1989 PLP (Trib (PTD)

These are four cross appeals against the order of the learned C.I.T: (Appeals) Zone-3, Karachi relating to the assessment years 1980-81 and 1981-82. The assessee in the case is a non-resident shipping company. According to the assessment order for the year 1980-81 return of income was filed showing Pakistan loss of Rs.14,

346. The I.T.O. further noted in the assessment order that the period involved was from 1st April, 1979 to 31st March, 1980 since the Central Board of Revenue vide a Notification dated 16-1-1980 had permitted the assessee to retain this income year. Similarly for the assessment year 1981-82 the return showing loss of Rs.3,206 was statedly filed for a period of three months from 1st April, 1980 to 30th June, 1980 since from 1st July, 1980 the assessment, according to the I.T.O., was to be made on ship-wise basis and not on annual basis. The I.T.O. in his almost identical orders for the assessment years 1980-81 and 1981-82 wrote that the assessee had not maintained a voyage account at Karachi and thus the actual amount of income, profits and gains accruing or arising to the assessee could not be determined. Apparently relying on rule 40 of the old Income-tax Rules now rule 24 of the Income-tax Rules 1982) the I.T.O. decided to compute the income as such percentage of the turnover at he considered reasonable and he decided that 1/6th of the freight earnings from Pakistan source income would be treated as the income for the two years. According to the assessment orders for the years 1980-81 and 1981-82 the freight earnings from Pakistan sources were to the tune of 34,941,154 yen and 6,460,270 yen respectively and thus the income computed on the basis of 1/6th of the freight came to 5,823,526 yen and 1,076,711 yen respectively which on the basis of the prevalent exchange rate was worked out by the ITO at Rs.2,31,092 and Rs.51,272 respectively.

2. In appeal before the learned C.I.T. (Appeals) the assessee contended that there was no justification for working out its income at 1/6th of the freight earnings at Karachi. It was contended that the method of computing proportionate profit in the ratio of Pakistan earnings to the world earnings had all along been accepted in the assessee's case as provided in the second method to Rube 40 of the old Income-tax Rules. Giving his finding the learned C.I.T. (Appeals) observed that it appeared that the I.T.O. had without pointing out any specific defect in the account version of the appellant changed the method of computing the assessee's profits for the two years under appeal. The C.I.T. (Appeals) therefore directed the I.T.O. to follow the previous practice for determining the assessee's income unless the I.T.O. could pin-point any defects necessitating recourse to the new method. The two assessments were thus set aside for de move action in accordance with law.

3. Before us it is contended on behalf of the Department that the learned C.I.T. (Appeals) was not justified in setting aside the assessments with the directions contained in his order. It is contended that the I.T.O. was justified in deviating from the past method because of the absence of the voyage account. On the other hand in. the assessee's grounds of appeals, it is merely contended that the order of the learned C.I.T. (Appeals) was bad in law and that he was not justified in setting aside the orders of the I.T.O. During the hearing of the appeals, however, the learned counsel for the assessee mainly defended the decision of the learned C.I.T. (Appeals) in so far as he did not accept the computation of the assessee's income at 1/6th of the freight earnings in Pakistan.

4. We have considered the matter and have also considered the provisions of section 80 of the Income-tax Ordinance as were applicable to the assessment year 1980-81, before the amendment brought about through the Finance Ordinance, 1980 (with effect from the income year relevant to the assessment year 1981-82) as also the provisions of rule; 4U (now rule 24). It seems that the I.T.O. without specifically mentioning rule 40 of old Income-tax Rules relied on its provisions in order to justify his new method of computation of the assessee's income as a percentage of its turnover arising in Pakistan. The said rule 40 (the language of which has been used verbatim in the assessment order) read as under: "In airy case in which the Income-tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territories whether directly or indirectly through or from any business connection in the taxable territories or through or from any property in the taxable territories, or through or from any asset or source of income in the taxable territories, or through or from any money lent at interest and brought into the taxable territories in cash or in kind cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income-tax may be calculated on such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or on an amount which bears the same proportion to the total profits of the business of such person (such profits being computed to accordance with the provisions of the Income Tax Act) as the receipts so accruing or arising bear to the total receipts of the business or to such other manner as the Income-tax Officer may deem suitable. Having decided to compute the assessee's income on the basis of the first of the possible methods referred to in rule 40, the I.T.O. then apparently considered the percentage of the turnover, which could be adopted as reasonable for estimating the assessee's income. Again without specifically indicating his basis the I.T.O. seems to have relied on the provisions of section 80 of the Income-tax Ordinance as it stood at the relevant time. Subsection (1) of the said section has all along provided that not with standing anything contained in the Income-tax Ordinance the income of a non-resident from the operation of ships would be taxed in accordance with the provisions of the said section

80. Subsection (2) of the said section has also remained unchanged and it provides for the filing of a return by the master of the ship before the departure of any ship from any port in Pakistan. Subsection (3) of the said section was, however, substituted by the Finance Ordinance, 1980 with effect from the assessment year 1981-82 and through the new subsection a flat rate tax of 8% was levied on gross shipping receipts. According to the CBR Circular No.30 of 1980 dated 20-11-1986 the new flat rate tax was to be levied on shipping receipts arising on or after 1-7 19,

