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Petitioner: EDULJI DINSHAW LIMITED VS Respondent: INCOME-TAX OFFICER
Court Name: Supreme Court of Pakistan Judge(s): Zaffar Hussain Mirza, Abdul Qadir Sheikh, S. A. Nusrat Title: EDULJI DINSHAW LIMITED vs INCOME-TAX OFFICER Case No.: Constitutional Petition No. D-461 of 1982 Civil Appeal No. K-1 of 1983 Date of Judgment:1988-05-16 Reported As: 1990 PTD 155 Result: Appeal allowed
JUDGMENT
JUDGMENT ABDUL KADIR SHAIKH, J.--Appellant was incorporated as a private limited company by the members of the Dinshaw family with the main object to acquire the immovable properties belonging to the family members and derive income therefrom by letting these out on rent or otherwise developing the family property. It is said to be a family Company and a property holding Company, and the income always being rental income from holding of the immovable properties and taxable under section 9 of the Income-tax Act, 1922. The following objects mentioned in the Memorandum of Association of the Company being relevant may be reproduced hereunder:-- " No. III (3) to acquire the immovable properties belonging to Messrs Eduljee Dinshaw and others of Pakistan and with a view thereto enter into the agreement mentioned in clause 3 of the Articles of Association of Company and to carry the same into effect with or without modification. (4) to purchase, develop and turn to account any property acquired by the company or in which the company is interested and in particular by letting out properties on rents or leasing them out on profitable terms, preparing building sites, constructing, reconstructing, altering, improving, decorating, furnishing and maintaining of assets, flats, houses, factories, warehouses and conveniences of all kinds and by consolidating or connecting or subdividing properties and generally to act as holders of buildings, theatres and other properties of all kinds." However, the crucial object No.111 (7) is as under:-- (7) to dispose of any property by sale or exchange or other means as may be profitable from time- to time and likewise other immovable properties, but not to car on business of but in and selling in an immovable properties or other Shares, Debentures, Stocks, Bonds or Securities:
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"Action under section 65 of Finance Ordinance, 1979 has been taken as you have concealed your income from sale purchase of properties. This entailed: (1) purchase of plots, subdivisions thereof and sales; (2) construction of new buildings and sales; (3) acquiring lands for conversion into Sikni Abadis with the sole intent of subdividing and selling at the proper time. You have very cleverly concealed the facts from the department that you were a company engaged in purchasing, developing, preparing building sites, construction, subdividing plots etc." It is the case of appellant that "the absurdity of these notices is revealed by the fact that for the entire period of 10 years for which the notices were issued appellant had not purchased a single plot of land. It had-also not constructed any new building nor it got converted any agricultural land into Sikni." The grievance of the appellant is that since all the transactions to which objection was taken relate to recorded facts, there can he no conceivable controversy. All the transactions relating to properties belonging to appellant and referred to by the Income-tax Officer, respondent herein, were already borne on the record of the Income-tax Department pertaining to appellant- company, and on the basis of the material on record all the previous Income-tax Officers had acted on the basis that the amounts accruing from the sales of all the properties were capital gains, and not taxable income. It is also the case of the appellant that the issuance of notices under section 65 of the Ordinance was mala fide. In this behalf, it was stated that despite the fact that the Income-tax Officer was seeking to reopen assessm ent for the past 9 years, he allowed only a few days' time to appellant for filing the revised Returns, although it was well within his knowledge that in order to trace out the old record substantial time was required. Accordingly appellant requested the Inspecting Assistant Commissioner and the Commissioner of Income-tax for extension of time. At a meeting held in the office of the Commissioner of Income-tax on 26-5-1982 at which the representatives of appellant- company and a Chartered Accountant were present, the Commissioner of Income-tax indicated his willingness to extend time by a period of 11 days i.e. Up to 11-6-1982, but even this was strenuously opposed by the Income-tax Officer who stated that in case time was extended his plans would be frustrated. It is alleged that he further stated that it takes 14 days to attach the properties of an assessee and that he wanted to attach appellant's property prior to 30-6-1982 i.e., the close of the financial year. According to appellant-company no conceivable doubt could be left that the Income-tax Officer had already pre-determined the entire issue. In the circumstances according to appellant, no hope of any redress from the higher authorities in the department could be foreseen, therefore appellant had no alternative but to file the Constitution Petition in Sindh High Court seeking to challenge the legality of the aforesaid notices. The High Court admitted the petition to a regular hearing and granted an interim relief by which while