1990 PLP (Trib (PTD)

Mujahid Akbar, D.R. for Respondent. Date of hearing: 30 June, 1989. For the charge years 1981‑82, 1982‑83, 1983‑84 and 1984‑85 these four further appeals filed at the instance of an assessee arise out of the two orders passed by the learned CIT (A), Lahore, dated 12‑2‑1989 and 31‑5‑1987. The first combined order, dated 12‑2‑1989 pertains to assessment years 1981‑82 and 1982 83 where the order, dated 31‑5‑1987 concerns the charge years 1983‑84 and 1984

85. Taking up the first set of two appeals relating to assessment years 1981‑82 and 1982‑83, the facts are that the assessee, a Private Limited Company, derived income from dyeing and finishing of cloth. Declared income of Rs. 20,744 and Rs. 38,118 was accepted under section 59(1) of the Income Tax Ordinance, 1979 (hereinafter referred to as `the Ordinance') on 11‑3‑1982 and 5‑3‑1983. Thereafter, on 21‑11‑1985 the assessee filed a writ petition in the Lahore High Court, Lahore agitating its grievances for the assessment year 1985‑86 which is not disputed before us. While dealing with the assessee's writ petition, the I.T.O. on perusal of the assessment record found some difference in the value of fixed assets before depreciation and cost as on 1‑7‑1984. On the basis of that difference the I.T.O. issued a show‑cause notice to the assessee company who in turn explained that difference of amount mentioned in writ petition was because of recording of purchase price of plant and machinery on cost and balance amount was shown as direct expenses on purchases under the head miscellaneous item. Finding the assessee's explanation to be unsatisfactory, the I.T.O. sought approval of the learned IAC on 20‑6‑1987 for reopening of assessments for the charge years 1981‑82 and 1982‑83 by issuance of notice under section 65 of the Ordinance. The notice under section 65 of the Ordinance was stated to have been served on the assessee‑company by affixture. No returns having been filed by the assessee company the I.T.O. issued notices under section 61/62 of the Ordinance on 18‑6‑1988. In the notice issued under section 62 of the Ordinance the assessee was required to submit various details, documents, books of accounts regarding difference in valuation of assets mentioned in the writ petition and existing in the documents available in the assessment record. On the quantum of assessment neither any defect was pointed out nor the assessee's explanation was called for. The I.T.O. made addition of Rs. 5,00,000 under section 13(1)(d) of the Ordinance on account of discrepancy in the value of machinery. G.P. rate of 30% was applied to sales estimated at Rs. 20,00,000 making thereby an addition of Rs. 2,51,970 to the declared gross profit. After making addbacks of Rs. 84,580 in the profit and loss account expenses and by allowing the depreciation as per rules, the assessee's net income for the first year was determined at Rs. 7,85,

541. For the charge year 1982‑83 by applying G.P. rate of 30% to sales estimated at Rs. 33,00,000 addition in gross profit was made at Rs. 571,

875. Addition under section 13(1)(d) of the Ordinance was repeated at Rs. 5,00,

000. After making disallowance of Rs. 81,868 in the profit and loss account expenses and allowing allowable depreciation, the assessee's net income was determined at Rs. 11,23,

288. On appeal, the first appellate authority accepted the assessee's plea that neither service of notice under section 65 of the Ordinance was refused nor made by affixture in accordance with law. It was held that the record did not contain any material to establish refusal of service of notice under section 65 of the Ordinance by the assessee. Regarding substituted service of notice under section 65 of the Ordinance, it was held that on record there did not exist any material to establish on which address the affixture was made. Substituted service was also found to be illegal being not supported by statement of the Inspector deposing the place of affixture in the presence of any witnesses. Thereafter, the first appellate authority held‑‑ "The learned AR is also justified in his assertion that the assessment for 1985‑86 could not be reopened without prior approval of the C.B.R. Keeping in view these objections, the appeals are decided, on the short ground that service of notices under section 65 is not in accordance with law and, hence, the orders passed in pursuance of these notices are not sustainable. The impugned orders are, therefore, vacated for de novo assessments after proper service of notices under section 65 for the assessment years 1981‑82 and 1982‑83."

