1990 PLP (Trib (PTD)

Ordinance, 1979 59 of the Income Tax Under the Self Assessment Scheme. Later on the I.T.O. noticed that the books of accounts, which were produced in support of the declared income, were defective. He brought the defect in accounts to the notice of the appellant, who submitted in response to notice that the mistake did not result in any concealment of income. The I.T.O. rejected contention of the appellant and levied tax on the amount of concealed income. The relevant portion of the order passed by the I.T.O. is reproduced below. The passage begins with the arguments advanced by the appellant at the time of assessment proceedings: . . ."That your assessee is a Government contractor and has shown the income‑tax deducted in the Trading Account and has property worked out income on it, has paid income‑tax liability‑ The amount of income‑tax has not been concealed but it has been shown as apparent from the Trading Account. Not to show income‑tax under its proper head in the Balance‑Sheet may be treated as technical mistake and not concealment and it has not been done deliberately." "The explanation furnished by the learned A.R. is without any merit because although income‑tax deducted has been disclosed in the trading account, this amount was receivable in the hands of the assessee on the closing date of the accounting period and besides this, on this particular date, as liability on account of income‑tax for this specified period stood determined or accrued as the assessee's liability to pay income‑tax arises or accrues on the date of filing of their return: .The whole amount of tax deduction should, therefore, have been reflected as receivable in the assets side of the balance‑sheet. If the balance‑sheet is re‑cast. after taking into account this omission the liability side would fall short of assets by the account of this receivable, leaving this source of amount unexplained. In view of this position, the whole amount of undisclosed tax deduction is being added to the assessee's already accrued income in pursuance of the provisions of section 13 with the prior approval of the I.A.C., Range‑1, Hyderabad Zone, Hyderabad."

3. The appellant agitated the addition before the learned AA.C., Hyderabad Zone. The learned A.A.C. has directed that the additions in each year should not be made to the extent of tax deducted at source.; but should be restricted to the amount of refund claimed by the appellant. As the appellant is not satisfied with this relief, he has filed further appeals before this Tribunal.

4. At the time pf hearing Mr. Sirajul Haque, the learned counsel for the appellant, advanced lengthy arguments to establish that the additions made by making provisions of section 65 are not tenable. He started his arguments with the contention that the mistake pointed out by the I.T.O. is only a technical mistake which has not given rise to any concealment of income. When the serious nature of the mistake was explained Mr. Sirajul Haque stated that in mufassil areas skilled manpower is not available, therefore, books of accounts cannot be maintained properly. He submitted that technical mistake committed by an assessee, should not be penalised when it does not amount to suppression of any income. According to him the appellant had disclosed the amount of tax deducted under section 50(4) in the Trading Account. According to him as tax has already been paid on the profit arising out of total contract receipts, no part of income escaped tax. On the other hand, the action under section 65 has amounted to double taxation of the same amount of receipts. The second argument of the learned counsel is that according to the I.T.O. an asset had been suppressed; this does not fall in the scope of section 65 which talks about concealment of income. The third argument of Mr. Sirajul Haque is that the addition has been made under section 13; whereas in fact it does not fall within the scope of section

13. He further submitted that as it does not fall in the scope of section 13 no addition can be made even if the mistake committed by the appellant has resulted into concealment of income. In respect of the order of the learned A.A.C. it has been stated that the same cannot be implemented because this will give rise to double approval under section 13 which was not obtained at the time of assessment proceedings. Lastly, he submitted that action under section 65 is not maintainable in respect of assessment years for which orders were passed under section 23(3) of the Income Tax Act, 1922 or under section 62 of the Income Tax Ordinance, 1979. This is because no new piece of evidence came to the knowledge of I.T.O. who invoked provisions of section

65. He acted on the same set of financial accounts which were examined by the I.T.O. who passed orders under section 62'>. Thus, according to the learned counsel, the action under section 65. in respect of these years, amounts to mere change of opinion which does not have the backing of provisions of section 65 of the Income Tax Ordinance, 1979. In support he cited the following cases: (1) 1989 PTD 1010 (2) 1989 PTD 1141 (3) 1988 PTD 760 (Trib.) (4) 1985 PTD 742 (Trib.) On the other hand, Mr. M.S. Lal, the learned D.R., has supported the action of I.T.O. The departmental case is that the I.T.O. had noticed that books of accounts, on the basis of which income was determined, are prima facie incorrect. The mistake was pointed out to the appellant who did not give satisfactory explanation; therefore the addition was made. The argument of Mr. M.S. Lal is that the change of opinion plea is not relevant for assessment years 1980‑81 and 1982‑83 to 1984‑85, for which assessments were completed under the Self Assessment Scheme because the I.T.O. was required to accept income declared by the appellant without conducting any detailed examination. Lastly, Mr. Lal submitted that the addition is covered by section 13(1)(c) of the Income Tax Ordinance, 1979.

