2025 PLP 936 (PTD)

MUHAMMAD EJAZ SWATI, ACJ.

The applicant / department has filed instant Reference under Section 133 of Income Tax Ordinance, 2001 (the Ordinance) against the order dated 24.07.2023 passed by Appellate Tribunal Inland Revenue Pakistan Karachi Bench, whereby, appeal filed by the respondent No.1 (Taxpayer) was accepted and the order passed by the Deputy Commissioner Inland Revenue (DCIR) and order of the Commissioner Inland Revenue, appeal was set aside.

2. Facts of the case are that the taxpayer had filed return of income for tax year 2018 on 30.11.2018, declaring agricultural income at Rs.31,840,200/- as exempt of tax on account of being agricultural income. The deemed income in term of Section 120 (1) of the Ordinance was found erroneous/prejudicial to the interest of revenue warranting amendment under Section 122 (5A) of the Ordinance, a show-cause notice dated 18.01.2021 under Section 122 (9) of the Ordinance for the tax year 2018 was issued against taxpayer for compliance on 27.01.2021. In response the taxpayer failed to make any compliance by due date, therefore, a reminder was issued on 20.12.2021, hence assessment order was passed by Deputy Commissioner Inland Revenue Quetta (DCIRQ) dated 13.06.2022 by creating demand of Rs.101,54812/- against the taxpayer. On appeal filed by the taxpayer, the Commissioner Inland Revenue Karachi (CIR) confirmed the order passed by the DCIRQ, however, the taxpayer appeal was accepted by the learned appellate Tribunal Inland Revenue Karachi, vide impugned order.

3. Learned counsel for the applicant contended that the taxpayer in his return specifically mentioned about his income from agricultural land, but no tax was paid, therefore, on his admission the notice under Section 122 (9) (3A) read with Section 111 (1) of the Ordinance was given. The learned appellate tribunal Inland Revenue has failed to consider the relevant provision in its true perspective. It is contended that after insertion of explanation in Section 111 of the Ordinance vide Finance Act, 2021, the issuance of separate notice under Section 111 of the Ordinance was not required for amendment of an assessment under Section 120 of the Ordinance; that there is no requirement of separate notice under Section 111 of the Ordinance because a notice under Section 122(9) of the Ordinance is sufficient and covers the matter; that agriculture tax was paid beyond specified date, therefore, penalty was to be imposed on taxpayer.

4. Learned counsel for the taxpayer/respondent No.1 contended that there is no provision available in the Ordinance that allowed the department to convert the exempt income into taxable income; that the agriculture tax was paid before the initiation of the proceedings before the learned appellate tribunal Inland Revenue dated 10.05.2023; that once the tax has been paid in the province, the Federal Board of Revenue (FBR) has no right to claim the provincial tax; that after 18th amendment in the Constitution of Islamic Republic of Pakistan, 1973 taxation of agricultural income is not a matter under the Ordinance; that the allegation of the department was based on erroneous demand with the assertion that Section 111 of the Ordinance deals with the concealment. The taxpayer never concealed any income he has declared the agricultural exempt income at Rs.31840,200/- in his income tax return against Code No.6100; that after payment of agricultural tax in province the FBR has no right to ask question or pass any order of concealment against the taxpayer as the same is excluded under Section 41 of the Ordinance; that the department has never issued a separate notice under Section 111 of the Ordinance which was violation of law; that the proceedings under Section 122 (5) of the Ordinance can only be initiated that if there is " definite information" the information provided under Section 111 of the Ordinance is not definite information but mere information. She placed reliance on case titled The Commissioner Inland Revenue, Lahore v. M/s. Tasneem Akhtar (2023 PTD 312), Civil Appeals Nos. 742 and 743 of 1998, Commissioner Inland Revenue, Zone-I, Regional Tax Officer Sukkur v. M/s. Ranipur CNG Station, Ranipur (ITRA No.224 of 2015), Civil Appeals No.872106 of 2024.

5. We have heard the learned counsel for the parties and perused the record. The matter pertain to tax year 2018 and involved question of law, (i) As to whether a notice under Section 111 of the Ordinance is to be issued prior or subsequent to a notice under Section 122(9) of the Ordinance or it could be issued simultaneously. Beside above the following question of law were raised before this Court, (ii) Whether on the facts and circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified by holding the addition under Section 111 of the Ordnance cannot be made without issuing specific notice under Section 111 of the Ordinance on definite information. (iii) Whether the tax charged under Section 111 of the Ordinance for non-payment of agricultural tax would sustain if the agricultural tax is paid during proceedings of appeal before the appellate tribunal Inland Revenue?

