M. M. Akram Reported Judgements : Mr. Zarar Ahmed, Prop: Zarar Traders, Ghalla Mandi, G.T. Road, Lalamusa. Vs Commissioner Inland Revenue (Gujrat Zone), RTO, Sialkot.

APPELLATE TRIBUNAL INLAND REVENUE, DIVISIONAL BENCH-I,

ISLAMABAD

ITA No.1998/IB/2021

MA (AG) No.72/IB/2022

(Tax Year 2018)

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Mr. Zarar Ahmed, Prop: Zarar Traders, Ghalla Mandi, G.T. Road, Lalamusa.		Appellant
	VS
Commissioner Inland Revenue (Gujrat Zone), RTO, Sialkot.		Respondent

Appellant by:		Mr. Zahid Shafique, DR
Respondent by:		Mr. Wilayat Khan, DR
Date of hearing:		06.07.2022
Date of order:		15.08.2022

O R D E R

M. M. AKRAM (Judicial Member): The titled appeal has been filed by the Appellant/taxpayer an Order dated 01.10.2021 passed by the learned Commissioner Inland Revenue (Appeals), RTO, Sialkot for the Tax Year 2018 on the grounds as set forth in the memo of appeal. Subsequently, the appellant also filed the additional grounds.

2. The facts, in brief, are that the appellant taxpayer, in this case, is an individual who filed a return of income for the tax year 2018, declaring a net income of Rs.475,00/-. The return so filed by the appellant was treated to be an assessment order under section 120(1)(b) of the Income Tax Ordinance, 2001 (“the Ordinance”). Later on, definite information was received that the appellant had made purchases from M/s Shangrilla Foods. In consequence thereof, to ascertain the correct income and tax liability, an amendment of assessment was found indispensable in the case under consideration. Accordingly, a show cause notice under section 122(9) of the Ordinance was issued on 06.01.2021 for compliance on 21.01.2021, Which is reproduced as under: -

"You have e-filed your return of income for the tax year 2018 declaring the following results.

· Other Revenue Rs.727,374/-

· Expenses Rs.252,374/-

· Accounting Profit Rs.475,000/-

The said return constitutes an assessment order in terms of Section 120 of the Ordinance. The assessing officer, however, possesses “definite information” which shows that the income for the year under consideration has escaped assessment as envisaged in Clause (i) of sub-section (5) of Section 122 of the Ordinance. The same, therefore, warrant amendment u/s 122(1) of the Ordinance. As per information available with this office, the taxpayer has made purchases from M/S SHANGRILA FOODS for the tax year 2018. Keeping in view, the facts and circumstances of the case, the assessing officer is, therefore, convinced that the taxpayer does not possess the funds to make the expenditure of Rs.6,287,482/-. Hence, the taxpayer owned an explanation of why an amount of Rs.6,287,482/- may not be added towards your income as envisaged in Section 111(1)(c) of the Ordinance for the tax year under consideration and total income may be worked out accordingly after making necessary alterations or additions in the light of Section 122(1) of the Ordinance.”

The appellant submitted its reply stating therein that the appellant derives income from the sale of basic commodities of life like oil, ghee, soap, etc. It was pointed out that while e-filing the return no sales were declared but only the margin of profit received amounting to Rs.727,374/- was shown. Since the margin was different, therefore, the trading account of the taxpayer was not completed/shown. After considering the reply of the taxpayer, the assessing officer did not satisfy with the reply of the taxpayer for the following reasons: -

i. That the taxpayer in his first reply filed through AR admitted the concealment of purchases as he disclosed the purchases and sales of oil and ghee of Rs.6,287,482/-, the same as confronted against purchases from M/s Shangrilla Foods. This company does not deal the items of ghee and oil.

ii. In another reply, the taxpayer admitted that he made purchases from M/s Shangrilla Foods, which deals in items of ketchup, mayonnaise, different kinds of sauces, etc.

