COMMISSIONER OF INCOME TAX/WEALTH TAX, MULTAN ZONE, MULTAN VS MUHAMMAD ZULFIQAR, 2009 PTD-LAHORE-HIGH-COURT-LAHORE 224 (2008)

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

----S. 62---C.B.R. Letter C. No. 1(49)-II/76 dated 16-9-1976---C.B.R. Letter C. No.1(23), IT-1/77 dated 1-1-1977---No account case---Rejection of declared version---Notice to assessee for estimated income--Necessity---Held, although notice under S.62, Income Tax Ordinance, 1979 was not mandatory in "no account case", yet Deputy Commissioner of Income Tax was bound to hear the assessee and confront him on his proposed estimate---Principles.

C.I.T. v. Sher Muhammad Tax Ref. 3 of 2006; Seth Gurmukh Singh and another v. Commissioner of Income Tax Punjab (1994) 12 ITR 393 H.C. Lahore; Gunda Subbayya v. C.I.T. Madras (1939) 7 ITR 21 and Commissioner of Income Tax v. Khemchand Ramdas (1940) 8 ITR 159 Lah. ref.

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

----S. 62---General Clauses Act (X of 1897), S.24-A--No account case---Rejection of declared version---Notice to assessee for estimated income---Necessity----Held, power to pass an order or give any direction conferred on authority, has to be exercised reasonably, fairly, justly and for the advancement of the purpose of the relevant enactment---Order passed against an assessee, detrimental to his interest without providing him an opportunity of presenting his case can, in no manner be termed as having passed fairly and justly---Income Tax Appellate Tribunal, in circumstances, was justified in holding that specific notice under S.62, Income Tax Ordinance, 1979 was to be issued in no account case---Principles.

C.I.T. v. Sher Muhammad Tax Ref. 3 of 2006; Seth Gurmukh Singh and another v. Commissioner of Income Tax Punjab (1944) 12 ITR 393 H.C. Lah.; Gunda Subbayya v. C.I.T. Madras (1939) 7 ITR 21 and Commissioner of Income Tax v. Khemchand Ramdas (1940) 8 ITR 159 ref.

Ch. Muhammad Asghar Saroha for Petitioner.

ORDER

The assessee derives income as jeweller/Zargar and filed his return declaring income at Rs. 1,59,200 inclusive of property income at Rs.13,200. The case was processed for total audit. The books of accounts were not produced, therefore, declared version was rejected and business income was assessed at Rs.1,32,702, while property income was assessed at Rs.19,200 against declared income at Rs.13,200. Net income was thus assessed at Rs.2,97,902. The appeal filed by the petitioner before the Commissioner (Appeals), was dismissed. The appeal before the Income Tax Appellate Tribunal succeeded, wherein learned Tribunal, while observing that Assessing Officer has finalized assessment without issuing notice under section 62 annulled the assessment on the ground of non-issuance of notice.

2. The Revenue, through instant tax reference has proposed the following questions, statedly arising out of the impugned judgment of learned ITAT:--

"(1) Whether on the facts and in the circumstances of the case, ITAT was justified to hold that specific notice under section 62 of the repealed Ordinance, was to be issued in no a/c case ignoring the decision of High Court Multan Bench reported as "Tax Ref. 3 of 2006 (C.I.T. v. Sher Muhammad)?"

(2) Whether it is mandatory upon the Assessing Officer to issue notice under section 62 even in cases where no books of accounts are produced by the assessee, before completion of assessment proceedings under section 62 of the (Repealed) Income Tax Ordinance, 1979."

3. Learned counsel for the petitioner/Revenue has contended that case of the assessee is "no account case" and as such, the issuance of notice was not a mandatory requirement. It is further submitted that learned Tribunal, while passing the impugned decision, has ignored the decision of this Court in the case of "Commissioner of Income Tax v. Sher Muhammad" (Tax Reference No.3 of 2006), Much emphasis was laid on the language of section 62 of the late Income Tax Ordinance, 1979, with specific reference to the phrase. "where the assessee provides books of accounts as evidence in support of his return." It was submitted that no books of accounts have been produced by the assessee nor it is required in "no account case", thus, notice under section 62 was not an essential requirement.

4. Heard learned counsel for the Revenue petitioner and record perused.

5. Determination of tax payability of an assessee, through an order in writing of Deputy Commissioner of Income Tax, on assessment of total income of such assessee, within the contemplation of section 62 of late Ordinance, 1979, is contingent upon notice to the assessee. The proviso to section 62, provides that Deputy Commissioner,' in cases, where assessee produces books of accounts as evidence, in support of his return, before disagreeing with such accounts, will give notice, pointing out therein the defects in the accounts and will also provide the assessee an opportunity to explain his point of view about the defects.

