1990 PLP (Trib (PTD)

MIAN ABDUL KHALIQ (JUDICIAL MEMBER).‑‑‑By this combined order, we proceed to decide three further appeals; two filed by the Department for the charge years 1977‑1978 and 1978‑79 and one at the instance of the assessee for the assessment year 1978‑

79. Two separate orders passed by the learned CIT(A), Zone‑I, Lahore dated 13‑6‑1981 are subject‑matter of these appeals.

2. The facts of the case are that the assessee, a registered firm,, derived income from manufacture and sale of bakery products alongwith dealings in general provisions items. The assessee's declared version w as under:‑‑ 1977‑78 1978‑79 Bakery sales Rs.3,43,560 24.5% Rs. 5,10,402 23.5% Provision sales Rs. 5,90,818 9.5% Rs. 12,45,460 9.6% On 4‑8‑1977 the ITO after discarding the assessee's trading results for the assessment year 1977‑78 applied G.P. rate of 25% to the bakery sales estimated at Rs. 3,50,

000. G.P. rate of 10% was applied to sales of provision items estimated at Rs. 6,00,

000. Addition of Rs. 4,450 was made to the declared G.P. For the assessment year 1978‑79 on 24‑7‑78 after discarding the assessee's trading results round addition of Rs. 9,000 was made in both the accounts. Assessments for both these years were made under the repealed Income Tax Act at an income of Rs. 21,192 and Rs. 30,292.

3. Some times in March 1979 the Vigilance Wing of the Income Tax Department started rowing and fishing inquiries to dig out information and collect material for assumption of jurisdiction to reopen the completed assessments. The Vigilance Wing addressed letters to various persons and on 11 4‑1979 recorded statement of Mr. Muhammad Afzal one of the partners of the assessee firm regarding quantum of business. No question was asked from the said partner regarding payment of goodwill of the business premises. In response to a letter issued by the Vigilance Wing on 26‑6‑1979, Office Manager Incharge of the assessee firm's shop, conveyed that a sum of Rs. 3,75,000 was paid to Messrs Gulberg Enterprises Limited as goodwill for getting vacant possession. This amount was stated to have been paid out of loan obtained from Messrs Muslim Commercial Bank Ltd., Regal Branch, Lahore. Subsequently, the same person clarified that a partner of the assessee firm i.e. Mr. Muhammad Afzal had firstly borrowed Rs. 3,75,000 from one Mr. Maqbool Ahmed Qureshi, a landlord, and subsequently same amount was returned to him on release of loan by Muslim Commercial Bank. On 9‑6‑1979, the Assistant Director Vigilance Wing recorded statement of Mr. Maqbool Ahmed Qureshi. The assessee firm or Mr. Muhammad Afzal its partner was not associated at the time of recording of statement. The said person admitted factum of advancing of Rs. 3,75,000 to Mr. Muhammad Afzal one of the partners of the assessee‑firm. He also disclosed his ownership of 8/9 squares of land alongwith 6/7 squared of land owned by his wife. That person further stated that he was living in a joint family system with his father who was also a big Zamindar. At the time of recording of statement of Mr. Maqbool Ahmed Qureshi, the assessee‑firm was neither summoned nor afforded an opportunity of cross examination. The Assistant Director Vigilance Wing furnished the evidence collected by him to the ITO who on 19‑11‑1979 after obtaining the approval of the learned IAC issued notice under section 65 of the I.T. Ordinance, 1979 (hereinafter referred to as the Ordinance). The ITO initiated reassessment proceedings by issuance of notice under section fit of the Ordinance for the first time on 10‑7‑1980. The assessee‑firm was directed to produce books of accounts which happened to be in possession of Vigilance Wing as a consequence of impounding before start of reassessment proceedings. After some adjournments ultimately on 20‑2‑89 books of accounts, comprising of cash book, ledger and sale memos were produced after collection from the Vigilance Wing. In response to the ITO's notice on quantum of assessments, the assessee explained that details of purchases alongwith purchase vouchers were taken in custody by the Vigilance Wing but only cash book, ledger and some sale memos have been returned. The ITO was requested to procure purchase vouchers and sale vouchers from Vigilance Wing, the ITO noticed some discrepancies in the dates on certain pages of sale register and merely on that basis declared version was discarded. Despite the fact that the assessee had requested for collection of purchase vouchers, sale reports, stock register and manufacturing account from the Vigilance Wing, the ITO held that the assessee's purchases were un-vouched and not supported by any stock register. The ITO relied on the inquiry conducted by the Vigilance Wing in the form of statement of the creditor, Mr. Maqbool Ahmed Qureshi dated 9‑6‑1179. Despite the fact that the creditor had admitted advancing of loan of Rs. 3,75,000 to Mr. Muhammad Afzal a partner of the assessee‑firm, the ITO held on extraneous considerations that the creditor was not a man of means. Reliance in this behalf was placed on the details of the bank account of the creditor, obtaining of loan by him for purchase of tractor from Agricultural Development Bank of Pakistan etc. The ITO applied G.P. rate of 26% to bakery sales estimated at Rs. 5,50,000 and Rs. 11,00,