80. Thus in the assessee's case the original subsection (31 of section 80 was applicable for the two, periods under consideration viz. 1-4-1979 to 31-3-1980 and 1-4-1980 to 30-6-1980. The said subsection (3) as it stood at the relevant time read as under:-- "(3) On receipt of the return, the Income-tax Officer shall determine the aggregate of the amounts referred to in subsection (2) and for this purpose, may call for such particulars, accounts, or documents as he ma; require, and one-sixth of the aggregate of the said amounts so determined shall be deemed to be the income accruing in Pakistan to the principal from the said business chargeable to tax under this Ordinance under the head "Income from business or profession", and subjected to tax accordingly". It thus seems that while estimating the assessee's income for the two periods the I.T.O. relied upon the provision regarding computation of income at 1/6th of the gross receipts in the original subsection (3) of section

80. Thus in the first place the I.T.O. apparently invoked the provisions of rule 40 of the old Income-tax Rules to deviate from the past method of computation of assessee's income and secondly he relied on the provisions of section 80 of the Income-tax Ordinance as it stood at the relevant time to compute the assessee's income at 1/6th of the gross receipts. While doing so, however, the I.T.O. does not appear to have considered subsections (6) and (7) of section 80 as these subsections stood at the relevant time and which too were substituted by the Finance- Ordinance-, 1980 with effect from the assessment year 1981-82. These two now substituted sections used to read as under:- "(6) Nothing in this section shall be deemed to prevent a principal from claiming in the year following that in which tax has been paid under this section that an assessment be made of his total income in accordance with the other provisions of this Ordinance, and where such claim is made, the amount of tax paid under this section shall be treated as an advance payment of tax and the provons of prorisins (3) of section 53, shall, so far as may be, apply accordingly. (7) The provisions of subsection (1) shall not apply where the Income-tax Officer is satisfied that there is an agent in Pakistan of such principal from whom the tax leviable under the other provisions of this Ordinance will be recoverable." It is obvious from the old subsection (6) reproduced above that the tax at 1/6th of the gross receipts of non-resident shipping enterprises was only any advance tax and in the following year the principal could claim that the assessment of the total income of the non-resident be made in accordance with the other provisions of the income-tax Ordinance and not on the basis of the rough and ready computation of income at 1/6th of the gross receipts. Moreover, subsection (7) also provided at that time that the entire provisions of section 80 would be inapplicable if the I.T.O. was satisfied that the principal had an agent in Pakistan from whom the tax could be recovered. Thus it seems that the I.T.O. was not; justified in assuming that 1/6th of the gross receipts of the assessee was w necessarily a fair estimate of the assessee's income as finally determined or that; section 80 authorised this as a method of final computation of income without taking into account the provisions of its subsections (6) and (7). In fact the I.T.O. has wrongly adopted a method specified for determining advance tax as a method! for determining final income and tax thereon without considering the options' available to the assessee under the said subsections (6) and (7) of section 80.

5. Coming now to the question whether there was any valid basis for the I.T.O. s deviation from the earlier method of computation of income in the assessee's case we again find that there does not appear to be any such valid basis. We have already noted above that the I.T.O. apparently relied on the provisions of rule 40 while departing from the history of the case but did not apparently appreciate that the said rule 40 provided that in cases where the exact Pakistan income of a non-resident could not be determined the income could be computed (a) as a reasonable percentage of turnover in Pakistan, (b) on such proportion of the total profits as the Pakistan source receipts had to the total world receipts, and (c) any such other manner as the I.T.O. deemed suitable. It seems that to the earlier years the income of the assessee, for purposes of tax in Pakistan, was being determined in accordance with the second method viz. on the basis of the ratio of Pakistan receipts to total world receipts as applied to the; assessee's total world income. The I.T.O. has not made it clear as to how the absence of the so-called voyage account created any difficulties in adopting this same method of income computation in the years under consideration. In fact there is no indication that in earlier years the assessee had furnished the voyage account. It thus seems that merely by pointing out a so-called defect (the implications of which were not at all discussed to the assessment order) the I.T.O. considered it justifiable to change the method of computation of the assessee s income from one basis to another of the I.T.O. was, however, not correct because rule 40 in any case applied only in cases of non-residents where the I.T.O. was of the opinion that the actual amount of income, profits or gains' could not be ascertained. It was in this context that the two specific methods had been indicated in the rule which also bog any other suitable method. Thus when the second method mentioned in the rule was in fact being applied in the assessee's case from year to year for the reason that the actual income, profits or gains in Pakistan could not be ascertained, the I.T.O. could not shift to another method merely by pointing out a so-called defect such' as the absence of the voyage account Obviously the particulars of the receipts' arising in Pakistan. were available to the I.T.O. even in the absence of the voyage account because it is 1/6th of these Pakistan receipts that have been taken as the' income of the assessee for the relevant periods. Furthermore the assessment order in no way indicates that the figure of the total world receipts and total' world income were not available for the relevant years or that the absence of the voyage account in any way hindered the availability of such information. We are thus of the view that there was no justification for shifting from one method of computation of income of the non-resident to another when both the methods: were applicable only in cases where the exact net income arising in Pakistan could not be ascertained. Such a deviation could be justified only if the information; required for the method of computation regularly employed was not available in a particular year i.e. for instance the information regarding total world receipts or total world income was not available for the years under consideration. As a result of the above we uphold the orders of the learned C.I.T. (Appeals) and direct that at the option of the assessee the I.T.O. should compute the assessee's income on the same basis as in the earlier years. The I.T.O. can deviate from this' method only if for the years cinder consideration the assessee is not able furnish' the necessary information which it had been furnishing to the I.T.O. in the earlier years.

6. As a result the Departmental appeals fail and are rejected while the assessee's appeals, which were apparently riled out of abundant precaution, also stand rejected. M.B.A/627/T Order accordingly.