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Income-tax Reference Application No. 161 of 1973, decided on 2nd April, 1984.

-- R. 46-Self-assessment scheme-Procedure provided in Rule 46 elaborated.

- R. 46, provisos-Income-tax Act (XI of 1922), S. 23 (1)-Return filed by assessee not duly verified, incomplete, not accompanied by any one or more of statements or documents referred in Cl. (c), r. 46, income-tax Rules, 1922 or where there was a mistake in computation of total incomes or total world income or tax (including allowances, deductions or rebates claimed by assessee)-Income-tax Officer may before completing assessment under S. 23 (1), Income-tax Act, 1922 require assessee by notice in writing to verify or complete return or to file statement or statements or document or documents which had not been filed or to correct mistake on or before date to be specified in said notice-Income-tax Officer, in compliance of such notice on or before specified date in said notice, shall complete assessment under S. 23 (1), Income-tax Act, 1922-Income-tax Officer can extend period for complying with such requirements and not debarred from making any assessment, initiating any proceedings, taking any action or making any order in any case under any of other provisions of Income-tax Act, 1922 or Income-tax Rules, 1922 as the case may be.

--- R. 46. provisos-Assessee a registered firm filing return under self assessment scheme after complying with all formalities-Provisos (I), (2), Rule 46, Income-tax Rules, 1922, held, not attracted.

--- S. 66 (1)-High Court cannot disturb any finding of fact arrived at .by Income-tax Officer or by Appellate Tribunal.

--- S. 46-Self-assessment Scheme--Rejection of return-Estimates of sales and profits rates made by Income-tax officer-Held, Income-tax Officer proceeded on assumption that assessee had filed a normal return and not a return under self-assessment scheme-Self-assessment scheme covered even those cases where assessee had not maintained proper books of account-Factum that in books of account, assess" had disclosed a profit of Rs. 3,917 whereas in return filed under self-assessment assessee disclosed profit of Rs. 16,000 in itself could not have been sufficient reason for rejecting return under self-assessment scheme-Assessee's return under self-assessment scheme having been accepted for a number of years without objection Income-tax Officer, before rejecting return and reaching to conclusion that profits disclosed on various items were not normal or that total sales disclosed could not have been the normal sales, should have some material before him to support his action-Rules 46, gave no discretionary power to Income-tax Officer to complete assessment either under self-assessment scheme or other provisions of Income-tax Act or Rules-Refusal of assessment under self-assessment scheme was, therefore, not proper in circumstances.

Commissioner of Income-tax Karachi v. Abdullah Habib I. T. C. No. 139 of 1973; Commissioner of Income-tax, Dacca Zone Dacca v. Alauddin and Brothers 1982 1' T D 35 and Commissioner of Income-tax - v. S. Zoraster- & Co. 1982 P T D 35 ref.

Commissioner of Income-tax, Central and United Provinces v. Lakshmi Naraindar (1957) 5 I T R 170 distinguished.

--- R. 46----C. F3. R. Circular 1%o. C. 3 (2)-TL/64, dated 27th July, 1965 Para, 10-Rejection of return of assessee filed under self-assessment scheme by Income-tax Officer, held, did not mean that assessment was completed-Para. 10 of Circular No. 2-IT of 1965, therefore, not applicable in circumstances.

Noor Muhammad for Applicant.

Shaikh Haider for Respondent.

Date of hearing : 2nd April, 1984.

-The above income-tax reference raises the following questions:-

(1) Whether rule 46 income-tax Rules, gives unfettered discretion to the Income-tax Officer to complete assessment either under self- assessment scheme or other provisions of, the Income-tax Act or Rules

(2) Whether in the facts and circumstances of this case, the Assistant I. T. O. properly refused assessment of the applicant under the self -assessment scheme i.e. rule 46 Income-tax Rules

(3) Whether in the facts and circumstances of this case the estimates of sales and profits rates made by the Assistant I.-T. O. are excessive and harsh