000. G.P. rate of 15% was applied to sales of provision goods estimated at Rs. 6,00,000 for the first year. Declared sales of provisions at Rs. 12,45,400 of the second year were subjected to G.P. rate of 15%. During the reassessment proceedings on 12‑3‑1980, the A.R. of the assessee attended and hearing was adjourned to 20‑3‑1980. After allowing adjournment, the ITO in the absence of the assessee recorded another entry on 12‑3‑1980 regarding summoning of Mr. Maqbool Ahmed Qureshi for 22‑3‑1980. On the fixed date i.e. 20‑3‑1980 the assessee's AR and Accountant appeared and produced books of account. The ITO did not disclose that he had summoned Mr. Maqbool Ahmed Qureshi. On 22‑3‑1980 in the absence of the assessee, the ITO allowed Mr. Maqbool Ahmed Qureshi to read his earlier statement made on 9‑6 1979 before the Vigilance Wing. On 22‑3‑1980 the ITO recorded brief statement of Mr. Maqbool Ahmed Qureshi confirming his earlier statement dated 9‑6‑1979. The assessee was kept in darkness regarding proceedings conducted on 22‑3 1980. In the assessment year 1977‑78 the ITO also added Rs. 3,75,000 on account of goodwill of the premises without mentioning the provisions of law under which the addition was made.

4. On appeal, the learned CIT(A) held that issuance of notice under section 65 of the Ordinance being with the prior approval of the learned IAC was justified but in reassessment the adopted estimates of sales in bakery products and general provision items were without any basis. Reassessments made by the ITO for both the years were cancelled. Additions made by the ITO in the trading account being without any basis and material were deleted directing that the assessee's business income as earlier determined by the ITO shall hold the field. However, the learned CIT(A) maintained the addition of Rs, 3,75,000

5. In both the departmental appeals, common grievance was regarding cancellation of the reassessments made by the ITO on quantum of assessment. In the assessee's appeal, relating to the charge year 1978‑79 grievances were about issuance of notice under section 65 of the Ordinance and making of an addition of Rs. 3,75,

000. On behalf of the Department general observations made by the ITO regarding extent of the assessee's business were repeated. The assessee's AR stated that the learned IAC did not exercise discretion in granting approval for issuance of notice under section 65 of the Ordinance in a judicious manner as no material was available with him to establish under‑assessment or concealment of any income by the assessee. The assessee's AR further pleaded that while making addition of Rs. 3,75,000 both the departmental officers failed to appreciate that neither any notice under section 13 of the Ordinance was issued to the assessee nor the assessee‑firm was confronted with the material used by the ITO in interpreting the statement of Mr. Maqbool Ahmed Qureshi. The assessee's AR further stated that legal formalities of obtaining of two approvals as provided in law having not been complied with, the addition merits deletion on facts as well as on legal score.

