JUDGEMENT: ABDUL HAYEE KURESHI, C. J.-The following seven Constitutional Petitions are being disposed of by this common judgement, as the points of law and fact bear similarity in each one of these cases.
The cases are:-
(i) C. P. No. D-796/19-83. Messrs Abid &. Sons Ltd., Vs. Excise and Taxation Officer and others.
(ii) C. P. No. 614/1984 Anwar Ali Vs. Government of Sind and others.
(iii) C. P. No. 617/1984. Messrs Hashwani Sales &. Service Ltd. Vs. Government of Sind and others.
(iv) C. P. No. 694/1984. Sayed Alay Niaz Rizvi Vs. The Director-General Excise &. Taxation, Karachi and others.
(v) C. Pi No. 695/1984. Sayed Muhammad Ahmad Salar Vs. The Director-General, Excise & Taxation and others-
(vi) C. P. No. 696/1984. Muhammad Anwar Vs. The Director-General, Excise &. Taxation and others.
(vii) C. P. No. 5/1985. Mrs. Khatija A. M. Kassim and another Vs. Government of Sind and others.
2. In each one of these seven cases, the three respondents, namely, Excise and Taxation Officer, Karachi, Director/Collector, Excise and Taxation, Karachi and Director-General, Excise and Taxation, Government of Sind Karachi, are common respondents. For the sake of convenience and brevity, the Excise and Taxation Officer in each one of these cases shall be hereinafter referred to as the "E.
T. O.", the Director/Collector, Excise and Taxation shall be referred to as the "Director", and the Director-General, Excise and Taxation shall be referred to as the "Director-General". Besides these respondents, the Province of Sind has been impleaded as respondent No. 4 in C. P. No. 796/1983, the Government of the Province of Sind has been arrayed as respondent No, 1 in C. P. No. 614/1984 the (government of Sind, the Sub-Registrar of Jacob Li res Complex and Sub-Registrar Defence Housing Society have been arrayed as respondents 1, 3 and 6 respectively in C.P. No. 617/1984.
However, the main respondents are the aforesaid three, namely, the E. To. O., the Director and the Director-General.
3. We have heard Mr. Sharaf Faridi, Mr. Mohsin Tayabally, Mr. Abdul Muneem Khan, Mr. Imamally G.
Kazi, Mr. G. M. Qureshi, Mr. Niaz Ahmad Khan and Mr. Kamal Azfar in the various cases on behalf of the several petitioners. We have also heard Mr. Muhammad Ibrahim Memon, Additional Advocate- General, and Mr. A. R. Akhtar for the respondents Mr, M. K. Ansari, E. T. O. Was present with him on the several dates of hearing. We had also asked some questions from Mr. M. K. Ansari, who had made some replies, which had been recorded, and the same shall be reproduced in the relevant context in this Judgement.
4. The brief facts in C. P. No. 796/1983 are that the petitioner purchased 54936 sq. Yds. Of land, bearing Survey Nos. 133, 628 and 629 in Deh Gujro, Blocks 1 and 2 in Gulshan-e-Iqbal, Karachi, for a sum of Rs. 82,40,400. It is stated that, for the "purchase, the petitioner borrowed a sum of Rs. 60 lakhs from Habib Bank Ltd., Kutchery Road Branch, Karachi. The petitioner further states that "he spent a sum of Rs. 4,94,424 on stamp duty, Rs. 41,223 as registration fee and a sum of Rs. 3,30,000 on account of brokerage and legal fee. A photostat copy of the purchase document, which is registered, has been placed on the record. It is stated that the land was equitably mortgaged with the Habib Bank, and a photostat copy of the document, purporting to be a memorandum, has also been placed on record. It is the case of the petitioners that, before they purchased the land, the seller had obtained a "no objection certificate" from the Karachi Development Authority for use of the land for residential purposes, and, for obtaining such "no objection certificate", a sum of Rs. 50 per sq. Yd. Was payable by the sellers to the Karachi Development Authority, but it was not paid, so that the amount was ultimately paid by the petitioners, lt is also stated that the petitioners paid some other amounts also to the Excise and Taxation Department, and receipts had been obtained.
In addition, the petitioners state that they made some improvements and additions by constructing a boundary wall and site office at a cost of Rs. 2,43,000 and Rs. 7,10,000 respectively.
The petitioners redeemed the mortgage of the land in favour of Habib Bank, and they have produced a certificate from chartered accountants, showing that the interest paid tu the Habib Bank in connection with the loan obtained by the petitioners was Rs. 36,54,825. On 11-7-1983, the petitioners agreed to sell the entire plot of land for a total sum of Rs. 1,75,00,000. In order to complete the sale and register the sale-deed, the petitioners applied to the E. T. 0. For grant of a clearance certificate, and filled up a form known as "CGT-I" on 27-7-1983 (Annexure 'P'), wherein they disclosed their total outlay, showing the cost as well as the price at which the plot had been agreed to be sold. After computation, the petitioners declared that their total capital gain amounted to Rs. 3,06,130. This return was filed on 27-7-1983, and the petitioner was asked to come after one week, and, after the expiry of that one week, he was informed that the case required decision of a "panel", and therefore it was to be decided in consultation with the Director and the Director-General. However, on 28-8-1983, the E. T. O. Passed an order, stating that, although :he property in question was initially agricultural property, but, since it had been converted for residential purpose, and since such huge plots are generally utilised for "commercial, housing and similar purposes", the plot vas, at least, residential-cum-commercial in nature, and he fixed the /valuation at Rs. 2,39,57,260 by calculating the price at Rs. 472 per sq. Yd. 0n the expenditure side, the E. T. O. Allowed a sum of Rs. 1,16,61,947. This vas as follows:- '(1) Actual cost of plot Rs. 82,00,000 (2f Cost of construction of boundary wall 16200 running foot. Rs.
2,43,000 (3) Cost of construction of site Office (2230 sq. Ft.) Rs. 2,89,900 (4) Registration and stamp.
Rs. 5,35,647 (5) Brokerage and legal 4% (both sides). Rs. 10,20,000 (6) Development charges paid to K. D. A. _ - Rs. 13,73,400 Total costs. Rs. 1,16,61,947.''
By such process, the E. T. O. Held that the capital gain was Rs. 1,42,93,313, and he assessed the capital gains tax at Rs. 28,42,063. An appeal was filed by the petitioner before the Director, who agreed with the E. T. O. On the point that the plot was not purely residential. The appeal was also dismissed. The petitioner then filed a Revision Application before the Director-General, who also came to the conclusion that the project, that will be erected on the plot, will not be "without any commercial aspect". It was held that, since the Karachi Development Authority, in its "no objection certificate", had not said that the plot would be used for residential purpose only, it was reasonable to term it as residential-cum-commercial. The E.T.O, and the Director had disallowed a sum of Rs.
13,73,400 paid by the petitioner to the Karachi Development Authority as development charge, and this amount was added to the cost of land. As regards the sale price, the Director-General varied it by reducing it from Rs. 472 per sq. Yd. To Rs. 425 per sq. Yd. The petitioner felt aggrieved by the three orders, and he filed the present Constitutional Petition. By a Miscellaneous Application the petitioner sought an interim order, seeking permission to register the die deed, and a consent order was passed on 18-10-1983, providing that, if he petitioner deposited a sum of Rs. 10 lakhs in Court, and additionally furnished Bank Guarantee in another sum of Rs. 10 lakhs, the sale deed may ; registered. The sale-deed has, indeed, been registered.
