2002 PLP (Trib (PTD)

(1) An application may be made to the Deputy Commissioner on behalf of a firm for registration of the firm for the purposes of this Ordinance. (2) No application shall be made under subsection (1) unless, before the end of the income year relevant to the year for which assessment is to be made; (a) the firm had been constituted by an instrument of partnership; (b) the said instrument specifies, among other things, the shares of the partners; and (c) the said firm had been registered under the Partnership Act, 1932 (IX of 1932), or an application for registration under the said Act had been made. (3) An application under subsection (1) shall be in such` form, be accompanied by such documents, be verified in such manner and be made on or before such date as may .be prescribed. (4) Where the Deputy Commissioner, after making such enquiry or requiring the firm to furnish such particulars, documents or evidences as he may think fit, is satisfied that the requirements of subsections (2)(3) have been fulfilled and that there is, or was genuine firm in existence in the relevant income year constituted as shown in the instrument of partnership; he may, by an order in writing made within three months of the date on which the return of total income was filed under section 55 of six months; of the end of the income year, whichever is the earlier, register the firm for the purposes of subsection (5), such firm shall be treated as registered firm for the income year for which it is first, registered and for all subsequent income years for so long as there is no change in the constitution of the firm; and if he is, not so satisfied, he may by an order in writing made within the‑aforesaid period, refuse to register the firm; Provided that, where no such order is made within the afore said period, the firm shall be treated as a registered firm and all the provisions of this Ordinance shall, so far as may be, apply as they apply in the case of firm registered under this subsection. (5) If, at any time after a firm has been registered or treated as a registered firm under subsection (4) for any income year, the Deputy Commissioner has reason to believe that; (a) there was no genuine firm in the existence in such income year constituted as shown in the instrument of .partnership; or (b) the requirements of subsections (2) and (3) had not been fulfilled in respect of the said income year, he may cancel the registration after giving a reasonable opportunity to the firm of being heard. For facility of reference relevant provisions of section 69 of the Income Tax Ordinance, 1979 are also being reproduced hereunder; Assessment of firms and partners‑‑‑Section 69 For facility of reference, relevant provisions of this section are also being reproduced hereunder:‑‑‑ (1) Notwithstanding anything contained in this Ordinance, where the assessee is a firm and the total income of the firm has been determined or assessed under sections 59, 59‑A, 60, 62, 63 and 65 as the case may be; (a)

(b) In the case of an unregistered firm, the Deputy Commissioner; (i) May determine the tax payable by the firm on the basis of the total income of the firm; or (ii) May proceed in the manner laid down in clause (a) as applicable to a registered firm, if, in his opinion, the aggregate amount of tax (including the tax payable under sub‑clause (1) of that clause (would be greater than the aggregate amount which would be payable by the firm and the partners individually if the firm were assessed as an unregistered firm: Provided that this sub‑clause shall not apply in respect of any assessment year commencing on or after the first day of July, 1986.

10. Bare reading of section 68 clearly envisages that the provisions of this section are machinery in character and as such the construction 'favourable to the taxpayer should be adopted as is held by the august Supreme Court of Pakistan in the ruling cited as CIT v. Khatija Begum 1965 PTD

540. In another case the apex Court of Pakistan in a case reported as 1961 PTD SC 119 has observed that the machinery section should be construed liberally and where two interpretations are possible, the one favourable to the subject shall be adopted.

11. Reverting to section 68 of the Income Tax Ordinance, 1979, it is observed that an order under subsection (4) of section 68 is not merely for granting of registration but under the same provision of law the ITO is also entitled to refuse the registration of a firm if he is satisfied that a gnuine firm as shown in the instrument of Partnership was not in existence in the relevant income year and that it had not fulfilled the requirements as laid down in subsections (2) and (3) of section 68 of the Income Tax Ordinance, 1979. It is also evident that in order to qualify for being a registered firm an application has to be made by the firm and the Department cannot on its own grant the registration to a firm. However, till assessment year 1985‑86, the Department could treat ate unregistered firm (i.e. a firm which does not even apply for registration) as registered firm for the purpose of levy of tax as laid down in sub- clause (ii) of clause (b) of subsection (1) of section 69 but due to insertion of proviso to this section, this power has been taken away from the Department. Now, natural corollary of this withdrawal of process by the legislature is that the appellant is entitled to claim status of and unregistered firm for the purposes of levy of tax at concessional rates. We also cannot digest how could the ITO pass an order tinder section 68 (4) of the Income Tax Ordinance without satisfying himself that the requirements of subsections (2) and (3) of section 68 of the Income Tax Ordinance, 1979 had been fulfilled as there was no application made by the appellant as required under subsection (1) of section 68 of the Income Tax Ordinance, 1979.