permitting the Income-tax Officer to carry on full investigation into the matter, directed him not to pass the final orders till the disposal of the petition. By the time petition came up for regular hearing on 8-12-1982, the Income-tax Officer had already carried out all the investigations and the orders of assessm ents were awaiting to be signed by him. On behalf of the appellant it was submitted before the High Court that the respondent was not able to produce any evidence of any transaction which did not find place in the tax returns already filed by appellant-company. It was pointed out that on the basis of the material on record all the previous Income --tax officers had proceeded on the express basis that appellant-company was not carrying on the business of buying and selling properties, and accordingly the amounts accruing from the sales of the properties which were already disclosed in the tax record of the company were treated as capital gains, and not taxable income. In this behalf, it was further pointed out that full disclosures had been made in the Income-tax Returns filed from 1972-73
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onwards, and reliance was placed on the assessment orders in which all the sales of the properties made by the company were treated as capital gains. It was therefore pleaded that the perusal of the relevant record establishes the fact that there was no conceivable justification for treating the amounts in question as income. Moreover, appellant company was specifically barred under its Memorandum of Association from carrying on the business of buying and selling properties and it had faithfully adhered to this mandate and not violated the embargo. It was accordingly contended that contrary to the allegations made by the Income-tax Officer, the actual facts as disclosed from the record already available with the Income-tax department was that it was a case of change of opinion and not a case of suppression of facts so as to justify the issuance of notices under Section 65 of the Ordinance. It was however a common ground before the High Court that an Income-tax Officer is not entitled to reopen an assessm ent merely on the basis of a change of opinion . The case made out by the respondent to justify his reopening of the past transactions was that while examining the case of another assessee (whose name he contended could not be disclosed to the Court for reasons of confidentiality), he had discovered that it was a case where the appellant-company "had failed to or did not declare profits and gains accrued to them by dealing immovable properties". It was further contended on behalf of the respondent that appellant -- company could dispose of any property by sale or exchange or other means as may be profitable from time to time as there was no embargo in the Memorandum of Association on purchasing, developing, selling and turning to account any properties. It was further asserted that certain properties had been purchased from outsiders and sold thereafter and according to respondent's information at least two immovable properties were acquired by the appellant --company out of which one was converted into plots for construction of residential houses or colonies. On the conflicting submissions made by the learned counsel for the parties the principal question that arose for consideration before the High Court was as to the validity of the impugned notices under section 65 of the Ordinance particularly whether the impugned action of the Income-tax Officer was due to a change of opinion by him or whether his contention that appellant-company had suppressed/concealed the fact that it was acquiring/selling immovable properties and now on discovery of this fact for the first time he was entitled to reopen the past assessments was valid. Learned Judges in the High Court however took the view as under: "It is well-settled that the intention of the assessee has to be considered in each case of sale of immovable property and several principles have to be borne in mind and in deciding whether the transaction of purchase and sale amounts to adventure in the nature of trade or otherwise ............ Each individual transaction has to be considered after going into the full facts of the case. In exercise of constitutional jurisdiction this Court does not usually go into-the facts .....--- The very provision of section 65 of the income-tax Ordinance, 1979 for additional assessment is sufficient to show that the respondent had authority to look into the matter. The point with regard to jurisdiction has been satisfactorily explained in the comments. It has also been explained in the aforesaid comments that the petitioner has plausible opportunity to put their case before the respondent during the inquiry as prescribed by section 65 of the Ordinance and if they have plausible explanation, the same would be considered." Learned Judges also favoured the argument advanced on behalf of the respondent that the Income-tax Ordinance provides the ordinary remedy for obtaining relief in respect of improper or illegal order passed by the respondent and unless such order is without jurisdiction or in excess of jurisdiction, the constitutional jurisdiction of this Court cannot be invoked as the petitioner has adequate remedy open to him under the Ordinance. On this view of the case learned Judges dismissed the Constitution Petition by the impugned judgment dated 19-12-1982 on the ground that it was premature.
