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Income‑tax Appeals Nos. 1159/KB to 1161/KB of 1976‑77, decided oil 30th May, 1979.

-------S. 34‑A‑Escaped assessment‑Revision‑Assessee's plea of having sublet certain portion of work to others not established from record-- Plea regarding examination of such sub‑lessees by Income‑tax Officer on verbal calls also not supported by entries in order sheet‑‑All sub- lessees filing returns on same date and their assessments also com pleted on same date‑Partnership deed of all sub‑lessees also drawn up on same date‑Sub‑lessees also becoming non‑existent subsequently Original contract deed not produced to show existence of any provision for subletting arrangement‑‑No evidence as to conditions of subletting of work nor any evidence on record to prove payments having been made to sub‑lessees on basis of work done‑‑‑‑No accounts maintained by sub‑lessees‑Entire arrangement, held, fake and manoeuvred by appellant through unscrupulous Income‑tax Officer to avoid proper payment of taxes.

‑‑‑‑‑ S. 34‑A‑Escaped assessment‑Revision‑‑Words and 'phrases Word "erroneous"‑‑Means riot in accordance with law‑Any order opposed to any provision of late considered as erroneous.

-----S. 34‑A‑Escaped assessment‑Revision‑Words and phrases Words "prejudicial to the interest of revenue"‑‑Signify an order, whereby revenue suffers loss and assessee pays tax less than validly due.

-----S. 34‑A‑Escaped assessment‑‑Revision‑Assessment order passed with male fide intention and without examining genuineness of sub -lessees‑Income‑tax officer concerned so unscrupulous as to have falsely mentioned in his order fact of examination of all sub‑lessees and all sub‑lessees having appeared before him‑‑Such Officer dismissed from service‑Order of assessment made by such Income‑tax Officer, held', based on male fide intentions, misstatements and incorrect facts, hence, nothing but erroneous‑Appellant's arrangement of subletting being fake and designed with sole aim of avoiding proper payment of taxes‑‑ Income‑tax Officer's order based on such subletting arrangements, hence, very much prejudicial to interests of revenue‑‑Inspecting Assistant Commissioner also issuing required notice to appellant and appellant '' responding to same‑All conditions envisaged under S. 34‑A having' been fulfilled, Inspecting Assistant Commissioner, hell, vested with, powers vested in him under S. 34‑A and could, inter alia. Cancel impugned assessment rind enhance same.

(1969) 20 Taxation 51 (Trib.) ref.

Muhammad Saeed Butt and Jamil Hussain for Appellant.

Ashfaq Ahmad, D. R. for Respondent.

These three appeals filed by the appellant, a registered firm engaged in the construction of Roads, Bridges, Drains and Excavation work etc., have mainly disputed the order of the Inspecting Assistant Commissioner passed under sec tion 34‑A of the income‑tax Act. In the other two appeals, which are consequential in nature, objections have been taken against the action taken under section 45‑A and 18‑A (6) of the Income‑tax Act. Briefly, stated facts of the case are:

2. The appellant firm declared the total receipts in inspect of the various jobs at Rs. 87,41,441. Out of these jobs the appellant allegedly sublet a portion of‑the contract work to the extent of Rs. 33,00,000. According to the Income‑tax Officer this subletting was assigned by the appellant's Con tractor to some 15 (fifteen) parties out of which (2 ('twelve) were individual and 3 (three) were reported t7 be registered firms. On the work undertaken by the appellant themselves in respect of receipts aggregating to Rs. 54,41,441, a Gross Profit rate of 13.6 % was declared. On account of certain defects in accounts, which are not in dispute, these declared result were not accepted by the Income‑tax Officer and he computed the Income by applying a Gross Profit rate of 15 % on the declared receipts mentioned above. This resulted in an addition of Rs. 76,336 to the declared Gross Profit of Rs. 7,39,880. The Income‑tax Officer considered the subletting arrangement to be genuine and he determined the income from subletting at the rate of 3 % on the total jobs of Rs. 33,00,000 allegedly assigned to them as agreed. After considering the various expenses etc., he passed an order on 12‑8‑1973, determining the total income of Rs. 6,42,851 against the declared income of Rs. 5,14,515.

