MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---Both the matters arise out of the same judgment of Tribunal and consequently have been heard together.
2. In I.T.R. 281 of 1991, the Income Tax Appellate Tribunal has referred the following two questions for our opinion.
(1) Whether in the facts and circumstances of the case, the learned Income Tax Appellate Tribunal was right in holding that estimate of income at Rs.7,50,000 was justified and correct in law and on facts.
(2) Whether in the facts and circumstances of the case there was no legal defect in the order passed on 24-5-1988 for an alleged default on 23-5-1988, particularly when the order was to be approved by an Inspecting Assistant Commissioner.
3. In I.T.C. No.35 of 1992, a direct reference application has been admitted for regular hearing to consider the following question: "Whether in the facts and circumstances of the case the learned Tribunal was right in holding that there was proper notice to the firm and this was a case of default?"
4. Heard Mr. M. Farogh Nasim, learned counsel for the applicant and Mr. Jawaid Farooqui, learned counsel for the respondent.
5. The relevant facts as stated by the ITAT are that the applicant a registered firm filed return of total income for the assessm ent year 1987-88 and the partners of the firm also filed their respective returns under section 59(1) of the Income Tax Ordinance, 1979. The cases were selected for total audit and the Assessing Officer, issued notices under section 61 of the Income Tax Ordinance to the firm, as well as, the partners on 23rd January, 1988, and repeated, the same on several subsequent dates: The assessments were, however, framed on 24th May 1988 ex parte determining income of the applicant at Rs.7,50,000. The applicant preferred first appeal which was dismissed. The second appeal was preferred before the Tribunal. A plea was taken that the applicant was not served with the notices under section 61 or 62 of the Income Tax Ordinance. The plea was rejected by the Tribunal for the reason that, the notices were served on one called Mujtaba who acted for and on behalf of partners as well as firm.
6. It was further contended on behalf of applicant before the Tribunal, that, the Assessing Officer failed to evolve any basis in support of his estimated income. This plea was also rejected for the reason that the Assessing Officer had disclosed his mind to the firm and its partners and had acted accordingly.
7. The main contention of Mr. Farogh Nasim, pertains to the Question No.1 referred by the Tribunal.
He has submitted that the Assessing Officer, has not evolved any basis whatsoever, for estimating the income at Rs.7,50,000, and therefore, the ex parte assessment which is required to be best judgment assessm ent was liable to be set aside. He has vehemently argued that there is no room for arbitrariness even in an ex parte assessment and when no basis whatsoever is evolved, the assessm ent becomes arbitrary. According to him the issue already stands decided by this Court in the case of Messrs Dawood Corporation Ltd. v. Commissioner of Income Tax 1989 PTD 177. In the cited case, an ex parte assessm ent was made on account of non-disclosure of income from its East Pakistan branches. A plea was taken that the estimated income was without any basis or material on record. It was observed by Saleem Akhtar, J. (as his lordship then was as follows: "Income Tax Officer has vast powers under section 23(3) but he is not to act arbitrarily and without any material on record. Even the estimate has to be based on facts and circumstances of the case as borne out from the record and not on the basis of whims and desires."
8. In support of the above view reliance was placed on a Full Bench Judgment of Lahore High Court in the case of Gurmukh Singh v. CIT 1944 ITR 393. Speaking for the Full Bench, Muhammad Munir, J.
(as he then was) observed as follows: "Though the Income Tax Officer has very vide powers and is not fettered by technical rules of evidence and pleadings, there is one overriding restriction on his judgment and that is that he must act honestly on the material, however, inadequate, before him, and not vindictively, capriciously or arbitrarily."
9. The point in issue has been considered by the Karachi Bench of the erstwhile West Pakistan High Court, in the case of Karachi Trading Co. v. Commissioner of Income Tax, 1958 PTD 274, wherein while considering plea that the assessment was not based on any material and was just a pure guess. It was held as follows: "An assessm ent under section 23(4) is bound to be based of guess work, but it should not be dishonest and must be based on a fair and proper assessment of the facts of a particular case."
10. The question came for consideration before the Chief Court of Oudh, in the case of Abdul Qayyum & Co. v. Commissioner of Income Tax 1939 ITR 375 and it was held as follows: "In making a best judgment assessm ent the Assessing Officer does not possess absolute arbitrary authority to assess any figure he likes and although he is not bound by strict judicial principle, he should be guided by rules of justice equity and good conscious."