5. We have examined the issue before us in the light of facts of the case and arguments of the learned representatives and provisions of law on the issue. The issue in brief is that tax under section 50(4) was deducted. The credit aspect of this business transaction was reflected in the form of contract receipts. The debit aspect of the same transaction was not reflected. As per basic principles of double entry book‑keeping system a Balance‑Sheet can never tally if both aspects of a transaction are not reflected in final accounts. In the case before us the Balance‑Sheet, that was submitted for each year, did tally. This shows that the books of accounts suffered from a defect. According to the appellant's representative it is a technical mistake which has not resulted in suppression of any income. On the other hand, the department's case is that some income escaped taxation due to this mistake. Before we examine the relevant provisions of law under which it can be taxed and also see if the I.T.O. has acted in accordance with provisions of law, we have to understand the nature of mistake. For this purpose we have to examine the nature of Double Entry Book‑keeping System. An important feature of the Double Entry Book‑keeping System is that each business transaction is recorded in two accounts. If one account is debited, the other account is credited with the same sum of money. Similarly, if one account is credited the other account is debited with the same amount. Whenever a Balance Sheet is prepared the grand total of each side of the Balance‑Sheet is identical. In case there is an omission in recording one aspect of any one or more transactions the Balance‑Sheet will never tally. In order to find out the nature of Double Entry Book‑keeping we seek help from Spicer & Pegler's "Book‑keeping and accounts" published by The English Language Book Society of London. The book is followed not only in U.K. but also in Pakistan and some other countries in the Commonwealth. We quote from the 1967 Edition: Double Entry Book‑keeping takes cognisance of the fact that every transaction which is capable of being recorded in terms of money involves the receiving of value by one or more persons and the giving of equivalent value by another or others. The system accordingly requires entries to be made in the books of a business to give effect to both aspects of the transaction.

Thus, if XY & Co. sell goods of the value of 100 on credit to AB & Co., in the books of XY & Co. the personal account of AB & Co. is debited and the impersonal account for Sales is credited with 100, AB & Co. having received the value, and Sales Account being the account in which the `giving' of value in the form of sales is recorded. When, later, AB & Co. pay the 100, their account is credited, because they give the value, and Cash Account is debited, because this account `receives' it. It must be observed that the value received by, and consequently debited to, an account is not in all cases something tangible, such as goods or cash. The payment of wages, for example, is made as consideration for a service received by the business, viz. the labour of employees, and must be debited to Wages Account, which represents that type of service. The value received may even be of a negative character, and constitute a loss, such as a bad debt which, when sustained, must be debited to the account which `receives' the loss viz. Bad Debts Account, and credited to the account of the defaulting debtor, which yields it

From the above considerations, the following advantages of the double entry system of book‑keeping may be deduced: (1) It provides a complete record of every transaction, from both its personal and impersonal aspects. (2) It provides an arithmetical check on the records, since the total of the debit entries must equal the total of the credit balances .............................

6. Now let us see what entries should have been passed. by the appellant in respect of the issue before us. When he received payment for executing contracts the entry will be as under: Cash Dr. 97 Tax Dr. 03 To receipts 100 The receipts amounting to Rs. 100 are reflected in the Trading Account. It this case, the same have been reflected by giving break up of the amount actually received in cash (i.e. Rs. 97) and the amount of receipts withheld as advance tax under section 50(4) (i.e. Rs. 3). This is the credit aspect of this transaction. The debit aspect of same transaction is that Rs. 97 was received in cash and Rs. 3 was withheld as advance tax. The appellant disclosed Rs. 97 as cash or bank receipt; but did not reflect the debit aspect of the transaction to the extent of Rs.

3. As the deduction under section 50(4) is only an advance payment of tax, which is ultimately adjusted against advance tax for tax liability, the same is an asset. This nature of deductions at source is clearly stated in section 50(4). The relevant part is quoted below: "

50. Deduction of tax at source

(4)

and credit for the tax so deducted in any financial year shall, subject to the provisions of section 53, be given in computing the tax payable by the recipient for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies; the assessment year, if any, in which the `said date' as referred to therein, falls, whichever is the later." The appellant did not reflect the assets amounting to Rs.

