JUDGMENT: ABDUL KADIR SHAIKH, J.--1. Appellant is a private limited company established to operate as Woollen Yarn Manufacturers. In the assessment year 1981-82, there was no business activity as the factory of the appellant was in the stage of erection and trial production. The appellant filed Nil Return for the year 1981-82. The computation of the return was as under:-- {{TABLE}} Trial & Test production expensesRs. 47,01,490.19 Less realised from trial test production Rs. 44,87,562.40 Capitalised & Allocated: Rs. 2,13,927.79 To building Rs. 71,310.00 To plants and Machinery Rs. 1,42,617.79. {{TABLE}}
2. According to the appellant no profit an loss account was prepared as the factory was still in the proces of erection and installation and had not yet started commercial production. All the detailed evidence, explanation, Books of Accounts, photostats of the vouchers were produced and the necessary explanations were given and placed on record. The Income-tax Officer after due scrutiny stated in the assessm ent order for the year as under:-- "Having consider the entire circumstances o- the case, the claim of the Assessee-company appears to be well-founded, gain resulting from the transaction in the fixed assets i.e. building, land, plant and machinery which was not commercially operated and were subject to trial run has correctly been claimed as the Capital Gain. The same shall therefore be accepted as such."
However, the Income-tax Officer created a demand of Rs. 3,74,806, which amount was paid by appellant on 28th May, 1983.
3. The appellant filed an appeal against the order of the Income-tax Officer before the Commissioner of Income-tax, which was yet pending when the dispute came up before the High Court.
4. On 18th September, 1984 appellant received a notice under section 65 of the Income-tax Ordinance, 1979, alleging that the income assessable to income-tax for the year 1981-82 has escaped assessm ent to which he made a reply dated 25th September, 1984 as under:-- Re: M/s. Arafat Woollen Mills Ltd. Assessment year 1981-82.
"Please refer to your notice under section 65 of the Income-tax Ordinance, 1979, dated 18th September, 1984 for assessm ent year 1981-82 received on 19th September, 1984, by our above named client.
On behalf of our above named client, we have to submit as under: (1)The notice is illegal and ultra vires and without any jurisdiction as the assessment was made by you under Section 62 of the Income-tax Ordinance, 1979 and full investigation of the information available, and the assessm ent order also comprised 6 foolscap pages. We understand that this order was approved by the then Inspecting Assistant Commissioner of Income-tax. Hence the question of escapement or under assessment of income for assessment year 1981-82 does not arise.
(2)Moreover, in the absence of any new information (after completion of the assessment), the notice is illegal in view of Section 65 (ii) of the Income-tax Ordinance, 1979.
We, therefore, request you to kindly withdraw the said notice issued by you. A letter of authority in our favour is enclosed.
Thanking you, Sd/- Hyder Bhimji & Co."
5. No reply was received by the appellant, but on 20th January, 1985 they received a notice under Section 61 of the Ordinance to which appellant made a reply dated 22nd January, 1985. On 26th January, 1985, however, appellant received another notice, with a letter, wherein for the first time it was mentioned that the above-said completed assessment was being reopened and the statutory notice under section 65 of the Ordinance had already been served.
6. In the circumstances, appellant filed a Constitution petition in the Sindh High Court challenging the vires of the notice dated 18th September, 1984 issued under Section 65 of the Ordinance.
7. In reply, the case set up by the Income-tax Officer was that the income of the appellant earned by sale of assets was not taxed, therefore, the same can be termed as not assessed. In this connection it was also asserted that the appellant had installed the machinery, commenced the production, and initiated normal business activity, but the former Income-tax Officer by mistake and oversight made the assessm ent on certain items in such a manner that the taxable income escaped assessm ent.
8. On behalf of the appellant it was inter alia submitted as under:--
(a) The escaped income means evasions, accidental or inadvertent omission as such no condition exists for issuing notice under section 65 of the Ordinance. On the part of the assessee there is no failure to submit all material and primary facts for the purpose of assessment which I.T.O. has considered in his order.
(b) The assertion as contained in comments is mere change of opinion on the facts already before him. It amounts to review and it is not contemplated under section 65 of the Ordinance.
(c) The Inspecting Assistant Commissioner before grant of approval has to apply his mind which he did not in this case, therefore the notice issued under section 65 is without jurisdiction.
9. Learned Judges of the High Court, however, dismissed the Constitution petition for the reasons which may be reproduced hereunder:-- "Only notice has been issued to the petitioner and he is called upon to submit his reply. The petitioner would have fair opportunity to show that the notice has been issued wrongly and not on any new material. The respondent has not to disclose all the material in the notice. It would be pre- judging the entire facts before hearing the other side. It is only a tentative opinion which may ultimately terminate in the discharge of the notice. The petitioner has alternate remedy under the Ordinance. Under Section 129 appeal lies to the Assistant Commissioner. Under Section 134 appeal is provided to the Appellate Tribunal. Under Section 136 reference can be made to the High Court and under section 138 the Commissioner has the revisional powers. These are the adequate and efficacious remedies provided under the law. The proper investigation would be made by the authorities under the Ordinance and as the facts have been disputed by the respondent therefore the present petition is not maintainable and the same is hereby dismissed with no order as to costs."
