1988 PLP (Trib (PTD)

ABRAR HUSSAIN NAQVI (MEMBER).--These are 11 appeals filed by an individual deriving income from salary, property dealing and real estate business and relate to the assessment years 1979-80 to 1983-84. Five appeals relating to the assessment years 1979-80 to 1983-84 have been filed against the assessment proper while another five appeals for the same assessment years have been filed against the imposition of penalty under Section 91 and still another appeal the assessment year 1982-83 is against the imposition of penalty section 111 of the Income-tax Ordinance, (hereinafter referred as Ordinance). For the assessment years 1979-80 to 1982-83 combined assessment order has been passed by the assessing officer.

2. Brief facts of the case are that the assessee was an employee of LDA and derived income from salary upto the assessment year 1982-83. A complaint was received by the department that the assessee was also dealing in property and real estate. Subsequently, a notice under section 56 of the. Income-tax Ordinance was issued and it was discovered on enquiry that the assessee had considerable Bank Deposits and. was also found to have earned income in some assessment years from sale and purchase of properties. Consequently, the assessing officer made various additions on the basis of peak credits in the Bank Account of the assessee. The assessing officer has made the following additions under section 13(1)(aa) of the Ordinance in the assessment years under consideration:- Salary income declared Rs. 8,440 The ITO accepted the salary income and, made an addition of Rs.70;000 on account of peak credits found in the Bank which and was therefore considered as deemed income of the assessee. Total income assessed at Rs.78,440 Salary income declared Rs. 8,400 Unexplained peak credits added as deemed income of the assesee at Rs.80,000 Total Income assessed at Rs.88,400 Assessment year 1981-82 Salary income declared Rs.5,600 Unexplained peak credits added as deemed income of the assesee at Rs.80,160 Total income assessed at Rs.85,760 Income declared Rs.19,780 The I.T.O assessed the income on the basis of peak credits as unexplained income at Rs.1,54,

000. The learned CIT(A) reduced the addition, for this assessment year to Rs.1,29,500 on the ground that in fact peak credits were to this extent. Assessment year 1983-84 Net income declared Rs.21,300 Subsequently a revised return was filed on 12-1-1985 declaring net Income at Rs. 74,

280. The ITO assessed the income on the basis of the peak credits at Rs.2,25,440.

3. The learned counsel of the assessee has taken a preliminary objection for the assessment years 1979-80 and 1980-81 that the additions under section 13(1)(aa) could not be made in these assessment years as clause (aa) of subsection (1) of Section 13 was added by the Finance Ordinance, 1980 and, therefore, according to the learner counsel, would be effective from 1st July, 1980. The learned counsel for the assessee contented that unless the legislature gives retrospective effect to any amending law it has no retrospective operation. It was therefore, submitted that since Finance Ordinance 1980, by which clause (aa) aforesaid was added, came into force with effect from 1st July, 1980, therefore, it could not be applied retrospectively to the assessment years 1979-80 and 1980-81. We have considered the arguments of the learned counsel for the assessee and we only partially agree with him inasmuch as the Finance Ordinance by its very nature has retrospective operation because it applies on an income year. Though the Finance Ordinance comes into operation with effect from 1st July, of each year but it has always operation on an income year ending on or before 30th June of each year. Therefore, by its very nature it applies retrospectively to all dealings, transactions and income etc. undertaken or conducted in the income year, which had closed before the coming into force of the Ordinance. The scheme of the Income-tax law is that tax is imposed after the earning of the income and not before the earning of the income. Therefore, the Income-tax Ordinance though' coming into force on 1st July, 1980, had its effect on the income earned by the assessee in the earlier income year. This, therefore, follows that so far as the assessment years 1979-80 and 1980-81 are concerned the amendment brought in by the Finance Ordinance 1980 was applicable to the assessment year 1980-81 corresponding to the income year beginning from 1st July, 1979 ending on 30th June 1980. However, clause (aa) aforesaid having been added by the Finance Ordinance 1980 and no retrospective effect having been given by the legislature to the amendment, it could not be stretched to the earlier income year and, therefore, has no application for the assessment year 1979-80. This is settled law 'that taxing statutes have to be strictly construed as they affect the rights of the citizens. Therefore, unless there is clear intention of the legislature, nothing can be assumed in favour of the department. Since for the assessment year 1979-80 clause (aa) was not available, the subsequent amendment cannot affect that assessment year. We, therefore, hold that the addition made under section 13(1)(aa) of the Income-tax Ordinance by the ITO in the assessment, year 1979-80 was illegal and is directed to be deleted.

