1989 PLP (Trib (PTD)

4. We have heard the learned counsel for the assessee as well as the learned D.R. on this issue at length. Section 13 of the I.T. Ordinance as it was applicable for the assessment year under consideration, speaks of various situations where the assessee is found to have acquired some money or valuable article or to have made some investment or, incurred some expenditure etc. In any of such situations, by fiction of law, the assessee would be deemed to have earned the income chargeable to tax under the Ordinance. Before making such an addition as deemed income the law has however, prescribed certain conditions. The first condition which is laid down under subsection (1) of section 13 is that the assessee's explanation has to be obtained about the nature and source of such amount or investment etc. If the assessee fails to give any explanation or the explanation given is unsatisfactory in the opinion of the I.T.O., only then the income could be added. Another condition which has been laid down is under the proviso the subsection (1) of section 13 which requires that before making such an addition prior approval of the IA.C. has to be obtained. Now this situation is where there is no dispute in regard to the su4 to be added. Another situation which has been envisaged by law is where the assessing officer is of the opinion that the value of any investment or valuable article of the amount of expenditure etc. is too low. In that case I.T.O. has been empowered under section 13 (2) of the Ordinance to determine a reasonable value. Again before the determination of the value under section 13 (2) the assessing officer is required: (1) to provide an opportunity of being heard to the assessee; and (2) I.A.C. s approval has to be obtained before determining the reasonable value:

5. Now reading section 13 (1) and section 13(2) together the I.T.O. is required to follow the following procedure:- (1) Where there is no dispute in regard to the sum invested, acquisition of money or valuable article or expenditure etc:- (i) The I.T.O. has to call for the explanation of the assessee in 'regard to the nature and source of the money or investment etc. (ii) Before making the addition he has to obtain prior approval of the IA.C.: (2) Where the assessing officer is at variance with the amount shown to have been invested or expenditure incurred etc. then the I.T.O. has to determine the value of such sum or investment etc. but before doing so he has to:- (i) provide a reasonable opportunity of being heard to the assessee; and (ii) then he has to obtain prior approval of the I A C:

6. Now question is as to what would be the effect on the order of the I.T.O. if any one or all other the conditions. are not fulfilled by the assessing officer. Taking the second categories of cases first where the assessing officer is of the opinion that the value declared by the assessee is too low and he determines the value without providing a reasonable opportunity of being heard to the assessee or he does not obtain the prior approval of the IA.C. before determining the value, the value so determined by the I.T.O. would not be in accordance with law and therefore provisions of subsection (1) of section 13 would not be applicable because the provisions of subsection (1) of section 13 under which the addition is made, are applicable only when the assessing officer determines the value of the investment or expenditure etc. in accordance with. subsection (2) of section

13. In such a situation the addition has to be deleted straightaway. Similarly, if before making an addition under section 13 (1) no explanation of the assessee in regard to the nature and source of the investment or expenditure etc. was obtained or prior approval of the I.A.C. had not been obtained, again in the same way he order of the I.T.O. in making the addition is not only illegal but also without jurisdiction. Therefore, in such a situation the addition has to be deleted as well. In these circumstances, the assessment cannot be set aside and remitted back to. the I.T.O. to provide him another opportunity to cover up. the lacuna as he had been negligent in not complying with the provisions of law.

7. It has been argued before us that if the provisions of section' 13 (1) and (2) are not complied with the order of the I.T.O. being void, .the assessment as a whole has to be annulled. This argument is misconceived. There is a distinction between a void order and an illegal order. A void order is always an illegal order but every illegal order is not a void order. An order of an Authority can be void if it is without jurisdiction or if the law applied by the authority is not applicable Mere fact that certain provisions of law have-not been complied with does not ipso facto renders an order as void in all situations. In Akhtar Ali v. Altaf-ur -Rehman reported in P L D 1963 Lahore 390 (F.B) The late Chief Justice Manzur Qadir highlighted the deid distinction between the objection to the proceedings and objection in the proceedings. At page 402 of the report it was observed: "It seems to me that a distinction exists between an issue as to the very existence of the authority, to adjudicate and these other issues which arise as between the parties and which are to be determined by the authority that has the power to resolve them:" On the same page it was further observed: "This point may be put in another way. Objections raised to' the proceedings must be distinguished from objections raised 'in' the proceedings."

