1. SALEEM AKHTAR, J.---The petitioner is engaged in the business of manufacturing and trading in electric-electronic mechanical, chemical and other products including participating in the rendering of services to other enterprises. The petitioner participated in establishing and promoting several companies as well as M/s. Elmac Limited at Lahore in the year 1963-64 for manufacturing integrated circuits and other electronic goods. The petitioner had been financing M/s. Philips Electric (Pakistan) Ltd. And Elmac Ltd. It supplied plant, machinery and equipment to Elmac, on rental basis and also rendered technical services on which it was entitled to charges in terms of the agreement. Elmac Ltd. Suffered losses in business and ultimately decided to go in voluntary liquidation. In the accounting year 1979 the Liquidator of M/s. Elmac Ltd. Certified that it would not be possible for him to repay the debts of unsecured creditors as the assessee were not sufficient to repay the same. The petitioner therefore, wrote off the whole amount due to it from Elmac Ltd. As bad debts and claimed its adjustment against other income assessment in year 1980-81. The total amount of bad debts claimed was Rs. 1,94,21,709. The Income-tax Officer considered the claim under section 23(X) of the Income-tax Ordinance, 1979 and disallowed it. The petitioner filed appeal before the Commissioner of Income-tax, which was dismissed. It then filed a second appeal before the Income-tax Appellate Tribunal which by order, dated 20th June, 1983 allowed the total claim of bad debts. The department filed application under section 136, (1) of the Income-tax Ordinance, 1979 for referring questions framed by it to the High Court, but this application was also dismissed.
2. Thereafter the respondent did not agitate the matter in the available forum. The Income-tax Officer by order-dated 31-12-1983 finalised the assessment in terms of the order of the Tribunal.
3. On 26-2-1987 a notice -was issued by the Income-tax Officer, Company Circle B-3 Karachi informing the petitioner the grounds on which he intended to reopen the case as claim of Rs. 1,94,2- 1,709 was allowed illegally. The petitioner replied this notice by letter dated 1-3-1987 denying all these allegations. The petitioner pointed out -that the proposed action is based on change of opinion which is not permissible. The respondent did not agree and issued notice under section 65 stating that he had reasons to believe that the petitioner's income assessable to income tax for the assessm ent year 1980-81 has been under- assessed. The petitioner was required to deliver to him within 7 days a return the prescribed form. The petitioner challenged the validity of this notice by filing this petition on 21-4-1989 and within the prescribed time shown in the notice by way of abundant caution filed the return as well. By an interim order granted on 11-5-1987 the respondents were restrained from re-opening the assessment for the assessment year 1980-81 but the respondent No., 1 was allowed to send for the account books for the purpose of ascertaining whether bad debts for which adjustment was claimed was in fact written off in the said books of account in terms of the order of the learned Tribunal. Respondent No. 1 filed an application CMA 951/88 seeking modification of the said interim order on the ground that on 30-6-1988 the case will become time-barred. On 2-5-88 the respondent was allowed to pass an order with the condition that the same will not be implemented till the disposal of the above petition.
4. Mr. A.I Athar the learned counsel for the petitioner has contended that action taken by respondent No. 1 is based on mere change of opinion and not on the basis of any definite information received as required by section 65 and threfore, the action was without jurisdiction and of no legal effect.
5. The admitted position is that the petitioner had claimed allowance for the amount of bad debt, which in claimed to have written off as it could not be realized from Elmac Ltd. Which has gone in voluntary liquidation. The petitioner succeeded in appeal before the Tribunal, which was challenged by respondent No. 1, under section 136(1) but this application was also dismissed and the respondent No. 1 did not pursue the matter further. Therefore, as provided by section 136(6) finality was attached to the order passed by the Tribunal. The question is whether such an order which could be challenged under the procedure provided by the Ordinance if not challenged and accepted can be set aside by invoking section 65 of the Ordinance. Before the notice under section 65 could be issued a show-cause notice was served on the petitioner which reads as follows:-- "M/s. N.V. Philips Gloeilampenfabrieken, MA. Jinnah Road, Karachi.
6. Subject: INCOME PROCEEDINGS FOR THE ASSESSMENT YEAR 1980-81 It has been observed that an amount of Rs.1,94,21,709 was claimed as bad debts which was disallowed during the original proceedings as it was considered a premature claim. This claim has been allowed vide order, dated 31-12-1983 passed under section 135 of the Income-tax Ordinance.