As the replies were contradictory to the facts, thus a reminder to show cause notices under section 122(9), as well as notice under section 111(1)(c), was issued. For the foregoing reasons, the assessing officer ultimately passed the order dated 22.02.2021by making an addition under section 111(1)(c) amounting to Rs.6,287,482/-. Felt aggrieved with the order passed by the Assessing Officer, the appellant preferred the appeal before the learned CIR(A) who vide order dated 01.10.2021 confirmed the treatment in toto accorded by the Assessing Officer. Still feeling aggrieved, the appellant has assailed the impugned appellate order before this Tribunal on a number of grounds.

3. This case finally came up for hearing on 06.07.2022. Learned AR reiterated the contentions already submitted in the grounds of appeal as set forth in the memo of appeal. Further contended that the proceedings initiated by the Assessing Officer were illegal and void ab-initio as he was required to first issue the notice under section 111 of the Ordinance for an explanation on the alleged concealment. If the explanation was considered unsatisfactory, then he should have passed the order under section 111 of the Ordinance before initiating the proceedings under section 122 of the Ordinance. In support of his contention, he placed reliance on the judgment titled Commissioner Inland Revenue, Zone Bahawalpur, RTO, Bahawalpur Vs M/s Bashir Ahmed (Deceased) through LRs, (2021 SCMR 1290). It has also been stated that while making the addition under section 111(1)(c) of the Ordinance, no separate notice was given to the appellant. Thus, the addition is unsustainable in law. Reliance was placed on the judgment titled Commissioner Inland Revenue, RTO, Faisalabad Vs Faqir Hussain and another, (2019 PTD 1828) and the unreported judgment of the Hon’ble Lahore High Court, Lahore titled Commissioner Inland Revenue, Zone-II, Lahore Vs Shazia Zafar, (ITR No.59534 of 2021 order dated 09.06.2022). On the other hand, the learned DR has supported the orders of the lower authorities and contended that the learned CIR(A) has passed a speaking order and there is no infirmity in the impugned appellate order.

4. We have heard both the parties and perused the record. Before dilating upon the submissions made on behalf of the appellant, it would be more beneficial to edify the procedure for reassessment proceedings under the Ordinance. We are of the humble view that the Income Tax Ordinance, 2001 is based on the concept of "voluntarily compliance backed by strong audit”. Under the provisions of this Ordinance, all returns of income filed under section 114(1) of the Ordinance shall be taken to be an assessment order in terms of section 120(1)(b) for all the purposes of this Ordinance issued to the taxpayer by the Commissioner on the day the returns were furnished. This means that the return of income without even being examined by the Commissioner to determine whether it has been prepared and the income and tax computed in accordance with the provisions of the Ordinance is taken be an assessment order. Even in cases, where an assessment is finalized after a detailed examination by the assessing officer, there is an inherent threat that the income assessed may not include certain incomes which may have escaped assessment due to concealment of such income by the taxpayer or due to submission of inaccurate particulars or may have been assessed at too low a rate or the order of the assessing officer may be erroneous in so far as it is prejudicial to the interest of the revenue or there may be mistakes apparent from the record. Remedies for all these eventualities are provided in the Income Tax Laws of almost all the countries. The sections in Income Tax Ordinance, 1979, which provided the remedies were sections 65, 66A, and 156 where subject to certain conditions, the departmental officers had been empowered to reopen assessments to retrieve the revenue loss due to concealed income or erroneous assessments. Looking at the peculiar nature of the finalization of the assessment under the Income Tax Ordinance, 2001, it is all the more important that there is a section for retrieving loss of revenue which may arise from unconditional acceptance of the returns of income. In the Income Tax Ordinance, 2001, the sections which have been incorporated to deal with retrieval of loss of revenue are sections 122 and 221 which have been titled “Amendment of Assessments” and “Rectification of mistakes”, respectively whereas, the sections para materia to sections 65, 66A and 156 respectively of the Repealed Ordinance, 1979. We will try to highlight the similarities and the differences between section 122 and sections 65 and 66A of the Repealed Ordinance, which sections are the sections, which the lawmakers in their infinite wisdom intend to replace with the new section 122. In our humble view, the proceedings under section 122 should be initiated only in those cases which fall within its four corners and should not be used as a tool for harassment and arbitrary revenue collection.