4. The learned counsel for the assessee has also relied upon a decision of a Division Bench of the Tribunal. In ITA No.1439/LB/ 1982-83 relating to the assessment year 1979-80. In that case a similar question arose as to whether section 13(1)(aa) of the Ordinance had a retrospective effect but the Judicial Member and Accountant Member different on this issue and expressed contrary views. Finally, the Chairman of the Tribunal referred the question to the third Member (Judicial Member, Karachi) who agreed with the view that clause (aa) of Section 13(1) was not available in the assessment year 1979-80 and, therefore, no addition could be made in that year under that clause. 5.The next legal objection taken by the learned counsel for the assessee was that for the assessment years 1979-80 to 1982-83 notice ruder section 56 was issued by the assessing officer. According to he learned counsel the assessee's case could not be re-opened without first issuing notice under Section 65 of the Ordinance as it fell within the purview of Section 65(1)(a) of the Income-tax Ordinance. It was contended that Section 56 applies to a case where an assessee, who was required to file a return under section 55 of the current year, had failed to do so. In regard to the past income years, where income of an assessee had escaped, the assessment can be made only by issuing notice under Section 65 of the Income-tax Ordinance. The learned D.R. on the other hand contended that Section 56 is an omni potent section under which an assessing officer is empowered to issue notice for any income year without any limit of time to any person who is chargeable to tax under the Income-tax Ordinance. A considerable stress was laid by the learned D.R. on the word "any, income year" appearing in Section

56. According to him there is no limitation in this section that it is applicable only to a current assessment year. The learned D.R. was asked to reconcile section 65(1)(a) and section

56. He was informed that if the interpretation of section 56, as placed by the learned D.R. is accepted, then clause (a) of section 65 would become redundant. In reply, the learned D. R. submitted that section 65 of the Income-tax Ordinance only applies in cases where some kind of assessment had already been made. In support of his contention he relied upon the title of section 65, which is 'Additional Assessment' According t& him section 56 applies to all cases of escapement of Income where no assessment has earlier been made. While section 65 applies in cases where some kind of assessment had already been made. According to him, the concept of total escapement of income was alien to section 65 of the Income-tax Ordinance which situation is covered by section 56 of the Ordinance. It was, therefore, contented that section 65 of the Ordinance visulizes an additional assessment or re-assessment and is not applicable where income had totally escaped assessment and fresh assessment had to be made.

6. We have not been able to persuade ourselves to accept the contentions of the learned D.R. Firstly a title of the section is not part of the statute nor can it control the words used in that section. The heading or marginal notes of a section can at best be regarded as preambles to the section and cannot be a guide to interpret the plain words used in the section. Maxwell, on the Interpretation of Statutes Twelfth Edition, while dealing with marginal notes, has observed at pages 9 and 10 as under:-- "But the weight of the authorities is td the effect that they are not parts of the statute and so should not be considered for they are 'inserted not by Parliament nor under the authority of Parliament, but by irresponsible persons'. 'This latter view was confirmed by the House of Lords in Chandler D.P.P where the side note ('Penalties for spying') to section 11 of the Official secrets Act 1911 was held not to restrict the wide words of the section, which made it an offence for any person for any purpose prejudicial to the safety or the interests of the State to approach or be in the neighbourhood of or enter any prohibited place. The offence could, therefore, be committed by demonstrators who had no intention of spying. Lord Reid said (at pp. 789, 790): In my view side cannot be used as an aid to construction. They are catch words and I have never heard of it being supposed recent times that an amendment to alter a side note could proposed in either House of Parliament. Side notes in original Bill are inserted by the draftsman. During the of the Bill through its various stages amendments to it other reasons may make it desirable to alter a side note that event I have reason to believe that alteration is made the appropriate officer of the House no doubt in with the draftsman. So, side notes cannot be said to be in the same sense as the long title or any part of the body of the Act."

