COMMISSIONER OF INCOME TAX VS BASHIR BROTHERS, 2014 PTD-LAHORE-HIGH-COURT-LAHORE 1377 (2014)

Income Tax Ordinance (XXXI of 1979)---

----Ss.59 & 62---Circular No.5 of 1990, 22 of 1991---Circular No. 16 of 1992 dated 1-7-1992---Self Assessment Scheme---Selection for total audit---Appellate forums setting aside decision of Assessing Officer, whereby cases of assessees were selected for total audit---Plea raised by authorities was that action by Assessing Officer was within the mandate of Circulars and suspicion was sufficient for selecting case for total audit---Validity---Definite information could become basis of setting apart a case before its finalization under S. 59(1) of Income Tax Ordinance, 1979, however the same definite information could become cause of an action under S. 65 of Income Tax Ordinance, 1979, if the case was finalized---Contention that mere suspicion was required for setting apart a case for audit, was negated by Circular itself---'State does not cheat the citizens' is the doctrine which leads subjects to follow schemes/invitation by government---Any unscrupulous action by a department under such schemes would lead to mistrust and result anarchy---Requirement of definite information was not met by authorities, therefore, High Court answered question of authorities in the affirmative---Reference was replied accordingly.

Income-Tax Officer and another v Messrs Chappal Builders 1993 PTD 1108 = 1993 SCMR 1108 ref.

Muhammad Irshad Chaudhary and Qazi Ghulam Dastgir, for Appellant.

Faisal Jaffar Khan for Respondent.

Date of hearing: 25th March, 2014.

JUDGMENT

SHAHID JAMIL KHAN, J.---This judgment shall dispose of captioned I.T.A. along with I.T.A. No.76 of 2000, I.T.A. No.77 of 2000, I.T.A. No.153 of 2000 and I.T.A. No.186 of 2000, having identical facts and same legal proposition.

2.All these appeals are filed by the department against orders passed by erstwhile Income Tax Appellate Tribunal ("the Tribunal"). The respondents/assessees filed their returns under Self-Assessment Schemes ("the Schemes") for the assessment years 1990-91, 1991-92 and 1992-93. The Schemes were issued vide Circular No.5 of 1990 dated 25-6-1990, Circular No.22 of 1991 dated 21-7-1991 and Circular No.16 of 1992 dated 1-7-1992 respectively. The returns of respondents were set apart (excluded from the Schemes) for total audit (normal assessment), because gross understatement of income was suspected; In some of the cases the reason of gross understatement was declaration of low Gross Profit Rate ("GP Rate") as compared to declaration in previous years and in other cases less sales were alleged to have been declared.

3.After setting apart, normal assessments under section 62 of the Repealed Income Tax Ordinance, 1979 ("the Repealed Ordinance") were passed. The action of setting apart was challenged before Commissioner (Appeals). The first appellate authority accepted appeals of respondents with the observation that department did not have definite information regarding the alleged understatements, therefore, actions of setting apart were cancelled. In second appeal before the Tribunal, the decisions by first appellate authority were upheld holding that allegations of understatement were not supported by material evidence.

4.In I.T.A. No.178 of 2000. The department has framed the following questions of law, which are taken as representative questions for the purpose of this judgment:--

(1)"Whether on the facts and circumstances of the case the learned ITAT was justified in directing to accept the assessee's returned income under SAS, when definite information regarding less declaration of G.P was available on record?

(2)"Whether on the facts and circumstances of the case, the learned ITAT was justified to hold that low G.P. rate cannot be termed as material evidence to suspect gross under-statement?"

5.Learned counsel for the applicant department has assailed the orders by first and second appellate forums. He argued that the action of setting apart was within the mandate given in paragraph 4 (ii) of the above said Circulars read with enabling provisions. He urged that declaration of 'low GP Rate' or 'less Sales', when compared with the declaration in previous years, was a reasonable ground to suspect the understatement.

6.Learned counsel for the respondents supported the orders of both appellate forums and reiterated the reasons given therein. He submitted that the understatement could not be a mere suspicion unless supported by material evidence based on definite information.

7.Heard both the parties. Record perused.

8.Before embarking upon the discussion to answer the above noted questions, relevant provisions of law and respective Circular are reproduced:--

Section 59 of the Income Tax Ordinance, 1979

"59. Self-assessment:---(1) Where the return of total income for any income year furnished by assessee not being a company engaged in the business of banking, leasing and modaraba, under section 55 qualifies for acceptance in accordance with the provisions of a scheme of self assessment made by the Central Board of Revenue for that year or under any instructions or orders issued thereunder, the Deputy Commissioner 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 assessment.

(1A) Notwithstanding anything contained in subsection (1), the Central Board of Revenue or any authority subordinate to it, if so authorized by the Central Board of Revenue in this behalf, may, in accordance with a scheme referred to subsection (1), select out of returns referred to in that subsection any cases or classes of cases or persons or classes of persons, howsoever determined, for assessment under section 62, and the Deputy Commissioner shall proceed to make the assessment under that section or, if the circumstances so warrant, under section 63, accordingly.

