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Petitioner: COMMISSIONER OF INCOMETAX, CENTRAL ZONE `B' VS Respondent: Messrs FARROKH JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Saleem Akhter, Ajmal Mian, Zaffar Hussain Mirza Title:COMMISSIONER OF INCOMETAX, CENTRAL ZONE `B' vs Messrs FARROKH
JUDGMENT
Reported As: 1992 SCMR 523 Result: Order accordingly Judgment JUDGMENT ' ZAFFAR HUSSAIN MIRZA, J.---These eight appeals by the leave of this Court, arise out of common judgment of a Division Bench of the Sindh High Court, dated 11th October, 1982 disposing of eight references in which a common question of law was referred to the High Court by the Income-tax Tribunal 'under section 66(1) of the Income-tax Act, 1922, at the instance of the assessee. We also propose to dispose of these appeals by this common judgment. ' The facts that formed the background which led to the references before the High Court, as stated in the judgment were as follows: The admitted position is that M/s. Farrokh Chemical Industries, which had assets both in the former West and East Pakistan, was the proprietary concern of Mr. Captain and it was assessed accordingly by the Income-tax Authorities until the year 1957-58. However, upon the promulgation of Martial Law in 1958, the said Mr. Captain and his wife Mrs. Captain, separately declared excess income under MLR-43 arising from the firm of M/s. Farrokh Chemical Industries. Mr. Captain, declared a total excess income of Rs,83,533 whereas Mrs. Captain declared a total excess income of Rs,2,84,520 for the period 1952-53 to 1957-58. It appears that the processing authority which was appointed for scrutinizing the declarations made under MLR-43, treated the two declarations of excess income filed by Mr. And Mrs. Captain as one, in view of the fact that M/s. Farrokh Chemical Industries was all along treated and assessed as a proprietary concern of Mr. Captain and tax recovered as such. ' It may be observed that the concern known as Farrokh Chemical Industries, Karachi was commenced somewhere in 1951 by Mr. Captain. The production of the concern was in Sodium Sillicate which was carried on in the then West Pakistan as well as in East Pakistan. Admittedly
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sometime in 1953 Mrs. Captain lent a sum of Rs,1,50,000 to her husband. It is also admitted position that the assessm ents upto the year 1957-58 in respect of the business carried on in both the then wings of Pakistan were made in the name of Mr. Captain. Then intervened the imposition of Martial Law and as stated earlier, excess income was declared by both husband and wife. Mrs. Captain's concealed income was attributed to her share of profits from the concern. However, according to the statement of the case contained in the references, under section 66(1) of the Income-tax Act, the concerned authorities assessed the entire declared income by both in the hands of Mr. Captain. The income from both the wings was assessed in the status of an Association of Persons for the charge year 1958-59. For the next assessment year, namely, 1959-60 it was claimed that during this year the business had been bifurcated and the East Pakistan factory had been transferred to Mrs. Captain. This claim of the division of business into two separate entities was accepted by the Department, with the result that the West Pakistan income was assessed in the hands of Mr. Captain and that relating to East Pakistan business was treated as income of Mrs. Captain. ' When the assessm ent for the assessment year 1960-61 was taken up, it was found that the bifurcation was artificial and not a genuine transaction, with the result that the income from both the wings was assessed as the income of Mr. Captain alone. The assessing officer also rejected the account version of both the wings and resorted to his own estimate both in the turn over and the gross profit rate. The appeal filed before the Income-tax Appellate Tribunal against the aforesaid mode of assessm ent was also dismissed. The rest of the facts may be narrated from the Statement of the Case contained in the References in Para 4 as under: "After considering the arguments of the parties the Tribunal upheld the decision of the assessing officer and refused to accept ownership of Mrs. Captain of East Pakistan factory. What really weighed with the Tribunal was that in view of the lady's letter to the Income-tax Officer Chittagong, she never had anything over and above the amount of the alleged loan given somewhere in 1952. This letter completely negatives the assertion that she was having share of profits. On the Tribunal's inquiry it was admitted that never any share of profits was credited in her name in the books of the concern. Trust in marital relations in understandable but when there is question of transfer of property it must be by proper means and methods. True that the facts considered in the year 1960- 61 were always there but they appear not to have been thoroughly considered on the earlier occasions. Be that as it may since separation was accepted in the immediately preceding year and for the still earlier year the lady was treated as a member of Association of Persons it appeals to us that the decision given by the Tribunal involves a mixed question of law and facts on the issue of bifurcation of the business in the two wings. Mr. Akhtar agrees that his purpose would be served if question No,6 alone is referred to the High Court