2011 PTD (Trib.) 936
[Inland Revenue Appellate Tribunal of Pakistan]
Before Shahid Jamil Khan, Judicial Member and Abdul Rauf, Accountant Member
Messrs RAFI ELECTRONICS CORPORATION (PVT.) LTD., LAHORE
Versus
C.I.T., R.T.O., LAHORE
I.T.As. Nos.963/LB to 965/LB of 2009, decided on 21st December, 2009.
(a) Income Tax Ordinance (XLIX of 2001)------Ss.122(5), 121, 115(4), 114, 144(6) & 177---Income Tax Ordinance, (XXXI of 1979), S.59A--Amendment of assessment---Concept and procedure---Correctness of the return was
presupposed, on the date of filing return, by words of law and no order like under S.59A of the
Income Tax Ordinance, 1979, was required to be passed---For verification of declarations made
in the return, the Commissioner was empowered to select a person for audit under S.177 of the
Income Tax Ordinance, 2001, of income tax affairs of the person who had filed a return under
S.114 of the Income Tax Ordinance, 2001 or a statement under S.115(4) of the Income Tax
Ordinance, 2001---Audit was a concept, different from assessment and was not envisaged to be
adopted as a routine in every case---If a person failed to file a return or statement, as envisaged
under Income Tax Ordinance, 2001, the Commissioner could, under S.121 of the Income Tax
Ordinance, 2001, made a "Best Judgment Assessment" based on the available information or
material---Assessment order treated as issued under S.120 or S.121 of the Income Tax
Ordinance, 2001 could be amended under S.122 of the Income Tax Ordinance, 2001--Subsection (5) of S.122 of the Income Tax Ordinance, 2001 provided that such amendment could
be made on receiving definite information, from audit or otherwise, to the effect that income 'had
escaped assessment', 'was under assessed', 'assessed at too low a rate', subjected to excessive
relief/refund' or 'had been misclassified'---Subsection (5A) of S.122 of the Income Tax
Ordinance, 2001, allowed such amendment if the assessment order was found to be 'erroneous in
so far as it was prejudicial to the interest of revenue'---Subsection (3) of the S.120 of the Income
Tax Ordinance, 2001 treated the revised return, filed under S.144(6) of the Income Tax
Ordinance, 2001, also an amended assessment order, having been passed by Commissioner, on
the day revised return was filed, for all purposes of the Income Tax Ordinance, 2001--Subsection (4) of the S.122 of the Income Tax Ordinance, 2001 authorized the Commissioner to
'further amend the assessment order `as many time as may be necessary'.
(b) Income Tax Ordinance (XLIX of 2001)------S.122---Amendment of assessment---Doctrine of merger---Though the doctrine of merger
deals with orders between inferior and superior authorities, nevertheless, the doctrine of merger
was applicable on all fours to the concept of amendment.
Messrs Gojer Brothers (P.) Ltd. v. Shri Ratan Lal Singh AIR 1974 SC 1380 rel.
(c) Income Tax Ordinance (XLIX of 2001)------S.122---Amendment of assessment---Effect---Necessary effect of the amendment was that the
amended part of the assessment order under S.120 of the Income Tax Ordinance, 2001 was
changed, absorbed into or swallowed by the amended assessment order and the amended part of
the original assessment order disappears.
(d) Income Tax Ordinance (XLIX of 2001)------S.122---Amendment of assessment---Second amendment---Doctrine of merger ---Change of
opinion---Merger of original assessment order under S.120 of the Income Tax Ordinance, 2001
in the first amendment assessment order---Validity---Several part of order treated as issued under
S.120 or issued under S.121 of the Income Tax Ordinance, 2001 merged into amended
assessment order under S.122(1) or (3) of the' Income. Tax Ordinance, 2001---Assessment order
under S.120 of the Income Tax Ordinance, 2001, to the extent of determining commercial status
of the taxpayer, had merged into the first amended assessment order---In the present case,
Taxation Officer in opening paragraph of that order, treated the taxpayer as 'manufacturer' before
making addition of the claimed expenses---Since taxpayer's commercial status, as manufacturer,
had already been examined by the Taxation Officer,' re-examination of the same for further
amendment was change of opinion---Language of second amended assessment order clearly
showed that it was amending the original assessment order under S.120 of the Income Tax
Ordinance, 2001, without discussing the first amended assessment order---Even the 'taxable
income/(loss)' was noted, whereas the same was reduced, by first amendment---Taxation Officer
through second amended order had attempted to amend the part of assessment order under S.120
of the Income Tax Ordinance, 2001 which had merged into first amended assessment order
under S.122(5A) of the Income Tax Ordinance, 2001 so was not in existence--Second/further
amended assessment order was not sustainable.
