2009 PLP 22 (PTD)

6. Retrospective applicability of subsection (5A) of section 122 of the Income Tax Ordinance, 2001 inserted through the Finance Act, 2003. The respondent claims to have filed an appeal against the Sindh High Court decision, dated 2-3-2004 in constitutional petitions No.D-643 to D-646 of 2004, dated 2-3-2004 in which it was held that subsection (5A) inserted in section 122 of the Income Tex Ordinance, 2001 w.e.f. 1-7-2003 could not be applied to assessments completed before that date. The fact, however, is that the legal principle involved in the Sindh High Court judgment viz. the lack of retrospectivity in the case of similar provisions of section 34A of the repealed Income Tax Act, 1922 and 66A of the repealed Income Tax Ordinance, 1979 has been accepted by the respondent itself over a long period of time. Thus section 66A (which was similar in nature to section 34A of the repealed Income Tax Act, 1922 and also to the new section 122(5A) of the Income Tax Ordinance, 2001 was inserted in the repealed Income Tax Ordinance, 1979 through the Finance Ordinance, 1980 w.e.f.1-7-1980 while the Income Tax Ordinance, 1979 itself came into force w.e.f. 1-7-1979. In High Court decisions in the context of the said section 66A it was held that the section was not retrospective and since it was inserted w.e.f. 1-7-1980 it could not be applied to assessments finalized before its insertion. This legal position was confirmed by the C.B.R. in its own circular, dated 17-2-1981 clearly stating that:- "Section 66A does not have retrospective application. The assessments finalized before 1st July, 1980 cannot be reopened under section 66A of the Income Tax Ordinance, 1979." The position with respect to section 122(5A) of the Income Tax Ordinance, 2001 is identical. Here the Income Tax Ordinance, 2001 came into force with effect from 1st July, 2002 and it did not contain any provision similar to section 66A of the repealed 1979 Ordinance. It was only through the Finance Act, 2003 that subsection (5A) was inserted in section 122 which read as under:- "(5A) Subject to subsection (9), the Commissioner may amend, or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue." The above provisions were similar in nature to those of section 66A of the repealed Income Tax Ordinance, 1979 but from 1st July, 2002 to 30th June, 2003 no comparable provisions were in existence on the statute. The principle contained in the earlier High Court decisions in the context of section 66A of the repealed Ordinance was thus fully applicable to section 122(5A) of the Income Tax Ordinance, 2001. The earlier decisions of the High Court in the context of section 66A were never challenged by the department before the Supreme Court and were in fact confirmed by the C.B.R. itself e.g. in the circular referred to above. Now, of course, the department claims to have filed a C.P.L.A. before the Supreme Court against the judgments(s) of the Sindh High Court. (These judgments of the High Court have, however, obviously not been held in abeyance. In fact in the light of section 124A of the Income Tax Ordinance, 2001 the Commissioner may follow the High Court decisions even in those cases in which C.P.L.A. has been filed and may take necessary action, if any, within one year after the Supreme Court judgment in those cases. In any case, the principle regarding lack of retrospectivity is well established and is incorporated in High Court decisions and several findings of his office. The retrospective application of section 122(5A) is thus found to be contrary to law and to constitute "maladministration" as defined in section 2(3)(i)(a) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000.

7. Validity of the section in the context of the scope of sub-section (5A) of section

122. The facts in this regard are that the complainant had declared a loss of Rs.250,004 for the assessment year 2002-2003 against the sales/receipts summarized in para 1(i) above. Vide his order under section 62 of the repealed Ordinance dated 27-3-2003 the assessing officer made an addition of Rs.171,200 to the complainant's wheat account and also made certain other additions to assess income at Rs.47,