[Emphasis supplied]

9.The authority to make a 'Self Assessment Scheme' was given to (the then) Central Board of Revenue ("CBR") under subsection (1) of section 59 of the Repealed Ordinance. Assesses could opt to avail the Scheme so introduced by the CBR and the returns were required to be filed in accordance with the conditions stipulated in the Scheme to qualify for acceptance. For this purpose, the Deputy Commissioner was to pass an order, confirming the qualification of the return for acceptance under the Scheme. As a check or deterrence against incorrect self assessment, the CBR, or an authority subordinate to it, was authorized, under subsection (1A), to select any case for assessment under section 62 of the Repealed Ordinance. However, the selection was required to be made in accordance with the Scheme made under the subsection (1).

10.As discussed in paragraph No.2 supra, the Schemes for the relevant assessment years were issued through Circulars noted therein. Since the language of paragraph 4(ii) is the same in all the Circulars, therefore, the relevant portions of Circular No.16 of 1992 are reproduced for the purpose of examination:--

"(1) All returns of total income filed under Section 55 of the Income-Tax Ordinance, 1979 for the assessment year 1992-93 by individuals, unregistered firms, registered firms, associations of persons, and Hindu undivided families shall qualify for acceptance under the Self Assessment Scheme except the following:--

(h)Returns set apart for audit.

(4)From amongst those qualifying for Self Assessment Scheme, returns may be selected for audit.

(i)through computer ballot

(ii)With the approval of Regional Commissioner of Income-tax, where gross under statement of income is suspected on the basis of definite information based on material evidence."

[Emphasis supplied]

11.Para (1) of the scheme stipulates the condition for qualification of a return under the Scheme. Para (1) (h) read with subsection (1A) of the section 59, empowers the subordinate authority of CBR to set apart any case for audit (assessment under section 62). Clause (4) of the Scheme prescribes the mode of setting apart any return, under sub-clause (i) through computer ballot and under sub-clause (ii) with approval of Regional Commissioner, 'where gross understatement of income is suspected on the basis of definite information based on material evidence'. To answer the questions of law raised in this reference, interpretation of this part of the Scheme/Circular is required. Plain reading of para 4(ii) suggests that the suspicion of gross understatement had to be based on definite information supported by material evidence.

12.The provisions of the Circulars mentioned above were similar for the purpose of setting apart cases under the Scheme (as discussed above). In this backdrop, Circular No.1 of 1991 dated 14-2-1991 issued by CBR is relevant. Clarification regarding selection of cases under paragraph 4(ii) was issued by the CBR through this Circular, which is reproduced hereunder:---

13.Paragraph No.3 of this Circular reveals that the 'definite information' is required for setting apart case for audit as is necessary for invoking provisions of section 65 of the Repealed Ordinance. Definite information could become basis of setting apart a case before its finalization under the section 59(1), however, the same definite information could become cause of an action under section 65 if the case was finalized. The argument of the appellant that mere suspicion was required for setting apart a case for audit is negated by the above referred Circular itself.

14.The 'State does not cheat the citizens' is the doctrine which leads the subjects to follow the schemes/invitation by the Government. Any unscrupulous action by a department under such schemes would lead to mistrust and result anarchy. The purpose of Self Assessment Scheme was enshrined by the Apex Court in Income-Tax Officer and another v. Messrs Chappal Builders (1993 PTD 1108 = 1993 SCMR 1108) in following words:--

" .Self-assessment scheme introduced in the Income Tax Law of Pakistan is to encourage the taxpayers to make contribution towards the State efforts in running the Government and other related State machinery more willingly than it used to be under the normal assessment scheme. One purpose was to save an honest taxpayer from unnecessary suspicion, accusation and torture of being accused and/or found guilty of deceit and falsehood. This being the main purpose, care was taken to safeguard the interest of the State also against deceit and cheating even in the self assessment scheme. For the latter purpose the scheme as well as the provisions in the Income Tax Ordinance provided for a very limited re-opening of the self-assessment."

The Hon'ble Court also gave guidelines for re-opening a case under self assessment, which has a binding force:--

" .It was the duty of the department before re-opening a case of self assessment to be in possession of definite information regarding the department's assertion against the assessee. The expression "definite information" and similar other expressions used in the above noticed provisions or other related provisions certainly meant much more than mere material so as to cause a reasonable belief or even such evidence, which might lead to a definite 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 re-opened."

[Emphasis supplied]

15.The requirement of definite information has not been met in the instant case, therefore, for the reasons and discussion with reference to the relevant laws, our answer to the representative question quoted above is in "Affirmative". All the appeals noted above are accordingly decided against the applicant department.

16.Office shall send a copy of this order under the seal of the Court to the learned Appellate Tribunal as per section 136(6) of the Income Tax Ordinance, 1979.

MH/C-7/LOrder accordingly.