credit under section 107-AA against the minimum tax under section 80-D of the repealed Ordinance, in accordance with law. The department agitated this order of the First Appellate Authority before the Tribunal, but later on the appeal was withdrawn on the April, 2006 vide I.T.A. No.5972/LB of 2005 (Assessment year 2002-2003). It is important to note that during the pendency of appeal before Tribunal, the Taxation Officer started proceeding on the basis of order of the First Appellate Authority passed on 28th June, 2005, when the Taxation Officer was informed that tax credit stood already allowed vide an order dated 24th August; 2005 passed under section 221 of the Ordinance of 2001. Subsequently the successor Taxation Officer, again initiated proceedings on 19th November, 2005, by resorting to the provisions of section 221 of the Ordinance on the ground that tax credit was not permissible to be set off against tax demand under section 80-D of the late Ordinance. The Taxation Officer rejecting the submissions made by the taxpayer repelling the incident action he, therefore, rectified the earlier order to the extent of disallowing set off of tax credit against tax under section 80-D of the Repealed Ordinance vide impugned order dated 20th June, 2007. The order dated 30th June, 2007 was impugned in appeal before the C.I.T.(A), which was dismissed vide the impugned consolidated order dated 20th November, 2007. Since the taxpayer was not satisfied with the impugned order, hence the same has been challenged through separate appeals amongst order inter alia on the grounds set forth in memorandum of appeals for both the years.

7. I have heard the learned representatives of the parties at length and available record has been perused. The learned counsel appearing on behalf of the appellant, has vehemently argued that the action of both the authorities below in both the years under appeal, was unlawful without jurisdiction and was only abuse of powers, therefore, not maintainable in the eyes of law for multiple reasons. AR stated that the assessment for both the assessment years under appeal were respectively completed under the Repealed Ordinance, on 26th June, 2002 and 28th June, 2003. Credit for under section 107-AA of the late Ordinance for the first time was allowed in both the years through orders dated 24th August, 2004 passed under section 221 of the Income Tax Ordinance, 2001 AR stated that the Income Tax Ordinance, 1979 was repealed w.e.f. 30th June, 2002 and Income Tax Ordinance, 2001 came into force on 1st July, 2002 while powers to rectify assessments completed under the repealed Ordinance were granted to the tax authorities by insertion of section 221(1A) in the new Ordinance through S.R.O. No.633 (I)/2002 dated 14th September, 2002. AR stated that the said S.R.O. itself was declared unlawful by the Lahore High Court in case reported as Kashmir Edible Oil v. Federation and cited as (2005)91 Tax 480 (H.C. Lah.) = 2005 PTD 1621. AR further stated that the Honourable Supreme Court has upheld the viewpoint of the Lahore High Court in case cited as (2006) SCMR 109 in re: Federation v. Kashmir Edible Oil Ltd.

8. AR further stated that the provisions of section 221 (1A) were again inserted through Finance Act, 2003 effective from 1st July, 2003. Therefore, AR stated that no assessment completed prior to 30th June, 2003 could be interfered with for the purposes of rectification under section 221(1A) of the Ordinance for the reason that the powers so granted were subsequent in time and could not have retrospective effect. In this behalf AR relied upon the law laid down by the superior Court in the case of Honda Shahrah-e-Faisal reported as 2005 PTD 1316, and the recent judgment of the Lahore High Court cited as 2008 PTD 1420 and reported as C.I.T. v. Idrees Cloth House Lahore. In this background AR stated that since the first rectification order in both the years was passed on 24th August, 2004 under section 221, was unlawful, therefore, any subsequent action taken shall also be considered to be unlawful on the basis of the principle that if initiation is bad whatsoever follows shall be bad in law. AR also stated that notwithstanding the earlier submissions, even otherwise the scope of rectification is very limited. AR stated that provisions of section 221 confers a power to rectify any mistake in an order, which is apparent from the record and mistake which may be seen floating on the surface and also does not require investigation or further evidence. Relying upon case reported as 1992 PTD 570 (SC Pak) in re: C.I.T. Companies-II Karachi v. National Food Laboratories, AR stated that essential condition for exercise of such power is that the mistakes should not only be apparent from the face of the record; such mistake may be seen floating on the surface and would not require further evidence and investigation. AR stated that when an officer exercising powers under section 221 enters into the controversy, investigates into the matter, or interprets a legal provision and reaches to a conclusion other than expressed in the order under rectification; exercise of power in such manner shall not fall within the scope of rectification. AR reiterated that both the orders dated 24th August, 2004 were passed after due consideration and appraisal of factual and legal position. The order passed by the predecessor has been altered by the successor officer by taking resort to different interpretation. AR stated that firstly the law does not permit a successor to find imaginary loopholes in the judgment of the predecessor, so as to reach a different opinion from one expressed by the predecessor. AR stated that such an action falls within the mischief of "changed opinion". According to the AR the law does not permit the use of rectificatory provisions on the basis of formulation of a subsequent opinion. AR stated that from the perusal of evidence available on record, it transpires that firstly the matter in issue is debatable and arguable an secondly it involves interpretation of law and thirdly two different interpretations are possible in the matter, which is evident from the fact that the successor Taxation Officer does express a viewpoint on the basis of an interpretation different from its successor. Therefore, in his view the matter squarely falls within the purview of change of opinion involving debatable and arguable issue subservient to interpretation. Therefore, AR stated in view of case reported as (2006) PTD 78, the provisions of section 221 cannot be pressed into service in the circumstances of the present case. AR further relied upon (1992) PTD 56 and 1992 PTD 932 to support his contention.