The brief facts leading to the filing of the above income-tax reference are that the applicant is a registered firm engaged in the manufacture and sale of silver and gold ornaments at Hyderabad. 1t filed income-tax return for the year 1971-72 under the self-assessment scheme and disclosed a profit of Rs. 16,000. The Income-tax Officer rejected the above return and proceeded with the assessment under section 23 (3) of the Income-tax Act and by his order estimated the gross profit as Rs. 24,000 in place of gross profit of Rs. 16,000 as follows:-

The applicant-assessee went in appeal (I. T. A. .N. 12992 of 1971-72) which was dismissed by an order, dated 4-4-1973 and it was observed that under rule 46 the Income-tax Officer possessed necessary discretion for completion of the assessment under the normal law. It was also observed that the determination of net income at Rs. 23,372 in 1972 was also not unfair or excessive in view of the fact that the assessee itself made voluntary increase of Rs. 12,083 in income over and above the book profits of Rs. 3,917 for which it had no evidence. The applicant has, therefore, filed the present income-tax reference and sought the opinion of this Court on the abovequoted points.

2. (a) Mr. Noor Muhammad learned counsel for the applicant has contended that once an assessee files a return under the self-assessment scheme after complying with all the formalities, the Income-tax Officer can not reject the same.

(ii) That in any case in view of para. 10 of Circular No. 2-IT of 1965 dated 27-7-1965 the Income-tax Officer was obliged to take the permission of the Inspecting Assistant Commissioner before rejecting the above return.

(b) On the other hand Mr. Shaikh Haider learned counsel for the respondent department has contended that the questions as framed do not raise any question of law and that the finding on the question of fact by the two competent forums, namely, the Income-tax Officer arid the Income-tax Appellate Tribunal cannot be questioned through revision.

(c) Mr. Noor Muhammad in support of his above contentions has relied upon unreported judgment of a Division Bench of this Court in the case of the Commissioner of Income-tax Karachi v. Mr. Abdullah Habib (I. T. C No. 139 of 1979) delivered on 30-11-1983 and the case of Co; missioner Of Income-tax, Dacca Zone, Dacca v, Alauddin and Bothers 1982 P T D 35 whereas Mr. Shaikh Haider has relied upon the case of the Commissioner of income-tax Central and United provinces v. Lakshmi Naraindas (1957) 5 I T R 170 and the Commissioner of Income-tax v. S. Zoraster & Co. 1982 P T D 339.

3. (a) Before taking up the above cited cases, it may be observed that the self-assessment scheme was introduced by incorporating rule 46. It may be advantageous to reproduce herein below the above rule 46 as in force at the relevant time, which reads a3 follows:-

"46. Where an assessee not being a‑

(a) firm which has not been registered under section 26‑A or which has not been treated as a registered firm under the provisions of clause (b) of subsection (5) of section 23 for purposes of assessment for the next preceding year or any year earlier than that year for which assessment has been completed under section 23 'and which has applied for registration under the said section 26‑A ;

(b) partner of any firm to which clause (a) applies, or

(c) partner of any firm which has been registered under section 26‑A or which has been treated as a registered firm under the provisions of subsection (5) of section 23 for purposes of assessment for the next preceding year or any year earlier than that year for which assessment has been completed under section 23 and the total income of which exceeds twenty‑five thousand rupees,

(a) chargeable under the head 'Salaries' and such income is not less than seventy‑five per cent of his total income ;

(b) (i) chargeable under the head salaries' and such income is less than seventy five per cent of his total income ; or

(ii) chargeable under any head other than "Salaries", "Interest on Securities", 'Income from property' and "Income from other sources" insofar as it consists of income from interest and dividends

and his total income does not exceed twenty‑five thousand rupees, and‑

(a) files a return of his total income and total world income on or before the date specified in subsection (1‑A) of section 22, or the extended date, if it has been so extended under that subsection ;

(b) such return is duly verified and is complete in all respects ;

(c) such return is accompanied by‑

(i) a statement showing the computation of his total income and total world income and the tax payable by him including the tax deducted at source or already paid by him ; and

(ii) where the assessee derives income chargeable under the head Profits and gains of business, profession or vocation", a copy of the Trading and Profit and Loss Account and the Balance Sheet or, where the assessee has not maintained proper books of account, a statement showing the particulars of his income au; d expenditure ; and

(d) (Deleted).