6. The learned Appellate Tribunal in respect of above first two interconnected questions of law observed that Addition under Section 111 of the Ordinance was made without issuing a specific and formal notice which is a mandatory requirement of law and agriculture income derived by a person shall be exempted from tax under Section 41 of the Ordinance. Section 111 of the Ordinance pertains to unexplained income or assets. The relevant is reproduced herein below, "(1) Where (a) any amount is credited in a person's books of account; (b) a person has made any investment or is the owner of any money or valuable article; (c) a person has incurred any expenditure (d) any person has concealed income or furnished inaccurate particulars of income including (i) the suppression of any production, sales or any amount chargeable to tax; or (ii) the suppression of any item of receipt liable to tax in whole or in part, and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made [suppression of any production, sales, any amount chargeable to tax and of any item of receipt liable to tax] or the explanation offered by the person is not, [in the Commissioner's opinion, satisfactory- (a) the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person's income chargeable to tax under the head "Income from Other Sources" to the extent it is not adequately explained; and (b) the suppressed amount of production, sales or any amount chargeable to tax or of any item of receipt liable to tax shall be included in the person's income chargeable to tax under the head "Income from Business" to the extent it is not adequately explained" Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law. "

7. Bare perusal of Section 111 of the Ordinance empower tax authorities to question any unexplained investment, expenditure or concealed income enumerated in Section 111 (1) (1) to (d), while first proviso to Section 111 provides that if a taxpayer claims an amount as agriculture income this explanation shall be accepted only, to the extent of the agricultural income worked back or the basis of agricultural income tax paid under the relevant provincial law. In case the taxpayer failed to render any explanation on the explanation offered by the taxpayer is not satisfactory in the opinion of Commissioner, the said liabilities become chargeable to tax. All this exercise naturally called from a taxpayer by issuing a specific notice under Section 111 of the Ordinance, while Section 122 of the Ordinance relates to Amendment of deemed assessment allows the Commissioner Inland Revenue to amend a tax assessment if the acquired definite information indicating that taxpayer declared income is incorrect or incomplete, such amendment must be based on concrete evidence and follow due process. The Honorable Supreme Court of Pakistan in case titled Commissioner Inland Revenue T.R.O Faisalabad v. Faqir Hussain and another (2019 PTD 1828) observed that a separate notice under Section 111 of the Ordinance is required before forming an opinion by Commissioner on adding unexplained income to a taxpayer total income. In case titled Commissioner Inland Revenue Zone Bahawalpur, Regional Tax Office, Bahawalpur v. Messrs Bashir Ahmed through legal heirs (2021 SCMR 1290), the Honorable Supreme Court of Pakistan observed that tax authorities must follow due process and cannot arbitrarily amend assessment without contracting taxpayer with proper notices. In case titled Commissioner Inland Revenue, Zone-I, Regional Tax Office, Sukkur v. Messrs Ranipur CNG Station, Ranipur (2017 PTD 1839) the Honorable Supreme Court of Pakistan observed that reassessment under Section 122 of the Ordinance require clear definite information and cannot be based on assumption. The Honorable Supreme Court of Pakistan in case titled Commissioner Inland Revenue, Lahore v. Messrs Millat Tractors Limited, Lahore and others (2024 SCMR 700) has provided clear legal safeguard to the taxpayer and observed as under, "Therefore, to answer the first question, and as applicable to the matters at hand, before an assessment can be amended under Section 122 on the basis of Section 111, the proceedings under Section 111(1) are to be initiated, the taxpayer is to be confronted with the information and the grounds applicable under Section 111(1) through a separate notice under the said provision, and then the proceedings are to be culminated through an appropriate order in the shape of an opinion of the Commissioner. This then becomes definite information for the purposes of Section 122(5), provided the grounds mentioned in Section 122(5) are applicable. The taxpayer is then to be confronted with these grounds through a notice under Section 122(9) and only then can an assessment be amended under Section

122. This view has also been recently taken by this Court in Bashir Ahmed10 wherein it has also been held that a notice under Section 111 can be simultaneously issued with a notice under Section 122(9), however, proceedings under Section 111 have to be finalized first in terms of an opinion of the Commissioner so as to constitute definite information, as is required under Section 122(5) of the Ordinance."

