Amendment of assessments

The basic function of the legislature is to make laws and the judiciary is responsible to understand, comprehend and interpret the law. It is the judiciary who while exercising the power of judicial review gathers the intention of the legislature contained in any law to apply it in its true perspective.
This process of interpretation takes years to comprehend the laws. The judiciary took almost two decades to comprehend the earlier law on the subject ie section 65 & 66A. These remedial provisions remained in vogue for more than 20 years and there has been a veritable war between the taxpayers and tax collectors about the invocation and interpretation of these penal provisions of the fiscal statute.
Now a new chapter has been opened by repealing the old law and enacting a new theory with various amendments through insertion of section 122 of the Income Tax Ordinance, 2001.
The sub-section (1) of section 122 of the Income Tax Ordinance, 2001 empowers the Commissioner to amend an assessment order treated as issued under section 120 or 121 of the new law or the assessment order issued under section 59, 59A, 62, 63 or 65 of the old law by making necessary alterations or additions.
Although this provision authorises the Commissioner to amend an assessment but there are certain prerequisites to invoke this provision which are provided in the subsequent sub-sections.
As per this sub-section, the basic requirement is that an assessment order sought to be amended should have been treated as issued under section 120 or 121 of the new law and it should have been issued under section 59, 59A, 62, 63 or 65 of the old law.
Briefly stating, a return of income shall be taken to be complete if it is in accordance with the provisions of sub-section (2) of Section 114, which means it shall be in the prescribed form and be accompanied by such annexes, statements or documents as may be prescribed and it shall fully state all the relevant particulars or information as specified in the form of return including a declaration of the record kept by the taxpayer and shall be singed by the authorised person.
One thing more should be remembered here that as per sub-section 3 of section 120, the Commissioner shall issue a notice to the taxpayer requiring to furnish such information particulars, statements, or documents which are missing in the return and in case of failure, the return furnished shall be treated as invalid return as if it had not been furnished.
Here it is emphasised that a general impression developed after the inception of new law that whatever return is furnished shall ipso-facto be treated, as assessment order is not correct. After due consideration of these provisions, one can understand that only a complete return is treated as assessment order issued u/s 120. And if the return is incomplete, the Commissioner shall issue a notice requiring the taxpayer to meet with the deficiencies.
This point is noteworthy that only a complete and valid return is to be treated as assessment order issued u/s 120. The verification of return and all the supporting documents/details etc as required by the statute is very essential.
So it can safely be said that return is accepted after due application of mind for treating it as assessment order issued to the taxpayer.
I repeat that only a complete return after conscious application of mind can be treated as assessment order issued to the taxpayer which can further be amended by the Commissioner u/s 122(1) or any other officer to whom the powers should specifically be delegated by the Commissioner to proceed in accordance with this remedial provision of law.
One other point is important that the delegation of the powers by the Commissioner is not a compulsion at law. Although the Commissioner is empowered to delegate his authority u/s 210 to some other officer the non-delegation of the powers to some other officer cannot be objected to as it is within the discretion of the Commissioner and when a discretion of law is exercised by the competent authority, it is not open to any exception.
This view has been upheld by the Karachi High Court in a judgement reported as 2004 PTD 1173. On going through section 210 and 239 of the new Ordinance, it would come to light that all pending matters, including proceedings under section 65 of the repealed ordinance at the time of commencement of the new Ordinance, are required to be decided in accordance with the provisions contained in the repealed ordinance but by an authority competent under the new law ie, Income Tax Ordinance, 2001.
It is relevant to add that as per the new law, the pivotal position in the execution of Income Tax law is occupied by the Commissioner in whom all the powers are vested.
The Commissioner may exercise all or any of these powers himself or may delegate all or any of his powers to any other Taxation Officer. However, after the inception of new law, the scheme of old remedial provisions would not prevail rather loss of revenue can be retrieved through application of section 122 of the Income Tax Ordinance, 2001.
