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Income-tax Reference Case No. 10 of 1972, decided on 3rd May 1984.

(a) Income-tax Act (XI of 1922)--

--S. 66(1)--Reference--Plea neither raised by applicant before Tribunal nor arising out of order of the Tribunal, held, could no, form subject-matter of reference.

(b) Income-tax Act (XI of 1922)--

---Ss. 18-A(6) and (8) & 29--Assessment order contained no reference to any default in depositing of advance income-tax amount in terms of S. 18-A(6) nor there was any reference to I.-T.30--Income-tax Officer, held, could not add any amount of penal interest under S.18-A(6) without first holding in the relevant assessment order that the assessee had defaulted in depositing of income-tax amount in terms of S.18-A(6).

In the assessment order there was neither any reference to any default in depositing of advance income-tax amount in terms of S.18-A(6) of the Act nor there was any reference to I.T.30.

Sub-section (8) of section 18-A of the Income-tax Act envisages conscious application of mind by an Income-tax officer at the time of passing of the assessment order on the question, whether there was any default in depositing of advance Income-tax in terms of above-quoted subsection (6) of section 18-A of the Act. If the Income-tax Officer comes to the conclusion that there was default, in that event, he can add the penal interest by virtue of the subsection (8) of section 18-A of the Act in the manner provided in subsection (6) in the assessment order. Section 29 which provides issuance of notice of demand also presupposes existence of an order in pursuance of which a demand notice is to be issued.

There is to be an order by the Income-tax Officer holding that advance tax in terms of section 18-A was not paid in the manner laid down in subsection (6) of section 18-A before adding any amount of penal interest under subsection (8) of section 18-A.

An Income-tax Officer cannot add any amount of penal interest under section 18-A(8) without first holding in the relevant assessment order that the assessee has defaulted in depositing of income-tax amount in terms of above section 18-A(6) of the Act.

Commissioner of Income-tax, Karachi West, Karachi v. Malik Wilayat Hussain and Sons Ltd., Quetta 1987 P T D 249 ref.

Schazoo Laboratories Ltd. v: Commissioner of Income-tax, Lahore 1976 P T D 361 distinguished.

Waheed Faruqui for Applicant.

Iqbal Naeem Pasha for Respondent.

Date of hearing: 3rd May, 1984.

.--(1) The above reference pertains to the assessment year 1961-62 and raises the following question of law:-

"That whether in view of the facts and circumstances of the case, the Appellate Tribunal was justified in holding that the charge of penal interest under section 18-A(6) of the Income-tax Act, 1922, cannot be legally enforced without passing separate order charging such interest "

The brief facts leading to the filing of the above reference are that the Income-tax Officer while passing the assessment order, dated 29-6-1966 for the above years did not make any reference to any default in payment of Income-tax in terms of Section 18-A (6) of the Income-tax Act (hereinafter referred to as the Act. However, while issuing a demand notice, he included a sum of Rs.6,844 as the penal interest a/s 18-A (6) of the Act. The respondent assessee being aggrieved by the assessment order filed an appeal before Appellate Assistant Commissioner, who allowed the same partly by an order, dated 18-1-1967. After that the respondent assessee went in appeal before the Income-tax Appellate Tribunal, which was allowed by an order, dated 2-12-1968, whereby inter alia it was held that the inclusion of the above amount of Rs.6,844 as the penal interest was not warranted by law. The applicant department filed an application u/s 66 (1) of the Act before the Income-tax Appellate Tribunal and got the above question referred to this Court for its opinion.

(2) (a) In support of the above reference Mr. Waheed Farooqui, learned counsel for the applicant department has contended as follows: -

(i) That no appeal was competent under Section 30 of the Act against imposing of penal interest under Section 18-A (6) of the Act.

(ii) That it was not incumbent to pass a separate order for imposing penal interest under Section 18-A (6) of the Act.

(b) On the other hand Mr. Iqbal Naeem Pasha, learned counsel for the respondent assessee has urged as follows:-

(i). That the question whether an appeal was competent against imposition of the penal interest has not been referred to this Court for its opinion, and, therefore, the applicant department cannot be allowed to raise the same.

(ii) That in order to press into service section 18-A (6) of the Act, it is incumbent that there should be a speaking order and there should be conscious application of mind by the Income-tax Officer concerned.

(3) Adverting to the first contention, it may be observed that Mr. Waheed Farooqui has referred to para 2 of the statement of facts, which reads as follows:-

"2.--The validity of charge of penal interest in the manner indicated in para 1 above does not appear to have been challenged before the Appellate Assistant Commissioner. It appears to have been raised for the first time before the Appellate Tribunal."