7. This principle was followed in a chain of authorities both by the Indian as well as Pakistan Courts. The leading case was decided by the Privy Council in Balraj Kanwar CS. Jagatpal Singh:, reported as (1904) I L R 26 in which it was held that marginal notes cannot referred for the purpose of construing a statute. A Similar view was taken by the Supreme Court of India in C I T Bombay v Ahmedbhai Umarbhai & Co. Bombay reported as 18 I T R page 4l2 (487) and by the Bombay High Court in B.M. Desai v. Ramamuurthy I T O reported as 34 I T R page

409. Lastely the Lahore High Court also took the same view following the Privy Council's case (supra) ml Zuhair Siddiqi v. M.H. Sufi and others reported as P L D 1964 453.

8. Here sections 56 and 65(1) may be reproduced for reference:

Section 56. Notice for furnishing return of total income.-The Income-tax Officer may, at any time by notice in writing require any person who, in his opinion, is chargeable to for any income, year, to furnish a return of total, for such year within thirty days from the date of service such notice or such longer or shorter period as may be in such notice or as the Income-tax Officer may allow". "Section 65. Additional assessment.-- (1) if, in any year for any reason

(a) any income chargeable to tax under this Ordinance has escaped assessment; or (b) the total income of an assessee has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance; or (c) the total income of an assessee or the tax payable by him has been assessed or determined under subsection (1) of section 59 and no order of assessment has subsequently been made under this section or any other provision of this Ordinance the Income-tax Officer may, at any time, subject to the provisions of subsections (2) , (3) and (4) , issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far is may be, apply accordingly.

9. The learned D.R. has raised another contention in support of interpretation placed by him. He has drawn a distinction between the words used in clause 'a' and clauses 'b' and 'c' of section 65(1). In clause (a) the word any income has been used while in caluse 'b' and 'c' the word 'total income' has been used by the legislature. According to him clause (a) contemplates the situation where a part of total income might have escaped assessment because, according to him, the words 'any income' is included in the word 'total income'. This interpretation in our opinion is not correct. According to the learned D.R. the word 'total income' includes 'any income'. On the contrary, we think the word 'income' is much wider a term than the 'total income'. The word 'income' includes the 'total income'. The word 'income' has been defined in section 2(24), though not exhaustively, that it includes any income, profits or gains etc. chargeable to tax under any provision of the Income-tax Ordinance under any head specified in section

15. It even includes any loss of such income. On the other hand the word 'total income' has been defined in a restricted manner and has been defined exhaustively in section 2(44) of the Ordinance which is reproduced below:-- "'total income' means the total amount of income referred to in section 11 computed in the manner laid down in this Ordinance; and includes any income which, under any provision of this Ordinance, is to be included in the total income of an assessee."

10. According to this definition of the total income it is that kind of income, the total amount of which is computed in the manner laid down in the Ordinance. Therefore, the word 'total income' is relatable l to the computation of income for purposes of tax. It is for this reason that section 9, which is the charging section, talks about the total income. Keeping this definition in view clauses (a) and (b) of. section 65 (1) become clear. Clause 'a' applies where the income is yet to be computed and therefore the word 'total income' could not be used in that clause. On the other hand, where some kind of income had been assessed earlier, clauses 'b' and 'c' are applicable and, therefore, in those clauses the word 'total income' has been used, because, in such cases, total income had already been determined and computed. Since it is discovered that there has been under assessment of the total income etc. reassessment can be made by invoking these clauses. As stated above, since the cases where clause a is applicable income has not been earlier computed, therefore, the word 'total income' is not used in that clause because the word 'total income' is relatable to the computation of income. Unless income is computed, it cannot become a total income, because the total income is that part of the income, which is assessable under the Ordinance. In B.M. Kaundar in re: 14 I T R p. 10 a Full Bench of the Bombay High Court observed at P. 21, "Secondly, that the manner of computation laid down by the Act, forms an integral part of the definition of 'total income'. Computation, it is to be observed, does not form a part of the charging section, but is introduced into the definition of the total income to be brought to tax". There again at the same page of the report it was observed, "The correct method of approach in any judgment is to treat nothing as being charged to status by the press of computation laid down by the Act, the status of income, profits and gains emerges". In cases where clause applicable, since the total income is not determined earlier, therefore, the word 'income' has been employed' which indicates that it applies to the total escapement of income which has not -been) assessed earlier.