(e) the amount of the tax payable (after adjustment of the amount of the tax, if any, already ducted at source or paid by him or on his behalf) is paid by the assessee on or before the date on which the return is filed by him,

the Income‑tax Officer shall complete the assessment under subsection (1) of section 23:

Provided that where the return filed by the assessee is not duly verified, or is incomplete or is not accompanied by anyone or more of the statements or documents referred to in clause (c) or there is any mistake in the computation of the total income or the total world income or the tax (including the allowances, deductions or rebates claimed by the assessee), the Income‑tax Officer may, before comp leting the assessment under subsection (1) of section 23 as aforesaid, require the assessee, by notice in writing, to verify or complete the return, or to file the statement or statements or document or docu ments, which have not been filed, or to correct the mistake on or before a date to be specified in the said notice and where the assessee complies with the terms of the said notice on c r before the said date, the income‑tax Officer shall complete the assessment under the said subsection (1) of section 23:

Provided further that the Income‑tax Officer may, at the request of an assessee and on sufficient cause being shown by him, extend the date for the compliance with any of the terms of the notice referred to in the preceding proviso:

Provided further that nothing hereinbefore contained shall have the effect of debarring the Income‑tax Officer from making any assess ment, initiating any proceedings, taking any action or making any order in any case under any of the other provisions of the Income tax Act or the Income‑tax Rules, as the case may be."

(b) It may be noticed that under the abovequoted rules an as excepting (a) to (c) could file a return under the self‑assessment scheme. It may further be observed that an assessee is required to verify the return and to complete the same in all respects and the return is to be accompanied by a statement showing the computation of total income and the tax payable by him including the tax deducted at source or already paid. It may also be noticed that it also provides that where an assessee derive income chargeable under the head "profits and gains of business, professional or vocation" a copy of the trading and profit and loss account and the balance‑sheet or where the assessee has not maintained proper books of account, a statement showing the particulars of his income and expenditure is to be filed alongwith the return. As assessee is also required to pay the is of tax payable before the date on which the return is filed by him after adjustments of the tax it‑ any already deducted at source or paid by him.

(c) The three provisos to the above rule are pertinent for the purpose of the controversy in issue. It may be observed that under proviso 1, it has been provided that where the return filed by the assessee is not duly verified or is incomplete or is not accompanied by any one or more o the statements or documents referred to in clause (c) or where there, is mistake in the computation of the total income or the total world income or the tax (including the allowances, deductions or rebates claimed by the assessee) the Income‑tax Officer may before completing the assessment under subsection (1) of section 23 as aforesaid require the assessee by notice in writing to verify or complete the return or to file the statement o statements or document or documents, which have not been filed or to correct the mistake on or before the date to be specified in the said notice. It further provides that upon the compliance with the terms of the afore said notice on or before the specified date the Income‑tax Officer shall complete the assessment under subsection (1) of section 23. It may also be stated that proviso 2 empowers the Income‑tax Officer to extend the period for complying with the requirements referred to in above proviso 1. It may also be noticed that proviso 3 provides that nothing hereinbefore contained shall have the effect of debarring the Income‑tax Officer from making any assessment, initiating any proceedings, taking any action or making any order in any case under any of the other provisions of Income tax Act or the Income‑tax Rules as the case may be.

(d) It is an admitted position that provisos 1 and 2 referred to here inabove are nit attracted to the present case. The only question is, whether proviso 3 was attracted to in the instant case as to warrant rejection of the return filed by the applicant assessee under the, self-assessment scheme.

4. (a) At this stage, ii may be pertinent to refer to the cases relied upon by the learned counsel for the parties. We intend to take up first the two cases relied upon by Mr. Noor Muhammad learned counsel for the applicant assessee.