8. It is important to mentioned here that in respect of issuance of specific notice to the taxpayer under Section 111 of the Ordinance an explanation was added in Section 111 pursuant to Finance Act, 2021, whereby it was clarified that a separate notice under this Section is not required to be issued if the explanation regarding nature and source of amount enumerated has been confronted to the taxpayer through a notice under subsection (9) of Section 122 of the Ordinance. The explanation was further substituted through the Finance Act, 2022 whereby it was also clarified that a separate notice is not required to be issued if the explanation enumerated in Section 111 (1) (a) to (d) of the Ordinance had been confronted to taxpayer through a notice under subsection (9) of Section 122 (9). The Honorable Supreme Court of Pakistan in case titled Commissioner Inland Revenue, Lahore v. Messrs Millat Tractors Limited, Lahore and others (2024 SCMR 700) in respect of above insertion/explanation also observed as under, "Therefore, as far as the cases prior to the Explanation are concerned, a separate notice is required to be issued under Section 111 before proceedings can be initiated under Section

122. The simultaneity of notices issued under Sections 111 and 122(9) is not of much consequence and the proceedings under Section 111 have to proceed first and be finalized before proceedings under Section 122 are formally taken up. After the introduction of the Explanation in Section 111 in the year 2021, a notice encompassing both the grounds under Section 111(1) and Section 122(5) can be issued under Section 122(9), however, the proceedings under Section 111 still have to be concluded first and thereafter the remaining part of the notice under Section 122(9) can be given effect to. "

9. The above clarification of the Apex Court judgment emphasized that proceeding under Section 111 of the Ordinance regarding unexplained income must be concluded before initiating action under Section 122 which pertain to the amendment of assessment of the Ordinance. This sequence ensure due process and taxpayer rights. The law allows the taxpayer an opportunity to revise returns and voluntarily pay tax under Section 114 (6A) of the Ordinance before a notice under Section 122 (9) of the Ordinance is issued, thereby avoiding penalties under Section 182 of the Ordinance. The Apex Court judgment further clarifies that even after 2021 introducing an explanation to Section 111 (1) of the Ordinance the procedural hierarchy remains unchanged i.e. the tax department must conclude the Section 111 of the Ordinance proceedings before invoking Section 122 (9) of the Ordinance. This ensures procedural fairness and prevents arbitrary or premature taxation.

10. In this case, the taxpayer, return for the year 2018 was amended by the department without concluding/completing the proceedings under Section 111 of the Ordinance. As a result, the proceedings under Section 122 of the Ordinance would be considered invalid and without legal sanctity.

11. The next question arising from the proceedings whether the tax charged under Section 111 of the Ordinance for non-payment of agricultural tax would sustain if the agricultural tax is paid during proceedings of the appeal before the appellate tribunal Inland Revenue? Section 111 of the Ordinance envisaged explanation inter alia of source of any income or asset to the satisfaction of the Commissioner concern, however, the proviso to subsection (1) of Section 111 of the Ordinance makes it obligatory by using the word shall to accept the explanation, if agricultural tax paid under the relevant provision of law for the amount credited or the investment made, money or valuable articles owned or funds from which the expenditures was made, by way of agricultural income, such explanation shall be accepted to the extent of the agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law. In the instant case the taxpayer has shown agricultural income in return for tax year 2018. The applicant/department issued notice date 18.01.2021 under Section 122 (9) (5A) of the Ordinance in absence of proof for payment of provincial agricultural tax. The taxpayer produced challan No.QA7277 dated 10.05.2023 tax on agriculture tax of the year 2018 of Rs.1572010/- in favour of Deputy Commissioner Quetta before the appellate tribunal Inland Revenue which was not disputed by the applicant/department by way of filing counter affidavit.

12. It is clear that the taxation of agriculture income is not a matter under the Ordinance. It is provincial matter and its collection and consequence of delayed payment/non-payment are to be governed by the provincial law i.e. The Balochistan Tax On Land And Agricultural Income Ordinance, 2000 Act and amended Act, 2024 and such delay of payment and its consequence are not subject matter of the Ordinance. Moreover agricultural income driven by a person shall be exempt from tax under Section 41 of the Ordinance. It is settled proposition that the matter during proceedings cannot be taken to be past and closed transaction, therefore, if agricultural tax is paid during appeal before appellate tribunal Inland Revenue. It nullifies the effect of Section 111 of the Ordinance and the assessment under this provision can no longer be sustained. This distinction safeguard taxpayer from being penalized under an incorrect unwarranted legal frame work and reinforce the principle that provincial law exclusively govern agricultural income taxation. No other law point has been raised by the learned counsel for the applicant to warrant interference in the impugned order passed by the appellate tribunal Inland Revenue of Pakistan Karachi Bench Karachi. In view of above, the Income Tax Reference No.03 of 2023 is dismissed. Copy of this judgment be sent to the learned Appellate Tribunal Inland Revenue of Pakistan Karachi Bench Karachi for information. MQ/50/Bal. Reference dismissed.