MUHAMMAD WASEEM CH. (JUDICIAL MEMBER).--- The subject appeal impugns the appellate order dated 02.09.2016 passed by the learned first appellate authority in connection with amendment order dated 08.08.2016 issued under section 122(5) of the Income Tax Ordinance, 2001 [hereinafter Ordinance] for tax year 2011. The said amendment order was passed ex parte on account of non-furnishing of documents/response by the appellant. This appeal was earlier decided by this Tribunal vide order dated 24.10.2016, in which additions made under section 122(5) were deleted. The department filed reference application before the Hono urable Lahore High Court who remanded back the case to this Tribunal for providing opportunity to the applicant vide order dated 16.10.2017.
2. Facts of the case are that the appellant filed return of income, for tax year 2011 on 17.11.201 1 which was treated an assessment order in terms of section 120(1) of the Ordinance. Later on, a notice dated 27.05.2016 was issued to the appellant under section 122(9)/122(5) of the Ordinance, by the 'Taxation Officer, Zone-X, R.T.O., Lahore through which following discrepancies identified in income tax return for the tax year 2011 and accordingly confronted to the taxpayer:
(i) Income of Rs. 190,000,000 declared as 'exempt' income in appellant's income tax return was not supported by any explanation/documentary evidence, thus warrant addition under section 1 11(1) of the Ordinance;
(ii) Taxpayer/Appellant declared agricultu ral income of Rs.700,282,263 in his income tax return, however , while submitting the nomination Form with Election Commission of Pakistan ['ECP'] such income was declared at Rs.
160,000,000 thus dif ference of Rs. 540,282,263 merit addition under section 1 11(1) of the Ordinance; and
3. Pending the conclusion of these proceedings by RTO, Lahore, the jurisdiction in the taxpayer's case was transferred to Large Taxpayers Unit ('LTU'), Lahore and a fresh notice dated 29.07.2016 was issued to the taxpayer under sections 122(5)/122(9) of the Ordinance for the same tax year, requiring compliance by 8.8.2016. On the due date, the appellant sought adjournment, however , the relevant officials at LTU, Lahore, declining the appellant's request proceeded to amend the deemed assessment on ex parte basis raising a tax demand of Rs.199.107 million against the appellant by making additions of (i) Rs.109 million on account of alleged unexplained exempt income; and (ii) Rs.648.258 million on account of alleged unexplained income in the garb of agriculture income by reference to provision of sections 111(1)(b) and 111(1)(c) of the Ordinance. Being aggrieved, the appellant preferred an appeal before Commissioner Inland Revenue (Appeals-(I), Lahore, who vide appellate order dated 02.09.2016 upheld the amended assessment order .
4. The learned counsel for the appellant, before us, after briefly explaining the underlying facts, argued the treatment of the authorities below to be unlawful, unjustified, unreasonable, harsh, without jurisdiction and contrary to facts and not maintainable under the law both on legal and factual plane. The gist of arguments of the learned counsel for the appellant could be summarized as follows:
(i) The exempt income represented gifts of Rs.109 million received from within the family exclusively through crossed cheques and thus remained outside the ambit chargeability of tax;
(ii) The reliance of learned taxation officer on quantum of agriculture income as declared in the nomination papers filed with Election Commission of Pakistan ['ECP'], which was admittedly less than that declared in annual income tax return, while confronting unexplained income is grossly misplaced as the relevant field in the nomination paper is meant to disclose payment of agriculture income tax and has no nexus or relevance with agriculture income as conceived in the provisions of the Ordinance;
(iii) The show-cause notice dated 27.05.2016, admittedly not mentioning the exact provision/clause/sub-clause of section 122(5) and section 111(1) of the Ordinance under which the jurisdiction was assumed, is ab initio void. In the circumstances that the very show-cause notice is without jurisdiction the resultant super structure built on it is also illegal and void ab initio. In order to support the proposition, the learned coun sel for the appellant relied upon the decisions of higher appellate authorities in (i). J997 PTD 47 (H.C. Lah.); (ii) 2001 PTD 1633 and 2011 PTR 145 (H.C. Lah.);
(iv) Even if the aforesaid defect, for argument sake, is condoned to bypass mere technicalities, the amendment is still not sustainable as in the show-cause notice the appellant was expressly and categorically confronted on account of alleged furnishing of "inaccurate" "particulars of income" which subject was made part of section 111(1) of the Ordinance vide Finance Act, 2011 and thus this was not applicable to proceedings for tax year 2011 covering income derived during the period 01.07.2010 to 30.06.201 1;
(iv) The conclusion drawn in the amendment order that claim of exemption in respect of agriculture income to the extent of Rs.648,258,103/- was in-fact a concealment of some other un-explained income [in the garb of agriculture income] is totally based on conjecture, surmises, whimsical grounds, hypothesis, presumption and thus not sustainable in law . Further submitted:
(a) The enquiry conducted by taxation officer, notwithstanding with any other consideration pertained to only 1,668 acres out of admittedly cultivated leased land measuring 18,566 acres, therefore, challenge to claim of agriculture income and/ or exemption thereof proportionate to cultivation of differential 16,898 acres could not be disputed as the taxation of ficer did not possess any information to this extent what to talk of 'definite information' or otherwise;
(b) The results/ findings from enquiry regarding aforesaid 1,668 acres, as narrated in the amendment order and made basis of adverse inference, even otherwise suffer from serious infirmities besides being contrary to facts.
