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I.T.A's. Nos. 121, 122, 124 to 127, 157, 158, 102 to 105, 144 and 145/KB of 1982-83, decided on 28th April, 1987.
--Ss. 4(1) & 24(2)--Income-tax Rules, 1962, R. 40--Scope and application of R. 40--Provisions of S. 4(1) of the Act are not in conflict with R.40, in fact both the provisions i.e. Ss.4(1) & 24(2) of the Act are to be read together--
From perusal of R. 40, Income-tax Rules, 1962 it appears that if the Income-tax Officer is satisfied that--
(1) the assessee resides outside Pakistan, and
(2) actual amount of income, profit or gains accrue or arise in Pakistan, but
(3) arise or accrue directly or indirectly through or from--
(a) any business connection in Pakistan,
(b) any property in Pakistan,
(c) any asset or source of income in Pakistan,
(d) any money lent at interest and brought into Pakistan in cash or in kind but which cannot be ascertained.
(4) The amount of such income, profits or gains, for purposes of assessment to income-tax may be--
(a) calculated on such percentage of the turn-over so accruing or arising as the Income-tax Officer may consider it to be reasonable, or
(b) calculated on an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the provisions of the Income-tax Act) as the receipts so accruing or arising bear to the total receipts of the business, or
(c) calculated in such other manner as the Income-tax Officer may deem suitable.
Rule 40 of the Income-tax Rules, 1962 talks of computation of the world income according to the provisions of the repealed Income-tax Act and both the provisions of sections 4(1) and 24(2) of the Income-tax Act and section 35 and section 11 of the Ordinance are to be read together.
---Ss. 4(1) & 24(2)--Income-tax Ordinance (XXXI of 1979), Ss. 35 & 11--Scope and application--Assessee a non-resident--Depreciation allowance of--Limits of such allowance--Loss--Carrying forward of losses to the coming assessment years for six years is allowable but depreciation has not such limit--
Section 4(1) of Income-tax Act, 1922 applies to the income profits and gains received or deemed to be received in previous year "subject to the provisions of the Act". And since section 24(2) is very much part of the Act, therefore, section 4(1)(a) is to be read with section 24(2) of the repealed Act. Similarly, the provisions of section 35 are also subject to the provisions of section 11 of the Ordinance.
Section 24(2) of the repealed Income-tax Act and section 35 of the Ordinance specifically allow carrying forward of the losses to the coming assessment years for six years.
The very fact that the loss can be carried forward for these years is indicative of the fact that it was not in conflict with provisions of section 4(1) of the Income-tax Act and for that matter with Rule 40.
The purpose of carrying forward of depreciation and loss is the same, namely, to allow them to be set off against the profits earned in future with the only difference that the loss cannot be carried forward for more than six years but the depreciation has no such limit. If the depreciation can be carried forward for computation of the income, profits and gains of a non-resident shipping company, why the brought forward loss cannot be allowed to be set off.
---Protective assessment--Concept not foreign to the tax laws of sub-continent of India and Pakistan--Concept illustrated.
In cases where it appears to the Income-tax authorities that certain income was received during the relevant assessment year but it was not clear as to who had to pay tax thereon, either 'A' or 'B', or both, it would be open to them to determine the question as to who was responsible to pay tax by taking assessment proceedings against both 'A' & 'B'. Thus, the concept of protective assessment is not foreign to the tax laws of this sub-continent. However, it is resorted to only when the assessment is likely to be time-barred and yet Income-tax Officer is not sure of the expected liability of the assessee out of more than one person involved.
Jaggan Nath Hanuman Bux v. Income-tax Officer (1957) 31 ITR 603 and Laljee Haridass v. I.T.O. 1965 P T D 317 ref.
---Ss. 65, 62 & 63--Assessing Officer is required to frame assessment either under S. 62 or 63 as the case may be and if he does so it would not be in keeping with policy of law to give him power to reopen it under S. 65 simply on the ground that he had not applied his mind earlier for one reason or the other.
Second Additional Income-tax Officer v. Atmala Naga Raj and others (1962) 46 ITR 609 and Roshanlal Kuthiala v. Income-tax Officer (1966) 62 ITR 558 distinguished.
---S. 7--Consultation of Income-tax Officer with I.A.C. or Commissioner--Opportunity of being heard to concerned assessee not required--Approval of I.A.C. or Commissioner-- Procedure.
In every consultation, which the Income-tax Officer makes with his Inspecting Assistant Commissioner or with his Commissioner an opportunity of hearing should not necessarily be given to the assessee. The Income-tax Officer would not frame assessment before obtaining the approval of his Inspecting Assistant Commissioner. The jurisdiction of Inspecting Assistant Commissioner or the Commissioner to provide approval, advice or guidance to Income-tax Officer is purely an administrative matter, which the legislature has insisted upon to avoid uncalled for harassment of an assessee. It is the Income-tax Officer who actually saddles an assessee with the tax liabilities and here the law has provided for an opportunity of hearing.
Province of East Pakistan v. Noor Ahmed PLD 1964 S C 451 and 1987 PTD 300 ref.
---S. 63--Income-tax Rules, 1962. R. 40--Non-resident company- Income-tax officer requiring assessee to produce certain documents- Failure of assessee to produce such documents--Effect.