10.Leave to appeal was granted by this Court as the points canvassed in support of the petition for leave to appeal were under examination in another appeal being, Civil Appeal No. K-1 of 1983 (Edulji Dinshaw Limited v. Income-tax Officer now reported as PTCL 1990 CL. 604).
11.At the hearing of the appeal Mr. S.A. Wadood, learned counsel for the appellant made several submissions, firstly, that the learned Judges in the High Court erred in not appreciating that assumption of jurisdiction by the respondent in the matter being unlawful, could be assailed by way of Constitution petition, inasmuch as, the matter already stood decided by a competent Income-tax Officer by his detailed/considered order and, as such, the respondent has no jurisdiction to reopen the matter on a mere change of opinion.
12. The learned counsel further submitted that before having recourse to section 65, the Income- tax Officer must have a reason to believe that the profits and gains chargeable to income-tax had escaped assessm ent, or were under-assessed, and that these facts were due to an omission or a failure on the part of the assessee to disclose fully and truly all the material and/or primary facts necessary for the assessm ent for the year in question. Once the assessee completely and truly disclosed all the material and primary facts, the Income-tax Officer would have no jurisdiction to reopen the case under Section 65. In the instant case, the appellant had disclosed all the material and primary facts, and the Income-tax Officer who dealt with their case after due consideration allowed the amounts in question as " capital gains", by a detailed and well-considered order, the case subsequently could not be reopened, on mere change of opinion, by the same Income-tax Officer or his 'successor, or on the basis of alleged oversight or mistake on the part of the assessing authority.
13.The learned counsel further urged that the learned Judges in the High Court erred in construing the approval of the Inspecting Assistant Commissioner as due fulfilment of the requirement of law to reopen the case under section 65 of the 1979 Ordinance, when in fact the approval is ex facile illegal and of no consequence in law, and therefore the Income-tax Officer acted illegally and without lawful authority in reopening the case under section 65 on the basis of the said approval and on his own initiative based on mere change of opinion.
14.The learned counsel then referred to a passage from the impugned judgment wherein learned Judges reached the conclusion that mere change of opinion is no ground for initiating proceedings under section 65 of the 1979 Ordinance. In this regard, the contention was that the learned Judges should have at once held that the impugned notice was void in law and not left the appellant to seek alternative remedy.
15.Learned counsel further submitted in this behalf that where jurisdictional defect is apparent on the face of the record, and initiation of proceedings is a colourable exercise of power, presence of an alternate remedy would not affect maintainability of a Constitution petition, and a writ of Certiorari would be issued to quash such proceedings. In the instant case, learned counsel submitted, the alternative remedy is neither adequate nor efficacious and, on the contrary is cumbersome and would put the appellant to harassment.
16.On the other hand, Mr. Shaikh Hyder, learned counsel for the respondent, while supporting the judgment of the High Court, submitted that the Appellant Company was formed to operate as Woollen Yarn Manufacturers, and under its Memorandum of Association, it is to carry on business actively, and the sales of the plots, buildings, machinery etc., were made in consonance with the Object Clause of the Memorandum of Association. Therefore, the contention of the Appellant Company that the proceeds of the aforesaid sales were 'Capital Gains' is not correct. According to the learned counsel, the information gathered by the Income-tax Officer from the return of the Company for the subsequent year vested in him the jurisdiction to initiate re-assessment proceedings by issuing a notice under section 65 of the Ordinance, and he also obtained the requisite permission of the Inspecting Assistant Commissioner in this behalf, therefore, the action taken by him was lawful and within his competence in law.
17.Learned counsel then submitted that the observations of the High Court that "the mere change of opinion" is not the ground for reopening a closed assessment, is based on the observation made by the High Courts and the Supreme Court of India on the basis of provisions of section 34 of the Income-tax Act, 1922 and sections 147 and 148 of the Indian Income-tax Act, 1962, which are not pari materia to provision of section 65 of the Income-tax Ordinance, 1979, and therefore, the pronouncements of the High Courts and the Supreme Court of India on the aforesaid sections do not lay down the correct law, applicable to the provisions of section 65 of the Income-tax Ordinance. In this behalf, learned counsel cited the cases:-- (1)Sutlej Cotton Mills v. CIT. (1965) PTD 465; (2)M/s Escorts Ltd. v. I.T.O. Lahore (PLD 1975 Lahore 443); (3)Begum Nusrat Bhutto v. I.T.O. (PLD 1980 Lahore 449); and (4)Muhammad Haneef Monnoo v. I.T.O., Lahore (now reported as PTCL 1984 CL 291).