and that question is:- 'Whether in the facts and circumstances of the case there is any material or evidence on the record to support the finding of the Tribunal that the transfer of the East Pakistan business in favour of Mrs. Captain had not taken place and is not this finding based on mere suspicions, surmises and conjectures?' ' and the same we refer for consideration by the High Court." ' The learned Judges of the Division Bench of the High Court who decided the references on the aforesaid question of law referred to the fact of two separate returns of income filed for the year 1959-60 by Mr. And Mrs. Captain in their individual capacity on the basis of the said bifurcation of business Learned Judges then reproduced relevant portion of the order of the I.T.O. Dealing with the business in West Pakistan of Mr. Captain. They also referred to the order of assessment by the 1.1.0. In respect of the business in East Pakistan claimed to have been transferred to Mrs. Captain for the same year. I the events that happened, however, in the assessment year 1960-61, the return by Mr. Captain as proprietor of West Pakistan business only was not a by the I.T.O., who held that the
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transfer of East Pakistan business to Mrs. Captain was only an ostensible transaction but in fact Mr. Captain was the proprietor of both the businesses in East and West Pakistan. He therefore lumped together the income arising from the trading activities of the concern in East Pakistan with the income from West Pakistan. ' Learned Judges after referring to the grounds that were adopted by the Income-tax Officer for holding that the businesses in the two wings of Pakistan were the single proprietary concern of Mr. Captain observed that the assesset Mr. Captain filed separate appeals against the assessment orders for the years 1959-60 and 1960-61. It was said that the appeal of the assessee against the assessm ent year 1959-60 a as accepted by the Tribunal, in so far as various add backs made by the I.T.O. Were allowed to be deleted and the book results shown by the assessee were accepted by the Tribunal. Learned Judges pointed out th?t although Mr. Captain had filed the return for the year 1959-60 as the proprietor of only the West Pakistan business, yet the Department did not agitate the point before the Tribunal in the proceedings of the appeal challenging the position taken by the assessee that he is only the proprietor of the business located in West Pakistan. In other words, the Department did not assert at that stage that the two businesses were of single proprietorship owned by Mr. Captain. ' As already stated in the appeal against the older for the assessment year 1960-61 the Appellate Tribunal maintained the order of the I.T.O. That the business both in East and West Pakistan belonged to Mr. Captain and that Mrs. Captain's name as proprietor of East Pakistan business was only a camouflaged arrangement. In coming to this conclusion, it was stated, the Tribunal adopted the same reasoning as prevailed with the I.T.O. On the same basis assessment orders for subsequent years of 1962-63 to 1966-67 framed by the I.T.O. Had been upheld by the Tribunal. In these circumstances, the references were submitted before the High Court. ' The learned Judges after referring to the arguments addressed by the learned counsel of either side, laid down the following proposition of law in order to proceed further for the decision of the controversy before them: "We are of the view that although the principles of res judicata and estoppel may not in strict sense apply to proceedings before the Income-tax Authorities but in order to avoid uncertainty in the mind of an assessee and to give some degree of finality to the decision of Income-tax Authorities it is necessary that these authorities should not be allowed to change their decision once taken by them after the consideration of all the material before them unless after taking the decision some new facts or information are laid before them which makes it necessary to change their earlier view. Such a view is not only desirable but is necessary for due administration of justice and any contrary course will result in uncertainties and anomalies." ' On the question whether the principles of res judicata are applicable in proceedings before the Income-tax Authorities, learned Judges referred to this Court's decision in Commissioner of Income-tax v. Wahiduzaman 1965 PTD 283. The learned Judges then examined the question whether the earlier decision of the Income-tax Authorities accepting the bifurcation of the firm and transfer of its assets in West Pakistan to Mr. Captain and those in East Pakistan to Mrs. Captain, "was passed after proper inquiry and was such as could reasonably have been reached on the material before the authority and it did not suffer from such defect which could render it liable to be set aside under section 100, C.P.C. In second appeal if it was a decision of a Civil Court". The final conclusion was then expressed by the learned Judges as mentioned hereunder: "We are, therefore, of the view that there was no new material or fact before the Tribunal which could justify the change in the basis of assessment of the Income of assessee on the ground that transfer of East Pakistan business in favour of Mrs. Captain had not taken place and that the findings in this regard proceeded on mere suspicions, surmises and conjectures."