The Income-tax Officer required the assessee, a non-resident company to produce statement showing ratio of Pakistan income to world income for relevant assessment years together with the depreciation schedule for assessment year 1970-80. Similarly, in assessment year 1980-81 the Income-tax Officer demanded production of as many as 13 details and particulars, which appeared to be very much relevant for determining the income of the assessee under Rule 40. Since they have been deliberately withheld by the assessee the Income-tax Officer was very much justified in framing best judgment assessment under section 63 for both the assessment years. However, a question remains as to whether he should have framed the assessment on 1/6th method by making a departure from past history of the appellant. Under the facts and circumstances of both the years, he has been very much justified in departing from old practice. If the assessee wanted the Income-tax Officer to adopt the past history, it should have complied with his directions. The Assessing Officers of the earlier years did not pay that much attention to the assessment orders of the appellant. Some Income-tax Officers just framed the assessment with undue haste and in order to save their skin laid down the condition of rectification though the law required them to apply their mind to the record supplied to them.
Even in case of making assessment on the basis of second method of Rule 40, the income of the assessee was to be assessed under the provisions of Pakistan Tax Laws. The Income-tax Officer wanted the assessee to produce all the relevant documents, which were required for that purpose. If the assessee himself was not producing the relevant documents not even its Auditor's report, the Income-tax Officer was left with no alternative but to frame the assessment to the best of his judgment. The best judgment assessment does not mean that the Income-tax Officer should become punitive in his approach. The order of Commissioner of Income-tax (Appeals) whereby she set aside the assessment of both the years was vacated by the Tribunal.
1984 P T D 101 ref.
Ali Athar for Appellant.
Muhammad Farid, D.R. for Respondent.
Date of hearing: 18th April, 1987.
.--The assessee, a non-resident shipping company, hereinafter referred to as "the appellant" has been assessed in all the relevant assessment years on its world income basis which is commonly known as second method as laid down under Rule 40 of the Income Tax Rules of 1962, framed under the repealed Income-tax Act. In assessment years 1973-74 and 1974-75 it filed its return declaring loss which was computed on the basis of brought-forward losses and unabsorbed depreciation. The Income-tax Officer did assess the income of the appellant on the world income basis but he showed the brought-forward losses and unabsorbed depreciation for prior years in Pakistan currency. Moreover, the assessment order also did not show either the Pakistan losses or world losses separately. Thus, a dispute arose regarding determination of the loss of the appellant. Finally, the matter was brought before this Tribunal and a Division Bench by its order recorded in ITA. No. 1604 and 1605/KB of 1978-79 on 15th March, 1980 disposed of the appeals regarding both the assessment years 1973-74 and 1974-75 by setting aside the assessment orders for both the years with certain directions to Income-tax Officer.
2. Pursuant to the order of this Tribunal the Income-tax Officer re-framed assessment in both the assessment years 1973-74 and 1974-75. In first assessment order the Income-tax Officer gave separate details of unabsorbed world depreciation, world business loss and total world loss in US Dollars regarding assessment years 1970-71, 1971-72 and 1972-73 as follows:--
| Assessment year. | Un-absorbed World Depreciation | World Business Loss. | Total World Loss. |
| 1970-71 | 74,76,160 | 2,82,11,678 | 3,56,78,838 |
| 1971-72 | 69,58,938 | 3,60,50,211 | 4,30,09,149 |
| 1972-73 | 63,53,145 | 3,43,01,309 | 4,06,58,454 |
| Total US | 2,07,83,243 | 9,85,63,198 | 11,93,46,441 |
However, though he allowed the brought-forward depreciation but did not allow the brought-forward world business loss of US 9,85,63,198.
3. Similarly, in his assessment order for assessment year 1974-75 the income-tax Officer treated world loss determined for the year to be apportionable by ignoring the previous years' brought-forward business losses. Not only that- but he also observed that the determined business loss would not be carried-forward for adjustment against future years' income. However, it is pertinent to note that he allowed unabsorbed depreciation not only to be adjusted in the relevant assessment year but also allowed it to be carried forward. The Income-tax Officer framed the assessment for both the assessment years allegedly in compliance with the direction of this Tribunal contained in the decision mentioned above, pursuant to which de novo assessment orders were framed. Having been aggrieved and dissatisfied the appellant went up in appeal and the learned Commissioner of Income-tax (Appeals) vide order dated 12th April, 1982 came to the conclusion that the Income-tax Officer could not properly appreciate the aforesaid decision of this Tribunal recorded in ITA Nos. 1604 and 1605/KB of 1978-79 on 15th March, 1980, and interpreting aforesaid decision made the following observation:
"I find that the learned Tribunal has nowhere stated that the business losses of the preceding years or this very year cannot be carried-forward. The learned Tribunal has merely stated that for determining the world losses of the year in question, the business losses brought forward will not be taken into account but the depreciation allowance brought forward will be taken into account because the same becomes a part of the depreciation allowance of the year under review. While passing order for 1974-75, the learned Tribunal had partially agreed with the appellant that the appellant will determine the currency losses and depreciation allowance separately and add to the business loss and depreciation loss and the losses brought forward from the preceding year. The I.T.O. was also directed that under Rule 40 the world losses have to be determined before apportioning Pakistani losses."