3. In view of this mistake his Balance‑Sheet could not tally. The assets side and the liabilities side of the Balance‑Sheet submitted before the I.T.O. did tally with each other. This happened in spite of the fact that a part of debit aspect of a transaction was not reflected in the annual accounts. The only logical conclusion that can be drawn from this is that the appellant concealed an equal amount of liability. Thin both sides of the Balance‑Sheet were tampered with. Now we have to see what is the effect of this tampering on income of the appellant. It may be argued here that the advance tax is not an asset. In other words it may be said that the amount of advance tax should have been shown as an expenditure in the Profit and Loss Accounts. Had this course of action been adopted the net profit declared by the appellant would have gone down. If the net profit had gone down, the liability side of the Balance‑Sheet would have also gone down because the net profit earned in a particular year is reflected on the liability side of the Balance‑Sheet. Since this was not done the effect is the same as would have resulted from treating the payment of tax as an asset. In other words in either case, by not showing debit aspect of the tax deducted at source in the final accounts, the appellant has concealed a credit balance which was necessary to match the debit aspect of the entry relating to deduction of tax under section 50(4).

7. The learned counsel for the appellant is wrong in saying that action under section 65 was taken in respect of tax deducted at source. This action was taken for the reason that books of account produced before the I.T.O. were defective because a Balance‑Sheet reflecting entries in books of accounts would not tally if debit aspect of a transaction is not reflected in the final accounts. The fact that the appellant submitted a Balance‑Sheet which did tally shows that not only tax deducted at source has been omitted from the Balance‑Sheet but also a corresponding entry on the liability side. It is for this reason that the addition has been made; and this fact has been clearly brought out in the assessment order passed by the I.T.O. In view of this we hold that the mistake committed by the appellant is not a technical mistake but a mistake of fundamental nature which has randered the accounts to be rejected as per provisions of section 13(2)(a) of the Income Tax Act, 1922 and section 32(3) of the Income Tax Ordinance, 1979. The conclusion drawn by the I.T.O. regarding suppression of income is proper because in response to the show‑cause notice the appellant failed to give any explanation for his serious defect in accounts. The learned A.A.C. has failed to appreciate the nature of concealment mechanism.

8. Now we have to see if the action taken by the I.T.O. is in conformity with the provisions of law. First of all we have noticed that this method of suppression of income does not fall under section 13 of the Income Tax Ordinance, 1979. It would have fallen in section 13(1)(a) if debit aspect of the entry was properly recorded and the appellant had failed to offer satisfactory explanation for any credit balance brought in the accounts to tally the Balance‑Sheet. Normally "cash credits" are introduced for this purpose. As per admitted facts of the case before us it is not a case of section

13. The section 73(1) is reproduced below: "

13. Unexplained investment etc deemed to be income.‑‑‑(l) Where,‑‑‑ (a) any sum is found to be credited in the books of an assessee maintained for any income year; or (aa) the assessee is found to have made any investment or is found to be the owner of any money or valuable article, in any year; or (b) the assessee is found to have made any investment in any income year which is not recorded in the books of account maintained for that income year or is not shown in the wealth statement furnished under section 58 in respect of that year; or (c) the assessee is found in respect of any income year to be the owner of any money or valuable article which is not recorded in the books of account, if any, maintained by him or is not shown by him in any wealth statement furnished under section 58 in respect of that year; or (d) the assessee has made investment in any income year or is found in respect of any such year to be the owner of any valuable article and the Income‑tax Officer finds that the amount expended on making such investment or in acquiring such valuable article exceeds the amount recorded in this behalf in the books of account maintained by him or shown in the wealth statement furnished under section 58 of that year; or (e) an assessee has, during any income year incurred any expenditure, and the assessee offers no explanation about the nature and source of such sum, investment, acquisition of the money or valuable article, excess amount or the money from which the expenditure was met, as the case may be, or the explanation offered by him is not, in the opinion of the Income Tax Officer, satisfactory, the sum so credited, the value of the investment, the money or the value of the article, the excess amount or the amount of the expenditure as the case may be, shall be deemed to be the income of the assessee of such income year chargeable to tax under this Ordinance.." Clause (a) is not attracted because the debit aspect of the tax deducted at source has been omitted. Similarly, clauses (aa), (b), (c) and (d) are not attracted because it is not a case of any investment or ownership of any money or valuable articles. Similarly, it is not a case of any expenditure not supported by income. The tax evasion mechanism adopted falls in the ambit of section 32(3) which says that if the method of accounting employed by an assessee is defective, the I.T.O. may determine income on a reasonable basis. The provisions of section 32(3) are reproduced below: "