418. The complainant filed an appeal against the assessment and the C.I.T. (Appeals) vide his order dated 1-10-2003 deleted the addition to wheat account and also allowed some relief in the add backs out of P&L account. The department then filed a second appeal before the Income Appellate Tribunal which was, however, rejected vide the decision, dated 11-3-2004. A year later, however, the Additional Commissioner of Income Tax, Range-II, Companies Zone, Peshawar issued a notice under section 122(5A), dated 29-4-2005 to the complainant the main portion of which read as under- "The results shown as per your accounts are as under:-- Purchase from open market Rs.550,000 Electricity consumed 137,450 units Electricity units consumed 24.99 units For grinding of 100 KG wheat. This shows consumption of 24.99 units per 100 KG crushing which is extremely high as normally as an accepted principle 5 to 6 units per 100 KG are allowed in this nature of business. As per units consumed at the rate of 5 unit per 100 KG the wheat grinded will come to 2,749,000 if taken at 6 units per 100 kg then 2,290,833 while declared grinding is 550,000 the concealed grinding will come to 2,199,000 KG if taken at 5 units and if taken at 6 will come to 1,740,

833. Since the assessing officer has ignored this very important aspect of the case which make assessments framed under section 62, dated 27-3-2003 for assessment year 2002-2003 erroneous in so far it is prejudicial to the interest of revenue which attract the provision of section 122(5A) of the Income Tax Ordinance, 2001. Therefore, I intend to amend your assessments already finalized under section 122(5A) of the Income Tax Ordinance, 2001 to retrieve the loss of revenue".

8. In response to the IAC's letter dated 29-4-2005 the complainant sent a reply dated 6-5-2005, relevant portion of which was as under: "That the appellant has declared total sales at Rs.5957536 which has also been confirmed by the assessing officer as per contents of assessment order itself. That said proceeds of sales have been derived from sales of following quantities:- Atta 533460 Kgs Rs.4,896,670 Bran 21900 Kgs. Rs.91,554 Refraction 24200 kgs Rs .43,762 Wheat grinded charges 1870000 Kgs Rs.925,550 Total: 2449560 kgs Rs.5,957,536 That the schedule of sales was submitted to the assessing officer vide appellant letter dated March 22, 2003. That the appellant has also submitted the details of electric consumption vide appellant letter dated March 27, 2003 and as per said letter the total consumption of electric units comes to 137450 units which have also been confirmed as per your office letter dated April 29, 2005. That the appellant has grinded 2449560 kgs of wheat which is also in conformity with your office letter under reference. As such the appellant has not concealed any grinded wheat as alleged in your office letter. All the documents as advised from time to time by the assessing officer have been submitted and after taking into account all the submissions the assessment under section 62 was framed. It is hoped that now the matter will be clear at your end and the letter under reference dated April 29, 2005 will be vacated."

9. The Additional Commissioner vide his letter, dated 24-5-2005, however, then took up a different ground for the proposed action under section 122(5A) and wrote as under:-- "Regarding your plea of grinding 1870,000 kg for other parties, the assessment record has been examined which reveals that in the assessment order for Assessment year 2002-2003 on page 2 of the following findings have been given by the assessing officer:-- "The assessee has also grinded 18700 bags of wheat for private parties. Copies of NICs along with agreement deeds were furnished and POF. The grinding charges declared at Rs.925,550 which in absence of any other evidence to the contrary is accepted under sections 65/156". In this regard the agreement deeds POF reveals that agreement was made with Mr. Niaz Ahmad son of Thaker NIC No.286-21-28000, resident of Baroaki, Darman, Gujranwala and Irshadullah Khan son of Maseetay Khan NIC No.289-92266612 resident of Soyoki, Post office Dhani, Tehsil Hafizabad, Gujranwala. The acceptance of these grinding arrangements by the assessing officer without any probe into the matter and subject to sections 65/156 is erroneous and prejudicial to the interest of revenue. Keeping in view the above position in order to process your case further and look into the genuineness of the grinding arrangements you are requested to produce Mr. Niaz Ahmad son of Thaker, NIC No.286-21-28000, resident of Baroaki, Darman, Gujranwala and Irshadullah Khan son of Maseetay Khan, NIC No.289-92-266612, resident of Soyoki, post office Dhani, Tehsil Hafizabad, Gujranwala for cross examination by 2-6-2005:-- "Please ensure that the needful is done on the due date other-wise inference will be drawn that the grinding of 18700 bags of 100 kg was your own grinding and accordingly your assessment for Assessment year 2002-2003 will be amended under section 122(5A) of the Income Tax Ordinance, 2001."