Glaxo Laboratories (Pak.) Ltd. v. IAC of Income Tax 1992 PTD 82 and Messrs Gojer Brothers
(P.) Ltd. v. Shri Ratan Lal Singh AIR 1974 SC 1380 rel.
(e) Income-tax------Functus officio, doctrine of---Applicability---Adjudicating authority, judicial or quasi
judicial, cannot change its determination in an adjudication, after signing the order/judgment as
doctrine functus officio conies in the way.
(f) Income-tax------Review---Review of a determination in an order or judgment can only be made if the same is
specifically allowed by the legislature in any enactment.
(g) Income-tax------Change of opinion---Assessing Officer, while making additional assessment under the former
laws, could not re-adjudicate a determination made in an assessment order and the same was
termed as 'change of opinion'.
(h) Income Tax Ordinance (XLIX of 2001)------S.122 (4)---Amendment of assessment---Limitation---Second/further amendment--Application of one year limitation' for further amendment---Validity---Subsection (4) of S.122 of
the Income Tax Ordinance, 2001 dealt only with the limitation for further amendment of an order
which had already been amended and the un-amended part of the order under S.120 or S.121 of
the Income Tax Ordinance, 2001 was termed as 'original order'---Limitation for first amendment
of orders under S.120 or S.121 of the Income Tax Ordinance, 2001 was given in subsection (2)
of S.122 of the Income Tax Ordinance, 2001, which was five years from the end of financial year
in which Commissioner had issued or treated to have issued an assessment order---To further
amend the original assessment order "as many times as may be necessary", limitation was
provided in the later part of the subsection, where key words were "within the later of" the period
provided either-in Cl. (a) or (b)---Clause(a) provided that a further amendment, of the original
order, could again be made within `five years front end of the financial year in which the
Commissioner had issued or treated as having issued the original assessment order'---Whereas
Cl. (b) provided limitation of one year front the end of the financial year in which, the
Commissioner had issued the amended assessment order under S.122(1) of the Income Tax
Ordinance, 2001 or treated as having issued the amended assessment order under S.122(3) of the
Income Tax Ordinance, 2001, when revised return was filed---When period of limitation given in
Cls. (a) and (b) of subsection (4) of S.122 of the Income Tax Ordinance, 2001 were read with the
key words 'within the later of', the necessary conclusion would be ; first if limitation of five years
had not expired, the original order could be further amended within this limitation; secondly, if
the limitation of five years had expired but limitation of one year, as provided in Cl. (b) of
subsection (4) of S.122 of the Income Tax Ordinance, 2001 had not expired, further amendment
could still be trade till the date of limitation of one year---Clause (b) of subsection (4) of S.122 of
the Income Tax Ordinance, 2001 shall remain dormant unless limitation under Cl. (a) of
subsection (4) of S.122 of the Income Tax Ordinance, 2001 was available---If said limitation
expired, Cl. (b) of Sub-S. (4) of S.122 of the Income Tax Ordinance, 2001 shall be operative by
dint of the words 'within the later of'---Appellate Tribunal disagreed with the taxpayer that after
amendment, the limitation of five years was restricted to one year because the assessment order
under S.120 of the Income Tax Ordinance, 2001 became an amended assessment order, after
having been merged---Such interpretation led to uncertainties---If such interpretation was
accepted, a taxpayer could misuse his right of revising return under S.114(6) of the Income Tax
Ordinance, 2001, which was treated as amended assessment order under S.122(3) of the Income
Tax Ordinance, 2001---Taxpayer would file a revised return showing a minor discrepancy, say
after six months of its becoming assessment order under S.120 of the Income Tax Ordinance,
2001 and would claim that the limitation of five years given under subsection (2) of S.122 of the
Income Tax Ordinance, 2001 was now curtailed to one year---Answer to question "whether
limitation of one year was applicable for further amendment was in the negative.