5. A counter-affidavit has been filed by the E. T. O., wherein it was ated that the respondents were not aware if the petitioner had borrowed ny amount frorn Habib Bank Ltd^.For purchasing the plot, and, in any case, that was not relevant, In regard to payment of the "no objection certificate" fees, it was stated that the E. T. O. Had no knowledge, and that act was not relevant. It was stated that the prevalent price of land in the reality was higher than Rs. 450 per sq. Yd. For residential-cum- commercial lats, and the price of Rs. 318.55 per sq. Yd. As disclosed by the petitioner /as incorrect. It was admitted that no notice under CGT-III had been issued, because the petitioner had himself filed form No. CGT-I, and he had also been heard. It was alleged that the petitioner had deliberately under-valued the property in order to avoid Government dues. It was further stated that a project in the name of "Abid Town" was to be constructed and such a project could not be contemplated without having commercial character. The allegation of the petitioner that the assessment was arbitrary and unjust was denied.
6. In C. P. No. 614/1984, the facts are that the petitioner, Anwar Ali transferred plot No. PR-1/32, in Preedy Quarters on M. A. Jinnah Road, measuring 8128 sq yds. For a consideration of Rs. 1,39,75,000, and submitted a return. This price was not accepted by the E. T. O. Who held as follows:- "The declared sale value does not represent the fair market value. Taking into account the situation, location and the position of the plot in question, following assessment is made:- Sale value of plot 8128 sq yds. Rs. 4,000 per sq. Yd. Rs. 3,25,1200."
The E. T. O. Came to the conclusion that the net capital gain was Rs.2,06,72,910. He valued the plot at Rs. 4,000 per sq yd. An appeal was filed before the Director, who reduced the assessment to Rs.
3,000 per sq. Yd. In the order, he stated that the property, bearing unit No. PR-2/17, had been sold in 1978 at the rate of Rs. 3,860 per sq. Yd. A Revision Application was filed before the Director-General, but the same was also dismissed on precisely the same process of reasoning, as was adopted by the Director. A counter-affidavit has been filed by the E. T. O. In this Court, wherein it was averred that the disclosure made by the petitioner in regard to the price was low, and the assessment had been done according tu best judgment of the authorities.
7. In C. P. No. 617/1984, the petitioners' case is that they had acquired lease-hold rights in a plot, measuring 2252 sq. Yds. Described as Bungalow No. 156, Clifton, Karachi, in 1979. It was purchased from the Government of Pakistan for a sum of Rs. 12 lakhs, and was a restricted lease-hold for ninety years. It is stated in the petition that this plot neither opened up nor faced the main Clifton Road, and therefore it was not accessible from the main road. Such averment was made, because, it is the case of the petitioner that the plot could not be used for commercial, or, business purposes.
It was also stated that the bungalow on the plot was absolutely dilapidated and had been demolished, lt is stated that, in March, 1984, the' petitioners contracted to sell the property to Messrs Shezan Services Ltd., for a sum of Rs. 15,00,000. For the purposes of registration, the petitioners filed a return in form CGT-1, and thereafter an application was made before the E. T. O. To permit the petitioner to adduce evidence and summon witnesses, but, on 8-4-1984, the petitioner was informed that an order had already been passed. By the order, the fair market value was fixed at Rs. 45,04,000 at the rate of Rs. 2,000 per sq. Yd. An appeal was filed before the Director, -who dismissed the same without awarding any relief, except by allowing an amount equal to 2-1/2% of the purchase price towards legal fee and brokerage. The net gains, according to the Director, were Rs. 31,95,900. A Revision Application was then filed before the Director-General, who held the property to be commercial plot, and stated that the assessment at the rate of Rs. 2,000 per sq. Yd.
For the purpose of capital gains tax was fair and reasonable. The E. T. O. Had filed a counter- affidavit, wherein it is stated that the rates of property in the same area were fixed at Rs. 2,000 per sq. Yd., which is reasonable. In paragraph 7 of the counter-affidavit, he stated that the petitioners had been afforded an opportunity of hearing, and they were allowed to produce one witness. A copy of the statement of %such witness has not been placed before us, and we are informed that his statement had not been recorded. It is also stated in the counter-affidavit that the plot was inspected by the E.T.O., and he assessed the value to his best judgment.
8. C. Ps. Nos. 694, 695 and 696/1984 are filed by three separate persons, who were the joint owners of plot No. ST-2, measuring 3000 sq. Yds. On Drigh Road, Karachi. This plot, according to petitioners, was initially allotted by Karachi Development Authority tu one Nawab Ahmad Hussain Lahori, from whom they have purchased the same by paying a sum of Rs. 4 lakhs to the initial allottee, Rs. 6 lakhs to Karachi Development Authority, and in addition a sum of Rs. 1,77,000 had been spent for stamp, registration fee, legal fees, etc. The case of the three petitioners is that they had agreed to sell the plot for a total consideration of Rs. 40 lakhs. Out of this purchase price, they claim Rs.
1,20,000 on account of brokerage and legal charges. After deducting the expenses on purchase of the plot, they disclosed a gain of Rs. 9,34,703, and submitted a return in form CGT-I. The E. T. O., by an order, dated 18-7-1984, stated that, on taking into account the premium, location, situation and size of the plot, the value should be Rs. 1,20,00,000 and he declared that the net gain was Rs.
1,13,60,922. An appeal was filed before the Director, who did not accept the disclosure made by the petitioner, because the plot was situated on the main road and was a commercial plot of land. He however, determined the sale value at Rs. 80,00,000 instead of Rs. 1,20,00,000. A Revision Application was then filed before the Director General, who upheld the valuation declared by the Director, but reduced it by a further sum of Rs. 5 lakhs on account of the price actually paid.
9. In the last case, viz. C. P. No. 5/1985, the facts are that the two petitioners, Mrs. Khatija A. M. Kassim and Mrs. Shahnaz Meer own property No. 36-H in Block VI, P. E. C. H. Society, Karachi, in the shares, of 3/5th and 2/5th, respectively. They state that they had agreed to sell the plot for a sum of Rs. 11 lakhs. A return in form CGT-1 was filed. The E. T. O. In his order dated 30-10-1982, stated that, on taking into account, "the location, situation and condition of the property", he fixed the sale value at Rs. 20 lakhs, out of which he allowed a sum of Rs. 2,55,570 as the total cost of the petitioner, and worked of the total gain at Rs. 17,44,430. It may be stated that the property was a double storeyed building on a plot measuring 1942 sq. Yds. Which had a covered area of 4123 sq. Ft. Which would roughly be about 350 sq yds. An appeal was filed before the Director, who came to the conclusion that the value of plot of land in Block VI, P.E.C.H. Society ranged between Rs. 2,000 and Rs. 2,500 per sq. Yd., and therefore, the assessm ent was reasonable, and the appeal was dismissed. A Revision Application was then filed before the Director-General, who came to the conclusion that the sale value determined by the E. T. O. Was, in fact, on the lower side, and he upheld the value.
10. It may be stated that, in some of these cases, counter-affidavits have not been filed by the respondents, but we have considered the counter-affidavits filed in the other cases in order to determine what the averments of the respondents are.
11. The case has been mainly argued by Mr. Sharaf Faridi, who is appearing for the petitioners in C. P.
No. 796/1983. The other learned advocates have adopted the arguments, and have given some additional reasons in support of their contentions. Mr. Muhammad Ibrahim Memon, who has appeared for the respondents, has, with his usual fairness, taken the stand that the reasons given for arriving at the conclusions in respect of the price at which the property has been sold are not convincing, or, in any case, impugned orders do not disclose the reasons for the conclusion. In such circumstances, the learned Additional Advocate-General has stated that the impugned orders may be held to be. Of no lawful authority, and may be quashed. He has further prayed that this Court may lay down the guidelines for decision in cases of this nature, and the E. T. O. May be directed to re-assess the sale price. l2. Before proceeding further in the matter, we would like to examine the provisions relating to the capital gains tax, as enacted by section 16 of the West Pakistan Finance Act of 1963, in conjunction with the West Pakistan Capital Gains Tax Rules, 1964. Initially tax on capital gains was a central subject, which may now be termed to be a federal subject. The words "capital asset" were defined in clause (4-A) in the Income-tax Act of 1922. The definition was that "capital asset" means property of any kind held by an assessee whether or not connected with his business, profession or' vocation. Three exceptions were, however, made, and the third exception was in respect of "any land from which the income derived by the assessee is agricultural income". Then, by section 5 of Central Act No. XVI of 1963, the words "and any other immovable property" were also supplemented after the words "agricultural income". However, by Central Act No. XI of 1968, the third exception, appearing in clause (4-A) of section 2 of the Income-tax Act, was substituted by two clauses, which read as follows:- "(iii) Any land from which the income derived by the assessee is agricultural income, and
(iv) For the purpose of capital gains any immovable property."