10. Vide its reply dated 31-5-2005 the complainant pointed out that in the Additional Commissioner letter dated 24-5-2005 another issue had been raised and sought confirmation that the complainant's explanation regarding the units of electricity consumption had been accepted. Subsequently the complainant sent the following letter:-- "That the appellant company has gone through the contents of your said letter and would like to state that the proceedings initiated under section 122(5A) ate not applicable to the appellant as the proceedings for the year of the appellant were completed as on March 27th, 2003. The appellant went into appeal with C.I.T. (A) and the appellant's appeal for the year has also been decided by the C.I.T.(A) vide appellate order dated October 1st 2003. Further to this, the appellant company is also enclosing herewith a copy of decision of Sindh High Court dated March 2nd, 2004 which relates to subject matter. As per decision of Sindh High Court, the proceedings under section 122(5A) of I.T.O., 2001 cannot be initiated."

11. On receipt of the complainant's letter the Additional 'Commissioner vide letter, dated 24-5-2005 wrote to the complainant as follows: -- `Reply/arguments submitted by you vide para 1 of your above quoted letter has been found unsatisfactory as proceedings for assessment year 20022003 under. section 122 (5A) of the Income Tax Ordinance, 2001 were initiated on the issue which was ignored by the assessing officer at the time of original assessment finalized under section 62 which make the original assessment erroneous in so far it is prejudicial to the interest of revenue. Accordingly the discrepancies were communicated to you vide this office notice under section 122(5A) quoted above. Further to the above, the decision of Honourable Sindh High Court referred by you has been challenged by the Department by filing C.P.L.A. in Supreme Court of Pakistan. Since the matter is sub judice, therefore, you are requested to submit your written reply as requested vide this office notice under section 122(5A) bearing No.1327, dated 24-5-2005 by 29-8-2005 positively. You are further requested to provide Cash Flow Statement for the period relevant to the year under consideration on the due date. Please ensure that the needful is done on the due date other-wise inference will be drawn that the grinding of 18700 bags of 100 kg was your own grinding and accordingly your assessment for Assessment year 2002-2003 will be amended under section 122(5A) of the Income Tax Ordinance, 2001."