11. The learned counsel for the department has submitted that the question whether the assessm ent made was proper or not, is a question of fact. We are not persuaded to agree with the submission. No doubt, if a question arises in respect of an assessment based on the appreciation of facts available on record, it would be a question of fact. However, if a question is raised about the validity of an assessm ent for the reason that there was no material or evidence on record to support the estimate, it will become a question of law. We are fortified in our views by the following two judgments.
(1) N.A. Concern v Commissioner of Income Tax (1938) 6 ITR 518 (Rangoon)(2)
(2) Kanhaiya Lal Umrao Singh v. Commissioner of Income Tax (1941) 9 ITR 225 (Oudh).
12. In the above, cases it has been held that the validity or otherwise of a best judgment assessm ent is a question of fact, but B whether there was any evidence to support the order will be a question of law.
13. Mr. M. Farogh Nasim, has taken us through the assessment order, first appellate order and the order of Tribunal, to show that the estimated income was not based on any evidence or material available on record. A perusal of the Tribunal's judgment shows that the estimated income has been upheld for the sole reason that the I.T.O. Had disclosed his mind and had evolved the basis on the information furnished in the Inspector's Report. A perusal of the notice under section 62 allegedly served on the applicant and reproduced in the assessment order shows that, estimated income had no basis at all.
14. In the above circumstances, we are persuaded to agree with the contention of Mr. M. Farogh Nasim, learned counsel for the D applicant that the estimated income was without any basis or material on record.
15. Respectfully following the earlier judgments referred to above, it is held that the Assessing Officer, while resorting to ex parte assessment has no arbitrary and vindictive powers to assess income as any figure he likes. He is required to evolve some basis and once a basis is evolved, then firstly, it will fulfil the requirement of best judgment assessment and secondly, it will become a question of fact only. In the present case, the Assessing Officer, has estimated the income just by a guess-work totally unsupported with any basis, evidence or material on record.
16. After coming to the above conclusion, we would further like to observe that, the Tribunal ought to have set aside the assessm ent with the direction for de novo assessment, after giving opportunity of being heard to the applicant/assessee with further direction to confront the applicant/assessee with the entire material available with him including the information furnished by the Income-tax Inspector. The I.T.A.T. Should have also directed the Assessing Officer to allow the applicant /assessee a reasonable opportunity to rebut the contention of department. Mr. Farogh Nasim has submitted that the stock which was reported to be pertaining to the applicant's business was the stock pertaining to Jehania Traders, as is evident from the perusal of Inspector's Report, which contains that such statement was given by Mujtaba son of one of the partners of the firm. Thus the applicant ought to have been allowed opportunity to substantiate the contention.
17. Learned Advocates for the parties have submitted that the Tribunal shall pass an order conformably .To the judgment of this Court and modify its order accordingly, however, sufficient time has already passed and therefore, in order to avoid further delay the Tribunal be directed to direct the applicant for appearing before the Assessing Officer on 4-5-2002 without any further notice from the Assessing Officer. The Tribunal should further direct the Assessing Officer to proceed with the fresh proceedings by confronting the entire material available with him to the applicant without further loss of time. The learned counsel for the Department has stated that he has no objection if such direction is contained in the order of Tribunal subject to the condition that if applicant fails to appear before the Assessing Officer on 4-5-2002, the Assessing Officer shall be at liberty to proceed in accordance with the law and keeping the principles stated in the earlier part of this judgment. The request is reasonable and the Tribunal should give such directions as well while passing the order in pursuance of this judgment.
18. The Question No.1, is answered in negative.
19. In view of our finding on Question No.1 and the observations made with the consent of learned Advocates for the parties pertaining to the directions to be contained in the order of Tribunal, the learned Advocates for the parties have stated that no findings are required on Questions Nos. 2 and 3. We, therefore, refrain from giving any opinion on Questions Nos.2 and 3.
Both the references stand disposed of accordingly.
A copy of this judgment shall be sent under the seal of the Court and the signature of Registrar to the Income-ax Appellate Tribunal, which shall pass necessary orders to dispose of the case conformably to this judgment within three weeks of receiving, the copy of this judgment. .