It would thus appear that, when the Income-tax Act was initially enacted in 1922, the exception related only to agricultural income, and, when the Income-tax Act was amended by Act No. XI of 1966, the exception was extended to ail immovable property, and, when Act No. XI of 196B was enacted, the exception was extended to all such income that accrued as capital gains on account of transactions in immovable property. Subsequently, taxes on capital gains were shown as a provincial subject, and even in the Constitution of 1973, Item 50 in the 4th Schedule reads as follows:- "50. Tax on the capital value of the assets, not including taxes on capital gains on immovable property."
The position then is that, after the enactment of Act XI of 1968, clause (4-A) of section 2 of the Income-tax Act stood so amended that capital gains from immovable property ceased to be the concern of the federal authorities for the purpose of income tax, or, capita! Gains. In view of capital gains becoming a provincial subject after ceasing to be a central subject, section 16 of the West Pakistan Finance Act made provisions for the levy. Sub-section (1) of said section is the declaring and enabling provision, which provided that capital gains tax shall be levied on all profits or gains arising from the sale, exchange or transfer of immovable property within urban area to be specified by the Government under the West Pakistan Urban Immovable Property Tax Act of 1958.
Subsection (2) of said section 16 of the West Pakistan Finance Act of (963, reads as follows:- "(2) The amount of the capital gains shall be Computed after making the following deductions from the full value of the consideration fur which the sale, exchange or transfer of property is made--
(a) expenditure incurred solely in connection with such transaction, and
(b) actual cost to the assessee of the property including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto."
For the purposes of these cases, the first proviso contained in the said sub-section would be relevant, and the same is reproduced below:- "Provided that--
(i) where a person who acquires a property from the assessee, whether by sale, exchange or transfer, is a person with whom the assessee is directly or indirectly connected or where the authority making the assessm ent has reason to believe that the sale, exchange or transfer was_effected with the object of avoidance or reduction of the liability of the assessee the full value of the consideration for which the sale, exchange or transfer is made shall be taken to be the fair market value of the property on the date on which the sale, exchange or transfer took place;"
13. A bare reading of this proviso would show that expenditure and actual cost, which is mentioned in clauses (g) and (b) in subsection (2) of section 16 of the West Pakistan Finance Act of 1963, may be determined by the functionaries of Excise and Taxation Department by a separate enquiry regardless of the price disclosed; in two cases, namely, when the person, who purchases the property from a seller, is a person, who is directly or indirectly connected with the seller, or where the Excise and Taxation Authority has reason to believe that the sale, exchange, or, transfer was affected with the object of avoidance, or, reduction of the liability of the assessee. In other words, the functionaries under the Act were to refuse to accept the price disclosed if they are of the view that the seller and purchasers were directly or indirectly connected, or where they have reason to believe that, for the purpose of avoiding or reducing the liability on account of capital gains tax, a wrong disclosure had been made. The Legislature has thereafter amended this section by adding subsections (2-a), (2-b), (2-c), (2-d) and (2-e). Subsection (2-a) provides that the seller shall within seven days of the sale submit a statement to the prescribed authority, showing the following particulars in regard to the transactions "(i) The name, father's name, profession and full address of the person by whom the property has been sold, exchanged or transferred and of the person to whom the property has been sold or transferred or with whom it has been exchanged;
(ii) The particulars and location of the property;
(iii) the price or other value of consideration received for the property; and
(iv) such other information or particulars as may be prescribed."
14. While sub-section (2-b) is not relevant in the context of these cases, subsection (2-c) provides - that, if the seller fails to submit a statement showing the' particulars, which are required under sub- section (2-a), or, has furnished the statement, which the prescribed authority has reason to believe to be false, or, not correct, the seller was liable to pay, in addition to the tax due, a penalty equal to the amount of tax. This sub-section reads as follows:- "(2-c) If the person required under subsection (2-a) to submit a statement fails to submit such statement to the prescribed authority within the period specified in the said subsection, or submits a statement which such person knows or has reason to believe to be false or not correct, he shall be liable to pay, in addition to the tax due, a penalty not exceeding the amount of the tax due."
Sub-sections (2-d) and (2-e) provide for an appeal and revision to the Director and Director General. Having stated the salient features of the basic law relating to capital gains tax arising out of sale of immovable property, we proceed to examine the rules that were framed by the Government of the Province of West Pakistan in 1964. These rules were framed in pursuance of section 20 of the West Pakistan Finance Act of 1963, and were published in Gazette of West Pakistan, Extraordinary, on 29th June, 1964. Rule 3 provides that any person, who is liable to pay capital gains tax under the Act, shall, within fifteen days of the sale, submit to Excise and Taxation Officer a return in form CGT-1. This form is prescribed, and contains the following columns, requiring disclosures:- "(1)Name and. Address of the assessee.
(2) Description (number, type, identification) of immovable property sold, exchanged, or transferred.
(3) Nature of transfer.
(4) Name and address of the transferee.
(5) Particulars and place of execution or registration of transfer deed.
(6) Form and value of consideration received.
(7) Details of expenditure of transaction.
(8) Assessee's actual cost of immovable property concerned.
(9) Capital cost of subsequent alteration or addition by the assessee in the immovable property concerned.
(10) Nature of proof in support of entries in columns 8 and 9.
(11) Net capital gains.
(12) Remarks."
15. Rule 4 states that the Excise and Taxation Officer shall serve a notice on the person liable to pay tax, requiring him to submit a return within a fixed period. Rule 5 states that, if the Excise and Taxation Officer is satisfied that the return is correct and complete, he shall accept' such return and assess the capital gains tax. Rule 6 is pertinent, and it reads as follows:-- .
"6. If in the opinion of the Excise and Taxation Officer a return submitted under rule 3 or rule 4 is not correct or complete, or no return is furnished in response to the notice referred to in rule 4, he shall serve the assessee with a notice in Form CGT-3 requiring him to appear before him and after giving the assessee an opportunity of being heard and examining such evidence, as he may produce, and after making such enquiries as may be deemed necessary, assess to the best of his judgment the Capital Gains Tax payable by him."
This rule requires the issuance of a notice in form CGT-III. In such cases in which the Excise and Taxation Officer believes-that the return submitted is not correct or complete, he will ask the assessee to appear before him, and, after giving the assessee an opportunity of hearing and examining evidence that he may like to produce, and, after making such enquiries as may be necessary, he will have the power to assess the capital gains tax to the best of his judgement. Form CGT-III is also prescribed by the rules, and states that such notice has to be issued for the purposes of determining, whether the return is correct' and complete, and it shall also state that the assessee could produce of cause to be produced all the evidence on which he may rely for The purpose of determination of capital gains tax. While rule' 7 is not relevant' in the context of circumstances of this case, rule 8 lays down principles for the guidance of the Assessing Authority in cases in which he is of the opinion that the actual cost of property is not correct. Clause (i) enables the Assessing Authority to take into consideration the value of consideration of sale, or, transfers of similarly situated and similarly used urban immovable property made in the year 1950, or, as the case may be, made on or about the time of the sale or transfer in question. Clause (ii) is not relevant in the context of the circumstances.