Before we start to analyze the provisions of section 122, it would be advantageous to reproduce the relevant sections, sections 65 and 66A of the Repealed Ordinance and Section 122 of the Income Tax Ordinance, 2001 in a juxtaposition.

SECTION 65 & 66A Of the Income Tax Ordinance, 1979

SECTION 122 Of the Income Tax Ordinance, 2001.

SECTION 65.

65. Additional assessment: - (1) if, in year, for any reason-

(a) any income chargeable to tax under this Ordinance has escaped assessment; or

(b) the total income of an assessee has been under assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund under this Ordinance; or

(c) the total income of an assessee and the tax payable by him has been assessed or determined under sub-section (1) of section 59 or section 59A or deemed to have been so assessed or determined under sub-section (1) or section 59 or section 59A.

the Deputy Commissioner may, at any time, subject to the provisions of subsections (2), (3), and (4), issue a notice to the assessee containing all or any of the requirements of a notice under section 56 and may proceed to assess or determine, by an order in writing, the total income of the assessee or the tax payable by him, as the case may be, and all the provisions of this Ordinance shall, so far as may be apply accordingly:

Provided that the tax shall be charged at the rate or rates applicable to the assessment year for which the assessment is made.

(2) No proceedings under subsection (1) shall be initiated unless definite information has come into the possession of the Deputy Commissioner and he has obtained the previous approval of the Inspecting Additional Commissioner of Income Tax in writing to do so.

Explanation: -As used in this sub-section, "definite information" includes information in respect of sales and purchases, made by the assessee, of any goods, and any information regarding acquisition, possession or transfer, by the assessee, of any money, asset or valuable article, or any investment made or expenditure incurred by him.

(3) Notice under sub-section (1), in respect of any income year, may be issued within ten years from the end of the assessment year in which the total income of the said income year was first assessable.

Provided that, where the said notice is issued on or after the first day of July 1987, this subsection shall have effect as if for the words "ten years" the words "five years" were substituted.

(3A) Where a notice under subsection (1) is issued on or after the first day of July 1982, no order under the said sub-section shall be made after the expiration of one year from the end of the financial year in which such notice was served.

(4) xxxxxxxxxxx

SECTION 66-A

66A. Powers of Inspecting Additional Commissioner to revise Deputy Commissioner's order.---- (1) The Inspecting Additional Commissioner may call for and examine the record of any proceedings under this Ordinance, and if he considers that any order passed therein by the Deputy Commissioner is erroneous insofar as it is prejudicial to the interest of revenue, he may, after giving the assessee an opportunity of being heard and after making, or causing to be made, such enquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or canceling the assessment and directing a fresh assessment to be made.

(1A) The provisions of subsection (1) shall, in like manner, apply;

(a) where an appeal has been filed under sections 129, 134 and 137, or an appeal has been filed under section 136, against an order passed by the Deputy Commissioner; and

(b) where an appeal referred to in clause (a) has been decided, in respect of any point or issue which was not the subject matter of such appeal.

(2) No order under sub-section (1) shall be made after the expiry of four years from the date of the order sought to be revised.

Explanation: -For the purposes of this section, an order prejudicial to the interests of revenue shall include an order passed without lawful jurisdiction.

SECTION 122.

122. Amendment of assessments: - (1) Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121 by making such alterations or additions as the Commissioner considers necessary.

(2) No order under sub-section (1) shall be amended by the Commissioner after the expiry of five years from the end of the financial year in which the Commissioner has issued or treated to have issued the assessment order to the taxpayer.

(3) Where a taxpayer furnishes a revised return under sub-section (6) 1 [or (6A)] of section 114 —

(a) the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and

(b) the taxpayer’s revised return shall be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished.

(4) Where an assessment order (hereinafter referred to as the “original assessment”) has been amended under sub-section (1), (3) or (5A), the Commissioner may further amend, as many times as may be necessary, the original assessment within the later of —

(a) five years 5 from the end of the financial year in which the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or

(b) one year from the end of the financial year in which the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer.

(4A) In respect of an assessment made under the repealed Ordinance, nothing contained in sub-section (2) or, as the case may be, sub-section (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time-limit specified in that section shall apply accordingly.