On the basis of the above-quoted para in the statement of facts, it was contended by Mr. Waheed Farooqui that since the factum that no appeal against the imposition of the penal interest was filed before the Appellate Assistant Commissioner is mentioned, he was entitled to urge the above first contention, and that even otherwise it was a question of law. The above contention seems to be devoid of any force. Apart from the fact that on the basis of above para 2 of the

statement of facts, the above plea canvassed at the Bar cannot be spelt out, we are inclined to hold that since the applicat department had not raised any such plea before the Income-tax Appellate Tribunal, the same does not arise out of the Income-tax Appellate Tribunal's above order, and, therefore, cannot form the subject-matter of this reference.

As regards the above second contention, it may be advantageous to reproduce subsections (6) and (8) of Section 18-A and Section 29 of the Act, which read as follows:- "

18-A(6) "Where in any year an assessee has paid tax under subsection (2) of sub-section (3) on the basis of his own estimate and the tax so paid is less than eighty per cent of the tax determined on the basis of the assessment under Section 23, hereinafter called regular assessment, and calculated in the manner laid down in subsection (1) so far as such tax relates to income to which the provisions of subsections (2), (2-A) and (2-B) of section 18 do not apply, an additional amount of tax at the rate of two per cent per mensem from the first day of April in the year in which the tax was paid upto thirtieth day of June of the year next following or up to the date of the said regular assessment, whichever is earlier shall be payable by the assessee upon the amount by which the tax

so paid falls short of the said eighty percent.

Provided that--

(a) Where tax is paid under Section 22-A, or

(b) where a provisional assessment under Section 23-B has been made but regular assessment has not been made, the additional amount of tax shall be calculated in accordance with the foregoing provisions:-

(i) upto the date on which tax under Section 22-A of as provisionally assessed was paid; and

(ii) thereafter such additional amount shall be calculated at the rate aforesaid on the amount by which the tax as so paid in, so far as it relates to income to which the provisions of subsections (2), (2-A) and (2-B) of Section 18 do not apply, falls short of the said highly per cent:

Provided further that, as a result of an appeal under Section 30 or of a revision under Section 33-A or of a reference to the Nigh Court under section 66, the amount on which additional tax was payable under this subsection has been reduced the additional tax shall be reduced accordingly and the excess additional tax paid, if any, shad be refunded together with the amount of income-tax that is refundable.

Provided further that, where a business, profession or vocation is newly set up and is assessable on the income, profits and gains of its first previous year in the year following that in which it is set up, the additional tax payable shall be computed from the first day of July of the said year."

(8)"Where, on making the regular assessment, the Income-tax Officer finds that payment of tax has not been made in accordance with the foregoing provisions of this section, additional tax calculated in the manner laid down in subsection (6) shall be added to the tax as determined on the basis of the regular assessment."

Section 29. "Notice of demand: When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax, penalty or interest a notice of demand in the prescribed form specifying the sum so payable."

It may be noticed that the above-quoted subsection (8) of section 18-A of the Act envisages conscious application of mind by an Income-tax Officer at the time of passing of the assessment order on the question, whether there was any default in depositing of advance Income-tax in terms of above-quoted subsection (6) of Section 18-A of the Act. If the Income-tax Officer comes to the conclusion that there was default, in that event, he can add the penal interest by virtue of the above subsection (8) of section 18-A of the Act in the manner provided in above subsection (6) in the assessment order. It may further be noticed that this above-quoted section 29 which provides issuance of notice of demand, also presupposes existence of an order in pursuance of which a demand notice is to be issued.

(5) Mr. Iqbal Naim Pasha, learned counsel for the respondent assessee has referred to the following cases:-

(i) The Commissioner of Income-tax, Karachi West, Karachi v. Malik Wilayat Hussain and Sons Ltd., Quetta 1987 P T D 249, in which a Division Bench of this Court while dealing with the identical question, held, that there is to be an order by the Income-tax Officer holding that advance tax in terms of Section 18-A was not paid in the manner laid down in subsection (6) of Section 18-A before adding any amount of penal interest under subsection (8) of section 18-A.

(ii) Schazoo Laboratories Ltd. v. Commissioner of Income-tax, Lahore 1976 PTD 361 in the above case the facts were that the default was referred to in the assessment order and reference was also made to I.T. 30 but there was no separate order for imposing penal interest. It was held by a Division Bench of the Lahore High Court that there was substantial compliance of the provisions of law. However, it was observed that it would have been appropriate if the Income-tax Officer would have passed a separate order for imposing penal interest. It was also clarified that the learned members of the above Division Bench were not dissenting from the above Karachi case.

(6) It may be mentioned that the above-Lahore High Court case is distinguishable from the present case inasmuch as in the assessment order in question there is neither any reference to any default in depositing of advance income-tax amount in terms of Section 18-A (6) of the Act nor there is any reference to I.T. 30. The above Karachi case on all fours is applicable to the instant case.

We are also inclined to hold that an Income-tax Officer cannot add any amount of penal interests under section 18-A (8) without first holding in the relevant assessment order that the assessee has defaulted in depositing of income-tax amount in terms of above Section 18-A (6) of the Act. Our answer to the above question is therefore, in the affirmative.

There will be no order as to costs.

M.B.A./C-12/K Reference answered accordingly.

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