3. The appellant's AR contended that the learned CIT(A) was not justified in giving permission for issuing fresh notice under section 65 of the Ordinance as that amounted to remand of the case for fresh proceedings which was beyond jurisdiction of the first appellate authority. The D.R. in his turn stated that substituted service of notice under section 65 of the Ordinance being not in accordance with law, the first appellate authority rightly remitted the case to the I.T.O. for fresh initiation of proceedings under section 65 of the Ordinance.

4. We have given our anxious consideration to the submissions of the representatives of the parties. Once the first appellate authority had held that notice under section 65 of the Ordinance was neither presented to the assessee nor served by affixture, the only legal course available was to cancel the reassessments made under section 65/62 of the Ordinance. For this conclusion we are fortified with the principle of law that if the basic foundation is illegal, superstructure based thereon automatically falls to the ground. For the charge years 1981‑82 and 1982‑83, there being no valid service of notice under section 65 of the Ordinance, the re‑assessments made by the I.T.O. on 29‑6‑1988 were without lawful authority. Under section 132 of the Ordinance the learned CIT(A) while examining the legality of initiation of proceedings under section 65 of the Ordinance had to hold whether the proceedings were or not in accordance with law. Once the conclusion was arrived at that no valid service of notice under section 65 of the Ordinance was made on the assessee‑company, it was beyond the domain of the first appellate authority to give a fresh lever in the I.T.Os. hands by vacating the earlier re‑assessment proceedings and with the directions of initiation of fresh proceedings. The only legal course available with the first appellate authority was that after coming to the conclusion that no valid service of notice under section 65 of the Ordinance was made the reassessments had to be cancelled. In this view of the matter, the impugned order is modified and the reassessments made by the I.T.O. under section 65/62 of the Ordinance are cancelled.

5. Taking up the appeals pertaining to the charge year 1983‑84, the assessee's declared income at Rs. 40,802 was accepted under section 59(1) of the Ordinance on 31‑3‑1984. For the charge year 1984‑85 the assessee‑company's case being qualified for immunity returned income of Rs. 50,011 was accepted under self‑assessment scheme on 24‑3‑1986. In November 1985 at the time of spot visit the I.T.O. collected a cheque book of Muslim Commercial Bank, Shahdara Branch, Lahore from the assessee's business premises. This pertained to account No .existing in the name of one Mr. M .A ..In that account credit balance of Rs. 30,000 was shown on 30‑6‑1983. At the time of impounding of cheque book, the I.T.O. prepared a recovery memo and got it signed from Sh. M...d A....r, Managing Director of the assessee company. As in the balance sheet as on 30‑6‑1983 credit balance of Rs. 30,000 of Account No.... was not revealed the I.T.O. assumed it as a definite information for concealment and reopened the assessment by issuance of notice under section 65 of the Ordinance. In response thereto the assessee filed return under protest declaring income as before. The I.T.O. issued notice to the assessee on 12‑2‑1987 specifically on the assessee non‑disclosure of credit balance of Rs. 30,000 in account No and in reply the assessee denied the ownership of that account as Mr. M ..A , the account‑holder was neither a Director nor shareholder of the company. No notice was issued to the assessee regarding quantum of assessment by pointing out any specific defect. The I.T.O. made addition of Rs. 30,000 under section 13(1)(c) of the Ordinance on the assumption that the credit balance in account No.....happened to be that of the assessee company. While making comparison of the assessee's declared receipts and G.P. rate, the I.T.O. found that the turnover was an improvement but the declared G.P. rate was not in accordance with the results of another case existing at NTN 07‑03‑1707898. In that case G.P. rate of 30% was applied. Without confronting the assessee with the alleged parallel case, the I.T.O. discarded the assessee's version and applied G.P. rate of 30% to receipts estimated at Rs. 33,00,000 making thereby an addition of Rs. 5,24,857 to the declared gross profit. After disallowance of Rs. 89,528 in the profit and loss account expenses and allowing the allowable depreciation the assessee's income for this year was worked out at Rs. 5,73,

298. For the charge year 1984‑85 on the basis of the raid as stated while dealing with the matter of assessment year 1983‑84, the I.T.O. issued notice under section 65 of the Ordinance on account of non‑disclosure of credit balance of account No .... as on 30‑6‑1984. In reply to the notice, the assessee denied ownership of the account. The I.T.O. did not accept the assessee's explanation and made addition of Rs. 94,795 under section 13(1)(c) of the Ordinance on the pretext of peak credit in the aforementioned account. Addition of Rs. 5,21,990 was made to the declared gross profit by applying G.P. rate of 30% to receipts estimated at Rs. 35,00,000 and after disallowing Rs. 81,743 from profit and loss account expenses. For applying G.P. rate of 30% the I.T.O. relied on the case of NTN 1721075. This case was not confronted to the assessee. Re‑assessment was made for this year at total income of Rs. 5,76,273.