16. Having stated the relevant salient features, appearing in the West Pakistan Finance Act of 1963, and the West Pakistan Capital Gains Tax Rules of 1964, the following results emerge:--
(i) That, after a sale is completed, the seller shall disclose all the particulars as are stated in CGT-I form.
(ii) The Assessing Authority shall examine that form to find out trie correctness, or, otherwise of the disclosures.
(iii) That out of the sale price, the assessee can deduct the actual cost incurred, or, borne by him for the initial purchase of the property, together with expenditure of capital nature borne by the seller in making any additions or alterations.
(iv) If the Assessing Authority is satisfied with the disclosures in form CGT-I, he shall call upon the seller to pay the tax, which is payable on the basis of such disclosures.
(v) If the Assessing Authority, on examination of form CGT-I, comes to the conclusion that the seller and purchaser are directly or indirectly connected, or, if he comes to believe that the transaction has been effected with the object of avoidance and reduction of the liability to pay the tax, then he can open the case by issuing a notice in form CGT-III.
(vi) After giving the notice in form' CGT-III the Assessing Authority shall afford to the seller a hearing and also give him an opportunity to lead evidence on the point.
(vii) After hearing and examination of witnesses, the Assessing Authority shall determine the full value of the consideration for the sale which shall be taken to be the fair market value of the property on the date of sale.
(viii) for the purposes of arriving at such conclusions in regard to the full value or consideration, the Assessing Authority shall have to consider the price at which sales, or transfers of similarly situated properties have been effected.
(ix) That the decision of the Assessing Authority shall be according to best of judgment.
17. Having stated the salient features, determining the scope of authority in dealing with cases of this nature, we proceed tu examine how far the requirements of law have been complied with in the instant cases. It is admitted case that rule 6 of the West Pakistan Capital Gains Tax Rules has not been complied with in any one of these cases. This rule states that as soon as the assessee files the CGT-1 form, the E. T. O. Has to apply his mind, and form-an opinion in regard to the return, making correct or incorrect disclosures, and, in case he comes to the conclusion that the return in form CGT-1 is not correct, he has to give another notice in form CGT-III to the assessee. This notice is required by statutory rules, and it shall state that the E.T.O, intends to satisfy himself in regard to the correctness of the return. Such notice not having been given, there was a serious lacuna in the proceedings. Mr. Muhammad Ibrahim Memon, Additional Advocate-General, has conceded that point. In fact, the learned Additional Advocate-General, on such premises, made a statement that the impugned orders may be declared to be void and of no legal effect, and he requested that the cases may be remanded for re-determination.
18. Coming to the mode of determination of these cases, we have been poorly impressed by the manner in which the cases have been dealt with in C. P. No. 796/1983, the price declared was Rs.
1,75,00,000. It is admitted case that this plot was agricultural, but the E. T. O. Remarked that such huge plots are generally utilised by Constructions Companies for commercial, housing and similar purposes, and he then went on to state that such plots are, at least, residential-cum-commercial in nature. Thereafter, without stating any reasons, he stated as follows:- "Relying on this premise as well as taking into account relevant factors, the position, location and situations of the property, I fix its valuation at Rs. 2,59,57,260." He fixed the price of land at Rs. 672.50 per sq. Yd. No reasons were stated for arriving at such figure, and, in fact, no data was also available on the basis of which such figure could have been arrived at. The Director also gave no reasons whatsoever for upholding the decision of the E. T. O. Even the Director-General, in his order, only stated as follows:- "After-hearing the arguments, on both the sides it is felt that the contention of the petitioner on the question of the rate has some force. However in this case it is unlikely that this entire area will have a project without any commercial aspect. Secondly, the petitioner has not produced final N. O. C. Of K. D. A. Whereby it could be verified with certainty that this area shall be solely used for residential purpose as K. D. A's interim N.O.C., dated 6-11-1979 was subject to completion of certain formalities.
It is not known if the previous owner really completed these formalities or not. Keeping all these factors in view, the sale rate is assessed at Rs. 625 per sq. Yard as against the assessed rate of Rs.
672.50 per sq. Yd".
In C. P. No. 616/1986, the declared price was Rs. 1,39,75,000 but the E. T. O. Arrived at a conclusion that the cost was Rs. 3,25,12,000. All that was stated in the order was that, taking into account the situation, location and the position of the plot in question, the price should be Rs. 6,000 per sq. Yd.
No data was indicated on the basis of which this cost was determined. However, when the case went before the Director in appeal, he referred to one sale in respect of property unit No. PR-2/17 in the Preedy Quarters, and stated that this property had been sold in 1978 at a price of Rs. 3,860 per sq. Yd. Mr. Mohsin Tayabally vehemently argued before us that the situation and condition of these two plots was vastly different, because of the following reasons:--
(i) The area of the plot, which is the subject-matter of this case, was 8182 sq yds., which is mure than double the area of the other plot.
(ii) That the Karachi Metropolitan Corporation has a right to re-purchase and resume the plot in question, because it was a lease, and the term of the lease was to expire on 9-7-1983.
(iii) That an area of 500 sq. Yds. From the plot in question was occupied by a mosque, and therefore would be of no use.
Civ) That the property in question was the subject-matter of litigation in the High Court and it had even been advertised for sale.
(v) That the plot was located on Marston Road, whereas the other, the sale price of which was pressed into service by the Director, was located on main Victoria Road.
20. Mr. Mohsin Tayabally also invited our attention to clause (i) of rule 8 of the West Pakistan Capital Gains Tax Rules, and stated that the consideration may be determined by comparison with other sales, or transfers. His argument is that the use of the words in- plural was significant, and simply because one property may have been sold at a particular price would be no criterion for fixing the price of another, even if it is in the same locality. His further grievance is that the area occupied by the mosque should have been straightaway excluded, but has not been excluded. It seems that, when the Revision Application was being heard by the Director-General, the petitioners referred to some other sales in the locality, but that aspect of the case was also not adverted to.
21. Again, in C.P. No. 617/1984, the declared price was Rs. 15 lakhs, but it was assessed at Rs.
45,04,000. The E.T.O, in his order stated that the market value of similar plots, as revealed from spot enquiry, ranged between Rs. 2,000 and Rs. 2,500 per sq. Yd. And he went on to state in his usual words that, keeping in view the location and position of the plot, he determined the fair market value at Rs. 2,000 per sq. Yd. We had asked the learned Additional Advocate-General to place before us the documents, showing that any spot enquiries were made. He frankly stated that there was nothing on the record to indicate, whether any enquiries were made. He, however, added that the E.T.O, had instructed him to state that an Inspector had been sent to make such enquiries, and he had stated that the normal price ranged between Rs. 2,000 to Rs. 2,500 per sq. Yd. No statement of such Inspector is available on the record, nor has he filed any affidavit, and, on the other hand, the E.T.O, states that he made no personal enquiries. The order does not itself indicate the nature of the enquiries that were made, or, the persons from whom enquiries were made. There is also no evidence in regard to other sales in the locality. The Director, in the appellate order, has only stated as follows:- "(1)The subject plot is very much a corner plot of land with attractive surroundings and enjoys best location.
(2) The present market value in that area ranges between Rs. 2,000 to Rs. 2,500 per sq. Yd. For such plots."
22. In the revisional order of the Director-General, it is stated as follows:-- "The unit in question is a commercial plot and has attractive commercial value as it has access from the main road and is also bound by 60' were road known as Zam Zama Boulevard. Further, there are properties in Clifton which has been assessed at Rs. 2,000 per sq. Yd. For the purposes of Capital Gains Tax."
23. Even in this order, no particulars in regard to other properties, which may have been sold at the rate of Rs. 2,000 per sq. Yd. Have been stated.