32. Method of accounting: (1)

(2)

(3) Where no method of accounting has been regularly employed, or if the method is such that, in the opinion of the Income Tax Officer the income, profit and gains cannot be properly deduced therefrom, or where in any case to which subsection (2) applies, the assessee fails to maintain accounts, make payments or records transactions in the form or manner as the case may be, prescribed under the said subsection, then, the income, profits and gains of the assessee shall be computed on such basis and in such manner as the Income Tax Officer thinks fit. " We see no force in the arguments of Mr. Sirajul Haq that the I.T.O. cannot make the addition if a case does not fall under section

13. Section 13 contains some provisions whereby income is deemed to arise. In the case before us there is no question of deeming any income. The matter under consideration is that the appellant failed to give any explanation for not reflecting one aspect of a business transaction and at the same time he produced a Balance‑Sheet which tallies. Thus it is clearly a case which attracts provisions of section 32(3). The I.T.O. has stated that this case falls under section

13. But this finding is contrary to the nature of tax concealment technique which has been very clearly stated by the I.T.O. in his order. The provisions of section 32(3) arc attracted in the facts of the case and not the provisions of section 13(1)(a). Of course, it would have attracted provisions of section 13(1)(a) if the following steps were taken by the assessee: (a) The debit aspect of the entry was properly reflected in the Balance Sheet, (b) To ensure that Balance‑Sheet tallies a `cash credit' was introduced, (c) The appellant had failed to give any explanation for cash credit. Before concluding we may state that both, section 32(3) and section 13(1)(a), empower the I.T.O. to make the addition which has been made in this case; but the facts of the case attract provisions of section 32(3). The lack of proper appreciation of provisions of law attracted in this case has misled the learned A.A.C. The learned A.A.C., against whose order these appeals have been filed, has not appreciated facts of the case. We see no reason behind his finding that the addition should be restricted to the refund claimed by the appellant. The addition is not on account of tax deducted at source or refund claimed by the appellant. It is for submitting inaccurate Balance‑Sheet for which no explanation was given by the appellant.

9. Now we examine whether the I.T.O. was justified in invoking provisions of section 65 of the Income Tax Ordinance, 1979 for the nine years under consideration. The assessing officers (i.e. an Income‑tax Officer or an Inspecting Assistant Commissioner) can take corrective measures in cases where assessments stand finalized through an assessment order, by invoking provisions of one of the following sections: (i) Section 66‑A of the Income Tax Ordinance. ' (ii) Section 156 of the Income Tax Ordinance. (iii) Section 65 of the Income Tax Ordinance. Section 66‑A can be invoked by an I.A.C. when he notices that an assessment order is erroneous as well as prejudicial to the interest of revenue. An order passed by an I.T.O. can be rectified by him under section 156 if it suffers from a mistake which is apparent from record. And lastly, section 65 can be invoked by an Income Tax Officer if a part of income of the assessee ascapes assessment. In the appeals before us the I.T.O. invoked provisions of section 65 to levy tax on an amount which remained unexplained. According to subsection (2) no action can be initiated under section 65 unless definite information comes in the possession of the I.T.O., who wants to initiate action under this section, or he obtains prior approval of his I.A.C. for initiating action under this section. Recently, the Honourable Supreme Court has examined the provisions of section 65 in the Edulji Dinshaw Limited case (1990) P T D

155. We quote a relevant portion from page 177: "....Once all the facts have been fully disclosed by the assessee and considered by the Income‑tax Authorities and the assessments have been consciously completed, and no new fact has been discovered there can be no scope for interference with these concluded transactions under the' provisions of section 65 of the Ordinance on the ground that the income chargeable to tax under the Ordinance has escaped assessment or has been under‑assessed, etc., in the meaning of clause (a) or (b) of the subsection (1) of section 65 of the Ordinance." In the appeals before us the I.T.O. has justified action under section 65 on the following grounds: "The original assessment in this case of a contactor was completed under section 23(3) on 26‑1‑1977 at the total income of Rs. 51,

038. Later on it was detected that an amount of Rs. 13,010 had been deducted as tax at source in this case during the accounting period relevant to assessment under consideration. This amount represents an asset on the closing date of the accounting period. The assessee, however, failed to disclose this asset in the balance‑sheet alongwith the return. In view of suppression of assets and hence concealment of income a notice under section 65 was served."