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' The assessee then moved an application for reference under section 66(1) I if the Income-tax Act, 1922 in respect of all the assessm ent orders which were processed on the basis of the aforesaid decision that the businesses located in the then East and West Pakistan were the proprietary concern of Mr. Captain. The above-stated question was accordingly referred to the High Court in all the references. ' The question was replied in the negative in the manner already stated hereinalbove. Being aggrieved the Commissioner of Income-tax called in question the common judgment of the High Court before this Court in the aforesaid reference by separate petitions for leave to appeal and leave was granted to consider the following contentions: (i) That the question referred to the High Court was patently a pure question of fact and was not referable as a question of law in terms of section 66(1) of the Income-tax Act, 1922, which only permits the Appellate Tribunal to refer to the High Court any question of law arising out of an order of the Appellate Tribunal on an appeal filed by the assessee. (ii) That the High Court has erred in deciding the Reference on a question of law not forming part of the Reference expressly or by implication." ' We have heard Mr. Shiek Haider in support of these appeals but no one ha4 appeared to defend these appeals as the respondent-assessee is ex parte. Ahmed counsel for the appellant has urged that the learned Judges of the Di ion Bench have erred in holding that the two assessment orders of the Income tax Officers in respect of the assessment year 1959-60 accepting the transfer of East Pakistan business to Mrs. Captain, can neither be said to have been p without proper inquiry nor can they be described to be such, as could not have been reasonably reached by the I.T.Os. Concerned on the basis of material before them. The finding of the learned Judges that the nature of orders passed by the said Income-tax Officers was not such as could have been liable t correction under section 100, C.P.C. In a second appeal, if they were decision of the Civil Court, which was the test laid down by this Court in the case of Commissioner of Income-tax v. Wahiduzzaman (supra), was also challenged.- ' Learned counsel has referred us to a number of decisions on the legal proposition that the doctrine of res judicata as such was not applicable to income-tax proceedings. Reference was made in this connection to New Jehangir Vakil Mills Co. Ltd. v. Commissioner of Income-tax, Bombay North Kutch and Saurashtra (1963) VIII Taxes 268 (Supreme Court of India) in which it was held that in matters of taxation there may be no question of res judicata. The learned Judges observed "The extent to which a decision given by an Income-tax Officer for one assessment year affects or binds a decision for another year has been considered by Courts several times and speaking generally it may be stated that the doctrine of res judicata or estoppel by record does not apply to such decisions; in some cases it has been held that though the Income-tax Officer is not bound by the rule of res judicata or estoppel by record, he can reopen a question previously decided only if fresh facts come to light or if the earlier decision was rendered without taking into consideration material evidence, etc." ' The next case referred to was M.M. Ipoh and others v. Commissioner of Income-tax, Madras (1968) 67 ITR 106 in which learned Judges of the Supreme Court of India reiterated their view more emphatically in the following words: "The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessm ent in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment; the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive." ' Reliance was also placed on Seth Ramnath Daga v. Commissioner of Income-tax, Bombay City (1971) 82 ITR 287 and Karnani Properties Ltd v. Commissioner of Income-tax, West Bengal (1971) 82