In view of this observation the learned Commissioner of Income-tax (Appeals), therefore, directed the Income-tax Officer in the following words:
"The I.T.O. is, therefore, directed to carry forward the losses for the assessment years 1973-74 & 1974-75 to the subsequent years alongwith loss, if any, of the earlier period because according to provisions of law the Department has no right to deny the appellant company from adjustment of business loss against the business income. Similarly, in the assessment year 1974-75 after computing loss/income of the year by taking into consideration the depreciation loss of the earlier years, the I.T.O. should carry forward the business loss from the earlier years and set off against the business income of the subsequent year."
4. It appears that in assessment years 1975-76 to 1978-79 the Income-tax Officer framed assessment orders under section 23(3) in each assessment year again adopting the aforesaid second method but observed in each assessment order as follows:--
"Assessment is finalized under section 23(3) under Rule 4(1) subject to rectification on receipt of assessment order from home country."
It appears that in these assessment years also the depreciation and brought-forward losses were allowed not only to be adjusted in the relevant assessment year but were also carried-forward. However, subsequently, the Income-tax Officer issued notices under section 65 in all the assessment years right from 1975-76 to 1978-79 after getting approval from his Inspecting Assistant Commissioner on 21st March, 1981 for the reason that the assessments framed under section 23(3) in each relevant assessment year were completed without any detailed examination and on first date of hearing on the understanding that they were being accepted provisionally "subject to rectification on the receipts of assessment orders from home country". The appellant in response to aforesaid notice filed the same return in each assessment year but questioned the jurisdiction of the Income-tax Officer regarding issuance of - notices under section 65 and his direction that the assessment orders made in USA should be produced before him. It further appears that the notices under section 61 were also issued but the appellant failed to comply with it. Consequently, the Income-tax Officer framed assessment under section 65 read with section 63 of the Income-tax Ordinance, hereinafter referred to as "the Ordinance" in each assessment year from 1975-76 to 1978-79 on the basis of 1/6th of the gross freight earning in Pakistan. Thus, thereby ignoring not only the so-called second method but also the claim of the appellant regarding depreciation and brought forward losses. Having been aggrieved and dissatisfied the appellant again went up in appeal and the learned Commissioner of Income-tax (Appeals) vide her consolidated order recorded on 12th April, 1982, came to the conclusion that--
(1) the action of I.T.O. in re-opening the assessment under section 65 was justified and according to law as he had obtained prior approval of the I.A.C.
(2) That the I.T.O. fell in error in departing from' the second method of computing income without bringing forth any new facts which could justify departure from earlier practice.
(3) That the appellant was justified in not producing Income-tax Assessment Orders from the United States of America pertaining to the relevant assessment years because the assessments were not yet completed.
(4) That the I.T.O. was directed to compute income/loss on the basis adopted by him for earlier assessment years, viz. 1973-74 and 1974-75 on world basis.
(5) That Income-tax Officer should take into consideration the figures returned by the appellant for all the years under appeal and the additions as proposed by Inland Revenue Services of America.
(6) That the Income-tax Officer should also follow her direction contained in her earlier order dated 12th April. 1982 regarding depreciation and brought forward losses.
(7) That the I.T.O. should adjust brought forward losses of the earlier years against the income if any, in the year in question.
(8) That the I.T.O. should follow the decision of this Tribunal reported as (1979) 40-Tax-47 (Trib.). Consequently, she directed that all the relevant orders should be set aside.
5. Now as far as assessment years 1979-80 and 1980-81 are concerned the appellant again declared loss of Rs.30,36,12,048 in assessment year 1979-80 but in assessment year 1980-81 it declared a net income of Rs.13,66.285. As usual it again claimed deprecation as well as brought forward losses in both the assessment years. However, the income-tax officer in assessment year 1979-80 insisted on production of--
(1) Assessment Orders of world income for assessment years 1975-76 to 1979-80 from United States Income-tax Department.
(2) Statement showing ratio of Pakistan income to world Income for the same years.
(3) Depreciation Schedule for assessment year 1979-80.
6. But in assessment year 1980-81 he went a step ahead and by his letter dated 17th April, 1981 required the appellant to produce following information:
(1) "The details of income over Rs.50,000.
(2) The break up of world receipts in Pakistan.
(3) The details of expenses over Rs.20,000 and furnish certificate from your Chartered Accountant that expenses claimed are entirely admissible according to Income-tax Ordinance, 1979.
(4) Copy of assessment order issued by US Tax Authorities for the year under reference or any other proof, that the assessment has not yet been completed. Please specify upto which assessment year the assessments have been completed by the US Tax Authorities and furnish the last 5 assessed orders by the US Tax Authority.
(5) Please furnish certificate from your Chartered Accountants that no amounts in the Balance Sheet are covered under section and under section 12(7) of the Income-tax Ordinance, 1979.
(6) The details of perquisites inadmissible under section 24 of the Income-tax Ordinance, 1979, if any, should be furnished.
(7) Copies of the audited final accounts.