6. We have given our due consideration to the submissions of the representatives of the parties. Assessment record as well as the statements of creditor Mr. Maqbool Ahmed Qureshi have also been examined. The inquiry conducted by the Vigilance Wing before issuance of notice under section 65 of the Ordinance was nothing short of fishing inquiry to dig out any material for reopening the assessment. Recording of evidence by the ITO in the form of statement of the creditor without associating the assessee‑firm and without affording any opportunity of cross‑examining is not only illegal but deplorable as well. The Assistant Director Vigilance Wing while recording statement of one of the partners of the assessee‑firm on 11‑4‑1979, did not question him about source of payment of Rs. 3,75,

000. All the material furnished by the Vigilance Wing could be relevant for the purpose of issuance of notice under section 65 of the Ordinance. Thereafter, the assessee firm was to be issued a show cause notice under section 62/13 of the Ordinance and addition could have been made after affording opportunity of hearing to the assessee. While recording statement of the creditor Mr. Maqbool Ahmed Qureshi on 22‑3‑1980, the ITO intentionally deprived the assessee‑firm of opportunity of hearing and cross‑examining the creditor. On that date the creditor appeared before the ITO and adopted his earlier statement made before the Vigilance Wing on 7‑6‑1979 regarding advancing of loan of Rs. 3,75,000 to Mr. Muhammad ADA one of the partners of the assessee‑firm. Despite the fact that hearing of the firm's case was fixed on 20‑3‑80 and on that date Authorised Representative of the assessee‑firm had appeared with books of accounts but the ITO in a clandestine manner concealed the fact that he had summoned the creditor for 22‑3‑

80. Recording of statement of the creditor on 22‑3‑80 without associating the assessee‑firm is nothing short of condemning the assessee unheard. After 20‑3‑80 the ITO did not summon the assessee for any date and it was only on 31‑3‑80 that the reassessment was processed.

7. We feel no hesitation in holding that the ITO condemned the assessee -firm unheard for using the statement of the creditor dated 9‑6‑79 and reaffirmation of the same on 22‑3‑

80. Strictly speaking, statement recorded by the Assistant Director Vigilance Wing, had no legal sanctity as he was not an officer entitled under law to record a statement under section 148 of the Ordinance, Established rule of law is that the concerned assessing officer could summon any witness under section 148 of the Ordinance for recording statement. This had to be done in the presence of the affected party i.e. the assessee‑firm. The pre‑trial statement recorded at the back of the assessee i.e. the person affected and that too without affording opportunity of hearing is just a piece of inadmissible evidence which cannot be used against such person. Proceedings under section 148 of the Ordinance being judicial in nature, statement of the creditor had to be recorded in the presence of the assessee‑firm while affording an opportunity of cross‑examination. In the case of Chief Commissioner v. Dina Sohrah Clark, reported as PLD 1959 SC 45 it was laid down that the maxim audi alterm partem (no one shall be condemned unheard) is a part of the fundamental law. This judgment has been followed by the Supreme Court in the cases reported as PLD 1965 SC 90, PLD 1966 SC 96 and PLD 1966 SC