8. Another distinction which has to be made is between an illegal order and the illegal proceedings. Where the assessing officer initiates the proceedings without any lawful authority in that case the entire proceedings are illegal and it was so held in Aslam Jia v. Yousuf Ali reported as P L D 1958 S 0 104 that any superstructure built on an illegal order is also void. Therefore, where an assessing officer assumed jurisdiction which did not vest in him or if before the assumption of any jurisdiction the assessing officer is required by law to fulfil certain conditions and these conditions are not fulfilled; in such a situation because of the wrong assumption of jurisdiction the entire proceedings are void. On the other hand if the assessing officer has the jurisdiction and illegality creeps in at some stage of the assessment proceedings, in that case the order of assessment may be illegal but the assessment proceedings ale not. In such a case if the assessment is annulled in toto it would affect not only the assessment order but also the assessment proceedings which are otherwise taken in accordance with law and' with jurisdiction. In that case the proceedings and the order would be. illegal from the stage from where the illegality had started. In F.B. Ali v. State reported as P L D 1975 SC 506, the Supreme Court held that what is done 'with jurisdiction' if separable, cannot be held to be void. At page 538 of the report, it was observed:- "There can be no doubt that if a Tribunal or a Court acts wholly without jurisdiction, its action would be a nullity but it does not necessarily follow from this that even what it done with jurisdiction will also be rendered void, because the Tribunal or Court has at the same time done something which was without jurisdiction. In my view, if it is possible to separate what has been done with jurisdiction from that which has been done without jurisdiction without any prejudice to anyone, then what is done with jurisdiction cannot be invalidated or declared null and void, at least, in the jurisdiction as held in the case of Khizar Hayat. The same view was taken by the Supreme Court in Jamal Shah v. Member Election Commission reported as PLD 1966 SC

1. At page 48 of the report of the late Mr. Justice Kaikaus dealing with the question of jurisdiction and wrongful exercise of jurisdiction observed, "it is necessarily involved in this provision that a Court acting illegally or with material irregularity is till acting with jurisdiction. An illegality or irregularity in the exercise of jurisdiction is not the same as acting without jurisdiction". Then on the same page it was further observed, if I put the matter in my own words I would say that if' a dispute be in the proper forum then the fact that illegalities are committed in the determination of the dispute does not render the proceeding without jurisdiction".

10. Clarifying the distinction between order without jurisdiction and an illegal order the learned Judge continued as under: -- "If an order passed in the illegal or irregular exercise of jurisdiction is not without jurisdiction, can it be said that it is without "legal effect". It is only acts without jurisdiction as have no legal effect. When a judicial Tribunal acts with jurisdiction its order has full legal effect till it is set aside by appeal, revision, etc. Let me refer to examples where a Court acts illegally in the exercise of jurisdiction. A Court acts illegally in the exercise of jurisdiction, when, by a misinterpretation of the relevant provision, it entertains a suit which is barred by res judicata, or Order Il, rule 2 or Order IX, rule 8, C.P.C. or which is time-barred. Now it is impossible to say about the decree passed by the Court in such cases that it has no legal effect. It is a good and valid decree binding on the parties unless it is set aside in appeal or revision. On the other hand if a Court acts without jurisdiction its order or decree is of no legal effect and has to be ignored. If a Court which has no jurisdiction under the Succession Act grants a succession certificate or probate of a will, or a Court which does not possess any jurisdiction under the Guardians and Wards Act appoint a guardian of a minor, or a Small Cause Court passes a decree for possession of land, or a civil Judge with pecuniary jurisdiction upto Rs.1,000 passes a decree for Rs.2,000, the order or decree has no legal effect. Such is the decree or order which is covered by para (ii) of Article 98 (2) (a)."