(i) Income Tax Ordinance (XLIX of 2001)------Ss.221 & 122 (5A)---Rectification of mistake---Amendment of assessment---Dropping of
proceedings initiated under S.122(5A) of the Income Tax Ordinance, 2001 was termed as an
order under S.122(5A) of the Income Tax Ordinance, 2001 and rectified under S.221 of the
Income Tax Ordinance, 2001---Result of dropping proceedings initiated under S.122(5A) of the
Income Tax Ordinance, 2001 was that no amendment was made and order under S.120 or S.121
of the Income Tax Ordinance, 2001, as the case may be, remained intact---Dropping of
proceedings at best be termed as withdrawal of notice through which proceedings were initiated,
as taxpayer had answered the notice to the satisfaction of the Taxation Officer---Order under
S.122(1)(5) or S.122(5A) of the Income Tax Ordinance, 2001 must be the one which amended
the assessment order for the reasons given in subsection (5) or (5A) of S.122 of the Income Tax
Ordinance, 2001 and not the one by which such reason were withdrawn---Action under S.221 of
rectifying the order was held to be nullity in the eye of law.
(j) Income Tax Ordinance (XLIX of 2001)------S.221---Rectification of mistake---No investigation on facts, through evidence, could be
made in rectification proceedings.
(k) Income Tax Ordinance (XLIX of 2001)------Ss.122 & 115(5)(6)---Amendment of assessment---Presumptive Tax Regime---Whether
notice under S.115(5) of the Income Tax Ordinance, 2001 was mandatory before bringing the
assessment into Final Tax Regime by invoking S.122 of the Income Tax Ordinance, 2001--Held, notice under S.112(5) of the Income Tax Ordinance, 2001 was directory in nature, as no
consequence of failure to issue such notice was given in the Income Tax Ordinance, 2001,
however, Taxation Officer could not just ignore a provision of law casting any duty upon him--Legislature had enacted said provision for an amicable resolution of the issue, if the taxpayer
found the opinion of the Commissioner as correct-If the taxpayer contested such notice, the
Commissioner would necessarily resort to the provisions of S.122 of the Income Tax Ordinance,
2001, for making any amendment of legally recognized order under S.120 of the Income Tax
Ordinance, 2001---Non-issuance of notice under S.115(5) of the Income Tax Ordinance, 2001
would not vitiate the proceedings initiated under S.122 of the Income Tax Ordinance, 2001.
Malik Muhammad Akram and Nasir Jamil, ACA for Appellant.
Ahmad Shuja Khan, D.R. for Respondent.
ORDER
These three appeals, filed by taxpayer, are against two independent orders, both dated 12-3-2009,
of Commissioner (Appeals). One is against upholding of order under section 122 relating to tax
year 2003 and two are against a combined order, relating to tax years 2004 and 2005, upholding
orders under section 221 of Income Tax Ordinance ("the Ordinance of 2001"). As similar legal
proposition and common facts are involved, so all three appeals are being decided by this order.
2. Facts, as gathered from available record, pleadings and arguments of the parties are, the
taxpayer, a private limited company, drives income from sale of electronic goods. Return for tax
year 2003, declaring loss, was taken to be assessment order under section 120, for all purposes of
the Ordinance of 2001. The assessment order was first amended under section 122 vide order
dated 23-2-2004 and declared loss was reduced by disallowing some expenses as payments
of the same were not made through cross cheque. In July 2008, another amendment in the
assessment order was intended, by the Taxation Officer, when a notice under section 122(5A)
was issued, confronting the taxpayer on claimed business status of a manufacturer. In Taxation
Officer's opinion, the taxpayer was a commercial importer, therefore, tax deducted under section
148 was final discharge of its liabilities under section 169. For this reason the assessment order
under section 120 was treated as erroneous in so far as prejudicial to the interest of revenue and
the assessment was further amended, after rejecting taxpayer's objections and explanations in
reply vide order dated 23-12-2008 under section 122(5A). This order was challenged in first
appeal, on factual as well as on legal grounds. Commissioner (Appeals) dismissed taxpayer's
appeal on all grounds, which is impugned before us.