11. The word 'assessee' has been defined in section 2(6) of the ordinance according to which an assessee is a person by whom any tax etc. is payable under the Ordinance and it also includes a person in respect of whom any proceedings under the Ordinance have been taken or a person who is required to file his return under sections 55, 72 or under section 81 and who is deemed to be an assessee under any provision of the Ordinance. Therefore, it is clear that the, assessee is a person who had either been already assessed to an' income or who is required to file his return under sections 55, 72 or section

81. This definition also makes it clear that the word assessee' does not include a person whose income has escaped assessment Now reverting to section 65(1) it is seen that in clauses 'b' and 'c' the word 'assessee' has been used but this word is conspicuously absent in clause 'a' whic4 only talks about the escapement of income. If the interpretation placed by the learned D.R. was intended by the Legislature, the wording of clause 'a' should have been "any income of an assessee chargeable to tax under this Ordinance has escaped assessment". What the learned D.R. wants us is to read 'the words 'an assessee' between the word 'income' and 'chargeable' which cannot be done. The interpretation of the learned D.R. cannot be, accepted without violence to the existing words in clause 'a'. If the intention of the Legislature had been to apply clause 'a' only to an existing assessee, the same wording, would have been used as in clauses 'b' and 'c' where the words 'total income of an assessee' have been used. Under no principle of interpretation the words, which are not there in clause 'a' can be added and without which the interpretation placed by the learned D.R. cannot be accepted. Now an objection can be raised that under section 65 it has been prescribed that a notice is to be issued to an 'assessee' which could mean that using of the word assessee presupposes a person who is an existing assessee. However, this would be a misconception of law. There are two stages is the assessment proceedings under section

65. First stage in when some kind of inquiry on receipt of certain information etc. is conducted. The second stage is to issue notice under section 65 When the', action is taken in the first stage the proceedings are started against a person and, therefore, under the definition of an assessee, the moment any proceeding are started, he becomes an assessee by fiction of law. It is for this reason that when the second stage comes and a', notice is .to be issued, the person concerned has already become an assessee because of the force of definition and therefore at that stage the word assessee has been used by the Legislature. It is, therefore, clear that a distinction has been kept in mind by the Legislature between clause 'a' on the one hand and clauses 'b' and' 'c' on the other. Both of these categories of cases cannot be placed on the same-footing. The clear distinction is that in clause 'a' the word 'income' has been used instead of 'total income' and the word 'an assessee' has not been mentioned. On the other hand in clauses 'b' and. 'c' the words 'total income of an assessee' have been used. Therefore, logically clause 'a' has to be placed on different footing than clauses 'b' and 'c'. The classes of cases falling in clause 'a' have to be differently categorised. This is only possible if clause 'a' is to be interpreted that it applies to cases of total escapement of Income of a person for the earlier year and who had not been earlier assessed.

12. There is another mischief, which is potential in the interpretation placed by the learned D.R. If it is assumed that notice under section 56 could be issued in regard to any earlier year and the income can be assessed in regular manner under section 62 of the Income-tax Ordinance, a question would arise, as to what would be the rate of tax applied on the assessed income of the past year? Section 56 is completely silent on that issue. On the contrary in proviso to section 65 it has been specifically mentioned that tax is to be charged at the rate applicable to the assessment year for which the assessment is made. If the departmental view is accepted then we are led into a blind alley. In that case, even if assessment is made under section 62, the department will not be able to charge tax at any rate because the current rate would not be applicable as the income relates to the earlier year and the rate of earlier years would not be applicable because there is no sanction of law. Therefore, we come to the same conclusion from a different angle as well.