24. In C.Ps. 694 to 696/1984, the sale consideration was declared at Rs. 30,00,000. All .That the E.T.O............................... Stated was that it was the large plot having corner location on Shah-re-Faisal, near and opposite Ayesha Bawani School. Immediately, in the next sentence, in regard to location, he stated that it was also near Taj Mahal Hotel. It is common knowledge that Ayesha Bawani School is, at least, six furlongs away from Taj Mahal Hotel, and therefore, it was inapt to compare the location of the two plots. However, no other reason was stated for enhancing the consideration to Rs.1,20,00,000 except a statement to the effect that, taking into account premium, location, situation and size of the plot, the value was fixed at Rs.1,20,00,000. The Director again, in the appellate order, stated that this unit was situated on the main road and was a commercial plot of land, and, having stated so, he determined the value at Rs. 80 lakhs, and that too without assigning any reason whatsoever. Again, in the revisional order passed by the Director-General, all that was stated is that, in less important localities, like M.A.- Jinnah Road and Shahre-Iraq, the prices ranged between Rs. 6,000' to Rs. 8,000 per sq. Yd. To say the least, M.A. Jinnah Road and Shahre-Iraq are miles away from Shahre-Faisal, and therefore, comparison was completely inapt. What is more that, even in regard to such prices prevailing on M.A. Jinnah Road, or, Shahre Iraq, no material in the shape of comparable sales was available. Even such properties as may have been sold at that price on M.A. Jinnah Road, or, Shahre Iraq have not been mentioned.
25. In C. P. No. 5/1985, the declared price was Rs. 11 lakhs, but was assessed at Rs. 20 lakhs. All that was stated in the order of the E. T. O. Was that the market value of plot of land in Block VI, P. E. C. H.
Society was ranging between Rs. 2,000 and Rs. 2,500 per sq. Yd. No comparable sales were mentioned. In this case, it may be stated that clause (ii) of rule 8 of the West Pakistan Capital Gains Tax Rules lays down a formula for determination of the actual cost at an amount between fifteen times and twenty times of the gross annual value. The Director was conscious that the rental value of this property had been fixed by his own Department, but still he completely overlooked it and thereby ran in grave error in arriving at the conclusions.
26. No doubt, valuation of immovable property does not follow any scientific process, and it is also true that enquiries in matters of such nature abound in uncertainties. It is also true that the process of valuation is in the nature of guess work. However, through the ages sound principles have been evolved to provide guidance to Courts as well as statutory functionaries under the taxation laws.
One can hardly overlook that arbitrariness in decision is extremely loathe to any system of law. In such circumstances the West Pakistan Capital Gains Tax Rules have provided adequate .Principles, "which have to be followed by the Assessing Authority. The first principle enunciated in rule 8 is that the value of consideration of sales, or, transfers of similarly situated and similarly used urban immovable property could be adopted for assessing the cost, In that respect, it may be said that the correct criterion to be followed is that the price at which properties situated in vicinity and used for same purposes could be taken into consideration. We would wish to make it clear that the price at which one property may have been sold would also not be sufficient, for the use of plurals viz. Sales and transfers is significant, and would point out that the statutory authorities must take into consideration a number of sales and transfers. One of the methods of valuation, which has been recognised by various judicial decisions, is by reference to the following factors:- "(i) The price paid within a reasonable time for the land.
(ii) Rates and profits of land received shortly before the sale.
(iii) Price paid for adjacent lands possessing similar advantages.
(iv) The opinion of valuator or experts."
The consideration of the aforesaid factors would in a vast majority of cases be correct guidelines and save a statutory functionary from criticism on ground that the decision is arbitrary.
27. While dealing With the point of arbitrariness pervading the decisions of the respondents, we are also inclined to refer to some other documents placed oh the record. These documents show slab rates fixed by the Department of Excise and Taxation in relation to value of land in various localities and quarters of the city of Karachi. In some of these cases, such slab rates have been placed on record, and the authenticity of these copies has been admitted before us by Mr. M. K. Ansari, the Excise and Taxation Officer. The said Officer stated before us on 7-2-1985 (see Order Sheet in C. P.
No. 617/1984) that such slab rate is followed generally in all such cases, where the seller declares the sale consideration upto Rs. 1 million but he went oh to state that, if the declared sale price was in excess of Rs.1 million, then the case went before a panel for consideration. He disclosed that such panel is composed of the Director-General, Revisional Authority, the Director, the Appellate Authority and the E. T. O. The assessing authority. He went on to state that, in fact, the decision that is arrived at by the panel is followed by the E. T. O. In the light of the guidelines that are provided in each individual case.
28. The above process of discussion by the Assessing Authority, the Appellate Authority and the Revisional Authority before passing the order appears to be opposed to the very fundamental rules governing independence in decision by public functionaries, making quasi judicial orders. It is patent that the E. T. O. Will, in such cases, have no option, but to give a "command performance", because he knows that, by arriving at such conclusions, which are different from the conclusions of the said panel, he may be guilty of gross disobedience, and thereby exposing himself to displeasure of the superior authorities. Oh the other hand, such a discussion renders remedies by way of appeal and revision virtually illusory, for such remedies are invoked before the same authorities, who have in fact given direction to the E. T. O. To decide a case in particular manner. To say the least, these remedies are then rendered meaningless. What is more that cases in which the declared value is up to Rs. 1 million, the panel of valuation is followed, but, in cases, where the declared value is in excess of Rs. T million, the price is determined by a virtual fiat of authority. This process, that is followed in decision of quasi-judicial matters, can never be lightly countenanced, because suchm process directly hits at the norms of equality and justice in each case. In so far as the slab rates are concerned, one must say that those are intended to achieve an object of equality, and those objects are indeed laudable. What is more that if these slab rates are followed in every case, the parties would initially know how much tax they would have to pay so that a prudent seller would determine the price at which he would sell the property. There is, however, no justification whatsoever for not following the slab rates, when the value of the property disclosed is in excess of Rs. 1 million. We may incidentally state that in cases, where the property sold is bigger in size, the comparative value is generally 1 ss. We have not been impressed by the manner in which the department has been dealing with cases of this nature. Possibly, if the slab balance were to be followed in all cases, it might tend to draw a reasonable finance of justice between citizen and citizen, and thereby satisfied the dictates of justice. On the other hand, if we were tc apply different measures as between one transaction and another, the results would be patent injustice- giving a grievance to the parties. We may, however, state that the slab price fixed has no sanction in the statute itself, but, in these cases, if the statutory authorities follow the slab in all cases, there would be a possibility of uniform decisions evolving, which might be acceptable to all the citizens.
In fact, in several petitions, which are being disposed of by this judgment, we find that the petitioners have made a grievance that the slab of price has not been followed.
29. We now proceed to consider another question that has arisen in these cases, except in C. P. No. 695 of 1984. In all these cases, the approach of the respondents has been that the plots are residential-cum-commercial. The slab rate of price also makes a distinction as between residential and commercial plots, because the value of commercial plots is deemed to be higher than the value of residential plots. There is no quarrel with the proposition that a commercial plot always fetches higher price in market as compared to the residential plot. The question, however, is in regard to determination, whether a plot is commercial, or residential. It seems to be the approach of the respondents that, if a plot is too big, it is, reasonable to assume that it will be used for commercial purpose or at least, for residentiail-cum-commercial purpose. They also seem to think that if a plot is located on a main road in the city, it should be considered to be commercial plot, regardless of use. This approach is also not justified. If a plot is a big plot, it is generally used for the purpose of -a complex having many flats. On the other hand, a plot may be on the main road, but ft may not be used for commercial purposes, lt may well be even for residential purposes.