The other two appeals are also based on the same reason, for bringing the taxpayer under
presumptive/final tax regime nevertheless, the treatment of holding the taxpayer a Commercial
Importer was given by employing provisions of section 221 of the Ordinance of 2001. Facts
relevant to these appeals are; returns filed for the tax years 2004 and 2005, were taken to be
assessment orders under section 120. Initially proceedings under section 122(5A) were initiated,
in 2007 for both the years, proposing amendments on the reasons, which later became basis of
second amended assessment order for tax year 2003. However, after considering reply to the
notice, proceedings were dropped vide order dated 27-6-2007, which purportedly was passed
under section 122(5A). The proceedings, impugned in appeals before us, were initiated in the
year 2008, when taxpayer was served with a notice under section 221, treating the order of
dropping proceedings as mistake of law and facts. Interestingly, the taxpayer was again
confronted, under a different provision on the same reasons/facts which were considered and
dropped earlier. In reply, the taxpayer raised objections on jurisdiction under section 221 besides
explaining his position on facts of the claimed status as manufacturer. After considering the
reply, Taxation Officer completed proposed action and passed a combined rectification order
under section 221 on 23-12-2008. We cannot lose sight of the fact that language/reasons and date
of order under section 122(5A) for tax year 2003 and of the combined order under section 221
for tax years 2004, 2005 are same. It appears that both the proceeding, under different sections,
were initiated simultaneously. Appeals, against this combined order, also met the same fate;
Commissioner (Appeals) upheld the action under section 221 as well as consequent order and
dismissed the appeals on merits.
3. Counsel for the appellant (taxpayer) assailed both the orders of Commissioner (Appeals),
contending that the legal objections were addressed in a perfunctory manner. While arguing for
the appeal relating to tax year 2003, he submitted that order under section 120 was not in field,
rather had merged in the first amendment order dated 23-2-2004, therefore, limitation of one year
as prescribed by subsection (4) to section 122 was applicable and second amendment order
passed on 23-12-2008 was time barred. He further submitted; while passing the first amended
assessment order, the Taxation Officer had necessarily applied his mind on the issue of status,
otherwise he should straightaway had taxed the taxpayer under presumptive tax regime instead
of passing an order of reducing loss by adding back expenses. He emphasized that treating the
taxpayer as commercial importer is a change of opinion, as the Taxation Officer had earlier
treated the taxpayer as a manufacturer and gave his decision of reducing losses. He also
submitted; before issuing notice under section 122, it was incumbent upon the Taxation Officer
to give notice under section 115(5), requiring taxpayer to file statement under section 115(4),
without fulfilling this precondition, he could not have entered into inquiry of determining the
taxpayer under final tax regime. While arguing in support of other two appeals arising out of
order under section 221, he submitted that Taxation Officer had no jurisdiction to invoke the
provisions of rectification, after dropping proceedings initiated under section 122(5A) on the
basis of taxpayer's reply on facts. He contended that re-evaluation of the same facts for arriving
at a different conclusions was change of opinion and was beyond the scope of section 221.
He also submitted that determination of facts on the basis of evidence could not be called a
rectification of mistake as held by the apex Court.
The DR opposed the appeals and preferred to plead the case on facts, by contending that
circumstantial evidence strongly support the fact that taxpayer was a commercial importer. On
legal grounds he replied by submitting that second amendment order, for tax year 2003, was not
time barred as Taxation Officer had amended the original order under section 120 and not the
amended assessment order. He argued that limitation as provided in subsection (4) to section
122 does not curtail the limitation of live years provided in subsection (2) rather the limitation
of live years was enhanced by one year in case the amended order is further amended. On
jurisdictional objection under section 221, he submits that dropping of proceeding was a mistake,
therefore, was rectifiable by resorting to the jurisdiction under section 221.
4. Heard learned representatives of the parties and record perused.
5. We have carefully considered the arguments of both sides, in light of the given facts. In our
view, some important questions arise in this case, which need our determination before deciding
these appeals, which are:-(i)
Whether the original assessment order under section 120 had merged in the first
amendment assessment order?
(ii)
If answer to the first question is in affirmative, whether limitation of one year was
applicable for further amendment?
(iii)
Whether dropping of proceedings, initiated under section 122(5A) can be termed as
an order under section 122(5A) and the same could be rectified under section 221?
(iv)
Whether Notice under section 115(5) was mandatory before bringing the assessment
into the Final Tax Regime by invoking section 122?