(8) Details of non-operating income and non-operating expenses and to explain whether nor operating income includes any profit on the sale of vessels it is taxable. Please explain while non-operating income has been excluded from computation of income why non-operating expenses at US . 7,06.11,000 have been claimed n the profit and loss account,
(9) The accounting depreciation on other assets at US . 52,23,000 has not been added back why
(10) Break up of wages arid fringe benefits ( . 3,00,54,662) with reference to section 24 of the Income-tax Ordinance, 1979. Details of sales purchases of vessel should be furnished alongwith the copies of sale purchase vouchers.
(11) Certificate that depreciation has been claimed on the ships which were actually owned by you. The rate of depreciation should be explained with reference to admissible depreciation rates of Income Tax Law in Pakistan.
(12) Your balance-sheet shows surplus at US . 19,52,61,222. Please explain how it was accumulated with reference to profit and loss appropriation account for 1980-81 preceding years it should be explained why 10 on Income-tax and Super-tax was not paid under part 3 of the 1st Schedule of the Income-tax Ordinance, 1979, as the surplus exceeds 150 of the capital i.e. US . 96,76,203.
(13) The details required for 1979-80, if received by now, should also be furnished for comparison and analysis of the current years accounts."
Needless to say that the appellant for one reason or the other did not furnish the Income-tax Officer with the information required by him in both assessment years and thus thereby he was left with no alternative but to frame assessment under section 63 of the Ordinance and he taxed the Pakistani receipts of the appellant during the relevant assessment years on 1/6th basis. The appellant having been aggrieved and dissatisfied again went up in appeal and the learned Commissioner of Income-tax (Appeals) by her order recorded on 4th July, 1982 set aside both assessment orders far assessment years 199-80 and 1980-81 and directed the income-tax Officer.
(i) to compute the income of the appellant on world basis.
(ii) to allow adjustment on brought forward losses against Income for assessment year 1980-81.
(iii) to compute the income of the appellant 'on the basis of the figures as returned by it for both the years under appeal and the additions as proposed by the Inland Revenue Services of America, if any.
(iv) to apply the decision of this Tribunal reported as (1979) 40-Tax-47 (Trib.) regarding levy of surcharge.
7. Thus, the Department has challenged "all the three impugned orders of learned Commissioner of Income-tax (Appeals) as mentioned above, regarding her direction to carry forward the losses for the current assessment year alongwith losses of earlier years in all the appeals filed by it for assessment years 1973-74 to 1980-81. Regarding assessment years 1975-76 to 1980-81 the Department has further impugned direction of learned Commissioner of Income-tax (Appeals) regarding computation of the income of the appellant on world basis as contained in her orders for the relevant assessment years. As far as assessment years 1979-80 and 1980-81 are concerned, the Department has further impugned the direction of learned Commissioner of Income-tax (Appeals) in so far it orders setting aside of the assessment orders for both the assessment years involved Regarding direction of learned Commissioner of Income-tax (Appeals) about levy of surcharge involved in assessment years 1977-78, 1978-79, 1979-80 and 1980-81 the Department has further challenged her direction contained in both the impugned orders.
8. Now as far as the appellant is concerned, it has filed appeals against her order about assessment years 1975-76 to 1980-81 to agitate the following points:
(1) That the approval given by the I.A.C. was illegal inasmuch as he did not give the appellant an opportunity of hearing and thus thereby violated the principles of natural justice;
(2) That the learned Commissioner of Income -tax, (Appeals) erred in Setting aside the assessment orders for assessment years 1975-76 to 1977-78;"and
(3) for assessment years 1975-76 to-1980-81 her direction that the figures as returned by the appellant and the additions proposed by the Inland Revenue Services of United States ,of America, if any, should be taken into consideration. "
9. Mr. Ali Athar, the learned counsel for the" appellant and Mr. Muhammad Farid, the learned Departmental. 4Qpresentative addressed us at length on all the aspects of the matter and we shall be reproducing their submissions during the course of our judgment as and when occasion arises.
CARRY FORWARD OF LOSSES:
10. This issue is involved in all the appeals filed by the Department regarding assessment years 1973-74 to 1980-81. The controversy centres round the interpretation of the order of this Tribunal recorded by a Division Bench in ITA Nos. 1604 & 1605/KB of 1378-79 dated 15th March, 1980. Both the Income-tax Officer and the learned Commissioner of Income-tax (Appeals) have interpreted the same order in support of their diametrically opposed contentions. Mr. Muhammad Farid, the learned Departmental Representative has reiterated the reasoning adopted by the Income-tax Officer; whereas Mr. Ali Athar, the learned counsel for the appellant has adopted the argument which prevailed upon the learned Commissioner of Income-tax (Appeals). Before we deal with the merits of the respective-contentions of the appellant as well as Department, let us first reproduce Rule.40 of the Rules. It reads:--
"40. In any case in which the, Income-tax Officer is of opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territories whether directly or indirectly through or from any business connection in the taxable territories or through or from any property in the taxable territories or through or from asset or source of income in the taxable territories or through or from any money lent at interest and brought into the taxable territories in cash or in kind cannot be ascertained, the amount of such income, profits or gains for the purposes of assessment to income-tax may be calculated on such percentage of the turn-over so accruing or arising as the income-tax Officer may consider to be reasonable or on an amount which bears the same proportion to the total profits of the business of such person (such profits being computed in accordance with the hrovisron5 ;a' the Income-tax .act) as the receipts so accruing or arising bear to the total receipts of the business, or in such other manner as the Income-tax Officer may deem suitable."