13. Now returning to section 56 of the Ordinance it has to be read as corollary to section

55. If the scheme of these sections is kept in mind it makes it clear that section 55 is applicable to the current assessment year for which a return has to be filed. It would be pertinent to note that even in section 55 the words "for any income year" have been used. If the contention of the learned D.R. that because of use of the words 'for any income year' section 56 is to be interpreted that it applies to all the past income years as well, the same interpretation on the basis of the same words has to be applied in section 55 as well. But if we look at subsection (2) of section 55 we find that certain limitations have been placed within which the return has to be filed. These limitations can only apply if section 55 is held to be applicable to the current year otherwise subsection (2) would be redundant. Therefore, it is clear that words any 'income year' do not lead to a conclusion that section 55 or 56 applies to past income years as well. The word 'any' in these sections would mean each and every. The Chamber's 20th Century Dictionary defines the word 'any' as "one indefinitely, some whichever, no matter which'. Therefore, the word 'any year' cannot be said to mean all, the past years. Any income year means one single year, not all the: past income years. Therefore, there is no escape, except the interpretation that the word 'any income year' has been used in section 56 to mean one particular year. The scheme of the statute is that section 55 requires certain persons in the given circumstances to file returns voluntarily. In case they do not do so the I.T.O. has been empowered to give a notice to file return under section 56 of the Income-tax Ordinance. Where, in regard to any past income year, the I. T.O. discovers that income had escaped assessment or under assessed etc., section 65 of the Ordinance takes care of with certain limitations on the power of the assessing officer.

14. Even otherwise the interpretation given by the learned D.R. that be accepted. Section 65 gives clear intention of the legislature the a citizen cannot be allowed to be placed wholly on the mercy of I.T.O. and it is for this reason that the Legislature has placed certain limitations and restrictions within which the powers can be exercised by an I.T.O. under section 65 of the Income-tax Ordinance. No corresponding restrictions or limitations have been placed in section

56. The Legislature cannot be assumed to be contradictory so as to give free hand to an I.T.O. under section 56 but to place numerous restrictions in section 65.

15. We, therefore, are of the view that section 56 applies only to the current income year corresponding to that assessment year and in regard to escapement of income for the past years section 56 has no application for which section 65 of the Ordinance is the relevant section. If an assessing officer finds any escapement of income of any person he has to issue a notice under section 65 of the Ordinance within the limitations and qualifications prescribed by that section and only then he can issue a notice "containing all or any of the requirements of a notice under section 56" and in that case all the provisions of the Ordinance have been made applicable.

16. In the present case no notice under section 65 of the Ordinance had been issued and only notice under section 56 of the Ordinance had been issued. Since a notice under section 65 is a condition precedent for making an assessment in regard to the income which has escaped assessment and is chargeable to tax under the Ordinance and which is the starting point of the assessment proceeding and such a notice having not been given to the assessee, therefore, all proceedings of assessment are null and void. We, therefore, annul the assessment proceedings as welt as the assessment orders passed' thereon for the assessment years 1979-80 to 1982-83.

17. On merit the learned counsel has also argued this case in the alternative. He has raised two points. Firstly that the assessee being a property dealer deriving income from commission on sale and purchase of properties, the peak deposits could not be treated as income of the assessee. It was contended that at best on the total deposits of the assessee commission, which was available to him could be worked out and income could be assessed on that basis. In support of his contention he has relied upon a decision of the Tribunal in I.T.As. Nos. 1979/LB/1985-86 to 1990/LB/1985-86 dated 15-1-1986. That case was also of a broker dealing in cloth and the Bank deposits of the assessee were also discovered. On the Bank deposits the I.T.0 held that the assessee was not a broker but was carrying on business of sale of yarn. That case is distinguishable because in that case it was categorically held by the Tribunal that the assessee was a broker and he was not carrying on business of yarn cloth on his own account. In the present case admittedly the assessee is also dealing in sale and purchase of properties. Therefore, the peak deposits have rightly been taken as the probable income of the assessee.