6. Before answering the first question, the doctrine of merger needs to be explored. This doctrine
was extensively discussed in two judgments, one by Sindh High Court in Glaxo Laboratories
(Pak.) Ltd. v. IAC of Income-tax reported as 1992 PTD 82 and the other by the Supreme Court
of Pakistan in appeals against the fist judgment, having same title of Glaxo Laboratories Limited
reported as PLD 1992 SC 549 (1992 PTD 932). Facts of the case were that additional assessment
order passed under section 65 of the late Income Tax Ordinance, 1979 was turned down by the
Tribunal holding that same amounted to change of opinion, because during proceedings under
section 62 the Assessing Officer would have or should have taken notice of extraordinary
receipts of 130 million shown in the audited accounts of the assessee. Later, the same amount
was attempted to be taxed by issuing notice under section 66-A of the late Income Tax
Ordinance of 1979. The notice was challenged in constitutional jurisdiction before Sindh High
Court. Number of judgments from both jurisdictions of India and Pakistan were discussed
elaborately and issuance of notice was upheld by Sindh High Court. It was held that
assessment order under section 62 had not merged in the order of Appellate Tribunal of
cancelling the order under section 65. In appeal, the apex Court reversed the judgment of Sindh
High Court and held that the assessment order had merged into the order of Tribunal therefore
notice under section 66-A could not have been issued. Before looking at the relevant portion pf
Supreme Court's judgment, it would be advantageous to refer some parts from both the
judgments, where concept of the doctrine of merger is discussed. (Bold, Italic and underling used
hereunder are to lay emphasis on the relevant portions).
The Supreme Court reproduced the definition of 'Merge' and 'Merger from Corpus Juris
Secundum (Volume 57, at page 1067);
"The verb 'to merge' has 'been defined as meaning to sink or disappear in something else,
to be lost to view or absorbed into something else, to become absorbed or extinguished,
to be combined or be swallowed up.
'Merger' is defined generally as the absorption of a thing of lesser importance by a
greater, whereby the lesser ceases to exist, but the greater is not increased, an absorption
or swallowing up so as to involve a loss of identity and individuality."
While Sindh High Court explained this doctrine by quoting Supreme Court of Pakistan in the
case of F.A. Khan v. The Government of Pakistan PLD 1964 SC 520:-"If the propositions stated above are to be accepted appears to be good ground for holding
that the passing of an order subject to appeal will not necessitate the filing of a suit for it
is only a step in proceeding and not a final order. In any case once, an appeal is tiled the
matter becomes sub judice and when the appellate authority passes an order the order of
the original authority disappears and merges in the order of the appellate authority so that
there remains in existence only the appellate order and this order can be made the basis of
a suit."
Sindh High Court also quoted Indian Supreme Court from its judgments in case of Messrs Gojer
Brothers (P.) Ltd. v. Shri Ratan Lal Singh (AIR 1974 SC 1380):-"10. The juristic justification of the doctrine of merger may be sought in the principle that
there cannot be, at one and the same time, more than one operative order governing the
same subject-matter. Therefore the judgment of an inferior Court, if subjected to an
examination by the superior Court, ceases to have existence in the eye of law and is
treated as being superseded by the judgment of the superior Court. In other words, tine
judgment of the inferior Court loses its identity by its merger with the judgment of the
Superior Court."
Having referred to the concept of the doctrine of merger, now we intend to be benefited from the
relevant extract from the judgment, noted above, in Glaxo Laboratories Case, wherein the
Supreme Court has summed, up its discussion and gave discussion in the following words:
"(8) The learned Judges of the High Court have also referred to State of Madras v.
Madhurai Mills Limited Co. AIR 1967 SC 681 in which reference was made to Amritlal
Bhogilal and Co. (supra) and it was observed that the 'doctrine concerned is not a
doctrine of rigid and universal application and it cannot be said that whenever there are
two orders, one by the inferior Tribunal and the other by the superior Tribunal passed in
appeal or revision, there is fusion or merger of two orders irrespective of the subjectmatter of the appellate or revisional order and the scope of the appeal or revision
contemplated by the particular Statute. To support this observation reference was made to
Amritlal Bhogilal and Company and it was observed that:-"the order of assessment made by the ITO in that case was a composite order namely the
order granting registration of the firm making the assessment on the basis of the
registration."
With respect this observation does not seem to correctly refer the observations of
Amritlal Bhogilal, which has been quoted above that both the orders of assessment and
granting registration were independent and separate orders. It was further observed that:
"the order granting registration to an assessee firm is an independent 'separate order and it
merely affects or governs the procedure to be adopted in calculating or recovering the tax
found due."
Therefore, the observation made in Madhurai Mills is not supported by Amritlal Bhogilal.