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ITR 547. In the first mentioned case, in somewhat similar circumstances as in the present case, the assessee pleaded the bar of res judicata on the basis of previous years' assessments in which findings were recorded by the Income-tax Tribunal and it was contended that these questions could not be reagitated in the subsequent assessment proceedings of the same assessee. The Bombay High Court observed: "The question of res judicata need not detain us long, as there is a plethora of decisions which hold that the income-tax authority is not a Court and the decision of an income-tax authority in a prior year does not operate as res judicata in the assessment proceedings of the subsequent years. To quote a few, they are: Perian Pillai v. Commissioner of Income-tax (1929) 4 ITC 217; AIR 1939 Mad 113, Kaniram Ganpat Rai v. Commissioner of Income-tax (1941) 9 ITR 332 (Pat), Tejmal Bhojraj v. Commissioner of Income-tax (1952) 22 ITR 208 (Nag.), Omar Salay Mohamed Sait v. Commissioner of Income-tax (1959) 37 ITR 151 (SC), Abdul Ghaffoor Trust v. Commissioner of Income-tax, Colombo (1961) 2 All ER 436 (PC) and Joint Family of Udayan Chinubhai etc. v. Commissioner of Income-tax (1967) 63 ITR 416; (1967) 1 SCR. In Kaniram Ganpat Rai v. Commissioner of Income-tax, it was held by the High Court of Patna that the Income-tax Officer is not bound by the rule of resjudicata or estoppel and he can reopen the assessment if fresh facts came to light which on investigation would entitle the officer to come to a conclusion different from that of his predecessor. Similarly, in Tejmal Bhojraj v. Commissioner of Income-tax, it has been held that "the principle of res judicata or estoppel by record has no application and the previous finding or decision may be reopened by the department when the previous decision has not been arrived at after due enquiry, the said decision is arbitrary or fresh facts come to light. In view of this, if the assessee in a subsequent year is able to satisfy the income-tax authority that the previous finding is not correct either because it was not arrived at after due enquiry or because it is arbitrary or if the assessee put forth before the income-tax authority fresh facts from which a different conclusion can be arrived at, then in that case the income-tax authority would be justified in arriving at a different conclusion than what was arrived at in the previous proceeding." The second case was cited in support of the proposition that the High Court when deciding a Reference upon a question which speaks of on the facts and in the circmstances of the case" is not entitled to decide the refrence on facts and circumstances that may be found by it, on its own examination of the material but that it means on the facts and circumstances found by the Tribunal. The Supreme Court of India in this case observed: "Neither the High Court nor this Court has jurisdiction to go behind or to question the statement of facts made by the Tribunal. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement:" ' The reason that prevailed with the learned Judges was simply that the question as to the correctness of the facts found by the Tribunal was not before the High Court nor before the Supreme Court as it was not within the Province of the Court to re-appreciate the evidence on record. ' Again reference was made to this Co. Urt's decision in Mst. Samina Shukat Ayub Khan v. Commissioner of Income-tax PLD 1981 SC 85 in which two cases of the Sindh High Court, namely, Commissioner of Income-tax v. M/s. Universal Engineering Company PLD 1963 Karachi 487 and Messrs Ellahi & Co. v. Commissioner of Income-tax PLD 1963 Karachi 490 were aproved which laid down the proposition that a cash credit entry in the account styled as "Deposit Account" in the books of the assessee could be re ordered as income, as it was purely a question of fact and acceptance of asssse e's explanation depended on facts and circumstances of the case; and further that a cash credit entry in the name of assessee's wife could legitimately be regarded as secreted profits of the assessee in the absence of any satisfactory explanation. ' The legal question as to how far the principle of res judicata is applicable to proceedings before the income-tax authorities need not detain us. This question directly arose for decision, in view of
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the question framed under section 66 of the Income-tax Act in the case of Commissioner of Income-tax v. Wahiduzzaman (supra). It was held that the principle of res judicata cannot be applied with the same strictness to decisions of the Income-tax Authorities, as it is applicable to cases decided by Courts or judicial tribunals. The bar of res judicata was postulated to be applicable within the limits as observed in the following dictum: "Under the circumstances the ends of justice will be served by confining the bar of res judicata in relation to decision of Income-tax authorities to cases where the decision is not clearly open to some objection. It should be a decision which is reached after proper enquiry, which is such as could reasonably have been reached on the material before the authority, and which does not suffer from such a defect as would render it liable to be set side under section 100, C.P.C. In