11. Then in the same judgment drawing the distinction between the act of judicial tribunal and the administrative authority the Court made the following observations:

It is a distinction attaching only to judicial tribunal that their acts with in their jurisdiction though illegal are not null an avoid. So far as administrative officers and authorities are concerned there is no distinction between illegality and want of jurisdiction. When an administrative officer had authority to pass order or to take action if certain facts exist. If these essential facts do not exist his order or action. As declared by the Supreme Court, a void order does not exist in law and can always by ignored while an illegal order has to be formally set aside or declared illegal by the Appellate Court or some other authority duly empowered to this effect. As stated above, there is no dispute that the assessing officer who had finalized the assessment, has the jurisdiction. There is also no dispute that under section 13 of the I.T. Ordinance, the assessing officer had jurisdiction to make addition in the given circumstances. The only dispute is that at a certain stage of the proceedings otherwise taken legally against the assessee, the I.T.O. had not complied with certain provisions of law i.e. he had not provided a reasonable opportunity of being heard in that the amount determined by the assessing officer was not confronted to the assessee so that he could explain the nature and source of the investment. It, therefore, follows that the assessing officer acting with jurisdiction and initiating the proceedings with lawful authority, acted at certain stage of the proceedings illegally. Therefore, it is from that stage that the Peelings can be said to be illegal and as such the resultant order would also be roc illegal. But it cannot be said that the proceedings before that stage from where the illegality had started, were also illegal.

12. Coming to section 13 where the assessing officer had not provided an opportunity of being heard to the assessee in determining the value under subsection (2) or if he had not provided opportunity to the assessee to explain the nature and source of the investment and expenditure etc. under section 13 (1), the order of the I.T.O. would be illegal but the proceedings which had been taken lawfully upto the stage from where the illegality had started, would he legal proceedings.

13. Now applying these principles on the facts of the present case, we note firstly that the learned C I T (A) has wrongly mentioned that subsection (2) .of section 13 has not been complied with. This is obvious from the wording used by the learned C I T (A) which is reproduced below:- "The appellant's grievance is that he was never -confronted with the estimated market value of the property at Rs.2,09,000:" From these wordings it seems that what has not been confronted to the assessee is the determined value. Therefore, the non-compliance is that of section 13 (1) and not of section 13 (2). Since, admittedly (and we say so as the department has not contested the finding of the learned C.I.T. (A) by filing an appeal before the Tribunal) the assessee has not been provided an opportunity under section 13 (1) to explain the nature and source of her investment, the addition made under section 13 would be illegal and has to be deleted. However, since the addition made under section 13 being separable from the rest of the assessment order, therefore, the rest, of the assessment order will remain intact and cannot be annulled.

14. It may not be out of place to refer the Supreme Court's judgment in Collector, Sahiwal v. Mohammad Akhtar reported as 1971 S C M R