The observation, with respect, seems to have been misunderstood and not correctly
quoted. It is true that it is the nature and scope of the provision of law as provided for
challenging an order in appeal or revision which determine the effect and scope of such
order. But where such an order has been passed in exercise of such jurisdiction it
becomes final and operative in respect of the, order against which appeal or revision has
been filed. The appeal provided under the Income Tax Ordinance is not of a limited
nature. It is however, to be noted that if two separate orders in respect of two separate
subjects/proceedings have been passed in a consolidated order which are severable and
one of them is appealable while the other is not, then the appeal filed in such case will
only affect that part of the order which is appealable. In Amritlal Bhogilal there were two
separate orders and appeal was filed against the assessment order only. It was not a case
where there was only one order, which was appealable In a case where there is only one
order against which appeal has been provided, filed and decided then there does not seem
to be a scope for argument that as some objections or pleas which did exist but have not
been taken, pressed or considered, that part of the order which is covered by such plea do
not merge in the appellate order. Such a view will create uncertainty and is bound to
result in confusion and chaos. The law does not favour uncertainties in decision and in
revenue matters one has to be very specific and certain. The Tribunal has considered the
receipt of Rs.130 million at length and has come to the conclusion that it must have been
taken into consideration by the ITO while making assessment under the total audit
scheme. The result is that the order of the Income Tax Officer merged into the order of
the Tribunal and, therefore, the IAC did not have the jurisdiction to initiate action under
section 66-A of the Income Tax Ordinance for reopening the matter. In this case
principles of res judicata will not apply as it is governed by the provisions of section 66A which lays down the boundaries and parameters for exercise of jurisdiction under it.
The fact that in 1991 subsection (1-A) was added authorizing IAC to initiate action under
section 66-A even if appellate and revisional order has been passed, supports the
contention that such a power did not exist earlier. The question whether it is applicable to
the present case is kept open and we refrain from expressing any opinion at this stage.
We, therefore, allow the appeal and set aside the impugned judgment and consequently
notice issued under section 66-A of the Income Tax Ordinance is declared as without
jurisdiction and of no legal effect."
7. After being benefited from the reproduced parts of the above said judgments, examination of
different provisions under the new law is deemed necessary for arriving at proper answers to
the question(s) framed above. Under the Ordinance of 2001 return filed under section 114, if
complete, is taken to be an assessment order passed by the Commissioner under section 120.
Whereas, the order under section 120, in fact is the computation of income declared/made by the
taxpayer in its return. The new law, having reposed confidence in the taxpayer, has abolished the
erstwhile procedure/proceedings of assessment. It may be noted here that the concept of
believing the taxpayer and bypassing the assessment procedure is not a novel one, section 59A of
the late Ordinance of 1979, also bore the similar concept. Under this section, the assessing
officer, if satisfied without requiring any evidence that the return was correct and complete,
could pass an order, without resorting to the procedure of assessment as was provided under
sections 61, 62 or 63. The section 59A is reproduced for reference:-"59A. Assessment on the basis of return.---(1) If the Deputy Commissioner is satisfied
without requiring the presence of the assessee or the production by him of any evidence
that a return furnished under section 55 is correct and complete, he shall, by an order in
writing assess the total income of the assessee and determine the tax payable on the basis
of such return."
Novel part of this concept, under the new Ordinance, is that the correctness of the return is
presupposed, on the date of filing return, by the words of law and no order, like under section
59A, is required to be passed. However, for verification of the declarations made in the return.'
the commissioner is now empowered to select a person for audit under section 177, of income
tax affairs of the person who has tiled a return under section 114 or a statement (in lieu of return)
under section 115(4). Needless to say that audit is a concept, different from assessment and is not
envisaged to be adopted as a routine in every case. If a person fails to file a return or statement,
as envisaged under the Ordinance of 2001, the Commissioner can, under section 121, make a
'Best Judgment Assessment' based on the'' available information or material. An assessment
order treated as issued under section 120 or issued under section 121 can be amended under
section 122. Its subsection (5) provides that such amendment can be made on receiving definite
information, from audit or otherwise, to the effect that income has escaped assessment', 'was
under assessed', 'assessed at too low a rate', 'subjected to excessive relief/refund' or 'has been
misclassified'. Subsection (5A), of this section, allows such amendment if the assessment order is
found to be 'erroneous in so far as it is prejudicial to the interest of revenue'. Subsection (3) of
the section 120 treats the revised return, filed under section 144(6), also an amended assessment
order, having been passed by Commissioner, on the day revised return is filed, for all purposes of
the Ordinance of 2001. Its subsection (4) authorises the Commissioner to 'further amend' the
assessment order 'as many time as may be necessary'.