There may again be cases when a plot is not located on a main road, but still it is in a locality, which is not fully developed,' or, is a developing locality, and therefore, a person may want to use a plot for commercial purposes in order to provide a small market, these are not questions that can be decided on ad hoc assumptions. If there is a plot, which is commercial by its very description, then there may be no difficulty, and similarly if a premises is being used for commercial purpose, then too there may be no difficulty. However, the difficulty arises in cases of open plots in respect of which even the plans for construction have not been approved. In such cases, it would be unreasonable to straightaway say that, because a plot was on a main road, or, it was a plot of very big size, it should be deemed to be a commercial plot. As stated above, there may be residential flats even on main roads and even big plots may be used wholly for residential purposes. In such cases, the functionaries of the Excise and Taxation Department cannot make assumption on ad hoc consideration. The better way will be to travel on safe lines, and consider all such plots as residential plots, unless there was evidence to show that the plot was to be used for commercial purposes, or was being actually used for such purposes. We have even noticed that some plots have been termed to be residential-cum-commercial plots on the assumption that, since the plot was big and so many flats would be constructed, therefore a marketing centre will also be constructed on the plot. This too is very arbitrary approach. Even if evidence discloses that a part of a plot is to be used for commercial purposes, or, the ground flour in a building is to be used for commercial purposes and the remaining floors for residential purposes, the proper course would be to apportion the area on which shops are to be constructed to the total constructed area, and, on such ratio being determined, the authorities should consider such proportion of the covered area to be commercial as is being, or, as is intended to be used for commercial purposes. Any other approach would be completely unjust.
30. On appraisal of all the aspects of these cases, we are of the view that the cases have been dealt with in a most arbitrary and fenceful manner. Such arbitrariness has never satisfied judicial norms. It is sometimes termed as excess or abuse of authority. De Smith in "Judicial Review of Administrative Action", Fourth Edition, at pages 322 and 323 has, in this context, stated as follows:- "If the source of authority relied upon is statutory, the Courts begin by determining whether the power has been exercised in conformity with the express words of the statute and may then go on to determine whether it has been exercised in a manner the Complies with certain implied legal requirements, In some contexts they have confined themselves to the questions whether the competent authority has kept within the four corners of the Act and whether it has acted in good faith. Usually they will pursue their inquiry further and will consider whether the repository of a discretion, although acting in good faith, has abused its power by exercising it for an inadmissible purpose or on irrelevant grounds or without regard to relevant considerations or with gross unreasonableness."
31. In the case of Miss Fasree Fatima Awan v. The Principal. Bolan Medical College (PLD 1978 Quetta 17), the effect of arbitrary decision was considered by a Division Bench of the Baluchistan High Court. The judgment was written by one of us. In paragraph 29, the cases of arbitrary decisions was discussed, and one of tis had expressed as follows: "Arbitrary decisions are never considered wholesome in our system of law. One of the demand tests of a decision being arbitrary is whether it proceeds on any substantial reason or exhibits lack of application of mind. Such manner of exercise of jurisdiction has very often been equated or called by a synonym of abuse of jurisdiction. Such abuse manifests itself by making it patent that the authority that had the lis before it either overlooked the evidence brought before it or by reason of preconceived notions misdirected itself to arrive at such conclusions, which are either perverse or could not be substantiated on the basis of available evidence. Such arbitrariness or abuse of jurisdiction may very often become patent by an ad hoc observation .Indicating a desire to overlook the available evidence coupled with a longing for evidence which in the imagination of the authority should have been produced. Very often a cloak is provided for arbitrary decision by mention of the words that some better evidence or the best evidence has not been produced, but the fact of the matter may well be that the available evidence is overlooked."
Since the statute, governing the imposition of capital gains tax, is a fiscal statute, it has to be construed with some exactness. No doubt, if the Taxation Authorities are of the view that the value disclosed is incorrect, they can form their own estimates, but those estimates too have to be in accordance with the rules of best judgment. This rule was explained by thd Privy Council in two cases viz. C.I.T, vs. Laxminarain Badridas (5 ITR 170) and Abdul Baree Chowdhry vs. C. I. T. (5 ITR 352).
Both these cases are reported. In the former case, it was stated as follows:- "The Officer is to make an assessme nt to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously, because he must exercise judgement in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess _ work, In that sense, too, the assessment must be to some extent arbitrary."
32. Having stated the rules, which have to guide the Excise and Taxation Authority, we proceed to consider the last point, which has been very ably argued by Mr. Sharaf Faridi in C. P. No. 796/1983. In that case, the petitioner's averment is that he had bought the plot in question for a sum of Rs.
82,40,400 and, in order to pay the price a sum of Rs. 60 lakhs had to be borrowed by the petitioner from Habib Bank Ltd., Kutchery Road Branch, Karachi.: Documents have been placed on the record to substantiate the taking of loan. Such documents consist of statement of accounts from the Habib Bank Ltd., letters showing loan limit of Rs. 60 lakhs, and a certificate issued by Messr Yousuf Adil & Co. Chartered Accountant, showing that a total amount of Rs. 36,54,825 has been paid by the petitioner to Habib Bank Ltd., as interest on the loan. A deduction was claimed under clause (b) of subsection (2) of section 16 of the Finance Act, 1963. This clause enables the assessee to claim a deduction from the full value of consideration to the extent of "actual cost to the assessee of the property", In the return, that had been filed in form C. G. T. I. Under rule 3 of the Capital Gains Tax Rules, 1964, amounts have been claimed. The E. T. O. While dealing with this aspect of the case, completely overlooked this claim of deduction. The Director, without specifically mentioning, stated that the balance of the claim made by the assessee was disallowed. Similarly, even the Director- General completely overlooked this point.
33. Mr. Sharaf Faridi, the learned Advocate for the petitioner, has urged before us that the words "actual cost to the assessee of the property" would mean and imply all such expenses that the owner has undertaken for acquiring the property. He urged that the words "actual cost to the assessee" do not merely mean the cost, which the owner had to pay to the previous seller for purchase of the property, but also such expenses incurred by the owner for acquisition of the property which, according to Mr. Sharaf Faridi, would include interest paid on the capital that had been borrowed to raise the same. We asked the learned Advocate if there was any direct authority on the point, whether the interest paid on raising capital for purchase of the property had been allowed or disallowed, and the learned Advocate stated that there was no authority under the Finance Act of 1963. He, however, stated that capital gains initially were covered by section 12-B(2) of the Income-tax Act, and there was authority to substantiate that proposition. The words "the actual cost to the assessees of the capital asset" appear in clause (ii) of subsection (2) of section 12-B of the Income-tax Act. It is reproduced below:- "(2) The amount of capital gain shall be computed after making the following deductions from the full value of the consideration for which . The sale, exchange or transfer of the capital asset is made, namely:-
(i) expenditure incurred solely in connection with such sale, exchange or transfer;
(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 10 and 12: Provided that where a person who acquires a capital asset from the assessee, whether by sale, exchange or transfer, is a person with whom the assessee is directly or indirectly connected, and the Income-tax Officer has reason to believe that the sale, exchange or transfer, was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange or transfer took place."
34. In an earlier part of this judgment, reference has been made to clause (4-A) of section 2 of the Income-tax Act for the purpose of showing that, by Act XI of 1966, an exception had been made in the case of capital gains by sale of immovable property. It would seem that initially capital gains by sale of immovable property were to be taxed under the Income-tax Act,* but an exception was created in clause (4-A) of section 2 of the Income-tax Act, since capital gains from immovable .Property were transferred to the Provincial list. However, by a comparison of the language employed in subsection (2), end first proviso thereto of section 16 of the West Pakistan Act, 1963, it would be clear that, in 1963, when capital gains on account of sale of immovable property became provincial subject, the Provincial Legislature did nothing more than to lift all the contents of subsection (2) of section 12-B of the Income-tax Act and inserted it in section 16 of the West Pakistan Finance Act. The learned Advocate, on such premises, states that, in so far as the principles, governing the imposition of tax are concerned, all such case law, which was formulated in interpreting sub-section (2) of section 12-B, or, clause (4-A) of section 2 of the Income-tax Act can be invoked in service for interpreting sub-section (2) of section 16 of the West Pakistan Finance Act, 1963.