681. In that case the question as to the effect of not providing a fair opportunity of being heard to a person has been examined in detail. The Supreme Court has made a distinction between two situations: (1) where no opportunity has been given and there is no specific statutory provision and reliance is only placed on the violation of the principle of audi alteram partem, (2) where there is violation of the statutory provision for providing an opportunity of being heard to a person. In regard tot the first category of cases it has been held that if at some stage the aggrieved person has been provided an opportunity to represent his point of view then the defect in the initial order may be deemed to have been cured. In regard to the second category of cases it has however been held that non compliance of the mandatory provision of law would render the order as wholly void. At page 684 of the report the Court has observed as under:- "The Courts in Pakistan have, however, taken the view that where the giving of a notice is provided for by the statute itself then to failure to give such a notice is fatal and cannot be cured. But where there is no specific statutory provision and reliance is only placed on the principles of natural justice and +audi alteram partem, there if at some stage or other the person aggrieved has been given a fair opportunity of representing his point of view, then the defect, if any, in the initial order may be deemed to have been cured. Thus, in the case of Muhammad Ishaq v. Dr. Saiduddin Saleh ( P L D 1959 Kar. 669) it was pointed out that each case will have to be determined on its own facts. If the statutory provision for notice be of a mandatory nature, then an order without any notice would be wholly void; but if there be no such provision or if the provision be merely of a directory nature, then wherever a violation of this principle of natural justice is alleged, the Courts may call upon the party alleging the same to prove prejudice before it set aside the order. Such prejudice would obviously not be there if it is found that the party had been actually given a full hearing by the appellate or revisional authority and afforded every opportunity of showing cause against the allegations made. To the same effect is the view of the Peshawar High Court in the case of Charsaddah Sugar Mills Ltd.-v. Government of Pakistan (P L D 1971 Pesh. 210). This Court, too, has consistently taken the same view vide; The Commissioner of Income-tax, East Pakistan v. Fazlur Rehman (P L D ,1964 SC 410), Abdul Latif Niazi v. Government of West Pakistan (P L D 1967 SC 62) and Mansab Ali v. Amir (P L D 1971 SC 124). This Court has gone to the extent of pointing out that the mere absence of a provision in a statute as to notice cannot override the principle of natural justice that an order affecting the rights of a party cannot be passed without an opportunity of hearing and also hold that where the giving of a notice is a necessary condition for the proper exercise of jurisdiction then failure to comply with this requirement renders the order void and the entire proceedings which follow, also become illegal. The principle, so far as this country is concerned, is accordingly well settled that where notice required to be given by the statute is a mandatory notice, then the failure to comply with such mandatory requirement of the statute would render the act void ab initio as being an act performed in disregard of the provisions of the statute. Furthermore, any further action taken on the basis of such a void order would also be vitiated and the defect at the initial stage would be incurable by a hearing at a subsequent stage:"

15. It is also worth pointing out that income which is added under section 13 is not the real income but is considered as deemed income under the fiction of law. In fact it might not be income at all. But the law has given a presumption that in the given circumstances if an assessee fails to satisfactorily explain certain credit, expenditure or investment etc. it would be treated as income of the assessee which may not be the income of an assessee in fact. Not only that; if an addition is made under section 13, it is now also treated as concealed income as by the Finance Ordinance, 1984. Section 111 (2) has been amended and it has been provided that any act referred to under clauses (aa), (b), (c), (d) and (e) to subsection (1) of section 13, would be considered as concealed income or furnishing inaccurate particulars of income. This means that any addition made under section 13 after the amendment in the year 1984, would also entail penalty under section 111 of the Ordinance. Therefore, for such a harsh treatment to the assessee the law has placed certain conditions on the exercise of the powers of the I.T.O. which, therefore, should be strictly complied with.

16. As a result of the above discussion our conclusion is as under:- Where; (1) No opportunity of being heard has been provided to the assessee whether under section 13 (2) for determination of the value or under proviso to section 13 (1) requiring the explanation of the assessee as to the nature and source of the credit, expenditure or investment etc., or (2) Prior approval of the I.A.C. has not been obtained either under section 13 (2) or under section 13 (1); the addition made under section 13 has to be deleted. (3) Notwithstanding the deletion of the addition under section 13 (1), the rest of the assessment order would be a legal order and as such the entire assessment order 'cannot be held to be null and void.

17. Applying the above principles, we hold that in this case the assessment order, though with jurisdiction, to the extent of the addition under section 13, was illegal in that specific provision of section 13 (1) had not been complied with as has been held by the learned C.I.T. (A) as the assessee had not been confronted with the value of the property determined by the assessing officer as required by section 13 (1). In these circumstances, the order of the learned C.I.T. (A) needs modification and consequently we direct that the addition made under section 13 of the Income-tax Ordinance should be deleted.