Submitted that (1) land holding of 5 lesso rs [appearing at entry Nos, 8, 9, 18, 21 and 23 of the table reproduced in the amendment order] as per land record was in excess 'of leased land; (2) lease agreement for land measuring to 572.6 acres [entry Nos, 3, 13, 15, 24 and 25 of the table] were executed with group of people collectively; (3) lease agreement with one lessor [entry No, 1 of the table] expired in February 2010 and thus was not relevant for tax year 2011 ab initio; and (4) lease agreements for remaining 852.4 acres of land were entered with the representative of the family members as the underlying property was held by family members in the land records.
Copies of fards and copies of af fidavits by the family members, to this ef fect, were placed on.
(c) Non-registration of 'lease agreements' cannot be made basis to draw any adverse inference under any provision of the Ordinance and the same at maximum be treated as a procedural lapse that too relating to compliance with the provisions of Punjab Registration Act, 1908. Reliance in this respect was placed on judgment of Honorable Sindh High Court reported as 2002 PTD 1 17;
(d) Reference to floods of year 2010 is misplaced on facts besides being again in the nature of hypothesis and presumption; and
(e) Co-relating the claim of exemption under the provisions of Ordinance with payment of provincial agriculture income tax is also irrelevant as this condition/nexus was made part of the Statute only vide Finance Act, 2013 thus not relevant for tax year under consideration i,e, 201 1.
5. Mr. Sarfraz Ahmad Cheema, learned LA, along with Mr. Waqas Ahmed Bajwa, the author of the assessment order and Mr. Waqas Aslam, learned DR represented the Revenue and vehemently defended the orders of the authorities below . Representatives of the respondent department submitted that:
(i) Non-mentioning of subsections and sub-clauses do not render any proceedings as illegal as it has been held by the apex court in judgment reported as 2008 SCMR 615/2007 PTD 1804 that where substantial compliance has been made by authorities, mere technicalities should not be made basis to examine the lawfulness of the proceedings;
(ii) Owing to non-registration of lease agreements the same would not be enforceable thus it was rightly held by the learned assessing officer that in absence of registration under Punjab Registration Act, 1908 lease arrangements cannot be considered as genuine and legal;
(iii) During the course of verification exercise it was observed that even the collective land holding of the family members was less than the land stated, leased out to the appellant thus, appellant failed to establish the veracity of income claimed as 'agriculture income' ;
(iv) The argument advanced by the learned AR that floods do not affect the sugarcane crop is flawed and only rains can benefit sugarcane growers by increas ing the weight of the crop, however , the floods would devastate the crop resulting in loss to the growers; and
(v) Learned assessing officer conducted the verification exercise on sample basis since it would be impractical to carry out verification of lease agreements relating to leased land of 18,566 acres. Further submitted that the addition made through amendment order cannot be annulled merely on the grounds that the same was passed without having 'definite information' and by extrapolating the information collected through verification exercise conducted on sample basis.
6. Parties heard and record perused. Due consideration given to rival averments, material and case laws relied upon by the respective parties during the course of the arguments. We first take up merits of the case. In regard to addition of Rs. 109 million on account of alleged unexplained exempt income, the nature of which has been explained through evidence by the AR to be gifts received from within the family through crossed cheques and hence not liable to tax, it is interesting to note that none of the representatives of the respondent department rebutted the documents produced by the learned AR which ground alone is sufficient to disapprove the addition.