35. Without doubt, subsection (2) of section 16 of the West Pakistan Finance Act, 1963, and subsection (2) with the first proviso of section 12-B of the Income-tax Act are statutes, which can be in pari materia. Patently, this section had always been considered to be relevant for interpretation of a later statute when the Courts deal with legislation on a particular point as followed appears to be same or similar. In such circumstances, the previous legislation always provides an indication as to how the subsequent legislation should be interpreted. This is more so when the subsequent legislation is couched in same or similar words as have been used in previous legislation. The argument gains further weight when it is found that some provision from the previous legislation has been virtually deleted and_inserted in subsequent legislation and the necessity had arisen by reason of the fact that the functionaries for enforcement of the law having changed such legislation has been enacted in a separate state at a subsequent time. In re: R. Vs. Loxdale 1(1758) 1 Burr. 445] and R. Vs. Palmer [(1785) 1 Leach CC], it was stated as follows:- "Where there are different statutes in pari materia though made at different times, or even expired, and not referring to each other, they shall be taken and construed together, as one system, and as explanatory of each other." It would thus be proper and in accord with sound principles of interpretation to examine the interpretation of section 12-B(1) of the Income-tax Act for the purpose of-truly understanding subsection (2) of section 16 of the West Pakistan Finance Act of 1963.
36- The first case, to which reference had been made by the learned Advocate for the petitioner in C. P. No. 796/1983, is the case of Commissioner of Income-tax vs. Mithlesh Kumari [(1973) 92 ITR 9] from the Delhi High Court. The facts were that the assessee had purchased perpetual lease-hold rights in an open plot of land for consideration of Rs. 95,000. The agreement had provided that the assessee was also to deposit a further sum of Rs. 5,000 either in cash or security on account of building security with the Delhi Improvement Trust. The assessee had raised a case that, for the purpose of payment, she had raised a loan from her mother-in-law, and she had paid a sum of Rs.
16,878 as interest. The same plot was sold by the assessee to her mother-in-law for Rs. 1,50,000 and, in the return under the Income-tax Act, the assessee had claimed the interest as a deduction. It was stated that the amount of loan had been taken for the purchase of land. The assessee had also claimed a sum of Rs 3,793 paid by her as ground rent, and a sum of Rs. 5,000 which had been paid by her as penalty. The Income-tax Officer disallowed the deduction to the extent to which the claim was made on the ground of payment of interest and ground rent. An appeal was made before the Tribunal, which allowed the deductions in respect of -interest and ground rent. The learned Judges formulated the question as reproduced at page 12 of the report in the following words:- "The question for consideration is whether the interest paid by the assessee to her mother-in-law and the ground rent paid to her may be included in the actual cost of the land to the assessee within the meaning of section 12-B(2)(ii) of the Act."
It seems the Income-tax Officer had not allowed interest as capitalised expenditure by adopting the reasoning that the actual cost of the capital asset would include only such expenses of a capital nature that have been incurred, but would exclude any expenditure in respect of which allowance is admissible under any provisions of sections 8, 9, 10 and 12. He came to the conclusion that, since the claim of interest was admissible only as provided by section 10 of the Income-tax Act, therefore, deduction on account of payment of interest was not allowed. In the report, it is stated that the Appellate Assistant Commissioner gave no reason for the order, whereby the assessee's claim for interest was disallowed-, for he also came to the conclusion that, if interest is allowed under sections 8, 9, 10 and 12 of the Income-tax Act, it could be included in the actual cost of the capital under clause (ii) of subsection (2) of section 12-B of the Income-tax Act. He went on to state that, if deduction in respect of interest actually paid is not covered by the four sections of the Income-tax Act, then it cannot be allowed. He also stated in the order that the capital asset was an open plot of land, and there was no building, -and therefore interest could not be allowed.
Before the High Court, Mr. B. N. Kirpal, who appeared for the "Revenue, had contended that the actual cost of the capital asset to the assessee is the actual cost to the assessee as on the date of acquisition of the capital asset and does not include expenditure which the assessee may have incurred subsequently, except what was specifically mentioned in clause (ii) of subsection (2) of section 12-B of the Income-tax Act, namely, the expenditure of a capital nature incurred and borne by him in making any additions and alterations in the capital asset. It was averred on behalf of the Revenue that the interest paid by the assessee did not come within the category of expenditure incurred for making any additions or alterations to the capital asset, and therefore, should not be included in actual cost of the capital asset. The learned judge referred to two cases from the Calcutta High Court and the Bombay High Court, namely, Commissioner of Income- tax vs.-Fort Glaster Industries Ltd. [(1971) 79 ITR 18] and the case of Habib Hussain vs. Commissioner of Income- tax [(1963) 48 ITR 859]. The first of these cases was from Calcutta High Court and the second from Bombay High Court. The learned Judges also expressed that the dictionary meaning of the word "cost" is what is laid down or suffered to obtain anything, and the words "actual cost to the assessee" according to the learned judges, meant what the assessee has, in fact, expended or laid out for the purpose of acquiring the assets. The Delhi High Court in such context expressed their view in the following words:- "We really see no justification for putting the construction on the words the actual cost to the assessee of the capital asset which the learned counsel for the revenue seeks to put on them, namely, that the actual cost of the asset is its cost on the date of its acquisition. By putting such a construction we would be qualifying the words used in clause (ii), in a manner which could not have been intended by the Legislature. We cannot also accept the construction sought to be put by the learned counsel for the revenue on the words including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto as meaning that it is only the expenditure incurred in making additions or alterations to the capital asset that can be included in the actual cost of the capital asset and that other similar items of expenditure cannot be so included. It would be reasonable, in our view, to include in the actual cost of the capital asset all expenses which were incurred by the assessee in acquiring the capital asset as distinct from the items of expenditure which were incurred by him for retaining or maintaining the capital assets."
In a subsequent passage in the same judgment, the Delhi High Court also expressed as follows:- "We are in respectful agreement with the observations of the Calcutta and the Bombay High Courts in the decisions referred to above. In the present case, we find that the assessee in order to purchase the land had .Not only to borrow the amount of Rs. 93,000 which was the consideration for the purchase of the land, but also had to pay interest of Rs. 16,878 on the amount borrowed by her. The amount of Rs.95,000 plus the interest paid by the assessee constitutes the actual cost to the assessee of the land. The fact that the amount of Rs.95,000 was paid by the assessee to the vendor and the amount of interest of Rs. 16,878 was paid to a different person, namely, her mother- in-law, does not make any difference so far as the assessee is concerned in respect of the actual cost of the land to her. It will not also make any difference whether the interest was paid on the date of the purchase or whether-it is paid subsequently to exclude the interest amount from the actual cost of the asset would lead to anomalous results. Supposing she had purchased the land for Rs. 1,00,000 by raising a loan of that amount and had paid interest of Rs. 20,000 on the said loan and had sold land for Rs. 1,20,000. It would be unreasonable to hold under such circumstances by excluding the interest amount from the actual cost of the land that she had made a capital gain of Rs. 20,000 when, as a matter of fact, she had not made any profit at all by the transaction. Applying the said observations of the Calcutta and the Bombay High Courts to the present case, we hold that the Tribunal was right in adding the interest amount of Rs. 16 b7h towards the actual cost of the land." On such process of reasoning, the Delhi High Court held that interest paid to obtain capital for purchase of capital asset was a legitimate deduction allowed under sub-section (2) of section 12-B of the Income-tax Act. We may point out that this case related to purchase of an open plot of land.