3. The Inspecting Assistant Commissioner, when he saw the order, did not consider the arrangement of subletting as genuine because the impugned order was passed without investigating the genuineness of the subletting arrangement and as such he considered this order to be erroneous and prejudicial to the interest of the revenue. Thereafter, the learned Inspecting Assistant Commissioner issued a notice under section 34‑A of the Income‑tax Act to the assessee appellant calling for, inter alia, evidence in support of the genuineness of subletting arrangements. In reply to this notice the appellant took the plea that part of the work had to be sublet on account of urgency to finalise the whole contract by a stipulated date, secondly the paucity of funds necessitated such an arrangement in order to tide‑over the difficult It was also admitted by the appellant that the job was sublet amount-wise and not with reference to the work done by the sub-lessees. Of the 15 sub- lessees as mentioned in an earlier paragraph the 12 individuals were paid @ Rs. 1,50,000 each and the 3 sub‑lettee firms @ Rs. 5,00,000 each respectively. As per the terms of agreement the sub‑lessees were supposed to invest their own capital for the execution of the work assigned to them and the payment were to be made to them by the appellant, on receipt of bills from the contract granting Authority. One of the paragraphs of the agreement also stipulated that the appellant, and also the sub‑lessees shall maintain their own accounts.

4. A perusal of the record revealed to the Inspecting Assistant Com missioner that the appellant made two part payments of Rs. 50,000 each t11 the two sub‑lessees on 20‑2‑1975 and four part payments also of Rs. 50,0W each to 4 other sub‑lessees on 13‑3‑1975. Quite significantly, these payments were made without reference to any work done by them. Similarly, other such payments are shown to have been made during the later part of tai: accounting aggregating to Rs. 33,00,000. According to the learned Inspecting Assistant Commissioner, since 12 out of 15 sub‑lessees did not have any accounts whatsoever, it was impossible to correlate the payments with the work alleged to have been done by them. The Inspecting Assistant Commissioner also noted that the appellant also completely failed to produce any evidence about the work allotted to the sub‑lessees as also the basis on which payment were made to them. He also found out that none of the sub‑lessees had any previous experience of doing such work. Further, he noted that all the 3 alleged sublettee firms namely Messrs Karamat & Company, Messrs S. Bros., and Messrs K. Z. Khan & Company, drew up deeds of partnership on 10‑6‑1975 and were given restrospective effect from 8‑1‑1975. These three deeds were also got registered with the Registrar of Firms on 27‑6‑1975. The partners, of these firms were "KHARKARS" by profession and did not have any, experience of undertaking such contract works. The partners of K & Company were reported to be all 'MISTERIES' by profession. It is h strange coincidence that all of the individual sub‑lessees filed their returns of income for the first time voluntarily on 22‑7‑1975. It is equally strange that all were assessed on income of Rs. 10,500 each on the same day. The remaining three sub‑lessee firms, who allegedly maintained accounts, also filed their returns on the same day (22‑7‑1975) and their assessments were also made as RF's for the year under consideration for the first and the last time.

5. After examining ail these facts about the alleged sub‑lessees, the learned Inspecting Assistant Commissioner concluded that the entire subletting arrangement was fake and that the whole contract work was entirely com pleted by the appellant. According to him, the subletting arrangement was introduced with the sole purpose of evading proper payment of tax. After this finding, the learned Inspecting Assistant Commissioner determined the income by applying a Cross Profit rate of 15% or, total receipts of Rs. 87,41,441 and after allowing various expenses etc., he computed the total income at Rs. 9.22,515.

6. The learned counsel appearing on behalf of the appellant in the first instance challenged the legality of Inspecting Assistant Commissioner's action by submitting that the notice issued by the inspecting Assistant Commissioner, gander section 34‑A of the Income‑tax Act as well as his action Of cancelling the Income‑tax Officer's order and framing an order de novo was not according to law. He vehemently argued that before the I. A. C. could assume juris diction under section 34‑A, he had to show that the Income‑tax Officer's order was erroneous as well as prejudicial to the interest of revenue. He agreed that in this case, the Income‑tax Officer completed the assessment after examining in detail the genuineness of the sub‑lessees and the arrange ment /agreement made with them. He further submitted that the sub‑lessee some of them being firms which were also registered with the Registrar of firms, very much existed; so much so that they even filed their returns of income and their assessments to tax were also made by the Income‑to Department. According to the learned counsel, the Income‑tax Officer con sidered all the relevant facts and then passed an order which was proper arid according to law ; and as such, in his opinion, the order of the income‑tax Officer could not be considered as erroneous and prejudicial to the interest of revenue. For these reasons he contends that the learned Inspecting assistant Commissioner was not justified ire cancelling the Income‑tax Officer's order and making his own estimates of income.