The Lahore High Court, Lahore's Judgement reported as 2005-91-TAX-480, can be consulted in this regard. After sub-section (1) I may directly switch over to sub-section (5) skipping over the sub-sections (2), (3), (4) and (4A) which are relevant to limitation but it would not mean that I am going to ignore these vital provisions.
The sub-section (5) says that an assessment order shall only be amended under sub-section (1) and an amended assessment for that year shall only be further amended under sub-section (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that:
(i) any income chargeable to tax has escaped assessment; or
(ii) total income has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or
(iii) any amount under a head of income has been mis-classified.
The corresponding sub-sections of previous law to this provision are 65(2), 65(1)(a) & 65(1)(b). These provisions are very vital to be understood.
As per the old law, there were two conditions provided in sub-section (2) of section 65 that the proceedings under section 65(1) can be initiated upon receiving definite information and that too after obtaining previous approval of the IAC.
Whereas, as per new law, as stated earlier, the entire authority u/s 122(1) vests with the Commissioner until and unless he delegates his powers to some other officer.
Now as per new law, the condition of approval has been waived off and there is only one condition in the field that assessment can be amended under sub-section (1) after acquiring definite information through audit or otherwise from which it can be inferred that any income chargeable to tax has partly escaped assessment.
I mean to say that if any income from one source has been assessed omitting the other source then It can be said that income from that other source has escaped assessment. It can also be said that it is not fully assessed or partly escaped assessment.
Second is the case of under-assessment. It may apply to the situation where a particular source of income has been assessed but the income from this source has not been fully assessed.
Thirdly, when assessed at too low a rate means and covers those cases where income has been correctly assessed but a lower rate of Tax has been wrongly adopted. A point is to be remembered here that computation of lower tax as a result of mis-calculation is strictly speaking not covered by this section but by section 156 of the old law and 221 of the new law.
However, the courts have held that both these provisions are not mutually exclusive. If a case is covered by both sections, choice lies with the Deputy Commissioner/Taxation Officer as per old law and the Commissioner as per new law.
Fourthly, this provision would apply if the total income has been the subject of excessive relief or refund. This term covers all the cases where any deduction, exemption, rebate or refund has been wrongly allowed.
Lastly if any amount under a head of income has been misclassified. This is a new provision having no parallel provision in the old law. The implications of this provision would be discussed later, before which I discuss the basic requirement of this section, which is the definite information.
In sub-section (8) definite information has been defined but this definition is not conclusive and it includes information of sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance, and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer.
The phrase "definite information" has been thoroughly examined, interpreted and illustrated by the judiciary.
This phrase used in section 65(2) of the old law and 122(5) and 122(8) of the new law is in fact penal in nature and requires that the concerned officer must have some material evidence in his possession in respect of the particular matter which he wants to reconsider.
The material already available on record cannot light-heartedly be used for this purpose, as the same may amount to change of opinion. Once assessment is complete and had attained finality, the officer concerned on the basis of record which was already available with him and without acquiring any new information which could be termed as definite information cannot invoke this remedial provision of law.
Here I would like to share the views of the judiciary on the subject. The most renowned judgement of the Supreme Court of Pakistan was delivered in the case of Edulji Dinshaw Limited. This case is reported as (1990) 61 Tax 105 (S.C Pak).
It provides that once all the facts have been fully disclosed by the assessee and considered by the Income Tax Authorities and the assessments have been consciously completed, and no new fact has been discovered, there can be no scope for interference with these concluded transactions under the provisions of Section 65 of the Ordinance on the ground that the income chargeable to tax under the Ordinance has escaped assessment or has been under-assessed, etc, in the meaning of clauses (a) or (b) of sub-section (1) of Section 65 of the Ordinance.
In an other case viz Philips electrical company of Pakistan (Private) Limited reported as 1990 PTD 389 Justice Saleem Akhtar observed that 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 the case reported as [(1997) 76 TAX 131(S.C.Pak.)], the Supreme Court of Pakistan held that there is no concealment of facts. Everything had been declared right from the very beginning and even after 1980 the legal position did not change as section 34A was not applicable to the respondent.