18.The learned counsel, therefore, submitted that the Income-tax Officer is vested with jurisdiction to initiate proceedings either on the basis of definite information or on the basis of permission granted by the Inspecting Assistant Commissioner.
19.According to the learned counsel the expression "discovery of new facts" is borrowed from the English Income-tax Act, 1918, and the expression relied upon by the learned counsel for the appellant "once all the primary facts are disclosed" does not find place in section 65 of the Ordinance and reliance, therefore, cannot be placed on these expressions in view of the different language now employed by the Legislature.
20. After having heard lengthy arguments in the light of the record before us and also the principles of law laid down in the several cases cited before us, we proceeded to hear the case on merits because the entire record pertaining to the Tax Returns of the Appellant Company is before us, and there is no other document or information which can have any bearing on the decision in the case.
It is clear from the Tax Return filed by the appellant for the year 1981-82 that all the detailed evidence, explanation, books of accounts and other possible information were produced and placed on record, and the Income-tax Officer after full inquiry passed the Assessment Order and created a demand of Rs. 3,74,806, which amount was paid by the appellant on 28th May, 1983. The assessm ent order shows that full dressed arguments in writing were considered by the Income-tax Officer on the question whether the proceeds of sales of the plots, machinery etc., which are subject-matter of the impugned notice under section 65 of the Ordinance, were "capital gains" or "revenue income". These written arguments consist of several typed pages, and it was thereafter that the Income-tax Officer held that:-- "the claim of the assessee-company appears to be well-founded. Gains resulting from the transaction in the fixed assets i.e. building, land, plant and machinery which were not commercially operated and subjected to trial run have correctly been claimed as 'capital gains'. The same shall therefore, be accepted as such."
In this regard, it is useful to reproduce relevant portion of the assessment order. It reads: "The written arguments of the counsel have been examined in depth in the light of above-quoted status as also in the light of statutory position containing both prior to the sale of the asset as also after the transaction had taken place. The factual position as it emerges from all the above narration is that:-- The factory was initially installed with the object of earning profit from the manufacture and sale of carpet yarn, land, building, machinery etc. were obtained by the assessee-company for the above-stated purpose.
The factory was in the process of installation and trial run when uncertainty in the international market for carpet exports caused the whole carpet trade serious losses during the year 1981-82.
This fact is borne out by trading results declared by carpet manufacturers during the year as well as market reports and bulletined etc. published at that time. This factor led the assessee-company to have second thoughts about commercially operating the above woollen mill as the whole carpet trade appeared to be economically not feasible. Meanwhile the assessee-company got an offer to sell the entire fixed assets i.e. land, building, machinery. Even before commercial production had started and worked out the expected profit on this offer which comes to over 44 lacs as per working shown above.
The nature of this profit on disposal of fixed assets (Rs. 44 lacs) is claimed to be that of a capital gain.
Having considered the entire circumstances of the case, the claim of the assessee-company appears to be well-founded. Gains resulting from transaction in fixed assets i.e. building, land, plant and machinery which were not commercially operated and were subjected to trial run has correctly been claimed as Capital Gain. The same shall, therefore be accepted as such."
21. After having gone through the record of the case we find that no exception can be taken with the above view that prevailed with the Income-tax Officer. No other information or material, except what was already in possession of the Income-tax Officer who passed the assessment order, came within the knowledge or possession of the Income-tax Officer, who issued the impugned notice under section 65 as to justify the reason that any income received by the appellant-company and chargeable to tax under Ordinance had escaped assessment. In the counter-affidavit filed by the Income-tax Officer in the High Court it is categorically stated "the then Income-tax Officer by mistake and oversight as regards the points of facts and law made an assessment (on the basis of Capital Gains). It is however stated further in the counter-affidavit that "certain items of taxable income escaped assessm ent which came to light at a later stage", but was not put into confidence of these items at all. It is the un-controverted position that the Income-tax Officer as well as the Inspecting Assistant Commissioner who gave the previous approval for initiating proceedings under section 65 of the Ordinance acted on the same material that was produced and made available to the previous Income-tax Officer who had passed the assessment order which is sought to be reopened.
22.Since we are of the same view that prevailed with the Income-tax Officer who passed the assessm ent order that the proceeds of the sales in question are "capital gains", and not "revenue income", the question of escaped assessment, chargeable to tax under the Ordinance, did not arise in the case so as to attract the mischief of provisions of section 65 of the Ordinance.
23. For these reasons, the appeal must succeed, the impugned judgment of the High Court dated 16th January, 1986 is set aside and the Constitution Petition filed by the appellant is allowed with the result that the impugned notice dated 18th September, 1984 and all subsequent notices dated 20th January, 1985 and 26th January, 1985 are declared as without lawful authority and of no legal effect, and the respondent is restrained from acting on the impugned notices or implementing the same or taking any further action in pursuance thereto himself or through any agency or in any manner whatsoever. The appellant shall also be entitled to costs.