18. As a result of the above discussion the appeal is accepted.

19. FARHAT ALI KHAN (CHAIRMAN).--I have carefully gone through the proposed order written by the learned Judicial Member and concurred by learned Accountant Member of Bench No.2 at Lahore. While I agree with both the learned Members that the addition made by the I.T.O. under section 13 (2) of the Income Tax Ordinance should be deleted but with profound respect for both the learned Member I do not find myself in agreement with them regarding interpretation of subsections (1) and (2) of section 13 of the Income Tax Ordinance.

20. From perusal of Paragraphs 4 and 5 of the order proposed by my learned brothers it appears that the I.T.O. can make addition under section 13 (1) of the Ordinance if the assessee fails to give any explanation or the explanation given is unsatisfactory in the opinion of the I.T.O. However, such addition is to be made after the prior approval of the concerned IA.C. Now as far as the I.T.O. is of the opinion that the value 'of any investment or valuable article or the amount of expenditure is too low' he has been empowered under section 13 (2) of the Ordinance to determine a reasonable value' but before determining the value under section 13 (2) the assessing officer is required: (1) To provide an opportunity of being heard to the assessee and (2) I.A.C. s approval has to be obtained before determining the reasonable value. My learned brothers elaborating their point of view further ma de the follow observation:- "Now reading sections 13 (1) and 13 (2,) together the I.T.O. is required to follow the following procedure:- (1) Where there is no dispute in regard to the sum invested, acquisition of money or valuable article or expenditure etc., (i) The I.T.O. has to call for the explanation of the. assessee in regard to the nature and source of the money or investment etc. (ii) Before making the addition he has to obtain prior approval of the IA.C. (2) Where the assessing officer is at variance with the amount shown to have invested or expenditure incurred etc., then the I.T.O. has to determine the value of such sum or investment etc., but before doing so he has to:- (i) Provide a reasonable opportunity of being heard to the assessee; and (ii) than he has to obtain prior approval of the IA.C.' However, sitting singly I have also interpreted the provisions of subsections (1) and (2) of section 13 of the Income-Tax Ordinance and have laid down the procedure to be followed by the I.T.O. in a case reported as 1987 P T D (Trio)

300. Referring to another earlier decision of a Full Bench of this. Tribunal reported as 1986 P T D (Trio)

578. It made the following observation:- "I think that the above-quoted observation applies mutatis mutandis in the case of additions to be made under section 13 of the Ordinance. Here also the Legislature has taken the precaution that the Inspecting Assistant Commissioner should remain involved in the assessment proceedings. This conclusion is further fortified by the requirement of two approvals as envisaged by section 13 (1) and. section 13 (2) of the Ordinance. An I.T.O. is firstly required to ask an assessee to show cause as to why an addition should not be made under section 13 of the Ordinance according to the facts and circumstances of each case which is contemplated in clauses (aa) to (e) of section 13 (1) of the Ordinance. When such explanation is offered to him, he should form his opinion on the basis of the material available to him and the explanation offered and if he comes to the conclusion that an addition should be made, he should seek the approval of the Inspecting Assistant Commissioner. Here the law requires him to offer his proposal regarding quantum of addition so that Inspecting Assistant Commissioner may scrutinise it in the light of the explanation. It appears from perusal of subsection (2) that if the Inspecting Assistant Commissioner agrees to the proposal of that I.T.O., the latter should then once again serve a notice on the appellant so that he could be given a reasonable opportunity of being heard. If after giving the opportunity of hearing to an assessee the I.T.O. comes to the conclusion that the amount originally proposed by him and approved by his Inspecting Assistant Commissioner was in his opinion justifiable even than he should again seek the approval of his Inspecting Assistant Commissioner. This procedure emerges out from the use of the words' and the assessee offers no explanation' in subsection (1) and `after giving a reasonable opportunity to the assessee of being heard' as used in subsection (2) of section 13 of the Ordinance. From the use of these expressions it appears that firstly the I.T.O. calls for an explanation of the assessee to form his opinion about the quantum of the addition. Here the assessee does not know what is in the mind of the I.T.O. except that he was 'not satisfied with his drawings. When he gives the assessee an opportunity of being heard, he does so after the proposed addition. At the first instance the Legislature has insisted merely and calling for an explanation but on the second occasion the opportunity of being heard is given to an assessee." From perusal of this observation it appears that I dealt with the cases falling under clauses (aa) to (e) of subsection (1) of section 13 of the Income Tax Ordinance. In other words the procedure laid down does not cover the cases following under clauses (aa) of subsection (1) to section 13 of the Ordinance. However, I think that I should take this opportunity to explain once again my point of view.