But there is more to be considered while dealing with this matter . Thought the alleg ation levelled in the show-cause notice was that the appellant had not produced documentary evidence in support of claim of exempt income but the learned taxation officer both in the show-cause notice and before us failed to point out what information was required to be annexed to return of income in this regard which was missing thus authorizing the authorities to proceed in the matter . The proposition becomes more interesting when we examine the matter with regard to provisions invoked by the taxation officer. The addition has been made under section 122(5) of the Ordinance which are attracted exclusively where the Revenue acquires definite information that some income has escaped the incidence of tax. In this case the learned taxation officer candidly concedes firstly that he had no information to draw any conclusion and secondly no provision of law the return. The conclusion therefore is a mere hypothesis and a presumption not based on any supporting evidence and is thus annulled. These observations should not be construed that such a claim cannot be questioned by Revenue under any circumstances as if a suspicion exists regarding any claim of a taxpayer . However , in such circumstances, the proper recourse is to proceed under section 177 of the Ordinance and then follow the procedure as specified in the Statute.
7. Regarding the dispute on claim of agriculture income in respect of cultivation, in aggregate, of leasehold land measuring 18,566 acres, no exception could be taken from the position argued by the learned counsel for the appellant that no justification existed for the taxation officer to draw adverse inference, by reference to alleged discrepancies noticed in 26 lease agreements covering 1,668 acres; with regard to claim of exemption on agriculture income attributable to differential 16,898 acres which admittedly constitute 91% of aggregate leased land cultivated by the appellant. Both the learned LA and the author of the amendments order conceded that they did not possess any information whatsoe ver with regard to such 16,898 acres. Instead their defense was that since the amendments was carried out on the basis of results derived from sample exercise, therefore, no unlawfulness was committed. With due respect, we are unable to subscribe to this line of argument. The proceedings carried out under section 122(5) of the Ordinance, as discussed above, essentially require possession of definite information by tax authorities to charge to tax income alleged to have escaped from tax charge. The expression 'definite information' has been interpreted by the apex court in 1993 SCC 1049 to be information that is exact, precise, fixed, clear , bounded and that having distinct limits. It is inconceiva ble and beyond comprehension that action taken on the basis of non-ava ilability of any information, what to talk of definite, with regard to 91% of the aggregate claim could be held to be justified and lawful. The refuge behind sampling, being taken by the Revenue, is hopelessly without merit especially by reference to nature of proceedings.
8. The clarification and explanation tende red by the learned counsel for the appellant vis-a-vis enquiry conducted on 26 lease agreements, coupled with factual position with regard to mode and manner of computation of agriculture income is forceful. The contention of the learned counsel for the appellant, while commenting on genuineness and bona fide of declared agriculture income, that (i) all payments were made to lessors through proper banking channel and certificates to this effect were issued by respective bankers; and (ii) as against this nothing contrary to establish the lease agreement to be fake or forged or payments to lessors or the expenses incurred by the appellant to be incorrect; also finds mention in decision in C.P. No, 36 of 2016 delivered in the appellant's own case by honorable Supreme Court of Pakistan. This when confronted to the learned LA/DR they had no answer but submitted that they could re-examine the matter if so held by this Tribunal. The learned counsel for the appellant was right in pointing out that non-registration of lease agreement under Punjab Registration Act, 1908 bears no consequences under the provisions of Ordinance and claim of income could not be disputed so long as the pre-requisite set out in the income tax law are adequately fulfilled. This position amplifies that the entire proceedings have been undertaken by the taxation officer on the basis of whimsical and presumptuous grounds and hence suf fer from serious defects.
