1988 PLP 147 (PTD)

AJMAL MIAN, J.- By this common judgment, we intend to dispose of the above ten Constitutional Petitions filed by the partners of a Registered Firm known as M/s. Burjorjee Cowasjee & Company, hereinafter referred to as the Firm for challenging the show-cause notices dated 8-3-1986 issued under section 156 of the Income Tax Ordinance, 1979, hereinafter referred to as the Ordinance for rectification of the Assessment Orders in respect of the four partners of the Firm for the Assessment Years 1983-84 and 1984-85.

2. The relevant facts leading to the filing of the above Constitutional Petitions are that the partners of the Firm received demand notices and I.T.-30 Forms for the Assessment Year 1983-84 and Assessment Orders for the year 1984-85. The I.T.O. while computing the total income of the partners had adopted the figure of profit of the firm without deducting the super-tax paid by the Firm. The partners being aggrieved by the method of computing their individual income for computing the income tax filed appeals, which were allowed by the Commissioner of Income Tax (Appeals) Zone IV, Karachi. The operative portion of the order reads as follows: "It has also been submitted by the representative of the appellant that the share profit from Registered Firm adopted by the Income-tax Officer Rs.12,70,815 is before the deduction of super-tax payable by the firm whereas under section 69(4) of the Ordinance the share of profit from the Registered Firm is to be adopted after the deduction of Super-tax payable by the ' Registered Firm. It has further been argued that even for the purpose of application of proviso (e) to Paragraph of the Part I of the First Schedule of the Income-tax Ordinance, the share of profit from' Registered Firm before deduction of fit-"Super-tax cannot be included in the total income. My attention has been drawn to judgment given by the Sind and Baluchistan High Court in ITC Nos. 90, 91 and 92 of 1969 (C. I. T., Central. Karachi v. Seth Saifuddin Ghulam Hussain). The case papers have been perused. The contention of the appellant is correct as the section 69(4) of the Income-tax Ordinance clearly provides that the share of partner in the income of any firm means aggregate of: -- (a) The proportionate share in the total income of the firm as reduced by the tax, if any payable by the firm and any sum referred to in clause and (b) any salary, brokerage, interest of commission receivable by the partner from the firm. From the above, it is clear that for the purpose of the computation of 'Total Income' the share of profit from Registered Firm is to be adopted after the deduction of super-tax and not before the deduction of Super-tax, as has been done by the learned Income-tax Officer. This action of the Income-tax officer is contrary to the provision of law and accordingly the assessment is set aside and the Assessing Officer is directed to verify the correct share of profit after deduction of super-tax from the assessment order of the firm and adopt the share of profit as determined i.e. after deduction of Super-tax payable by the firm and to compute the tax liability in accordance with the formula given in the case law referred to above. The appeal is disposed of as indicated above." After the above remand order the ITO issued notices dated 21-11-1985 under section 62 of the Ordinance informing the petitioners that after the aforesaid decision of the Hon'ble High Court referred to in the above-quoted operative portion of the order, the Central Board of Revenue Islamabad, had reviewed instructions on the subject and issued Circular No.13 of 1982 dated 23-8-1982 which had set at rest the controversy. It was also stated that the above Circular gave working which was the same as he had adopted in the original assessment. The ITO while concluding the above notices observed as follows:- "Since the above working is quite different for what has been mentioned by you are requested to please submit detailed basis for the working and supply copies of case-law cited by you alongwith other necessary evidence." In response to the above notices the petitioners submitted a detailed reply dated 9-11-1985. Upon the receipt of the above reply the ITO gave effect to the aforesaid Order of the Commissioner by his order 'dated nil. It would be advantageous to reproduce the relevant portion of the order, which has bearing on the controversy in issue, which reads as follows:- ORDINANCE, 1979 In this case original assessment was completed on 30-11-1983 and the total income was determined at Rs.12,75,