From its perusal it appears that if the Income-tax Officer is satisfied that--
(1) the assessee resides outside Pakistan, and
(2) actual amount of income, profit or gains accrue or arise in Pakistan, but
(3) arise or accrue directly or indirectly through or from-
(a) any business connection in Pakistan,
(b) any property in Pakistan,
(c) any asset or source of income in Pakistan,
(d) any money lent at interest and brought into Pakistan in cash or in kind but which cannot be ascertained.
(4) The amount of such income, profits or gains, for purposes of assessment to income-tax may be--
(a) Calculated on such percentage of the turn-over so accruing or arising as the Income-tax Officer may consider it to reasonable, or
(b) calculated on an amount which bears the same proportion tot the total profits of the business of such person (such profit being computed in accordance with the provisions of the Income-tax Act) as the receipts so accruing or arising bear the total receipts of the business, or
(c) calculated in such other manner as the Income-tax Officer may deem suitable.
Before proceeding further let us point out that sub-paragraph (b) of', paragraph 4 lays down what is commonly known as the second method. Now turning to the merits of the submissions it appears that the Department's case is that as far as the non-resident is concerned, his total income includes "all income, profit and gains from whatever source received which accrue or arise or is deemed to accrue or arise in Pakistan during such year. It is contended that since section 4(1)(a) of the repealed Income-tax Act deals with the income accruing or arising in immediately preceding year, which is implied by the use of words "in such year", the loss of earlier previous years could not be brought forward to the relevant assessment year. However, Mr. Ali Athar, the learned counsel for the appellant contended that since section 24(2) of the repealed Income-tax Act and section 35 of the Ordinance specifically allow carrying forward of the losses to the coming assessment years for six years, therefore, the order of learned Commissioner of Income-tax (Appeals) was sustainable. Section 4(1)(a) of the repealed Act reads as under:-- ,
"Subject to the provisions of this Act, the total income of any previous year of any person, including all' income, profits and gains from whatever source derived which:--
(a) are received or are deemed to be received in Pakistan in such year by or on behalf of such person; ------- "
Similarly, section 24(2) of the repealed Income-tax Act reads as under:--
"(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, under the head "Profits and gains of the business profession or vocation", and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off, or the whole of the loss where the assessee has no income under 'any other head, shall be carried forward to the following year, and
(i) where the loss was sustained by him in a business consisting of speculative transaction, it shall be set off only against the profits and gains, if any, of the business in speculative transactions carried on- by him in that year;
(ii) where the loss was sustained by him in any other business, profession or vocation it shall be set off against the profits and gains, if any, of such business, profession or vocation in such business, profession or vocation continued to be carried on by him in that year:
and if the loss, in other case, cannot be wholly so set off, the amount of the loss not set off shall be carried-forward to the next year and so on but no loss shall be carried forward for more than six years:"
From perusal of section 4(1) of the repealed Act as reproduced above, it appears that it applies to the income profits and gains received or deemed to be received in previous year "subject to the provisions of the Act." And since section 24(2) is very much part of the Act, therefore, section 4(1)(a) is to be read with section 24(2) of the repealed Act. Similarly, the provisions of section 35 are also subject to the provisions of section 11 of the Ordinance, therefore, submission of Mr. Ali Athar, the learned counsel for the appellant- appears to be sustainable in law. The Division Bench of the Tribunal has specifically referred to Rule 40 and if the entire order of the Division Bench is read in context of and with reference to Rule 40, the finding of learned Commissioner of Income-tax (Appeals) appears to be unexceptionably sound which we have already reproduced above.
11. The next contention of the Department is that if the losses are brought forward then section 4(1) of the repealed Income-tax Act would come into conflict with Rule 40. We are afraid we see no force in this submission. Rule 40 talks of computation of the world' income according to the provisions of the repealed Income-tax Act, and as we have discussed above, both he provisions of sections 4(1) and 24(2) of the repealed Income-tax Act and section 35 and section 11 of the Ordinance are to be read together. ,
12. It is also contended that the world income/loss was not relevant for the assessment of a non-resident except for an apportionment under Rule 40 and a brought-forward loss cannot be treated as loss of the year as mentioned in section 24 of the repealed Income-tax Act. We de not see any force in this submission also. The very fact 'that the loss-can be carried-forward for these years is indicative of the fact that it, was nut in conflict, with provisions of, section' 4(1) of the repealed Income-tax Act and for that matter with Rule 40' It appears to be admitted position that the Income-tax officer allowed depreciation to be carried-forward right from assessment, year, 1973-74 and the Department has not contested it in any appeal. But 'when it comes to carrying forward of the loss; it has been made subject matter of all the appeals. The purpose of carrying forward of depreciation and loss is the same, namely, to allow them, to be set off against the profits earned in future with the only difference that the loss cannot be carried forward for more than six years but the depreciation has no such limit. If the depreciation can be carried forward for computation of the income, profits and gains of a non-resident shipping company, why the brought forward loss cannot be allowed to be set off. We therefore, find no force in the departmental appeals regarding this point.