21. From perusal of clauses (a) to (e) of subsection (1) of section 13 of the; Ordinance it appears that the deemed income has been divided in threes categories i.e., (i) Deemed income which is recorded in the books maintained by an assessee; (ii) Deemed income which is neither recorded in the account books nor finds place in the wealth statement; and (iii) Deemed income which is recorded in the account books or wealth statement but the I.T.O. thinks that it is on lower side.

22. Now as far as the first category is concerned, I agree with my learned brothers that under certain circumstances the I.T.O. can make addition after finding the explanation unsatisfactory provided he has obtained the prior approval of his IA.C. But even in such case, let me emphatically point out, an I.T.O. may be required by law to give more opportunity to an assessee than mere calling for his explanation. Let me illustrate this point. Suppose an I.T.O. finds Rs.,5,00,000 to be credited in the books of an assessee and consequently calls upon him to offer his explanation. Further, suppose that the assessee explains to him that aforesaid amount of Rs.5,00,000 belongs to 5 persons called A, B, C, D and E in equal shares as they had deposited their respective amount as advances against payments of certain goods to be purchased subsequently and in his explanation he gives full particulars of all these 5 persons. With due respect, I do not think that m such case I.T.O. can simply say that he finds the explanation unsatisfactory as offered by the assessee without proceeding further with the matter. But if he does so the Superior Courts would not uphold such addition. In my humble opinion the I.T.O. would have to proceed further with the matter and perhaps would have to call for the explanation of the assessee again and again in order to meet the requirements of natural justice.

23. Now as far as the deemed incomes falling under categories 2 and 3 are. would be altogether different. In the cases falling under clause (2) the I.T.O. would issue notice under section 13 (1) (aa), (b) or (c) as the case may be when he comes to possession of some information or evidence. This is essential as the deemed income sought to be added is not reflected either in the account books or in the wealth statement. Thus, he would have to make up his mind as to how much deemed income he could legally add. Similarly, in cases falling either under Clause 13 (1) (d) or (e) the I.T.O. has before him the figures but he thinks that the figures so disclosed are on lower side. If he, therefore, follows the procedure laid down in 1987 P T D (Trib)

300. He would not only comply with the requirements of various principles of interpretation of Statutes but would also make his action compatible with the policy of law which apparently emerges out from the close reading of both subsections of section 13, After all we have to keep in mind that the legislature has deliberately used the (a) "excess amount or money" (b) "excess amount or the amount of money" which find place in subsection (1) of section 13 of the Ordinance and (c) the expression "all the provisions of subsection (1) shall have effect according". Which find place in subsection (2) section 13 of the Income Tax Ordinance. Moreover, section 13 lays down the exceptional rule of deemed income and if an I.T.O. is required to seek double approval from his IA.C. as discussed in 1987 P T D 300 (Trib) it would not only lead to more additions which are found sustainable by Appellate Forums but also would spare so many assessees from unnecessary harassment. Unfortunately my learned brothers have not considered all these aspects. I, therefore, feel myself verb, much reluctant to subscribe to their point of view.

24. Notwithstanding the discussion made above, I agree with my learned brothers that under its circumstances .the appeal should be accepted. M.BA/562/T Appeal accepted.