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Within a week of the judgment of the High Court the Income-tax Officer who was authorised by the interim order of the High Court that he may proceed with the investigations of the case, but was prohibited from making the final orders, passed assessment orders on 26-11-1982 in respect of the appellant --company for the year 1971-72 onwards and issued Demand Notices and also notices under section 116 of the Ordinance to appellant to show cause why penal action under sections 111 and 116 for concealment of income etc. Should not be taken. However, in the meanwhile appellant- company had filed the petition for special leave to appeal from the impugned judgment of the High Court and an interim order was passed by this Court on 23-12-1982 directing stay of the proceedings by the Income-tax Officer till the petition was decided by this Court. These assessm ent orders were called in question and a Miscellaneous Application was filed in Court in which following allegations were made: "That by means of the said stay order the operation of the impugned notices in terms whereof the respondent Income-tax Officer was proposing to reassess the income of the petitioner was stayed. That service of the above stay order was effected on December 26, 1982 since December 24 and 25, 1982 were public holidays. That about one hour after the Income-tax Officer had been served with the certified copy of the stay order he despatched through a messenger the assessment orders for the years in question despite the fact of the stay. That, however, since the respondent Income-tax Officer has ex facie disregarded the orders of this Honourable Court it has become necessary to file the present application. That the mala fides of the Income-tax Officer is also revealed by the fact that the assessment orders have been passed without giving the petitioner a proper hearing contrary to the principles of natural justice. The respondent Income-tax Officer had merely issued notices under section 61 requiring the production of some documents/records which was duly done by the petitioner's representatives personally several months earlier and carried out investigations on the factual side for the past six months in connection with which there was an exchange of correspondence but he did not hear legal arguments in the case. The petitioner was, at the very least, entitled to be given an opportunity to advance legal arguments since a voluminous case law exists on the points at issue, which needs to be cited. The so-called assessment orders were passed with indecent haste in a few days in order to try and render the appeal to this Honourable Court infructuous." 1974 SCMR 5(9), Leave to appeal was however granted earlier by the order-dated 5-1-1983 so as to consider the following submissions, amongst others: (i) That the Income-tax Officer in seeking to reopen the past assessments for the last 9 years under section 65 of the Income-tax Ordinance, 1979 acted beyond his jurisdiction because all material facts were already on the record' of the Income-tax Department on the basis of which his predecessors had held that the petitioner was liable to be assessed as a property holding company i.e. a Company not carrying on the business of buying and selling properties. There was no suppression or concealment of any facts but merely a change of opinion by the respondent, Income-tax Officer, as to the inference to be drawn from the same facts. There was, thus, no legal basis for proceeding under section 65 of the A Income-tax Ordinance. (ii) That the High Court erred in law in considering that the petitioner had an adequate remedy under the Income-tax Act against the proceedings initiated against it. There is, in fact, no remedy in the Income-tax Act against the issuance of a wrongful notice. The Constitutional Petition could not, therefore, have been dismissed as premature but deserved to be decided on merits. (iii) That the assessm ent orders passed by the Income-tax Officer on 26-12---1982 are not valid and legal, because they were passed after the issuance of the stay order by this Court (on 23-12- 1982). In so far as a stay order is operative and takes effect as soon as it is passed, vide 1974 SC M
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R 509, the circumstance that it might have been communicated to the respondent Income-tax Officer after he had passed his assessment orders on 26-12-1982, would not make any difference because this Court had fixedpassed the order of stay three days earlier on 23-12-1982." At the hearing of the appeal several arguments were addressed by the learned counsel for the parties. On behalf of the appellant-company it: was emphasised that it is a family Company incorporated by the members of Dinshaw family only, with the sole object to acquire the immovable properties belonging to the family members and derive income therefrom by letting these on rent and under clause (III)(7) appellant-company is authorised to sell any of its own properties but not to carry on the business of buying and selling properties to which restriction it has all along adhered. In this behalf it was pointed out that the Supreme Court of India in the case of Lakshminarayan Ram Gopal & Son Ltd., v. Government of Hyderabad (1954 Vol. 25 ITR 449 at page 460) held as under: "When a partnership firm comes into existence it can be predicated of it that it carries on a business, because partnership according to Section 4 of the Indian Partnership Act is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. (See Indershand Hari Ram v. Commissioner of Income-- tax, U.P. & C.P.) But when a company is incorporated it may not necessarily come into existence for the purpose of carrying on a business. According to section 5 of the Indian Companies Act any seven or more persons (or, where the company to be formed will be a private company, any two or more persons) associated for any lawful purpose may, by subscribing their names to a memorandum of association form an incorporated company, and the lawful purpose for which the persons became associated might not necessarily be the carrying on of business. When a company is incorporated for carrying out certain activities it would be relevant to enquire what are the objects for which it has been incorporated. As was observed by Lord Sterndale, M.R., in Commissioners of Inland Revenue v. The Korean Syndicate Limited:-- If you once get the individual and the company spending exactly on the same basis, then there would be no difference between them at all. But the fact that the limited company comes into existence in a different way is a matter to be considered. An individual comes into existence for many purposes, or perhaps sometimes for none, whereas a limited company comes into existence for some particular purpose, and if it comes into existence for the particular purpose of carrying out a transaction by getting possession of concessions and turning them to account, then that is a matter to be considered when you come to decide whether doing that