(5) An assessment order in respect of tax year, or an assessment year, 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 audit or on the basis of definite information 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 misclassified.

(5A) Subject to subsection (9), the Commissioner may amend, or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue.

(5AA) In respect of any subject matter which was not in dispute in an appeal, the Commissioner shall have and shall be deemed always to have had the powers to amend or further amend an assessment order under sub-section (5A).

(5B) Any amended assessment order under sub-section (5A) may be passed within the time limit specified in sub-section (2) or sub-section (4), as the case may be.

(6) As soon as possible after making an amended assessment under subsection (1), subsection (4) or sub-section (5A)], the Commissioner shall issue an amended assessment order to the taxpayer stating-

(a) the amended taxable income of the taxpayer;

(b) the amended amount of tax due;

(d) the time, place, and manner of appealing the amended assessment.

(7) An amended assessment order shall be treated in all respects as an assessment order for the purposes of this Ordinance, other than for the purposes of subsection (1).

(8) For the purposes of this section, “definite information” includes information on 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.

(9) No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard:

Provided that order under this section shall be made within one hundred and eighty] days of issuance of show cause notice or within such extended period as the Commissioner may, for reasons to be recorded in writing, so, however, such extended period shall in no case exceed ninety days. This proviso shall be applicable to a show cause notice issued on or after the first day of July, 2021.

From a perusal of the comparative sections in a juxtaposition, it can be seen that section 122 has been incorporated in the new Ordinance to cater to the cases falling under both sections 65 and 66A of the erstwhile Income Tax Ordinance, 1979. We will first compare the provisions of section 65 with the relevant provisions of section 122(5) and then compare the provisions of section 66A with the relevant provisions of section 122(5A).

5. The conditions, which have been made mandatory for application of section 122, have been outlined in sub-section (5) of this section. Clause (b) of subsection (5) deals with the cases which would have fallen under section 65 of the Repealed Ordinance. The mandatory condition prescribed is that the Commissioner Inland Revenue is in possession of “definite information” acquired from an audit or otherwise that the income has been concealed or inaccurate particulars of income have been furnished or the assessment is otherwise incorrect. 'Definite information' has been defined in sub-section (8) of this section and is almost the same as 'definite information' defined in section 65 of the Repealed Ordinance except that the information on the receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under the new Ordinance and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer, has been included in this definition and therefore the definition of the 'definite information' in the new Ordinance is broader than the definition of the 'definite information' in the Repealed Ordinance. The major difference between the two statutes is that: -

i. there is no requirement for requisitioning a return of income under the provisions of section 122 as was necessary under the provisions of section 65.

ii. Another important distinction is that the Commissioner IR is not required to obtain approval from any of his senior officers for taking action under section 122 as was a mandatory requirement under section 65.

Since, section 65 was almost para materia with section 34 of the Income Tax Act, 1922, a plethora of case laws had emerged over the years on all aspects of section 34 of the Income Tax Act, 1922 and section 65 of the repealed Income Tax Ordinance, 1979. In our view, we have scrutinized various case laws and tried to analyze them to see whether they shall also apply to the interpretation of the provisions of section 122 as well. The possession or otherwise of definite information has been the subject matter of a number of decisions of Supreme Courts and High Courts of Pakistan and India and in the light of these judgments, a consensus interpretation has been reached. It is well-settled law that facts already on record, that is the facts which were available before the assessing officer at the time of original assessment do not constitute definite information and cases cannot be reopened on that basis. From these case laws, the analogy has developed that information should come in the possession of the Assessing Officer subsequent to the assessment. Another analogy that has arisen from the orders of the Superior Courts and is connected with the case law on definite information are the case laws on reopening of cases on mere change of opinion. It has been held in several cases, that where complete facts have been disclosed and the Assessing Officer has consciously formed an opinion and framed the assessment on the basis of that opinion, he cannot in presence of the same facts change his opinion and reopen the assessment. Reliance may be placed on Eduljee Dinshaw Ltd Vs ITO, (1990) 61 TAX 105, Arafat Woolen Mills Ltd Vs ITO, (1990) 61TAX 46, Commissioner of Income Tax Delhi Vs M.K.S. Pratap Kumari of Alwar, (1982) 45 TAX 116, Wyeth (India) Pvt Ltd Vs. N.D. Bhatt, Inspecting Assistant Commissioner of Income Tax and another, (1982) 137 ITR. 20) and M/s Central Insurance Co Vs. C.B.R, (1993 PTD 766) whereby it was held that interpretation of CBR (now FBR) does not tantamount to definite information. However, in some cases, the honorable courts have held that assessments framed without conscious application of mind can be reopened under section 65. Reliance may be placed on H.M. Abdullah Vs ITO, Karachi, (63 TAX 113), Quddus Ahmed Vs ACIT, (74 TAX 24), and National Beverages Vs CIT, (2000) 83 TAX 359 (H.C.) Karachi.