In these circumstances, the opinion of the petitioners that a definite information has been received as it was discovered that section 34A was ignored, was completely misconceived and based on mis-appreciation and misapplication of law.
Where an assessment has been framed consciously by applying mind and there being no concealment of facts by the assessee, discovery of the fact that a provision of law had been ignored or not applied cannot be called a definite information. In Central Insurance Co it was observed that the expression definite information will include factual information as well as information about the existence of a binding judgement of a competent court of law/forum for the purposes of section 65 of the Ordinance.
This dictum will not cover a case where after framing assessment consciously, the assessing authorities realise that any provision of law has been ignored, not applied or misapplied. Such discovery does not fall within the ambit of term definite information as used in section 65 of the Ordinance.
In another famous judgement of M/s Central Insurance Company, reported as 1993 SCMR 1232, it was held that the words "definite information " are the key-words for the purpose of justifying action under sub-section (1) and as the said words had not been defined in the Ordinance, they will carry their literary meanings. It was observed that every information cannot be treated as the basis for reopening of the assessment but the information should be of the nature which should qualify as "definite information" and that the expression definite information" could not be given a universal meaning but it will have to be construed in each case.
It was further observed that where an assessee discloses all the material facts without any concealment and the assessment had been consciously completed by the Income Tax Officer, in such a case, in the absence of the discovery of any new facts which can be treated as "Definite information" there cannot be any scope for reopening of the assessment under section 65.
It was further observed that any change of opinion on the basis of the same material by the Income Tax Officer will not warrant pressing into service the said provision.
It was observed that a Circular from the Board of Revenue interpreting any provision of law was not a "definite information" which will include factual information as well as information about the existence of a binding judgement of competent Court of law/forum for the purpose of section 65 of the Ordinance, but any interpretation of a provision of law by a functionary which has not been entrusted with the function to interpret such provision judicially cannot be treated as a "definite information".
In its judgement reported as 2004 PTD 1901, the Sindh High Court held that the pronouncements made in the aforecited case establish beyond any reasonable doubt the principle that misapplication of law or ignorance of law or a principle/pronouncement made by the superior Courts would not furnish a ground for reopening of assessment under section 65 of the repealed Ordinance as the said misapplication or ignorance could not come within the scope of definite information.
The Assessing Authority had framed the assessment consciously, with application of mind, after taking into consideration all the material facts and there was no concealment of facts.
Such facts would not empower or permit respondent No 1 to reopen the assessment under section 65 of the repealed Ordinance as it would amount to a change of opinion which did not warrant action under section 65 of the repealed Ordinance.
The Sindh High Court also held in another case reported as 2005 PTD 1014 that merely because in the same locality some other property was sold on a higher price than the price shown by the petitioner cannot be termed as definite information to make basis for reopening the assessment.
There are plenty of judgements wherein it has been concluded that retrieval action cannot be initiated on the basis of change of opinion and definite information means some specific material information acquired subsequent to completion of assessment sufficient to believe that income already assessed is escaped assessment, under assessed, assessed too low a rate or subjected to excessive relief or refund.
With reference to new provision contained in sub-section (5) regarding misclassification of any amount under a head of a Income, I may very humbly say that this provision has been added without proper appreciation of law. The Supreme Court of Pakistan has already held as I said earlier that mis-application of law or ignorance of law would not amount to definite information.
Like wise it is also the opinion of the Supreme Court that the discovery of the fact that a provision of law had been ignored or not applied would not call definite information.
As far as the question of binding force is concerned, Article 189 of the Constitution of Pakistan specifically provides that when any principle of law is decided by the Supreme Court, it is to be followed as such by all other courts. So in this scenario the Commissioner may be at liberty to take cognisance of misclassification of any amount under any head of income while treating it a complete return and order issued u/s 120.
Once it is accepted after due application of mind, it will be difficult to take a different stance on this account. As far as sub-section (8) is concerned it is almost identical to the explanation to sub-section (2) of section 65 of the old law.