12. It is evident from the above that the first notice under section 122(5A) was issued on the assumption that the quantity of wheat subjected to grinding was not commensurate with the number of units of electricity consumed. Obviously while adopting this view the IAC took into consideration only the grinding of wheat undertaken by the complainant on its own account and ignored the grinding stately undertaken for other parties. When this was brought to the notice of the IAC by the complainant the IAC took up a different ground viz., that the assessing officer had not properly probed the genuineness of parties for whom the wheat was ground. In fact the grinding agreements and copies of identity Cards of the parties were on record and were duly mentioned in the assessment order itself but these were ignored by the IAC when the first notice was issued. When this was pointed out by the complainant, the IAC directed that the parties be produced before him for cross-examination and other information such as `cash flow statement" be also provided. It was conveyed to the complainant that if the parties were not produced the entire grinding would be considered to have been done on the complainant's own account. Now it is- evident from the words "erroneous in so far it is prejudicial to the interests of revenue" used in section 122(5A) that there should be an element of error apart from the assumed prejudice to revenue in the assessment order. In this context the Azad Jammu and Kashmir High Court in its well known judgment in United Builders (1984 PTD 137) while quashing action under section 34A of the repealed Income Tax Act, 1922 observed as follows:-- "In order to exercise the powers under this section, it was incumbent upon the Inspecting Assistant Commissioner to determine that an order sought to be interfered, was erroneous and prejudicial to the interests of the revenue. The word "erroneous' is defined in the Oxford Dictionary, means; mistaken, incorrect; in the legal sense, an order was considered erroneous if it deviated from the law. This suggested that it was a condition precedent to declare the impugned order erroneous by reference to definite violation or deviation from law." The Azad Jammu and Kashmir High Court also noted that where the IAC was not in possession of definite facts to negate the assessment order there could be no valid action under section 34A of the repealed Income Tax Act, 1922. In this context the High Court observed as under: "The powers conferred under section 34A indicated that such powers were exercisable only on the proof and satisfaction that the order of the income Tax officer was unlawful as such erroneous, so as to be prejudicial to the interest of the Revenues. Unless such, a condition was not fulfilled, powers under the section could not be invoked. In the present case, the close study of the notice under section 34A reflects that the Inspecting Assistant Commissioner was not in possession of sound facts leading to the inference that the assessment made by the income Tax Officer was in any manner erroneous." The Honourable High Court further observed that the mere fact that an IAC disagreed with the result of an assessment was not a valid reason for invoking section 34A. The relevant portion of the judgment was as under:-- "It is well-accepted that provisions of section 34A were not available on the ground of mere disagreement in assessment. Such powers can be invoked only when an order of Income Tax Officer is found deviating from law. Thus, only that Inspecting Assistant Commissioner was not in agreement with the result of assessment made by the Income Tax Officer was not a genuine reason for resort to section 34A. The other aspect of the case is that power conferred on Inspecting Assistant Commissioner under section 34A is just in the nature of supervisory power. In exercise of supervisory authority, Inspecting Assistant Commissioner was not expected to indulge in deep inquiry by assuming the role of Income Tax Officer."

13. Now in the instant case it has already been noted that the original notice under section 122(5A) was issued on totally wrong assumptions and ignoring relevant material on record. These assumptions could obviously not be a valid reason for considering the assessment for the year, 2002-2003 to be erroneous insofar as it was prejudicial to the interest of Revenue. When the erroneous assumption was pointed out by the complainant the IAC took upon himself the role of an assessing officer and commenced assessment proceedings by requiring the complainant to produce the parties for whom he had ground the wheat. Obviously even at this point of time the IAC had no definite reason to believe that the parties were fake and again he had no genuine reason to consider the assessment to be erroneous insofar as it was prejudicial to the interest of Revenue. Thus on mere suspicion the IAC has stepped into the shoes of the assessing officer and has attempted to commence fresh assessment proceedings in the case. The IAC's observation that if the parties were not produced for cross examination by the complainant, the entire grinding would be considered to have been done on its own account is again quite illogical. It is to be noted that this is the case of a limited company in which final accounts, duly audited by chartered accountants, were filed with the return. Grinding of wheat for other parties is a common activity among flour mills and even the failure to produce the parties could in no way justify the discarding of the audited accounts and jumping to the conclusion that all the wheat was ground on the complainant's own account. In the light of the above, the action initiated by the Inspecting Additional Commissioner is found to fall outside the scope of section 122(5A) of the Income Tax Ordinance, 2001. For this reason too it is thus found to fall within the definition of "maladministration" contained in section 2(3)(i)(a) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000.

14. Merger with the order of the Income Tax Appellate Tribunal.

As already noted above, the notice under section 122(5A) was issued almost a year after the department's appeal before the Tribunal had been rejected. The contention of the learned Advocate for the complainant was that the assessment order for the year, 2002-2003 had merged with the order of the Tribunal and could, therefore, not be amended under section 122(5A). The representative of the respondent was of the view that since the matter of the genuineness of the grinding receipts were not before the I.T.A.T. it was not considered by it and action under section 122(5A) could, therefore, be validly taken in the case. It is evident, however that the issue was not involved in the appeals before the C.I.T. (Appeals) and the I.T.A.T. but the question of quantum of sales representing own grinding was involved and the sales as reduced by the C.I.T. (Appeals) stood duly confirmed. The Inspecting Additional Commissioner now wants to enhance the sales of wheat ground on own account on the basis of a fresh probe. This is obviously against the accepted principle of 'merger'. It would, in this context, be useful to refer to the judgment of the Supreme Court of Pakistan in the case of Glaxo Laboratories Limited reported as (1992) PTD

