1. MUHAMMAD SAIDUZZAMAN SIDDIQUE, J.-By this order we propose to dispose of the above two cases in which the following question has been referred to this Court under section 66(1) of the Income-tax Act, 1922 by ,the Commissioner of Income-tax (West), Karachi, for decision :- "Whether on the facts and in the circumstances of the case the Income--tax Appellate Tribunal was justified in holding that the order of Income-tax Officer dated 8-10-1968 imposing penalty under section 46(1) of the Income-tax Act was rightly set aside by the Appellate Assistant Commissioner?"
2. The facts leading to these two references are as follows; The Income-tax Officer, Companies Circle, Hyderabad, imposed penalty under section 46 (1) of the Income-tax Act, upon the respondent Messrs Fateh Textile Mills Ltd. In respect of charge years 1960- 61 and 1961-62. The penalty was imposed on the respondent by the 1. T. O. On 8-11-1968 on the ground that the respondent had failed to pay the existing demands of income-tax to the tune of Rs. 17,71,715 and Rs. 17,52,624, respectively. It is an admitted position that before penalty was imposed by the I. T. O. For non-payment of the above amounts these demands of income-tax were held to be excessive by the Income-tax Appellate Tribunal in appeals filed by the respondent and decision to that effect was given by the Tribunal on 25-9-1968. The order of I. T. O., dated 8-11-1968, imposing penalty was accordingly set aside by the Appellate Assistant Commissioner on 9-1-1981 on the appeal of respondent. The decision of the Appellate Assistant Commissioner, was further confirmed by-the Income-tax Appellate Tribunal, on appeal filed by the Department against the above order.
3. It is contended before us by the learned counsel appearing on behalf of the Department that the imposition of penalty by the Income-tax Officer was justified as the order of the Income-tax Appellate . Tribunal dated 25-9-1968 was not received by the I. T. O. Concerned until 5-8-1969. It is further contended before us that even if the order of Tribunal was given effect to, there was still a large sum outstanding against the . Respondent as the income--tax due from them which was admittedly not paid by the respondent and therefore, it is contended that the imposition of penalty by the I. T. O. Was otherwise justified. It is not disputed before us 'that before imposing penalty under section 46 (1) of the Act the I. T. O. Did not issue any revised demand of taxes in accordance with the order of the Tribunal dated 25-9-1968 Admittedly the basis for imposing penalty on the respondent was the original demand of income-tax as assessed by the I. T. O. Which was held to be excessive by the Tribunal in its order dated 25-9-1968. We are, therefore, of, the view that in these circumstances the I. T. O. Was not justified in imposing, penalty under section 46 (1) of the Act without having first served a demand' in accordance with the order of the Appellate Tribunal dated 25-9-1968. It, cannot be disputed that the original demand as determined by the I. T. O. Stood modified in view .Of the order of the Tribunal dated 25-9-1968 and therefore it could not form the basis of imposing penalty under section 46 (11 of the Act. In the case of Commissioner of Income- tax v. Azam Industries Limited, Karachi (1980) 41 Tax Cas. 154,the order of 1. T. O. Imposing a penalty under sec--tion 46 (1) on the basis of the original demand of taxes which was set aside in appeal in the meantime was held by the Court to be unwarranted. We respectfully agree with the observation appearing at page 158 of the report in the above case which is as follows :- "Respectfully agreeing with the view expressed in the Karachi and Lahore cases referred to above, we are also of the opinion that the assessment order which furnished the basis for the recovery proceedings culmi--nating in the order of penalty, having been set aside in appeal by the Tribunal, the penalty order itself was wiped off along with the entire superstructure of recovery proceedings founded on the assessm ent order. The default, if any, that followed as a result of the non-- payment of tax. Liability created by the assessment order originally passed by the Income-tax Officer could not, therefore, survive and likewise disappeared."
4. In view of above discussion we answer the question referred to us in the above two references in the affirmative. However in the circumstances of the case we leave the parties to bear their own costs.