6. On appeal, the learned CIT(A) vacated the re‑assessments made under section 65/62 of the Ordinance directing the I.T.O. that fresh orders will be passed after calling upon the assessee to produce Mr. M....A...., the account holder, after examining him and making proper inquiries. On the quantum of re assessments the first appellate authority opined: "However, in my opinion the fate of the impugned assessment order made under section 65/62 would depend upon the fact whether or not the I.T.O. is able to establish to a reasonable extent, the factum of actual concealment and on which point his order has been set aside while discussing the observations about the proposed addition of Rs. 94,795 under section 13(1)(c) of the Ordinance as noted above:"

7. On behalf of the assessee it was vehemently contended that the first appellate authority erred in setting aside the re‑assessment, by giving fresh lever in the hands of the I.T.O. to 611 up the legal flaw and lacuna in initiation of proceedings under section 65 of the Ordinance. The assessee's AR contended that cheque book pertaining to Account No. 479 as recovered from the assessee's business premises being not relatable to the company's business could not legally form a definite information or sufficient material to attribute any escaped assessment, under assessment or concealment. The assessee's AR further stated that the I.T.O. neither made any effort to find out the identification of Mr. M A .., the account‑holder nor called upon the assessee to produce the account‑holder and as such the basis for issuance of notice under section 65 of the Ordinance for the charge years 1983‑84 and 1984‑85 was without any legal sanctity. The D.R. in his turn reiterated the narrations as made by the I.T.O. in the assessment order regarding collection of cheque book from the assessee company's business premises in the presence of the Managing Director of the Company.

8. After giving due consideration to the contentions of the representatives of the parties we feel no hesitation in holding that the departmental officers erred in issuing notice under section 65 of the Ordinance for the years under review. The cheque book belonging to Mr. M ..A , recovered from the assessee's business premises could not form a valid basis for holding that there existed a definite information in attributing any under assessment, escaped assessment or concealment of income in the assessee's business. Finding of the I.T.O. that the account existing in the name of Mr. M ..A ,was that of the assessee company is not supported by any evidence. No effort was made by the I.T.O. to seek information from the bank authorities regarding identity of Mr. M .A .,That was essentially required because the account opening form with introduction could sufficiently establish the identification and ownership of the account opener. The I.T.O. neither himself made any efforts nor asked the assessee to produce any evidence to establish the genuineness of account existing in the name of Mr. ..M A The I.T.O. erred in attributing the ownership of account to the assessee‑company merely because of recovery of a cheque book from its business premises. Mere fact that the Managing Director of the assessee company had signed the recovery memo was not enough to establish that the Managing Director himself was operating the account. This fact had to be established on the basis of relevant evidence which the I.T.O. miserably failed to collect. On quantum of assessment there being neither any definite information nor material available with the I.T.O., no addition in gross profit could be made while processing re‑assessment under section 65/62 of the Ordinance. For doing so, the I.T.O. was required to be in possession of definite material of escaped assessment, under assessment or concealment of quantum of assessment. That being not in existence the I.T.O. was not empowered under law to re‑open the assessment on merits. The learned CIT(A) erred in giving fresh lever in the hand of the I.T.O. to fill up the lacuna and legal drawbacks in re‑assessment proceedings. Once it was concluded that recovery of cheque book of account operated by Mr. M...A... from the assessee's business premises was not a sufficient material for issuance of notice under section 65 of the Ordinance, the re‑assessments as made by the I.T.O. had to be cancelled. In these circumstances we modify the orders of the first appellate authority holding that the solitary material available with the I.T.O. in the form of recovery of cheque book was no good piece of evidence for issuance of notice under section 65 of the Ordinance. As a result, the impugned orders are modified and re‑assessments made by the I.T.O. under section 65/62 of the Ordinance for the charge years 1983‑84 and 1984‑85 are cancelled.

9. As a result of the above discussion, all the four appeals filed at the instance of the assessee succeed accordingly. M.BA./890/T Appeals allowed.