18. The second contention of the counsel was that the assessing officer has not given the benefit of intangible additions to the assessee. One year's income can be adequate explanation for the next year's income. There is a force in this argument. There is no dearth of case law on this issue and the Tribunal as well as the other superior Courts have already decided this issue. The leading case is S. Kuppuswami Mudaliar v. C.I.T. Madras reported as (1964) 9-Taxation 284 in which the Madras High Court held that the amounts which the I.T.O. had added in the earlier years on an estimate, must be treated as real income of the assessee and the assessee has to be given benefit of such an income assessed earlier as that was the current income of the assessee and the assessee can very well use such an; explanation in regard to his investment in the subsequent assessment' year. Similar view was taken by the Tribunal in a case reported as 1978 18 Tax page

83. The lat6st decision is that of Karachi High Court in Malik Mir Hassan Khan v. C.I.T. reported as P L D 1978 Kar.

408. In the present case, for instance, the I.T.O. assessed the income of the assessee for the assessment year 1979-80 at Rs.78,440 which includes an addition of Rs.70,000 as unexplained income on the basis of peak credits which should be regarded as the real income of the assessee and the department is fixed with it. In the subsequent assessment year the department cannot take a somersault to say that the assessee did not have this amount of income available with him. Therefore, in the assessment year 1980-81 the peak deposits being Rs.80,000, they are adequately explained as the income of Rs.78,440 was available to the assessee including the salary income of Rs.8,

400. Similarly the same amount was available to the assessee in the assessment year 1981-82 when the assessing officer found Rs.80,160 as peak deposits of the assessee. In the assessment year 1982-83 in similar way the I.T.O. made an additions of Rs.1,54,000 on the basis of peak credits. He has not taken into account the income available to him in the shape of benefit in the earlier years. In the assessment year 1983-84 the I.T.O. made an addition of Rs.2,25,000as unexplained peak deposits without giving any benefit of intangible additions. On this issue, therefore, in the alternative, we hold that the assessee is entitled to the benefit of intangible addition and on that account the assessment could be set aside for redetermination of the income. However, since we have held for the assessment years 1979-80 to 1982-83 on technical grounds, that the assessments were illegal and hl have annulled the assessments for those assessment years, therefore, no other order is called for those assessment years. However, for the assessment year 1983-84, we set aside the assessment order with the direction that the benefit of intangible additions for the earlier assessment years should be given to the assessee and then the income should be worked out on the basis of peak deposits or on the basis of other deposits if any made by the assessee or other income earned by him.

19. Penalty appeal under section 91.-- The assessee has wrongly filed the appeal relating to the assessment year 1982-83 as the C .I. T. (A) has already cancelled the penalty on the ground that the assessment had been partly modified by him and therefore penalty was not imposeable in the light of the decision in the case of Begum Mumtaz Jamal reported as P L D 1976 SC

761. In regard to the other appeals against the penalty under section 91, applying the same principle laid down by the Supreme Court we respectfully follow, since we have annulled the assessment and in the alternative also we have held on merits as well, that the assessment orders need to be modified, therefore, the penalties in these assessment years under section.91 are cancelled. 20. _Penalty appeal under section 111.-- Penalty appeal under this section has been filed for the assessment year 1982-83 which was 118.68,

518. The learned C.I.T. (Appeals) himself observed that amendment brought in law with effect from 1st July, 1984 under which clause (c) was added in subsection (2) of section 111, according to which the addition made under section 13(1) clauses (aa), (b), (c), (d) and (e) of subsection (1) of section 13, has been treated as furnishing of inaccurate particulars of income. Since this amendment was not applicable upto the assessment year 1983-84, therefore, he cancelled the penalties except for the assessment year 1982-83 which was reduced to Rs.55,

280. Since the amendment has been brought in subsequently, we cancel the penalty for the assessment year 1982-83 as well.

21. As a result of the above discussion all the appeals are disposed of as above. M.B.A./454/T Order accordingly.