6. Undisputedly, the deemed assessments under sections 120(1)(b) and 122(3)(b) of the Ordinance are finalized without any application of mind or scrutiny/examination of the documents furnished as the declared return filed mandatory, it becomes an assessment order under sections 120(1)(b)/ 122(3)(b) ibid. The question is, whether, the judgments of the Superior Courts in which it has been held that the facts already on record at the time of framing of the assessment order do not constitute 'definite information' and/or the contradictory orders of the Superior Courts that if the assessments have not been consciously completed, they can be reopened under section 65 will apply to the orders deemed to be issued under section 120 of the new Ordinance. To resolve this dilemma, one has to once again review, the mandatory condition for amending an assessment under section 122 delineated in sub-section (5). On a plain reading of this subsection, it becomes clear that the 'definite information' for taking action under section 122 must have been acquired by the Commissioner from an audit or on the basis of definite information and must lead to the conclusion that the income has been concealed or inaccurate particulars of income have been furnished or the assessment is otherwise, incorrect. It is our humble opinion that for amending an assessment, the 'definite information' cannot be acquired from the documents enclosed with the return, but must have come into the possession of the Commissioner from the proceedings of the audit, if the Commissioner has selected the case for audit under section 177 of the Income Tax Ordinance, 2001 or must have been acquired by him from any other source after the assessment has been deemed to have been finalized. It is therefore our humble opinion that the judgments of the Honorable Supreme Court of Pakistan in M/s. Edjuljee Dinshaw and Arafat Woolen Mills supra will still hold the ground and it will only be possible to amend the assessments if the 'definite information' is acquired by the Commissioner after the deemed finalization of the assessment order. In the light of our above understanding, we would like to examine the jurisdiction of the Commissioner to further amend an order, which has already been amended under section 122(1) of the Income Tax Ordinance, 2001. Since we have already opined that the judgments of the Honorable Supreme Court of Pakistan in M/s. Eduljee Dinshaw and Arafaat Woolen Mills cited supra will also apply to cases under section 122, we conclude that the 'definite information' on the basis of which, the amended order, is sought to be further amended should have come into the possession of the Commissioner or acquired by him subsequent to the passing of the amended assessment and should not have been in his possession at the time of passing of the last amended assessment. Thus, without definite information, the deemed order cannot be amended under section 122 of the Ordinance and cannot be asked to the taxpayer for any information without first assuming the jurisdiction under the said section.