7. The learned Departmental Representative in turn, submitted that the Inspecting Assistant Commissioner served a valid notice as required under section 34‑A of the Income‑tax Act. It wars in fact, also acknowledged by the appellant and a reply thereto was also given. Similarly, in respect of other contentions of the learned counsel of the appellant, he submits that the findings of the learned Inspecting Assistant Commissioner to the effect that the arrangement of subletting was fake, is correct and based on facts. According to him, there is no evidence available on record to indicate that ally of the so called sub‑lessees were ever summoned by the Income‑tax Officer for examining their genuineness. Even the relevant order sheet does not show any entry to suggest that any of these sub‑lessees were called for examination by the Income‑tax Officer, before passing his order. In this factual background he also seriously condemned the false statement of the Income‑tax Officer in the impugned order to the effect that the sub‑lessees were examined by him. Likewise, he disputes the execution of proper affidavits or the verification of payments made to the sub‑lessees by the appellant. Regarding the filing of returns by the alleged sub‑lessees and completion of them assessment, he contends that this was all arranged by the appellant to cover his fictitious arrangement of subletting because none of the parties either had any experience of this work nor were they ever borne on the list of tax‑payer. He also seriously disputes the genuineness of the payment in cash of Rs. 33,00,000 to the alleged sub‑lessees in a business of this nature where big payment even to genuine, known and verifiable parties are invariably made through cheques. He further submits that the very fact that the three alleged sub‑lessee firm became nor.‑existent after doing the appellant's work, proves that the entire arrange ment war, fake. In the background of these facts, he contends that the assess ment order passed by the Income‑tax Officer was certainly erroneous inasmuch as it was passed on incorrect facts. It was also prejudicial to revenue because through this fake arrangement of subletting, the appellant avoided the proper payment of tax‑ He, therefore, concludes that both the requirements of the provisions of section 34‑A being present, the I. A. C. was properly seized of the jurisdiction under section 34‑A of the Income‑tax Act and as such his order should be upheld.

8. We have giver our thoughtful consideration to the facts of the case' and have also heard both the sides. Regarding the non‑existence of the lessees the learned counsel took the plea that the Income‑tax Sub Officer has clearly mentioned in the order that he examined all of them and therefore, the Department cannot say that the same were fake and non‑existent since, according to the Departmental Representative, there was nothing available on the record to indicate if the sub‑lessees were ever called by the Income‑tax Officer, we asked the learned counsel to produce before us copies summons or letters etc. issued by the Income‑tax Officer to the alleged sub‑lessees. The learned counsel Was not in a position to produce any such document. His submission that the Income‑tax Officer might have called them verbally could not also be supported by the entries in the order sheet of the Income‑tax Officer which is considered to be a day to day record to proceedings in respect of the assessment. The learned counsel was also allowed o examine the record of the Income‑tax Officer so as to find out if there was anything to prove his assertion that the stab‑lessees were genuine and were galled and examined by the Income‑tax Officer. Similarly, the facts recorded by the learned Inspecting Assistant Commissioner that all of them filed the returns on the same date and their assessments were also completed on the same date proves beyond all shadow of doubt that this was all manoeuvred by the appellant through an unscrupulous Income‑tax Officer to avoid proper payment of tax. In the same manner, the partnership deeds of the three alleged sub‑lessees firms were drawn up on the same date. Also by a strange coincidence, all the returns were filed on the same date and their assessments were also made on one particular date and subsequently they became non‑existent. These facts strongly suggest that the whole arrangement was fake and was aimed at reducing the proper incidence of tax. In order, to ascertain whether or not the term of the contracts had tiny provision for subletting arrangement etc., we asked the learned counsel to produce the original contract agreement. It was not produced on the plea that they did not have it at the moment. Moreover, from, a letter produced by the learned counsel it transpires that the appellant: requested the Project Engineer, WAPDA, through a letter on 7‑1‑1975 for permission to sublet the work and permission was also allowed on the same day. In the absence of original contract we do not know if it was at all permissible to sublet the work and if so, on what conditions. Any way, from the circumstances in which the arrangements were made with the sub‑lessees, without assigning the work to be done and in the absence of any material to prove that payments were made to there on the basis of work done, makes the whole arrangement highly doubtful and suspicious. Also, the alleged 12 individuals sub‑lessees did not maintain any accounts as a result of which it was impossible to verify the quantum of work done if any, or the payments made thereof. Lastly, as submitted by the Departmental Representative almost all the sub‑lessees, including the (partners of the three firms, became non‑existent strongly con firms the findings of the learned Inspecting Assistant Commissioner that the entire arrangement was fake and was designed to avoid proper payment of taxes. The learned counsel was not in a position to rebut any of the facts stated above.