(i) In the above cited first case the facts were that the respondent- assessee was a retail sale dealer of cloth at Hyderabad. He filed return of Income under self‑assessment scheme showing Rs. 7,750 as net income for assessment year 1970‑71. It seems that the I.‑T. O. did not accept the above return but issued notice under section 23 (2) and estimated his net income at Rs. 23,000 on the estimated sale of Rs. 1,00,000 against the sale disclosed in the return amounting to Rs. 65,000. The assessee went in appeal. The Income‑tax Appellate Tribunal allowed the same and held that the Income‑tax officer was restricted in his power by instructions issued by C. B. R. which were to the effect that the claim to self‑assessment could not be thrown out unless it was a case of concealment of income and that prior approval of Inspecting Assistant Commissioner would be taken before proceeding under the normal law with reference to rule 46. The department filed the above reference which was answered against the department and it was held that the High Court did not find anything wrong with the order of the appellate tribunal which was based on the instructions issued by the C. B. R. particularly in view of the fact that section 5(8) of the Income‑tax Act directs all Officers and persons employed in the execution of Income‑tax Act to observe and follow the orders, instructions and directions of the Central Board of Revenue.

(ii) Adverting to the second case relied upon by Mr. Noor Muhammad, it may be stated that the above reported judgment was delivered by High Court Division of the Supreme Court of Bangladesh which is directly on the point in issue. Since the above judgment is very short, it may be advantageous to reproduce it herein below:-

"This is an application at the instance of the Commissioner of Income tax, Dacca Zone, under section 66 of the income‑tax Act for a decision of this Court on the question whether the 3rd proviso to Income‑tax Rules, rule 46 empowering the I.‑T. O. to make assess ment under section 23(3) of the Income‑tax Act where the return has been filed under self‑assessment procedure.

The self‑assessment return filed by the assessee in the present case was modified and the amount of income shown therein was raised by the Income‑tax Department which was upheld by the Appellate Com missioner. The Tribunal however found that the 3rd proviso to Income‑tax Rule 46 empowering the I.‑T. O. to take assessment under section 23 (3) of the Income‑tax Act is not applicable unless the 1st proviso to Income‑tax Rules, rule 46 are complied with Income‑tax Rules, rule 46 provides for the completion of the assess ment by the Income‑tax Officer under section 23 (1) of the Income‑tax Act and it has, however, been provided at the first instance that where the return filed by the assessee is not verified or is incomplete or is not accompanied by proper documents or if there is any mistake .in the computation of the total income the Income‑tax Officer, may require the assessee to comply within a specified date, and thereafter the Income‑tax Officer shall complete the assessment under section 23(1) of the Income‑tax Act. Only upon the failure of an assessee to comply with the aforesaid proviso to rule 46, the 3rd proviso to rule 46 will be applicable which empowers an Income‑tax Officer to make assessment under section 23 (3) of the Income‑tax Act. In the present case it has been found by the Tribunal that the 1st proviso to rule 46 as aforesaid did not arise at all and the assessee was never required to correct any mistake before completing the assessment as such, there could not be any invocation of the 3rd proviso to rule 46. In such circumstances the Tribunal rightly directed the I. T. O. to make a fresh assessment under subsection (1) instead of sub section (3) of section 23 of the Income‑tax Act. The answer 'to the question raised herein being made in the affirmative. This application is rejected. Prayer for leave to appeal is also refused."

(b) We now intend to take up the taro cases relied upon by Mr. Shaikh Haider learned counsel for the respondent department.

(i) In the first case the Privy Counsel while allowing the appeal filed against the judgment of the judicial Commissioner's Court of Central Provinces observed that "It is not possible to turn a mere question of fact into question of law by asking whether as a mater of law the officer came to a correct conclusion upon a matter of fact."

(ii) As regards the second case referred to by Mr. Shaikh Haider, it may be observed that a Division Bench of Rajasthan High Court held that High Court was not entitled to go behind the fact found by Tribunal and that only legal effects of such facts can be considered by the High Court.

5. In our view, the above quoted questions Nos. 1 and 2 are questions of law. It cannot be said that they have been twisted in such a way as to make them questions of law from the questions of fact. The above Privy Council case has no application rot the above case of the Rajasthan High Court is applicable as we are not going to disturb any finding of fact arrived; at by the Income‑tax Officer or by the Tribunal.