536. In PLD 1970 Lahore 416 in the case of the Malik Abdul Majid v. Disciplinary Committee of the University of Punjab, Lahore High Court held that it is the duty of every person or authority who is in a position to pass an order inflicting any punishment, penalty, forfeiture or disability to fairly disclose substance of the information affecting the person facing the inquiry so as to put him in guard as to the nature of the case, he is supposed to meet on trial. Their Lordships disapproved the action of examining any witness in the absence of the petitioner and the refusal to allow the petitioner to cross‑examine such witness. A perusal of the creditor's statement recorded by the ITO sufficiently establishes that the assessee‑firm was neither associated/confronted with the information collected by the Vigilance Wing/ITO from Mr. Maqbool Ahmed Qureshi creditor nor was it called upon to explain any point requiring clarification. It is also established that the Assessee‑firm was never afforded any opportunity of hearing; rather the creditor's statement was recorded on 22‑3‑1980 behind the back of the assessee‑firm. It was clear attempt to bypass the assessee‑firm for keeping it in darkness. The admitted fact is that the assessee‑firm had applied for loan from Messrs Muslim Commercial Bank in order to finalise the payment of goodwill as the amount had to be paid. Before the sanction of the loan, one of the partners of the assessee‑firm, procured loan from the creditor. Letter written by the Manager to the Vigilance Wing was an inadmissible piece of evidence as the Manager was not an authorised agent of the assessee‑firm. It seems that the Manager made statement without verification of actual state of affairs as existing in the books of accounts. The assessee had duly recorded in the books of accounts factum of payment of Rs. 3,75,000 as goodwill merely due to the letter of the Manager regarding source of payment, the assessee could not be condemned because neither the Manager was authorised to furnished any reply nor had he consulted the books of accounts. Both the departmental officers erred in law in interpreting the reply of the Manager about the source of payment of goodwill amount. Moreover, this reply of the Manager having been furnished to the Vigilance Wing the ITO erroneously relied on that reply in reassessment proceedings after issuance of notice under section 65 of the Ordinance. If the ITO wanted to use the statement of the Manager, the proper course was to summon him under section 148 of the Ordinance after issuance of notice under section 65 of the Ordinance. In this view of the matter reply sent by the Manager of the assessee- firm before issuance of notice under section 65 of the Ordinance was neither an admissible piece of evidence nor binding on the assessee‑firm. As the assessee's books of accounts established the factum of borrowing from Mr. Maqbool Ahmed Qureshi prior to release of loan by the Muslim Commercial Bank, the departmental officers misdirected themselves in interpreting and concluding the issue on erroneous assumptions. Another aspect of the matter is that Mr. Maqbool Ahmed Qureshi, the creditor in his statement recorded behind the back of the assessee admitted advancing of loan of Rs. 3,75,000 to Mr. Muhammad Afzal, one of the partners of the assessee‑firm and admitted repayment of the advanced loan as well. The creditor having admitted advancing of loan, the ITO unnecessarily indulged in unwanted criticism about financial status of the creditor. As per decision reported as (1985) 52 Tax 77 if the creditor admits advancing of any loan, the onus shifts on him to establish the sources of his income. While following that decision, we feel no hesitation in holding that the assessee‑firm stood absolved of its responsibility after admission of the creditor regarding advancing of loan.

8. Looking at the case from legal angle, addition made by the departmental officers, at Rs. 3,75,000 is untenable because of non‑issuance of any notice for confronting the assessee regarding the proposed addition and non‑obtaining of a valid approval as held in PTD 1988 Trib. 88 and PTD 1989 Trib.

762. In these circumstances addition of Rs. 3,75,000 made by the departmental officers in the charge year 1978‑79 being untenable on facts as well as in law is deleted.

9. Taking up the departmental appeals, we do not find any merit therein. Without entering into controversy of legality of issuance of notice under section 65 of the Ordinance, it has been held by the learned CIT(A) that the ITO could not lay hands to any material for re-determining the estimate of assessee's sales under both the heals. Initially the assessee's trading results were discarded and the assessments were made in the light of the past history by estimating sales, applying G.P. rates and making additions in the declared gross profit. There did not exist any material on record for re‑determining the estimate of sales and application of high G.P. rates. For both the years there was no material with the ITO for enhancing the assessee's sales and income. This was nothing short of change of opinion of the one ITO over the other. The learned CIT(A) rightly cancelled the quantum assessments in both the years.

10. In the light of the above discussion the assessee's appeal succeeds to the extent of deletion of Rs. 3,75,000 made in the charge year 1978‑

79. Both the departmental appeals for the assessment years 1977‑78 and 1978‑79 being devoid of any merits are dismissed. M.B.A./886/T Order accordingly.