ORDER: SALEEM ASGHAR MIAN, CIT (A).--1. The appellant, an individual, is aggrieved with the orders passed under section 62 for the assessment years 1978-79 and 1982-83 and under section 62/65 for the assessm ent years 1984-85 and 1985-86 and are disposed off as follows.
Assessment year 1978-79
2. The proceedings had been initiated through issuance of a notice under section 56 of the Income Tax Ordinance, 1979 to which the appellant had not complied. The Department had received information that the appellant had purchased a Plot No, 15-Jail Road, Lahore, measuring 18 marlas 15 sq.ft. for a consideration of Rs, 55,000/-. This was felt to be grossly understated as it was in the mids of car dealing business. Notices under section 62/13(2) of the Income Tax Ordinance 1979 had been issued on 22nd August, 1988 confronting the appellant with the price of Rs, 10,000/- per marla.
The appellant had replied that in the first instance, notice under section 56 was illegal and further more, registered deed had been submitted in support of the purchase. The ITO was of the opinion that this being a new case, it was not hit by limitation of time and section 56 was quite applicable.
The ITO also discarded the purchase deed as satisfactory proof regarding the value relying on the Supreme Court's decision quoted as (1976) 34 Tax 42 (S.C.Pak.) wherein it had approved all valuation to be adopted on the basis of sales which had taken place in the vicinity. He had, therefore, kept in view the sale price adopted by the Capital Gain Authorities of a neighbouring plot and with the prior approval of the IAC had adopted the same at Rs, 10,000/- per marla and the difference of Rs, 1,32,222/- was charged to tax under section 13(1)(d) of the Income Tax Ordinance, 1979, a source which could not be applied to the assessment years prior to the enforcement of the Ordinance. In a decision cited as (1987) PTD (Trib.). I, = PTCL 1987 CL-194). the issue of applicability of section was examined in detail in the latest majority decision by the learned Income Tax Appellate Tribunal vide ITA No, 6759/LB of 1985-86 (Now reported as PTCL 1990 CL. 1) and it was held that a notice under section 56 could not be issued for the assessment years prior to the enforcement of the Income Tax Ordinance, 1979. Further more, addition under section 13(1)(d) for assessm ent years prior to the introduction of the Income Tax Ordinance, 1979 was also held to be illegal as there is no provision in law for its retrospective application of section 13(1)(d). Also no A specific opportunity was given to the appellant to explain the nature and source of the proposed addition of Rs, 1,32,222/-which is a Sine qua non and as has been held in ITA No, 2526/LB/86-87, such addition has been deleted.
3. Considering the legal defects as discussed above, and relying on case law and the order of the Assessing Officer is I held to be without lawful authority and is hereby annulled.
Assessm ent year 1982-83
4. The proceedings for this year had been initiated through notice under section 65. It was served on the appellant but no response was made. It was contended by the appellant that the issuance of notice under section 65 being barred by time was, therefore, illegal. The ITO was of the opinion that a notice under section 65 can be issued within five years from the end of the assessment year in which income of the assessee was first assessable and since the first year of assessment of income for the period ending 30th June, 1982 expired on 30th June, 1983, the period of five years ended on 30th June, 1988. As such, the notice was within time. The ITO had obtained information that the appellant had purchased a plot in Sher Shah Block, New Garden Town, Lahore, measuring 2 kanal and 4 marlas on 18th July, 1981 for Rs, 80,000/- on which a house had been built. Since Garden Town is a posh locality, the value declared was felt to be understated and notice under section 62/13(2) had been issued in which the appellant's attention was drawn to the auction of plots in nearby schemes which had higher prices.