12. Having taken regard to the foregoing discussion, we find the observation of the ITO that, the applicant could not be allowed to avail facility of concessional rates of tax by claiming status of an "A.O.P." is misconceived especially in view of the amended provision of sub‑clause (ii) of clause (b) of subsection (1) of section 69 of the Income Tax Ordinance. Prior to introduction of the amendment in this section, the Department had a right to treat even an "unregistered firm" as "registered firm" for determination of tax payable by it if the same was beneficial to the Revenue. Since, applicability of this provision has been withdrawn from the assessment year 1986‑87 onwards; the clear intention of the legislature is to allow the assessee to avail facility of concessional rate of tax by claiming status of alt "unregistered firm".

13. Although for the purpose of determining tax payable by a firm, section 69 of the Income Tax Ordinance. 1979 had entrusted the powers to the DCIT to treat an "unregistered firm" 'to be a "Registered Firm" nevertheless the fact remains that rates of tax in case of U.R.F., A.O.P. and individual are the same. So, in order to avail concessional rates of tax it is immaterial whether the assessee had claimed the status as "U.R.F:." or "A.O.P", or "individual" in the relevant assessment year viz. previously claimed as "R.F". Acquiring strength from the amendment introduced in section 69 of the Income Tax Ordinance, 1979, we feel convinced that the respondent was legally well within its right to claim the status of an "AOP" irrespective of the fact whether the firm had been dissolved or intact as the claim of registration under section 68 of the Income Tax Ordinance is the privilege for which the assessee cap, apply after fulfilling the requirements so enumerated thereunder. It is so because if in a case, firm is legally constituted, as envisaged under the: Partnership Act, but does not intend to have itself registered under section 68, it has the vested right to do so. It is pertinent to mention that Provisions of subsection (4) of section 68 to treat a firm as "Registered" in all subsequent assessment years, if once registered, was only mandatory on the Department and not on the appellant. Similarly, observance of provisions of subsection (5.) of section 68 for cancellation of registration of firm already granted is also binding only on the Department. Hence, this is the assessee's privilege and prerogative to be taxed at a concessional rate if the law has been so amended.

14. In the given scenario, we are persuaded to hold that the Assessing Officer has acted in flagrant violation of law in observing that status of an "A.O.P. has illegally been claimed by the respondent instead of a "Registered Firm". His observations to ‑this extent are not sustainable and having no legal effect. It would not be out of place to mention that despite making a lot of discussion in the assessment order regarding claiming incorrect status by the assessee, status of an "A.O.P." has personally been assigned by the Assessing Officer rather than assigning a "Registered Firm". This act of the Assessing Officer suo Motu nullifies the effect of findings recorded by him in the assessment order. So, our answer to the question posed (supra) is that the assessee can change its status from a "registered firm" to that of an "un‑ I registered firm" or "association of persons" or "individual" for the purpose of availing concessional rate of tax.

