THIS ORDER PASSED BY: KHALID WAHEED AHMAD, JUDICIAL MEMBER:----------


This is an appeal by the assessee against the order of the learned IAC, Range-I, Zone-A, Lahore under section 66A for the assessment year, 1996-97. It was agitated by the AR that order under section 66A by the IAC concerned, dated 17-1-2001 was bad in law and against the facts of the case and that it was without assumption of lawful jurisdiction. Similarly, the cancellation of assessment under section 66A was in excess of lawful jurisdiction and that order for cancellation of assessment should have been restricted to the extent of claim of expenses under heads Charity and Donation only and that directions should have been issued for modification of assessment under subsection 3 of section 59. It was prayed that the order of the IAC under section 66A should be vacated and that of the Assessing officer should be restored.

Brief and relevant facts of the case leading to this appeal are that the learned IAC, Range-I, Zone-A, Lahore examined the assessment record of the assessee for the assessment year, 1996-97 and issued a notice under section 66A, dated 4-1-2001 through which the assessee was confronted that the assessment framed for 1996-97 by the Assessing officer, Circle-27, Zone-A, Lahore had at a net income of Rs.61,266 under the SAS was erroneous insofar as prejudicial to the interest of Revenue as under;

You submitted return of total income declaring income at Rs.61,266 in IT-II.B along with trading, profit and loss account and balance-sheet of the business. The Assessing officer accepted the return under SAS. The action of the Assessing officer was wrong as the case did not qualify under SAS. The Assessing officer failed to scrutinize the return and finalized the case under SAS. As per P&L account, you claimed charity of Rs.576 and donation of Rs.1605 which were inadmissible expenses as they did not relate to the business activity. As the return was filed without adding back these inadmissible expenses, the return did not qualify for acceptance under SAS 1996-97 in view of Para. No. 2(1) of Circular No.4 of 1996, dated 1-7-1996. The Assessing officer ignored this fact and finalized the case under SAS. It is also worth-mentioning that net profit of the business as per P&L account was computed at R.2,63,050 while as per summary of return of total income the figure was given at Rs.2,61,266 and tax was computed on the said figure. Due to this irregularity, the return also did not qualify under SAS. The Assessing officer also ignored this fact and finalized the case under SAS which was erroneous insofar as it was prejudicial to the interest of Revenue.

In view of these facts, the learned IAC established that the assessment completed is erroneous and prejudicial to the interest of Revenue and issued a show-cause notice why the assessment already completed may not be cancelled/modified/enhanced under section 66A.

In response to show-cause notice, the AR appeared before the learned IAC and argued that the order passed by the Assessing officer is neither erroneous nor prejudicial to the interest of Revenue, so return had rightly been accepted under SAS. It was .Further contended that inadmissible expenses could be added under section 156 of the Income Tax Ordinance, 1979 and the Assessing officer had failed to resort to the provisions of section 59(3) to the extent of these expenses. It was stated that income assessed can be enhanced to the extent of inadmissible expenses. The AR also referred a case before the learned IAC decided by the Hon'ble SUPREME COURT OF PAKISTAN reported as 1992 SCMR 1898 where following observation has been made:-

"That discretion is not desire of the Judge but regulated by law. Discretion comes into play to choose one of the two or more alternatives all of which are lawful. It is not proper exercise of discretion to refuse relief to party to which it is entitled under the law".

After considering the explanation offered by the AR and order of the Hon'ble SUPREME COURT OF PAKISTAN and also a decision of learned ITAT vide I.T.As. Nos. 564 and 565/LB of 2000 (Assessment Years 1997-98 and 1998-99), dated 10-4-2000, where inadmissible expenses in the shape of excess depreciation had been claimed on motor car and such the expense was inadmissible. Finally, the learned IAC established that the assessment completed by the Assessing officer is erroneous insofar as it is prejudicial to the interest of Revenue and cancelled the assessment.

We have heard both the sides and we are of the view that the contentions of the learned AR in this respect carry force and we agree that the learned IAC should have directed the concerned Assessing officer to first rectify the order under section 156 of the Ordinance and then should have resorted to action under section 59(3) to the extent of B disallowing expenses on account of charity claimed at Rs.576 and donation claimed at Rs.1605 as being inadmissible expenses instead of invoking action under section 66A of the Income Tax Ordinance. In the circumstances, the order of the learned IAC under section 66A is vacated with the directions as given above.