5. It was agitated by the appellant the area was low-lying and was occupied by illegal settlers.
There was also stated to be no road in that area. As regards the source of investment, it was stated to be meted out of a loan from an agriculturist for which relevant documents were submitted and the loan was accepted. However, the declared purchase price was not found to be satisfactory for various reasons recorded in the body of the order and after obtaining permission of the IAC, the plot was estimated at Rs, 5,00,000/- and the addition of Rs, 4,20,000/- made under section 13 (1)(d) of the Income Tax Ordinance, 1979. The appellant had also built double-storeyed building on the said plot during this period for Rs, 4,95,000/-. The covered area of the house is 3767 sq.ft. The construction was considered to be excellent and the cost of construction as disclosed by the appellant was worked out to Rs, 131/- per sq.ft. which was considered low and the appellant was confronted under section 13(2)/62 of the Ordinance estimating the cost of construction at Rs, 180/- per sq.ft. As the explanation tendered was not considered plausible, the ITO had determined the same at Rs, 180/- per sq.ft. under section 13(2) and the difference between the declared price and that worked out by the ITO amounting to Rs,1,88, 060/- was also added to the income of the appellant under section 13(1)(d) of the Income Tax Ordinance, 1979, after obtaining prior approval of the IAC, Range-II, Zone-B, Lahore.
6. It has been agitated that no return had been filed by the appellant on the ground that notice under section 65 was null and void. The impugned assessment order was further assailed for the following reasons:--
1. The assumption of jurisdiction by the ITO was mechanical there being no provision in the Income Tax Ordinance for a combined notice under section 56/65. Further more, if the notice was issued under section 65 it was neither in the prescribed form nor did it mention any of the conditions under section 65 which could justify its issuance;
2. Further more, the ITO should have obtained the approval of the IAC for issuing the notice under section 65 which from the record is not verifiable or also should have had definite information that income had escaped assessm ent. It was, therefore, argued that the notice was illegal and it tendered the entire super-structure of assessment as illegal and without lawful authority. The additions made under section 13(1)(d) were also assailed because the provisions of section 13(1)(d) were agitated to be not applicable to the facts of the present case as the appellant had neither maintained any books of accounts nor made any declaration of assets under section 58 of the Income Tax Ordinance, 1979. For this, the Counsel placed reliance on the decision of the Income Tax Appellate Tribunal cited as (1986) 54 Tax 85 (Trib.). Also placing reliance on:--
(a) PTCL 1989 CL 278.
(b) PTCL 1989 CL. 1.
7. It was argued that a specific opportunity to explain the nature and source of the proposed addition which sine qua non was not provided resulting in the addition being illegal. The approval also was agitated to be illegal as the approval of the additions preceded the approval of estimates and as has been held by the higher courts that a mechanical approval is no approval in the eyes of law. Again, the cost of construction worked out by the ITO was argued to be excessive and in support a case ITA No, 5774/LB/86-87 was cited wherein the cost of construction of a residential house for the assessm ent year 1984-85 had been determined at Rs, 100/- per sq.ft.
8. After examining the various factors and placing reliance on the decision cited (1988) PTD (Trib.)
973 and 1989 PTD (Trib.) 1141 the notices issued are held to be illegal. Further more, again as envisaged by law to make additions under section 13(1)(d) has not been followed and following the decision of the Income Tax Appellate Tribunal in (1984) 50 Tax 45 (Trib.) the same is held to be without lawful authority and the assessment is hereby annulled.
Assessment years 1984-85 & 1985-86
9. The assessm ents for the assessment years 1984-85 and 1985-86 have been framed under section 65/62. In both these instances, the appellant had not responded to the notice issued under section 65 and no return had been filed suo mote. During the assessment year 1984-85 the appellant had purchased a Plot No, 259-G, Model Town, Lahore measuring 2 kanal 5 marlas for Rs, 1,10,000/-. As the Department felt that the Model Town was posh locality, notices were issued to the appellant to explain why the same had been understated and why the purchase price should not be determined at Rs, 6,60,000/- per kanal citing cases of adjoining localities. The appellant's response regarding the plot being occupied by illegal squatters and it being low-lying was not accepted but the source of investment which had been met out from a loan from Sardar Mohammad Islam Khan, an agriculturist was accepted. For the declared purchase price, the appellant's contention was not accepted as he was not able to produce support of the claim that unauthorized persons were occupying the plot and because Model Town Flats were more expensive, the estimate of the purchase price was made at Rs, 2,75,000/-per kanal under section 13(2) of the Income Tax Ordinance, 1979, with the prior approval of the IAC. The difference between so determined and the one that declared amounting to Rs, 5,08,750/- was added to the income of the appellant under section 13(1)(d) of the Ordinance.