So this matter has already been adjudicated by the superior courts as I stated earlier hence this provision would not bring any difference to the already settled law.
As far as matter of limitation is concerned, sub-section (2) says that an assessment order can only be amended under sub-section (1) within 5 years after Commissioner has issued or is treated having issued assessment order. Whereas sub-section (3) speaks about the revised return filed under section 114(6). As per sub-section (3)(a) the Commissioner shall be treated as having made amended assessment on the basis of revised return and as per sub-section 3(b) revised return shall be taken as amended assessment order on the day the revised return was furnished.
The sub-section (4) provides that where original assessment order has been amended under sub-section (1) or (3) the Commissioner can further amend the original assessment within 5-years after the Commissioner has issued or is treated to have issued the original assessment order or within one year after the Commissioner has issued or is treated to have issued the amended assessment order whichever is later.
The sub-section (4A) inserted by Finance Act, 2003 says that limitation provided in sub-section (2) or (4) shall not affect the limitation of section 65 of the repealed Ordinance wherever applicable.
SUB-SECTION (5A) & (5B) The sub-sections (5A) & (5B) inserted by Finance Act, 2003 dated 17-06-2003 wef 01-07-2003 provide that after providing opportunity of being heard as per sub-section (9), the Commissioner may amend or further amend an assessment order if he considers that the assessment order is erroneous in so far as it is prejudicial to the interests of revenue.
The provisions contained in section 122(5A) are pari-materia to the provisions contained in section 66A of the Repealed Ordinance. In saving clause ie section 239 of new law, the provisions contained in section 66A of the Repealed Ordinance were not saved and sub-section (5A) of section 122 of new law was introduced through Finance Act, 2003 wef 01-07-2003.
So the provisions contained in sub-section (5A) of section 122 of the new ordinance are not retrospective in operation. Consequently the assessments finalised before 01-07-2003 cannot be reopened, revised or amended in exercise of jurisdiction under these provisions.
Likewise section 66A was not saved in saving clause ie 239 so it can also not be applied right from the inception of new law. This view has unanimously been upheld by the judiciary.
For instance, Karachi High Court through the judgement reported as 2005 PTD 1316. To further elaborate the issue it may be submitted that the same situation arose with the insertion of section 66A of the old law wef 01-07-1980. The view taken by the C.B.R at that time clinches the issue under consideration and directions contained are still binding. It is Circular No 1(48)I.T/I/79 dated 17-02-1981 which reads.
"Retrospectivity of application of section 66A of the Income Tax Ordinance, 1979-Instructions regard.
It would be recalled that section 34A of the repealed Income Tax Act, 1922 provided that the Inspecting Assistant Commissioner of Income Tax could reopen an assessment made by the Income Tax Officer if it was erroneous insofar as it was prejudicial to the interests of Revenue. No order could, however, be made under the said section after expiry of four years from the date of order sought to be revised.
A corresponding provision was not available in the Income Tax Ordinance, 1979 at the time of its promulgation. However, section 66A was inserted through Finance Ordinance, 1980 which corresponds to the provisions of section 34A of the repealed Income Tax Act 1992.
(2) Certain queries have been made from the Board raising the following questions:
(i) whether the proceedings under section 34 A of the repealed Act pending on 1st July, 1979, have lapsed on repeal of the said Act;
(ii) Whether it is possible to revise assessments completed after the promulgation of Income Tax Ordinance, 1979 but before the insertion of section 66A in 1980. "
(3) The undersigned is directed to say that the principle applicable in such case is given in section 6 of the General Clauses Act, according to which the repeal does not affect the proceedings already commenced unless the repealing Act otherwise intend. The repeal does not revive anything not in force or existing at the time the repeal takes effect. Hence the proceedings which were pending under the repealed Act may continue under that Act.
However if proceedings under section 34A had not been initiated when the old Act was repealed these cannot be initiated under the repealed Act. Similarly section 66A does not have retrospective application. The assessments finalised before 1st July, 1980 cannot be reopened under section 66A of the Income Tax Ordinance, 1979.