379. The learned C.I.T., Zone TV, Karachi vide his Order No. C.I.T.(A)/Z-IV /474 /1983-84, dated 1-6-1985 has directed as under:- (a) To compute the total income after taking into consideration the share of profit from the Registered Firm as determined; under section 69(4) i.e. after deduction of super-tax. (b) To compute tax it accordance with the formula given in the case of Seth Saifuddin." The decision of the learned C.I.T. (Appeal) Zone IV, Karachi is not according to circular No.13 of 1982 dated 23-8-1982 but the matter is pending in Supreme Court of Pakistan. Hence no second appeal is being filed. The assessment will be re-opened under section 65 if warranted upon the decision of the Supreme Court. Accordingly assessment is revised under section 132 of the Income Tax Ordinance, 1979 and the computation of tax is made." After finalising the assessment orders in terms of the Commissioner's Appellate Order the ITO issued the impugned notices under section 156 of the Ordinance. It may be pertinent to reproduce the two reasons given by the ITO for issuing of the impugned notices, which read as follows:- (i) The learned Commissioner of Income Tax (Appeals) Zone-IV, Karachi, directed to compute the tax liability in accordance with the formula given in the judgment of the High Court of Sind in ITC Nos. 90, 91 & 92 of 1969 (C.I.T. Central, Karachi v. Seth Saifuddin Ghulam Hussain). According to this judgment, where the proviso prescribing the maximum limit of, tax in case of partners is applicable, the share to be apportioned among the partners should be taken before deducting super-tax payable by the firm as discussed in paragraphs 7, 8 and 9 of the said judgment. (ii) C.B.R. Circular No.13 of 1982 (Income Tax) dated 23-8-1982 also relied upon the aforesaid judgment of the High Court of Sind in ITC Nos. 90, 91 and 92 of 1969 and illustrated the effect of calculation of tax in the correct manner according to the High Court decision holding that the share to be apportioned among the partners should be taken before deducting super-tax (Para. 7 of the Circular refers)." The petitioners have, therefore, filed the above petitions.

3. In support of the above petitions, Mr. Ali Athar learned counsel for the petitioners has vehemently urged that the impugned notices are without jurisdiction as the ITO after having given effect to the Appellate Order of the Commissioner has no jurisdiction to reopen the assessment orders under section 156 of the Ordinance on the grounds which were before the Commissioner and which were decided by him in favour of the assessees. On the other hand Mr. Waheed Farooqui, learned counsel for the respondents has submitted that this Court will not exercise constitutional jurisdiction in order to set aside the impugned action which has undone the wrong committed by the ITO earlier and that since a judgment of the High Court was wrongly construed. Section 156 of the Ordinance could have been invoked, by the ITO.

4. In order to appreciate the above contention of the learned counsel for the parties, it may be pertinent to refer to Section 156 of the Ordinance which provides as follows:- "

156. Rectification of mistake.-- Any income tax authority or the Appellate Tribunal may amend any order passed by it to rectify any mistake apparent from the record on its own motion or on such mistake being brought to its notice by any other income tax authority or by the assessee. (2) No order under subsection (1), which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee, shall be made unless the parties affected thereby have been given a reasonable opportunity of being heard. (3) Where any such mistake is brought to the notice of any income tax authority by the assessee and no order under subsection (1) is made by such authority before the expiration of the financial year next following the' date in which it was so brought to its notice, the mistake shall be deemed to have been rectified and all the provisions of this Ordinance shall have effect accordingly. (4) No order under subsection (1) shall be made after the expiration of four years from the date of the order sought to be amended." A perusal of the above-quoted subsection (1) of above section 156 of the Ordinance indicates that any income tax authority or the Appellate Tribunal may amend any order passed by it in order to rectify any mistake apparent from the record, either on its own motion or such mistake being brought to its notice by any other income tax authority or by the assessee. The other quoted subsections of above section 156 relate to the manner in which the power conferred under the above subsection (1) of section 156 is to be exercised by any income tax authority or the Appellate Tribunal. To put it differently, it may be stated that in order to invoke subsection (1) of Section 156 it is incumbent that there should be a mistake apparent from the record. It must therefore follow that if there is no apparent mistake from the record the above section 156 cannot be invoked. The basic question, therefore, in the instant case is whether there was any apparent mistake on the record as to warrant the issuance of the impugned notices. The ITO in the impugned notices has given two reasons, which have been reproduced hereinabove. In this behalf, it may be observed that the judgment of the High Court of Sind in I.T.C. Nos.90, 91 and 92 of 1969 was referred to by the Commissioner in his Appellate Order and so also by the ITO in his order of re-assessment in terms of the above appellate order, which is apparent from the above-quoted relevant portions of the two orders. Both the Commissioner, as well as the ITO were of the view that the above High Court judgment was in favour of the assessee inasmuch as the I T O in his above-quoted order stated that the department's appeal against the above judgment was pending in the Supreme Court and upon decision of the Supreme Court the assessment would be re-opened. 1,actually the department filed petitions for leave against the above judgment, namely C.P.S.L.A. Nos. K-108, 109 and 110 of 1978, which were taken up alongwith C.P.S.L.A. No. K-235 of 1979 and other, on 25-8-1980 by the Hon'ble Supreme Court and leave was granted inter alia on the point in issue by observing a follows:- "The income of the respondents-assessees in all these petitions includes income from firms of which they are partners. But, as firms are liable for super-tax, net income paid to them as partners was paid after deduction of super-tax. And, the point under the first question in all these petitions is of the manner of calculating super tax for the purpose of determining the limit to the liabilities of assessees fixed under Part I of the Schedule to the relevant Finance Act. The judgment in all the petitions ' is one of first impressions and the question requires further examination." However, it seems that ITO has changed his view as to the effect of the above High Court judgment. According to him as indicated in the impugned notices, the above judgment was against the assessees and not against the department, though the factum that the department has gone in appeal against it before the Supreme Court has not been denied.