932. In this case too the question of validity of action under section 66A of the repealed income Tax Ordinance, 1979 after a decision of the Tribunal came up for consideration and the Supreme Court held the notice under section 66A to be without jurisdiction and of no legal effect. While coming to this conclusion the Supreme Court inter alia observed as under:-- "(6) Section 66A authorizes IAC to examine and initiate action if the order passed by the ITO is erroneous insofar as it is prejudicial to the Revenue. The IAC did not have the jurisdiction or power to initiate same action in respect of the orders passed by the appellate authorities or the Tribunal. However, as observed above such power has now been vested in IAC from the year 1991. The controversy is whether after the appellate authority has passed the order of the ITO merge in it and IAC cannot reopen it under section 66A in Corpus Juris Secundum, Volume 57, at page 1067 words "merge" and `merger" have been defined as follows:-- "The verb "to merge" has been defined as meaning to sink or disappear in something else, to be lost to view or absorbed into something else, to become absorbed or extinguished to be, combined or be swallowed up. "Merger" is defined generally as the absorption of a thing of lesser importance by a greater, whereby the lesser ceases to exist, but the greater is not increased, and absorption or swallowing up so as to involve a loss of identity and individuality." It is well-settled principle that on appeal the original order merges in the appellate order, The Commissioner of Income Tax v. Farrokh Chemical Industries, 1992 SCMR 523 it was observed that "the order of the I.T.O. upon appeal merged in the order of the Income Tax Appellate Tribunal". Here the assessment order made by I.T.O. was reopened under section 65 and a revised assessment was framed which has been set aside by the Tribunal. Thus, the order of the I.T.O. has merged in the order of the Tribunal which holds the field. The Supreme Court also took note of subsection (1A) which was inserted in section 66A in the year 1991 and which read as under:-- (1A) The provisions of subsection (1) shall in like manner, apply,-- (a) Where an appeal has been filed under sections 129, 134 and 137 or a reference has been made under section 136, against an order passed by the ITO: and (b) Where an appeal or reference referred to in clause (a) has been decided in respect of any point or issue which was not the subject matter of such appeal or reference. (c) No order under subsection (1) shall be made after the expiry of four years from the date of order sought to be revised." In the context of the new subsection (IA) of section 66A the Supreme Court observed as follows:-- "The fact that in 1991 subsection (IA) was added authorizing IAC to initiate action under section 66A even if appellate and revisional orders have been passed, supports the contention that such a power did not exist earlier. The question whether it is applicable to the present case is kept open and we refrain from expressing any opinion at this stage. We, therefore, allow the appeal and set aside the impugned judgment and consequently notice issued under section 66A of the Income Tax Ordinance is declared as without jurisdiction and of no legal effect." Now section 122(5A) of the Income Tax Ordinance, 2001 again does not contain any provisions similar to those contained in subsection (IA) of section 66A of the repealed Ordinance inserted in 1991 and obviously the Inspecting Additional Commissioner no longer has the powers indicated in the subsection. In the light of the Supreme Court judgment, the scope of section 122(5A) can again not be extended to cases where an assessment order has merged with the order of an appellate authority. On this basis too the action under section 66A in the instant case is found to constitute "maladministration" as defined in section 2(3)(i)(a) of the Establishment of Office of Federal Tax Ombudsman Ordinance, 2000.

15. In the light of the above, it is recommended that-- (i) The action under section 122(5A) of the Income Tax Ordinance, 2001 initiated by the Inspecting Additional Commissioner for the assessment year 2002-2003 be dropped. (ii) Compliance be reported within 45 days. C.M.A./74/FTO Order accordingly.