9. In order to appreciate the implication of the legal objections as raised by the learned counsel, we would better reproduce the provision of sec tion 34‑A of the Income‑tax Act as under :‑‑

"34‑A.‑(1) The Inspecting Assistant Commissioner may call for and exa mine the record of any proceeding under this Act and if he considers that any order passed therein by the Income‑tax Officer is erro neous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after asking, or causing to be made, such inquiry as deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment to be made."

A simple reading of this provision would indicate that powers have been given to the Inspecting Assistant Commissioner to review the order of the Income‑tax Officer. In a case reported as (1969) 20 Taxation 51 (Trib) the Tribunal while interpreting these provisions field that the law requires that before the Inspecting Assistant Commissioner can assume jurisdiction under this section two co‑existing conditions have to be fulfilled, namely that there should be an erroneous or bad in laws order of the income‑tax Officer and secondly the error should be prejudicial to the interest of revenue. We have now to examine whether the impugned order passed by the Income‑tax Officer suffered from the two defects pointed above. The Word "erroneous" means not in accordance with law and thus any order, opposed to any provision of law will be considered as erroneous. The work prejudicial' to the g interest of revenue' signify an order whereby the revenue suffers a loss and the assessee pays tax less than what is validly due from him. Now in the present case as the facts discussed in detail, in the foregoing paragraphs indi cate the assessment order was passed with mala fide intention; and without examining the genuineness of the sub‑lettees. The income‑tax Officer who passed the order was unscrupulous to the extent that ho even mentioned in the order that he examined all the sublettees and all of them also appeared before him. As has been discussed in detail in earlier paragraphs this statement of the Income‑tax Officer in the impugned order is totally false. In this respect we have been given to understand that the officer who passed the order, has been dismissed from service and his review petition ha also been rejected. Obviously, therefore we do not have any hesitation in holding that the order based on mala fide intentions, misstate merits and incorrect facts, can be nothing but an erroneous order. So far as the second condition is concerned; namely that the order should be prejudicial to the interest of revenue, the facts stated in the fore going paragraphs, which could not be repelled by the learned counsel, prove beyond any shadow of doubt that the appellant's arrangement of subletting was fake and was designed with the sole aim of avoiding proper payment of taxes. Admittedly, there can be no doubt that the order of the Income‑tax Officer was very much prejudicial to the interest of revenue. The learned I.A. C. also issued a notice to the appellant as provided in section 34‑A to which the appellant also responded. Facts in this regard have already been considered in a foregoing paragraph. These two conditions having been fulfilled the learned I. A. C. was vested with the powers to Act under provi sions of section 34‑A of the Income‑tax Act and in exercise of his powers under this section, he could pass such order as the circumstances of the case justify, including an order cancelling an assessment or passing an order enhancing the assessment. The I. A. C., through his order, cancelling the impugned order of the Income‑tax Officer and himself passed a fresh order making his own estimates of income. So far as the quantum of income determined by him, is concerned, the learned counsel has not been able to place any material before us to prove that the estimate of income made by the I. A. C. was in any manner excessive.

10. In the background of the facts our irresistable conclusion is that the action of the Inspecting Assistant Commissioner under section 34‑A was fully justified and the estimates of income made by him are also fair.

11. Appeal against order under section 45‑A and under section 18‑A(6).‑The appellant has challenged the Department's order under the aforesaid sections. The appellant sought for consequential relief in the event of any reduction or amendment made in the assessment order. Since the order of the learned Inspecting Assistant Commissioner has been confirmed and no other relief will be due to the appellant under the above section except that the material date of service of notice of demand will the date when it will be issued served by the Income‑tax Officer.

The D. R. informed us that the issue of demand notice by the authorised officer is being regularised. The appellant will get necessary relief in this regard.

Appeal dismissed.

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