is carrying on a business or not. Justice Rowlatt followed the above view of Lord Sterndale, M.R., in Commissioners of Inland Revenue v. Birmingham Theatre Royal Estate Co. Limited and held that "when you are considering whether a certain form of enterprise is carrying on business or not, it is material to look and see whether it is a company that is doing it." The objects of an incorporated company as laid down in the memorandum of association are certainly not conclusive of the question whether the activities of the company amount to carrying on of business. (See Commercial Properties Ltd., In the and East India Prospecting Syndicate v. Commissioner, of Excess Profits Tax, Calcutta). But they are relevant for the purpose of determining the nature and scope of such activities. Mr. Khalid Anwar, learned counsel for the appellant-company pointed out from the record before this Court that after its incorporation in 1952 appellant-company has been consistently assessed by the Income-tax Department on the basis of its income as a property holding company, and it was for the first time after 30 years that the Income-tax Officer issued notices on 11-5-1982 under section 65 of the Income-tax Ordinance, 1979 contending that the company had concealed the fact that it was carrying on business of buying and selling properties and it was therefore proposed
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to reopen the assessm ents for the years 1971-72 to 1980-81 (excluding the assessment year 1979- 80), the Company was however given 7 days' time to file revised returns for the entire period. According to appellant the case of the appellant-company however was that it was simply a case of change of opinion, which is not permissible under the law. The allegation of concealment was controverted by the appellant-company relying upon the following facts and circumstances:-- (a) Appellant filed Income-tax Return every year alongwith balance-sheets, which is an integral part of the return under the provisions of Income-tax Manual. The sales of the properties made in each year were specifically shown therein. Thus there was no question of concealment. (b) Since no "sale of immovable property can be carried out except after obtaining prior permission of the Income-tax/Wealth-tax Officer, appellant applied for and obtained the requisite permission. This fact is itself decisive to dislodge the assertion of the Income-tax Officer that the sales were made secretly. (c) A perusal of the original assessm ent order for each year reveals the fact the assessments were made under section 9 of the Income-tax Act, 1922, and not under section 10 which deals with business. Thus it is clear that the successive Income-tax Officers after considering the returns filed by appellant-company accepted the fact that the income which had accrued was from income from property and not income from business. (d) Several letters on record exchanged between the appellant- company and the Income-tax Officer also proved that the income from the sales of the property was treated as income under section 9 of the Income-tax Act, 1922. It was pointed out that one of the properties in question consisted of 184 acres of agricultural land situated in Deh Safooran, bulk of which was acquired by the Government and the single largest item in question pertains to Rs. 60 lac which was paid by way of compensation. A part of this land measuring 8.06 acres was sold to private parties. 1t was contended that the compulsory acquisition of land by no imagination constitutes a business transaction; nevertheless, the Income-tax Officer has treated the compensation as income of the appellant --company. When the compensation received from the Government for the acquisition of the aforesaid agricultural land was distributed by the Company to its share-holders, the Department claimed that the amount was exempt m their hands just as it was exempt in the hands of appellant-company as being capital and not income. It was however specifically contended by the Income-tax Authorities in the tax proceedings as well as in the High Court of Sindh in the affidavit filed in Constitution Petition No. 1043 of 1981 that although the amount was capital in the hands of the appellant- company, it was not necessarily so in the hands of the share-holders. With reference to the argument advanced on behalf of the respondent before the High Court that appellant should have disclosed transactions in question under section "C" of Part-I of the Return, Mr. Khalid Anwar pointed out that this section relates to income, profit or gains which the assessee claims as not taxable, for any reason. Since the stand taken by the appellant is that the amounts in question were not income, these could not and ought not to have been disclosed in section "C", otherwise the Income-tax Officer would have immediately treated this as an admission that the amounts were income from business, and not capital gains. Learned counsel further pointed out that all these transactions were however a part of the Income-tax Returns filed by the appellant and therefore no question of concealment arises or any other mischief so as to attract action under section 65 of the Ordinance. (i) the information, particulars, details and statements recorded under section 148 in the case, GIR No. 09-20-2210878; (ii) the salary which the petitioners were giving, as their accountant, to the said assessee in the said GIR No. 09-20-2210878;
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(iii) the brokerage and commission on sale and purchase of properties which the petitioners were giving or had given in the past to the said assessee GIR No. 09-20-2210878; (iv) proceedings in the matter of final determination of the acquisition price in High Court of Sind, Reference No. 2 of 1974, in the matter of D.C. v. Ahmad Gabol & others; (v) certified copies of certain sale and purchase documents relating to properties sold or purchased by the petitioners; (vi) while the petitioners, in all the nine years, according to the said prima facie definite/positive information, earned or made substantial profits and gains (aggregating to a sum exceeding Rs. 1.50 crore) on sale and purchase transactions of immovable properties, the transactions ex-facie exceeding 100 in number, yet the petitioners had not declared such profits and gains in their return(s) of income in any of the said nine years either in section A or in Section C, and had thereby wholly and totally, as would apparently appear, concealed and suppressed the income, profits or gains." According to respondent, therefore, an ex-facie definite/positive information was available upon which he could have issued notices for reopening of the assessment. It was further submitted that since the controversy before the High Court required investigation into disputed facts, the High Court rightly refused to rant the relief prayed for and dismissed the petition on the ground that it was premature. It was therefore submitted that it is also…
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