8. Now, we revert to answer the first question, in light of the law discussed ibid. Though the
doctrine of merger, as analysed above, deals with orders between inferior and superior
authorities, nevertheless, in our opinion, the doctrine of merger is applicable on all fours to the
new concept of amendment. Because, "there cannot be, at one and the same time, more than one
operative order governing the same subject-matter", as was observed by Indian Supreme Court in
Messrs Gojer Brothers Case. Necessary effect of the amendment is that the amended part of the
assessment order under section 120 is changed, absorbed into or swallowed by the amended
assessment order and the amended part of the original assessment order disappears. In other
words, as enshrined in Glaxo Laboratories Case by Supreme Court of Pakistan, the severable part
of the order treated as issued under section 120 or issued under section 121, which deals with a
separate subject and is appealable separately, merges into the amended assessment order passed
under section 122(1) or (3). Therefore, answer to the fist question is in affirmative and we hold
that assessment order under section 120 for tax year 2003, to the extent of determining
commercial status of the taxpayer, had merged into the first amended assessment order dated232-2004. In opening paragraph of that order, the Taxation Officer, treated the taxpayer as
'manufacturer' before making addition of the claimed expenses, same is reproduced for
reference:-"The assessee, a Private Limited Company derives income from manufacturing of
electronics products. The perusal of assessment record reveals that the assessee has failed
to make payments through crossed cheque under the following heads of P&L Accounts."
Since, taxpayer's commercial status, as manufacturer, had already been examined by the
Taxation Officer, therefore, re-examination of the same for further amendment was a change of
opinion. Language of the second amended assessment order dated 23-12-2008 clearly shows that
it was amending the original assessment order under section 120, without discussing the first
amended assessment order. Even the 'taxable income/(loss)' was noted as Rs.(11,746,276),
whereas the same was reduced, by first amendment, to Rs.(5,089,231). It is established from
perusal of both the orders that Taxation Officer through impugned order dated 23-12-2008 has
attempted to amend the part of assessment order under section 120, which had merged into the
order dated 23-2-2004 under section 122(5A) so was not in existence. Therefore, the second/
further amended assessment order dated 23-12-2008 is not sustainable. Legality of this order
with reference to limitation is determined after examining subsection (4) of section 122, while
answering second question.
9. To answer the second question of limitation, examination of subsection (4) to section 122 is
necessary. The subsection (4) of section 122 is reproduced hereunder:-"(4) where an assessment order (hereinafter referred to as the "original assessment") has
been amended under subsection (1) or (3), the Commissioner may further amend, [as
many times as may be necessary) the original assessment within the later of (a) five years after the Commissioner has issued or is treated as having issued the
original assessment order to the taxpayer; or
(b) one year after the Commissioner has issued or is treated as having issued the
amended assessment order to the taxpayer."
The legislature under this subsection has defined the assessment order, treated as issued under
section 120 or issued under section 121, as "original assessment", for the purpose of further
amendment. It may also clarified that under subsection (7) to section 122, the legislature has
treated the amended assessment order as 'assessment order for all purposes of this Ordinance' but
has also given an exclusion of this treatment in the same subsection with the words, "other than
for the purpose of subsection (1)". It is, therefore, reiterated that the assessment order defined as
original assessment order in subsection (4) is the one which is either treated as issued under
section 120 or is issued under section 121. First part of this subsection clearly shows that the
further amendment, under this subsection is allowed only of the original assessment and not of
the amended assessment. The rationale is obvious; an adjudicating authority, judicial or quasi
judicial, cannot change its determination in an adjudication, after signing the order judgment as
doctrine functus officio comes in the way. It is also a settled law that a review of a determination
in an order or judgment can only be made if the same is specifically allowed by the legislature in
any enactment. History of the Income Tax Law, as special law, also shows that the superior
courts have deprecated in number of judgments that the Assessing Officer, while making
additional assessment under the former laws, could not re-adjudicate a determination made in an
assessment order and the same was termed as 'change of opinion'. Subsection (4) deals only with
the limitation for further amendment of an order, which has already been amended and the unamended part of the order, under section 120 or 121 is termed as 'original order'. Whereas, the
limitation for first amendment of orders under section 120 or 121 is given in subsection (2) of
section 122, which is five years from the end of the financial year in which the Commissioner
has issued or treated to have issued an assessment order. To further amend the original
assessment order, "as many times as may be necessary", limitation is provided in the later part of
the subsection, where key words are "within the later of the period provided either in clause (a)
or (b). Answer to second question relates to the interpretation of clauses (a) and (b) of the
subsection (4) along with the key words. Clause (a) provides that a further amendment, of the
original order, can again be made with five years from end of the financial year in which the
Commissioner has issued or treated as having issued the original assessment order'. Whereas
clause (b) provides limitation of one year from the end of the financial year in which, the
Commissioner has issued the amended assessment order under section 122(1) or treated as
having issued the amended assessment order under section 122(3), when revised return is tiled.