7. The perusal of the details filed by you alongwith the return of income reveal the break up of the bad debts as under:--
1. Rental not received but charged to tax in the assessment year 1979-80 Rs. 12,57,276.
2. Advance to ELMAC Limited against export 15,01,592.
3. Technical assistance fee royalties relating to accounting year ended 31-12--1973 and 1974 charged to tax in the assessm ent years 1974-75 and 1975--76, but amount could not be remitted by ELMAC Limited due to shortage of funds Rs. 18,36,241.
8. 4.Repatriable loan given to ELAMC Limited Rs. 1,48,26,600.
9. It is noted that these debts do not relate to the business income of the assessee and thus cannot be allowed. For example repatriable loan given to ELMAC Limited even if not recovered is a capital loss as it had nothing to do with the income declared by you. Similarly rental not received but charged to tax cannot be claimed as bad debts. So is the case with the advance to ELMAC Limited, and technical assistance fee. It may please by noted that the claim of bad debts is governed by section 23 under clause (x) which relates to income from business or profession. The concept of bad debts is alien in case of income from dividend, rent and interest.
10. It is therefore clear that claim of Rs. 1,94,21,709, has been allowed illegally and is intended to be disallowed.
11. I, therefore, intend to re-open your assessment under section 65 of Income-tax Ord. You are hereby given an opportunity to explain within 7 days of the receipt of this letter as to why your case should not be re-opened.
12. (SHAUKAT SOOMRO)
13. INCOME TAX OFFICER COMPANIES CIRCLE B-3, KARACHI"
14. A bare perusal of this notice will show that it recited facts and allegations for reopening the assessm ent under section 65 of the Ordinance. The notice refers to the claim of had debts allowed by the Tribunal and goes on to recite that as these debts do not relate to the business income they could not be allowed. This objection to the grant of claim for bad debts is based on perusal of details tiled by the petitioner alongwith the return of income. Therefore on respondent's own showing the objections arc based on the return of income and documents filed by the petitioner which were available before the Income-tax Officer,' Commissioner of Income-tax and the Income-tax. Tribunal. At least it can be said that the points enumerated and raised in the notice dated 26-2-871 which are the basis for reopening assessment under Section 65 did not strike the afore stated authorities nor the department at any stage challenged that the debts did not relate to business income. The respondents are however of the opinion that the debts do not relate to the business income. This is merely a change of. Opinion based on application of facts which were available to the assessing officer and cannot amount to a definite information which may have come to the possession of the respondent. The term "definite information" conveys a meaning, which is not the same as change of opinion. A different interpretation of any provision of law or deriving a different conclusion from a given set of facts will not amount to definite information. It will be a change of opinion. Therefore the basis for reopening the assessment was a change of opinion of the respondent. The respondent therefore could not have taken any action under section 65 of the Income-tax Ordinance as it was not based on any definite information, but on change of opinion. In Edulji Dinshaw Limited v. The Income-tax Officer (Appeal No. K-1 of 1983) the Supreme Court observed as follows:- "Where all the fact have been fully disclosed by the assessee and considered by the Income-tax Authorities and the assessm ent has been B framed consciously and no new facts have been discovered the assessm ent could not be re-opened under section 65 of the Income-taxi Ordinance."
15. Reference can also be made to Jeson International (Pvt.) Ltd. v. Income-tax Officer and others 1989 P.T.D. 1141 where it was observed that: "It is now well settled that jurisdiction under section 65 of the Ordinance can be exercised only in case where after the assessm ent any new material comes to the knowledge of the Income-tax Officer and definite information to that effect has beer. Received from which it can he inferred and deduced that the assessee's income has been under assessed or escaped assessment. Unless such definite information is available on record the Income-tax officer cannot exercise jurisdiction by reopening the case under section 65. Where all the materials available on record including documents and account books produced have been scrutinized and assessment order has been passed by applying mind, merely by deducing another conclusion from the same documents and materials will amount to change of opinion and the income-tax Authorities would not be entitled to invoke section 65. But there may be cases where documents may have been riled but neither they have been examined nor considered and the assessment order has been passed without referring to those documents and materials then proceedings under section 65 can be initiated. However, when the materials have been placed and a considered speaking order has been passed it would be difficult to say that the order does not take into consideration all the disclosed materials."
16. Reference can be made to the following judgments which have been considered in the above authorities:--
(1) Gemini Leather Stores v. I.T.O. AIR 1975 S.C. 1268.
(2) Jahawarlal Daryabuxmal v. Commissioner of Income-tax (1982) 137 ITR 54.
(3) Commissioner of Income-tax v. Janah S. Khadirwalli Sahib (1951) 20 ITR 308.