7. Now we turn to analyze the provision of section 66A of the repealed Ordinance with subsection (5A) of section 122 of the Income Tax Ordinance, 2001. The main feature of section 66A was that for an Inspecting Additional Commissioner (IAC under repealed Ordinance) now Additional Commissioner Inland Revenue (under new Ordinance, 2001) to exercise jurisdiction under this section, the order should have been erroneous in so far as it was prejudicial to the interest of the revenue and it was held by the superior courts that both these conditions, should co-exist and only then the IAC/Add CIR can assume jurisdiction under section 66A. It was also held by the Courts that section 66A covered both legal and factual errors. However, section 122(5A) of the Income Tax Ordinance, 2001, which seeks to amend or further amend, an assessment order is slightly different from the provisions of section 66A. Section 66A had given the power to the IAC to cancel the assessment and direct the Assessing Officer to pass a fresh assessment order whereas on the other hand section 122(5A) gives the power to the Commissioner to amend the assessment himself. Orders under section 66A were appealable directly before the Income Tax Appellate Tribunal and therefore another major change is that orders under section 122(5A) are appealable before the Commissioner of Income Tax (Appeals) and no direct appeal has been prescribed before the Tribunal. By following the original concept of this Ordinance i.e. voluntary compliance backed by strong audit, it has provided in sub-section (3) that where the taxpayer furnishes a revised return under sub-section (6) of section 114, the Commissioner shall be treated as having made an amended assessment and tax payer’s revised return shall be taken to be an amended assessment for all purposes of this Ordinance. To meet the ends of justice and by following the maxim 'Audi Altarem Paltaram', it has been provided under sub-section (9) that no assessment shall be amended or further amended without providing the taxpayer an opportunity of being heard. Sub-section (6) states the requirements of stating certain information in the amended assessment order and bounds the Commissioner to issue the amended assessment as soon as possible. There are several points, which may still require clarification but we have tried my best to cover all major implications of section 122.

8. Now we come to section 111 of the Ordinance and to see whether section 111 is an independent provision or it has to be read with section 122 of the Ordinance (dependent on section 122). To answer the said question, again we come to the scheme of the Ordinance and explain it firstly in tabulated form and thereafter in theoretically form for better understanding. In the tabulated form we may visualize the scheme below: -

The above-tabulated flowchart and the opinion given in the foregoing paras clearly suggest that after filing the return under section 114 by the taxpayer, the deemed order under sections 120(1)(b)/122(3)(b) can only be amended under section 122 of the Ordinance subject to the restriction and limitation enumerated therein. Without assuming the jurisdiction under section 122 of the Ordinance for reopening of the already deemed assessment, the notice under any of the provisions of the Ordinance cannot be issued to the taxpayer for roving or fishing inquiry otherwise it would frustrate the basic concept of "voluntarily compliance backed by strong audit” on the basis whereof the Ordinance was promulgated.

9. In a theoretical form, it would be expedient to first reproduce below the provisions of section 111 of the Ordinance: -

“111. Unexplained income or assets: - (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;

(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.

(2) The amount referred to in sub-section (1) shall be included in the person’s income chargeable to tax:

(i) in the tax year to which such amount relates if the amount representing investment, money, valuable article or expenditure is situated or incurred in Pakistan or concealed income is Pakistan-source; and

(ii) in the tax year immediately preceding the tax year in which the investment, money, valuable article or expenditure is discovered by the Commissioner and is situated or incurred outside Pakistan or concealed income is foreign-source.

Explanation.—For the removal of doubt, it is clarified that where the investment, money, valuable article or expenditure is acquired or incurred outside Pakistan in a prior tax year and is liable to be included in the income of tax year 2018 and onwards on the basis of discovery made by the Commissioner during tax year 2019 and onwards and the person explains the acquisition of such asset or expenditure from sources relating to tax year in which such asset was acquired or expenditure was incurred, such explanation shall not be rejected on the basis that the source does not relate to the tax year in which the amount chargeable to tax is to be included.

(3) Where the declared cost of any investment or valuable article or the declared amount of expenditure of a person is less than reasonable cost of the investment or the valuable article, or the reasonable amount of the expenditure, the Commissioner may, having regard to all the circumstances, include the difference in the person’s income chargeable to tax under the head “Income from Other Sources” in the tax year to which the investment, valuable article or the expenditure relates.

(4) Sub-section (1) does not apply to any amount of foreign exchange remitted from outside Pakistan through normal banking channels not exceeding five million Rupees in a tax year that is en-cashed into rupees by a scheduled bank and a certificate from such bank is produced to that effect.

Explanation: - For removal of doubt, it is clarified that the remittance through money service bureaus, exchange companies or money transfer operators shall be deemed to constitute foreign exchange remitted from outside Pakistan through normal banking channels as provided under this sub-section.