37. The next case to which reference may be made is a case of Chalapalli Sugars Ltd., v. The Commissioner of Income-tax [(1975) ITR 167], which was decided by the Supreme Court of India. No doubt, this case pertained to deduction on account of payment of interest on borrowed capital, which was paid for acquisition and installation of plant and machinery for a sugar mill. The words, that came up for consideration, were "actual cost", as distinct from the words "actual cost to the assessee", with which we are concerned in the instant case. The words "actual cost" have been used in section 10(5) of the Income-tax Act, 1922. The facts were that the assessee in that case had borrowed considerable sums of money from the Industrial Finance Corporation of India for installation of sugar producing machinery and plant, and for the assessment year in question he had paid Rs. 2,38,614 as interest. The case of the assessee was that the payment of interest had added to the cost of machinery and plant, so that, while calculating depreciation, the interest paid should be treated as part of the cost of machinery and plant. The Income-tax Officer rejected the claim on the ground that interest paid was an admissible item of revenue expenditure and depreciation should not be allowed on the capitalised amount of expenditure incurred on account of interest. In appeal, the Appellate Assistant Commissioner reversed the decision by holding that interest should be added to the cost as in fact it was the cost of -maintaining the borrowal, and therefore, it formed part of the capital cost. A reference was made to the High Court, and it was held that, where the plant is constructed out of borrowed money, the interest on the loan up to the date of commencement of business could not be capitalised or treated as part of the actual cost of the plant. The assessee then filed an appeal before the Supreme Court of India. The learned Judges of the Supreme Court of India considered the words "actual cost" in detail. Reference was made to several authoritative books on accountancy and auditing. A passage, appearing "Higher Book-keeping and Accounts" by Cropper Morris and Fison was reproduced in the report, which reads as follows:- "Capital_expenditure over a long period must perforce involve the question of interest as an additional Cost. If the work were undertaken by an independent contractor he would, of course, take interest into account when preparing the estimates on which to base his tender. The final cost of construction work is made up of the cost of the machinery, materials, labour, supervision and establishment charges, plus interest on the capital employed which, but for its employment in that way, would be invested in good securities paying a reasonable rate of interest."
The learned Judges also referred to section 20-B of the Indian Companies Act of 1956, which provides that the Company may charge the sum paid by way of interest to capital as part of the cost of construction of the work or building or the provision of the plant. At page 175 of the report, the learned Judges of the Indian High Court summed up their conclusions in the following words:- "It would appear from the above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition, In case money is borrowed by a newly started company which is in the process of constructing and creating its plant, the interest incurred before the commencement f production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutary definition or other indication to the contrary."
The learned Judges of the Supreme Court of India had also considered the judgment of Lord Atkin in the case of Corporation of Birmingham vs. Barnes, [[1935) 19 TC 195] and a wealth of other case law on the subject, including the cases of India Cements Ltd., vs. Commissioner of Income-tax [(1966) 60 ITR 52], Commissioner of Income-tax vs. L. G. Balakrishnan and Bros. [(1974) 95 ITR 284], Commissioner of Income-tax vs. J. K. Cotton Spg. & Wvg. Mills Ltd. [(1975) 98 ITR 153] and either distinguished those cases or disagreed with them, except in the case of Income-tax Commissioner vs. L.G. Balakrishnan and Bros, lt seems that there was a cleavage of opinion in the Indian High Courts, because the High Court of Bombay in the case of Habib Hussain [(1963) 48 ITR 859] and the High Court of Calcutta in the case of Standard Vacuum [(1966) 61 ITR 799], had taken a view that interest paid could be allowed as a deduction, but, on the other hand, the High Court of Andra Pradesh in the case of Commissioner of Income-tax vs. Challapalli Sugars Ltd. Had taken a different view. The Andra Pradesh view was examined by the Supreme Court of India and dissented from, so that the authoritative pronouncement now in India is the same as in the cases from Bombay and Calcutta.
38. Another case from the Sind High Court is also relevant in the context. This is a case of the Commissioner of Income-tax vs. Messrs Pakistan Progressive Cement industries Ltd., which was registered in this Court as I. T. C. No. 114/1973. The facts in that case were that a Transaction had been entered into between the original owners of a cement factory and-the assessee in this case.
According to the agreement, a part of the price had been paid, and the balance of the price with interest was payable by sale of cement produced in Pakistan and exported to India. The assessee claimed interest as a deduction under section 12(2)(iii) of the Income-tax Act. Such deduction was not allowed by Revenue, so that the case came up to the High Court. The learned Judges in paragraph 32 of the judgment distinguished two situations, one which arises when interest is paid on account of borrowing the capital for the purposes of business, and second when it is paid for purchase of the capital asset on long term credit. The High Court answered this question against the assessee, because, on facts, it came to the conclusion that the borrowing of capital could not entitle the assessee to a deduction. In fact, the Division Bench held that there was no borrowing of capital, and, as we understand, in fact, the factory had not even been purchased. We would, therefore, think that the concept of deduction enunciated in this case is the same as we understand in these cases also, but, since there was no borrowing for the purpose of business, or, for purchase of the capital asset, the deduction was disallowed. Even this case goes in favour of the petitioner.
39. The actual words used in section 16 of the West Pakistan Finance Act, 1963, are "actual cost to the assessee". The words "actual cost" and "to the assessee" are indeed significant, and not without relevance. The significance clearly is that such cost has to be deducted, which the assessee actually incurs. The stress is on the word "actual". In the present day of complex society instances are not unknown when the capital assets are often purchased with borrowed capital, such borrowed capital generally I carries interest, In these circumstances, if interest is actually paid to maintain the borrowing, then such interest becomes a part and parcel of the cost, which the assessee has to bear. It is thus "cost to the assessee". Even under the Companies Act interest on money borrowed by a Company to defray expenditure on the construction of any building, structure, or, works, or, expenditure, which is allowable as a deduction in computing a gain on the disposal of the said building, structure, or works is similarly allowable, provided it is referable to a period, or, part of the period prior to the disposal and the Company has charged such borrowing to its capital. Again, in the book "Capital Gains Tax" by Wheatcroft and Whiteman, Second Edition, topic 18-12, the same concept has been reiterated in the following words:- "However, a company may deduct interest in a capital gains tax computation where it has incurred expenditure on the construction of a building, structure or works, that expenditure was defrayed out of borrowed money and the interest was charged to capital, In such circumstances, the interest so paid may be deducted in computing the gain on a disposal of the building, etc." The argument then boils down to the principle, whether the borrowing has become a part of the capital, and, if any interest has been paid, a deduction even to that extent has to be allowed. Such interest within the meaning of section 16(2) of the West Pakistan Finance Act of 1963 will become the actual cost to the assessee.
40. Some documents have been placed on the record to show that interest has been paid. We have not thought it proper to examine those documents and arrive at our own conclusions in regard to the quantum of interest actually paid. This may require a more detailed enquiry for arriving at conclusions. Such factual enquiry is normally not undertaken by the High Court in exercise of its Constitutional jurisdiction. We will, in these circumstances, direct the E. T. O. To re- open this case, and also determine the amount of interest that has been paid by the petitioner in C. P. No. 796/1983 for borrowing a sum of Rs. 60 lakhs from the total price paid by the petitioners for the purchase of this land. Whatever interest is found to have been paid by the petitioner shall be allowed as a deduction.
41. In the result, we allow all the seven petitions before us, and quash the impugned orders in each one of these cases. We further direct the assessing authority viz. The Excise and Taxation Officer to re-open the cases, and determine the actual capital gain derived by each one of the assessees by sale of the property, which is the subject-matter in each one of these cases. In the performance of these functions the Assessing Authority shall follow all the principles, procedural as well as substantive, as have been enumerated in the body of this judgement. In addition, the Assessing Authority shall also in C. P. No. 796/1983 determine the actual amount of interest that has been paid by the petitioner/assessee for borrowing the capital to purchase the property. The petitions are allowed to the extent indicated above. In the circumstances of these cases, we leave the parties to bear their own costs.