13. The appellant declared its income in assessment years 1977-78, 1978-79, 1979-80 and 1980-81 at Rs.42,82,97,770, Rs.51,97,11,-130 (loss), Rs.16,35,38,918 and Rs.31,37,005 which was, however, assessed at Rs.99,18,869, Rs.70,07,844, Rs.74,07,109 and Rs.97,57,OG2 and the Income-tax Officer determined the amount of tax payable thereon at Rs.49,59,435, Rs.35,03,922, Rs.40,73,910 and Rs.53,66,571 in each year respectively. The Income-tax Officer then treated the amount of tax payable as unretained income and further levied surcharge amounting to Rs.4,95,944, Rs.3,50,392, Rs.4,07,399 and Rs.5,36,657. Having been aggrieved and dissatisfied the appellant went up in appeal and the learned Commissioner of Income-tax (Appeals) directed the Income-tax. Officer to follow the decision of this Tribunal reported as (1979) 40-Tax-47 (Trib.). Mr. Muhammad Farid, the learned Departmental Representative has contended before us that since the Department had not reconciled itself with the view of the Tribunal that no surcharge could be levied on amount of taxes payable, therefore, these appeals have been filed as a matter of principle and in order to safeguard the revenue interest. Mr. Ali Athar, the learned counsel for the appellant, however, relied upon the decision of this Tribunal. It is true that the Department had gone in reference and several applications are pending in the High Court in which the question as to whether surcharge could be levied on amount of taxes payable requires to be adjudicated upon. However, as far as this Tribunal is concerned, it has' been consistently following its decision mentioned above under the facts and circumstances of these appeals, we see no reason to depart from it. The departmental appeals, therefore, fail on this point as well.
14. As pointed out earlier the Income-tax. Officer assessed the appellant on world basis by adopting second method of Rule 40. The same method was adopted by him also in all the assessment years right from 1.975-76 to 1978-79, when he framed the original assessment orders under section 23(3) of these assessment years. However, subsequently he issued notices under section 65 and then framed fresh assessments under section 65 read with section 63 of the Income-tax Ordinance. The learned Commissioner of Income-tax (Appeals) has set aside these orders and the department has impugned her this order. Mr. All Athar, the learned counsel for the appellant however, has impugned her order for the reason that she should have cancelled additional assessments framed under section 65 read with section 63 of the Ordinance.
15. Mr. Muhammad Farid, the learned Departmental Representative submitted that all the original assessments ere protective assessments as the Income-tax Officer did not apply his mind to them and even mentioned it in the assessment orders that they were subject to rectification on receipt of assessment orders from home country. Mr. Ali Athar, the learned counsel for the appellant however, submitted that the assessment were strictly in line with, the past history hence they were sustainable in law, whereas the condition of rectification inserted therein meaningless and otiose. According to him, the Income-tax officer had no jurisdiction to re-open the assessments for assessment years 1975--76 to 1978-79.
16. Mr. Muhammad Farid, the learned Departmental Representative invited our attention to a case from Calcutta High Court reported as (1957) 31 ITR 603, Jaggan Nath Hanuman Bux v. Income-tax Officer and submitted that protective assessment was recognized by Courts though there was no provision in the repealed Income-tax Act. In that case, a firm, which was an assessee was only a benamidar of another firm. While an appeal was pending in Supreme Court, firm 'A' submitted its return and the Income-tax Officer framed protective assessment which was upheld by the High Court. We have also laid our hands on a decision coming from no less an authority than Indian Supreme Court, which is reported as 1965 P T D 317, Laljee Haridass v. I.T.O. In this case also the concept of protective assessment has been judicially noticed. However, it has been held that in cases where it appears to the Income-tax Authorities that certain income was received during the relevant assessment year but it was not clear as to who had, to pay tax thereon, either 'A' or 'B', or both, it would be open to them to determine the question as to who was responsible to pay tax by taking assessment proceedings against both 'A' & 'B'. Thus, it is clear that the concept of protective assessment is not foreign to the tax laws of this sub-continent. However it is resorted to only when the assessment is likely to be time-barred and yet Income-tax Officer is not sure of the expected liability of the assessee out of more than one person involved. However from perusal of assessment orders from assessment years 1975-76 to 1978-79 it is not clear that the Income-tax Officer framed the assessments under section 23(3) of the repealed Income-tax Act, as protective assessment in order to avoid the bar of limitation. Moreover it is the argument of Mr. Muhammad Farid that they are the protective assessments but as far as assessment orders are concerned they described themselves subject to rectification on receipt of assessment orders from home country. Furthermore, the Income-tax Officer has described them in his additional assessment orders as provisional assessment orders. On the other hand, Mr. Ali Athar, the learned counsel for the appellant has invited our attention to (1976) ITR 212, Commissioner of Income-tax West Bengal v. Simon Carves Ltd. In this case a non-resident company carrying on business of construction engineer was assessed under one of the method of Rule 33 of the Income-tax Rules (equivalent to Rule 40 of our Rules). But, subsequently, the assessment was re-opened and applying a different method as laid down by Rule 33, the income was assessed at a higher amount. Their Lordships of Indian Supreme Court held that there was nothing to show that the discretion was not exercised by the I.T.O. in a proper or judicious manner; nor was it suggested that he was actuated by some extraneous consideration. From the mere fact that the method selected by him was such which resulted in lower tax liability of the assessee as compared to the liability, which was created by subsequent assessment, it would not follow that the discretion was