15. Now coming to the other question as to whether the. assessee's return was hit by mischief of any para. of the relevant SSAS in the given circumstances. Perusal, of the Scheme reveals that originally no amnesty to the taxpayers was granted in the said Scheme whereby they could claim immunity from special audit. Subsequently, the C.B.R. through a clarificatory Circular bearing No.12 of 1997 (Income Tax) Islmabad, the 17th September, 1997 introduced an immunity clause thereunder para, 2 of the said Circular provides that all the taxpayers who intend to avail benefits of the SSAS will be immune from special audit if they pay 25 % more tax in the assessment year 1997‑98 viz. the tax payable in the last year. However, out of the cases not qualifying for the immunity, 5% to 10% cases will be selected for special audit. Meaning thereby rest of the cases, otherwise not eligible, shall be processed under the Self Assessment Scheme. In addition to, facility of amnesty from special audit was also extended to the persons who have already filed their returns for the assessment year 1997‑98 prior to issuance 'of the said Circular by the C.B.R. so that they could revise their returns by 30th September, 1997 in order to avail the benefits of the immunity clause introduced by the C.B.R. in the said Circular.

16. Coming to the facts of the present‑ case, the return was filed by the assessee in the status of an "AOP" under the SSAS: In order to claim immunity from "special audit", a revised return was submitted declaring net income of Rs.149,545 and tax worked-out thereon at Rs.17,500 had duly been paid. While the net income in the immediately preceding assessment year 1996‑97 was returned at Rs.164,240 and tax payable thereon was at Rs.13,900 but in the status of a "Registered Firm". Admittedly' the tax paid by the assessee in the year under appeal was more than 25 % when compared with the last year's tax which was the pre‑condition for entitlement to fall out of the ambit of the "special audit". Since, the income returned for the year under appeal was less than the income previously declared, the Assessing Officer refused to accept the assessee's return under the Scheme for the reason that comparison of income and tax paid thereon was not possible owing to change in status of the firm in the year under appeal viz. the preceding assessment year. Accordingly net income was computed by the Assessing Officer at Rs.514,000 by assigning status of an "AOP" to the assessee. At the first appellate stage, the Appeal Commissioner directed to accept the return under the SSAS as the appellant's case qualified to be accepted under the immunity clause of the Scheme.

17. Upon having considered the learned D.R's. contentions and the facts available on file, we feel convinced that the assessee's return of income has erroneously been excluded out of the ambit of the immunity clause of the Self‑Assessment Scheme. In fact the Assessing Officer has processed the assessee's case in "special audit" without appreciating the relevant provisions of SSAS in its proper perspective. C.B.R. in para. 2 Circular No.5 of 1997 (Income Tax) Islamabad, July 12, .1997 had certainly qualifications for acceptance of the returns to be accepted under the Scheme. Out of which sub‑para. (b) the said para clearly spells out that all the returns shall qualify for acceptance in the Scheme if the tax paid .by an existing assessee on the basis of income declared for assessment year 1997‑98 is higher than the tax payable for the assessment year 1996‑97 on the basis of assessment or the returned income whichever is higher. In order to claim, immunity from "special audit" Circular No. 12 of 1997 (Income Tax) Islamabad the 17th September, 1997 shall have to be taken into account which envisages that persons who availed Broad Based Self‑Assessment Scheme (BBSAS) in the preceding assessment year will be immune from "special audit" if they pay 25 % more tax than the last year's tax. Glancing through both these circulars we find that main thrust of these circulars is that the condition precedent for making comparison to fall out of the purview of the special audit is two‑fold. Firstly that the case for the‑preceding assessment year should have been processed under the Broad Based Self -Assessment Scheme and secondly tax paid 'for the year under appeal should be 25 % more than the last year's tax. Perusal of the facts reveals that while setting apart the assessee's return out of the parameter laid down for special audit, the Assessing Officer .has mistakenly involved himself in making comparison of the income returned as well as the status claim by the assessee in the year under appeal with those of the immediately preceding assessment year. Making comparison on such basis amounts of benefits of the SSAS to the assessee. In fact this is not the case of the 'Department that the assessee has paid less tax in the year under appeal, which was required to be paid in order to avail amnesty from special audit of the case, and he had not cut the fruit of Broad Base Self‑Assessment Scheme in the preceding assessment year. In this back ground we have no other alternative except to hold that the CIT(A) has rightly ordered for acceptance of the returned income under the SSAS being the case did not hit by any disqualification enumerated in the said scheme.

18. Consequently, the Departmental appeal fails and we dismiss being bereft of any merits. C. M. A. /M. A. K./179/Tax(Trib.) Appeal dismissed.