10. In the case before us it is an admitted fact that no new piece of information came into possession of the I.T.O., who initiated proceedings under, section

65. He started action because he noticed a defect in the Balance‑Sheets which were considered by the I.T.O. who had finalised original assessments after' detailed examination of record or under the Self‑Assessment Scheme. This being the case the I.T.O. should have discussed the reasons for which he was invoking section

65. According to the observations of the learned Judges of Supreme Court, quoted above, action under section 65 could be taken if the I.T.O. could establish that the Balance‑Sheets were not considered at the time of original assessments. He has not stated anything in this respect. As a matter of fact no assessment, whether under the Self‑Assessment Scheme or under section 62 of the Ordinance or on agreed basis can be made without examining the annual financial statements of accounts comprising of Trading and Profit and Loss Account and a Balance‑Sheet. These statements form the foundation of any exercise which is undertaken to compute taxable income of an assessee. Even under the Self‑Assessment Scheme an I.T.O. is not required to accept returned income blindly without looking at the statements of accounts. He is empowered section 59(3) to add back inadmissible expenses and other unreasonable expenses claimed by an assesses. He can do so provided he examines the statements of accounts filed along with the return. This aspect of processing of a return filed under the Self‑Assessment scheme has been examined in detail in this Tribunal's order reported as (1986) P T D W. The point worth noting here, is that even an order under section 59(1) is passed after ensuring that the return of income qualifies for acceptance under the Self‑Assessment Scheme. This cannot be ensured without examining a Balance‑Sheet. The mistake committed by the appellant is of such a nature that it can be easily detected while reading a Balance‑Sheet cursorily. We are of the view that the I.T.O. who finalised the original orders as well as those who initiated action under S.65 were unable to understand the nature of mistake. And it is for this reason that provisions of section 13 were invoked instead of taking help from section 32(3). The original orders resulted from an erroneous judgment of the I.T.O. The proper corrective measure, in this case, is given by section 66‑A, which is reproduced below: "66‑A. Power of Inspecting Assistant Commissioner to revise Income Tax Officer's order.‑‑(I) The Inspecting Assistant Commissioner may call for and examine the record of any proceedings under this Ordinance, and if he considers that any order passed therein by the Income‑tax Officer is erroneous in so far as it is prejudicial to the interest of revenue, he may, after giving the assesses an opportunity of being heard and after making, or causine to be made, such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment to be made:" The original orders passed by the I.T.O. are erroneous as well as prejudicial to the interest of revenue.

11. Before concluding we may add a few words on the case‑law on the scope of section

65. Mr. Sirajul Haq has relied on the following cases to prove that action under section 65 is the result of change of opinion by the I.T.O. (1) 1989PTD1010 (2) 1989 P T D 1141 (3) 1988 P T D 760(Trib.) (4) 1985 P T D 742 (Trib.) The first two judgements in the cases of Messrs N.R. Sons and Jeson International (Pvt.) Ltd. have been delivered by the Honourable Sindh High Court. In the first mentioned case it was held that an I.T.O. cannot re‑open a case merely on the basis of change of opinion. In the second case it was held that section 65 cannot be invoked if all facts arc fully disclosed by the assessee at the time of original assessment and the I.T.O. makes an assessment after considering them, and no new fact is discovered by the I.T.O. who wants to initiate action under section

65. In the two other decisions cited by the learned counsel this Tribunal has followed the same principles as laid down by the Honourable Sindh High Court. On the other hand we have the decision of the Honourable Lahore High Court in the case of Dr. Khurshid Alam Malik 1988 P T D 771 wherein it has been observed that scope of section 34 is very wide because it covers escapement of tax due to "any reason". By highlighting these words, used by the legislators, the learned Judges observed that: "....To us, in the presence of these words, there appears to be no justification for confining the meaning of the word `escape' to those cases only which have not come to the notice of the Income‑tax Officer at all and excluding those cases where he has applied his mind but on account of an error of judgment has set any part of the income free from assessment..." Instead of seeking guidance from these cases we have relied on a decision of the Honourable Supreme Court delivered on 16th May, 1988 and reported as 199() PTD 155.

12. We cancel the order under section 65 because in this case the I.T.O. was not justified in invoking provisions of' section

65. The re‑assessment orders under consideration arc result of change of opinion.

13. The appeals succeed. M.B.A./868/T Appeals allowed.