So it is quite evident that provisions of section 122(5A) are applicable from 01-07-2003 and cannot be invoked in respect of assessments completed before the introduction of this provision of law.
However as far as prospective application of this provision of law is concerned, a comparative study of section 66A and 122(5A) would reveal that the order sought to be amended must be erroneous in so far as it is prejudicial to the interests of the revenue. As per new law, the Commissioner has to be satisfied of twin conditions namely:
(i) The assessment order sought to be revised is erroneous and
(ii) it is prejudicial to the interests of revenue.
If one of them is absent ie if the order is erroneous but not prejudicial to the revenue and if it is not erroneous but it is prejudicial to the revenue, recourse cannot be had to section 122(5A). These provisions cannot be invoked to correct each and every type of mistake or error. It is only when it is erroneous as well as prejudicial to the revenue.
The phrase prejudicial to the interests of revenue has to be read in conjunction with an erroneous order. Every loss of revenue as a consequence of an order cannot be treated as prejudicial to the interests of revenue eg in the case of Galxo Laboratories limited reported as PLD 1992 SC. 549, the Supreme Court while examining the provisions of section 66A observed that IAC can invoke these provisions if he considers that any order passed by the Income Tax Officer was erroneous causing prejudice to the interests of the revenue.
The Apex Court further observed that mere erroneous order without prejudice to the interests of the revenue would not authorise the IAC to exercise powers u/s 66A.
There are various authorities wherein it has been held that these provisions cannot be invoked light heatedly without establishing both the conditions simultaneously. It has also been concluded that these provisions cannot be applied on account of change of opinion meaning thereby that if any information was available on record and assessment was consciously completed taking due cognisance of the matter.
Any subsequent disagreement in this regard would amount to change of opinion and these provisions would not be applicable. On comparative study of both these provisions, it would come to light that as per earlier law, IAC was solely authorised to invoke this section that too after calling for the record at his own and if after examination and scrutiny of the record, he was satisfied that assessment was erroneous and prejudicial to the interests of revenue.
The opportunity of being heard was also a sine qua non in this regard. As per new law, this power vests with the Commissioner who can delegate his powers u/s 210 to an officer not below the rank of Additional Commissioner.
The new law does not provide that the Commissioner or the IAC to whom powers are delegated may call for the record at his own. So impression is that as contrary to previous law, action under this section can also be taken on the report of some other officer.
As per old law, limitation in this regard was four years whereas sub-section (5B) says that limitation will be applicable as per sub-section (2) or (4) as the case may be. I have already discussed both these provisions while dealing with sub-section (1) of section 122.
The sub-section (6) provides that as soon as possible after making an amended assessment under sub-section (1), (4) or (5A) the Commissioner shall issue an amended assessment order to the taxpayer stating the amended taxable income, amended amount of tax due, the amount of tax paid and time place and manner of appealing the amended assessment.
A careful study of this provision would reveal that instead of providing any definite time frame, ambiguous words "as soon as possible" have been used. In my view, the lawmakers should be very vigilant while drafting the provisions of law. The vague and ambiguous terminology should be avoided. The element of reasonableness is missing in this provision. For this purpose General Clauses Act & case law can be consulted.
The sub-section (7) is self speaking which says that amended assessment order shall be treated as an assessment order for the purposes of this ordinance except sub-section (1). I have already discussed sub-section (1), which provides remedy against the original assessment order only and not against subsequent amended assessment order.
Finally sub-section (9) provides that no assessment shall be amended or further amended under section 122 unless the taxpayer has been provided an opportunity of being heard. The principles of natural justice are part and parcel of the fiscal statute.
It is well established now that none can be condemned unheard. So while proceeding u/s 122(1)/122(5) as well as 122(5A), issuance of a Notice with the proposed treatment requiring the Taxpayer to furnish his defence is a mandatory requirement, otherwise the proceedings shall be considered as nullity in the eyes of law.