The question in issue is, as to whether the Income‑tax Officer and the Tribunal could have rejected the return tiled under the self‑assessment basis for the reasons found favour with them. It has not been even alleged by the Income‑tax Officer or the Tribunal that the applicant assessee has not complied with the requirements of the self‑assessment scheme provided for in the abovequoted rule 46. The Income‑tax Officer has rejected the applicant assessee's return on the following grounds:-

(i) That in silver account G. P. of Rs. 1,435 has been shown on sale of Rs. 15,884 which works out to 9 % which is low in the line of business.

(ii) That in gold account G. P. of Rs. 1,483 has been shown on sale of Rs. 12,851 which is also low in this line of business,

(iii) In labour account G. P. has been shown at Rs. 1,436 on receipts of Rs. 1,619 and that since the receipts are not verifiable, the result cannot be accepted.

(iv) In Nagina account assessee has shown G. P. of Rs. 224 but no sales or purchases have been shown and therefore, cannot be accepted.

(v) The assessee has not maintained any stock register or manufacturing account and as such there is no check on sales and purchases as well as on manufacturing of ornaments.

(vi) That the three partners have total drawings at Rs. 3,960 which are ridiculously low and are not sufficient to meet the day to day expenses of the partners.

After having concluded the above reasons the Income‑tax Officer pro ceeded on estimation in the manner reflected hereinabove in para.1. The Income‑tax Tribunal has upheld the above order for the reasons already referred to hereinabove.

6. We are inclined to hold that the Income‑tax Officer as well as the Income‑tax Appellate Tribunal have proceeded on the assumption as if the applicant assessee had filed a normal return and not a return under the self assessment scheme. The self‑assessment scheme covers even those cases where the assessees have not maintained proper books of account. The factum that in the books of account, the applicant‑assessee had disclosed a profit o Rs. 3,917 whereas in the return filed under the assessment they have disclosed profit of Rs,16,000 in itself could not have been sufficient reason for rejecting the return under the self‑assessment scheme. There should have been sour material before the Income‑tax Officer to support the conclusion that the profit disclosed on the various items referred to hereinabove were not normal or that the total sale disclosed could not have been the normal sale, particularly in view of the fact that for a number of years upto the assess ment year in question the Income‑tax Department accepted the applicant assessee's return under the self‑assessment scheme without any objection. In our view, it is not necessary for us to say whether the view found favour with the High Court Division or the Supreme Court of Bangladesh quoted it is not necessary for the decision of the present reference.

For the aforesaid reasons our answers to questions Nos. 1 and 2 are in the negative. We are also inclined to hold that it is not necessary to give any answer to question No. 3 which is not relevant for the purpose of the above main two questions.

7. Before parting with the above discussion, we may observe that Mr. Noor Muhammad has relied upon para, 10 of the Circulars C. No. .3(2) TL/64, dated 27th July, 1965 (Circular No. 2‑I T of 1965), which reads a follows:-

"10. To remove any misgiving on the part of the tax‑payers, instruc tions have been issued to all Income‑tax Officers that no assessment, which has been completed under the self‑assessment procedure, should be reopened except where an Income‑tax Officer has reason to believe that the tax‑payer has concealed his income or committed any fraud. In all such cases, the Income‑tax Officer will have to take the prior approval of the inspecting Assistant Commissioner before he actually reopens the assessment and the Inspecting Assistant Commissioners have instructions not to grant approval for the reopening of an assessment unless they have satisfied themselves that there is prima facie case of concealment or fraud. The tax payers can, therefore, rest assured that there will be no arbitrary or thoughtless reopening of assessment completed under the se thoughtless procedure."

On the basis of the above circular, it was urged by him that without the prior approval of the Inspecting Assistant. Commissioner, the Income‑tax Officer was not competent to reopen the assessment which has been com pleted under the self‑assessment procedure. In our ieview, this rule has no application because the assessment of the applicant‑assessee was not completed, therefore, there was no question of reopening the assessment. The return filed by the applicant‑assessee was not accepted.

The reference stands disposed of in the above terms with no order as to costs.

M. Z. M. Reference, disposed of.

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