(4A) Where a taxpayer, while explaining the nature and source of any amount referred to in sub-section (1), takes into account any source of income which is subject to final tax under any provision of the Ordinance, the taxpayer shall not be entitled to take credit of any sum as is in excess of imputable income, unless the excess amount is reasonably attributed to the business activities subject to final tax and the taxpayer furnishes financial statements and accounts duly audited by a chartered accountant.

(5) The Board may make rules under section 237 for the purposes of this section.

Explanation: - For the removal of doubt, it is clarified that a separate notice under this section is not required to be issued if the explanation regarding nature and sources of;

(i) any amount credited in a person’s books of account; or

(ii) any investment made or ownership of money or valuable article; or

(iii) funds from which expenditure was made; or

(iv) suppression of any production, sales, or any amount chargeable to tax; or (v) suppression of any item of receipt liable to tax in whole or in part has been confronted to the taxpayer through a notice under sub-section (9) of section 122 of the Ordinance.” (Emphasis supplied)

It can be seen from the plain reading of the above provision of law that it is a charging cum substantive provision dealing with the special purpose of antitax avoidance (Chapter-VIII) as regards targeted transactions. In its force and effect, it is in addition to the charging provisions given in Chapters II and III of the Ordinance. On the contrary, section 177 is procedural and section 122 is procedural cum substantive provision which relates to the subject of how to create a charge, assess and amend the declared income of a taxpayer. In this legislative backdrop, when this provision is read with section 122 of the Ordinance in a juxtaposition, it can be seen that firstly the jurisdiction under section 122 of the Ordinance is to be assumed by the assessing officer subject to the provisions of subsections (5) or (5A) of section 122 of the Ordinance as the case may be and thereafter, the explanation as required under section 111(1) is called for, as the case may be, from the taxpayer. If the explanation offered by the assessing officer under section 111(1) is found unsatisfactory then he is obliged under subsection (2) of section 111 to include the amount referred in subsection (1) of section 111 the person’s income chargeable to tax in the tax year to which such amount relates if the amount representing investment, money, valuable article or expenditure is situated or incurred in Pakistan or concealed income is Pakistan-source and in the tax year immediately preceding the tax year in which the investment, money, valuable article or expenditure is discovered by the Commissioner and is situated or incurred outside Pakistan or concealed income is foreign-source as the case may be. Thus, in our humble view, the provision of section 111 is dependent on section 122 of the Ordinance, and as per the scheme of the Ordinance as discussed above, in sequence, first the assessing officer has to assume the jurisdiction under section 122 thereafter he may proceed under section 111 of the Ordinance as the case may be otherwise the provision of subsection (2) of section 111 would not press into service unless and until the deemed order is not reopened under section 122 for the reason that the unexplained investment ultimately is to be added in the declared income of the taxpayer under subsection (2) of section 111 ibid.

10. When the above scheme of law is applied in the circumstances of the instant case, then in our humble view, the proceedings initiated by the assessing officer are in accordance with law. The record shows that on receipt of the definite information, the proceedings were initiated under section 122(1)/122(5) of the Ordinance. After providing an opportunity to the appellant under section 122(9) and specifically offering the explanation from the appellant with separate notice as required under section 111(1) of the Ordinance, the assessing officer passed a speaking order which was subsequently confirmed by the learned CIR(A). Thus, as per our understanding, the appellant has not made out his case and therefore, the appeal must be dismissed.

11. However, when we consider the judgments of the Hon’ble Supreme Court and High Court relied upon by the learned AR, the conclusion of instant appeal is different. As far as the Hon’ble High Court judgments titled Commissioner Inland Revenue, RTO, Faisalabad Vs Faqir Hussain and another, (2019 PTD 1828) and the unreported judgment of the Hon’ble Lahore High Court, Lahore titled Commissioner Inland Revenue, Zone-II, Lahore Vs Shazia Zafar, (ITR No.59534 of 2021 order dated 09.06.2022) are concerned wherein it has been held in these judgments that before making addition under section 111 of the Ordinance, a separate notice has to be issued to the taxpayer for explanation of the source of investment whereas the record shows that a separate notice under the said section was issued to the appellant. Thus, the assessing officer had duly complied with the law laid down by the High Court. Therefore, the contention of the appellant on this score is not tenable and is against the record. In the case titled Commissioner Inland Revenue, Zone Bahawalpur, RTO, Bahawalpur Vs M/s Bashir Ahmed (Deceased) through LRs, (2021 SCMR 1290) wherein the Hon’ble Supreme Court observed that:

“7. Now, subsection (8) of section 122 contains an inclusive definition of "definite information", which provides in material part that such information includes "information ... on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer". At the relevant time, subsection (5) required that the deemed assessment order could only be amended "where, on the basis of definite information acquired from an audit or otherwise" the Commissioner was satisfied that any one of three clauses of the subsection was applicable. In the present case, there was of course no audit involved, and therefore the definite information could only have been "otherwise" acquired. Now, one manner in which the information can be so acquired is by proceedings under section 111. This provided, at the relevant time and as presently
material, in subsection (1) that if any of its clauses was found to apply, and the person concerned

"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... 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 head "Income from Other Sources" to the extent it is not adequately explained..."

8. As noted above, a notice under section 111 was issued to the
respondent. However, the sequence of the notices was crucial. The notice under section 122, subsections (1), (5) and (9) was issued first, on 24.09.2011 and it was only later, on 07.12.2011, that the notice under
section 111 was issued. Now, and this is crucial and determinative for
present purposes, the first notice purported to state that "the department is in possession of definite information" regarding the investment allegedly made in immoveable property. That claim was repeated in the notice under section 111. In other words, the respondent was not given an opportunity, as is mandatorily required by section 111, to satisfy the tax authorities as to the source etc. of the funds by which the immoveable property was
acquired. Rather, the department from inception, and throughout,
proceeded on the basis that it already had definite information with it in this regard, such as was sufficient to allow the amendment of the deemed
assessment order. However, that could not be so until first the proceedings under section 111 had culminated in an appropriate order. That order could have constituted the definite information as would allow the amendment of the deemed assessment order, and indeed, subsection (2) of section 111 contains elaborate statutory instructions as to which is the tax year in which the concealed income is to be added. It is possible for both steps, i.e., the finding under section 111 and the amendment of the deemed assessment order to be done together, and for the notice under section 111 to be issued along with the notice to amend. However, in such a case, the proceedings and notice(s) must expressly so state on the face of it. Here, the proceedings under section 111 were, as it were, "short circuited" altogether since the department began with the premise that it already had definite information available with it, and the concerned officer proceeded accordingly. That, in law, could not be so. Therefore, in our view, there was no definite
information available within the contemplation of the statute. The
conclusions arrived at by the learned Tribunal and learned High Court were correct and did not warrant interference by this Court.”

Precisely as per our understanding, para 7 and 8 of the judgment of the Hon’ble Supreme Court it has been observed that where no audit (proceedings under section 177) is involved, "definite information" could only have been "otherwise" acquired for the purpose of amendment of assessment under section 122 through recourse to proceedings under section 111 and on getting culminated such proceedings in an appropriate order. As no audit was initiated under section 177 of the Ordinance in that case, therefore, the first departmental notice issued by the assessing officer under section 122 was erroneous by observing that it has acquired definite information. The second notice issued by the assessing officer under section 111 too was erroneous as the department neither ventured to acquire definite information by recourse to section 111 of the Ordinance nor passed a formal order to that effect under such provision and hence, rejected the departmental appeal. By respectfully following the judgment of the Supreme Court, the appeal of the appellant is accepted and the orders passed by the lower authorities are annulled as the department has not passed the order under section 111 of the Ordinance before invoking the provisions of section 122 of the Ordinance.

12. This order consists of (20) pages and each page bear my signature.

-SD-

(M. M. AKRAM)

JUDICIAL MEMBER

-SD-

(MUHAMMAD IMTIAZ)

ACCOUNTANT MEMBER

M. M. Akram Reported Judgements

Pages

Monday, August 15, 2022

Mr. Zarar Ahmed, Prop: Zarar Traders, Ghalla Mandi, G.T. Road, Lalamusa. Vs Commissioner Inland Revenue (Gujrat Zone), RTO, Sialkot.

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