9. The observation leading to adverse inference in the matter quoting the devastating floods of year 2010 also speak of arbitrariness and lack of understanding on agriculture on the part of Revenue. The reliance of the appellant on the research paper of Hamdard University on the subjects of 'impact of 2010 flood on sugarcane industry of Pakistan' is a complete answer to the proposition. The research analysts note in the paper as follows: "The major cause of reduction in recovery rate was the excess water due to devastating flood in the country and rain. As a result excessive water was absorbed by the sugarcane crop which reduced the sugar contents in the cane and increased in the weight of the same. A major issue pertains to sugarcane crushed is more or less the same but production of sugar decreased due to reduction in recovery percentage"
10. The above excerpts make it abundantly clear that sugarcane growers, as is the appellant, heavily benefited from the floods as there floods caused increase in weight of sugarcane crop thus yielding more income. The taxation officer, it follows, grossly erred in concluding in the amendment order that these floods had a result disadvantageous to the appellant as a crop grower and thus inferring that claimed agriculture income was bogus.
The order on this account is also based on lack of understanding and hypothesis which, to say the least, was erroneous and flawed. In arriving at the conclusion that provincial agriculture income tax paid had no relevance with determining the veracity of agricultu re income computed and declared under the Ordinance, we are fortified from following observations recorded by the Honorable apex court in decision in C.P . No, 36 of 2016 cited supra: "15. The mechanism for charging, declaration of the amounts/assets subjects to the charge of tax etc., the process of assessment and the resulting /subsequent adjudication; the liability for the failure to comply with such law and the consequences of recoveri es, fines penalties have been provides by the law, which are to be undertaken by specified forums in a particular form and by adhering to a person aggrieved of such actions/decisions with a complete hierarchy of further remedies before higher forums. We have seen that in the instant matter the declaration of agriculture income by the respondent and the tax paid thereupon has not been questioned by the concerned department."
11. The observation of the apex court makes it abundantly clear that any views with regard to alleged short payment of provincial income tax needs to be dealt with under the relevant (provision and) governing statute, in the manner prescribed therein, and as such cannot be made to draw adverse inference under any other statute.
12. On the legal plane also the entire proceeding conducted in the matter lack lawful jurisdiction. The show-cause notice, and the subsequent amendment order , passed on the basis of the same, is unlawful as the officer failed to confront to the appellant as to which exac t sub-clause of section 122(5) was attracted in this case. The defense of the learned LA is not convincing as the Honorable Lahore High Court in its judgment in 2011 PTR 145, relied upon by the learned AR, has categorically held that the ratio settled in judgment of the apex court in 2008 SCMR 615/2007 PTD 1804 , referred to by LA, is not applicable with regard to proposition under consideration. Even otherwise proceedings under section 111(1) of the Ordinance, with regard to alleged furnishing of inaccurate particulars/ concealment, lack lawful jurisdiction for tax year 2011 as mandate to this effect was inserted in the Statute vide Finance Act, 201 1.
13. In the end we would also like to mention that in any case the very foundation of the show-cause notice i,e, alleged difference of agriculture income mention in nomination papers filed with ECP and that stated in statutory return of income does not justify proceedings under section 111(1) of the Ordinance rather demonstrate lack of understanding on the part of taxation officer. In arriving at this conclusion we are again benefited from the judgment of apex court in C.P . No, 36 which dilates on basis of disclosure in nomination papers as follows: "17. As regards the scope and interpretation of entry No, 14 of the nomination papers which reads as follows:-- "14.
Tax Land holding Acres Agricultural income Total agricultural Income Tax paid 2012 295 165,000,000 8,654,929 2011 507.5 160,000,000 7,181,124 2010 207.5 120,000,000 3,171,024 Note II: Attach copies of agricultural tax returns of the last three years mentioned above."
On the plain reading of the entry which is the main provision, the primary question asked and the purpose behind it seems to be requiring the candidate to disclose the "agricultural income tax" he has paid during the last three years. The predominant requirement is about the amount of the "tax paid" and the relevant column in this context is 4 i,e, "Total agricultural income tax paid" whereas columns Nos. 2 and 3 of the table are the enabling part of the 4th column when considered in the light of the language of the entry . Note II reproduced above the requires the attachment of the copies of the agricultural tax return. One is not required to specify, independent of the return, about the holding of the land. It is not the case of the petitioner that false and fake figure of the "tax paid" was mentioned in column No, 4 or that the copies of the returns were either not filed or were bogus etc. Therefore, on the above account too we are not persu aded to declare the respondent "dishonest" within the purview of Article 62(1)(f) of the Constitution."
In the light of discussed above, we have no hesitation in our minds that the orders of the authorities below are unsustainable and hence illegal being devoid of any merit or substance. These are accordingly annulled and the subjects appeal is accepted.