5. In our view, the above change of view cannot be said to be a mistake apparent from the record as to warrant the ITO to reopen the assessment orders in view of the fact that the Commissioner has` not changed his view. It may also be mentioned that in the above High Court judgment the subject-metters were two questions on which the Income Tax Commissioner sought the opinion of the High Court under section 66(2) of the Income Tax Act, 1922, hereinafter referred to as the Act, and one of the questions which is relevant to the point in issue was question No.1 which reads as follows:- (1) "Whether on the facts and circumstances of the case, the computation of tax by the Tribunal for purposes of the proviso (ii) of Para-A of Part I of the Schedule to the relevant Finance Act, without regard to the provisions of section 16(1)(b) of the Act, is according to law ? " The above question was answered by a Division Bench by the above judgment dated 22-3-1978 in the affirmative. The above judgment came for consideration before a Division Bench of this Court in the case of Commissioner of Income Tax (Investigation), Lahore v. Soli M. Cowasjee, Karachi reported in 1985 P T D 401 (H. C. Kar.). The Division Bench has commented upon the same as follows:- "it may be noticed that in the above case inter alia it was held that the assessment of the total income of the firm for the purpose of payment of super tax is before the deduction of super tax payable by the firm. It was further held that the partners share of super tax payable by the registered firm under the proviso is no' to be apportioned with reference to the share of the partner's income as computed under section 16(1)(b). The above case has no direct bearing on the question of claiming of refund of super tax by an assessee partner on the ground that overall his business result was in loss for the relevant year," The Division Bench in the above case also quoted with approval an example given by the learned Income Tax Appellate Tribunal it the case of Assessee v. Department reported in 1968 XVII Taxation 53 and explained the same with reference to proviso (11) of Part I of the 3rd Schedule to the Income 'Tax Act in the following words:- "Where income of the partner including exemption allowable under section 15-B of the Income Tax Act. Rs.2,30,708 Add: Income from other sources

Rs.2.30.798 Income tax on Rs.2,30,708 Rs.1,48,474 Add: Proportionate super tax paid by the firm Rs. .56,592 Rs.2,05,066 It is more than 75% income the total income and as such restricted to 75% of the total income. It will come to: Rs.1,73,031 In terms of and proviso to para. I of Part I of the third Schedule is the Finance Ordinance 1960, super tax paid by the firm is deducted out of the tax demanded. Rs.56,592 Net tax payable by the assessee. Rs.1,16,439 It may be noticed that in the above case the income of the partner is Rs.2,30,

708. The Income Tax payable on the above amount comes to Rs.1,48,474, whereas the super tax paid by the firm on account of the above partner is Rs.56,592 thus making a total of Rs.2,-05,

066. Since proviso (ii) provides that income tax which includes super tax shall not exceed 75 % of the total income of an assessee, and as the above sum of Rs.2,05,066 exceeds the above maximum limit of 75% of the income, the assessee's liability to pay tax has been reduced to the maximum limit of 75% of his income, which works out to Rs.1,73,