17. Mr. Shaikh Haider the learned counsel for the department has contended that from the notice under section 65 it cannot be concluded that it is based on change of opinion. The notice under section 65 was issued in pursuance of show-cause notice dated 26-2-1987. It contained facts and grounds for issuing notice under section 65 by respondent No. 1. In the counter-affidavit the respondents have not pointed out any definite information on the basis of which notice under section 65 was issued.
18. The learned counsel for the respondent then contended that section 65 permits an action either where definite information has come in possession of the I.T.O. Or prior approval for such action has been obtained from the Inspecting Assistant Commissioner of Income-tax and as such prior approval had been obtained the notice is legal.
19. "65. Additional assessment
(1) If, in any year, for any reason,
(a) Any income chargeable to tax under this Ordinance has escaped assessment, or
(b) The total income of an assessm ent has been the subject of excessive relief or refund under this Ordinance, 2, or
(c) The total income of an assessee or the tax payable by him has been(assessed or) determined under subsection (1) of section S9 and no order of assessment has subsequently been made under this section or any other provision of this Ordinance, the Income-tax Officer may, at any time, subject to the provisions of subsections (2), (3) and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 50 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him as the case may be, and all the provisions of this Ordinance shall, so far as may be apply accordingly: Provided that the tax shall be charged at the rate or rates applicable to the assessment year for which the assessm ent is made.
(2) No proceedings under subsection (1) shall he initiated unless definite information has come into the possession of the Income-tax Officer and he has obtained the previous approval of the Inspecting Assistant Commissioner of Income-tax in writing to do so,
(3) Notice under subsection (1), in respect of any income year, may be issued within ten years from the end of the assessm ent year in which the total income of the said income year was first assessable.
20. (3A) Where a notice under subsection (1) is issued on or after the first day of July, 1982, no order under the said subsection shall he made after the expiration of one year from the end of the financial year in which such notice was served.
(4) Nothing contained in subsection (2) shall apply to any such case or class of cases to which clause (e) of subsection (1) applies as may be specified by the Central Board of Revenue."
21. Section 65 has been subject to various amendments. The amendment relevant to the case was by Finance Act, 1987 in subsection (2) of section 65 whereby word `or' was substituted by the word "and"
22. The effect of this amendment was that Income-tax Officer before issuing notice under section 65 should have definite information and has also obtained the approval of the Inspecting Assistant Commissioner of Income-tax. However, the notice was issued before the amendment. Mr. A.I Athar the learned Counsel for the petitioner has contended that the word `or' should be read as and. In this regard he has referred to Maxwel's Interpretation of Statutes and Crawford on Statutory Construction. It is well-settled principle that the word or can be read interpreted as and provided it is in consonance with the letter and sprit of statute and does not in any manner violate the provisions of the enactment word 'or' can be read as and provided such interpretation meets the ends of justice, the object of the legislation and is in consonance with the provisions of therefore to he considered whether word `or' can be read as and: A scrutiny of the legislative history of this provision of law will show that when Income-tax Act 1922 was applicable, section 34 which was equivalent to section 65 provided that action under section 34 for re-opening the assessment could be taken when definite information had been received and approval of the Income--tax Appellate Commissioner had been obtained. When the Income-tax Ordinance was enacted in section 65 instead of word and word or was used but soon thereafter within few years the difficulties faced by the assessee were realized and ultimately the word or was substituted by the word and. Therefore, except for period 1979 to 1986 throughout from 1922 for reopening an assessm ent two preconditions viz. (1) "definite information should be available and (2) "approval of IAC" were required. This shows that the intention of the legislature was to put double check on such exercise of powers which was serious in nature and had far reaching consequences. If the word or is not read as `and' the assessm ent duly completed which has attained finality under law could be allowed to be reopened by mere approval of the Inspecting Assistant Commissioner. This would mean that the decisions of the entire hierarchy provided under the Income-tax Ordinance, can be disturbed and reopened by an officer arbitrarily who can exercise such powers unchecked and unfettered. The legislature never wanted that the orders which have attained finality may be reopened merely on the approval of Inspecting Assistant Commissioner of income-tax which is not restricted or governed or based on any ground or principle. Such a power would mean that if the matter has been considered, discussed, and adjudicated even at the highest level it can be reopened by the Inspecting Assistant Commissioner of Income-tax without any reason. This could never he the intention of the legislature and for that reason the amendment was made. In these circumstances we are of the considered view that for the period before the amendment was made the word or should be read as and. Reference is made to Salehon v. State PLD 1969 SC 267 where it was observed that :-- "The answer to the question raised in the appeal lies in finding out whether word `or' in the exception clause is used in disjunctive or conjunctive sense.