10.For the assessm ent year 1985-86, the appellant had purchased plot bearing khasra No, 317 in Lahore Cantonment measuring 1 kanal 13 marlas 150 sq.ft. and a plot at khasra No, 316 measuring 2 kanal 10 marlas. The appellant had set-apart a piece of land measuring 18 marlas and 07 sq.ft. on which a double-storeyed commercial building known as "Aslam Plaza" had been built from which rental income had been declared for the first time in the year 1986-87. Covered area of both the floors was 2433 sq.ft. each. The cost of construction had been declared at Rs, 3,75,000/-. Regarding the source of investment for the acquisition and construction of properties, the appellant stated that he obtained a loan of Rs, 4,90,000/- from his brother-in-law, Ch. Habib Ullah. Necessary evidence was filed and the said creditor was also summoned by the Department and after obtaining details of sources of income, the declared quantum of investment was accepted. The Department felt that the plots were situated in one of the most attractive developing localities and the rates declared did not match with those of other properties at that time. Notices under section 62/13(2) of the Income Tax Ordinance, 1979, were issued confronting the appellant with the gross understatement. The appellant replied that at the time of purchase, both the plots were agricultural tracts. The ITO however, felt that the size of the plots is small and it is difficult to have agricultural land measuring less than 12.5 acres and the fact that the appellant had built a commercial building over there shows that these were not agricultural lands. He therefore, estimated the purchase price at Rs, 10,000/- per marla under section 13(2) and after obtaining permission from the IAC, worked out the total purchase price at Rs, 8,82,666/-. The difference in the value worked out and that declared amounting to Rs, 6,82,666/- was added to the income of the appellant under section 13(1)(d) of the Income Tax Ordinance, 1979, after obtaining relevant permission from the IAC. The covered area of Aslam Plaza as per plan was 4836 sq.ft. where as the appellant had shown the same to be 4000 sq.ft. with the cost of construction of Rs, 3,50,000/- yielding rate of Rs, 87/- per sq.ft. This was considered as low. The appellant was asked to explain why Rs, 172/- per sq.ft. and Rs, 163/- per sq.ft. for the ground floor and the first floor respectively should not be applied as the same had been declared in a parallel case. As the appellant did not tender any explanation regarding the discrepancy in the covered area, the same was adopted at 2433 sq.ft. each. The appellant's explanation that the cost of construction was low because that had no wooden work and was very simple was also not accepted and it was worked out at Rs, 172/- and Rs, 163/- per sq.ft. under section 13(2) of the Income Tax Ordinance, 1979 with the prior approval of the IAC. The total cost worked out to Rs, 8,15,055/-. The difference between the cost of construction worked out and the one declared by the appellant amounting to Rs, 4,65,055/- was added to the income with the prior approval of the IAC.
11. The appellant has again agitated that both these assessments are illegal. There being no provision in law for a combined notice under section 56/65 and the assessment orders have been passed in pursuance of notice under section 65 which is neither in the prescribed form nor mentioned any of the conditions under section 65 which could justify its issue. Further more it was agitated that provisions of section 13(1)(d) were not applicable to the appellant's case and the estimates under section 13(2) had been made without confronting the appellant with full facts of the similar transactions. No notices had been issued under section 13(1) for addition of specific amount under section 13(1)(d) and approval was also argued to be mechanical.
12. The facts and arguments regarding the illegality of notice under section 65, the proceedings under section 13(2) and 13(1)(d) are similar to those as for the assessment year 1982-83. For the reasons discussed in detail for that assessment year, both these assessments are held to be illegal and are hereby annulled.