9. AR vehemently argued that after the order of the First Appellate Authority in respect of assessment year 2002-2003, directing the Taxation Officer to allow set off of tax credit determined under section 107-AA against the tax payable under section 80-D of the Repealed Ordinance, the orders of the lower authority stood merged with the orders of the superior authority in view of Glaxo Laboratories case reported as (1992) PTD 566 and (1992) PTD 932. Therefore, as per AR no room was left for interference under rectification provision by the Taxation Officer. AR, therefore, prayed for cancellation of the impugned order.

10. The DR on his turn has supported the impugned orders on the basis of reasons recorded therein. DR stated that the action taken under section 221 in both the years was lawful and the appellant/assessee was incorrectly allowed set off of tax credit against the tax payable under section 80-D of the Repealed Ordinance, while passing the first order under section 221 of the Income Tax Ordinance, 2001. DR stated that the scope of rectification is not limited to arithmetical errors but it also covers the errors of law. Reference in this behalf was made to case reported as 23 Tax 236 and 1971 PTD 2004. DR also made reference to Circular No. 10 of 1960 dated 14th July, 1960 to support his contention. DR further stated that the assessee/appellant was entitled to tax credit under section 107-AA, but such tax credit can only be adjusted against normal tax, while the same cannot be allowed adjustment against tax payable under section 80-D of the late Ordinance. According to the DR', while passing orders dated 24-8-2004, the then Taxation Officer under misconception of provisions of section 80-D (1) allowed set off of tax credit to appellant, thereby a legal error was committed, which was open to action under section 221 of the Income Tax Ordinance, 2001 and the. said mistake was subsequently corrected lawfully, fairly and justifiably. Reliance in this behalf was placed on case (1986) 64 Tax 26 (H.C. Kar.).

11. Both the parties have been heard and their arguments have been given conscious consideration. In my view the primarily the issue which needs consideration is "as to whether the Taxation Officer has lawfully rectified both the orders in exercise of power under section 221 (1) of the Income Tax Ordinance, 2001". The whole edifice is dependent upon the decision of the above issue. Therefore, the fate of the subject-matter of rectification is dependent upon the decision in the above issue. I have observed that in both the years under appeal the assessments originally completed were rectified on the ground of allowing credit of tax deductions against the tax levied. Subsequently the assessee claimed tax credit under section 107-AA of the Ordinance of 1979 and requested for set off of the same against the tax payable under section 80-D of the late Ordinance. The rectification sought was granted by the Taxation Officer and consequently a further order was passed under section 221 in both the years under appeal.

12. Subsequently to passing the order under section 221, the successor Taxation Officer, was of the view tat the assessee was illegally set off referred above. Consequently he having an opinion different from his predecessor,, invoked the provisions of section 221 and corrected the stated illegality by passing a further order under section 221 reversing the allowed set off. In the pleading the department has taken stance that the original rectification was based on misconception of the statutory stipulations, while through the subsequently further rectification order the said error/mistake has been corrected on the basis of correct interpretation, while the assessee pleads that the scope of rectification is very limited and action can only be taken where the mistake is glaring obvious and floating on the surface of record. It is also the case of the appellant that the case where any difference of opinion or interpretation is involved, rectification provisions cannot be pressed into service. I would agree with the submissions of the assessee/appellant for the reason, first that rectification in both the years has been made on the basis of change of opinion, secondly the matter involves difference of interpretation, as in the opinion of predecessor the set off of tax credit was available against tax under section 80-D, while the successor had a different view. Thus the matter relates to diversified interpretation of statutory provisions making the issue debatable and arguable. Thirdly, that specially in the assessment year 2002-2003, the C.I.T. (A) having directed that set off of tax credit be allowed bears hardly any room for the office of lower authorities to interfere with in view of the principle of merger. All the foregoing reasons are sufficient to hold that the action taken under section 221 of the Income Tax Ordinance was unjustified and unlawful, therefore, the same merits vacation, while reaching the above conclusion we are fortified from the decision of superior Court viz. 1992 PTD 570 (SC Pak), 2006 PTD 78, 1992 PTD 566 and 1992 PTD 932. Since it is held that the basic action was illegal, whatsoever shall follow the same shall be unlawful and without jurisdiction. Therefore, the question whether the tax credit is amenable to set off against tax under section 80-D of the Repealed Ordinance needs not be discussed.

13. In view of the foregoing reasons, it is held that subsequent impugned rectification orders passed on 30th June, 2007 in both the years are unlawful and without jurisdiction. Therefore, the orders so passed are ordered to be vacated.

C. M. A./106/Tax(Trib.)Order accordingly.