When period of limitation given in clauses (a) and (b) are read with the key words 'within the
later of', the necessary conclusion would be; First if limitation of five year has not expired, the
original order can be further amended within this limitation. Secondly, if the limitation of five
years has expired but limitation of one year, as provided in clause (b) has not expired, further
amendment can still be made till the date of limitation of one year. Clause (b) shall remain
dormant unless limitation under clause (a) is available, however, if this limitation expires, clause
(b) shall be operative by dint of the words 'within the later of'. We do not agree with the
submission by learned counsel for the taxpayer that after amendment, the limitation of five years
is restricted to one year because the assessment order under section 120 becomes an amended
assessment order, after having been merged. Such an interpretation leads to uncertainties, which
are deprecated by the Supreme Court in the above quoted judgment. If such interpretation is
accepted, a taxpayer can misuse his right of revising return under section 114(6), which is treated
as amended assessment order under section 122(3). The taxpayer would tile a revised return
showing a minor discrepancy, say after six months of its becoming assessment order under
section 120 and would claim that the limitation of five years given under subsection (2) of
section 122 is now curtailed to one year. Our answer to the second question is in negative.
10. Our answer to the third question is also in negative. Result of dropping of proceedings
initiated under section 122(5A) was that no amendment was made and order under section 120 or
121, as the case may be remained intact. Dropping of proceedings at best be termed as
withdrawal of the notice through which proceedings were initiated, as taxpayer had answered the
notice to the satisfaction of the Taxation Officer. Order under section 122(1)(5) or (5A) must be
the one which amends the assessment order for the reasons given in subsection (5) or (5A) and
not the one by which such reasons are withdrawn. Hence, the action under section 221 of
rectifying the order dated 27-6-2007 is held to be a nullity in the eye of law. Even otherwise, it is
settled law that no investigation on facts, through evidence, can be made in rectification
proceedings, particularly when, for tax year 2003, action was taken under section 122.
11. Before answering third question, we would like to examine sections 115(5) and (6), the same
is reproduced for this purpose:-"115. Persons not required to furnish a return of income.--(5) Subject to subsection (6), the Commissioner may, by notice in writing, require any
person who, in his opinion, is required to file a prescribed statement under this section for
a tax year but who has failed to do so, to furnish a prescribed statement for that year
within thirty days from the date of service of such notice or such longer period as may be
specified in such notice or as he may, by order in writing, allow.
(6) A notice under subsection (5) may be issued in respect of one or more of the last five
completed tax years."
In our opinion, notice under section 115(5) is directory in nature, as no consequence of failure to
issue such notice is given in the Ordinance, However, the Taxation Officer cannot just ignore a
provision of law casting any duty upon him. The legislature, in its wisdom, has enacted this
provision for an amicable resolution of the issue, if the taxpayer finds the opinion of the
Commissioner as correct. In case taxpayer contests such notice, the Commissioner would
necessarily resort to the provisions of section 122, for making any amendment of a legally
recognized order under section 120. Therefore, we hold that non-issuance of notice under section
115(5) will not vitiate the proceedings initiated under section 122.
12. For the reasons given above, actions taken under section 122 for tax year 2003 and under
section 221 for tax years 2004 and 2005 are held as void ab inito therefore nullity in the eye of
law. Orders of Commissioner (Appeals), impugned before us, are also held to be against law and
facts. All the orders below challenged through these appeals are annulled.
Appeals filed by the taxpayer are accepted.
C.M.A./31/Tax(Trib.)
Appeals accepted.