031. In the above-quoted example the aforesaid sum of super tax namely Rs.56,592 has been deducted from the above sum of Rs.1,73,031 for reason that this sum was already paid by the firm on behalf of the assessee partner and therefore he was allowed to pay Rs.1,73,031 minus Rs.56,592 equivalent to Rs.1,16,

439. The above example contained in the above-quoted chart succinctly explains the effect of proviso (ii)."

6. In our view, the above proviso (ii) of Part I of the Third Schedule to the Income Tax Act of which corresponding provision is contained in proviso (e) to Para-A of part I of the 1st Schedule to the Ordinance was intended to give relief to the assessees, who were partners in Registered Firms which were liable to pay super tax. It was designed to reduce the liability of such partners to a maximum limit provided for in the above provision which has been explained in the above-quoted observations of the Division Bench in the case of Commissioner of Income Tax v. Soli M. Cowasjee i.e. while computing the income of a partner with reference to the above proviso (ii), of Part I of Third Schedule to the Income Tax Act, the provisions of Section 16(1)(b) of the Act which correspond to section 69(4) of the Ordinance were not to be taken into consideration. But where the benefit of the above proviso is not to be claimed the income of a partner is to be computed in terms of section 16(1)(b) of the Act or in terms of section 69(4) of the Ordinance without including the proportionate share of the super tax debited in the account of the partner with reference to his profit sharing capacity.

7. The second reason given in the impugned notices also cannot be said to be a mistake apparent on the face of the record as the circular of the CBR referred to was very much before the ITO when he passed the re-assessment order in terms of the Commissioner's above appellate order which is apparent from the above-quoted portion of the I. T. O's order. It may also be observed' that the ITO in his original assessment order had included the amount of super tax paid by the Firm for working out the individual shares of the partners. The Commissioner set aside the above order of the ITO and directed him to compute the Income tax on the income of the partners after excluding the super tax paid by the firm in accordance with the formula given in the case-law. The issue before the Commissioner in the appeal was, whether the income of a partner for the purpose of tax liability was to include the amount of the super tax paid by the Firm and debited to the account of the partner with reference to his profit sharing capacity. The above question was decided in the affirmative by the ITO, whereas the Commissioner decided the same in the negative. In our view, the ITO cannot nullify the order of the appellate authority in disguise of a notice under section 156 of the Ordinance. If we were to condone the above act, there would be chaos as it would be open to an ITO to undo even an order of the Income Tax Appellate Tribunal. Even if the view of the Commissioner was erroneous, the proper course for the department was to have filed an appeal before the Income Tax Tribunal and then a reference before the High Court but it cannot be undone by invoking section 156 of the Ordinance. Mr. Waheed Farooqui has referred to the case of Commissioner of Income Tax, West Bengal-IX v. McLeod & Co. Ltd. (1982) 134 ITR 674, in which it was held by a Division Bench of the Calcutta High Court upon a reference under section 256(1) of the Income Tax Act, 1961 that wrong calculation made on misreading of a section of the Act was a mistake apparent from the record which could be rectified under section 154 of the above Act. The facts of the above case are distinguishable from the present case inasmuch as no misreading of any section of the Act or the Ordinance is involved in the instant case.

8. We have also given our serious consideration to the second limb of Mr. Waheed Farooqui's submission that this Court should not exercise constitutional jurisdiction in order to perpetuate an illegal order, which is intended to be rectified by the impugned notices. In this regard, we may observe that apart from the fact that it cannot be said that the orders of the re-assessment passed by the ITO in terms of the Commissioner's orders are per se illegal we may again reiterate that, if we were to allow an ITO undo an appellate order, it will have far-reaching repercussions, as there will be no sanctity attached to an order of an appellate forum, which will inter alia create indiscipline in the department, uncertainty as to the tax liability of assessees and lack of confidence amount the assessees as to the credibility of the appellate orders. The impugned notices are patently without jurisdiction as to warrant exercise of constitutional jurisdiction of this Court.

9. We would, therefore, allow the above petitions and declare the impugned notices as being without lawful authority and of no legal effect. There will be no order as to costs. M.B.A./D17/K Petitions allowed.