23. Ordinarily or is used in disjunctive sense. The governing rule, however, is to carry out the intention of the Legislature. It may be found necessary to read the conjunctions or and one for the other depending on the consequences intended by the Legislature: Mr. Shaikh Haider the learned counsel then contended that after the notice was issued the petitioner filed return and assessm ent was completed against which appeal is pending before the Tribunal therefore there is no notice available as it has merged in the order passed by the Income- tax Officer and the is not maintainable. In support of the contention that the original order merges in the appellate order learned counsel has referred to 1989 PTD 544, 198_` PTD 874, 157 ITR 327 and 1972 SC"MR 556. There can he no dispute with the proposition that the original order merges with the appellate order. However, it the present case the position is somewhat different. The respondents had initiated action under section 65,which was challenged by filing this petition on the plea that they have no jurisdiction to reopen assessment. After filing the petition simultaneously the return was filed by way of abundant caution and to avoid severe penalty and complications. It was under the orders of the Court in this petition that the Income-tax Officer was allowed to proceed with the assessment as according to him it would have become barred by time. The Court had further ordered that the assessment order passed shall not be implemented.
24. Therefore, the entire exercise of filing return and passing the assessment order was subject to the decision of this petition. As the petition had been filed challenging the very jurisdiction to initiate the action merely because the Income-tax Officer was allowed to pass assessment order or the petitioner has filed an appeal against the order does not mean that if the impugned action is without jurisdiction it is legalised and the petition has become infructuous. Where any action is challenged as without jurisdiction and if it is so declared then all orders and proceedings taken on the basis of such illegal action shall also be vitiated. The petitioner has challenged that notice under section 65 could not be issued and it was without jurisdiction. The assessment can be reopened only after notice under section 65 has been issued. If the notice itself is illegal and without jurisdiction the entire superstructure built on such illegal notice cannot sustain. In 1970 Law Notes 28 DB (Lab.) it was held that if on the basis of void order subsequent orders have been passed either by the same authority or by other authorities, the whole series of such orders, together with the superstructure of rights and obligations built upon them, must fall to the ground because such orders have as little legal foundation as the void order on which they are grounded.
25. The respondents have built the entire superstructure on a notice under section 65. It is the foundation stone of the entire proceedings upto the filing of appeal. If the notice is knocked down the entire structure will crumble and proceedings based on it cannot stand. The theory of merger will therefore not apply here.
26. Reference can also be made to Y. Narayana Chetty and others v. Income-tax Officer, Nellore and other (1959) 35 ITR 388 where it was observed as follows:--- "The argument is that the service of the requisite notice on the assessee is a condition precedent to the validity of any re-assessm ent made under section 34, and if a valid notice is not issued as required, proceedings taken by the Income-tax Officer in pursuance of an invalid notice and consequent orders of re-assessm ent passed by him would be void and inoperative. In our opinion, this contention is well-founded. The notice prescribed by section 34 cannot be regarded as a mere procedural requirement it is only if the said notice is served on the assessee as required that the Income-tax Officer would be justified in taking preceding against him. If no notice is issued or if the notice issued is shown to be invalid then the validity of the proceedings taken by the Income-tax Officer without a notice or in pursuance of an invalid notice would be illegal and void."
27. Similar question came for consideration in C.P.D-447/88, Bhambre Ceramic Industries v. Income- tax Officer, Circle F-3, South Zone, Karachi where relying on the afore stated authority it was observed:-- "Where for initiating any action service of notice is a precondition and such notice is without jurisdiction, all the proceedings and actions taken in pursuance thereof will be without jurisdiction In our view in such circumstance to resort to departmental remedy will be an exercise in futility as in view of illegality of notice subsequent actions cannot be legally maintained. It will amount to multiplicity of proceedings, which should be avoided.
28. Same view has been expressed in Jeson International (Pvt.) Ltd. v. Income-tax Officer, Karachi 1989 PTD 1141.
29. The learned counsel contended that after the return has been filed notice cannot be challenged.
30. Section 154(6) of the Income-tax Ordinance provides that the validity of any notice issued under this Ordinance or the validity of service of any notice shall not be called in question after the return in response to such notice has been filed or compliance thereto has been made. However, in the present case the validity of notice has been challenged before submission of the return and therefore, in our view section 154(6) is not applicable.
31. We, therefore, declare that the impugned notice dated 19-3-1987 issued under section 65 of the Income-tax Ordinance is without Jurisdiction and of no legal effect. We further declare that subsequent proceedings based on such illegal notice are also without lawful authority and no of legal effect.
32. M.B.A.N-256/K Petition accented.