not exercised in a proper and judicious manner. Their Lordships, therefore, held that the original order made by the Income-tax officer was a legally correct order and subsequent proceedings of re-opening the assessments were not sustainable in law. In the light of this Indian decision when we go through the original assessment orders, we find that the Income-tax Officer framed them following the history of the appellant. The fact that they were framed on the first hearing date, or that they were framed subject to rectification are wholly irrelevant. Similarly, the fact that the Income-tax Officer adopted the second method during the relevant assessment years and thus generated lesser revenue does not mean that he had jurisdiction under section 65 to re-open them. The fact, which clinches the issue in favour of the appellant is the practice of adopting second method as the basis of the assessment which the Income-tax Officer has followed during the relevant assessment years. As far as other two points regarding carry forward of the losses are concerned, he also followed immediately preceding years. Thus, he framed assessment orders under section 23(3) after fully applying his mind to all the facts of the case involved in each assessment year. As far as his observation regarding rectification of the assessment orders on receipt of assessment orders is concerned, it is meaningless. Firstly, as pointed out by Mr. Ali Athar that they would not have helped him at all as the American Law was not in pari materia with the Pakistan Tax Laws. Moreover, if the appellant had not complied with any direction of Income-tax Officer he was very much justified in proceeding under section 23(4) of the repealed Income-tax Act, which he did when he framed additional assessments regarding assessment years 1975-76 to 1978-79 and assessment orders for assessment years 1979-80 and 1980-81. If we accept the contention of Mr. Muhammad Farid, it would, on one hand serve as premium to lazy and indolent officer, and on the other hand would prove to be very lethal weapon of oppression in the hands of smart but unscruplous officers. In our judgment an assessing officer is required by law to frame assessment either under section 62 or 63 as the case may be and if he does so it would not be in keeping with policy of law to give him power to reopen it under section 65 simply on the ground that he had not applied his mind earlier for one reason or the other. We, therefore, following Laljee Haridass Case (supra) hold that the additional assessments framed subsequently were not legal. Mr. Ali Athar, the learned counsel for the appellants also invited our attention to two more decisions reported as (1962) 46 ITR 609, Second Additional Income-tax Officer v. Atmala Naga Raj & others, and (7966) 62-ITR-558, Roshanlal Kuthiala v. Income-tax Officer. However we need not dilate on them because they revolve round their own facts. Thus, we hold that the additional assessment order framed under section 65/63 of the Income Tax Ordinance, regarding assessment years 1975-76, 1976-77, 1977-78 and 1978-79 are not legal. We further hold that the learned Commissioner of Income-tax (Appeals) should have cancelled them instead of setting them aside. We, therefore, conclude that the assessment orders originally framed are legal and binding and. should be given effect to.
17. Mr. Ali Athar, the learned counsel for the appellant impugned the order of learned Commissioner of Income-tax (Appeals) regarding assessment years 1975-76 to 1978-79 on the 'round that the Inspecting Assistant Commissioner before according his approval should have afforded an opportunity to the appellant and since he did not do so his order was against principles of natural justice. In this connection the learned counsel invited our attention to a Supreme Court's decision reported as P L D 1964 SC 451, Province of East Pakistan v. Noor Ahmed. With due respect to the learned counsel we do not think that in every consultation which the Income-tax Officer makes with his Inspecting Assistant Commissioner or with his Commissioner an opportunity of hearing should be given to the appellant. The law as laid down provides that the Income-tax Officer would not frame assessment before obtaining the approval of his Inspecting Assistant Commissioner, which, he had done in this case. The jurisdiction of J Inspecting Assistant Commissioner or the Commissioner to provide approval, advice or guidance to Income-tax Officer is purely an administrative matter, which the legislature has insisted upon to avoid uncalled for harassment of an assessee. It is the Income Tax Officer who actually saddles an assessee with the tax liabilities and here the law has provided for an opportunity of hearing. If the argument of Mr. Ali Athar is stretched to its logical ends then no officer including income Tax Officer would be in a position to consult or seek approval or guidance from his seniors and if he did so, the advice of such senior would be void in law being in violation of principles of natural justice. Similarly, if such Senior, before giving advice to ITO, calls guidance from his legal Adviser, then the legal adviser would also have to give an opportunity of hearing before giving his advice. Thus, the principle of natural justice would become a ridiculous hurdle at every step of advice sought. In recent case reported as (1987) PTD 300 the procedure of approval of Inspecting Assistant Commissioner has been discussed at length and we confine ourselves presently to it. This submission of Mr. Ali Athar is, therefore, devoid of any merit and is rejected.
18. The learned Commissioner of Income-tax (Appeals) has directed that the Income Tax Officer should take into consideration the return filed in USA alongwith the additions proposed by the Inland Revenue Services of that country. Mr. Ali Athar further submitted that since the American Law was not in pari materia with Pakistan Law, therefore, the direction of learned Commissioner of Income Tax (Appeals) was not sustainable in law. We have discussed Rule 40 above at length. From its perusal it is clear that the income of the appellant is to be assessed according to Pakistan Law. As such, her direction is not sustainable in law till it is found that the Tax Law in USA is pari materia with Pakistan Tax Laws. We, therefore, vacate the direction of learned Commissioner of Income-tax (Appeals) to this effect.