6. Revenue (petitioner) claims that there is no necessity of a notice to an assessee, in "no account" cases, as phrase used in proviso to section 62; "where the assessee provides books of accounts as evidence in support of the return", is indicative of the fact that notice under section 62, is restricted to the cases of assessee in account cases only. There is no denial of the fact that assessment made under section 62 is an order, whereby the tax liability of an assessee is enhanced. Such order affects the assessee adversely and the same is detrimental to his interest. The question, therefore, arises that Deputy Commissioner, under the provisions of section 62, is vested with the power to pass an order, adverse to the interest of a party. Can such order has the legal sanctity which has been passed, against the assessee, without providing an opportunity to explain his position? Central Board of Revenue (now FBR) had expressed in letter C No.1 (49)-II-I/76 dated 16-9-1976 that assessing officers have general tendency to dispose of "no accounts cases", without any serious effort to go into the facts. It was further expressed in Para-3 of the letter that maintenance of some sort of accounts is unavoidable and notice to such assessee under section 61 is necessary to such assessee, as maintenance of accounts is indispensable for the conduct of business in certain cases. Para 5 of the aforementioned letter reads as under:--

"The Income Tax Officers will be the best Judges as to whether the non-maintenance of accounts is genuine and the income so far assessed does not need to be disturbed in any substantial way. He must, however, either obtain a formal wealth statement under section 58 or record the assessee's statement specifically questioning him about the value of stocks, the properties, if any, standing in his name or in the name of his wife and dependents, the monthly expenses including rent, electricity and other expenses of similar nature and finally the fixed obligations like payments of insurance premium etc."

7. Reference to another circular letter of C.B.R. will be useful for the resolution of instant controversy. Letter C No.1 (23) IT-I/77 dated 1-1-1977, reported in Third Edition (1988 of C.B.R.' s Income Tax Manual Part V, contains the direction that Assessing Officer, while framing assessment should take note of:

(i) An assessment order being a quasi-judicial order, the findings recorded therein should be precise and well-reasoned. In cases, where accounts are rejected, the orders must record in detail the reasons for rejecting the accounts. The defects in the accounts should be specified with instances or a signed admission regarding these defects be obtained from assessee/authorized representative. Before rejecting of accounts, the explanation of the assessee be obtained and reasons for its being not acceptable should be recorded. If accounts are not be accepted, the rejection must be stated in so many words. The responsibilities of the Assessing Officer do not end with rejecting of accounts. He still has to estimate the sales, rate of profit or work out other appropriate additions to the trading results. These estimates and additions have to be fully justified. It may be remembered that the onus of justification of the adopted results or additions is on the Assessing Officer. The principles relating to disallowance or curtailment of an item of expenditure are same as those obtaining in rejection of accounts; and

(ii) Opportunity to explain.---Before an adverse inference is drawn, the assessee should be afforded an opportunity to explain. Most of the appeals against the department succeed as no opportunity is afforded to the assessee. It can be done by a notice under section 62 or an entry on order sheet. If an assessee accepts a defect and the consequent adverse inference, an admission may be recorded on order sheet and got signed by assessee or his authorized representative and a reference be made in the order.

8. The circular letters mentioned hereinabove, speak about the instructions of C.B.R. that notice to assessee, is essential requirement and the same may not be in the form and under section 62, so far as "no account cases, are concerned.

9. The questions raised in these petitions, can be viewed from another angle. The rule of natural Justice, as is well established, is to be read into the provisions of law, authorizing a statutory functionary to pass order in relation to the rights of citizens. The law on this point is settled and needs no scholarly discussion.

10. We may refer to the case of Full Bench of this Court the case of "Seth Gurmukh Singh and another v. Commissioner of Income Tax Punjab" (1944) 12 ITR 393 (H.C. Lahore). The questions proposed was that if the Assessing Officer makes his own estimates, is he bound to disclose the material, on which he finds that estimate to the assessee? The question was answered in the following terms:--

"If he proposes to make an estimate in disregard of the evidence oral or documentary, led by the assessee, he should in fairness disclose to the assessee the material on which he is going to found that estimate"

11. Learned Full Bench arrived at above conclusion, after discussing in the judgment, plethora of case law. Among the cases, which have been discussed in the judgment, following two cases require specific mention:

(i) "Gunda Subbayya v. C.I.T, Madras" (1939) 7 ITR 21. Wherein it was observed that:--

"There is nothing in the Act itself which requires the Income Tax Officer to disclose to the assessee the material on which he proposes to act or to refer to it in his order but natural Justice demands that he should draw the assessee's attention to it before making the order. Information which the Income Tax Officer has received may not always be accurate and it is only fair when he proposes to act on material which he has obtained from an outside source that he should give the assessee an opportunity showing, if he can that the Income Tax Officer has been misinformed, but the Income Tax Officer is obviously not bound to disclose the source of his information."

(ii) "Commissioner of Income-tax v. Khemchand Ramdas" (1940) 8 ITR 159, wherein the Court has observed that:--

"Though there is nothing in the Act which requires the Income Tax Officer to disclose to the assessee the material on which he propose to act or to refer to it in his order, natural Justice requires and he should conduct his proceedings in accordance with natural Justice, he should draw the assessee's attention to any such material and give him a reasonable opportunity to meet the case arising therefrom before making his order."

12. Further section 24-A of the General Clauses Act of 1897 needs it's mention. The power to pass an order or give any direction conferred on authority, has to be exercised reasonably fairly, justly and for the advancement of the purpose of an enactment. An order passed against an assessee, determined to his interest without providing him anopportunity, in no manner be termed as having been passed fairly and justly. The impugned judgment of learned Tribunal, wherefrom the proposed questions of law have been raised, is based on well-settled principles and questions framed therefrom, for our opinion, are answered in negative.

13. The upshot of the above discussion is that although notice under section 62, is not mandatory its no account cases, yet D.C.I.T. is bound to hear the assessee and confront him on his proposed estimate. The question framed in this reference are answered accordingly.

M.B.A./C-23/LOrder accordingly.