second appeal if it was a decision of a Civil Court. Also a matter can always be re-opened on the ground that fresh evidence having a material bearing on the point decided is available." It is not necessary, therefore, to go to the decisions cited by the learned counsel for the appellant on this point. It, may be reiterated that a previous decision of an income-tax authority will not be a bar in the following cases: (i) where the earlier decision is clearly open to some objection; (ii) if it is a decision which is not reached after proper enquiry; (iii) if it is a decision as could riot reasonably have been reached on the material before the authority; (iv) if it is a decision which suffers from such a defect which falls within the purview of the grounds mentioned in S. 100, C.P.C. And liable to correction thereunder in second appeal, if it were a decision of a Civil Court; and (v) if fresh evidence having a material bearing on the point decided in the previous decision is available. ' The above-said tests laid down by this Court is the substance of the decisions cited by the learned counsel at the Bar before us on this point. It may however be pointed out at this stage that in the case of Wahiduzzaman, as already observed the question referred to the Court was so framed that the question of res judicata came up for adjudication directly. The frame of the question and the wordings employed therein in the present case are such that the question of res judicata was not referred for decision. Therefore the Court was not called upon to decide that legal question. The question in the present case w whether the tribunal had before itself any material or evidence to support the finding recorded by it to the effect that the transfer of the East Pakistan business in favour of Mrs. Captain had not taken place and whether this finding was based on mere suspicion, surmises and cojectures. It would therefore appear that there was no controversy between the parties, so far as the question referred to the Court was concerned, that if there was material or evidence to support such a finding and the finding is not speculative, then the Tribunal was competent to uphold the decision of the I.T.O. Reopening the question of transfer of the business in question in favour of Mrs. Captain. Looked at in this perspective the controversy would be confined to a narrow compass. For this purpose, therefore, it was necessary to analyse the order of the Income-tax Appellate Tribunal, and the evidence or material referred to therein, because the order of the I.T.O. Upon appeal merged in the said order of the Income-tax Appellate Tribunal. However, the learned Judges of the Division Bench seem to have examined the order of the Income-tax Officers alone. Further the learned Judges examined the previous orders of the Income-tax Officers in respect of the assessment year 1959-60 accepting the transfer of East Pakistan business to Mrs. Captain, in the light of the decision laid down by the Court as mentioned above. The question referred to them, as discussed above did not call for any examination on these lines.
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' It will now be convenient in the context of the foregoing discussion, first to refer to the assessment order of the Income-tax Officer for the assessment year 1959-60, when for the first time the alleged change of ownership of the concern located in East Pakistan in favour of Mrs. Captain was brought to the notice of the said officer. The relevant portion of the order passed by the Income-tax Officer in the said year reads as follows: "There is a change in the ownership of the concern in this year. Last year it had been assessed as A.O.P., because Mr. And Mrs. Captain had been and were taken as members or partners thereof, whereas in this year separation in business took place and Mrs. Captain got her share out of her capital in the- firm, in the shape of 2 branches in East Pakistan (i.e, Chittagong and Dacca). As such both have filed returns separately as individuals. It is reported that previously Mrs. Captain who is a Science Graduate, has been assisting Mr. Captain in the business of Chemical manufacturing actively, apart from her capital investments in the firm, as per books of accounts. On 1st January 1958 the branches in East Pakistan as mentioned above were taken over by Mrs. Captain and the factory at Chittagong was registered in her name with the Chief Inspector of Factories, Director of Industries and Chief Controller of Import and Export. She also obtained sales tax manufacturing licence from the Sales-tax Officer,…
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