19. The Department has challenged the direction of learned Commissioner of Income Tax (Appeals) that the assessments for assessment years 1975-76 to 1978-79 should be made on the basis of second method of Rule 40. Mr. Mohammad Farid, the learned Departmental Representative has submitted that since the appellant failed to comply with the direction of the Income Tax Officer regarding production of assessment orders, he was very much justified in taking resort to 1/6th method. Since we have already held that the additional assessment orders framed under section 65 read with section 63 of the relevant assessment years are illegal, we have, therefore, also held that the original assessment orders framed on the basis of second method of Rule 40 are sustainable in law, for the simple reason that they were in line with the past history. The learned Commissioner of Income Tax (Appeals) has discussed various authorities from which she gathered the Support in order to reach the same conclusion. We therefore, refrain ourselves from discussing the same again. We, however, agree with her that the Income Tax Officer should have framed assessments on the basis of second method as provided in Rule 40 of the Rules. Thus, the departmental appeals on this point also fail.
20. In these years the Department has impugned the finding of learned Commissioner of Income Tax (Appeals) on several grounds. We have given our careful consideration to the assessments framed in these two assessment years. From perusal of the assessment order it appears that the Income Tax Officer required the appellant to produce 3 documents in assessment year 1979-80 and 13 documents in assessment year 1980-81. As far as the production of assessment orders from United States of America is concerned, we do not think that the Income Tax Officer was justified in making that order in order to determine the income of the appellant under Rule 40. But as far as other documents are concerned, they all appeared to be relevant for determination of the income of the appellant according to Pakistan Laws. Mr. Mohammad Farid, the learned Departmental Representative invited our attention to a decision of Sind High Court which is reported as 1984 P T D 101 and which has been followed by a Division Bench of this Tribunal in I.T.As. Nos. 607 and 6010 of 1981-82 dated 28th April, 1985. On the basis of these authorities Mr. Mohammad Farid argued that it was the duty of the appellant to produce before the Income Tax Officer all the relevant documents which the Income Tax Officer required even if he had to bring a ship-load of account books and vouchers etc. Mr. Ali Athar, the learned counsel for the appellant, however, submitted that since the American Law was not in pari materia with the Pakistan Laws, therefore, the direction of Income Tax Officer was frivolous. We have given our careful consideration to the submission of both the learned Departmental Representative as well as the learned counsel for the appellant. As we have pointed out above the Income Tax Officer required that appellant to produce statement, showing ratio of Pakistan income to world income for relevant assessment years together with the depreciation schedule for assessment year 1979-80. Similarly, in assessment year 1980-81 the Income Tax Officer demanded production of as many as 13 details and particulars, which appeared to be very much relevant for determining the income of the appellant under Rule 40. Since they have been deliberately withheld by the appellant we, therefore, find force in submission of Mr. Mohammad Farid, the learned Departmental Representative, and hold that the Income Tax Officer was very much justified in framing best judgment assessment under section 63 for both the assessment years. However a question remains as to whether he should have framed the assessment on 1/6th method by making a departure from past history of the appellant. We think that under the facts and circumstances of both the years, he has been very much justified in departing from old practice. If the appellant wanted the Income Tax Officer to adopt the past history, it should have complied with his directions. Unfortunately, the assessing officers of the earlier years did not pay that much attention to the assessment orders of the appellant. As we have discussed above, some Income Tax Officers just framed the assessment with undue haste and in order to save their skin laid down the condition of rectification though the law required them to apply their mind to the record supplied to them.
21. As far as order of learned Commissioner of Income Tax (Appeals) is concerned whereby she had set aside the assessment orders for both the assessment years is concerned, with due respect to her, we do not think that she has been justified in recording that order. She has set aside the orders for both the years because the Income Tax officer had not been able to convince her on the issue of change in the method of assessment. Had she applied her mind to the provisions of Rule 40, she might have discovered that even in case of making assessment on the basis of second method of Rule 40, the income of the appellant was to be assessed under the provisions of Pakistan Tax Laws. She should have further noticed that the Income Tax Officer wanted the appellant to produce all the relevant documents, which were required for that purpose. Now if the appellant himself was not producing the relevant documents, not even its Auditors' report, the Income Tax Officer was left with no alternative but to frame the assessment to the best of his judgments. We agree that the best judgment assessment does not mean that the Income Tax Officer should become punitive in his approach. However, under the facts and circumstances of these appeals we think that he has exercised his discretion judiciously. We, therefore, agree with the contention of Mr. Mohammad Farid that the order of learned Commissioner of Income Tax (Appeals) whereby she set aside the assessment of both the years should be vacated and so we do. Let us point out that the assessee had also filed appeals for the same assessment years. Mr. Ali Athar contended that the direction of learned Commissioner of Income Tax (Appeals) that Income Tax Officer should take into consideration the returns filed in USA and the additions proposed by the Inland Revenue Services was not sustainable in law. We have already discussed this issue earlier. We, therefore, allow these appeals also and hereby quash the directions of learned Commissioner of Income Tax (Appeals) to that effect.
22. Thus, in view of discussion made above, all the appeals stand disposed of to the extent and in the manner as discussed above.
M.B.A./399/T Appeal allowed.
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